Peoples Bancorp Inc. Aktie

Good morning, and welcome to Peoples Bancorp Inc.'s conference call. My name is Chuck, and I'll be your conference facilitator. Today's call will cover a discussion of the results operations for the quarter ended March 31, 2026. [Operator Instructions] This call is also being recorded. [Operator Instructions] Please be advised that the commentary in this call will contain projections and other forward-looking statements regarding Peoples' future financial performance and future events. These statements are based on management's current expectations -- the statements in this call, which are not historical fact, are forward-looking statements and involve a number of risks and uncertainties detailed in the People's Securities and Exchange Commission filings. Management believes that the forward-looking statements made during this call are based on reasonable assumptions within the bound of their knowledge of Peoples' business and operations.

However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples First Quarter 2026 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations.

A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 15 to 20 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available at peoplesbancorp.com in the Investor Relations section for 1 year.

Participants in this call today are Mr. Tyler Wilcox President and Chief Executive Officer; along with Ms. Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Wilcox, you may begin the conference.

Thank You, Chuck. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we announced that we entered into an agreement to merge with Citizens National Corporation. Citizens has approximately $700 million in assets and operates 12 branches in 8 counties in Kentucky. We expect to close the merger in the second half of 2026. We are excited about this partnership, which expands our presence in Kentucky markets that both overlap and complement our existing footprint. Citizens is a deposit-rich franchise that shares a similar philosophy in serving the needs of clients and communities.

We look forward to welcoming their shareholders employees and clients to become part of the Peoples team. We believe this merger will improve shareholder value and benefit associates of both Citizens and Peoples, while offering clients of citizens more diversified products. I will go into more details on the planned merger later in the call, and you can refer to our accompanying slides for additional details.

Now I would like to highlight our results issued this morning. We reported diluted earnings per share of $0.81 for the first quarter. Our results included several improvements compared to the linked quarter. For the first quarter, our net interest margin expanded 4 basis points driven by lower deposit costs. We had a $400,000 increase in fee-based income. We had loan growth of $13 million when we had originally anticipated loan growth to be flat due to expected paydowns during the first quarter.

Our nonperforming loans and delinquency levels improved while we also experienced reductions in our criticized and classified loan balances. Our noninterest-bearing deposits grew over $41 million or 3% our loan-to-deposit ratio improved to 88.5%. Our tangible equity to tangible assets ratio increased 12 basis points to 8.91%. Our book value per share grew 1% on an annualized basis compared to year-end, while our tangible book value per share improved 3% on an annualized basis.

All of our regulatory capital ratios improved and our diluted EPS of $0.81 exceeded consensus analyst estimates of $0.80. As we've noted previously, we typically have annual first quarter onetime expenses that occur, which include stock-based compensation expense related to the annual forfeiture rate true-up on stock vested during the first quarter, along with upfront expense on stock grants to retirement-eligible employees which combined for a total of $764,000 and negatively impacted diluted EPS by $0.02 per share and employer health savings account contributions of $689,000 which reduced diluted EPS by $0.02 per share.

For the first quarter, our provision for credit losses totaled $9.7 million, increasing our allowance for credit losses as a percent of total loans to 1.16% from 1.12% at year-end. Our provision for credit losses for the quarter was driven by a deterioration in macroeconomic conditions used within our models and is not indicative of issues we are seeing within our portfolio. However, we are cautious and disciplined within our underwriting and portfolio management as we assess the impact of the Iran conflict on oil prices and inflationary pressure on prospects and existing clients.

Our annualized quarterly net charge-off rate improved to 40 basis points compared to 44 basis points for the linked quarter. Our small ticket lease charge-offs totaled $3.8 million for the first quarter and contributed 23 basis points of our annualized quarterly net charge-off rate. While we experienced a reduction in our net charge-offs for the first quarter from a dollar perspective, we do anticipate our second quarter net charge-offs to be consistent with recent quarters. We continue to project that the net charge-offs will come down in the second half of 2026, compared to recent quarterly levels.

We continue to reduce the size of our high balance accounts in our small ticket leasing business which totaled around $9 million at March 31, down from nearly $13 million at year-end. For more information on our small ticket leasing business and related net charge-offs, please refer to our accompanying slides. Our nonperforming loans declined over $3 million compared to the linked quarter, mostly due to reductions in several categories of loans 90-plus days past due and accruing. We also had improvements in our criticized loans, which were down $12 million compared to the linked quarter end, and our classified loans were down $5 million.

At March 31, our criticized loan balances as a percent of total loans improved to 3.31%, while our classified loans as a percent of total loans declined to 2.1%. Our delinquency levels improved. And at March 31, 98.9% of our loan portfolio was considered current compared to 98.6% at year-end.

Moving on to loan balances. We generated loan growth of $13 million. We had significant commercial and industrial loan growth of over $111 million, which was partially offset by reductions in construction and commercial real estate loans of about $55 million combined. We also had clients in premium finance and leases of $24 million and $15 million, respectively. We experienced some of the payoffs we had anticipated for the first quarter. However, some of those migrated to the second quarter.

I will now turn the call over to Kate for a discussion of our financial performance.

Thanks, Tyler. Our net interest income declined $629,000 compared to the linked quarter, while our net interest margin expanded 4 basis points. Most of the reduction in net interest income was driven by declines in accretion income which totaled $1.3 million compared to $1.8 million for the fourth quarter, contributing 6 basis points and 8 basis points, respectively. We had 2 fewer days in the first quarter than in the fourth quarter, which also contributed to the decline in net interest income. .

The improvement in our net interest margin was partially driven by a 12 basis point reduction in our core deposit costs, which exclude brokered CDs. We also had a decrease in our brokered CD position, which helped to increase our net interest margin. From a total balance sheet perspective, we have worked to minimize our interest rate risk exposure and are in a relatively neutral interest rate risk position. As it relates to our fee-based income, we had growth of $400,000 compared to the linked quarter.

We recognized $1.2 million related to our annual performance-based insurance commissions, which we typically receive in the first quarter of each year. This income was partially offset by lower electronic banking income and deposit account service charges, which are seasonally higher in the fourth quarter of each year. Our noninterest expenses were up $341,000 compared to the linked quarter.

As Tyler mentioned, we typically recognize additional employee-related expense during the first quarter of each year, which drove the increase compared to the fourth quarter. If you exclude our additional onetime expenses from the first quarter, our noninterest expense is actually down compared to the fourth quarter. Our reported efficiency ratio was 58.6% for the first quarter and 57.8% for the linked quarter. Increase in our ratio was driven by the onetime expenses from the first quarter, coupled with lower accretion income.

Looking at our balance sheet at quarter end, our loan-to-deposit ratio improved to 88.5% compared to 88.8% at year-end as our influx of deposits outpaced our loan growth for the first quarter. Our investment portfolio as a percent of total assets declined slightly to 20.3% at March 31, and compared to 20.5% at year-end. Our core deposit balances, which exclude brokered CDs, increased $192 million compared to the linked quarter end. This improvement was due to $102 million of governmental deposit growth, coupled with an increase of $41 million in noninterest-bearing deposits. This growth was partially offset by $154 million of declines in our brokered CDs as we reduced our physician opting for lower short-term borrowing rates as a funding source.

As a note, our governmental deposits are seasonally higher in the first quarter of each year, so we anticipate seeing some of that money flow out in the second quarter. Our demand deposits as a percent of total deposits were flat at 35% for both quarter end and year-end. Our noninterest-bearing deposits to total deposits grew to 21% at March 31 compared to 20% at year-end. Moving on to our capital position. All of our regulatory capital ratios improved compared to the linked quarter end. Our tangible equity to tangible assets ratio improved 12 basis points to 8.9% in quarter end compared to 8.8% at year-end. Our book value per share grew to $33.85

while our tangible book value per share improved to $22.95 and or 3% annualized.

We increased our quarterly dividend rate for the 11th consecutive year to $0.42 per share. This results in an annualized dividend yield of 4.84%.

Finally, I will turn the call over to Tyler for his closing comments.

Thank you, Katie. Looking to our results for the full year of 2026. We expect the following, which excludes the impact of noncore expenses and the proposed merger. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4% and 4.2% for the full year 2026, which includes 125 basis point rate cut. Each incremental 25 basis point reduction in rates from the Federal Reserve is expected to result in a 3 to 4 basis point decline in our net interest margin for the full year, while similar increases would have a 3 to 4 basis point improvement in our net interest margin.

We believe our quarterly fee-based income will range between $28 million and $30 million, we expect quarterly total noninterest expense to be between $73 million and $75 million for the remaining quarterly periods of 2026. We believe our loan growth will come in towards the low end of our guided range of 3% to 5% due to the movement of paydowns from late 2025 to 2026 coupled with the macro environment changes that occurred in the first quarter.

We anticipate a slight reduction in our net charge-offs for 2026 compared to 2025, which we expect to positively impact provision for credit losses, excluding any changes in the economic forecast. As far as our proposed merger, we find the Citizens merger attractive for many reasons. While we have talked more frequently about large deals to cross $10 billion, we have consistently sought opportunities for depth and efficiency in our existing markets. This opportunity with Citizens meets all of those other criteria while retaining the strategic flexibility to organically stay under $10 billion as well as pursue additional merger and acquisition opportunities.

Citizens has high-quality, low-cost deposits and an attractively low loan-to-deposit ratio. This merger will give us increased efficiency in markets where we already have a meaningful presence. Our diversified products and services will allow us to expand offerings to the Citizens clients to engage them in a more robust overall financial experience, while giving our existing clients more access to convenient locations.

We look forward to welcoming the Citizens associates into our organization and allowing them to continue to deliver high-quality service to their clients while giving their clients the opportunity to work with our other lines of business in fulfilling their needs. This transaction is valued at approximately $77 million with shareholders of Citizens receiving 2.1 shares of people's stock and $8 in cash for each share of Citizens stock. The merger is priced attractively for our shareholders with an expected tangible book value earn-back period of less than 1 year. As far as assumptions, we anticipate realizing 40% cost savings associated with this transaction, which should improve our combined efficiency ratio. We expect the transaction to be accretive to our 2027 EPS by $0.20.

We also anticipate that our regulatory capital ratios will improve at the close of the merger based on pro forma results. We have included additional details regarding the proposed merger within our accompanying slides. The Citizens merger transaction is subject to the satisfaction of customary closing conditions including regulatory and shareholder approvals. Last quarter, we provided clarity as to our anticipated crossing of $10 billion in assets.

We said that [indiscernible] actions taken, we would cross that mark in 2027. This remains the case, and we also continue to retain some flexibility to remain under $10 billion for a period of time using the levers we described last quarter. including flexibility in our investment portfolio beyond proposed actions taken related to the merger. Going forward, we will continue to consider all viable paths. These include a larger bank acquisition in the $2 billion to $5 billion asset range as our primary priority.

We additionally see a path where we do more small deals, given the larger number of available partners at that level and the potential for efficiencies as seen in our recently announced deal. Additionally, we believe the current regulatory environment is generally favorable to bank mergers and acquisitions, giving opportunities for multiple deals, which our team is capable of pursuing and executing.

Finally, we will weigh the trade-offs of crossing $10 billion organically in the future and the negative impact of the Durbin amendment. Ultimately, we acknowledge some uncertainty is inherent in our share price and has been noted by us, our analysts and our shareholders, crossing $10 billion in any of these described manners could serve to provide strategic clarity. We continue to strive to increase shareholder value by producing stable and reliable financial results, being mindful with our strategic and organic growth while giving our clients a robust financial offering, we will always work to make decisions that are in the best interest of our shareholders, associates and clients.

This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session with Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator.

Thank you. [Operator Instructions] our first question for today will come from Jeff Rulis with D.A. Davidson. Please go ahead.

This is Ryan Penon for Jeff Rulis. If I could start with how the deal came to be and overall, your relationship with the bank.

Yes. Thanks. Appreciate the question. So in 2018, we did the First Commonwealth acquisition, which was headquartered very close in proximity geographically that represented our kind of first of multiple expansions into Kentucky. And even at that time, we looked around those markets saw the attractive cost of deposits saw the kind of like-minded associates and communities where we can make a difference and frankly, have had an interest in this franchise ever since then. So we've been watching and waiting for some number of years. They've been a good performing bank and have been committed to independents.

And given their recent decision to proceed with exploring a sale, we found that think we were great partners for each other, and it came together nicely because of that fit, because of that overlap and because of that long-term interest that we had.

Okay. Great. And I appreciate the NIM guide for the full year. But looking ahead with the transaction, where could we see the margin shaking out kind of post the planned securities sales and borrowing paydowns?

Yes. I mean I think there's obviously upward history to that number. I think 26% is going to be impacted, but not until the later part of the year. So I think when we look at 27% on a more full year basis, I think there's a 15 to 20 basis point opportunity to our stand-alone guide on the margin side. .

Got it. last one for me. So with the 40% cost savings, what's built into that number. Is that more so back office and systems? And do you have estimates on timing of those cost saves?

Yes, I'll address the timing first. We expect about 50% of that cost savings to be effectuated within 2026 and the remainder within the beginning of 2027. As to kind of the mix of that, it's a combination of everything. There's contracts, there's duplicate locations. There's staffing and so forth. So it's the usual mix of efficiencies from the 2 organizations combining. .

Next question will come from Tim Switzer with KBW.

On the deal. One quick one, and I'm sorry if you guys already said this, but any more color you can provide on like the timing of the deal close? Are we thinking end of Q4, beginning Q4, Q3? Just trying to get a better idea for the model. .

