Earnings Call Transcript - PEBO Q2 2024

Operator, Operator

Good morning and welcome to the Peoples Bancorp Inc. Conference Call. My name is Cole and I'll be your conference facilitator. Today's call will cover a discussion of the results of operations for the three months and six months ended June 30, 2024. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. 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, 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 facts, are forward-looking statements and involve a number of risks and uncertainties detailed in the Peoples' Securities and Exchange Commission's filings. Management believes that 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 2024 earnings release conference call presentation were issued this morning, and are available under the peoplesbancorp.com under Investor Relations. A reconciliation of these non-generally accepted accounting principles, or GAAP financial measures discussed during this call to the most directly comparable GAAP measures is included at the end of the earnings release. This call will include about 15 minutes 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 the peoplesbancorp.com in the Investor Relations section for one year. Participants in the call today 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.

Tyler Wilcox, President and CEO

Thank you, Cole. Good morning, everyone, and thank you for joining our call today. This quarter, we're providing an earnings conference call presentation, which we filed as part of our Form 8-K this morning with our earnings release, and it is also posted on our website with this webcast. We are pleased to bring another quarter of consistent results for our shareholders, and for the second quarter, diluted earnings per share were $0.82 compared to $0.84 for the linked quarter. For the first half of 2024, diluted EPS were $1.66 compared to $1.56 for 2023. Positives for the second quarter included loan growth of 8% annualized compared to the linked quarter, improvements in our criticized and classified loans which declined 6% and 19% respectively, compared to the linked quarter end. While our total deposits declined $29 million, our core deposits grew by $42 million for the quarter, which excludes brokered CDs. Our brokered CDs continue to decline as we generate customer deposits. Our book value increased from $29.93 at the linked quarter end to $30.36 at June 30, while our tangible book value per share grew to $18.91, a 3% increase from March 31. Our tangible equity to tangible assets ratio improved 24 basis points to 7.6%. Our regulatory capital ratios improved by double-digit percentages compared to the linked quarter end. Our return on average assets for the second quarter was 1.3%. We had a decline in our provision for credit losses compared to the linked quarter, and we generated improvements in our fee-based income excluding the annual performance-based insurance commissions we recognized last quarter. As it relates to our credit quality, we had many improvements this quarter, including a reduction in our criticized and classified loans, which were down $17 million and $27 million, respectively, compared to the linked quarter end. This was driven by paydowns on some loans that we downgraded last quarter as we diligently worked those credits. We noted last quarter in our call that we did not believe the downgrades at that time were indicative of core portfolio issues, and this has shown to be the case. We continue to receive paydowns on these loans, and have received additional funds in July, including another $8 million. We also had upgrades of two classified credits totaling $5 million to watch status, and one upgrade of $2.5 million from criticized to fair. Our allowance for credit losses remained at 1.05% of total loans at quarter end, consistent with the linked quarter end. Our provision for credit losses for the quarter was driven by net charge-offs, higher reserves on individually analyzed leases, and loan growth. Our annualized net charge-off rate for the quarter increased to 27 basis points