Peoples Bancorp Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 10 speakers on the call.

Operator

Morning and welcome to the Peoples Bancorp, Inc. Conference Call. My name is Anthony and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the 3 9 Months ended September 30, 2023. Please be advised that all lines have been placed on mute to prevent any background noise.

Operator

Fiscal year. After the speakers' remarks, there will be a question and answer period. Fiscal year. This call is also being recorded. 3rd quarter.

Operator

Please be advised that the commentary on this call will contain projections or other forward looking statements regarding Peoples Future's financial performance and future events. These statements are based on management's current expectations. 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's filings. 3rd quarter. Management believes that the forward looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' businesses and operation.

Speaker 1

3rd quarter.

Operator

However, it is possible actual results may differ materially from these forward looking statements. Peoples disclaims any company's responsibility to update these forward looking statements after this call, except as may be required by applicable legal requirements. Peoples' 3rd quarter 2023 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations. Reconciliation of the non generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures fiscal year 2019 is included at the end of the earnings release. This call will include about 25 to 30 minutes of prepared commentary, followed by a question and answer period, which I will facility.

Operator

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 Chuck Seleczynski President and Chief Executive Officer, Tyler Wilcox Chief Operating Officer and Katie Bailey, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Fiscal year. Mr.

Operator

Sellereszewski, you may begin your conference.

Speaker 2

Thank you, Anthony. Good morning and thank you for joining our call today. We are starting to realize the benefits of our Limestone merger along with our strong organic growth, which is evidenced 3rd quarter. Compared to the linked quarter, our net interest income grew 10% and

Speaker 1

3rd quarter. Our fee based revenue increased 3%.

Speaker 2

Our return on average stockholder equity improved to 12.6% for the quarter, 3rd quarter, while our return on average tangible stockholder equity was 23%. Our return on average assets also increased to 1 point 4% for the Q3. Our net charge off levels remained low and were 15 basis points of average loans 3rd quarter on an annualized basis. We had strong loan growth of $110,000,000 or 7% annualized compared to the linked quarter end. We had increases in our deposit balances of $78,000,000 compared to the linked quarter, which was mainly due to our fiscal campaign for retail CTEs during the quarter.

Speaker 2

Our loan to deposit ratio stayed flat compared to the linked quarter 3rd quarter at 86%. We generated positive operating leverage compared to the linked quarter, prior year quarter 3rd 9 months of 2022. Our earnings for the quarter totaled 31,900,000 3rd quarter and increased 51% compared to the linked quarter and 23% from the prior year quarter. Fiscal year. Diluted earnings per share were $0.90 and were negatively impacted by $0.15 of onetime cost 3rd quarter, which included Limestone acquisition related expenses of $4,400,000 resulting in a $0.10 decrease fiscal 2019 and diluted EPS.

Speaker 2

A $2,400,000 pension settlement charge associated with the final termination of our pension plan, 3rd quarter, which negatively impacted diluted EPS by $0.05 We will no longer be recognizing any future ongoing cost or settlement charges 3rd quarter related to our pension plan as a result of this final termination. Moving on to our credit quality. Our allowance for credit losses 3rd quarter represented 1.03 percent of total loans at quarter end. A higher allowance compared to the linked quarter was attributed fiscal 2019 and deterioration of macroeconomic conditions used within our CECL model. All of these increases were partially offset by a decline in our reserve for individually annualized loans.

Speaker 2

The reduction in our reserves for individually annualized loans was largely due to the payoff of a single commercial real estate relationship. 3rd quarter. This relationship totaled $5,300,000 at June 30th and was on non accrual and included in our criticized and specified asset balances at the linked quarter end. We also recorded $110,000 charge off on this relationship 3rd quarter at payoff during the Q3. Nonperforming assets remained flat compared to the linked quarter and were 48% of total assets at September 30.

Speaker 2

Portion of our loan portfolio considered current at quarter end was 99%, fiscal year 2019, which is flat compared to June 30. For the quarter, our annualized net charge off rate was 15 basis points, fiscal year, consistent with the prior year quarter and an increase from 9 basis points for the linked quarter. On a year to date basis, our annualized net charge off 3rd quarter. The rate was 13 basis points for 2023 compared to 15 basis points for the 1st 9 months of 2022. Criticized loans declined to 3.5 percent of total loans at quarter end, while our classified loans increased 3rd quarter and with 2.05 percent of total loans.