Probably right near the ending of Q3 beginning of Q4 for closing we expect conversion in kind of the second quarter sometime of next year.

Got it. Okay. And does the Citizens acquisition, like does that preclude you at all from announcing another merger before closing? Or do you think you still have the capability to do that if the right opportunity arrives. .

Given the right opportunity, we are ready, willing and able and obviously, continue long term in many conversations. So should any of those come to fruition, we would we would be ready to announce that and execute on it. So this does not put us on the sidelines in any way, shape or form.

Okay. That's great to hear. And my guess would be no just given the size, but does this acquisition alter your criteria on the type of bank you'd like to acquire the size of bank, your strategy or approach to that as you cross $10 billion? .

It doesn't. I think like I said in the prepared remarks, although we've talked probably more frequently about our #1 choice being a single large acquisition we've left open that possibility, especially kind of in the last year given the regulatory favorability to time close and those types of things and we've seen in other transactions out there in the world. So we see that and noticed it. And then if we find something that's very attractive in the $1 billion range, maybe a little bit more, maybe a little bit less. It has a lot of the metrics that are attractive for our shareholders like this 1 is we would absolutely pursue that. And then be on the train to continue that over time and continue to be open in that scenario to larger or smaller deals going forward.

Got you. Very helpful. Thank you, Tyler.

Thank you.

Thanks, Tim. .

Next question will come from Brendan Nosal with Hovde.

If I look at Slide 22, just the actions that you plan on taking around the $10 billion threshold, are those contemplated in the deal accretion of 5.6%? Or would that be further accretive kind of given where securities roll off versus where the borrowing costs are.

All right. Sorry, I'm getting to your slide. So the transaction -- the selling of the securities is contemplated in the metrics that we noted related to the deal. But any further action outside of selling part of their securities -- or their securities portfolio and part of ours is not contemplated in the deal. .

Sorry, say that again, Katy, what is included in the deal accretion you provide and what isn't?

Yes. Included is the selling of about $300 million of our securities and their securities portfolio. So the $560 -- I don't think it's -- Yes, the $560 million noted on Slide 22 is contemplated or is included in the deal math that we articulated. .

All right. That's helpful. Maybe turning to expenses. -- even with the seasonally higher items that tend to hit in the first quarter, I thought expenses were really well contained but it looks like you did increase the expected run rate for the final 3 quarters of the year. Is this just a timing difference for when you realize certain things? Or is there maybe something else worth pointing out?

The 1 thing I would point out is it's mostly impacted by operating lease expense, which has corresponding revenue associated with it from our Vantage leasing operations. And so positive to pretax earnings, but it does increase the expense base, and that's what's driving that increase in the guide. And there's revenue on the other side, like I said, but that revenue side stayed within our guide previous guide.

Got it. Okay. And let me sneak 1 more in here. Just on the loan mark for Citizens. I mean 4% Lanmark feels I guess, somewhat heavy from the current credit environment. Was there anything in particular that drove the market to that level, whether it's a specific portfolio or something you saw in the diligence performance sorry, in the diligence process that might not be super obvious to those of us on the outside?

Yes, I would agree with you that, especially their reported metrics, which we found to be validated at very few charge-offs I'd say, one, it's a very small denominator. So 1 or 2 loans can significantly move that a little bit as we did our analysis, they had 1 or 2 very small emerging loan situations that we wanted to take a cautious approach to and ensure that we are fully reserved for. So there is no systematic issue. We're very satisfied with the credit but that 1 or 2 relationships is what drove a reasonable size for them is what drove that mark.

Next question will come from Adam Kroll with Piper Sandler.

I'm on for [indiscernible] Maybe a question for Katie. You had some really nice reductions in funding costs during the quarter. I guess, are you still seeing opportunities to reduce deposit costs even with the Fed on hold?

Yes, we continually evaluate, I think, we meet at least twice a month and more regularly off-line to evaluate pricing and compare our pricing competitively as well as the balances that we're seeing in our portfolio. So -- we have continued to remain strategic and opportunistic as it relates to the deposit costs and most notably in the retail CD product.

Got it. Maybe switching to the loan growth guide for the year. Just given some of the commentary in the deck on the macro environment changes. I was just wondering if you could provide some color if you're seeing that come through in the pipeline or hearing some of your borrowers pausing on projects? Or is it more just being conservative?

Yes. I'll start by saying it's generally more being conservative. And when we look at kind of the pressures on our net loan growth, it's really about the payoff activity. For context, we have -- we expect a little over $400 million in payoffs for the full year. And the vast majority, about $380 million of that we expect in the first half, just to give you an idea of kind of where we're coming from there. So our commentary about the macro environment, we still continue to see really robust as shows in our results, C&I loan demand. maybe a tinge down in the CRE project funding and sourcing, but still experienced growth there.

And then finally, I would say, maybe in the consumer side, we're seeing a little bit more slowdown particularly in kind of our indirect and residential as interest rates remain high and affordability, for example, in the auto industry, I think we've all seen the headlines around the average auto price hitting $50,000. And so I think rising fuel costs and some of those things are impacting the consumer demand, a little bit more than the commercial demand.

Got it. Really appreciate the color, Tyler. Maybe just last 1 on credit. On the Northstar portfolio specifically. I was wondering if you had the charge-off contribution specifically from the high balance accounts during the quarter?

We'll see the high balance accounts as a percentage of the charge-offs. They're about -- in this quarter, they were about $1.15 million of the $3.8 million of the charge-offs within that business. So about 30%.

Okay. Got it.

Your next question will come from Daniel Tamayo with Raymond James.

Thank you I'm going to dig a little bit more into the size of the deal. I know you had -- you've made comments in the prepared remarks and then I answered a question on it. But -- you've obviously been looking for a deal for a while and then this 1 comes along and it's significantly smaller, I think, than what we were potentially looking for, which I don't think is a bad thing. Is it fair to say -- I mean, I think you said it, but is it fair to say that the $2 billion to $5 billion deal is that checks all the boxes as much harder to find maybe than you were anticipating and the more likely path or at least easier to see path over the next few years as you do a number of these smaller deals to find your way over $10 billion?

Yes. I mean just playing the odds, Danny. One I would say the old saying the neighbor's farm only goes on sale once a generation, right? And so this -- I hope everybody realizes this is a deal that because it became available now, we felt like we had to be opportunistic and seize on it. But if you're just going back, if you're just playing the numbers, there are literally hundreds of banks that fit within the kind of $1 billion range and there's a much smaller number.

So strategically and execution wise, it is -- for all the reasons we've said all along, it is much more preferable to grab that $3 billion or $4 billion bank but there's just fewer. I would say I'm still as optimistic as I have been because we continue to have conversations with banks that are in that space, whether those materialize in quarters over 2 years, I can't say right now, but I am optimistic enough to continue to talk publicly here about that being something that we see as a viable path. But just given the numbers and given the favorable regulatory environment and given our ability to execute on that. I wouldn't say it's more likely that we'll do a smaller deal, but it may be is as likely, and we're ready, willing and able because again, those who have followed us for a while, like you have, remember the 4 deals in 4 quarters, I'm not announcing that, to be very clear. But our team is capable of that. And so we see it as a viable path.

Okay. That's great. Anything else in the loan book or business-wise that you think you are interested and get out of or selling from their balance sheet?

No. They have a very -- their balance sheet and their loan portfolio is very much in line with what you look at First Commonwealth Bank, you look at Premier, you look at -- although I would say it's maybe higher quality than some that we've looked at in the past. So -- there's nothing that we're going to wholesale walk away from, and we'll work with those clients, and we're looking forward to that. It's, again, communities we know -- there are many loans that we had at some point that they picked up and vice versa. So that's the good of being in markets that we are highly familiar with.

Okay. So the way to think about the net add from a balance sheet perspective is kind of their balance sheet that they're bringing on minus the 560 securities I mean that's kind of the way to think about it from a -- before any growth obviously and maybe some on off, that's a kind of fair way to start for a place to start. .

Yes, that's fair. I think their loan portfolio is about $350 million, CRE and 1-4 family. And it's just very, very community bank. -- no surprises. Some C-stores, some hotels, all things we're familiar with.

Okay. And sorry, some cleanup items here, Katy, the 15 to 20 basis points of NIM expansion that you talked about, how much of that is accretion do you think?

It's a couple of basis points. It's not a significant contributor to the to the margin impact. I think the more significant margin benefit is coming from the reduction of low-yielding securities and the paydown of higher cost overnight wholesale funding? .

Got it. Okay. I don't want to take everybody's questions. I'm not sure if I'm the last one or not. If I'm not, let me know, and I'll jump off by the way.

I'll you more behind you, but that's okay.

Go ahead. I'll drop off. And if it doesn't get asked, I'll get back on.

Next question will come from Matthew Breese with Stephens Inc.

to start, what is the current Durbin-related revenue risks upon crossing $10 billion?

It's about $10 million pretax before this deal.

Okay. And then is there any incremental expenses or you've kind of already checked off that box.

No. We have our expenses baked in, we are ready to cross.

And there won't be a negative dividend to that on expenses for us.

Okay. And Katy, I think you had mentioned just kind of the remixing or the repricing of securities. Could you give us some sense for expected cash flows the rest of the year in the securities book and kind of the roll-on, roll-off dynamics within that?

So for our portfolio on a stand-alone basis for our portfolio, it still remains in that $15 million to $20 million a month of cash flow that we received .

Do you know what the yield is one cash flows?

I would guess somewhere in the range of $350 million .

Okay. And you're putting it back on 100 to 150 bps better .

Sometimes, it just depends where we are with loan growth where we are on the funding side. But yes, if we're reinvesting it, I think your number is correct. -- maybe upward -- up to 5 depending where we are in the cycle of the market .

Okay. Okay. I will -- do you have the -- I think you had said just a couple of bps from accretion from the deal? Is that's right, right out of the gate?

Correct.

Thats' all I had.

The next question is a follow-up from Adam Kroll with Piper Sandler.

Just a follow-up for me. Maybe for Katy. I'd be curious, just what are new loans coming on the portfolio at an more broadly what you're seeing from a competition perspective? And maybe just remind us what you have in terms of fixed rate loans repricing over the next year or so?

Sure. So the rate that's coming on, as you might imagine, it varies meaningfully across all the portfolios that we have on the lending side. but I would say it's somewhere between -- between 7 and 7.25%. And then as far as fixed versus variable, it's a -- about 50-50, I think we're slightly -- it might be 55% variable and 45% fixed as we sit here today. And I can't remember if there was another component to your question. And if so, please feel free to reask. Just in terms of fixed rate loans, maybe repricing higher over the next 12 months or so, that could be kind of a tailwind to yield? Yes, I think that's correct. And the other thing I've highlighted the last few quarters is the production in our North Star leasing portfolio been depressed or lower than we had historically seen, given the activities on the credit side that we've articulated the last few quarters.

I think to the extent we start to see that production ramp back up -- and we -- in the credit box that we've articulated very clearly, there is, I think, meaningful opportunity to the margin given those are coming in somewhere between 18% and 20% from a rate perspective on new originations.

We expect that ramp up to kind of as we've added -- as we've talked about, new management there, kind of towards the end of this year, beginning of next year is when you'll see that begin to make an impact.

Got it. Really appreciate the color there. .

The next question is a follow-up from Brendan Nosal with Hovde.

Just not to beat a dead horse on kind of the merger assumptions. But Kate, you said the security sales were contemplated in the 5.6% EPS accretion -- does that also include the impact of the borrowing reduction?

Yes. The whole -- that whole balance sheet trade rate there is included. .

Okay. Perfect. And then 1 other for me, just on North Star, I guess the work you've done on kind of the high balance stuff. But given that like 2/3 of the charge-offs from North Star are coming from outside of that particular sleeve. Is there anything else you -- any other actions you need to contemplate and get the loss content in that book where you need to? Or is the high balance activities sufficient in your view?

No. There is action taking. We talk about the high balance quite a bit because it's a quantifiable portfolio that we haven't originated for well over a year now, and we want to make clear that that's not going to be a recurring issue. As to the rest of it, one, the denominator has continued to shrink, and that's as Katie just acknowledged, and that's by design. And so the charge-off rate is a bit higher than we would like. But historically, we'd like to get back to that 4% to 6% charge-off rate. So we turned that portfolio around to growth and originate what we will be seeing that's not high balance and that is of the quality that will deliver that 4% to 6% charge-off ratio. We feel good about where the credit target is.

I think we're right over the target that we want to be at. And it's just going to take a while for that rate to normalize as the portfolio begins to grow again. But some of that is non high balance but is related to the 2022, 2023 vintages. But with what we've been putting on the books and in this new credit regime over the last year, we have a high degree of confidence that we have it under control. And it's a viable business that we're pretty excited about for the reasons that Katie articulated in future.

Okay. Fantastic.

Your next question will come from Daniel Cardenas with Brean Capital.

Good morning guys. Dan? Congrats on the deal. Just absent the transaction itself, maybe if you could -- and I apologize if I missed this, I been jumping around here, but can you maybe give us some color on competitive factors on the deposit side and was beginning to pick up in your footprint? Or are they still rather manageable at the moment?

Yes. I would say it's manageable. Katie talked a little bit about our regular pricing committee where we do kind of evaluations of our extensive geography and -- there's always some outlier players, often smaller banks or credit unions. -- but we're able to maintain where we want to be from a macro -- we don't -- as we shared, I think, last quarter, we don't chase stupid. It's a technical making term, but we really value our margins. So we don't price to the lowest common denominator. And there's not a lot of -- we're competing largely against rational actors in the community bank and larger regional space.

