Peoples Bancorp Inc/OH 2026 Q3 Earnings Call

Thank you, Gary. Good morning, everyone, and thank you for joining our call today. Activity levels at Peoples are high as we focus on a number of strategic priorities. We are working to close the Citizens merger at the end of this month. We also recently announced the pending acquisition of Capital Bancorp, which we expect to close in 2027. We are excited about these strategic initiatives and the opportunity to enhance our capabilities, products, services, and company performance as a result of these investments. Focusing on the present, we continue to be pleased with our consistent and high-performing core results as reflected in our third quarter 2026 earnings, which we released earlier this morning. For the third quarter, we reported diluted earnings per share of $0.91. When adjusted for one-time items, our diluted EPS for the quarter was $1.04, which exceeded consensus analyst estimates of $0.93.

Our one-time items for the quarter included a $4.5 million loss on investment securities, which reduced diluted EPS by $0.10. This was part of our planned effort to remain below $10 billion in assets with the pending Citizens merger and acquisition-related expenses of $1.5 million, which reduced our diluted EPS by $0.03. Some of our highlights for the third quarter include improvements in our net interest income, which was up 1%, expansion in our net interest margin of eight basis points, growth in our fee-based income of 5%, provision for credit losses declined 24%, improvement in our efficiency ratio adjusted for one-time items, higher return on average assets, which was 1.36%, increased return on average stockholders' equity of 10.44%, declines of 11% in our non-performing loans, growth in our lower cost interest-bearing demand deposit and money market accounts of nearly $100 million combined, and improved regulatory capital ratios.

Our provision for credit losses declined to $3.6 million, a 24% reduction compared to the second quarter. Our allowance for credit losses to total loans was 1.11%, a three-basis point decrease compared to June 30th. The reduction in our provision for credit losses for the quarter was due to declines in reserves for individually analyzed loans, coupled with updates to our prepayment, curtailment, and funding rates, partially offset by higher net charge-offs. Our annualized quarterly net charge-off rate grew to 35 basis points compared to 31 basis points for the linked quarter. For the third quarter, we had higher commercial and industrial loan charge-offs, along with increases in commercial real estate and consumer indirect loan charge-offs. At the same time, we had a reduction of 25% in our lease charge-offs. As anticipated, our small ticket lease charge-offs have declined throughout 2026.

We remain committed to our small ticket leasing business and see a return to growth coming throughout the year in 2027, with a focus on appropriate risk-adjusted returns and minimized volatility. For the third quarter, our non-performing loans declined $4 million, or 11%, compared to the linked quarter end, which was driven by lower non-accrual loans. Criticized loans decreased $18 million, while classified loans grew $30 million. For the third quarter, we had downgrades of two commercial real estate relationships and one commercial and industrial relationship which drove the increase. We do not anticipate significant losses as we are in the process of exiting these credits. We expect an increase in our criticized and classified loan balances during the fourth quarter as we onboard the loan portfolio from the Citizens merger.

Our delinquency levels continue to improve with 99.2% of our loan portfolio considered current at September 30th, compared to 99.1% at the linked quarter end. Moving on to loan balances, we had increases of $19 million, or 1% annualized compared to June 30th. We mentioned on our last quarterly earnings call that we had expected payoffs later in the year that would be a headwind for loan growth, and we realized some of that this quarter with commercial payoffs of over $160 million. We have also been selective with our lending activity as we are strategically managing under the $10 billion mark through year-end. Most of our increases in balances was in construction loans, which were up $40 million, while commercial and industrial loans and home equity lines of credit grew $34 million and $10 million respectively.

We had reductions of $38 million in our commercial real estate loans, which were due to the aforementioned payoffs, while residential real estate loans declined $14 million and leases were down $12 million. For the fourth quarter, the Citizens merger is expected to add nearly $350 million of loans before purchase accounting adjustments. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. Our net interest income grew 1%, or $1.1 million, while our net interest margin improved eight basis points. Increased investment in loan yields contributed to the higher margin, while net interest income benefited from higher loan income. Accretion income totaled $1 million compared to $1.1 million for the linked quarter, contributing four basis points and five basis points to net interest margin respectively. For the first nine months of 2026, net interest income improved 5%, or $12.8 million. Net interest margin expanded eight basis points over the same period and was mostly attributable to our lower deposit costs. Our interest expense on deposits declined nearly $19 million compared to the first nine months of 2025. Accretion income totaled $3.4 million compared to $7.8 million for 2025, contributing five basis points and 12 basis points to net interest margin respectively.

As it relates to our interest rate exposure, we are relatively neutral to slightly asset sensitive. We have been in this position for several quarters and the two pending mergers will not have a meaningful impact on our overall interest rate risk position. Moving on to our fee-based income. We had growth of 5% compared to the linked quarter, driven by higher lease income as well as increases in deposit account service charges, trust and investment income, and bank-owned life insurance income. For the first nine months of 2026, fee-based income grew 8%. The improvement was mostly due to increased lease income, trust and investment income, and deposit account service charges. Our non-interest expenses were up 2% compared to the linked quarter. This included $1.5 million of acquisition-related expenses, which were largely professional fees. Excluding these expenses, non-interest expenses were flat compared to the second quarter.

For the first nine months of 2026, non-interest expenses were up 4%. This included $1.9 million of acquisition-related expenses, which was the primary driver of our higher professional fees. Salaries and employee benefits also contributed to the growth along with operating lease expense, which corresponds to our fee-based lease income. Our reported efficiency ratio was 58.5% for the third quarter, an increase compared to 58.3% for the linked quarter. Excluding acquisition-related expenses, our adjusted efficiency ratio was 57.3% for the third quarter compared to 57.9% for the second quarter. For the first nine months of 2026, our reported efficiency ratio was 58.5%, compared to 59% for the prior year, and was driven by higher revenue. Excluding acquisition-related expenses, our adjusted efficiency ratio was 57.9% for 2026, compared to 59% for 2025.

Looking at our balance sheet, our investment portfolio as a percent of total assets declined to 18.3% at quarter end compared to 19.1% at June 30. We completed another sale of securities as part of our investment portfolio restructuring related to the Citizens merger, which resulted in a $4.5 million loss for the quarter on the sale of approximately $59 million of securities. In addition to providing flexibility to remain under $10 billion, this will also improve the yield on our investment portfolio. Our loan-to-deposit ratio grew at quarter end to 91.9%, compared to 91.5% at the linked quarter end, mostly due to lower deposits and some loan growth for the third quarter. Our core deposit balances, which excludes brokered CDs, were up $19 million compared to June 30. We had significant increases in our interest-bearing demand and money market accounts, which were up $52 million and $46 million respectively.

These increases were partially offset by reductions of $44 million in retail CDs and $34 million in non-interest-bearing accounts. Our demand deposits as a percent of total deposits was flat at 36% for both September 30 and June 30. Our non-interest-bearing deposits to total deposits ratio was unchanged at 21% at quarter end and at June 30. The Citizens merger is projected to add approximately $550 million of deposits for the fourth quarter of 2026. As far as our capital levels, all of our regulatory capital ratios improved compared to the linked quarter end as earnings outpaced dividends. Our tangible equity to tangible asset ratio declined this quarter and was negatively impacted by increased unrealized losses on our available-for-sale investment portfolio. I will now turn the call back over to Tyler for his closing comments.