Speaker 2

As it relates to commercial office space, Which is a very small portion of our loan portfolio, our total outstanding balances were $136,000,000 at quarter end and represented 2% of our total loan portfolio. We continue to see high demand and successful project execution 3rd quarter with our construction portfolio. There have been occasional construction delays. However, these projects have generally been leasing up at appropriate speeds and often at higher rents than projected. We typically work with high net worth individuals who are able to withstand fiscal year, increases in interest carrying costs and delays in timing.

Speaker 2

We have witnessed a number of construction projects achievement certificate of occupancy in the 3rd quarter and more are likely in the 4th quarter. As a result, construction loans saw a decline in outstanding balances at quarter close. The current portfolio has $374,000,000 in outstanding balances compared to $689,000,000 in commitments. Land development remains a small percentage of the portfolio, representing $106,000,000 or 1.7 percent of total loans at quarter end. Our multifamily balances continue to grow as projects come through the construction phase and now rest at 501,000,000 the segment.

Speaker 2

This sector has advanced not only due to construction seasonality, but also from the Limestone merger, which had outstanding balances of 235,000,000 3rd quarter at the end of the Q1. Our top 10 multifamily loans accounted for 38% of the funded multifamily portfolio, 6 of which are in the construction phase. These projects are located within growth markets with strong metrics and notable guarantor support. Hospitality loan balances were $192,000,000 at quarter end and comprised 3% of our total loan portfolio. Hospitality loan balances have grown in 2023 due to the Limestone merger.

Speaker 2

However, we were able 3rd quarter to exit an out of market hotel in the Q3 that was acquired through the Limestone merger. The Limestone acquisition shifted the geographic distribution 3rd of our hospitality portfolio. 6 of our 10 largest exposures are located in the state of Kentucky, including the suburbs of Cincinnati, Ohio. Other hotel projects span throughout our footprint with the concentration in Ohio. The top 10 funded loans with 3rd quarter.

Speaker 2

Flag hotels represent 47% of the hospitality portfolio at quarter end. Occupancy trends within the portfolio generally remain above market competitors with trailing 12 and trailing 3 month occupancy reported at 76% 82%, respectively. We continue to be highly selective in this segment percentage of total loans in a meaningful way, and we'll continue to manage our portfolio exposure where we can. 3rd quarter. Specific assets are anticipated to be sold or refinanced in the Q4, which will shift the overall project mix.

Speaker 2

We continue to closely monitor our dealer floor plan portfolio and are assessing the potential impact of the United Auto Workers' strike on the portfolio. At quarter end, we had $340,000,000 of exposure to vehicle dealers, 30% of which was 3rd quarter to domestic franchise auto dealers and another 7% was to specialty vehicle dealers who are supplied by the domestic manufacturers. Remaining 63% of the portfolio was evenly distributed among independent auto, foreign franchise auto, commercial truck and RV dealers. Our domestic franchise dealers are currently well stocked with new vehicle inventory, the Phase and the delivery of vehicles should the strike possess. Our largest 11 floor plan clients have an average debt service ratio 3.3 times with a trust position approaching 2 times.

Speaker 2

Our top 5 floor plan commitments totaled $87,000,000 While the top 11 cover nearly $150,000,000 in commitment. Compared to the linked quarter end, Our total loan balances grew $110,000,000 or 7% annualized. The largest contributor of our growth compared to June 30 was our commercial real estate loans, which grew $118,000,000 while our specialty finance businesses 3rd quarter provided over $51,000,000 in growth. Consumer indirect loans were up $14,000,000 while we had segment. At fiscal year.

Speaker 2

At quarter end, our commercial real estate loans comprised 36% of total loans, nearly 40% of which were owner occupied. 3rd quarter. At the same time, our total consumer loans were 29% of total loans, commercial and industrial loans were 19%, Specialty Finance totaled 10% and Construction loans were 6%. At September 30, 48% of our total loans were fixed rate with the remaining 52% at a variable rate. Additionally, while our premium finance loans are fixed rate.

Speaker 2

These loans operate similar to variable rate loans and they reprice every 9 months. 3rd quarter. I will now turn the call over to Tyler for additional details about our fee based income, deposits and the Limestone Systems conversions.