Perfect. All my other questions have been asked and answered. Thank you.

The next question is a follow-up from Daniel Tamayo with Raymond James.

Super quick one. The Durbin hit of $10 million, I think you said was before the deal. I imagine it's really small, but do you have a sense for what citizens would add to that?

It's about $1 million, Danny.

Great. Thanks.

This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Wilcox for any closing remarks.

Yes. I want to thank everybody for joining our call this morning. Please remember that our earnings release and a webcast of this call, including our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to Peoples Bancorp Inc.'s conference call. My name is Gary, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter and fiscal year ended December 31, 2025. [Operator Instructions] Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical in fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. Management believes that forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations.

However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. People's fourth quarter 2025 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release.

This call will include about 15 to 20 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year. Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Thank you, Gary. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we reported diluted earnings per share of $0.89 for the fourth quarter which is a 7% increase compared to the linked quarter. During the fourth quarter of 2025, our diluted EPS was negatively impacted by $0.02 from the sale of another real estate owned property that we had previously acquired through a merger, which resulted in an $850,000 loss. This property comprised most of our OREO balance and the sale reduced our nonperforming assets meaningfully compared to the linked quarter. We also redeemed a tranche of subordinated debt we had assumed in a prior acquisition, resulting in a loss of nearly $800,000 for the fourth quarter, which also negatively impacted diluted EPS by $0.02 but will result in future savings in our funding costs.

For the full year of 2025, we achieved our expected results. We generated positive operating leverage compared to the prior year, excluding the impact of accretion income, We had loan growth of 6% compared to 2024, and our fee-based income improved 6% over the prior year. For the fourth quarter, when compared to the linked quarter, we have several highlights to note. Our fee-based income improved 5%. Our efficiency ratio was stable at 57.8%. Our tangible equity to tangible assets ratio grew 26 basis points to 8.8%. Vast majority of our regulatory capital ratios improved. Our book value per share grew 2%, while our tangible book value per share improved by 3% and our diluted earnings per share exceeded consensus analyst estimates for the quarter, which were $0.88.

For the fourth quarter, our provision for credit losses totaled $8.1 million and was largely driven by net charge-offs. At year-end, our allowance for credit losses stood at 1.12% of total loans, an increase from 1% at the prior year-end. Our provision for credit losses for the quarter was driven by net charge-offs, loan growth and a slight deterioration in economic forecasts. These increases were partially offset by reductions in reserves for individually analyzed loans and leases. Our annualized quarterly net charge-off rate was 44 basis points compared to 41 basis points for the linked quarter. Our small ticket lease charge-offs contributed 31 basis points of our annualized quarterly net charge-off rate. The increase in lease charge-offs compared to the linked quarter was largely driven by expected charge-offs that were included in our individually annualized loan and lease reserves at September 30.

Overall, there were no surprises here for the fourth quarter as we had anticipated this rate would remain elevated for several quarters, and we believe it should start to taper off in the back half of 2026. We have significantly reduced our position in the high balance leases in our small ticket leasing business, which totaled $13 million at year-end compared to $35 million at the end of 2024. As we have mentioned before, we are no longer originating these types of leases in our small ticket business. Excluding the lease net charge-offs, the remainder of our loan portfolio had net charge-offs of $2.1 million at an annualized net charge-off rate of 13 basis points. For more information on our net charge-offs, please refer to our accompanying slides.

Our nonperforming loans grew nearly $4 million compared to the linked quarter and were driven by an increase in nonaccrual loans, along with higher loans 90-plus days past due and accruing. The increase in nonaccrual balances was primarily driven by 1 acquired commercial and industrial relationship. Nonperforming assets declined compared to the linked quarter due to the previously referenced sale of an OREO property. Our criticized loans declined $32 million compared to the linked quarter end while classified loans were down $11 million. These reductions were mostly due to upgrades and payoffs during the fourth quarter, which we had noted last quarter was our expectation. At year-end, our criticized loan balances as a percent of total loans improved to 3.5% compared to 3.99% at September 30.

Classified loans as a percent of total loans declined to 2.18% at year-end compared to 2.36% at linked quarter end. At year-end, 98.6% of our loan portfolio was considered current compared to 99% at September 30. Moving on to loan balances. We achieved the top end of our previous guidance with full year loan growth of 6% compared to 2024. For the fourth quarter of 2025, we had annualized loan growth of 2% compared to the linked quarter end. Loan balances grew nearly $30 million compared to September 30 and were led by increases of $46 million in commercial and industrial loans and another $40 million in construction loans. This growth was partially offset by declines in premium finance loans, leases and residential real estate loans.

Last quarter, we mentioned our loan growth would be tempered during the fourth quarter and possibly into the first quarter of 2026 due to anticipated payoffs. We had a near record quarter of commercial loan production which offset some of the payoffs we experienced while some of the expected payoffs have shifted into the first and second quarters of 2026. At quarter end, our commercial real estate loans comprised 35% of total loans, 33% of which were owner occupied, while the remainder were investment real estate. At quarter end, 44% of our total loans were fixed rate, with the remaining 56% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. For the fourth quarter, our net interest income was relatively flat when compared to the linked quarter, while our net interest margin declined 4 basis points. We were able to mostly offset declines in our investment and loan income by closely managing our funding costs. Our net interest margin was negatively impacted by lower loan yields, which declined 17 basis points, while our overall funding costs declined 10 basis points. Our accretion income for the quarter totaled $1.8 million compared to $1.7 million for the linked quarter and contributed 8 basis points to net interest margin for both periods. For the full year of 2025, our net interest income improved 2% compared to 2024, while our net interest margin declined 7 basis points.

Our lower net interest margin was driven by declines in our accretion income which totaled $9.6 million for 2025 and contributed 11 basis points to margin compared to $25.2 million and 30 basis points to margin for 2024. Excluding accretion income, our net interest income grew over $22 million while our net interest margin expanded 12 basis points. We made a move in October to pay off subordinated debt we had previously acquired from Limestone as we could secure financing at half the cost through FHLB advances and brokered CDs. The subordinated debt was being carried at a rate of around 8.5%. This should result in annual savings of around $1 million with the tangible book value earn-back period on the transaction coming in at less than 1 year.

From a total balance sheet perspective, we continue to position ourselves in a relatively neutral interest rate risk position and we'll continue to monitor market interest rates, taking action to reduce our deposit costs if rates move lower. As it relates to our fee-based income, we had a 5% increase compared to the linked quarter. The improvement was due to higher lease income in deposit account service charges as well as mortgage banking and trust and investment income. Compared to the full year of 2024, our fee-based income grew 6% largely due to higher lease income and trust and investment income. Our net interest expenses were up 2% compared to the linked quarter. This increase was due to higher operating lease expense which was more than offset by our higher fee-based lease income, coupled with higher sales and incentive-based compensation related to our production and performance.

For the full year, total noninterest expense grew 3% compared to 2024. The increase was due to higher salaries and employee benefit costs. coupled with increased data processing and software expenses. Our reported efficiency ratio was 57.8% for the fourth quarter and was 57.1% for the linked quarter. The increase in our ratio was mostly due to higher lease expense and sales-based incentive compensation. For the full year of 2025, our reported efficiency ratio was 58.7% compared to 58% for 2024. The higher efficiency ratio was largely due to the impact of lower accretion income coupled with higher noninterest expense compared to the prior year. For the full year of 2025 compared to 2024, we generated positive operating leverage, excluding accretion income. This measure compares our total revenue growth, excluding gains and losses to our total expense growth over the same period.

Looking at our balance sheet at year-end, our investment portfolio as a percent of total assets was 20.5% at year-end, which was flat compared to September 30. Our loan-to-deposit ratio continued to be around 89%, which was in line with the linked quarter end as well as the prior year-end. Our deposit balances decreased $22 million compared to the linked quarter end. The decline was mostly due to reductions in governmental deposits, which were down $30 million while our retail CDs were down $25 million. These declines were partially offset by higher interest-bearing demand accounts, which grew $24 million and noninterest-bearing deposits which were up over $9 million.

Compared to the prior year, total deposits, excluding brokered CDs, increased nearly $160 million with noninterest-bearing deposits contributing $38 million of the growth. Our demand deposits as a percent of total deposits were 35% at year-end compared to 34% for the linked quarter end. Our noninterest-bearing deposits to total deposits were flat at 20% at both year-end and the linked quarter end. Our deposit composition was 78% in retail deposits, which includes small businesses and 22% in commercial deposit balances. Moving on to our capital position. Most of our regulatory capital ratios improved compared to the linked quarter end as improved earnings more than offset dividends paid and risk-weighted asset growth. Our Common Equity Tier 1 and Tier 1 capital ratios both grew by 18 basis points. Our total risk-based capital ratio was relatively flat, but was directly related to the redemption of our subordinated debt which classified, which qualifies as Tier 2 capital.

Our tangible equity to tangible asset ratio improved 26 basis points to 8.8% at year-end compared to 8.5% at September 30. Our book value per share grew to $33.78 while our tangible book value per share improved to $22.77 Finally, I will turn the call over to Tyler for his closing comments.

Thank you, Katie. To recap 2025, our results for the year fell within our guided ranges, while we continue to make meaningful investments in our infrastructure. We made it a point in recent years to heavily focus on our technological capabilities and have continued on this path during the last year. We implemented state-of-the-art software programs, most of which integrate with each other and provide a more cohesive environment for our associates between lines of business and closely connecting the front line with our operational groups. We have automated many manual processes, increasing efficiencies and oversight of functions. Each year, we strive to be a great employer with a proven culture that has far-reaching impacts. The fifth year in a row we received recognition from American Banker's Best Banks to Work For, which has only been achieved by 1% of the banks in the United States.

We have invested our time and resources into our talent which we continue to develop over the last year. We have made some key hires in certain areas, which will help us grow and expand our businesses while adding expertise to our existing groups. Earlier this morning, we announced the planned retirement of Doug Wyatt, our Chief Commercial Banking Officer. Doug joined us nearly a decade ago and has been instrumental in our diversified commercial loan growth, putting together a world-class commercial banking team and has done so while improving our credit profile. Stepping into Doug's role will be Ron Maczka, who joined us in September and has over 30 years of experience serving middle market companies throughout the markets we serve. Ron will perpetuate and expand the proven commercial strategy that Doug helped us establish.

During the year, we have also focused on solidifying the strategies and targets around our small ticket leasing business including originating higher-quality credit tiers while tightening the credit standards to more closely align with our expectations for the business. This business continues to provide a high return and we anticipate a reduction in charge-off levels as we get into the second half of 2026. Last quarter, during the question-and-answer session, we discussed the timing around when we anticipated exceeding $10 billion in assets. And I would like to provide more clarity around that discussion. Absent any actions taken by us, we expect we would cross that threshold in 2027. However, we currently have no plans to go over that threshold organically as we do have several levers we can pull to manage the size of our balance sheet.

For example, we typically target our investment portfolio as a percent of assets of between 18% and 20%. While we are slightly over that now, we can allow principal paydowns on the portfolio to generate meaningful rundown of that portfolio in the near term. We also have the flexibility to absorb smaller restructures as needed to shrink the balance sheet. Therefore, we do not plan to actually cross $10 billion in assets, absent any acquisition activity. As it relates to 2026, here are our expectations, which excludes the impact of noncore expenses, we expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4% and 4.2% for the full year of 2026, which includes 125 basis point rate cut. Each 25 basis point reduction in rates from the Federal Reserve is expected to result in a 3 to 4 basis point decline in our net interest margin for the full year.

We believe our quarterly fee-based income will range between $28 million and $30 million. Our first quarter fee-based income is typically elevated as it includes annual performance-based insurance commissions. We expect quarterly total noninterest expense to be between $72 million and $74 million for the second, third and fourth quarters of 2026. With the first quarter of 2026 being higher due to the annual expenses we typically recognized during the first quarter of each year. We believe our loan growth will be between 3% and 5% compared to 2025, which is dependent on the timing of paydowns on our portfolio which could fluctuate given changes in interest rates and the timing of payoffs. We anticipate a slight reduction in our net charge-offs for 2026 compared to 2025, which we expect to positively impact provision for credit losses excluding any changes in the economic forecasts. I am optimistic about our projected results for 2026, and we will continue to look for opportunities to become more efficient and position ourselves to drive increasing shareholder value. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator.

[Operator Instructions] Our first question today is from Jeff Rulis with D.A. Davidson.

Just a question on the margin guide. I appreciate that range. I guess, is that safe to assume the accretion benefit within that guide is, call it, 6 to 8 basis points for the full year. Is that fair?

I think 8 is the highest it would be, I think, in the fourth quarter, that's what it was. I expect that to come down as we proceed through the year. So I would say closer to 5 -- around 5 for the full year. .

Got it. And Katy, while I have you on the tax rate, any expectations to kind of step down in the fourth quarter, but I guess, looking forward, any range you'd expect?

Yes. A couple of thoughts just as it relates to the fourth quarter. So as we noted, we did participate in a tax credit of about $650,000 in the fourth quarter. The other component in the fourth quarter is annual true-ups that we do as we finalize our prior year tax return. So I think that took us to about a 21% rate for '25, again about 50 basis point benefit from the tax credit. So that would get us up to 21.5% on a kind of run rate perspective for '25. And I think you can expect that in probably in the 22% range for '26 as we move forward. .

Great. And then maybe just a last one on the loan demand. It sounded pretty encouraging. And I guess, pretty good year in '25 and I guess, expecting something inside of that in '26 and it sounded like a little of that's timing on paydowns. Maybe if you could just flesh out a little bit more expectations on the production side as that sounds like that's increasingly positive, at least from the tone.

