Q2 2022 Peoples Bancorp Inc Earnings Call
Good morning, and welcome to people Bancorp's incorporated 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 quarterly and six months period ended June 30th 2022.
Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time simply press star one on your telephone keypad and questions will be taken in the order. They are received if you would like to withdraw your question. Please press star.
To.
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Please be advised that the commentary in this call will contain projections or other forward looking statements regarding peoples' future financial performance or future events.
These statements are based on management's current expectations.
The statements in this call, which are not historical facts are forward looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings.
Management believes the forward looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of peoples business and operations. However, it is possible actual results may differ materially from these forward looking statements.
Peoples disclaims any responsibility to update these forward looking statements. After this call except as may be required by applicable legal requirements.
Peoples' second quarter 2022 earnings release was issued this morning and is available at peoples Bancorp Dot Com under Investor Relations are.
A reconciliation of the non generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial Records measures is included at the end of this earnings release.
This call will include about 20 to 25 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 peoples Bancorp Dot com in the Investor Relations section for one year.
Participants in today's call will be Chuck So risky president and Chief Executive Officer, and Katie Bailey, Chief Financial Officer, and Treasurer, and each will be available for questions. Following opening statements Mr.
Mr. Sella risky you may begin your conference.
Gary Good morning, and thank you for joining our call today.
Earlier. This morning, we announced net income of $24 $9 million and diluted earnings per share of 88 cents for the second quarter. This is an improvement over the linked quarter and the prior year quarter. Our net income nearly doubled during the first half of 2022 compared to 2021.
And our net income for the first half of 2022 with more than our net income for the full year of 'twenty 'twenty. One we benefited from our recent acquisitions and organic growth, we had positive operating leverage compared to the linked quarter.
Our year quarter, and first six months of 2021.
Our net interest income was up 13% compared to the linked quarter and has benefited from the recent rise in market interest rates, coupled with the accretion income from the leases acquired from vantage financial.
We controlled our total noninterest expense, which came in at the low end of the range, we provided in our guidance from last quarter.
Reported efficiency ratio improved to 58, 8%. This is our lowest in decades.
Reported return on average assets improved to one 4%, but the second quarter and the first half of 2022.
Pre provision net revenue as a percent of total average assets improved to one 8% annualized for the second quarter and 1.5% for the first half of 2022 are.
Our reported return on average stockholders' equity grew to 12, 6% for the second quarter and was 12% for the first half of 2022 or.
Our asset quality remained stable compared to the linked quarter and year end.
Some one time items reported within our results for the second quarter, which included acquisition related expenses totaling 602000, which reduced diluted EPS by two cents and the recognition of a death benefit of the cash surrender value of a bank owned life insurance policy.
We added 248000 or one to diluted EPS.
Our allowance for credit losses decreased compared to the linked quarter end and we reported a 780000 release of provision for credit losses, which added two cents to diluted EPS for the quarter or the first half of 2020 to the release of provision we reported added 21 cents to diluted EPS.
Yes.
Contributing to the provision reduction with changes in our loss drivers this quarter, coupled with a reduction in reserve for individually analyzed loans, our allowance for credit losses comprise 1.1% of total loans at quarter end compared to one 2% at March 31 22.
92, and one 4% at year end, if we had a normalized provision for credit losses. This corner. It would have negatively impacted our diluted earnings per share by approximately what sense.
Resulting in us, beating consensus EPS estimates by eight cents.
Moving on to our loan portfolio, our loan balances increased by nearly $41 million or 4% annualized compared to the linked quarter and excluding purchase accounting adjustments related to advances in PPP loans.
We had a reduction of $27 million of loan balances do the P. P. P forgiveness during the quarter.
Majority of growth compared to the linked quarter was in consumer indirect loans, which increased $38 million or 29% annualized a consumer indirect loans had the best quarter of production ever as we booked over $100 million of new balances at the same time, our lease balances were up 33 million.
Our 49% annualized excluding purchase accounting adjustments.
Finance loans also grew at an 18% annualized rate.
During the quarter, we had reductions in a previously acquired loan balances of 95 million, which included payoffs and normal amortization.
We continue to experience payoffs in our commercial portfolio, which is holding back growth from a strong new loan originations we were optimistic about our commercial loan production during the second half of the year. However, we do not participate significant growth in commercial loans for the third quarter due to expected pay offs.
These payoffs are driven by business is being sold commercial real estate going quicker to the permanent market.
