Peoples Bancorp Inc 3rd Qtr 2026 Earnings Call - PEOPLES BANCORP INC

Financial Performance:

• Reported diluted EPS of $0.91; adjusted diluted EPS of $1.04, exceeding consensus estimates of $0.93.
• One-time items included a $4.5 million loss on investment securities (reducing EPS by $0.10) and $1.5 million in acquisition-related expenses (reducing EPS by $0.03).
• Net interest income increased 1% ($1.1 million) for the quarter and 5% ($12.8 million) for the first nine months of 2026.
• Net interest margin expanded by 8 basis points in Q3 and 9 months, driven by higher yields and lower deposit costs.
• Fee-based income grew 5% sequentially and 8% year-to-date, driven by lease, trust, and deposit service charges.
• Provision for credit losses declined 24% to $3.6 million; allowance for credit losses to total loans decreased to 1.11%.
• Non-interest expenses increased 2% sequentially (including $1.5 million acquisition costs) and 4% year-to-date (including $1.9 million acquisition costs).
• Reported efficiency ratio was 58.5%; adjusted efficiency ratio (excluding acquisition costs) improved to 57.3% from 57.9% in the prior quarter.
• Tangible equity to tangible asset ratio declined due to unrealized losses on available-for-sale securities.
• Loan-to-deposit ratio rose to 91.9% from 91.0% at the previous quarter-end.
• Core deposit balances increased $19 million, with significant growth in interest-bearing demand ($52 million) and money market ($46 million) accounts.

Guidance and Future Outlook:

• Q4 2026 non-interest expense guidance: $78–$80 million; fee-based income: $28–$30 million per quarter.
• Full-year 2026 net interest margin guidance: 4.2%–4.3%; loan growth: 6%–8% (including Citizens merger loans).
• Full-year 2027 NIM guidance: 4.3%–4.5%, assuming two 25bps Federal Reserve rate hikes (March and September 2026, one in late 2026).
• Full-year 2027 fee-based income guidance: $31–$33 million per quarter (Q1 typically elevated due to insurance commissions).
• Full-year 2027 non-interest expense guidance: $80–$82 million for Q2–Q4; Q1 expected higher due to annual expenses.
• Full-year 2027 loan growth guidance: 3%–5%, contingent on portfolio paydown timing.
• Management expects reduced net charge-offs in 2027 compared to 2026, with a coverage ratio stabilizing around 1.2% after the Capital Bank merger.
• Acquisition expenses for Citizens merger in Q4 2026 estimated at $11–$13 million.
• Cost savings from the Capital Bank merger are not expected to be fully realized until 2028.

Business Segments and Product Lines:

• Loan growth was driven by construction loans (+$40 million), commercial and industrial loans (+$34 million), and home equity lines (+$10 million).
• Commercial real estate loans declined $38 million due to payoffs and refinancing activity.
• Leasing portfolio: Small-ticket lease charge-offs declined 25% in Q3; management expects the small-ticket leasing business to return to growth in H2 2027.
• The Citizens merger (closing end of current month) adds ~$350 million in loans and ~$550 million in deposits.
• The pending Capital Bank merger (expected Q1/Q2 2027) is anticipated to perpetuate Capital's historically higher growth rates.
• Investment portfolio restructuring resulted in a $4.5 million loss on the sale of ~$59 million of securities (yield ~1.5%) to stay under the $10 billion asset threshold.

Market and Competitive Landscape:

• Commercial credit quality remains strong, though classified loans increased $30 million due to the exit of two CRE and one C&I relationships.
• Delinquency levels improved, with 99.2% of the portfolio current.
• Market competition for deposits is increasing as interest rates stabilize or rise, leading to slight increases in CD pricing.
• Commercial loan production hit a third-highest quarter ever, with strong demand shifting toward CNI; multifamily project sales drove ~40% of recent loan payoffs.
• Consumer indirect lending faces headwinds from rising interest rates and fuel prices, though credit quality remains high (near 750 average credit scores).

Risks and Challenges:

• Asset growth management: Strategic efforts required to remain under the $10 billion asset cap through year-end, potentially requiring further securities sales and additional unrealized losses.
• Credit trends: Slight increase in indirect portfolio delinquency due to consumer pressure; projected higher classified loan balances in Q4 due to Citizens merger portfolio integration.
• Interest rate risk: Position remains relatively neutral to slightly asset-sensitive (approx. 5bps benefit per 25bps rate hike), with future hikes dependent on Fed policy assumptions.
• Merger integration: Onboarding the Citizens portfolio is expected to increase criticized and classified loan balances in Q4.
• Lease income volatility: Fee income guidance faces volatility due to the cyclical nature of lease income and potential end-of-term transactions.

Management Commentary and Tone:

• Tone was confident and optimistic regarding strategic execution and the dual mergers.
• Management emphasized the completion of the Citizens merger as a catalyst for expanded market areas and improved efficiency ratios.
• Strong emphasis on "positive operating leverage" for both 2026 and 2027.
• Management highlighted investments in people, technology, and infrastructure to support the $10 billion+ threshold and future growth.
• Executive team expressed commitment to maintaining a strong employer culture and community focus post-merger.

Analyst Questions and Answers:

• Capital Merger Timing: Expected to close in late Q1 or early Q2 2027.
• Security Sales: The $4.5M loss occurred in August; further sales may occur in Q4 to manage asset size, potentially adding $2–$3M in losses.
• Durbin Impact: The $11M annual hit to interchange fees starting July 2028 remains unchanged; Capital merger has minimal impact here.
• Deposit Betas: Management confirmed deposit betas are factored into the 2027 guidance, with non-interest-bearing deposits comprising ~30% of the mix.
• Q4 NIM Impact: The Citizens merger is expected to lift NIM by 8–10 basis points in the next quarter.
• 2027 Expense Guidance: The higher Q1/Q2 2027 expense range accounts for annual salary increases, higher benefit costs in 2027, and timing differences from a lighter Q3.
• Leasing Outlook: Small-ticket leasing growth is anticipated to start in late 2027, weighing more heavily in H2, and is factored into the NIM and fee income guidance.

Other Key Points:

• Citizens merger transaction is on track to close by the end of the current month.
• The company maintains a "cautiously optimistic" view on overall credit, despite minor sector-specific pressures.
• The company has achieved 99.2% loan portfolio current status, up from 99.1% in the prior quarter.
• Acquisition-related expenses for the nine months of 2026 totaled $1.9 million.
• Return on average assets (ROAA) reached 1.36%, and return on stockholders' equity (ROSE) was 10.44%.