compared to 22 basis points for the first quarter. Combined, our leasing and consumer indirect net charge-offs contributed 21 basis points of the 27 basis points of our annualized net charge-off rate for the second quarter. We continue to see elevated net charge-offs in small-ticket leases from our North Star division, which contributed 14 basis points of the 27 basis points to our annualized net charge-off rate. These charge-off levels are similar to pre-pandemic rates or the rates we expected to see when we acquired the business. We continuously evaluate the various lending verticals in the small-ticket leasing area, and adjust our appetite based on performance. For the second quarter, the yield on our small-ticket leasing balances was over 14% and we continue to be very satisfied with our risk-adjusted return on our core small-ticket leasing business. Our net charge-offs have grown in consumer indirect loans, adding 7 basis points to our annualized net charge-off rate for the second quarter. We are seeing a national trend of increased delinquency in auto lending, leading to higher surrender rates. When combined with the previous spike in used values, the dollar value of our net charge-offs has increased. We remain disciplined in our lending practices with weighted average FICO scores at over 750 on our production and remain optimistic about the business. Non-performing assets increased $2.4 million, which was mostly due to higher non-accrual leasing balances. Our delinquency improved this quarter, and the portion of our loan portfolio considered current at June 30 was 98.8%, up from 98.7% at March 31. We're confident in our commercial loan concentrations, with our exposure to non-owner-occupied office space at less than 2% of our total loan portfolio balance at June 30. Our exposure declined compared to the linked quarter end as we successfully exited an $8 million classified office loan. Our hospitality and assisted living facilities were each around 2.5% of our total balances. At the same time, our multifamily loan balances were $557 million, a $35 million increase compared to the linked quarter end. We continue to have strong sponsor support and economic metrics with the deals we have chosen in this segment, and will continue to be diligent in our underwriting of these loans. We see rents on multifamily loans holding up, and in our seven metro markets, we are still experiencing average rental growth of 3.2% compared to the national average of 0.9%. Compared to the linked quarter end, our total loan portfolio grew $123 million or 8% annualized. Our premium finance balances contributed $54 million of growth compared to the linked quarter end. Increases in our commercial and industrial portfolio of $43 million mostly offset declines of $48 million in our commercial real estate portfolio. But as I mentioned earlier, a meaningful portion of the credits that paid down this quarter were part of our criticized and classified assets which we view as a positive. Consumer loans contributed $39 million of growth, driven by higher consumer indirect balances. At quarter end, our commercial real estate loans comprised 35% of total loans, nearly 40% of which were owner occupied, while the remainder were investment real estate. At the same time, our total consumer loans, which include residential, real estate, and home equity lines of credit, were 29% of total loans, commercial and industrial loans were 20%, leases totaled 7%, construction loans were 5%, and premium finance was 4% of total loans. At quarter end, 47% of our total loans were fixed rate with the remaining 53% at a variable rate. We continue to actively assess market conditions on our commercial real estate book, including the impact of higher interest rates on upcoming loans repricing or maturing. We are comfortable with our ability to handle the repricing of our commercial loan portfolio, and only have $289 million repricing or maturing during the last half of 2024 and another $396 million during 2025. I will now turn the call over to Katie for a discussion of our financial performance.