Our desire to maintain excellent credit results.
At the end of the second quarter, we only had $15 million in PPP loans remaining which will be less impactful as we move through the remainder of 2022, we continue to have strong pipelines and believe we can capitalize on these commercial loan opportunities in future quarters with this.
In mind, we are projecting loan growth for the full year of 2022 of a 4% to 6%.
From a credit quality perspective, we continue to have stable metrics compared to the linked quarter and a non accrual loans declined by nearly $3 million or 8% compared to March 31 2022.
The portion of our loan portfolio considered current stood at 98, 8% and was stable compared to the linked quarter and year linked quarter end and year end.
Our quarterly annualized net charge off rate was 14 basis points for the second quarter and was 15 basis points for the first half of 2022.
Our criticized loans declined by nearly $9 million or 5% compared to the linked quarter and while our classified loans grew by almost $6 million or 5% leased.
These fluctuations in criticized and classified loans were driven by several small relationships all.
Loans, 90 days, plus past due and accruing grew $2 million compared to the linked quarter driven by leases and residential real estate loans.
However, our nonperforming assets as a percent of total loans declined one basis point to 64 basis points commitment to our communities, where we do business. It's one of our top priorities.
Charitable foundation donated over 300000 during the first half of 2022.
Since the launch of our foundation in 'twenty <unk>, three we have contributed over $6 million to our communities.
I mentioned on our last call that we were delivering 120 acts of kindness for 120th anniversary. This years. Our team has completed 72 acts of kindness, so far and I'm, having a great time doing so we have received positive feedback from our communities and I'm proud of the difference all contributions can make.
I will now turn the call over to Katy for additional detail around our financial performance. Thank you check our net interest income grew 13% compared to the linked quarter and our net interest margin expanded 43 basis.
Our loan yields were positively impacted by accretion, which added 34 basis points. While the recent increase in market interest rates also positively impacted our loan yields compared to the linked quarter.
Most of the increased yields are tied to our variable products repricing, not just commercial loans and home equity lines of credit.
Our deposit costs remained stable and we continue to control these costs as closely as we can to remain competitive while responding to market forces.
At the same time, our borrowing cost grew 57 basis points and were largely driven by the acquired long term borrowings from vantage.
For the quarter P. P. P income only added two basis points to net interest margin.
Accretion income net of amortization expense from acquisitions with $3 $9 million compared to $2 $7 million for the linked quarter, adding 25 basis points and 17 basis points, respectively to margin.
Our quarterly average cash balance continued to be inflated, but has declined by nearly half compared to the linked quarter.
Our large cash balances reduced net interest margin by nine basis points for the quarter.
Compared to the second quarter of 2021 net interest income grew 55% and net interest margin expanded 39 basis points.
The improvement has been driven by our acquisitions core growth and the increases in market interest rate.
Loan yields expanded by 44 basis points, while lease yields came down due to the vantage acquisition, having lower rates on our north star leasing portfolio.
We continued to control our deposit costs, which decreased 15 basis points.
At the same time, our borrowing cost grew 82 basis points and was driven by the acquired vantage borrowing and the recent rise in interest rate.
For the first half of 2022 our net interest income and margin both grew and were up 54% and 27 basis points respectively.
We had a 34 basis point increase in loan yields, which was partially offset by higher borrowing costs.
Our reported efficiency ratio improved to 58, 8% for the quarter compared to 66, 8% for the linked quarter and 68, 6% for the prior year quarter.
When adjusted for Noncore expenses, our efficiency ratio was 58% an improvement compared to 64, 8% for the linked quarter and 64% for the prior year quarter.
For the first half of 2022 the adjusted efficiency ratio improved to 61, 3% compared to 64, 6% for 2021.
Our fee based income declined 2% compared to the linked quarter.
This decrease was driven by the recognition of annual insurance performance based commissions totaling $1.3 million in the first quarter of 2022.
We had many improvements in fee based income that partially offset the decline.
Including the one time, then that benefit we recognized related to bank on life insurance.
We also had growth of 3% and electronic banking income while service charges on deposit accounts.
We're up 4% and swap fee income increase.
Compared to the prior year quarter, our fee based income was up 21%.
The biggest driver of the increase was higher deposit account service charges, which were up 74% along with higher electronic banking income, which increased 23%.
We have had increased customer activity in recent periods, coupled with a higher number of accounts associated with the Premier acquisition.
Our swap fee income more than tripled to $270000 for the second quarter of 2022 as demand grew during the quarter compared to prior period.
