Peoples Bancorp Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 22, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to Peoples Bancorp, Inc. Conference Call. My name is Gary, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the 3 9 months ended September 30, 2024. 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. Peoples' Q3 2024 earnings release and earnings conference call presentation were issued this morning and are 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 measures is included at the end of the earnings release. This call will include about 20 minutes of prepared commentary, followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year. Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr.

Operator

Wilcox, you may begin your conference.

Speaker 1

Thank you, Gary. Good morning, everyone, and thank you for joining our call today. For the Q3, our diluted earnings per share improved to $0.89 compared to $0.82 for the linked quarter. Diluted EPS for the 1st 9 months of 2024 was $2.55 compared to $2.47 for 2023. As we reflect on our performance for the Q3, here are a few highlights compared to the linked quarter.

Speaker 1

Our net interest income improved 3% and our net interest margin expanded 9 basis points. Fee based income grew 5%, total non interest expense declined 4%, Return on average assets for the 3rd quarter improved to 1.38% compared to 1.27%. Return on average stockholders' equity improved to 11.5% from 11%. Our efficiency ratio improved to 55.1% compared to 59.2%. Compared to June 30, our deposits increased $185,000,000 with over 100,000,000 dollars of client deposit growth.

Speaker 1

Our tangible equity to tangible assets improved 65 basis points to 8.25%. Compared to the linked quarter end, our book value per share improved 4% to $31.65 while our tangible book value grew 7% to $20.29 Our regulatory capital ratios improved compared to the linked quarter end as earnings exceeded dividends paid. We also surpassed consensus estimates for diluted EPS for the Q3, which were $0.82 compared to our reported results of $0.89 As far as our credit quality, compared to June 30, our criticized loans declined as a result of pay downs and upgrades during the quarter. Our classified loans increased during the Q3, primarily due to the downgrade of 2 commercial relationships totaling nearly $10,000,000 combined from criticized to substandard. Our delinquency was comparable to the prior quarter with a portion of our loan portfolio considered current at September 30th was 98.5% compared to 98.8% at June 30th.

Speaker 1

We continue to prudently manage our portfolio concentrations and there were no material changes in balances in any specific loan segment during the Q3. At quarter end, our total investment commercial real estate exposure was 37% of the CAD4.5 billion in our commercial loan portfolio and was 182% of our total risk based capital. This compares favorably to the other banks in our peer group and is well under the regulatory limit of 300%. Most of our commercial real estate exposure continues to be within our multifamily portfolio accounting for CAD 564,000,000 or 9% of total loans. We remain happy with the diversified risk profile and geographic distribution of this portfolio focused on quality metropolitan areas within our core markets.

Speaker 1

During the Q3, economic indicators in these markets showed the following highlights. Average annualized rental rate growth of 3.4 percent, job growth of 1.09%, median household income growth of 3.1% and population growth of 0.74%. Other notable contributions other notable concentrations include land development at 1.3% of total loan balances at quarter end, office at 1.9% and hospitality at 2.6%. As we have anticipated, our small ticket leasing division continued to experience higher net charge off levels this quarter. Industry data and peer reporting have demonstrated a similar trend of higher charge offs in the small equipment leasing space.

Speaker 1

The leases originated through this division are at much higher interest rates and carry a higher credit risk than our traditional loans. We were aware of the higher net charge off rates of this business when we purchased it, which was around 4.5% historically. We have enjoyed high gross origination yields from our small ticket leasing division of around 20%. We have also experienced multiple years of lower than expected credit losses with net charge off levels of less than 1.5% from 2021 through 2023 as noted on Page 4 of our accompanying slide presentation. Even with the higher net charge off rates, this business remains highly profitable providing meaningful contribution to return on average assets and margin due to the higher returns.

Speaker 1

Through the 1st 9 months of 2024, our return on assets from our small ticket leasing division was over 2% and for the full year of 2023 was over 4%. Going into the Q4, we expect net charge offs for this business will be higher than the Q3 with elevated levels continuing into the Q1 of 2025. While we greatly value the risk adjusted return of this business, we've been making adjustments to our risk appetite to ensure that credit remains in line with our pricing and reserve levels. At September 30, we had included specific reserves in our allowance for credit losses for nearly $4,000,000 of the remaining lease balances we believe will be charged off. We have also made a strategic decision to eliminate some large broker relationships in order to increase the focus on the core vendor and lending channels within this division.

