Peoples Bancorp Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to Peoples Bancorp, Inc. Conference Call. My name is Rocco, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter fiscal year ended December 31, 2023. Please be advised that all lines have been placed on mute to prevent any background noise.

Operator

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.

Operator

The statements in this call, which are not historical facts, are forward looking statements and involve a number of risks and uncertainties detailed in 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. People's Q4 2023 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations.

Operator

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 25 to 30 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 Chuck Silversky, President and Chief Executive Officer Tyler Wilcox, Chief Operating Officer and Katie Bailey, Chief Financial Officer and Treasurer and each will be available for Mr. Silversky, you may begin your conference.

Speaker 1

Thank you, Rocco. Good morning, and thank you for joining our call today. In the Q4, we reported record quarterly earnings of $33,800,000 While our diluted earnings per share improved to $0.96 compared to $0.90 for the linked quarter. This includes $1,300,000 of acquisition related expenses for the Limestone merger, which reduced Diluted EPS for the Q4 by $0.03 Overall, our 4th quarter results included many highlights such as Growth in our return on average stockholders' equity, which was 13.4% compared to 12.6% for the linked quarter. Our efficiency ratio improved to 56% from 58.4% for the linked quarter.

Speaker 1

Our loan to deposit ratio declined slightly compared to the linked quarter end. Our non performing assets declined 8% compared to the linked Quarter end and are at their lowest level as a percent of total loans since the Great Recession. Our book value per share improved to $29.83 compared to $28.06 At September 30, and $27.76 at year end 2022, While our tangible book value per share grew to $18.16 compared to $16.52 And $16.23 respectively. Our tangible equity to tangible asset ratio Increased to 7.3% compared to 6.9% at the linked quarter end, and We completed a $3,000,000 share repurchase during the quarter. On a full year basis, our net income $113,400,000 and our diluted EPS was $3.44 Compared to $3.60 for 2022.

Speaker 1

This includes acquisition related expenses Of $17,000,000 during 2023, which negatively impacted diluted EPS by $0.40 and A $2,400,000 pension settlement charge associated with the final termination of our pension plan, Which negatively impacted diluted EPS for 20.23 by 0 point 0 $6 Some highlights for the full year of 2023 Net interest income was up 34% compared to 2022. This increase was driven by the Limestone merger And higher market interest rates improving our earning asset yields while we controlled our deposit costs. Our fee based income grew 18% compared to 2022. Our return on average assets adjusted for non core expenses improved to 1.61 percent for 2023 compared to 1.47% for 2022. We had positive operating leverage for the year compared to the prior year, which means we grew our revenues faster than our expenses.

Speaker 1

Our efficiency ratio improved to 58.7 percent from 59.6 percent for 2022. At the same time, our efficiency ratio adjusted for non core expenses improved to 54.4% for 2023 Compared to 58.6 percent for 2022 and our net charge off rate was 15 basis points of average loans Compared to 16 basis points for 2022. Moving on to our credit quality, our allowance for credit losses represented 1.01% of total loans at quarter 1.01 percent of total loans at quarter end. Changes in our allowance were driven by charge offs within the loan portfolio, Which were partially offset by improvements in our individually analyzed loan portfolio. The net charge offs were driven by higher lease charge offs, a third of which was the result of a fraud related charge off And increased consumer indirect loan charge offs.

Speaker 1

While our consumer indirect loan charge offs were higher than recent periods, They were consistent with pre pandemic levels as we had anticipated. For both the leasing and indirect portfolios, We are satisfied with their risk adjusted business performance. Non performing assets improved during the 4th quarter and were down 8 And compared to the linked quarter end as both our non accrual and loans 90 days past due and accruing declined. At year end, our non performing assets decreased to 43 basis points of total assets compared to 48 basis points at the linked quarter end and 63 basis points at year end 2022. The portion of our loan portfolio considered current at quarter end was 98.6% compared to 99% at September 30.