Speaker 3

3rd quarter. Thanks, Chuck. Our fee based income improved 3% compared to the linked quarter, was 15% higher than the prior year quarter 3rd and grew 13% compared to the 1st 9 months of 2022. The increases were driven by the additional accounts from the Limestone merger, 3rd quarter, which resulted in higher deposit account service charge income compared to the linked quarter and prior year periods as well as higher electronic banking income compared to prior year period. Our insurance income has increased considerably this year, mainly due to client acquisition efforts and hardening insurance markets.

Speaker 3

3rd quarter. We also recorded a death benefit associated with our bank owned life insurance during the Q3 of 2023, which totaled around $400,000 3rd quarter. During the quarter, we recorded $1,300,000 of operating lease income, which drove the increase in other non interest income. Fiscal year. At the same time, our lease income declined $1,800,000 compared to the linked quarter as we recognized the unwind of a residual premium 3rd quarter related to 2 leases from the Vantage acquisition, which paid off during the quarter.

Speaker 3

The residual premiums were a result of the fair values associated with the acquisition service and accounting for the Vantage acquisition. Moving on to our deposit book, we increased our deposit balances by $78,000,000 compared to the linked quarter end.

Speaker 4

3rd quarter. Our retail CDs grew

Speaker 3

$248,000,000 as a result of our recent campaigns, which more than offset the decline in our non interest bearing deposits. 3rd quarter. We typically have seasonal increases in our governmental deposits during the Q3 of each year, which contributed to growth of $56,000,000 As we mentioned last quarter, we have utilized brokered CDs in recent periods as a funding mechanism as it provides us with a lower funding cost FHLB borrowings we might otherwise use and the brokered CDs do not require us to pledge collateral. Our demand deposits comprised 39% of total deposits at quarter end compared to 42% at June 30. Fiscal year 2019.

Speaker 3

At quarter end, our deposit composition included 79% in retail deposit balances, which is comprised of consumers and small businesses fiscal 2019 and 21% in commercial deposit balances. Our average customer deposit relationship fiscal year 2019. We successfully completed the conversion of the Limestone system to our core system. This helps our lines of business interact 6 months together in a more coordinated effort and allows for collaboration between business partners to optimize our offerings to our new clients. We continue to work on the expansion of our business model throughout our new footprint.

Speaker 3

As part of our culture and core values, we always make helping our communities 3rd priority. I'm pleased to note that we now have over 65% of our associates contributing a portion of their paychecks to local food banks, fiscal year. We're excited to note that Energage recognized us for the 2nd year in a row as one of the top workplaces in the financial services industry for 2023. 3rd quarter. Next, I will turn the call over to Katie, who will provide additional details around our financial performance.

Speaker 5

Thanks, Tyler. 3rd quarter. Our net interest income continues to grow as we benefited from a full quarter of the Limestone merger, organic growth, high market interest rates 3rd quarter and our controlled funding costs. Compared to the linked quarter, net interest income was up 10% and net interest margin expanded 16 basis points fiscal 2020 to 4.70%. During the quarter, our net interest income and margin increased as we refined the fair value marks from our Limestone merger and related accretion income net of amortization expense.

Speaker 5

This resulted in an additional one point $9,000,000 in accretion income from May June being recognized during the Q3 of 2023. Q3. For the Q3, accretion income totaled $9,800,000 and positively impacted our net interest margin by 49 basis points. Fiscal year 2019. Our higher accretion income for the quarter benefited our loan yield and helped offset increases in our funding costs.

Speaker 1

Fiscal year 2019.

Speaker 5

As Tyler mentioned, we had retail CD growth from our recently advertised specials. However, we controlled the rates fiscal year 2019. We also expect the increase in our funding costs to be relatively low for the quarter. Our total deposit cost was 128 basis 3rd quarter compared to 87 basis points for the linked quarter. Excluding broker deposits, fiscal year 2019.

Speaker 5

Our total deposit cost for the quarter was 94 basis points compared to 63 basis points for the linked quarter. Fiscal year. Compared to the prior year quarter, our net interest income grew 39%, while our net interest margin expanded 53 basis points. Fiscal year. On a year to date basis, our net interest income increased 37% and margin grew 93 basis points.

Speaker 5

Fiscal 2020. Since the beginning of 2022, the Federal Reserve has increased rates a total of 5.25 percent and over the same time period, 3rd quarter. Our interest bearing deposit rates have gone up 1.45% and are up 1.1% if you exclude brokered CDs. Fiscal year 2020. At the same time, our deposit betas have moved 28%.