Speaker 1

Finally, we have also pulled back on leasing activity with respect to certain industries and equipment types as we have noted increased delinquency and charge offs both in our portfolio and in national industry data. While we are focused on the credit quality of this business, the small ticket leasing division only comprised around 3% of our outstanding balances at September 30. To provide perspective on a combined basis, our total leasing portfolio year to date had an average balance of $418,000,000 This combined portfolio had a yield of 11.3%, 2.2% of net charge offs and contributed 38 basis points to our net interest margin. Our consumer indirect loan net charge offs have also increased in recent quarters as they returned to pre pandemic levels. We continue to maintain healthy FICO scores on our originated consumer indirect loans with a weighted average FICO score of 749 for our Q3 production.

Speaker 1

Our net charge offs are being driven by a combination of economic hardship on borrowers and softening in used car prices collectively resulting in higher net charge offs. This level of net charge offs is typical for this portfolio, which provides an appropriate risk adjusted return. At quarter end, our overall allowance for credit losses was 1.06 percent of total loans. Our provision for credit losses in the Q3 was mostly due to charge offs and was up from the linked quarter due to higher individually analyzed loans and leases. Our annualized net charge off rate was 38 basis points for the Q3 compared to 27 basis points for the linked quarter.

Speaker 1

The higher lease net charge offs represented 23 basis points of the annualized rate for the Q3, while our core commercial credit quality performance has been stable. Our non performing assets increased to 0.76% of total assets at quarter end and were driven by loans 90 plus days past due and accruing. The increase was a combination of additional lease, premium finance and commercial real estate loans that became over 90 days past due. The increase in past due leases was mostly due to the finalization of renewal documentation in process for leases in our midsized leasing business. This resulted in administrative past due accounts, which is typical in the educational and governmental segments and we very rarely see delinquencies proceed to charge off.

Speaker 1

We demonstrate the non performing assets visually on Slide 5 of our accompanying presentation. While our past due premium finance loans increased, these loans carry low credit risk as we have the ability to cancel premiums and recover the majority of our receivable from the insurer. As of September 30, we were awaiting expected proceeds from insurance carriers on past due premium finance loans where the policies have been appropriately canceled. Dollars 20,000,000 of the $27,600,000 that was past due at September 30 was related to the leasing and premium finance segments. As far as loan balances, we were impacted by a high volume of pay downs.

Speaker 1

For the Q3, we had 23% annualized growth in our midsize leasing and a 10% annualized increase in our home equity line of credit balances. At the same time, we had reductions in commercial balances due to pay downs of $148,000,000 during the quarter, which exceeded our new loan production. These pay downs are being driven by higher than historical sale activity in the investment commercial real estate market as stabilized projects are highly valued in the open market. We have a healthy production pipeline for commercial loans for the Q4 and we expect to grow our balances compared to September 30. We also experienced reductions in premium finance and consumer residential real estate balances.

Speaker 1

We had declines in our small ticket leasing business driven primarily by the tightening in the broker channel and our risk appetite within that business, which we discussed earlier. At quarter end, our commercial real estate loans comprised 34% 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 5% of total loans. At quarter end 47% of our total loans were fixed rate with the remaining 53% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Speaker 2

Thanks, Tyler. Compared to the Q2, net interest income improved 3% for the 3rd quarter and net interest margin expanded 9 basis points. The improvement was driven by higher accretion income, which totaled $8,100,000 for the 3rd quarter and added 39 basis points to net interest margin compared to 5 $800,000 28 basis points for the 2nd quarter. This positive impact to the 3rd quarter will lower our future accretion income to be recognized. For the 1st 9 months of 2024, net interest income increased 4%, while net interest margin declined 36 basis points.

Speaker 2

Our loans repriced more quickly than our deposits as the Federal Reserve raised rates in prior periods. So the decline in net interest margin compared to the prior year was driven by the catch up of deposit costs. Accretion income totaled $20,000,000 for the 1st 9 months of 2024 adding 33 basis points to margin and was $16,000,000 adding 29 basis points for the same period in 2023. Moving on to our fee based income. We had growth of 5% for the 3rd quarter compared to the linked quarter.