Katie Bailey, Chief Financial Officer

Thanks, Tyler. Our net interest income remained stable compared to the first quarter, and our net interest margin was 4.18%, down from 4.26%. Almost half of the decrease in net interest margin from the previous quarter was due to lower accretion income after accounting for amortization expense, contributing 28 basis points this quarter versus 32 basis points last quarter. The rest of the decline was mainly from higher borrowing costs in the second quarter, which offset the increase in earning asset yields. For the first half of 2024, our net interest income rose by 10%, while our net interest margin decreased by 31 basis points to 4.22%. Earning asset yields improved to 6.32% for the first six months of 2024 from 5.49% in 2023, but higher funding costs negated this improvement. Accretion income, after accounting for amortization expense, contributed 31 basis points to the net interest margin for the first half of 2024, compared to 19 basis points for 2023. Regarding our fee-based income, excluding the annual performance-based insurance commission of $2.2 million we received in the first quarter, fee-based income increased from the previous quarter. We generally recognize this insurance commission in the first quarter of each year. In the second quarter, the growth in electronic banking and trust and investment income compensated for declines in bank-owned life insurance and lease income. For the first half of 2024, our fee-based income grew by 15%, with gains across all lines, primarily due to the Limestone merger on April 30, 2023. Concerning our non-interest expenses, they were relatively unchanged compared to the first quarter of 2024 in part due to a one-time adjustment of corporate expenses. For the first half of 2024, non-interest expenses increased by 8% as higher operating costs from the expanded footprint from Limestone were partly offset by lower acquisition-related expenses. In the second quarter, both our reported efficiency ratio and the efficiency ratio adjusted for non-core expenses was 59.2%. Our reported and adjusted efficiency ratios rose compared to the previous quarter, primarily due to lower fee-based income. For the first half of 2024, the reported efficiency ratio was 58.6%, a decrease from 2023. The adjusted efficiency ratio for the first six months of 2024 was 58.7%, an increase from 2023 because of rising non-interest expenses. Looking at the balance sheet, our investment securities portfolio made up 20% of total assets as of June 30, and our loan-to-deposit ratio increased to 87%. During the quarter, we enhanced our liquidity by transferring some governmental deposits and repurchase agreements into insured cash sweep products, freeing up previously pledged investment securities. From a deposit perspective, our total deposits fell by $29 million from the previous quarter, largely due to declines in brokered CDs and seasonal decreases in governmental deposits, which are typically at their highest during the first and third quarters. Excluding brokered CDs, our deposits rose by $42 million compared to the last quarter. Our retail CDs increased by $132 million, while we reduced brokered CDs by $71 million. For the second quarter, our deposit costs only increased by 9 basis points from the previous quarter. Our retail CD promotions have featured a 5% CD over a relatively short term, and our overall retail CD portfolio had an average lifespan of five months as of June 30. Our demand deposits as a percentage of total deposits remained unchanged from the previous quarter at 35% as of June 30, with non-interest bearing deposits comprising 20% of total deposits. At the end of the quarter, 78% of our deposit composition was in retail deposit balances, including small businesses, and 22% was in commercial deposit balances. The average retail customer deposit relationship stood at $25,000 at quarter-end, with a median of nearly $3,000. Regarding our capital position, our capital ratios improved compared to the previous quarter, bolstered by earnings exceeding dividends. At the end of the quarter, our common equity Tier 1 capital ratio was 11.8%, our total risk-based capital ratio was 13.5%, our leverage ratio was 9.7%, and our tangible equity to tangible assets ratio improved to 7.6%, up from 7.4% at the end of the previous quarter. In terms of capital deployment, we did not repurchase shares this quarter, but we offer an attractive dividend as part of our capital use, which currently yields 4.89%. Our dividend payout ratio was 48.9% for the second quarter. Finally, I will hand the call back to Tyler for his closing remarks.

Tyler Wilcox, President and CEO

Thank you, Katie. During the first half of 2024, we made strides in improving our technology, as we rolled out a new customer relationship management system that integrates referrals, opportunities, and client information between our lines of business, enhancing our ability to execute by making it easier for us to connect with, and serve our clients. We also implemented a new software system for our insurance groups and began utilizing more functionality with our implementation of Microsoft products as we continue to look to replace legacy systems. We are also well on our way to implementing a new business loan origination system that will be in place starting in 2025. As we mentioned software upgrades, I would also like to note that the CrowdStrike outage from last week had a nominal impact on our systems, and any impact has been resolved at this point. We place high importance on our employee satisfaction and workplace. We are proud that our company's culture is being recognized in the marketplace. During the first half of 2024, we were recognized by US News & World Report as a Best Company to Work For in Banking and by Newsweek as One of America's Greatest Workplaces. As we look to the second half of 2024, we currently anticipate net interest income to benefit from the full year impact of the Limestone merger. We continue to expect our quarterly net interest margin to be between 4.1% and 4.3%, assuming that there are no significant short-term interest rate changes in the remainder of 2024. We believe our fee-based income growth will be between 6% and 8% compared to 2023. Our quarterly total non-interest expense forecast remains unchanged at between $67 million and $69 million for the third and fourth quarters of 2024. We're lowering our 2024 loan growth guidance to 5% to 7% compared to our previous guidance of 6% to 8%. This slight adjustment in our estimate is partly a result of the paydowns received, and expected paydowns we noted on criticized and classified loans, which will offset some of our anticipated loan production. We also expect some reduction from our leasing business due to recent credit quality and net charge-off trends. Based on current information, we expect our provision for credit losses for the third and fourth quarters to be relatively consistent with the amounts recognized during the first two quarters of 2024. We anticipate a full year net charge-off rate of around 25 basis points to 30 basis points, primarily driven by trends in small-ticket leasing, and indirect charge-offs expected for the remainder of the year. We are pleased to bring our shareholders solid, consistent performance while also improving our product offerings, infrastructure, technology, and aligning our business to grow. 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 this call back into the hands of our call facilitator. Thank you.