Yes, Jeff, thanks for that question. We're very encouraged by the loan growth that we've seen. If there's a downside, it's the expectation of payoffs in a declining rate environment, a very small portion of that maybe due to we're going to be selling more of our mortgage production. But overall, especially on the commercial side, we have seen incredible demand and incredible execution by our team, particularly led by the commercial team and on the C&I side. And we expect that to continue into this year as we think about favorable tax policy and adding new bankers, we've consistently added new talent.

I think I've talked about that on our call over time. the aggregate incremental value of all this talent, we continue to add and are able to attract because of some of those things we talk about in building the culture, I think this is all paying off in that regard. A lot of optimism there.

The next question is from Brendan Nosal with Hovde Group.

Maybe just to kick things off your, Tyler, in light of your comments around $10 billion and not winding the cross organically. Can you just take a minute to refresh us on your own view of the M&A environment both at large as well as for PEBO and just remind us of the criteria you folks have internally from deals at this point, whether it's a size range or geographic preference? .

Certainly. There's a lot to say there. Obviously, there's been a lot of high-profile M&A. We -- we enjoy when the large regionals engage in M&A because it allows us to attract talent and clients from some of the disruption. And so I think we'll continue to see some of that. As it relates to our outlook, I'm going to bore you and say some of the same things I've been saying for probably over a year. First of all, I'll start with my mantra of strategic patients. We continue to evaluate a number of opportunities. And where we evaluate them is generally 1a priority would be within our existing footprint, Ohio, Kentucky, West Virginia and Virginia. Adjacent states that we would consider would be Pennsylvania, Indiana, Tennessee, and we continue to have conversations with banks throughout all of those regions.

We have a size preference, although it is not an exclusive preference, a size preference of larger deals being a bit easier to kind of execute all in 1 chunk. So in the $3 billion to $5 billion range would be ideal. The alternative, I would say, though, is increasingly become viable due to the regulatory environment where the expected approval timing of deals is more favorable. And I have a supreme degree of confidence in the history of our team which includes multiple years where we did multiple deals. So we do hold out the possibility that small deals or 3 small deals over a reasonable time frame are viable as a path forward, and we will -- we have and will continue to consider those.

So again, but I'll take you back to where we started with patience and discipline, and we desire nothing more than to ensure that our shareholders understand the strategic vision of where we're going and that we stay within disciplined metrics in terms of earn-back, and we are optimistic about our ability to do that, whether it's in months or longer.

Fantastic color. It's always good to get your latest thoughts or you do get the question each quarter. Maybe switching gears here to North Star. Can you just update us on kind of the plateau that you guys have been speaking about for the past couple of quarters of losses not improving for a while before you get that step down. It feels like that plateau is a little bit longer than you may have thought like 3 or 6 months ago. So just kind of curious what your you're seeing there and kind of what benchmarks will be on the ad side should be looking for to make sure progress is taking place there.

Yes, Brendan, as we mentioned in the script, the -- a slight increase is, I would call it, quarter-over-quarter in the dollars of charge-offs in that business. and that's largely related to 2 high balance accounts that we had already identified and individually analyzed and had reserved for. So I think our predictability, I would go back to this entire year. I believe we've been giving guidance that the second half of 2026 is when we expect that plateau to begin to decline. And that's exactly what we're seeing. So do I like the charge-offs being where they are at that plateau? I do not. We've talked pretty extensively about the discipline that we've exercised on credit. And if nothing else, you can certainly see that in the overall balances dropping in that portfolio, which stands at $133 million today. That's by design. But I am optimistic about that business over the long term. We have added new credit-conscious growth-oriented leadership in that business that we're very optimistic and I would say, Brendan, to this year, with North Star Leasing represents kind of a systematic collections, credit and production overhaul of what we believe is a long-term sound and lucrative business so that it delivers what we want on a risk-adjusted return basis for our shareholders.

So yes, you'll see from a dollar perspective, you'll see first and second quarter, somewhere consistent with the dollars charged off this year. And then again, we have a very good handle on the vintages and those high-balance accounts. And both of those continue to decline as predicted and as designed. So we are optimistic about the future with that business.

The next question is from Daniel Tamayo with Raymond James.

Katie, maybe kind of looking at your commentary around positive operating leverage. I think that was intended to be taken absent rate cuts. Do you think you can get to positive operating leverage with a rate cut or 2 in '26?

So that -- the guidance includes a 25 basis point cut in '26, as we mentioned, in the prepared remarks. So yes, we do believe with a 25 basis point cut, we can get to positive operating leverage in '26.

Yes. Well, fair enough. Sorry about that. The -- I guess what's the biggest threat to that in terms of the levers that we'll get there? Is it margin contraction on a core basis? Is it fee income not hitting your targets expenses? Obviously, it would be some combination of all 3, but how do you think about what might be the biggest risk to achieving that?

Yes. I mean I think we stand there and we feel pretty good about our budget or our expectations for '26. I mean, I think your point is it could be in any of those I don't know that I can say one is more likely or ways on more heavily.

Expenses is obviously the 1 that is most controllable, and we have shown over the past years, the ability to pivot on expenses relative to where we're tracking, and we will obviously continue to pull that lever as we need to. .

Okay. Maybe asking a different question, but kind of zeroing in on the margin a bit. With the movement happening in the first quarter with the sub debt redemption and then the rate cut, you gave obviously some comments earlier and some guidance on the margin for the year. But if we stripped out the accretion number, the 8 basis points in the fourth quarter to get to that 404, how do you think about just the pace of the margin moving through the year as we go?

I mean I think it depends on when the rate cuts happen. I think we quantified in a -- every 25 basis point cut will see compression of about 2 to 3 basis points in the margin. So I think that will play a factor. I think it's the mix of the loan growth and when it happens, will also drive the margin. So I think it will be fairly stable over time. But if we have big payoffs in a quarter or a big production in a quarter, we could get some lift faster or slower than anticipated.

Okay. So fairly stable kind of ex rate cuts would be the way you're thinking about it on a core basis. Okay. I mean is that -- you hit on the -- I guess, what's top of mind to me is the reduction in the small ticket leasing, obviously, high-yield stuff, which is impacting the margin longer term, but you've got the offset on the fixed rate loans or pricing. Is that -- do you think that offsets ultimately over time? Or is there more on 1 side of that equation that you think could drive -- I mean, I guess I'm probably thinking it would be on the leasing, the remix. But I mean, is that -- do you think that drives any kind of contraction over time as that plays out?

Well, I think we have some expectations of the North Star leasing portfolio over time. I think what you've seen is that has been shrinking a bit as we've kind of rightsized the portfolio, the credit metrics experienced the charge-offs. So as -- and that's not a very professional term, but a big juice to margin when you're putting on those types of rates even at small balances. So to the extent we can see some recovery in that production in '26, I think that adds some true value to the margin on a go forward. We're not expecting that right off the bat. But over time, we do expect that to recover on the production side within the credit profile that we've set for that business on a go forward. .

The next question is from Tim Switzer with KBW.

Quick follow-up on the margin discussion here. If we get more than, say, 2 rate cuts in '26, which I think is what the market has priced in right now. If we get more than 2 rate cuts. Do you think the NIM can end the year above that 4% level you gave? Or do you think you'd maybe push a little bit below that?

I think we can still end above the 4%. I think it's -- as I'm going to state the obvious, it's dependent on timing of all of that, if all the rate cuts happen in March and the loan -- the production doesn't kind of happen in the early part of the year that could compress it for a period of time. But I think for the total year, we could still end above the 4%.

Okay. That's helpful. And I appreciate all the color you've given on NorthStar Leasing. Given your modeling kind of flattish charge-offs for the first half of the year and then it starts to moderate down. What does that mean for the provision? If you already have charge-offs embedded within the reserve right there. Are we able to stick around the levels we saw in the second half of '25 rather than it being a little bit higher like we saw in the first half of the year. .

We do. We expect a lower provision as the year goes on. As we said in the script, kind of absent any economic indicators should -- our model obviously drives some of that as well should unemployment spike or other economic news like that, that would temper that. But on a core basis, yes, we feel well provisioned for the expected losses in those businesses.

Okay. That's helpful. And then sorry if you already answered this, but are there any other capital actions being contemplated beyond the sub debt pay down? .

Nothing outside of our history of what we've been active in. We continue to have a program in place for share buybacks. The dividend we announced earlier this morning with the continuation of our dividend rate. So I think it's more of the same and continued with the organic growth that we laid out in our projections for 2026.

We certainly feel comfortable growing our capital position as we anticipate, obviously, some M&A in our future. And so that gives us some flexibility, and we'll continue to balance all of those priorities. .

Your next question is from Terry McEvoy with Stephens.

Maybe a couple of questions on fee income. The insurance income was up, call it, 1% in 2025. I'm just wondering if you could talk about the outlook and plans to accelerate growth there. And then leasing income had a good year, call it, $15.5 million, Is that the appropriate run rate as we start 2026?

As it relates to the insurance, on a core basis, they had a good amount of growth. Year-over-year, we saw a decline -- a bit of a decline in our performance-based insurance income, which hits in the first quarter. We are experiencing a hardening market, which I would say on a -- if you see the market hardening that should be kind of accretive to the bottom line, on the other hand, it creates a significantly more difficult sales cycle as clients are actively shopping and carrier appetite is constantly moving. So you tend to run in place quite a bit in the hardening market. We continue to be interested in are having multiple conversations on the acquisition side, most of which are generally small in our history, but we've done a number of those. And insurance is a core part of our business and looking for ways to interrelate some of our lending businesses as well with our insurance business.

Yes. And as it relates to lease income, I think the full year number for that was around $15 million, $16 million. I think that's a good range for 2026. I think there's a couple of activities that go through that line. as it relates to our mid-ticket leasing business, they do some operating leases, which you see as the part of that fee income and then there's some end-of-term activities that, as we've mentioned, historically, can vary quarter-to-quarter based on activity of the clients and how that plays out for us. So I think the '25 expectation or actual results is a good expectation as you proceed into '26 for lease income line specifically.

And then just as a follow-up. Within the 2026 expense outlook, can you discuss where inside the bank you expect to make investments? I know, Tyler, you talked about technology and '25 talent. What are the top 3 areas of investment?

One of the primary areas is in data provision and data warehousing as we've added and increased our sophistication with multiple systems. Centralized data is a big part of $10 billion and beyond, both from our expected infrastructure of what we're trying to build and just what our -- all those systems demand. So that is part of it. Investments in kind of continued investments in new talent, as I referred to earlier, we are very opportunistic about kind of hiring the best people who become available in the businesses that we're in as well as some investments into specialty areas within those existing businesses that we have added talent with and hope to see growth from in the future. So anything you would add?

Okay. Great. And Katie, I'd say big juice is 100% of technical term in my book. .

The next question is from Nathan Race with Piper Sandler.

Just going back to the capital question earlier. Just curious to get your thoughts on maybe contemplate the securities portfolio repositioning. Obviously, you have a good amount of excess capital. And it seems like some of those repositionings have been well received in the market. So just curious on maybe using some excess capital to that end over the course of 2026.

Yes. I mean I think our most recent 1 was in Q3. We didn't do much in Q4, although we had some calls on some discounted investments we made. So we'll continue to evaluate. I don't think we have -- have a need for or a desire to do a wholesale restructure and blow through a big loss in a quarter. We've kept that to around the $2 million loss coming through in the quarter, but continue to evaluate pretty much every quarter, we do an evaluation to see if there's anything we want to move on. And again, in the fourth quarter, we didn't do it, but we will continue that analysis as we proceed through .

Okay. Great. And then changing gears a bit. Curious if the expectation is for deposit growth to keep up with the 3% to 5% target for loans this year. And based on what you're seeing in terms of production levels on each side of the sheet, if you expect that growth in both loans and deposits to be accretive to the core margin around 4.4% -- or I'm sorry, 4.04% in the quarter.

Yes. I don't think we have expectations that deposits will keep up exactly with loan growth. I think we feel better that loan growth will be a little stronger than deposit growth, but we continue to be encouraging of the sales force to seek the deposit opportunities equally. And so we remain optimistic, but I think that's will be more of a challenge. So I do think the loan-to-deposit ratio will increase as we proceed through '26. We evaluate each deal we put on the book to the margin that we have here today. And -- we look for it to be accretive or at least neutral to. So that will be continued valuation as we look at pricing, both the loan and deposit side as a business.

And we continue to invest in a number of deposit-focused initiatives, particularly within the commercial and small business banking realms that I expect to bear fruit over the coming year, 1.5 years.

[Operator Instructions] the next question is from Daniel Cardenas with Janney Montgomery Scott.

Maybe some color on competitive factors on the lending side, are you seeing any slowdown in the intensity there and what are your competitors doing in terms of credit standards? And do you see any signs of weakness on that front?

I would say we don't see craziness and that's another banking technical term. In the deal structure or in pricing, there have been a limited amount of payoffs and things we have not renewed, very limited for the year or for the quarter, especially where we did not pursue an existing loan or a new client opportunity because we weren't going to chase rate or make term exceptions. There is a high demand for high-quality borrowers and it is competitive, but we win with the people and we win with the services not to sound cliche, but we don't win by -- and our numbers would bear this out in terms of our yields and everything else that comes with that, that we're not seeing that type of competitive pressure impact us nor do we expect it to. We would rather deliver lower loan growth than unfavorable metrics in those other areas is what I'm trying to say.