Speaker 1

For the quarter, our annualized net charge off rate was 23 basis points, An increase of 15 basis points for the linked quarter and up from 18 basis points for the prior year quarter. For the full year, our annualized net charge off rate was 15 basis points for 2023 Compared to 16 basis points for 2022, criticized loans to total loans increased during the 4th quarter 3.82 percent at year end, while our classified loans declined 10 basis points To 1.95 percent of total loans at year end. The increase in criticized loans was related to Downgrades of several commercial relationships, while the growth was partially offset by payoffs and upgrades during the quarter. In regards to the commercial real estate and commercial and industrial loan portfolios, credit quality metrics remain strong With delinquency reported at 45% at year end and combined had 0 basis points in net charge offs for the year. This compares to prior year end delinquency of 0.86 percent and net charge offs of 5 basis points for the full year 2022.

Speaker 1

As it relates to non owner occupied commercial real estate as well as construction and land development, these balances represented 38% of Total commercial loans and 27 percent of total loans at year end. The land development remains a small percentage of the loan portfolio In totaled $106,000,000 or 1.4 percent of total loans at year end. Our commercial office space outstanding balance was 2 percent of our total loan portfolio at year end. We have 2 large projects maturing in 2024 totaling $17,000,000 which will give us an opportunity to reassess 12% of our office portfolio. As it relates to our construction loan portfolio, We continue to see high demand and successful project execution.

Speaker 1

We mentioned last quarter that we expected more construction projects To achieve certificates of occupancy during the Q4, which were obtained and resulted in the decline in our construction loan balances. At year end, our construction loan balances totaled $364,000,000 with outstanding commitments of 670,000,000 Our multifamily balances continue to convert from construction as projects reached completion And stood at $520,000,000 at year end. These projects have generally been leasing up at appropriate speeds and often at higher rates than projected. Our top 10 multifamily loans account for 33% of the funded multifamily portfolio, 6 of which are still in construction phase. As we have noted previously, the location of these projects are within the growth markets With strong metrics and notable guarantor support.

Speaker 1

Hospitality loan balances were $174,000,000 at year end And we're less than 3% of our total loan portfolio. Following the Q3, we were able to exit an out of market hotel that was acquired through the Limestone merger further reducing our hospitality exposure at year end. Additionally, Two hotels successfully exited in the 4th quarter, while the outstanding balance on one hotel materially changed Through a refinance utilizing the SBA 504 program. The top 10 funded loans with Flag Hotels represent 50 2% of the hospitality portfolio at year end. Occupancy trends within this portfolio generally will remain above the market competitors With trailing 12 and trailing 3 months occupancies at 77% and 79%, respectively.

Speaker 1

Our total loan portfolio grew $75,000,000 or 10% annualized compared to the linked quarter end. Commercial and industrial loan balances experienced the most growth and were up $55,000,000 for September 30. The Specialty Finance divisions provided $25,000,000 of growth, while commercial real estate loans were up $7,000,000 Compared to year end 2022, our organic loan growth was 10%, which excludes loans acquired from the Limestone merger. Most of the organic growth was in commercial real estate, which was up $204,000,000 while our specialty finance divisions provided $113,000,000 of growth, commercial and industrial balances were up $77,000,000 and consumer indirect loans increased $37,000,000 At December 31, 2023, our commercial real estate loans comprised 36% of Total loans, nearly 40% of which were owner occupied, while the remainder was investment real estate. At the same time, our total consumer loans, which include residential real estate and home equity lines of credit, With 29% of total loans, commercial and industrial loans were 19%, specialty finance totaled 10% And construction loans were 6%.

Speaker 1

At year end, 49% of our total loans were fixed rate with the remaining 51% at variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Speaker 2

Thanks, Chuck. During the Q4, our net interest income was lower than the linked quarter due to higher deposit costs, which were partially offset by improved Investment yields. Our net interest margin was 4.44 percent for the 4th quarter compared to 4.71% for the linked quarter. The lower net interest margin was partially due to our margin during margin being higher during this linked quarter as a result of acquisition related adjustments to accretion, which totaled $1,900,000 and added 10 basis points to our Q3 net interest margin. During the Q4 of 2023, we recognized a $1,300,000 increase to accretion income related to refinements our fair value marks from our Limestone merger, which added 7 basis points to net interest margin.