Operator, Operator

And our first question today will come from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo, Analyst

Thank you. Hey, good morning.

Tyler Wilcox, President and CEO

Good morning.

Daniel Tamayo, Analyst

Maybe we can start with the margin. I know you appreciate the guidance you provided, but I'm wondering if you could elaborate more on the restructuring benefit in the third quarter, along with deposit competition and other factors, regarding your outlook on the extent of margin compression in the second half of the year?

Katie Bailey, Chief Financial Officer

So, Danny, you mentioned a restructuring in the third quarter, but I'm not entirely clear on what you mean. We did not change our investment portfolio in the second quarter, or really in the first quarter either. Therefore, the guidance we have provided has remained consistent throughout the year. I anticipate there will be a slight margin compression, mainly due to the decline in accretion income. In the second quarter, we saw a benefit of 28 basis points from accretion. We expect a continued compression of about 2 to 4 basis points in each subsequent quarter, aiming for a total benefit from accretion of 25 to 30 basis points for the year, noting that the latter half will be lower than the 28 basis points. This is our expectation as we move forward. I believe the core margin accretion will remain stable compared to what it was in the second quarter.

Daniel Tamayo, Analyst

Got it. Okay. Yeah, sorry, that was a misspeak. My apologies on the restructuring, but yeah, the accretion is what I was thinking of. Then, I guess just to follow up on just the small-ticket leasing business, you talked about it a lot in the prepared remarks and in the release, but just curious if you are seeing an uptick in those loss rates. I mean, you saw classifieds come down. I guess if you could just talk a little bit about the drivers of the lower classifieds, but also kind of the continued elevated net charge-offs related to the leasing business, that'd be great.

Tyler Wilcox, President and CEO

Sure, Danny. Thanks for your question. To break it down a bit, I'm very optimistic, as we've discussed in the past and reiterated regarding our core commercial segment. There’s a compelling narrative there. The decline was primarily due to upgrades and payoffs. Overall, we’re actively managing both our core portfolio and the business we acquired from Limestone. A positive note is that delinquency rates have decreased in the core commercial portfolio. I take pride in the fact that our portfolio is relatively less exposed to commercial real estate compared to the industry and our peers. During the first half of this year, we experienced a favorable shift from commercial real estate to commercial and industrial segments, with paydowns around 60% in commercial real estate and production about 60% in the commercial and industrial area. This indicates a natural rebalancing. It’s somewhat of a tale of two portfolios, yet the core, which constitutes over 90% of our loan portfolio, remains strong. Regarding the small-ticket leasing sector, it's inherently associated with higher risk segments such as hospitality, restaurants, startups under three years, breweries, and transportation of critical equipment. When we acquired this business, we anticipated charge-offs around 4.5%, based on a historical context of 22 years. Notably, in 2021 and 2022, the charge-offs were below 1%. This favorable outcome has positively influenced our pricing, and we are now seeing a return to normalization. The higher risk areas combined with elevated pricing continue to provide satisfaction with the risk-adjusted returns in that sector, although we are observing an increase in those rates.

Daniel Tamayo, Analyst

That was helpful. Thanks, Tyler, appreciate it. And that's all for me. Thanks for taking my question.

Katie Bailey, Chief Financial Officer

Thanks, Danny.