Also included in other fee based income income associated with our leasing division, which contributed to the growth compared to the prior year quarter.
At the same time, our insurance income grew 9% and was supplemented by our recent acquisitions.
For the first half of 2022 E based income grew 19% compared to the prior year.
Nearly half of the increase was due to higher deposit account service charges, which were up 73%.
The remainder of the increase was driven by growth of 28% and electronic banking income, 6% interest in investment income as well or as well as higher swap fee in bank owned life insurance income.
As a note we added $30 million to our bank owned life insurance policies during the second quarter, which will impact our run rate of bank owned life insurance income in future quarters.
As it relates to total noninterest expense, we experienced a 3% decline compared to the linked quarter.
We are pleased to have come in slightly below our 50 to 52 million dollar quarterly expense guidance from our last call.
The majority of the decline was driven by lower acquisition related expenses.
We had declines in expenses associated with other loan expenses net occupancy and equipment FDIC insurance and marketing expenses.
Compared to the prior year quarter, our total noninterest expense grew 25% and was up 30% for the first half of 2022 compared to 2021.
These expenses increased these expense increases reflect the growth of our business through acquisitions as we see increases across the board through our expense categories.
From a balance sheet perspective, our balance sheet has expanded by $2.2 billion or 44% compared to June 32021.
Our investments to total assets ratio has remained stable the last few quarters at 24%.
After the recent acquisitions, our total loans to deposits ratio is 77% compared to 80% at June 30th 2021.
Total deposits declined $74 million or 1% compared to the linked quarter.
Most of the reductions were in Cds and other higher cost interest bearing deposits are noninterest bearing deposits only declined $5 million.
From a capital perspective, we had improvements in our regulatory capital ratios compared to the linked quarter end.
At June 30th 2022 our common equity tier one capital ratio was 11, 6% our total risk based capital ratio was 12, 8% and our leverage ratio was eight 4%.
At the same time, our tangible equity to tangible assets ratio continued to be impacted by higher unrealized losses on our available for sale investment portfolio.
And with six 6% at June 30th 2022.
Our book value per share also declined to $27.81.
Compared to March 31, 2022 the accumulated other comprehensive losses included stock included in stockholders' equity grew by $31 million or 50%.
Our tangible book value if you exclude the accumulated other comprehensive losses grew at a 20% annualized rate compared to the linked quarter end.
The current interest rate environment is driving the unrealized losses, and we'll continue to do so as market interest rates rise as projected in future quarters.
I will now turn the call back to Chuck for his final comments. Thank you Katy as we move into the second half of the year, we will continue to focus on growing our business, including our recent acquisitions. The Premier acquisition continues to provide opportunities for growth and our teams are actively working with our clients to expand the products and.
<unk> is available to them during the quarter, we added two commercial bankers and Washington D C market, which will help us expand our presence and capabilities within that market area. We recently acquired advantage with.
And expect to grow our leases at a higher rate relative to the size of our overall loan portfolio, we hope to gain additional referrals between lines of business on our recent insurance acquisition, even those clients a more diversified product suite for the remainder of 2022, you are our current expectations.
We expect loan growth between four and 6% excluding P. P. P loans, we continue to anticipate stabilization in credit cost I believe that our annual gross charge off rate, including leases will likely return to a more historical level of between 20 to 30 basis points as a percent of the balances for the second half.
Half of 2022.
Net interest income perspective, if we get seven rate increases of 25 basis points five of those being in the third quarter and the remainder in the fourth quarter. This would result in a benefit of approximately $3 million for the last half of the year.
This amount does not include the increase we expect from the prior rate hikes. This year, which will also benefit the last six months of the year.
Fee based income growth is expected to be between 12, and 16% compared to 2021, which includes the impact of the acquisition this year.
We're maintaining our projected quarterly total noninterest expense guidance of between 50 and $52 million, which includes the cost advantage and insurance acquisitions and we are still on track to have an efficiency ratio below 60% for the full year of 2022.
We expect our earnings over the next two quarters to be similar to this quarter.
While we have had recently leases and provision for credit losses, we do not anticipate this will be the reason we achieve similar earnings in the last two quarters of the year.
Our share price and market conditions, we repurchased $6 million in shares during the second quarter of 2022, we will continue to evaluate our repurchase strategy in future quarters. This concludes our commentary and we will open the call to questions. Once again this is Chuck seller askey enjoying.