Speaker 5

Moving on to expenses. Fiscal year 2019. Our total non interest expense increased 2% compared to the linked quarter. Our acquisition related fiscal year. Expenses for the quarter totaled $4,400,000 We recorded a pension settlement charge of $2,400,000 fiscal year 2019.

Speaker 5

And we recognized a full quarter of operating costs from the expanded Limestone footprint. Compared to the prior year quarter, fiscal year. Total non interest expense increased 37% and was 29% higher on a year to date basis. Fiscal year 2020. The comparison to these prior periods have been impacted by the acquisition related expenses, the Limestone merger 3rd quarter and on a year to date basis, the Vantage Lease acquisition.

Speaker 5

Our reported efficiency ratio improved and was 58.4% for the quarter fiscal year 2019 compared to 62.7% for the linked quarter. When adjusted for non core expenses, our efficiency ratio was 52.5% 3rd quarter compared to 53.3 percent for the linked quarter. This quarter was our best adjusted efficiency ratio in decades. Fiscal year 2020. For the 1st 9 months of 2023, our reported efficiency ratio was 54.2% compared to 59.6 3rd quarter

Speaker 1

and a 3rd quarter of fiscal

Speaker 5

2020. Moving on to the balance sheet. At September 30, Our investment securities portfolio declined to 19.7 percent of total assets compared to 21.3% at the linked quarter end. Segment portfolio continues to be well positioned for potential movement in interest rates. We will benefit from higher rates and should not be significantly impacted by falling rates.

Speaker 5

Fiscal year. We intend to be opportunistic as it relates to our investment portfolio and potential restructuring. Fiscal year 2019. Our capital levels continue to be strong and increased compared to the linked quarter end. The improvement was a result 3rd quarter of our higher earnings, which included a full quarter of Limestone.

Speaker 5

At quarter end, our common equity Tier 1 capital ratio fiscal year 2019 was 11.5%. Our total risk based capital ratio was 13.1% and our leverage ratio was 9.5%. Fiscal year. As I had mentioned in our call last quarter, our leverage ratio was inflated due to the Limestone merger and is now at a normal level.

Speaker 1

Fiscal year 2019. Our tangible

Speaker 5

equity to tangible asset ratio was 6.9% at quarter end and declined compared to 7% at the linked quarter end. Fiscal year. This ratio continues to be impacted by our accumulated other comprehensive losses, which grew this quarter and was driven by the higher market interest rate. 3rd quarter. I will now turn the call back to Chuck for his final comments.

Speaker 2

Thank you, Katie. We continue to have strong earnings, SIBs Daily. We have consistently mentioned how we are positioning ourselves to cost $10,000,000,000 in assets. We are making many investments in systems, associates and processes in order to have a successful transition. Along those lines, we have hired senior talent that will allow us to execute our plan.

Speaker 2

As far as the cost, we estimate that we have already incurred more of that expense at this point fiscal 2019 that we have left to pick up. We continue to make investments in our systems in order to have best in class systems. 3rd quarter. These include the current process of implementing a new customer relationship system and replacing our email and communication software with Microsoft. Moving on to our expectations for the full year of 2023, excluding acquisition related expenses, we anticipate Our net interest income and margin will experience some compression in the 4th quarter compared to the 3rd quarter, 3rd quarter, but we still believe it will be between 4.5% and 4.7% for the full year.

Speaker 2

Excluding the acquired Limestone loans, 3rd quarter. We believe our annual organic loan growth will be between 6% 8%. We expect fee based income percentage growth fiscal 2020 to be in the low to mid double digits compared to 2022. We are still anticipating a 22% to 24 5th quarter and our total non interest expenses for 2023, excluding acquisition related expenses 3rd quarter compared to the full year of 2022, which continues to assume we achieve our anticipated cost savings associated with Limestone merger. This assumes our 4th quarter non interest expense is between $65,000,000 $67,000,000 fiscal year.

Speaker 2

We still expect our efficiency ratio excluding one time expenses to be between 55% 57% for the full year, fiscal 2020, including Limestone. We expect our net charge off rate during 2023 will be relatively consistent with 2022. For the Q3, the analyst consensus estimate of our core diluted EPS was $0.93 per share. Fiscal year. Excluding our acquisition related expenses and pension settlement charges, we exceeded this expectation by $0.12 We have exceeded the quarterly consensus estimates 13 of the last 14 consecutive quarters.