Okay. And then just maybe a follow-up question on the M&A front, and I might have missed your answer if you answered this before. But -- on -- for the fee-based income side, I mean, what's your appetite for those types of M&A transactions? And are there a lot of opportunities presenting themselves right now.

As it relates to insurance investments, we are in the market, we would buy more, and we will buy more. As it relates to specialty finance businesses for the reasons for the $10 billion threshold reasons, and I mean this by asset generators. And as to the loan-to-deposit ratio, we would rather add talent to those businesses then pursue an acquisition, although we remain active in the market and considering opportunities, but those are lower on our priority list right now behind primary bank M&A, fee-based income, M&A and then passing on -- considering too much in the specialty finance area asset generators. .

All right. All my other questions have been asked and answered.

At this time, there are no further questions. Sir, do you have any closing remarks?

Yes. I want to thank everyone for joining our call this morning. Please remember that our earnings release and a webcast of this call, including our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time today, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to Peoples Bancorp Inc.'s Conference Call. My name is Gary, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the 3 and 9 months ended September 30, 2025. [Operator Instructions] This call is also being recorded. [Operator Instructions]

Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings.

Management believes the forward-looking statements made during this call are based on reasonable assumptions within the balance of their knowledge of Peoples' business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements.

People's Third Quarter 2025 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release.

This call will include about 15 to 20 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for one year.

Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer and each will be available for questions following opening statements.

Mr. Wilcox, you may begin your conference.

Thank you, Gary. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we reported diluted earnings per share of $0.83 for the third quarter of 2025, an improvement compared to the linked quarter. During the third quarter of 2025, we sold approximately $75 million of investment securities at a loss of $2.7 million, which negatively impacted our earnings per diluted share by $0.06 for the third quarter. We took this opportunity to sell some of our lower-yielding investment securities in an effort to increase our investment securities yields going forward.

When compared to the linked quarter, some of our highlights for the third quarter included annualized loan growth of 8%, our net interest income increased nearly $4 million, while our net interest margin expanded by 1 basis point. Excluding accretion income, net interest margin expanded 5 basis points which marks our fifth straight quarter of core net interest margin expansion.

We continue to produce stable fee-based income. Our quarterly net charge-off rate decreased by 2 basis points, while our provision for credit losses declined by over 50%. Our noninterest expenses declined 1%. Our efficiency ratio improved to 57.1% compared to 59.3%. Our tangible equity to tangible assets ratio improved 27 basis points and stood at 8.5%. Our book value per share grew 2%, while our tangible book value per share improved by 4%, and our diluted earnings per share, excluding the losses on investment securities we recorded, exceeded consensus analyst estimates for the quarter.

As we mentioned last quarter, we anticipated a reduction in our provision for credit losses. For the third quarter, our provision for credit losses declined over $9 million and our allowance for credit losses stood at 1.11% of total loans. Our provision for credit losses for the quarter was driven by net charge-offs, loan growth and a slight deterioration in economic forecasts, which was partially offset by reductions in reserves for individually analyzed loans. For more information on our provision for credit losses, please refer to our accompanying slides.

Our annualized quarterly net charge-off rate was 41 basis points, an improvement from 43 basis points for the linked quarter. The reduction was due to lower small ticket lease charge-offs as we had anticipated.

Our nonperforming loans declined nearly $2 million compared to the linked quarter end, with improvements in both loans 90-plus days past due and accruing and nonaccrual balances. At September 30, nonperforming loans comprised 58 basis points of total loans compared to 61 basis points at June 30. Criticized loans increased by nearly $24 million compared to the linked quarter end, while classified loans grew nearly $34 million.

We had a handful of downgrades during the quarter. However, we do anticipate some of these credits will be paid off or upgraded in the fourth quarter. The downgrades were among credits that are unrelated from an industry and geographic standpoint and viewed as isolated issues, we continue to complete our extensive portfolio reviews while recognizing some softening economic indicators in recent quarters.

At quarter end, our criticized loan balances as a percent of total loans was 3.99% compared to 3.7% at June 30. Classified loans as a percent of total loans grew to 2.36% at quarter end compared to 1.89% at the linked quarter end. Please refer to our accompanying slides for trends in our historical criticized and classified loans.

Our second quarter delinquency rates were stable with 99% of our loan portfolio considered current at September 30 compared to 99.1% at the linked quarter end. We continue to monitor our loan portfolio for impacts from the recent changes in economic conditions and monetary policy and have not identified any systemic negative trends at this time.

Moving on to loan balances. We have loan growth of $127 million or 8% annualized compared to the linked quarter end. The most significant areas of growth were in commercial real estate and commercial and industrial loan balances. At the same time, we had declines in construction loans as those projects completed and moved into our commercial real estate portfolio. We also had decreases in our lease balances with the reduction being mostly due to declines in our small ticket leasing balances.

Our loan production this quarter arrived as anticipated. As we indicated last quarter, we expected and continue to expect payoff activity to be weighted to the second half of the year. Those payoffs have shifted to the fourth quarter and possibly into the first quarter of 2026. Our year-to-date loan growth through the third quarter was 6%, and we expect it to come down during the fourth quarter but to remain in our guided range for the full year. Quarter end, our commercial real estate loans comprised 35% of total loans, 32% of which were owner-occupied while the remainder were investment real estate. At quarter end, 43% of our total loans were fixed rate, with the remaining 57% at a variable rate.

I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. Our net interest income and net interest margin improved by 4% and 1 basis point, respectively, compared to the linked quarter. The increase in net interest margin was due to higher investment security yields compared to the second quarter. Our investment securities yield improved to 3.79% compared to 3.52% for the linked quarter as we made moves during the quarter to sell some lower-yielding investment securities at a loss in an effort to be opportunistic with our portfolio yields.

For the third quarter, accretion income declined to $1.7 million and contributed 8 basis points to net interest margin compared to $2.6 million and 12 basis points for the linked quarter. Excluding accretion income, our net interest margin expanded by 5 basis points which is the fifth straight quarterly increase in core net interest margin.

For the first 9 months of 2025, our net interest income improved 1% while our net interest margin declined 9 basis points compared to 2024. Our lower net interest margin was due to a reduction in our accretion income which was $7.8 million for 2025, contributing 12 basis points to margin compared to $20.3 million or 33 basis points to margin for 2024.

Excluding accretion income, our net interest margin expanded 12 basis points. We continue to be relatively neutral -- in a relatively neutral interest rate risk position and we'll continue to take further action on our deposit costs as market interest rates decline.

Moving on to our fee-based income. We had a 1% decline compared to the linked quarter, which was driven by lower lease income and partially offset by higher electronic banking and deposit account service charges. For the first nine months of 2025, fee-based income grew 7% compared to 2024. The improvement was due to increases in lease income, commercial loan swap fee income and trust and investment income. As it relates to our noninterest expenses, we experienced a 1% decline from the linked quarter and were within our guided range. This was driven by lower professional fees, which was partially offset by increases in marketing and franchise tax expense.

For the first nine months of 2025, noninterest expenses grew $7.7 million or 4% compared to 2024. The increase was due to higher salaries and employee benefit costs, coupled with higher data processing and software expenses. Our reported efficiency ratio improved to 57.1% compared to 59.3% for the linked quarter. This was primarily due to higher net interest income for the third quarter compared to the linked quarter.

For the first nine months of 2025, our reported efficiency ratio was 59% compared to 57.4% for the same period in 2024. The increased efficiency ratio was largely due to the impact of lower accretion income, coupled with higher noninterest expense compared to the prior year.

Looking at our balance sheet at quarter end. We had another quarter of considerable loan growth, which was an annualized rate of 8% compared to the linked quarter end. The loan growth outpaced our deposit growth this quarter, bringing our loan-to-deposit ratio to 88% from 86% at June 30. Our investment portfolio shrank to 20.5% of total assets compared to 21.2% at June 30. This reduction was primarily due to our sales of around $75 million of lower-yielding investment securities, which resulted in a $2.7 million loss we recognized during the quarter. We reinvested about half of the proceeds into higher-yielding investment securities and used the remainder to pay down our borrowings. We will continue to look for opportunities to improve the yield on our investment portfolio.

Compared to June 30, our deposit balances were relatively flat. Increases in our money market interest-bearing demand and noninterest-bearing accounts did not offset declines in our brokered CDs, governmental and savings accounts. Typically, our governmental deposit balances grew in the third quarter. However, this quarter, the outflows -- the inflows were offset by outflows of tax payments. Our demand deposits as a percent of total deposits remained flat at 34% compared to the linked quarter end. Our noninterest-bearing deposits to total deposits remained unchanged and stood at 20% at both September 30 and the linked quarter end. Our deposit composition was 77% in retail deposit ounces, which included small businesses and 23% in commercial deposit balances. Our average retail client deposit relationship was $26,000 at quarter end, while our median was around $2,600.

Moving on to our capital position. Most of our capital ratios improved compared to the linked quarter end. This was due to earnings net of dividends more than offsetting the impact of loan growth on risk-weighted assets for the quarter. Our tangible equity to tangible assets ratio improved 27 basis points to 8.5% at quarter end as higher earnings and reductions in our accumulated other comprehensive losses increased the ratio. Our book value per share grew 2%, while our tangible book value per share increased 4% compared to the linked quarter end.

Finally, I will turn the call over to Tyler for his closing comments.

Thanks, Katie. We continue to develop our business organically as we await the right opportunity to grow through acquisitions. We're managing our net interest income and net interest margin through this interest rate cycle and have recorded our fifth straight quarter of growth in net interest margin, excluding accretion income. We boasted 6% of loan growth through the first nine months of 2025. Our provision for credit losses declined to a more normalized rate for the third quarter we generated positive operating leverage compared to the linked quarter.

For the remainder of 2025, excluding noncore expenses, we expect to achieve positive operating leverage for 2025 compared to 2024 excluding the impact of the reduction in our accretion income, which declined faster than we had anticipated compared to the prior year. Assuming two 25 basis point reductions in rates from the Federal Reserve in the fourth quarter, we expect our full year net interest margin to be in our guided range of between 4% and 4.2%. We continue to be in a relatively neutral position so the declines in interest rates have a minor impact to our net interest margin. We believe our fee-based income growth will be in the mid-single-digit percentages compared to 2024. We expect total noninterest expense to be between $69 million and $71 million for the fourth quarter of 2025. We believe our loan growth will be between 4% and 6% compared to 2024. We expect the provision for credit losses similar to the third quarter, excluding any negative impacts to the economic forecasts.

As it relates to 2026, I would like to give some preliminary high-level guidance, which excludes noncore expenses. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 4% and 4.2% for the full year of 2026, which does not include any expected rate cuts. Each 25 basis point rate reduction in rates from the Federal Reserve is expected to result in a 3 to 4 basis point decline in our net interest margin for the full year. We believe our quarterly fee-based income will range between $27 million and $29 million. Our first quarter fee-based income is typically elevated as it includes annual performance-based insurance commissions.

We expect quarterly total noninterest expense to be between $71 million and $73 million for the second, third and fourth quarters of 2026 with the first quarter of 2026 being higher due to the annual expenses we typically recognized during the first quarter of each year. We believe our loan growth will be between 3% and 5% compared to 2025 which is dependent on the timing of paydowns on our portfolio, which could fluctuate given changes in interest rates.

We anticipate a reduction in our net charge-offs for 2026 compared to 2025 which we expect to positively impact provision for credit losses, excluding any changes in the economic forecast. We will update this guidance in January at our next call.

This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.

[Operator Instructions] Our first question is from Daniel Tamayo with Raymond James.

Maybe one for you, Tyler, on credit to start here. I think you said in the prepared remarks, correct me if I'm wrong, on -- the increase in the criticized and classified loans in the quarter that you expect to have some of that come back in the fourth quarter or near term. Can you just provide some clarification or color on what you -- what would cause you to think that and kind of size the amount of that 27% increase in classified loans, how much of that you would expect to revert?

Sure thing, Danny. Just generally, so we expect to see -- it's a broad variety of kind of results depending on the specific credits. Obviously, we have a very granular view down into it. We expect some refinances. We expect some property sales in these cases.

Just to give you a little bit of color in the criticized book, it's largely based on three loans. There's varying types and varying sizes in the classified books, it's about four loans that comprises the increase a couple of those, three out of those four actually came from acquired portfolios, and we expect the kind of an orderly sale or an orderly exit from some of those that's timed in the fourth quarter. And so something on the order of -- based on what we know now, $35 million to $55 million in either upgrades or payoffs in that -- in those buckets.

Okay. That's helpful, Tyler. And then maybe on the loan growth side. So you've got guidance coming down a little bit in 2026 at the 4% level from what you've done recently and what you're expecting here in the fourth quarter. Is that -- is there a particular driver behind that? Is there like a paydown assumption that's increasing or something else underlying the loan growth thoughts for '26?

Yes. Danny, thanks -- soon we get some good questions about that. I would say a couple of things. one, we're maybe slightly below this year's guidance, but we're kind of in line with our historic kind of 3% to 9% where we've been. As we look out in the coming year, Obviously, we've been talking for a couple of quarters now about our -- the paydown activity accelerating, particularly in a falling rate environment. That can tend to accelerate sales of completed projects, refinance activity, investors moving projects to the permanent market. There's probably a small component of that in there of future expected multifamily projects cooling off to a degree. And maybe a touch of consumer softening on a go-forward basis as we see kind of increases in auto prices and a little bit of weakness in the consumer. I think the consumer -- I think all the data would suggest that the top 20% is driving a lot of the activity there. And we tend to bank the 80% more thoroughly. So that's a little bit of the color on kind of where we see things.