Speaker 2

Also contributing to the decline in net interest margin compared to the linked quarter were higher deposit costs as we offered short term higher rate CDs that were part of a successful deposit acquisition strategy. We partially offset this increase with higher investment yields for the quarter. For the Q4, our deposit costs were 1.66% And excluding brokered CDs were 1.33%. Accretion income net of amortization expense Totaled $9,300,000 for the 4th quarter compared to $9,500,000 for the linked quarter. Accretion income positively impacted our net interest margin by 47 basis points for the 4th quarter and 52 basis points Compared to the prior year quarter, our net interest income grew 25%, while our net interest margin remained flat as improved investment in loan yields were offset by higher deposit costs.

Speaker 2

For the full year of 2023 compared to 2022, our net interest income increased 34% And net interest margin grew 59 basis points. Net interest income was positively impacted by the Limestone merger compared to 2022. Most of the increase in our net interest margin was due to our investment and loan yields improving, which were partially offset by higher deposit and funding costs. Since the beginning of 2023, the Federal Reserve has increased rates a total of 5 0.25 percent. Over the same time period, our interest bearing deposit costs, when excluding brokered CDs, have only grown 1.2%.

Speaker 2

During the same period, our deposit betas have moved 23% excluding brokered CDs. As far as our expenses, total non interest expense was down 6% compared to the linked quarter, which was largely due to lower acquisition related Acquisition related non interest expenses totaled $1,300,000 for the 4th quarter And we're $4,400,000 for the linked quarter. Compared to the prior year quarter, total non interest expense increased 27% And was up 29% for the full year of 2023 compared to 2022. These increases were primarily Due to the acquisition related expenses for the Q4 of 2023 $17,000,000 for the full year of 2023, As well as the larger footprint and ongoing operating costs of the additional offices from Limestone. Our reported efficiency ratio was 56% for the 4th quarter compared to 58.4% for the linked quarter.

Speaker 2

When adjusted for non core expenses, our efficiency ratio was 54.9% compared to 52.5% for the linked quarter. The increase was the result of higher deposit costs compared to the linked quarter. For the full year of 2023, Our reported efficiency ratio was 58.7% compared to 59.6% for 2022. Excluding non core expenses, our efficiency ratio improved to 54.4 percent for 2023 compared to 58.6 percent for 2022. Moving on to the balance sheet.

Speaker 2

At year end, our investment securities That's declined to 19.6%, while our loan to deposit ratio declined slightly to 86 Point 1%. We continue to actively manage our balance sheet position with a focus on our interest rate risk profile. During the Q4, we made a decision to sell nearly $37,000,000 of our investment securities and recognized a loss of $1,700,000 This move resulted in a payback of just over a year and reduces the credit exposure within our investment portfolio. We will continue to be opportunistic in our decisions, while trying to do so in a low risk manner with a short earned bacterium. Along those lines, we did utilize the Federal Reserve's bank term funding program this quarter as it provided a lower cost funding source than our alternatives.

Speaker 2

As of today, the funds we borrowed under this program At a rate 76 basis points less than what we would have paid for an FHLB overnight borrowing And assuming the same rate benefit, it will result in savings of nearly $1,200,000 over a 1 year period. As we have noted previously, we have ample liquidity and the attractive rate offered on this source was advantageous for us. We continue to have strong regulatory capital ratios. We are confident in our stock and performance. And with that in mind, we repurchased $3,000,000 of our shares this quarter at an average price of $27.98 We have repurchased our shares in 2023, 2022 and 2020 for an aggregate total of nearly $40,000,000 We are committed to deploying our capital in the most effective manner and will continue to do so in the future, While also being cognizant of the impact of dilution, at year end, our capital ratios improved And our common equity Tier 1 capital ratio was 11.8%.