Speaker 2

For the 1 quarter we missed in 2021, 3rd quarter. If you exclude the acquisition cost in day 1 provision for credit losses related to the Premier acquisition, we would have beaten estimates. Fiscal year 2020. The current core consensus estimate for 2023 diluted EPS is $3.87 fiscal year 2020. We continue to expect to beat the consensus estimate for the full year of 2023, excluding acquisition related expenses, pension settlement charges and one time provision for credit losses for the acquired Limestone loans.

Speaker 2

Fiscal year 2019. I would like to give some high level guidance for 2024, which is preliminary. We expect higher net interest income 3rd quarter as we will see the full year benefit of the Limestone merger. We believe our fee based income growth will be in the low double digit percentage fiscal year 2019 as compared to 2023. We expect quarterly non interest expense to be between $67,000,000 $69,000,000 for the 2nd, 3rd and 4th quarters of 2024.

Speaker 2

With the Q1 of 2024 being higher fiscal year 2019 due to our annual expenses we typically recognize during the Q1 of each year. We believe our loan growth will be between 6% 8% compared to 2023. As a result of this projected growth, 3rd quarter. We also anticipate an increase in our provision for credit losses, excluding the one time provision recorded for the Limestone merger in 2023. Fiscal year 2020.

Speaker 2

We will update this guidance in January at our next call. We are looking forward to capitalizing on our recent successes And we'll continue to develop our relationships with our clients. Our lines of businesses are focused on working together to identify client needs fiscal year 2019 and improve our overall client experience. With that being said, the current core consensus estimate fiscal year 2020 is $3.61 fiscal year 2020. This concludes our commentary and we will open the call for questions.

Speaker 2

3rd quarter. Once again, this is Chuck Selariski. And joining me for the Q and A session is Tyler Wilcox, Chief Operating Officer fiscal year 2019 and Katy Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator, Anthony.

Operator

First question will come from Daniel Tamayo with Raymond James. You may now go ahead.

Speaker 6

Good morning, guys. Thanks for taking my questions. We start on the margin and particularly the loan yields, which are remain very high. Obviously, you've got the you had the one time benefit from accretion in the Q3. But Just curious if you think we're nearing a peak there or if not kind of how that plays out assuming rates are relatively stable here over the next few quarters and if you could just fill us in on your thoughts on accretion as well going forward.

Speaker 1

Fiscal year.

Speaker 2

I'll start with the yields and I'll have Katie talk about accretion. Our yields weighted average for the quarter were 8.5 We think there's still some room to improve there a little bit, but we're nearing the top. Your guess is as good as mine on rate increases. It wouldn't surprise me if there is another rate increase in the next Q2 or 2, but if there is, we'll see even higher yields.

Speaker 5

Yes. And Dania, and as it relates to accretion, so as noted in the script and in the earnings release, there was a true up in the 3rd quarter, of which $1,900,000 of that should have been recorded in the Q2, but we were using an estimate in the Q2. And as we refine the purchase accounting or finalizing some of those numbers. So, I would say, as quoted in the script, it was 49 basis points of accretion 3rd quarter. If you take out that piece that related to the 2nd quarter, it would have been closer to 40 basis points impact.

Speaker 5

Fiscal year 2019. And I think we can expect that 35% to 40% in the 4th quarter of benefit. If we go back to kind of day 1 purchase accounting for the Limestone acquisition, fiscal year. Since about 85% of our mark on loans was related to interest rates and the other 15% obviously related to credit. So again, the rate environment created a much bigger discount than we've seen in prior deals when rates were relatively low and stable.

Speaker 5

So we'll continue to see some higher fiscal year. As those loans continue to pay down. I would say we haven't seen a lot of payoffs in that portfolio. So much of that is just the normal 3rd quarter, the 3rd quarter, the 3rd quarter,

Speaker 1

the 3rd quarter, the 3rd quarter, the 3rd quarter, the 3rd quarter, the 3rd quarter,

Speaker 5

the 3rd quarter,

Speaker 1

the 3rd quarter, the 3rd

Speaker 5

quarter, the 3rd quarter, the 3rd quarter, the 3rd quarter, the 3rd quarter,

Speaker 1

the 3rd quarter, the 3rd quarter,

Speaker 5

the 3rd quarter, the 3rd quarter, the 3rd quarter, the 3rd quarter,

Speaker 6

Okay. That's very helpful. And then I guess on the other side of the equation, the CD maturities that you have, just curious Sorry, the CDs that you already have on the book. Just curious, maturities on those, if anything is going to be maturing in the next few quarters. I apologize if you 3rd quarter.