Speaker 2

Most of the improvement was driven by higher lease income as we recognized some early termination gains on leases that paid off totaling $1,100,000 These terminations are hard to predict and are driven by client activity. We also had an increase in mortgage banking income due to higher loan production, which was partially offset by lower bank owned life insurance income. Through the 1st 9 months of 2024, fee based income grew 13%. We had several improvements, including higher lease, trust and investment and insurance income. We also had increases due to the full year impact of the Limestone merger.

Speaker 2

As it relates to our non interest expenses, we came in lower than we had projected for the 3rd quarter totaling around $66,000,000 which was a 4% decline from the linked quarter. The decrease was driven by lower other non interest expense partially due to the linked quarter one time prior period true up of corporate expenses as well as the reduction in data processing and software expense. For the 1st 9 months of 2024, non interest expense was up 2% as higher operating costs from the additional footprint from Limestone were partially offset by lower acquisition related expenses during 20 24. For the 3rd quarter, our reported efficiency ratio was 55.1%, improvement over 59.2% for the linked quarter. This improvement was driven by a combination of higher revenue and lower non interest expense.

Speaker 2

For the 1st 9 months of 2024, our reported efficiency ratio was 57.4%, an improvement from 59.7% for the same period in 2023. Looking at our balance sheet at September 30, our loan to deposit ratio declined to 84% compared to 87% for the linked quarter end. During the quarter, our total deposits grew $185,000,000 with over $100,000,000 of growth coming from client deposits. Retail CDs led the increase with over $71,000,000 of balanced growth, while governmental deposits increased $58,000,000 and money markets grew $26,000,000 Our governmental deposits are seasonally higher during the Q3, which contributed to the increase in balances. We also added brokered CDs during the quarter, which was a lower cost funding source for us than FHLB advances and contributed $83,000,000 of our total deposit growth compared to the linked quarter.

Speaker 2

In conjunction with the Federal Reserve's recent move to reduce rates, we have also lowered our current offerings for retail CDs by a similar rate and are now below 5% on new retail CDs. As we have noted in recent quarters, we have a relatively short term on our CDs at the higher rate and should see the repricing benefit of the lower rates in future quarters. Our demand deposits as a percent of total deposits totaled 34% at quarter end compared to 35% for June 30. Our non interest bearing deposits comprised 19% of total deposits at quarter end. At September 30, our deposit composition was 79% in retail deposit balances, which includes small businesses and 21% in commercial deposit balances.

Speaker 2

Our average retail client deposit relationship was $25,000 atquarterend, while our median was around $2,500 Moving on to our capital position. Our capital ratios improved compared to the linked quarter and benefited from earnings outpacing dividends. At quarter end, our common equity Tier 1 capital ratio was 11.8%. Our total risk based capital ratio was 13.5%. Our leverage ratio was 9.9% and our tangible equity to tangible assets ratio improved to 8.3% compared to 7.6% at June 30.

Speaker 2

The increase in this ratio was mostly attributable to improvements in accumulated other comprehensive losses related to our available for sale investment securities. Over the last several quarters, we have improved both our book value and tangible book value significantly. Compared to September 30, 2023, our book value has grown by 13%, while our tangible book value improved by 23%. Compared to September 30, 2022, our book value has increased by 18%, while our tangible book value has grown 33%. As part of our capital strategy, we continue to provide an attractive dividend, which has a current yield of 5.38 percent.

Speaker 2

Our dividend payout ratio stood at 44.7% for the Q3. Finally, I will turn the call over to Tyler for his closing comments.

Speaker 1

Thank you, Katie. We have mentioned before our focus on being a great employer. In July, we received awards from the U. S. News and World Report for Best Companies to Work for Banking and Best Companies to Work for Midwest.

Speaker 1

We also strive to contribute meaningfully to the communities we serve. In September, we partnered with Washington State College of Ohio and celebrated the official opening of the Peoples Bank Foundation Student Market. The market will provide a variety of nutritious food options for students and their families at no cost. In October, several executives and I attended a groundbreaking ceremony of a specialized women and children's hospital with Marietta Memorial Hospital in Southeastern Ohio for which we pledged a meaningful multiyear donation from our foundation in support of bringing world class healthcare to our area. As 2024 comes to a close, we would like to update our guidance for the Q4.