Speaker 2

Our total risk based capital ratio was 13.5% And our leverage ratio was 9.6%. At year end, our tangible equity to tangible assets ratio proved to 7.3% compared to 6.9% at the linked quarter end. Our improved earnings, along with some recovery of our The improvement in our accumulated other comprehensive losses accounted for 44 basis points of the increase over the linked quarter. Next, I will turn the call over to Tyler, who will provide additional details around our performance and future outlook.

Speaker 3

Thanks, Katie. For the Q4, our fee based income was up 12% compared to the linked quarter and was driven by higher lease income. Compared to the Q4 of 2022, our fee based income grew 35% and on a year to date basis was up 18%. The increase compared to these prior periods was a result of higher lease income and insurance income and was also impacted by the Limestone merger, Which improved electronic banking income and deposit account service charges. A bright spot for us this quarter has been our ability to generate deposits.

Speaker 3

Compared to the linked quarter end, our total deposits grew $115,000,000 or 2%. The largest contributor to the growth was retail CDs, which were up $245,000,000 We acquired a lot of these CDs with our deposit pricing strategy utilizing short term higher rate CD offerings for customers. Money market accounts grew $45,000,000 during the same period, while we had some declines in other interest bearing deposits. Our non interest bearing deposit balances were relatively flat, while we reduced our position in brokered CDs, which were down $33,000,000 Our demand deposits were 38% of total deposits at quarter end compared to 39% at September 30. At quarter end, our deposit composition included 80% in retail deposit balances, which is comprised of consumers and small businesses And 20% in commercial deposit balances.

Speaker 3

Our average retail customer deposit relationship was $24,000 at year end, while our median was $2,500 While we think about 2024, I would like to give Updated guidance for the next year. We expect net interest income to benefit from the full year impact of the Limestone merger, But to also be impacted by the projected market interest rate reductions in 2024. With that being said, based on our most recent model runs, We have some preliminary expectations regarding potential rate cuts and increases. If rates were to stay flat for 2024, We would expect our deposit rates to move higher as competition accelerates. The potential impact of this could be a 1% to 3% decline In net interest income, with a net interest margin of between 4.1% and 4.3% for the full year.

Speaker 3

If rates are flat for the first half of the year with reductions coming in the middle of the year, we would anticipate some higher deposit costs, I would expect to offset those with lower funding costs resulting in minimal impact to net interest income and margin. If there were a 75 basis point decline in rates at the beginning of 2024, it could potentially lower our full year net interest income By approximately 1% with our net interest margin for the year coming in around 4.3%, A 150 basis point rate reduction at the beginning of 2024 could lower our full year net interest income by approximately 3% With net interest margin of around 4.2%. Our primary uncertainty at this point is the potential impact to deposit rates As competition may slow the corresponding reduction in deposit rates if market interest rates were to decline. In the down 150 basis points rate environment, we would anticipate net interest income and margin to be further compressed, But we would not anticipate net interest margin to fall below 4% for the year in this scenario unless the Federal Reserve We're to cut rates more drastically than expected. We believe our fee based income growth will be in the high single digit to low double digit percentages Compared to 2023, we expect quarterly total non interest expense to be between 67,000,000 And $69,000,000 for the second, third and fourth quarters of 2024 with the Q1 of 2024 Being higher due to our annual expenses we typically recognize during the Q1 of each year, we continue to believe our loan growth for 2024 Will be between 6% 8% compared to 2023.

Speaker 3

With the anticipated loan growth In return of some of our net charge offs to pre pandemic levels, we do expect an increase in our provision for credit losses during 2024. In our budget for 2024, we are expecting our full year net charge off rate will be around 20 basis points. We do not anticipate having positive operating leverage for 2024 compared to 2023 given the technology investments we mentioned last quarter. However, we do anticipate returning to positive operating leverage in 2025. As we customarily do at the beginning of each year, I wanted to note that our Q1 expenses are generally higher due to a few expenses that we typically expect to recognize during the Q1, which include Employer contributions to health savings accounts, stock based compensation expense for certain employees, higher payroll taxes and Annual merit increases.

Speaker 3

I will now turn the call back to Chuck for his final comments.