And me for the Q&A session is Katie Bailey, our Chief Financial Officer.
I'll now turn the call back into the hands of our call facilitator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question is from Scott <unk> with Piper Sandler. Please go ahead.
Good morning, everybody. Thanks for taking the question.
That's got thing.
Hey, I was hoping you could walk through the the fee guide and the Delta there seems kind of a substantial down shifts from I think you guys were saying, 25% to 30% fee growth last last quarter with the introduction of Vantiv. So I just want to make sure what the sort of apples to apples.
Comparison is before thinking 12% to 16% growth.
Growth, there and maybe just sort of the puts and takes in other words, what what's going better or worse than our than maybe we thought 90 days or so ago. At this time sure Scott I'll take that one so it was all predominantly related to vantage and as we noted on the call last time, there is residual assets associated with that and as we were.
Through the purchase accounting for that that is what is impacting BN com. So historically, they would've recognized gains on the sale of residuals, but with purchase accounting, we have to mark that to fair value at acquisition date and therefore.
Are not getting the fee income, but we are seeing it through the accretion on the net interest income side. So it's a geographical switched from fee income to accretion income that you're seeing there.
Otherwise that guidance, we're providing now is consistent with what we would've provided prior to vantage.
Okay. So basically the.
I guess the the revenue contribution from vantage should still be the same but geographically it's going into NII versus fees is that a fair presumption that that's right Scott.
Okay perfect.
And then the so the 46% loan growth that's that's not a year over year expectation is that that that's simply from here on out we would expect 4% to 6% sort of annualized growth rates does that is that they're correct read.
Yeah, it's from December to December .
Okay. So.
So basically you take the <unk> 21 end of period.
Low number add 4% to 6% on and that that's what we'd expect to be expecting a total for the full year 'twenty two is that as it is it as simple as that yes.
Okay perfect alright, good. Thank you very much. Thank you. Thanks Scott.
The next question is from Tim Switzer with K B W. Please go ahead.
Hi, Thanks for taking my question Tim.
So the first one I had was also on loan growth just sort of with the economic uncertainty I'm curious on what you're hearing from your customers, particularly your commercial customers you know.
Is there business confidence.
That you know are they a little bit more worried at all or have you seen them slowing investment spending or anything like that or do you expect that to occur maybe later in the year, just because of the fed tightening.
At this point in time, we really do not see any business slowing in fact.
To the contrary in Ohio in particular.
60% of our business is still based in Ohio, a little bit more than 60%.
Yeah, we see a lot of signs real positive you know you've heard about Intel you saw Ford Motors investment you saw the Chinese battery farms Ah.
And those are just you know big big companies with Big Big names, but there are dozens and dozens of efforts across the geography.
Manufacturing related bringing things back onshore so I actually am very optimistic about the environment that we're in.
You know for several quarters and while you want to skew the question towards.
You know commercial you know consumer from everything that we see in terms of automobile lending and home equity lending.
Seems to be you know spending money a big time so.
You know it may slow down, but I can't tell you that we're seeing it we're feeling it.
Okay. That's good to hear and it sounds like you know the pay downs are really limiting some of the net growth youre getting what are you expecting that to moderate at all within your guidance over the next couple of quarters or are you expecting that to remain pretty.
Pretty elevated from here.
I think you'll see it elevated in the third quarter I think we'll return back to normal in the fourth quarter that assumes that the deals that we know about happened in the time frame that we anticipate and are you know they're not these are not.
Not competitive situations there are people getting permanent.
On real estate.
You know its companies are being sold and.
In some cases, we continue to improve the portfolio.
We've had about a 50 million dollar reduction in hotels and you know.
We will always era.
The credit quality for growth and.
You can see what we did in terms of margin we have the fastest growth rates in the higher margin products and that allows us.
A lot of opportunity to.
To focus on credit quality and continue to focus on earnings growth.
Right, Okay, and since it's a lot of people move into permanent financing, it's not like the higher rate environment is going to really.
Oh, you know slowed down the pay downs, it's more just.
You've kind of got to work through the loans you have in there right now.
Yeah, I would agree with that okay and the last question I had was on the NIM. There's no helpful. Giving us the you know what you're expecting from the coming rate hikes, but what what's the impact that you estimate from the rate hikes, we've already had like what was in.
The Q2, NIM and what do you think is the expansion in Q3 from the more recent hikes.
Yeah, I think Theres a couple of factors at play and net interest margin from second quarter to third quarter I think you're isolating just the rate benefits and you know I think that could be 10 to 15 basis points of what's already been kind of.