Speaker 1

Assuming 50 basis points in rate reductions by the Federal Reserve during the Q4, we expect net interest income and net interest margin to modestly decline. This would result in a net interest margin of between 4% and 4.1%. We anticipate our fee based income will normalize for the Q4 and exclude the early termination gain on leases we reported for the Q3. We expect quarterly total core non interest expense of between $67,000,000 $69,000,000 for the 4th quarter. We anticipate full year loan growth to come in between 4% 6% with this reduction in our forecast including potential pay downs, charge offs and selective lease balance growth for the Q4.

Speaker 1

We anticipate a full year net charge off rate of between 30 35 basis points, primarily driven by trends in small ticket leasing and indirect charge offs expected for the Q4. As it relates to 2025, I would like to give some preliminary high level guidance, which excludes non core expenses. We expect to achieve positive operating leverage for 2025 compared to 2024 as we focus on expenses and efficiencies derived from the investments made during 20 24. We 20 4. We expect to have improvement in our return on average assets for 2025 compared to 2024.

Speaker 1

Assuming an additional 50 basis point reduction in rates from the Federal Reserve during 2025 spread over the 1st 9 months of the year, we anticipate a stabilization in our net interest margin of between 4% and 4.2%. In our projections for 2025, each 25 basis point reduction in rates results in a nominal impact to net interest margin with a 1 or 2 basis point impact to net interest margin. We believe our fee based income growth will be in the mid to high single digit percentages compared to 2024. We expect quarterly total non interest expense to be between CAD69 1,000,000 CAD71 1,000,000 for the second, third and 4th quarters of 2025 with the Q1 of 2025 being higher due to the annual expenses we typically recognize during the Q1 of each year. We believe loan growth will be between 4% 6% compared to 2024.

Speaker 1

We anticipate provision for credit losses to be similar to our 2024 quarterly run rate for 2025. We also expect our net charge off rate for 2025 to be similar to the rate experience for the full year of 2024. We will update this guidance in January at our next call. This concludes our commentary and we will open the call for questions. Once again, this is Tyler Wilcox and joining me for the Q and A session is Katie Bailey, our Chief Financial Officer.

Speaker 1

I will now turn the call back into the hands of our call facilitator. Thank you.

Operator

We will now begin the question and answer session. Our first question is from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 3

Thanks guys. Good morning everyone.

Speaker 4

Good morning, Daniel.

Speaker 3

I appreciate all the detail on the credit outlook and on on the Q3 impact from leases, Tyler. Maybe we can start there and just is there anything else that you can provide in terms of where you see the credit outlook specifically for leases going. I think you said, you're looking for charge offs similar to what you had in the Q3 over the next 2 quarters, I believe. Yes. Yes, if you could just kind of give us an idea of the type of charge offs you're expecting over the in that time period and then what would be bringing that down beyond that?

Speaker 1

Sure. Thanks for the question, Danny. I guess the first thing I would say is, I expect that the lease charge offs and the small ticket leasing will peak in the 4th quarter. And we've done obviously a lot of analysis of the kind of pipeline and the assets within that portfolio. And so I think we'll end the year with a full year net charge off rate of between 5% and 6%.

Speaker 1

And so you'll see a modest increase in the Q4 and then more in line with the 2nd and third quarter and the Q1 of next year. Based on what we know today, but we've done a pretty deep dive into the portfolio. From an outlook perspective, if you look at the accompanying slide that we put in there, we've been at kind of I would say abnormal lows relative to that type of business and relative to the pricing that we're getting in that business. And so we expect it to normalize somewhere in the low to mid-4s. Again, we've said for years, we price it at 4.5%.

Speaker 1

I wish we were at 1.5% net charge offs in that business forever. But it's on a risk adjusted return basis at 4.5%. As we noted, it's incredibly profitable. So that would be the normalization that I would expect. And I would expect that because of the changes that we've made to some of the segments.

Speaker 1

You see that production is somewhat challenged because we've curtailed some of the broker business and we feel like we have a really good handle on the ongoing production and production is being focused on where we see less charge offs over time.

Speaker 3

Okay. That's very helpful. And I guess just a follow-up there. I think you said you eliminated some larger broker relationships and then I think you also said some specific industries within the leasing business. What industries are you backing away from at this point?