Speaker 1

Thanks, Tyler. I would like to thank the employees of Peoples for producing another record Quarterly earnings report. This is my final earnings call. As a point of personal privilege, I would like to reflect back on my time at Peoples. Looking at our stock performance as of year end 2023, there were several key highlights.

Speaker 1

Over my nearly 13 year tenure, we have beaten the KBW Bank Index by over 4% on an annualized basis. Over the last 3 years, we have beaten the S and P by 3.4% and the KBW Bank Index by 10.4% annualized. In 2023, we beat the KBW Index by 27%. More important than these results are the distinctive characteristics that makes Peoples a differentiated high performing community bank. With apologies to David Letterman, I'd like to share my top ten reasons why Peoples has been and will continue to be A great choice for investors.

Speaker 1

Number 10, we are the epitome of a community bank. We make meaningful investments of time and money We provide capital to individuals and businesses that promote economic growth and employment. As a result, we are trusted and have deep and meaningful relationships with our customers. Number 9, Our employees are our most valuable asset. For the last 3 years, we are proud to have been recognized as one of America's best banks to work for For constant individual and organizational improvement, frequent coaching and an attention to performance numbers at a corporate and individual level.

Speaker 1

Number 8, we have a diverse set of businesses. In addition to traditional banking, we have meaningful earnings contributions from insurance, Investments, Leasing and Premium Finance. As a result, we are better protected than the average community bank Number 7, credit discipline is a key to our success. Our portfolio is comprised of 5 buckets from largest to smallest consumer lending, investment real estate, Commercial and Industrial Owner Occupied Real Estate and Specialty Finance. We have averaged 20 basis points of net charge offs over my tenure And 13 basis points over the last 8 years.

Speaker 1

We have a disciplined underwriting and portfolio management process That makes us confident we will have a better than industry risk adjusted margin over all credit cycles. Number 6, as demonstrated during the historic rate increases of 20222023, We have a quality deposit base. While the Federal Reserve has increased rates 5.25%, Our deposit costs have increased 1.5% since December of 2021 and meaningfully outperformed the industry averages. Number 5, we have a core competency in acquisitions. We have done deals in banking, insurance, investments and specialty finance.

Speaker 1

We quickly assimilate new associates and have them learn and strengthen our culture. We hit our financial targets for the deals that we do. Number 4, we strive to provide an extraordinary client experience. We are proud to be recognized as one of Newsweek's best regional banks for the 2nd year in a row and there are only 10 banks in the country to be recognized by both Newsweek and The American Banker For best banks to work for. Number 3, we manage capital with a focus on long term returns.

Speaker 1

We believe in a meaningful and growing dividend. We maintain healthy capital levels and use stock buybacks We are prudent. Number 2, our Board and management decision making is guided by what is best for our shareholders In a 3 to 5 year timeframe, we do not chase the flavor of the day. We do not worry about short term negativity When we know long term risk adjusted returns will be improved. Number 1, our management team is a mix of professionals from larger As I pass the baton, we have a great mix of young leaders like Tyler and Katie, As well as a cadre of very experienced executives from larger institutions and talent grown from within our organization.

Speaker 1

I am fully confident that Tyler and the management team will build on our strengths and further improve our performance and results. Thank you for your interest and investments in Peoples. This concludes our commentary and we will open the call for questions. Once again, this is Chuck Selaretsky, and joining me for Q and A session is Tyler Wilcox, Chief Operating Officer And Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator.

Operator

Today's first question comes from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 4

Good morning, everyone. Chuck, congratulations on your last call. I guess, first of all, Thank you for all the detail Tyler on the margin and the sensitivity. I think I missed the last Part of that guidance, if you don't mind just repeating it, I got all the way through the one 150 basis point of rate cuts and I think you had one more line in there.

Speaker 3

Sure. Danny, I'd said that our primary uncertainty at this point There's a potential impact to deposit rates as competition may slow the corresponding reduction in deposit rates if market interest rates were to decline. So, In the down 150 basis points rate environment, we would anticipate net interest income and margin to be further compressed, But we would not anticipate net interest margin to fall below 4% for the year in this scenario unless the Federal Reserve were to cut rates more drastically than expected. Is that the part you're referring to?