That's helpful. And then maybe last one here, just a small one. But as we think about the $10 billion threshold getting closer to that now, do you have kind of updated thoughts on when you might cross that organically?

We think that's a 2027 event. Now let me say -- let me be very clear, absent any other action. So we also think -- before we have to move any levers outside of just our normal organic growth, we would expect 2027 to be when we would face the crossing issue. And then we would have options to obviously keep ourselves under there. My hope is that we would potentially do a deal before then, but we retain the flexibility and the patience to not feel the need to go forward with the deal just because 2027 is looming out there.

The next question is from Brendan Nosal with Hovde Group.

Just want to circle back to the loan growth. This one might seem obvious, but just on the growth for this year and for fourth quarter, in particular, given that you're at 6% growth for this year-to-date and your commentary around payoffs in the fourth quarter, I think, fair to assume that spot balances are flat in the final quarter of the year?

Yes, the payoff activity that we expected to kind of materialize in the third and fourth quarter is really kind of bunched up into the fourth quarter and possibly into the first. And so we still think we have a really good handle on that. We expect record production particularly on the commercial side and record payoffs on the commercial side, particularly in the fourth quarter.

Okay. That's helpful. And then maybe just kind of circling to the margin outlook, specifically, the commentary around the impact of rate cuts. I think you're saying 3 to 4 basis points per 25 bps cut. I mean that's -- if it happens like on January 1, right? If we're getting a midyear cut, the impact would be less than that. Is that fair to assume?

That's exactly correct.

Okay. Good. I'm going to sneak one more in here. Just on asset quality, as it pertains to North Star, can you just update us on kind of that plateau commentary that you spoke to last quarter around North Star loss content and then if things go according to your plan, how do you envision lost content in that book evolving kind of quarter-by-quarter as we move through next year?

Sure. Brendan, thanks for the question. I think a couple of thoughts. One, we kind of demonstrated in our charts that the continued work as it relates to the high balance accounts, which as we've discussed kind of have correlated highly with the losses in that portfolio. That high balance accounts, your portfolio is now down to about $15 million, $16 million and continues to fall. And obviously, we're not refilling that bucket. And so the outlook for the fourth quarter and for the first quarter of next year, are that, that plateau will kind of continue in the range of where it's been specific to the North Star leasing charge-offs. With our expectation that the portfolio -- the plateau will begin to get a little bit of a slope down to it in that second and third quarter and get to a normalized rate.

Right now, the production in that portfolio is obviously not staying in pace with the amortization and the charge-offs. And that's by design as we make -- as we exercise some credit discipline and stick to our knitting there. So that's where we think we'll end up.

The next question is from Nathan Race with Piper Sandler.

This is Adam Kroll on for Nathan Race.

No problem.

Yes. So maybe just starting on the margin front, given the guide for 2026. For Katie, I was wondering if you'd be able to expand on what offsets you have to your floating rate portfolio if we were to get a few cuts in '26 and maybe what you have in terms of fixed rate loan repricing and securities cash flow rolling off?

Yes. So on -- as we've shown over the course of 2025, we have been continuously taking action on the deposit portfolio and predominantly the retail CD product that's within that portfolio. We also have some floating rate borrowings that we'll look to, to provide us some optionality as rates fall. And then the other piece of your question was on the investment securities portfolio. It's generally trends $15 million to $20 million a month of normal cash flow. And I would just say, as you probably have seen in the balance sheet, we did have some short-term funding in there, too. So that fluctuates, obviously, as does the variable rate loans.

Got it. That's super helpful. Maybe just another one on North Star. I was wondering if you could quantify the charge-off contribution from the high balance accounts, specifically during the quarter? Just trying to get a sense of how large of a driver of those accounts are as you meaningfully reduce your exposure over the last few quarters?

In the third quarter here, they were about 25% of the charge-offs. We expect kind of 30% for the full year. If you look at the full year projection of where those charge-offs will be coming from.

Got it. And then last one for me on the securities restructure. Is there any sort of earn back or any sort of metric you evaluate in your decision-making process? And is there any consideration for a larger one?

So yes, there is an earn back considered. I think we're about 1.5 years on this one. We try to quantify it also from a loss perspective, we don't want to flush through a significant loss in any given quarter. We want it to be manageable. As far as a more meaningful in size loss trade, Surely, we have evaluated them. We don't see the need by which to have to do that transaction at this point. And so we have continued to just be opportunistic and periodically look at the portfolio. I would just note, this trade also was what we would call an odd lot trade. There was a lot of small pieces in our portfolio. And so to make it more manageable in a number of securities that was part of this transaction as well.

We've done a few of these over the past couple of years, and we've consistently kept them under two years and -- kind of as a discipline.

And on the loss side, generally $2 million to $3 million is kind of our appetite in a given quarter.

The next question is from Tim Switzer with KBW.

The first one I have is there's been some noise around the market around consumer behavior and the health of the consumer, particularly like the subprime end of the market? And just given your guys exposure in both the deposit and loan side and your commentary about maybe slower growth for Consumer in '26. Just curious if you guys have seen any indications of that at all? or any changes in behavior?

Well, the good news -- let me start with the good news. We have our auto portfolio -- it comprises about $700 million, and the subprime component of that is about $1 million. So we feel really good about our lack of exposure to subprime in the consumer side. And our average origination yield on the indirect side in the most recent quarter was close to $750 million. So we're sticking to our knitting there.

I will say, Tim, that we have seen some increased surrender activity. I think the affordability of vehicles, particularly as tariffs are helping finally drive up some of the pricing is challenging for consumers. And from a deposit standpoint, I think I haven't seen any indications of increased utilization of our deposit protection services and overdraft protection services, but we'll obviously monitor that, that we'd be an outlet for that kind of activity.

I think there is a lot of pent-up demand though for refis. And if we see a falling rate environment, if mortgage rates do fall, we'd see an increase in refi activity and probably an increase in home purchases. So debt-to-incomes are kind of going down a little bit year-over-year, but we're watching it. It's -- on the flip side, our indirect losses. I think last year, we're running at about 88 basis points and this year quarter to date, there is 70. So there's -- I would say that's a result of the discipline and the underwriting.

Okay. Great. That was very helpful. I appreciate all the color there. And then on your previous commentary about the $10 billion asset threshold not getting there until 2027. If we take the high end of your loan growth guidance for '26, that kind of gets you right to the $10 billion mark. What are your plans if you have to kind of manage near in that level for a while? Is it run down deposits in the securities book a little bit? Just curious how you guys are doing to approach to that.

Yes. I think the securities book is our first place to look. I think right now at 9/30, we're at 20.5%. I think historically, we've guided an 18% to 20% range to assets. So obviously, there's some room there. We have some overnight funding and some funding there that we could help manage the asset side. So those would be the first places we would look.

Okay. Got you. And then one really quick last one. Can you remind us of the dollar amount of the seasonality for noninterest income and expenses? I think it was about $1.5 million in insurance income in Q1, but wasn't positive about the expenses.

Yes. I think you're right. On the contingent performance-based income we see in our insurance agency, it's generally $1.5 million to $2 million thereabout. So that would be the revenue side. And on the expense side, it varies a bit, and it's predominantly around contributions to employee health savings accounts some stock activity that happens in the first quarter, both with granting and vesting. So the -- I'd say that probably as close to the 2%, 2.5% range.

The next question is from Terry McEvoy with Stephens.

This is Brandon Rud on for Terry. First just quick on loan growth last quarter, kind of a two parter. For C&I loans, can you expand if there are any particular industries or regions that contribute to that growth? And on the premium finance side, looks like they were down year-over-year. So was that more strategic? Or is that just a reflection of what the market's offering now?

Yes. As to your first question, I'm happy to report that it's across a broad swath of industries and our geography. And so no particular concentrations to note on the C&I, just good broad-based solid C&I growth.

As to the premium finance, that's more of a timing issue. I think by the end of the year, we'll see some growth in that business. And as premiums increase in a hardening market, the demand for their services obviously goes up. So we're not -- we really like that business. It's pristine from a credit standpoint. So there's no kind of strategic consideration there on a reduction. It's just -- I would say it's a timing issue as to where that fell in the quarter.

Okay. Got it. second, I guess we're about a month now past the last rate cut. Can you just discuss any actions taken since then and clients' willingness to digest additional cuts and how that differs from the first 100 basis points?

Sure. So we meet regularly as a pricing committee and have taken action throughout the year, even in light of the Fed not having moved earlier in the year. And so we're continually evaluating most notably our retail CD promotional product, which I think right now is a 5-month product over the last few years, it's ranged from a 13- to a 5-month product. So we continue to bring that rate down less significant when there aren't rate cuts, but still taking action to lower that rate over time. And so we're seeing the repricing of that portfolio as that 5-month term rolls off for various clients in any given month.

Got it. Okay. And then just my last one, just from the benefit of fixed rate asset repricing, particularly on the loan side, I think excluding accretion, loan yields rose about 6 basis points last quarter. Is that mid-single-digit basis point increase on a sequential basis. Is that kind of a good rate to use going forward?

You're saying for the fixed rate, I think, specifically, so the 43% of the loan portfolio, that's what you're seeing.

Right. Yes.

I think it's dependent on the mix of the loan growth in a given quarter. This quarter, that we did not have any meaningful growth in our small ticket leasing business, which has high yields. Our premium finance business also did not have growth. They have nice origination yields too. So I think it's dependent on the mix of loan growth in a quarter and obviously, the paydowns thereof. But I would expect it to continue to go up slightly but I can't say that it's 6% every quarter. So some mix.

The next question is from Daniel Cardenas with Janney Montgomery Scott.

So a couple of quick questions. Just returning to the auto portfolio. If you could remind us what the average FICO score is on that portfolio and then historical loss rates on it?

Yes. Average FICO is 746, Dan, and historic loss rates, let me pull the right number for you here. Sorry, I'm just shuffling papers.

No worries. And maybe as you're shuffling through your papers, if you could give us maybe an update on the health of your restaurant exposure.

Yes. So as it relates to the indirect, if you -- this year, it's -- I mentioned it's tracking at 71 basis points, year-to-date '24, 80 basis points, year-to-date '23, 50 basis points, year-to-date '22, 30. And I think we've been talking about for basically a couple of years now, kind of a little bit more of a reality of decline in that book, notwithstanding the kind of continued strength of the FICO scores.

Your question was about the restaurant portfolio, size of it?

Size and just the relative cost of the portfolio.

Yes. So the McDonald's portfolio, specifically is about $389 million in commitments. The non-McDonald's is at about $128 million in commitments. McDonald's continues to be a really high performer for us from a credit standpoint. And the rest of it includes a broad variety, including some acquired loans. We don't really originate much on the restaurant side in the commercial space. So McDonald's is really our focus as we think about restaurants.

And they're showing no -- that's not causing you any concern at the moment?

No, it's been quite solid. I mean it always depends on specific operators and specific geographies. And we have had some cases where some of those moved into other buckets as we monitor and watch them. But never lost a dollar out of McDonald's deal thus far, and we have a good partnership with corporate and good outlook and good insight into the operators and understanding how they operate.

[Operator Instructions] The next question is a follow-up from Brendan Nosal with Hovde Group.

I just wanted to circle back on North Star, how much of the current reserve balance is like allocated to North Star? And I ask because I'm trying to get a sense of like as you kind of work to cure that book, like how much of a reduction there could be, whether it's through -- working through the book or outright reserve releases to get to like a stabilized reserve to loan ratio?

It's about $18 million, Brandon, of the $75 million.

The next question is from Ryan Payne with D.A. Davidson.

Most of my questions have been asked and answered, but just one for me here. On capital, I just wanted to gauge your appetite for buybacks and thoughts on M&A and how conversations have been going as we start to see an uptick in deal activity across the industry. So just any detail on priorities you'd offer as you build capital?

Yes. Thanks. I think as we think about capital, buybacks are probably -- we do have an active buyback program. We have exercised it where appropriate. Our -- I would say our priority is building up capital in preparation for M&A and kind of supporting the dividend. And as we think about M&A, I agree with you, there's a lot of conversations going on there. We have a number of conversations taking place always at varying degrees of seriousness.

But I would say we also look to be opportunistic as there's market disruption. We've had opportunities to hire employees. We've had opportunities to look at market share in certain locations. And we've also -- we will pursue the opportunity, even potentially hire teams that are disrupted by M&A activity that overlaps with our market. So in addition to just being very interested, obviously, in using M&A as the catalyst across $10 billion. But we have -- we have and will continue to exercise strategic patients. We think doing the right deal is a lot more important than doing the next quick deal. And that's kind of how we think about it.

At this time, there are no further questions. Mr. Wilcox, do you have any closing remarks?

Yes. So I want to thank everyone for joining our call this morning. Please remember that our earnings release and a webcast of this call, including our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good morning, and welcome to Peoples Bancorp Inc. conference call. My name is Betsy, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the 3 and 6 months ended June 30, 2025. [Operator Instructions] This call is also being recorded. If you object to the recording, please disconnect at this time.

Please be advised that the commentary in this call will contain projections and other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical facts, are forward-looking statements and involve a number of risks and uncertainties detailed in the People's Securities and Exchange Commission filings.

Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples' disclaims any responsibility to update these forward-looking statements after this call except as may be required by applicable legal requirements.

Peoples' second quarter 2025 earnings release and earnings conference call presentation, were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release.

This call will include about 15 to 20 minutes of prepared [indiscernible] followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year.

Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Thank you, Betsy. Good morning, everyone, and thank you for joining our call today. This morning, we reported diluted earnings per share of $0.59 for the second quarter of 2025. We had improvements in our quarterly results in many areas, including annualized loan growth of 11%. Our net interest income increased over $2 million, while our net interest margin expanded 3 basis points which includes reductions in accretion income of nearly $1 million.