Speaker 1

Sure. No, we are we've backed out of titled fleet over the road trucking, garment printers. We've reduced pretty significantly reduced hotel and hospitality and all of that in favor of investments that we have made and we'll be making in the sales force in that area to kind of focus on some of the core examples, which the core kind of positives are these $30,000 to $40,000 loans in manufacturing equipment, landscaping equipment, plumbing, areas like that.

Speaker 3

Okay. That's interesting. Thanks. And then finally, again, on that topic, but on the loan growth side, just curious how the slower loan growth within the leases, what kind of impact that's having on your overall loan growth forecast coming down?

Speaker 1

It didn't help in the Q3. We probably saw a reduction of about $10,000,000 relative to where it had been, but that we were seeing double digit growth in that portfolio this time last year. So the swing is probably $15,000,000 to $20,000,000 swing as to kind of where we might have expected to be otherwise.

Speaker 5

Okay, perfect.

Speaker 3

Well, thanks for taking all my questions.

Speaker 4

Thank you. Thanks, Danny.

Operator

The next question is from Brendan Nosal with Hovde Group. Please go ahead.

Speaker 6

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

Speaker 1

Hey, Brendan.

Speaker 6

Just want to start off on the commentary for positive operating leverage in 2025. I guess somebody like unpack the parts of the guide, it looks like expenses will grow like 4% or 5% kind of using your guidance off of the core 24% number. So just kind of curious what you're seeing on the revenue side, especially within NII that would allow you to outpace that level of cost growth? Thanks.

Speaker 2

Yes. I think on the expense number you just quoted, I think that's a little higher than what we're anticipating. I think you quoted 4% to 5%. I'd say we're probably closer to the 2% to 4%, so somewhere in the middle there. And then on the expense side, I'd say it's so we do expense balance growth on the loan portfolio even though as we noted maybe some steadiness or contraction on the margin slightly.

Speaker 2

And then I think we expect some meaningful fee income growth. I think we expect mortgage to recover a bit. And then our other businesses including wealth management or trust and investment services and insurance, I think we expect handsome growth out of them in 2025 relative to 2024.

Speaker 6

Okay. All right. That's helpful. Thanks. Maybe kind of pivoting from here to capital and the M and A environment.

Speaker 6

Just kind of curious, how you perceive the M and A environment today, kind of pace of conversations and your own appetite for additional deals at this point?

Speaker 1

Yes. So, a lot going on in the M and A world, especially with some recently announced deals that are kind of within the size range and adjacent to us geographically. So, we continue to watch that space. I would say the pace of conversations is significantly increased from where it was at the beginning of the year. I still think there are some who are weighing their options in anticipation of the election results to see what happens there.

Speaker 1

We're agnostic about that. I think either way there's going to be increased M and A activity. I would say from just to reiterate kind of where we stand, we're at $9,300,000,000 We have made significant investments into crossing the $10,000,000,000 threshold. We have said previously that we had an appetite for maybe 2 parallel paths. 1 would be multiple smaller deals and one would be 1 larger deal.

Speaker 1

I'd say in the last two quarters, our thinking is Sharpen maybe a little bit on that around, leading more heavily towards patiently seeking out a larger deal. And because I think I don't believe we as a bank have execution risk with the ability to do multiple deals. But I think you're just seeing more that being a little bit more difficult in this environment. So we prefer to see what our options are and we're having a lot of conversations and I expect that some of those will bear fruit in the future. But we're being patient and leaning towards larger opportunities is what I would say.

Speaker 1

But open to all conversations and we'll continue to have those.

Speaker 6

Excellent. That's super helpful color and thank you for taking the questions.

Speaker 2

Thank you. Thank you, Brandon.

Operator

The next question is from Terry McEvoy with Stephens. Please go ahead. Hi, good morning everyone.

Speaker 1

Hi, Terry.

Speaker 7

Hi. First off, thanks for all your comments and insight into 2025, much appreciated. And in terms of questions, could you just maybe run through how your competitors reacted to the Fed rate cut from a deposit pricing standpoint and how your strategy may be different from your competitors? And I'm just kind of curious the decision to kind of add some higher costing retail CDs did impact your cost of deposits, which are up a bit more than I had expected, particularly given kind of the decline in loan balances.