Speaker 6

I mentioned that in the comments. And then not sure if you have any kind of overall thoughts on Where the margin may end up next year, as it kind of comes down from a high here?

Speaker 5

Yes. So on the CDs, the specials we've been running are anywhere from kind of 7 to 14 months. So they will start to mature in the coming quarters and we continue to 3rd quarter. As it relates to margin going into the Q4 and into 2024. As we quoted, we do expect some compression in the Q4, and I think we expect it fiscal 2020.

Speaker 5

I kind of hit bottom there, but we'll hold relatively stable from that point into the 2024 period. So I think that we've quoted we guided to 2023 for the full year will be $450,000,000 to $460,000,000 or $470,000,000 And I think you'll see us a little south of that range for the 2024 year.

Speaker 6

Okay. Well, great. Thanks for all the color. I'll step back.

Speaker 5

Thank you.

Operator

Our next question will come from Terry McEvoy with Stephens. You may now go ahead.

Speaker 7

Hi, good morning, everyone.

Speaker 5

Good morning, Terry. Hi, Terry.

Speaker 7

Hi, Katie, maybe a question for you. Could you just talk about Managing the size of the balance sheet, will you continue to pay down short term borrowings and, are there additional securities portfolio for additional restructuring.

Speaker 5

Yes. So Short term borrowing is a function of loan growth and deposit flows, and so we'll continue to manage that on a daily basis as we have fiscal year 2019. Historically, on the investment securities, as we referenced in the script, we continually evaluate opportunities to restructure that portfolio. Fiscal year 2019. As you might recall, we did a meaningful amount in the Q1 and took a loss of about $2,000,000 at that time.

Speaker 5

And to the extent there are securities, which we experienced, that gains, we will likely offset those to clean up some of the lower yielding securities and offset the loss there. We will continue to evaluate that trade. And when we look at that, we look at it from fiscal year 2020. What is the loss we are willing to accept in the quarter as well as what is the payback on that and kind of locking in the payback somewhere between 1.5 years to 2 years is kind of where we range where we look at the range for the payback on that trade as it relates to the investment security restructuring option.

Speaker 7

Thanks for that. And then just limestone, I know this was touched on throughout the call, but Our cost savings tracking in line with expectations, anything to comment on deposit or loan runoff? I think you said on the lending side that hasn't happened. And any maybe early comments on business synergies between some of the businesses and products that you bring to the table with those new customers?

Speaker 2

Costs are tracking, probably slightly maybe above where we expected them to be at this point in time. The loans, as you indicated, are where we thought they would be. Deposits Coming back together, we may be in the beginning saw a little bit more run out than we would have. I'm not so sure if it's related to the deal or related to the market situation. And in terms of synergies, with the leasing and the investments and the insurance stuff, I think we see more Each passing week as the newer associates become more familiar with what we do and how we do it.

Operator

Our next question will come from Tim Switzer with KBW. You may now go ahead.

Speaker 6

Hi, Tim.

Speaker 8

Hey, I'm on for Mike Ferreto. Thanks for taking my question. I wanted to ask a quick follow-up on the net interest margin and your guidance for it to be lower on a full year basis first 23. And that makes sense to see given the compression we see, but if it's crossing in Q4, you guys are growing loans mid to high single digits, with I would assume a lot of help there from the leasing portfolio. Can you help quantify for us like how the NIM should like the trajectory should look over the course of 2024 assuming the Fed holds on to rates?

Speaker 8

How many basis points of expansion do you think we could see over the course of the year?

Speaker 5

I mean From a quarterly basis, I think we could see 5 to 10 basis points of expansion, from beginning to end on a quarterly basis.

Speaker 8

Like 5 to 10 basis points each quarter?

Speaker 5

No, I'd say more in total. So a few basis points each quarter.

Speaker 8

I got you. Q4 over Q4. Yes. Yes. Okay.

Speaker 8

That's helpful. And In a let's say it's a scenario where the Fed cuts rates sometime next year. If this is after deposit costs have settled out from the rate hikes, do you have an idea of kind of like the sensitivity of your balance sheet to that and what NII would look fiscal year

Speaker 5

2019. Yes. I would say we have positioned our balance sheet to be relatively neutral. We have taken much of the benefit from rising rates into our base case scenario and therefore have hedged on the lower side, predominantly through the investment securities portfolio and what we have

Speaker 8

Okay. That's helpful. And What are like the economic assumptions you have for your loan growth expectations next year? And which category should be the leaders? And maybe what are the risks of not achieving that given the macro environment?