For the second quarter, accretion income added 12 basis points to net interest margin compared to 17 basis points for the linked quarter. This is the fourth straight quarter that we have had core net interest margin expansion, which excludes accretion income. Our fee-based income was relatively stable as improvements in several areas mostly offset the reduction in insurance income due to the annual performance-based insurance commissions we recognized in the first quarter.

Our noninterest expense declined and was within our guided range. Our pre-provision net revenue exceeded consensus estimates for the quarter, and our tangible equity to tangible assets ratio was stable at 8.3%. During the second quarter, our overall allowance for credit losses grew $9.4 million to 1.13% of total loans. This increase in our ratio puts us more in line with the median of our peers which was at 1.17% at March 31.

For the second quarter, our provision for credit losses totaled $16.6 million, an increase of $6.5 million from the linked quarter. Our second quarter provision for credit losses was comprised of $7 million in net charge-offs, which was down from $8.1 million for the linked quarter, a $3.8 million increase in reserves on individually analyzed loans, a $2.5 million increase in reserves on small-ticket leases, a $2.3 million net increase related to a periodic refresh in our loss drivers utilized within the CECL model. And the remainder of the increase was due to the deterioration in economic forecasts, coupled with loan growth during the quarter. For more information on our provision for credit losses, please refer to our accompanying slides.

Our annualized quarterly net charge-off rate was 43 basis points, an improvement from 52 basis points for the linked quarter. The reduction was driven by lower small ticket leasing charge-offs. As we mentioned last quarter, we expected a reduction in our charge-offs from our small ticket leasing business, but that they would remain elevated. We were down from $5.4 million in net charge-offs for the previous quarter to $4.8 million for this quarter.

For the second quarter, our annualized net charge-off rate for the small ticket leasing business was 11.51% compared to 11.97% for the first quarter and down from the peak of 13.35% for the fourth quarter of 2024. For additional details on our small ticket leasing business, please refer to the accompanying slides in our presentation.

Our nonperforming assets increased a little over $800,000 and were 49 basis points of total assets compared to 50 basis points at March 31. The increase was due to higher balances in 90 or more days past due and accruing and was due to increases mostly within our premium finance portfolio. The past 2 premium finance loans are mostly due to the timing of the receipt of expected proceeds from carriers and canceled policies, which we have noted previously on occasion as administrative delinquencies. These increases were partially offset by lower nonaccrual loans.

Our criticized loans grew $18 million, which was largely due to the downgrade of 1 commercial relationship. We are optimistic that we will be able to exit this credit with little loss exposure.

Our classified loan balances as a percent of total loans declined to 1.89% compared to 1.93% at March 31. Our second quarter delinquency rates improved as the portion of our loan portfolio considered current was 99.1% compared to 98.5% at the linked quarter end.

At this point, we have not observed impacts to our loan growth or credit metrics from the tariffs. While we continue to closely monitor our portfolio for the potential effects of tariffs to [indiscernible], we've experienced increased loan demand, which was reflected in our pipelines last quarter and in our loan growth this quarter.

Moving on to loan balances. We have loan growth of $173 million or 11% annualized compared to the linked quarter end. We had balanced loan growth in all categories, which included commercial and industrial loans of $64 million, residential real estate loans of $30 million, construction loans of $22 million, commercial real estate loans of $18 million, premium finance loans of $14 million and consumer indirect loans of $12 million.

We had lease balance growth of $5 million during the quarter, which was driven by our mid-ticket leasing business. At quarter end, our commercial real estate loans comprised 34% of total loans, about 35% of which were owner-occupied while the remainder were investment real estate. At quarter end, 46% of our total loans were fixed rate, with the remaining 54% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. We had improvements in our net interest income this quarter, which was up over $2 million or 3% compared to the linked quarter, while our net interest margin expanded 3 basis points to 4.15%. The primary driver of the increase was a reduction in our deposit and borrowing costs, which declined 10 basis points and 18 basis points, respectively.

For the second quarter, our deposit costs were 1.76%. Our accretion income declined to $2.6 million and contributed 12 basis points to net interest margin compared to $3.5 million and 17 basis points for the linked quarter. As Tyler mentioned, excluding accretion income, our core net interest margin has expanded for the last 4 consecutive quarters.

For the first half of 2025, our net interest income was relatively stable, and our net interest margin was down 8 basis points. compared to 2024. The reduction in our net interest margin was entirely due to lower accretion income, which was $6.1 million for 2025 contributing 15 basis points to margin compared to $12.3 million or 30 basis points for 2024.

Excluding the impact of accretion income, our year-to-date core net interest margin expanded 7 basis points compared to the prior year. Reductions in our loan yields compared to the prior year were offset by higher investment yields coupled with decreases in our deposit and borrowing costs. Our deposit costs declined 10 basis points during the first half of 2025 compared to 2024. We are currently in a relatively neutral interest rate risk position and have actively been managing our funding costs even without further reductions from the Federal Reserve.

Moving on to our fee-based income. We experienced a decline of 1% compared to [ the linked ] quarter, which was primarily due to performance-based insurance commissions we recognized in the first quarter. These commissions for the first quarter totaled $1.5 million and are typically received annually during the first quarter, resulting in the decline for the second quarter.

This reduction was partially offset by higher lease income, electronic banking income, trust and investment income and commercial loan swap fees. The improvement in lease income was largely driven by gains recorded on early termination of leases through our mid-ticket leasing business.

For the first half of 2025 fee-based income grew $4 million or 8% compared to 2024. The improvement was due to higher lease income, which grew $3.5 million. As it relates to our noninterest expenses, we were within our guided range at $70.4 million, which was a 1% decline from the linked quarter.

The majority of the reduction was related to lower salaries and employee benefit costs, which were higher in the linked quarter due to additional costs related to stock-based compensation expense an employer health savings account contributions we record annually in the first quarter. This reduction was partially offset by higher professional fees and data processing and software expense.

For the first half of 2025, noninterest expenses grew $3.9 million or 3% compared to 2024. The increase was due to higher salaries and employee benefit costs, data processing and software expenses and professional fees. At the same time, we had reductions in amortization of other intangible assets, other expense and net occupancy and equipment expense.

Our reported efficiency ratio was 59.3% and improved compared to 60.7% for the linked quarter. The improvement was driven by higher net interest income, coupled with reductions in noninterest expenses compared to the linked quarter.

For the first half of 2025, our reported efficiency ratio was 60% compared to 58.6% for the first half of 2024. The efficiency ratio was negatively impacted by lower accretion income during 2025 compared to 2024. And along with increased noninterest expense, mostly due to higher salaries and employee benefits costs.

Looking at our balance sheet at quarter end, the highlight is our annualized loan growth of 11% compared to the linked quarter end. This coupled with the seasonal declines in our deposits, nudged the loan-to-deposit ratio to 86% from 3% at March 31. [indiscernible] portfolio grew around $140 million compared to the linked quarter end, and was driven by investments in higher-yielding bonds at around 5.3%, while some lower-yielding securities paid off, improving our overall investment yield for the quarter.

Our investment securities comprised 21% of total assets at June 30, which was slightly higher than our target range of 18% to 20%, but we are satisfied with the higher-yielding securities we have added. We will continue to be [indiscernible] investment portfolio as we look to obtain higher-yielding securities.

Compared to March 31, our deposit balances declined 1% or $98 million. Our governmental deposits were at a seasonal high at March 31 and decreased $52 million during the second quarter. We also had reductions in our money market accounts of $40 million in interest-bearing checking accounts of $28 million. These declines were partially offset by retail CD growth of $39 million.

Our demand deposits as a percent of total deposits remained flat compared to March 31 and was 34% at quarter end. Our noninterest-bearing deposits to total deposits was flat at 20% for both periods. Our deposit composition was 78% in retail deposit balances which included small businesses and 22% in commercial deposit balances. Our average retail client deposit relationship was $23,000 at quarter end, while our median was around $2,300.

Moving on to our capital position. Most of our regulatory capital ratios declined compared to the linked quarter end. This was due to earnings net of dividends not outpacing the impact of loan growth to risk-weighted assets for the quarter.

Our tangible equity to tangible asset ratio was stable at 8.3% at quarter end and at March 31. Our book value per share grew 1%, while our tangible book value per share increased 2% compared to the linked quarter end. Finally, I will turn the call over to Tyler for his closing comments.

Thank you, Katie. During the second quarter, our small ticket leasing business continued to experience elevated charge-off levels over historical rates. We knew this was going to be an issue for a period of time as we continue to reduce our exposure in the high balance accounts, which we stopped originating mid-2024.

We also experienced increased delinquencies within the portfolio which contributed to the higher charge-offs and provisions for credit losses. Industry data from the first quarter of 2025 indicated that the equipment financing industry as a whole has seen an uptick in charge-off rates related to economic stress and uncertainty in the heightened rate environment.

Our small ticket leasing portfolio has declined in size from around $220 million at June 30, 2024, to approximately $160 million at quarter end. We expect balances to continue to decline in the near future. To put this in perspective, at the end of the second quarter, this portfolio totaled 2% of our total loan balances.

Our small-ticket leasing net yield for the second quarter was over 14%, which continues to be well above any of our other loan yields. For the second quarter of 2025, our small ticket leasing business added 20 basis points to net interest margin and added 21 basis points for the first half of 2025.

We continue to expect some cleanup in our high balance accounts within the small ticket leasing business, which totaled $22 million at June 30. We are working diligently to return to the 4% to 5% net charge-off rate for this line of business, which we continue to believe is attractive considering our yield on the portfolio. For more information on our small ticket leasing business, and high balance accounts, please refer to our accompanying slides.

For the remainder of 2025, excluding noncore expenses, we expect to achieve positive operating leverage for 2025 compared to 2024. Assuming 325 basis point reductions in rates from the Federal Reserve in the second half of the year, we anticipate a full year net interest margin of between [ $4 and $4.20]. We continue to be in a relatively neutral position so that declines in interest rates have a minor impact to our net interest margin.

We believe our fee-based income growth will be in the mid-single-digit percentages compared to 2024. We expect quarterly noninterest expense to be between $69 million and $71 million for the third and fourth quarters of 2025. We believe our loan growth will be between 4% and 6% and compared to 2024. We expect that the small ticket leasing net charge-offs will plateau over the next 2 quarters of the year.

We will continue to evaluate delinquency trends and the remaining exposure of high balance accounts for expectations as we get closer to 2026. We believe quarterly provision for credit losses will be lower over the next couple of quarters compared to the second quarter, excluding negative impacts to the economic forecasts.

As always, we continue to focus on our core business principles. We are actively managing our balance sheet, including our interest rate risk profile. We are also generating promising levels of loan growth with high underwriting standards to protect our credit quality.

We're offering our clients competitive deposit rates while developing long-term relationships and offering other services that differentiate us from other institutions. We make it a priority to give a solid return to our investors. We work to get back to our communities in meaningful ways and we strive to provide our employees with a workplace that is one of the best in the country. Our recent recognition for the second year in a row as one of America's greatest workplaces 2025 by Newsweek illustrates our commitment to our employees.

This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.

[Operator Instructions]. The first question today comes from Daniel Tamayo with Raymond James.

Maybe just starting on the charge-offs and the credit side, obviously, really focused on the small ticket leasing. But you have that slide in there that has the net charge-offs for the small ticket leasing relative to the everything else basically. So just curious, you talked about plateauing in the back half of the year for the small ticket leasing charge-offs. How you're thinking about the pace of those 2 lines kind of coming together over time and how we should think about kind of overall charge-off levels as you guys are kind of backing off of that portfolio?

Thanks, Danny. A couple of thoughts. One, I think as we demonstrate the charge-offs have been and will continue to be, to a degree, highly correlated with the high-balance accounts. So we wanted to be able to demonstrate the decline of that portfolio and also the fact that we are not building that portfolio back on the back end with new production.

And so as we look at the next 2 quarters, which I think we have pretty good visibility in into, we would expect charge-offs in the small ticket leasing to be consistent with basically the second quarter where that's been. Could be a little up, could be a little down, but that's what kind of what we're trying to communicate by saying that we expect it to plateau.

As for the rest of the charge-offs, I mean, the health of the -- I can't emphasize enough the health of the core commercial portfolio. And you look at the charge-off breakdown of the non small ticket leasing. The indirect portfolio charge-offs declined in a meaningful way from the first quarter to the second quarter. and the charge-offs and the remainder of the entire portfolio have been nominal at best. So we expect that trend to continue of that core strength in the 98% of the rest of the portfolio.

Okay. Terrific. That's very helpful. And then from a reserves perspective, you added specific reserves. I'm assuming that those were primarily related to the small ticket leasing. How should we think about -- you've got the CECL impacts where you made changes on the loss drivers -- how should we think about kind of as these small -- or as the specific reserves are charged off, but you also have the loss drivers, which maybe you can give a little bit color on how that might impact overall reserves in the next few quarters?

Sure. Let me give a little bit of clarity on 2 of those items and then circle back to answer your question a little bit. One I would say this -- obviously, it's a big provision number. The -- there's a confluence of a variety of pieces here that combined to land in the second quarter that resulted in this big number.

With respect to your question about the individually analyzed, which is about $3.8 million of the $16 million, only about half of that is attributable to a small number of high balance accounts within the small ticket leasing. The other half consists of one commercial relationship that we're provisioning for that we expect some recovery on going forward, but it's really kind of a timing issue.