Speaker 1

Why the need to

Speaker 7

add CDs here in the Q3?

Speaker 1

Terry, I would say the first of all, to answer your question about the competitors, it's all over the place is what I would say. Every time, one, we have a broad variety of geographies and we have small irrational banks. We have larger irrational banks and we have other banks that are very well in line with where we are. So we've really tried to remain middle of the pack and lower our special rates, which is where we've been attracting a good amount of our deposit growth over time. So, and I can talk more about kind of the loan growth challenges a little bit, but I would say the deposit strategy has been to continue to ramp down our deposit costs over time and keep the duration short as we have with our specials, so that we have flexibility there.

Speaker 7

Thanks. And then maybe as a follow-up, and I guess it's a pretty direct question. Tyler, when you think about the small ticket leasing business, do you think it's accretive to shareholder value? I mean, it is high ROA, high margins, but when times are good, we get worried, times are going to get bad and when charge offs go up, we spent the first 10 minutes of this call kind of talking about a portfolio that's what 3% of total loans. So I just kind of get your high level view is this portfolio you think the right for a publicly traded company, again, given kind of the trends we've seen and the discussion we've had today?

Speaker 7

I think it is, Terry.

Speaker 1

I think the bogey is obviously that it's been at an unnaturally low and unnaturally low charge off rate over time. I think if you what is the attractiveness of our bank, it's the margin that's very powerful. It's the deployment of our low cost deposits into profitable businesses. And so yes, it is getting some headlines. It gives us diversity.

Speaker 1

It's very granular. There's 7,000 loans in there or 7,000 leases. And I realize why there's questions about it, but I'll trade off talking about it for 10 extra minutes for the profitability that's brought to our bank over time.

Speaker 7

That's great. I appreciate your insight there and thanks for taking my questions.

Speaker 2

Thanks, Terry.

Operator

The next question is from Nathan Race with Piper Sandler. Please go ahead.

Speaker 8

Yes. Hey. Good morning, Nathan.

Speaker 1

Hey, Nathan.

Speaker 2

Good morning, Nathan.

Speaker 8

Well, thank you. Just thinking about the margin trajectory in the next year, if you end up getting maybe more than 50 basis of cuts in 2025, maybe it's close to 100 basis points. How do you guys kind of think the margin trends under that scenario in the back half of next year?

Speaker 2

Yes. I think we quoted this in the script. I think for every 25 basis points out, as you know, we run a parallel shift for our ALCO reporting. And in a parallel shift, we would expect about a 2 basis point impact for every 25 basis point cut, roughly a little under $2,000,000 Now assuming some steepness to the curve or flatness to the curve even, that gets cut in about half for a 25 basis point cut. So again, if you get an extra 50, we're thinking 2 to 4 basis point impact to the margin that we've set forth in the expectations.

Speaker 8

Okay, got it. And I imagine that's under static balance sheet scenario. So assuming 4% to 6% loan growth next year and you're funding that with both the combination of cash flow off the bond book and deposit gathering, how do you kind of think about that kind of more dynamic impact? Is it more stable?

Speaker 2

Yes. I think it is more stable. I think we do expect deposit growth to continue as we proceed and as we saw in the Q3 and as we proceed into next year. And as we noted, those special rates are coming down and have been coming down even before the Fed cut rates. So we will continue on that path to make that growth profitable for us.

Speaker 8

Got it. And any thoughts on a good starting point for accretion income for the Q4 and just expectations for next year and kind of how that plays into overall expectations under the discussion we just had from NIM?

Speaker 2

Yes. So the quarter for the Q3, just to level set it out about 28 basis points to margin. I think you could expect in the Q4 and first half of next year, it's probably between the 20 25 basis points a quarter, trending down over that time horizon. And then we probably go 15 to 20, the back half of twenty 25.

Speaker 8

Okay, got it. And assuming charge offs remain kind of in the 30 to 35 basis point range into next year, How do you think about providing in terms of provisioning to cover those charge offs and also just given the loan growth expectations?

Speaker 2

Yes. I think we're as we noted it here, we have we feel good that we have much of the small ticket leasing charge offs reserved for adequately as we sit here at 9:30. And I would say the charge offs that we're expecting otherwise within the portfolio are largely covered within the reserve coverage ratios we already have for those portfolios and I would say plus in excess of those. So I think we're adequately reserved as we sit here today and under the assumption that the charge off rates stay relatively stable in 2025 as they are in 2024.