Tyler Wilcox, President and CEO

Thanks.

Operator, Operator

And our next question will come from Brendan Nosal with Hovde Group. Please go ahead.

Brendan Nosal, Analyst

Hey, good morning, folks. Hope you're doing well.

Tyler Wilcox, President and CEO

Hey, Brendan. Good, thanks.

Brendan Nosal, Analyst

I wanted to follow up on the charge-off guidance and the leasing aspect. What are you including for lease charge-offs in your overall guidance for the second half of the year? Also, you mentioned that the normalized rate is 4.5%, but it seems like there's still some distance to cover to reach that. I'm interested in your thoughts on today's normalization compared to the 4.5% you mentioned.

Tyler Wilcox, President and CEO

Well, I think the third and fourth quarter will be relatively consistent from a charge-off standpoint, with the small-ticket leasing specifically. There is the delinquency in that portfolio has ticked up. We've obviously, as we referenced, done some tightening of the portfolio there, but as far as the outlook specifically with those leases, that guide is going to be consistent from a charge-off standpoint. I don't know if I answered your question.

Brendan Nosal, Analyst

Yeah, that's helpful. Maybe one more from me, just pivoting. Can you provide some color on the overall M&A environment, and whether you're expecting any change in that environment now that bank multiples have firmed up as much as they have over the past few weeks?

Tyler Wilcox, President and CEO

Sure. There is a lot of discussion happening regarding mergers and acquisitions, but it seems that many management teams and boards are taking a cautious approach, waiting to see what happens with interest rates and the election. I’m not suggesting that either of these factors will dramatically change things, but during our ongoing conversations, it’s clear that many banks are exploring their future options, and we’re actively participating in those discussions. I anticipate that there will be more M&A activity next year compared to this year, but that's about as far as I can predict. My main focus is on identifying opportunities for us in the upcoming year, and I believe there is a good chance that some of the discussions we’ve been having for a while will lead to positive outcomes in the future.

Brendan Nosal, Analyst

Yeah, yeah. Okay. Thank you for taking the questions.

Tyler Wilcox, President and CEO

Thank you.

Katie Bailey, Chief Financial Officer

Thank you.

Operator, Operator

And our next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy, Analyst

Hi. Good morning.

Tyler Wilcox, President and CEO

Hi, Terry.

Katie Bailey, Chief Financial Officer

Good morning, Terry.

Terry McEvoy, Analyst

Just looking at the average balance sheet, the CRE and C&I average yields both declined quarter-over-quarter, and it's kind of half of your loan portfolio. So, can you just talk about the quarter-over-quarter decline, and within the margin outlook for the back half of this year? Where do you see loan yields or those portfolios trending?

Katie Bailey, Chief Financial Officer

Yeah, I think you're seeing the accretion on those portfolios diminish quarter over quarter as we've stated. That's where the large marks come when we acquire the books, predominantly Limestone most recently. So, again, I think we'll continue to see slight compression and accretion quarter to quarter. I think I previously said 2 basis points to 4 basis points that might go down in the quarters, again, as that book continues to pay down, pay off. That's why we see less accretion there. So, I think it'll be relatively stable with the caveat that accretion will go down slightly.

Terry McEvoy, Analyst

Perfect. That's what I assumed it was, but wanted to ask. And then, Tyler, you talked about some technology investments, infrastructure investments. How is that kind of built into your expense outlook, and maybe talk about some of the efficiency gains that you foresee because of those investments?