With respect to the loss drivers on a kind of every other year basis, we're the CECL sausage making, if I could say that, gets updated, and we take a look at a number of things that demonstrate probability of default, and there's a lot that goes into that calculation. But essentially, it's a bit of a backward-looking analysis of the portfolio in addition to economic conditions, and in addition to comparison to a select peer group that we use as well.

So 2 years ago, when we updated our loss drivers, we saw about an $800,000 impact with that same analysis. So maybe it's unfortunate that it landed alongside these other items, but it's the time to do it and we follow our CECL process whether or not it lands at the right time for us regardless. So that's what that represents. So let me stop there and see if I was able to clarify that for you.

So I guess that -- I'm just trying to figure out kind of where you guys are now from a reserve perspective. Does the back half of the small ticket losses expected impact where the reserves might move, if there's some specific reserves, maybe even that commercial loan that comes out the other small ticket specific reserves that come out versus the elevated losses on the small ticket in the next couple of quarters.

Just trying to see how that -- where you think that might kind of move out if they kind of offset roughly or they're still moving upwards. I know it's a lot.

So let me just qualify and say, obviously, one of the components of this one was the $2.5 million in additional reserves because a certain tranche of the small ticket leasing was experiencing some elevated delinquency. So we'll obviously be really close to that portfolio. But I guess to answer your question simply, we believe this is the peak, and we believe it's that we're going to be down from here and that we're appropriately reserved at this point for all of our portfolios, but particularly with the small ticket leasing.

Next question comes from [ Adam Croll ] with [ Piper Sandler].

This is [ Adam Krowl ] on for Nate Race. So you had really solid loan growth during the quarter, and you obviously kept the loan growth guide at mid-single digits for 2025. So I was just wondering if you could provide some color on that? Was there some pull forward during the quarter or maybe increased line utilization or is that just being more conservative given the continued uncertainty on tariffs? And just any color on those various drivers.

Yes. No, thank you for the question. I think a couple of thoughts there. I don't think we're being too conservative. We guided after the first quarter, putting up a 4% annualized, we guided to a strong second quarter because the pipelines demonstrated that.

One of the -- we had great production in the first half total, we had about -- I'll give you the number here. We had about $171 million of paydowns against our production for the first half. We expect probably a little over $400 million total paydowns for the full year. So when we think about the guidance for the second half, we are very optimistic about the portfolio and the pipelines going into the third quarter.

But we think the paydowns will be slightly elevated relative to the first half. And so that's kind of where that is coming from. When you combine the 4% first quarter, 11% second quarter, little bit increased paydowns, but still very strong loan demand. And I would say, robust growth across the broad swath of all of our businesses, which -- so a lot of optimism there. But that's why the guide stays kind of at that 4% to 6% range and maybe at this point in the middle to the higher of that range.

Got it. That's super helpful. Maybe switching to the funding side. I know there was some seasonality during the quarter, but I was just curious what's your outlook on the deposit growth side for the rest of '25 maybe what you're seeing in terms of deposit pricing among competition and maybe how that's changed over the last 90 days or so?

Yes. So the outlook on deposit growth as we proceed to Q3 and Q4. The seasonality will continue and that they will peak -- our governmental deposits will peak back up. We expect at 9/30 and they revert back down in as of 12/31. So the high points are March 31 and September 30, and the low points are generally 6/30 and 12/31.

So from the governmental line, we'll see some growth in the third quarter. As it relates to the other categories, I'd say they were relatively stable. We had some reductions in the quarter, as we noted. I'd say noninterest-bearing was relatively flat. We continue to seek those opportunities and retain those clients. We have other lower cost funding in our interest-bearing and savings accounts that we were able to largely maintain balances. We had a slight reduction in interest bearing. But the sales team is continuing to have the conversations with the clients, and we're optimistic that we'll maintain and see some slight growth in those categories.

The one we've had the most meaningful growth in its retail CDs. And as you can see from our deposit costs quarter-to-quarter. And we had some reduction in that and we continue to manage the rate we pay on those, but we're still seeing some strong pipelines and strong efforts by the sales team. So I'm optimistic Q3, we'll see some continued growth in deposits, and then we'll see some seasonality in Q4 again.

And then sorry, the other piece of your question, sorry, was on deposit competition. I'd say it's relatively stable. There's always an outlier here or there in the different geographies. that we cover. But I'd say it's pretty consistent from during the second quarter as it was in the first quarter.

Got it. And so last one for me. Just kind of going off that, Katie, do you see any opportunities to reduce non-maturity deposit costs if the Fed were to remain on hold in the third quarter?

Yes. We continue -- so I think I've shared this before, we have regular pricing committee meetings, and we've continued to move our deposit rates even with the Fed being constant in where they have kept short-term rates. So we continue to be actively managing that portfolio and looking for opportunities to reduce the cost there.

The next question comes from Tim Switzer with KBW.

I really appreciate all the detail on the credit outlook. But could you help us understand the overall profitability of the North Star business? It looks like, if I'm looking at that slide deck about a 250 basis point risk-adjusted spread.

How is the profitability below that line? Your deck mentions 6%-plus ROE the last 2 years, obviously pretty good for any bank segment. But can you help us understand the variable and fixed expenses and maybe where the ROA is sitting now?

Yes. I mean, I think we've seen -- so the first few years we owned that, they were very strong in all categories. I think we've given some of that back in the current year. So the profitability has been tightened and reduced significantly.

There's been active management of that portfolio and that team, and we're continuing to look for ways to regain the profitability and the performance outlook. So I'd say it's not as strong as we would like right now, but it's on a trajectory to get back to where it was previously.

Yes. And the only thing I would add, just to echo what Katie said is we have and will continue to restructure the infrastructure of that business commensurate with the portfolio size and on the go forward so that it will be profitable engine and positively add to the greater hold.

Okay. And you guys mentioned you haven't observed any impacts from tariffs yet. Could you let us know maybe what kind of review you've done of your loan portfolio and overall customer base on who is most exposed to tariffs? And like maybe which geographical markets and industries you're most exposed to?

Yes, absolutely. So we've done a broad review of our entire portfolio going back stretching into the first quarter for impact. Broadly, we've looked at essentially every loan relationship that we have on the commercial side over a couple of million dollars. We have particularly done a deep dive into our auto business as well as our manufacturing businesses to see what the potential impact would be and to see if there's forward risk.

We obviously are big in the automotive business. If I could give you one anecdote where I do think tariffs have seen an impact is in our indirect business, we saw record application volume in March of 8,500 applications, which dropped back in the most recent months to about 7,200 applications where you saw consumers kind of maybe pre-buying in anticipation of tariffs. But that spike didn't really lead to any anomalies.

So I would say the health of the commercial portfolios, the health of all of the vary businesses that we have has not been materially impacted by the tariffs, but our -- in the course of our activities that we do to monitor all of our loan relationships, that is kind of #1 on the Q&A and #1 upon our review with the clients and #1 upon our review of the financial statements as we receive them and monitor covenants and monitor the expected outlook.

The next question comes from [ Emmanuel Nava ] with [ D.A. Davidson ].

I'm just thinking about some of the near-term NIM dynamics. The PAA came down a little bit. Should we expect PAA at this level? Also happy to hear kind of commentary around loan pricing trends and deposit trends -- deposit pricing trends.

Did you ask about [ NPAs]? So was that your --

No. He asked about accretion.

I have trouble hearing you. I'm sorry.

Sorry. So as it relates to accretion, just to level set, so we impacted margin by 12 basis points beneficial to margin by 12 basis points in the second quarter compared to 17 in the first. And so I think we're -- as we had guided before, think of that we'll continue to stay in that range as we proceed through the year. We might see it go up a basis point or 2 from the 12%. But I think in the mid- to low teens is where we expect to be for the year and for the back half of the year.

As it relates to deposit pricing, I think I touched on this a little bit earlier. So we continue to actively manage deposit costs even in light of not taking action in the first half of the year, and we'll continue to do so as we proceed through the year and obviously be more aggressive to the extent the Fed takes action.

On the loan pricing, I think we're still staying diligent, both on the credit side of loans and on the rate side. So we're happy with where those spreads are coming in, in the quarter.

Yes, the yields and pricing discipline have been consistent quarter-to-quarter and for a while now in this rate environment.

Great. At some point, if you get the leasing back to prior profitability, there shouldn't be any NIM impact, correct?

So if we get it back to where it historically had been, we would likely see some benefit to our margin in the fact that those are generally 19% to 20% yields, and we haven't seen growth in that portfolio for a few quarters now. So to the extent we can start to see some growth albeit it's a small component of the total, but at that, those yields, that's pretty attractive.

Your NIM range with the 3 cuts, what are the cuts? Since you're so neutral, just what are the impacts on each of those cuts within that NIM range?

So the cuts, just to be clear. So we quoted 3. Again, the one in December, that transpires has little to no impact. And as they get later in the year, there's less of an impact, but the immediate impact is most on the loan portfolio, given the variable rate component of our portfolio, which is about 50 -- I think it's 54% or a little over 50%.

So -- and then on the funding side, much of our deposits are a meaningful portion is in the retail CDs. And those are generally a 5-month right now. So it's going to take a little bit of time for those to reprice down, but we'll continue to stay after it.

And then on the OpEx side, what would drive kind of the higher end of your quarterly run rate range or the lower end? Is it a lot of the variable comp in loan growth? Or what else would drive some of the -- kind of that range of OpEx?

Yes. So again, we were in the range for the second quarter. One might say towards the higher end of the range at 70.4% versus the high end being 71%. And I would say a meaningful driver of that was medical expense, which is pretty variable to us. And so that continues to be a factor at play. And then to your point, I think there is some variable comp as it relates to whether it's our fee-based businesses or our loan section and how those play out for the remainder of the year.

The next question comes from Terry McEvoy with Stephens.

This is [ Brandon Rod ] on for Terry. My first question, just on the downgraded commercial relationship, do you have the industry that was in? And then, I guess, your total exposure to that in the industry, too.

Yes. That is a -- first of all, it's a C&I loan. It is a kind of wholesaler/manufacturer. And in Ohio, so in the second part of your question, help me out. Sorry.

Your total exposure to that industry.

Total exposure to that industry specifically, it's part of a granular portfolio of C&I really not particularly tied to any one segment.

Okay. Got it.

No correlation to any other concentrations, I guess, is what I would say.

Okay. I heard your earlier comments on the leasing charge-offs plateauing in the second half of this year. Is there a specific drive to that step up [indiscernible] step up in the second half? Or is that just an ordinary course of business before the plateau?

I think part of it is the -- we've talked about the active management, especially at the high-balance accounts. And to the extent that those are -- we are working those out quickly, you're seeing that materialize in the net charge-off number. And again, because that segment is not growing, it's only shrinking, there's a -- we believe that there is a kind of lifetime to that portfolio that's running itself out over the next 2 quarters as well as this quarter currently, we're talking about.

Okay. And I guess just my last one on -- can you help me understand the spread between the maturing commercial loans relative to the new production yields. I guess I'm just trying to get an idea of like what the -- how loan yields may drift higher over the next couple of quarters and what that magnitude might look like.

Over what time frame specifically are you thinking?

Let's just say over the next 12 months.

I mean I think it's been pretty stable, and that's the expectation on a go-forward that the spread will remain stable. We're not going to chase. We're going to -- we're not going to compromise credit or kind of profitability just for the deal.

Yes. And to the extent that there's rate cuts that drive lower pricing across the industry. We will kind of move with the tide, I guess, is what I would say. And it's a competitive market, but it has been a competitive market in this flat rate environment for some time. And so I believe we will all move together relative to each other.

[Operator Instructions]. The next question comes from Daniel Cardenas with Janney Montgomery Scott.

Just a couple of questions on capital. I mean, your capital level is relatively stable on a sequential quarter basis, if you look at the TCE ratio. What is your appetite for stock repurchases, given where your capital level is? And then maybe a second question really more on the M&A side. what the environment is like? And where do you see potential opportunities for the people franchise?

Yes. Dan, as you alluded to, I think our capital levels are stable. I think they're still strong and you recall, I think we noted this in our last quarter call, we did purchase some shares in April when bank stock prices were kind of lower. We continue to remain active in that space, but opportunistic. And so we'll continue to evaluate it as we do each quarter with the Board but we expect to stay kind of in our relatively kind of opportunistic approach and not be overly aggressive with that function.

Yes. If the capital continues to build as it has been for a number of quarters, that would be probably the priority over any kind of meaningful buybacks. But as Katie mentioned, we maintain the active plan, and that's important to be able to be opportunistic.

With respect to M&A and one of the reasons why we want to have a strong capital position is to be, as we've talked about for a while now, the [ poise ] under $9 billion and exercising some strategic patience as to over find the right deal to go over [ 10%], which we think will be meaningful and transformative over time.

I think the outlook is good. There's a lot of deals being announced. We are having a lot of conversations and whether any of those bear fruit in 1 quarter or in 6 quarters, we'll -- either time frame would be appropriate for us. We are looking -- we continue to look the slight preference for a larger deal.

And we obviously have a slight preference for overlapping deals in existing footprints or expanding where we already are in states like Virginia or adjacent states like Pennsylvania, Southern Indiana, but more Ohio, more West Virginia, more Kentucky and I would say we're having conversations in all of those spaces.

And given the asset size, the interest in buying any asset-generating specialty finance businesses is probably lower, but we will and have been continuing to add talent to the ones that we have. I don't know if that covered it for you, Dan.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Wilcox for any closing remarks.

Yes. I want to thank everyone for joining our call this morning. Please remember that our earnings release and a webcast of this call, including our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.