Speaker 8

Okay, great. I appreciate all the color. Thank you. Thanks for the questions.

Operator

The next question is from Tim Switzer with KBW. Please go ahead.

Speaker 4

Hey guys, thank you for taking my questions. I have a follow-up on the margin trajectory in your guys' I guess asset sensitivity given the guide to 2 basis points for every 25 basis point cut With 53% of loans variable rate,

Speaker 1

can you

Speaker 4

kind of walk us through the offsets on the liability side of the balance sheet, particularly the deposits? I know you have a pretty short CD portfolio that can help, but where else would you be able to kind of offset that 50% of loans that reprice relatively quickly as well?

Speaker 2

Yes. I think there you're seeing some money markets at higher rates than the deposit book. And we do have some funding that is relatively short in nature as well that will help offset. I would say on the loan side, there are floors in all or majority of our variable rate loans as well. Depending how drastic cuts we observe over the next few quarters, they may or may not kick in, but they are in there as a stopgap.

Speaker 4

Can you provide any color on how low those floors are relative to current rates?

Speaker 2

Yes. They vary by borrower and by segment.

Speaker 4

Okay. And what's kind of like the overall deposit beta assumption you guys have over the course of the cycle? And does that change, as you get deeper into the cycle?

Speaker 2

Yes. Historically, we've said it's around 25%, but that includes non interest bearing. So I think what we've seen is something closer to the low thirty percent deposit beta. And I would again say that's kind of the benefit of our franchise, very granular low cost deposit franchise providing the benefit to margin that you see. So I would think there is some lag as you note that some of our pricing higher pricing products in the deposit portfolio are sitting in 5 month CDs.

Speaker 2

So it takes a short time for those to reprice, but they will reprice in relatively quick manner.

Speaker 4

Okay. And do you guys project the margin to kind of dip below that 4% level and then recover back to the 4% to 4.2% or just kind of stay around there after Q4? I wasn't sure what you guys meant by stabilize.

Speaker 2

Yes. I think that we would expect to see a 4 handle in much of 'twenty or in all of 'twenty 25. Again, that includes the accretion estimates that I just quoted on a previous question that was raised. So I do think the 4 to 4.10, 4.20 that we guided is reasonable and I don't expect that we dip meaningfully or at all below 4.

Speaker 4

Okay, great. And my last question, appreciate all the details. What kind of like leasing revenue and mortgage banking assumptions do you have embedded in your guide? Because with your outlook for modestly lower NII, but positive operating leverage, that implies still strong revenue growth overall.

Speaker 8

So I

Speaker 4

was wondering what assumptions you guys have in there?

Speaker 2

Yes. I don't I didn't mean to quote that net interest income would be lower next year than this year. I said we'd feel compression in margin, but with the growing balance sheet, I think we expect net interest income to be relatively stable with a slight upside. And then on the fee income side, I think we quoted mid to high single digit growth in 2025 relative to 2024. I would say lease income is comparable to that in 2024 with maybe a little bit of an upside.

Speaker 2

I'd say the more of the growth is on the mortgage, which again you saw some benefit in the Q3, which I'd say we would expect to kind of continue into the 4th and through 2025. But trust and investments and insurance are the other 2 driving meaningful growth year over year in the fee income businesses.

Speaker 4

Got you. My bad for misunderstanding and I got it there. Thanks for answering the question.

Speaker 8

Thank you.

Speaker 2

Thank you.

Speaker 5

Thank you. Thank you.

Operator

The next question is from Manuel Neves with D. A. Davidson. Please go ahead.

Speaker 5

Hey, sorry to touch on NIM trajectory, NII trajectory again. So it seems that is it right to think about it that there's some potential for expansion or at least once pressure diminishes with rate cuts, you could see stability to upside on the NIM NII later next year?

Speaker 2

Yes, I think that is correct.

Speaker 5

And then if could

Speaker 9

you add into

Speaker 5

a little more detail on CD repricing trends over the next couple of quarters just to kind of help with the NIM guide and where you can reprice to?