Speaker 4

I think so, yes. Sorry, I got it. Yes. No, I appreciate that. So I guess the bottom line of that in terms of guidance is You're assuming that real I mean assuming kind of what we most folks are baking in now in terms of rate cuts in the back half of the year that There's not too big of an impact on either margin or NII as a whole for 2024 that starts to Or I guess, let me ask you, does that start to then impact negatively on 2025 or how should we think about that?

Speaker 1

I don't think it will have a meaningful negative on 2025. I don't see the Fed Bringing rates back to where they were, they'll stop 2.5% to 3% and depending on the shape of the curve, We should be fine.

Speaker 5

Okay.

Speaker 4

And just on the commentary on the hospitality loans. I think you said $174,000,000 at year end. Did you say that you exited 1 post year end? Is that correct?

Speaker 1

No. We said we exited an out of market 1 during the Q4.

Speaker 4

During the Q4. Okay. So that $174,000,000 is carrying into the Q1. Okay.

Speaker 1

We continue to decrease that portfolio.

Speaker 4

Okay. Okay. And then I guess lastly just on repurchases, you repurchased a small amount in the Q4. The stock has done well by and large valuation. You've got a stronger valuation than the market.

Speaker 4

How are you Thinking about what's a reasonable valuation when repurchasing shares?

Speaker 2

Yes. We continue to evaluate each quarter. As you And see from the prices we quoted, we are willing to go beyond kind of what we would do for an earn back of a bank deal slightly On the share repurchase given the less risk, but again, I don't think we would expect to take a meaningful position and do a large volume of repurchase in any one quarter as we We'll continue to keep it relatively small and continue to support the stock.

Speaker 4

Understood. Okay. Thank you. That's all I had. Appreciate it.

Speaker 1

Thanks, Danny.

Operator

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

Speaker 6

Hi, good morning, Chuck, Tyler and Katie. Chuck, I've enjoyed working with you and our ongoing debate on people's deposit costs, Which I must say it's an argument you won and the market rewarded your company last year. So congratulations on winning there.

Speaker 1

Thank you, Terry. Don't bet against the mighty people.

Speaker 6

I learned that last year. A couple of questions here. On the criticized loans, any common theme among the CRE downgrades? And I'm wondering if you built up reserves for that portfolio last quarter.

Speaker 1

It was a combination of C and I and CRE. We feel really good about We have our lowest levels of NPAs and lowest level of credit class classified. So, we did have an uptick in charge offs in Q4, which Q4 charge offs are usually a little higher Yes, than the rest of the year. But we remain extremely optimistic on the credit portfolio.

Speaker 2

And as it relates to the allowance, as you would expect, each quarter we go through and evaluate whether Q factor qualitative factors are necessary. And as you noted, We did, establish a qualitative factor in the Q3, and we continue to evaluate the use of that as we proceed, but it remains.

Speaker 6

And then as a follow-up, the expense levels ending 2024, will most of the expenses related to Crossing $10,000,000,000 be in the run rate by the end of this year? Yes. And then maybe I'll ask one last one. What the loan growth of what 6% to 8% is the target? How are you thinking about areas Within the portfolio that should support that loan growth in 2024.

Speaker 1

Yes. And I will comment that we had a good year in 2020 3 with 10%. I think you'll see the traditional C and I business continue to perform Strong. We'll see some increase in balances as some of these projects move to completion On commercial real estate front, our specialty finance businesses will continue to be strong. I think we'll see a little less growth in the indirect portfolio than we've seen historically.

Speaker 6

Great. Thanks for taking my questions.

Speaker 7

Thank you. Thanks, Terry.

Operator

Thank you. And our next question comes from Nick Cucharale with Hawley Group. Please go ahead.

Speaker 5

Good morning, everyone, and congratulations, Chuck.

Speaker 1

Thank you. Hi, Nick.

Speaker 5

I wanted to start on fee income. The leasing line was quite volatile across 2023 and you pointed to the large buyout in 4Q. Can you help us think about a more normalized number for that business and how it may play out over the course of 2024?