Speaker 2

Well, we will still see some growth in real estate as construction projects come to completion, We will not see as much CRE volume of new business as we have been seeing. We do not see a slowdown in our C and I customers, so we expect to see good C and I growth. Auto will be we'll get a few percentage of growth out of it. The leasing businesses Seeing as is typical when you see the leasing businesses do better in higher rate environments or slow economic environments and we expect that to continue. We are very optimistic in the ability of our premium finance folks to have good strong 20 plus percent growth.

Speaker 2

So it's really a lot of little actions across many different portfolios. We have some opportunities on things like a very large McDonald's franchise lender in the state of Ohio. We won't be able to do that in Kentucky with the acquisition. So a lot of granularity to the portfolio, which We think it's great for origination and great for risk management.

Speaker 8

Okay, great. That's all for me. Thank you, guys.

Speaker 5

Thank you, Tim.

Speaker 4

Thank you.

Operator

Our next question will come from Manuel Nieves with D. A. Davidson. You may now go ahead.

Speaker 4

Hey, good morning. Hey, just thinking on the with your NIM expectations next year, what do you kind of contemplate deposit costs going to, especially if the rate environment stays where they are? Just kind of what are your deposit beta assumptions with it?

Speaker 5

Yes. I think historically, we've said our deposit betas run 3rd quarter. All inclusive, non interest bearing and otherwise, about 25%. I don't think we have in our projections getting quite to that high, but we definitely have us Getting pretty upwards of 18% to 20%.

Speaker 4

What are the new CDs coming on at, the kind of the promotional CD rate and I apologize if you said it during the prepared comments.

Speaker 5

No need to apologize. We didn't say it. Some of the tenors that we've put out there Have a 5% handle.

Speaker 4

Okay. Are you seeing And you're keeping it pretty short. Are you seeing most of the CD funding coming from current customers? Are you gaining some customers? How are you thinking about that just strategically?

Speaker 5

Yes. We're seeing a fair amount of the production in the CD specials coming from New clients, somewhere between 40% 45%, I would say, is kind of new money. And maybe I guess maybe not always new clients, But new money to the institution.

Speaker 1

Okay.

Speaker 4

And historically, a pretty strong metrics that those turn into Nice cross sells and more permanent customers?

Speaker 5

Yes, that is the strategy.

Speaker 4

Fiscal year. And then can you walk me through the earn back on the securities transaction this quarter. It sounded like it was even a faster earn back than you kind of target Usually, like it's within a year, right? Or did I misread it a little bit?

Speaker 5

So what we did in Q1, So we sold, I can't remember the volume, dollars 70,000,000 maybe or we sold it that equated to about a loss of about $2,000,000 What we said and I guess it was closer to $97,000,000 of balances we sold for about a $2,000,000 loss in the Q1 and what we stated at that time was That would pay back within the calendar year. So yes, it was less than a year payback on that strategy.

Speaker 4

Okay. And you're willing to kind of play around up to 2 years if you see opportunities and the balance sheet needs it?

Speaker 5

Correct. And we'll be confident that the securities would stick around for those 2 years to make that earn back hold true.

Speaker 1

Okay.

Speaker 4

Leasing has been really strong trends. Can you kind of just focus in on that for a moment? Just what are our expectations next year? You talked about with higher rates, more folks are interested in leasing. And also just kind of big picture credit expectations there, just kind of a reset on expectations for that business.

Speaker 2

We have 2 leasing companies. 1 is a small ticket lease, where the average ticket is about $50,000 The average yield of originations for those leases at this point in time are north of 19%. We see growth in that business and the second one which I'll talk about in a second in the neighborhood of 20 plus percent. Obviously, at 19%, you are pricing in some room for charge offs. Our charge offs for the last fiscal year have been less than 1.5%.

Speaker 2

Those charge offs may go as high as 3% to 4% Over the next 24 months, but obviously we're getting well compensated for that. The The second leasing business is our Vantage business in Minnesota. The average ticket size there is about $270,000 They have an emphasis or a focus on 3rd technology. Many of their clients are publicly traded companies, well positioned school districts, some of the leading hospitals in the country. We expect we have had very little charge off expectation with that business.