Speaker 2

Yes. So, the retail current offering that we have out there is 4.roughly 4.5%, again a 5 month term on that. And I would expect as rates cut, we would move with the Fed in that as we did previously or as we did in September with the rate cut.

Speaker 5

And then how have you seen your kind of commercial pipelines react or the borrowers react to rate cuts? And just what are kind of some preliminary discussions there in terms of demand?

Speaker 1

Yes. Manuel, I would say that the story of loan growth is an interesting one. And I would say that in this quarter and this year to date, we've seen really accelerated pay downs. So especially in our investment commercial real estate book. For reference in year to date last year we saw $10,000,000 total sale pay downs for stabilized properties in the investment commercial real estate.

Speaker 1

This year to date we're at 100,000,000 dollars so 10 times refi pay downs year to date are $71,000,000 And so I think one of the reasons for kind of a measured 4% to 6% loan growth guide for next year is the expectation that in a declining rate environment there is the potential for more pay downs to the refi in the permanent market on the investment commercial real estate notwithstanding the fact that demand has been good. Do I think a continuing falling rate environment can be good for demand on the loan side in all businesses? I do. But that the countervailing pressure in that particular quarter of a big chunk to swallow of pay downs where we had $148,000,000 in pay downs this quarter in the commercial space is kind of the trend there.

Speaker 5

And to this point, what are you seeing on commercial loan yields and just kind of competition in that space specifically? I know you're moving off of the lease, so leasing benefit a little bit, but just kind of what else are you seeing on new loan yields and competition there for the areas that you are growing?

Speaker 1

I would say stability. I mean, obviously, we're competing in in metro areas that are there's a lot of players like Columbus, Cincinnati, Cleveland, Louisville, Lexington, Richmond and Washington DC. But I think commercial yields in the Q3 are in the 7.5 range and that's been pretty stable for a while now.

Speaker 5

That's great. That's good color. I appreciate that. I'll step back into the queue.

Operator

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

Speaker 4

Hey, good morning guys. Hi, Dan. Good morning.

Speaker 9

Just most of my questions have been asked and answered. Just a quick question on capital. I guess with AOCI continuing to or potentially continuing to decline in the falling rate environment in your TCU ratio poised to continue to strengthen. What are your thoughts on stock repurchase activity?

Speaker 2

Yes, Dan, we continue to evaluate them. I think we've given the priority historically organic growth, we remain committed to the dividend. And then depending on the environment, kind of M and A and stock buyback. So we will continue to evaluate it as the capital ratios continue to improve. But again, I think as you've seen us in past, we're pretty opportunistic as it comes to the buyback.

Speaker 9

Right, right. No, makes sense. And then in terms of the specials, deposit specials that you ran in the Q3, what kind of rate were you guys offering on those specials? And what was the term of the product?

Speaker 2

Yes. The product, it was close to the 5%. I think it might have been a little higher than 5%. We moved it throughout the quarter and definitely moved it most meaningful when the Fed moved. But I think the special the highest price special was a 5 month.

Speaker 2

And where that sits today is what I quoted. Again, we've come down on that rate now to something closer to 4.5% for a 5 month CD. We do have some other 11 months out there, but again, it's a lower rate than what we're paying on the 5 month.

Speaker 9

Got it. And additional plans for additional product offerings in Q4? Or are you just going to kind of see how things kind of settle down here?

Speaker 2

I think your question is specific to deposits. I think we'll continue on the path we're on at this point and continue to evaluate the rate on the CD specials that we offer in the terms. But I would expect us to stay relatively consistent with where we've been over the last few quarters, changing the rate downward as the Fed moves.

Speaker 9

Yes. Makes sense. And then I guess as you look at in terms of deposit costs, as you look at yourself versus your competition in some of your larger markets? Do you guys typically rank in the middle of competition or higher end, lower end?

Speaker 2

No, I think we rank pretty much middle of the road for deposits pricing.

Speaker 1

Try to stick to our discipline and that's one of the reasons for our focus on C and I lending as well as that generally brings the whole relationships, so deposits, treasury management and so forth.

Speaker 9

Got it. Okay, perfect. I'll step back. Thanks guys.

Speaker 1

Thank you. Thanks, Dan.

Operator

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

Speaker 1

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

Operator

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

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Earnings Conference Call
Peoples Bancorp Q3 2024
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