Tyler Wilcox, President and CEO

Thank you, Terry. In terms of our expense outlook, we've mentioned over the past few quarters that these expenses have already been accounted for. Our guidance for the rest of this year and into next year should remain fairly consistent because we started paying for the customer relationship management software last year, and it has been implemented this year. From an efficiency perspective, we are seeing some early benefits. It has provided us with a unified system for certain operational aspects, allowing us to streamline processes and significantly reduce internal service times from hours to minutes, which is a positive outcome. Additionally, it has enabled us to eliminate some third-party systems by integrating them into a single platform. Moving forward, I expect that our diverse range of businesses will work more cohesively. One of our main objectives has always been to foster collaboration among those businesses. This system will enhance our ability to analyze client data and create opportunities for our clients across the businesses more efficiently, which we hope will ultimately boost our revenue. We are excited about this system as it represents a long-term investment and a fundamental change in our operations.

Terry McEvoy, Analyst

Maybe one small one. The tax, $1.1 million tax benefit that was cited in the press release, what's the outlook for the tax rate in the back half of the year? Thanks again.

Katie Bailey, Chief Financial Officer

I think the tax rate in the back half will be consistent with the first quarter. I think that if you adjust the Q1 or Q2 amount for the $1.1 million we quoted, I think you'd get something closer to 22%, 22.5%, and I think that can be the expectation for the back half of '24.

Terry McEvoy, Analyst

Great. Thanks for taking my questions.

Tyler Wilcox, President and CEO

Thanks.

Operator, Operator

And our next question will come from Tim Switzer with KBW. Please go ahead.

Tim Switzer, Analyst

Hey there. Thank you for taking my questions. I have a quick follow-up on some of the commentary around the leasing charge-offs. Could you talk about how maybe a change in the macro environment along with lower interest rates could maybe improve that, the credit trends you're seeing in that sector right now?

Tyler Wilcox, President and CEO

Thank you, Tim. A decrease in interest rates would certainly improve the outlook and ease some of the pressure faced by small businesses. Historically, the average interest rate before the pandemic fluctuated around 4.5%. Borrowers in higher risk industries tend to seek alternative options outside traditional banking services for their loans, which are typically fixed rate. As interest rates decrease, they might find better relief options. While this likely won't lead to a significant change, it would be beneficial. Additionally, these leases usually have short durations, so they tend to be resolved more quickly than the average portfolio.

Tim Switzer, Analyst

Okay, that's helpful. And you guys have always had a good amount of non-interest income, higher percentage of revenue than most peers. It's come down a little bit over time, partially due to acquisition. Is there a range you'd like to bring that back up to, or like give a target of fee income as a percent of total? And are there any specific businesses you'd like to get a little bit more scale in?

Tyler Wilcox, President and CEO

Historically, we were at around 30%, and I would love to see us return to that level. You are correct that the acquisitions, including bank acquisitions and some specialty finance businesses, have contributed to this trend. We really value our fee businesses. From an insurance perspective, we have continued to grow, although not at the same rate as the bank. We expect to generate around $20 million in annual revenue this year and in the future. We have also been making smaller acquisitions in that area and plan to keep doing so, as we see it as a good opportunity for insurance owners looking for an exit strategy. In terms of trust and investments, we manage $3.6 billion in assets and have been growing that business organically at a healthy pace, while also expanding some of the lines of business. We will continue to pursue acquisitions, both for books of business and for larger opportunities within that sector. While I can't give you an exact target, my goal is to see more growth in that area.

Tim Switzer, Analyst

Great. Thank you. That's all for me.

Tyler Wilcox, President and CEO

Thank you.

Katie Bailey, Chief Financial Officer

Thank you.

Operator, Operator

Our next question will come from Manuel Navas with D.A. Davidson. Go ahead.

Manuel Navas, Analyst

Hey. Good morning.

Tyler Wilcox, President and CEO

Hey. Good morning, Manuel.

Manuel Navas, Analyst

I'm wondering to what extent you expect to see declines in the leasing balance? Is this a typical cyclical trend where you might pull back on small-ticket leasing when net charge-offs increase slightly, while still achieving higher risk-adjusted return metrics over time? I'm trying to clarify these movements.