Speaker 2

We expect to have very little charge off activity in that in the next 24 months. Their yields are currently fiscal

Speaker 4

2020. That's great. I really appreciate it. And there's some seasonality here, right? Is there seasonality towards the end of the year with those 2 businesses?

Speaker 2

Seasonality, not Yes, there's a little bit of seasonality, but not that much that it makes that much of a difference.

Speaker 4

Okay. And I just make you sure I confirm that 19% yields and 9%, right?

Speaker 2

Yes, more or less.

Speaker 4

Okay. I really appreciate that. Thank you very much.

Speaker 2

Thank you. Thank you.

Operator

Our next question will come from Daniel Cardenas with Janney. You may now go ahead.

Speaker 4

Good morning, guys. Good morning, Dan.

Speaker 9

I may have missed this. I joined a little bit late here. But On your leasing income for the Q3, I noticed a significant drop. Can you give us a little bit of Color as to what drove that and what's the potential for a bounce back in leasing income in the Q4?

Speaker 5

Sure, Dan. That relates to the purchase accounting related to the Vantage transaction that we did last year. They have residual values on their books. And when we went through purchase accounting, we had to mark those as we have to mark the whole balance sheet fair value. And so we had to put on a premium related to that portfolio.

Speaker 5

And as those come to term, We have to realize that premium against any gain that would otherwise be recorded. So that is what you see About $1,800,000 $7,800,000 premium amortization in the 3rd quarter. In prior quarters, it has not been that significant, but it is choppy On a quarterly basis, just given when those leases kind of come to term.

Speaker 9

Thanks. And then on the credit quality front, Good to see some improvement in the non performers, but did notice that your 90 days past due We're up a bit there. Can you give us some color as to where that was coming from categorically?

Speaker 2

Yes. The majority of that is coming from the small ticket leasing business.

Speaker 9

Okay. And then how are trends, how are watch list trends looking for that business?

Speaker 2

The trends in delinquencies are increasing. The charge off rate. We do expect it to increase as I mentioned earlier. We've had multiple years with like 1.5% 3rd quarter or less charge off rates. Obviously, at a 19% yield, you're not going to get over a cycle 1% to 1.5% Charge off rates and we're very comfortable.

Speaker 2

We frankly price that stuff Yes, to a 4.5% charge off rate. We do not see ourselves getting near that 4.5% Charge off rate, but if it creeps up to the 2s and the 3s, we're perfectly comfortable with that.

Speaker 9

Okay, good. And then on the lending front, thank you for the guidance for 2024. Are there any areas that you're maybe tapping the brakes a little bit on in terms of Growing those portfolios and then how should we be thinking about your provision on a go forward basis?

Speaker 2

Should we be thinking about our provision? Provision. Okay. We've never been a lover of hotels. We are acquisitive And we pick up hotels and we try to run tighten up that space a little bit.

Speaker 2

That being said, if somebody has a built hotel that's cash flowing and good sponsors, we'll You'll certainly look at it, but it's not our favorite place to lend. But for the most part, we're open for business. We think we're benefiting from that. We're seeing some competitors having to pull back because of liquidity issues. The 86% loan to deposit, we have room.

Speaker 2

So We're hoping to see the benefits of that over 2024.

Speaker 5

And as it relates to provision, I think, it's safe to assume that we'll follow what the forecast does. So to the extent the forecast worsens, we will likely The building reserve, and otherwise, we'll just be reserving on the growth at the rates kind of at That you see on as it relates to the coverage ratio.

Speaker 9

And then last question, I guess, with competitors pulling back Somewhat, is that being reflected in current yields?

Speaker 2

I think it will be more reflected in future yields than current yields. I don't think we've got a A ton of book a ton of business on our books in the 1st three quarters from competitors pulling back. We tend to see More and more of that more recently and I expect that that will continue.

Speaker 9

Great guys. Thanks for the info.

Speaker 8

Thanks Dan. Thank you. Fiscal

Operator

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

Speaker 2

Yes. This concludes our commentary and we will open the I'm sorry, I'm in the wrong place. Yes, I want to thank everybody for joining our call this morning.

Speaker 1

Fiscal year. Please remember that our earnings release and the webcast of

Speaker 2

this call will be archived at peoplesbancorp.com under the Investor Relationships section.

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Earnings Conference Call
Peoples Bancorp Q3 2023
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