Captured and the rates that have been announced to date as well as those that are forthcoming are expected to be forthcoming, but I would also note that there are some margin. We noted two basis points of margin impact from P. P. P. So that's the windowing and we'll continue to do so but not having a major impact accretion income I would say it was a little elevated.
In the second quarter, it'll come down a few basis points, our historical guidance with somewhere in the 15 to 20 basis points a quarter and so I think we'll continue to be in that range again second quarter was about 25 basis points and then we didn't know we cash balances were still a little elevated in the second quarter as we can deploy that we'll get some lift.
And margin there. So those are kind of the puts and takes in total but to answer just your question on the rate hikes are somewhere between 10 to 15 basis points quarter over quarter.
Okay, you're saying, there's 10 to 15 basis points for the Q2 impacted absolutely you would expect in Q3 from the rate hikes, we already have the lift from Q2 to Q3.
Okay perfect. Thank you guys.
The next question is from Steve Moss with B Riley's Securities. Please go ahead.
Good morning, everybody good Schwartzman Sidoti and are happy to be talking to you guys.
First question I have here is just I'm curious you know on some updated thoughts on gross around the leasing business now that you know you get the fully integrated vantage and premier out of the platform could you walk us through some of the expectations, there and maybe the expected origination yield.
With.
With North Star leasing, we're expecting yields in the 16% to 18% range and the growth rates.
Have been you know north of 20 or north of 20%.
With vantage the yields are in the U S.
No, 11% to 13% range with similar type of great growth rates.
Gotcha. Thank you that helps.
So I.
I guess my next question here is more so on the funding cost side of things I think a lot of your peers.
Peers out there have been seeing deposit costs come in a little bit hotter some higher deposit betas I was curious you know last quarter you guys were modeling call at 25% I'm curious do you guys think that that's still persist here and just you know where in your funding costs rolling in these days.
Our deposits were 14 basis points in the fourth or the first quarter and 14 basis points in the second quarter.
I think what we said last time is that we expect our deposit cost to go up 25 basis points for each 1% ish.
Inquiries, but I think that will probably be able to do.
That'll start.
The first point is two will probably be a little bit less than the 25 basis points.
Got you that's very helpful. And then I guess on the purchase accounting accretion here in the NIM or I'm, sorry in net income or interest income I should say.
I get that call. It you know 4 million that it was that last quarter.
Is that like a good run rate to think about it moving forward or do you think that indicated a little bit from here.
No I think that's the case a little bit from here I think second quarter was a little high I think it will run somewhere around the two two and a half.
As opposed to the four I.
I would say two and a half is probably a good run rate for the remainder of this year.
Awesome very helpful. Thank you guys.
Thank you.
Again, if you have a question. Please press Star then one the next question is from Terry Mcevoy with Stephens. Please go ahead.
Hi, good morning.
Maybe question could you just talk about pricing competition within the indirect consumer business and whether you're seeing any loosening of credit standards there.
We're not seeing any loosening of credit standards in fact, I am leaves and lucky to be able to tell you that our average score last quarter in terms of production was 753, which is the highest that we've ever had I think we are seeing some good traction.
On a part of some of our competitors were all.
Also benefiting from the expansion of our geography through the acquisition.
So we feel good about what's happening in indirect we feel good about the delinquency rates. The Oh. It was just the overall performance so with.
We are we're pretty happy.
And.
I apologize I was a few minutes late for the call could you maybe comment on those several several commercial relationships that led to the higher classified classified loans.
Is this really isn't that much it isn't really that meaningful I was just a handful of small deals nothing outstanding.
And then one last question I hate to go back to the accretion question, but if the residual gains on on vantage.
<unk> zero that all flows through the accretion line and maybe ask another way what are what amount of the accretion. This last last quarter came directly from vantage.
Hum.
Hum.
Yes.
It probably it was about half of that accretion that we had for the quarter would have been related to the vantage transaction.
And in the step down in the third quarter to what what pieces that coming from vantage or other that it's coming largely from other other okay. That's what I thought okay, sorry to ask but just wanted to have some clarity there I appreciate it. Thank you both thank you.
At this time there are no further questions. Sir do you have any closing remarks.
Yes, I want to thank everyone for joining our call. This morning. Please remember that our earnings release and a webcast of this call will be archived at peoples Bancorp Dot com under the Investor relationship section. Thank you for your time and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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