Tyler Wilcox, President and CEO

Thank you, Manuel. We've had this business for a few years now, and this is our first credit increase since our acquisition. We were at a low point regarding charge-offs, so we're not concerned. We're making adjustments within the different sectors of that business. I don't expect to see a decline in small-ticket leasing balances. There is still production in the core, and if there were any decline, it would be very minimal. We are confident in our ability to continue growing that business. In a rising environment, we need to assess what is performing well and make the necessary adjustments.

Manuel Navas, Analyst

There would be a feeling that if rates came down, I don't know, 100 basis points middle of next year, you'd be right back in some of these verticals, or would you be still cautious?

Tyler Wilcox, President and CEO

No, I think we could look at the fact that we've grown that business from $80 million on the balance sheet to over $220 million. As we've expanded, we’ve enhanced our capabilities and nationwide reach. We’re fully committed to this business. From a pre-tax perspective, it's generating over a 2% return on assets, making it very profitable for us despite the higher loss rates due to our pricing strategy. We intend to keep investing in it, and in light of the recent steep increase, we are actively managing the business to sustain long-term growth because it remains viable and profitable. It represents 3.4% of our total loan portfolio, which highlights its potential impact, even though it’s a relatively small part of the overall portfolio.

Manuel Navas, Analyst

That's a great point. I'm moving on to net interest margin. Can you share your thoughts on deposit costs? Where do you think they might peak, and how would deposit costs and net interest margin respond to rate cuts?

Katie Bailey, Chief Financial Officer

Yeah. So, I think the deposit cost, you saw some increase this quarter compared to last quarter as we had a little bit of continued re-shifting in the mix of our deposit portfolio to a slower extent than what we saw in the prior quarter. I think we're close to the peak on that rate. We are continuing to see a little bit more mix shift. We're continuing to see growth in the retail CDs, but I think it's slowing a bit. And I think to the extent rate cuts transpire as they are being projected to happen later this year and this quarter, we'll see some benefit. As we mentioned, we've kind of used a short-term promotional product that had at 06/30 a five-month average life remaining. So, I think we can take the benefit of rate cuts in pretty short order on the funding cost side.

Manuel Navas, Analyst

And can you talk about balancing? You made the comment that less of your securities book is now pledged because of some movement on the deposit side. Can you just talk about that flexibility that adds? Will we see more securities run-off to pay down broker, to pay down other kind of higher-cost areas of the liability side, or just kind of talk about that balance that you're getting based on that comment?

Katie Bailey, Chief Financial Officer

Last quarter, we saw an increase in cash and cash equivalents on our balance sheet. However, in the second quarter compared to the first quarter, there was a decrease in cash and cash equivalents because we didn't need to hold as much cash for immediate liquidity. This was because we had unpledged securities that could be quickly sold if we required immediate liquidity. This explains the trade-off we mentioned. The reduction in cash and cash equivalents during the quarter occurred because we were able to rely on unpledged securities for liquidity as needed. We don't anticipate needing them, but we are following our internal policies and guidance.

Manuel Navas, Analyst

Got it, cash and cash equivalents. Thank you for clarifying for me. And does that mean that the current level is probably where you'll run at a little bit going forward, kind of cash a little tighter, securities balance is probably staying in similar range or similar level?

Katie Bailey, Chief Financial Officer

I agree with that. Over time, we have mentioned that we aim for our investment portfolio to be between 18% and 20%. Currently, we are at 20%, which falls within that range. However, I would note that we are not actively purchasing much for the investment portfolio due to interest rates and similar factors. Therefore, I expect it to remain relatively stable.

Manuel Navas, Analyst

Okay. I appreciate it. Thank you guys for the commentary.

Katie Bailey, Chief Financial Officer

Yeah, thank you.

Tyler Wilcox, President and CEO

Thank you.

Operator, Operator

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

Tyler Wilcox, President and CEO

Yes. I want to thank everyone for joining our call this morning. Please remember that our earnings call, 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.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.