Speaker 2

Yes. And as we had kind of noted when we bought this Leasing company, this is the one we bought in early 2022. There is some kind of volatility to the fee income associated with that business As they do periodically experience buyouts, in which case they generally recognize meaningful gains, which is what you saw in the Q4, This is kind of the Q1 we have had them under our ownership where we've seen this, but it's kind of at the customer's discretion when those transpire. So I would say they'll be less frequent, but it's kind of contingent upon how the customer wants to engage with us.

Speaker 5

So if you were to think about a more normalized level for that business, is it closer to the first half of the year? Yes.

Speaker 2

I think the 4th quarter was Kind of inflated by about $2,000,000

Speaker 5

That's helpful. Thank you. And then on the short term higher rate CD offerings, are you still running those campaigns? And if so, what rate are you paying for new money?

Speaker 2

So we have continued to run them. They're kind of evaluated each month. The rate currently is just over 5%, And we continue to manage that as we meet, like I said, every other week. And we're keeping them short term. So the terms on those are anywhere from 7 to 11 to 14 months.

Speaker 2

The rate is different for Each term.

Speaker 5

Okay, great. And then just lastly for me, just a follow-up on the loan growth commentary. The leasing portfolio 20% in 2023, is your expectation for a similar rate of growth in 2024?

Speaker 1

Yes, I think that there you will have Double digit growth mid to high teens, I think it's probably more likely.

Speaker 5

Thank you for taking my questions.

Speaker 2

Thanks Nick. Thanks.

Speaker 7

Thank you.

Operator

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

Speaker 7

Hey, good morning. Thanks again and Chuck congratulations on your career.

Speaker 4

Thank you.

Speaker 7

I appreciate all of you guys' really detailed guidance on the NII by different scenarios. So the right way to think about it Is that a rate cut in the near term is negative to the margin just because there's limited offset in the deposit side due to competition right now? So there's a cut later in the year, it's a little bit easier to digest as the competition moderates. Is that kind of what you guys are talking about in your guidance?

Speaker 2

Yes. I think that's consistent.

Speaker 7

Okay. And then with your comment that there was minimal impact to NII, there's reductions in mid-twenty 24. Is that just meaning that the full year NII would be flattish relative to 2023? Yes.

Speaker 2

I think we'll see some compression 23 to 2024 is kind of what we're expecting given that we do expect rates. I think we ended 2023 at something like a 4.5% net interest margin. I think what we said is if you expect a 75 basis Point cuts, which is kind of generally what some people expect for 2024. We end at something closer to the 4.3%. And some of that is being driven by kind of accretion adjustments in 2023 or accretion reductions in 20 24 relative to

Speaker 7

Right. Sorry, I should have been more specific. I meant that NII in 2024 is flat with 23 in that scenario.

Speaker 2

Yes, I think it will still be up. Net interest income would still be up. Mean, we will have the additional 4 months of the Limestone acquisition in our numbers.

Speaker 7

Okay. I got you. And if rates are flat throughout the year, is it NIM down the first Quarter 2 and then NIM rebounding back up towards the end of the year.

Speaker 2

I think our uncertainty there remains around deposit competition. I think the expectation we have is if rates hold flat throughout the year, Deposit competition will remain fierce and will continue to be pressured on deposit costs throughout the year.

Speaker 7

Okay. And the last question I have is on the loan yields, a lot of the reported yields are lower Quarter over quarter, most of the categories except for CRE, and leases are down quite a bit. I know some of that might be like moderating Can you maybe walk us through that what you're really seeing on an underlying basis?

Speaker 2

Yes. Let us pull

Operator

So I

Speaker 2

think to your point, there is some noise in the yields as you see them by category in the earnings release because of accretion Is that the segment level? But as far as loan origination yields, we did see improvement. I would say in the total portfolio, We were up 31 basis points from the Q3 to the Q4 in origination yields.

Speaker 7

Okay. That's helpful. Thank you, Katie.

Speaker 8

Thank you.

Operator

Our next question comes from Manlan Abbas with D. A. Davidson. Please go ahead.

Speaker 9

Hey, good morning. Congrats, Chuck. I just want

Speaker 1

to follow-up on the CDs.

Speaker 9

Are these mainly coming from is it new money to the bank? Is it new customers? Is it new customers bringing funds over? Do you have any other color on kind of Where are the funds are coming from?

Speaker 1

Thank you, Manny. It's primarily existing customers bringing us new money to the bank

Speaker 9

Is the plan to kind of shift to this funding vehicle as the brokered runs off? Just any color on kind of those two pieces together?

Speaker 2

Yes. I mean, I think we would prefer customer deposits over brokered Deposits. Absolutely. And I think that again, our evaluation of broker deposits is more a function of pricing as it relates to Comparable alternatives to us such as kind of FHLB overnight is our primary source for overnight funding.

Speaker 7

Okay.

Speaker 9

The short earn back on some securities Exchange you had, what kind of was a shift in yields and is there potential for more down the road?

Speaker 2

Yes. I mean, we sold lower yielding securities and we reinvested in yields over 6% At certain times during the quarter, we will continue to evaluate, as you saw, I think we did an investment kind of restructure in the Q1. We Followed up in the Q4 with another one. As we said in the script, we'll be opportunistic as it relates to future Opportunities there, we won't extend the earn back much past 2 years, if at all. And again, we'll keep the loss in a quarter relatively reasonable.

Speaker 9

So the new securities are about 6% that's across the whole quarter, any reinvestment you do?

Speaker 2

Those are what we just reinvested in the Q4 with this transaction, yes. We have not been Actively buying each consistently throughout the quarter. As you saw, our assets or our percentage of investment securities to assets went down this quarter relative Last quarter.

Speaker 9

Yes. And I'm sorry, did you give what the new loan yields were? I know you said they were up about 31 basis Quarter over quarter to

Speaker 1

what? $881.

Speaker 9

Okay, that's great. And I guess is there any other kind of big picture wildcards in your outlook besides deposit costs?

Speaker 1

I think we feel really good about the underlying Operating details in all of the businesses and we're optimistic on the outlook that we've presented.

Speaker 9

That's great. I really appreciate it guys. Thank you.

Speaker 1

Thank you. Thanks.

Operator

And our next question comes from Daniel Cardenas with Jamie Montgomery Scott, please go ahead.

Speaker 8

Good morning, everybody. Chuck, congratulations on the nice run here.

Speaker 7

Thanks.

Speaker 8

Quick question, just given where valuation levels are right now, what are your thoughts on the M and A front?

Speaker 1

We continue to have dialogue with institutions in good times and bad times. So we're pretty persistent and consistent on Talking to people, I think the accounting complexities make M and A less attractive Today, I think that a lot of institutions are looking at where they are And wondering about whether it makes sense to join an institution that has A little better currency both in terms of performance and in terms of volume Our share has greater liquidity and I think some people are beginning or some institutions are beginning to Get more realistic with premium expectations. That being said, If you're asking me to guess for the industry, I think you'll see slightly more deals in 2024 than 2023, It will not be a return to some of the historic levels. All right.

Speaker 8

Good. Got it. Thanks for that color. And then Kate, what kind of Accredible income can we expect from the Limestone transaction in 2024?

Speaker 2

Yes. I think For the Q4, we had accretion added about 47 basis points to margin. I think we'll and again, that included some true ups As we continue to refine the purchase accounting for that transaction given we're within that year window. But I think we would It to be somewhere probably between 30 to 35 basis points on a quarterly basis, benefit to the margin as we proceed through 20 24. And again, there's a lot of volatility there.

Speaker 2

I'm not telling you anything you probably don't know, but to the extent any of these deals kind of rewrite or pay off, There could be kind of swings in that in any given quarter, but that's kind of what we would expect that they state.

Speaker 8

Got it. Okay, perfect. I think all my other questions have been asked and answered. So I'll step back. Thanks, guys.

Speaker 1

Thanks, Dan.

Operator

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

Speaker 1

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

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

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Earnings Conference Call
Peoples Bancorp Q4 2023
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