Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Peoples Bancorp Inc (Marietta OH) (PEBO, Financial) reported consistent results with diluted earnings per share of $0.82 for Q2 2024.
- Loan growth of 8% annualized compared to the linked quarter.
- Core deposits grew by $42 million, excluding brokered CDs.
- Book value increased to $30.36, and tangible book value per share grew by 3% to $18.91.
- Regulatory capital ratios improved by double-digit percentages compared to the linked quarter end.
Negative Points
- Total deposits declined by $29 million.
- Annualized net charge-off rate increased to 27 basis points from 22 basis points in the first quarter.
- Non-performing assets increased by $2.4 million, mainly due to higher non-accrual leasing balances.
- Net interest margin declined to 4.18% from 4.26% in the previous quarter.
- Provision for credit losses driven by net charge-offs and higher reserves on individually analyzed leases.
Q & A Highlights
Q: Can you provide more detail on the expected margin compression in the back half of the year?
A: Kathryn Bailey, CFO: The guidance remains consistent with what we've been giving all year. We expect slight compression in margin, primarily due to accretion income trailing off. We printed 28 basis points of accretion benefit in the second quarter and expect 2 to 4 basis points of continued compression in each quarter thereafter, resulting in a 25 to 30 basis points benefit of accretion for the year.
Q: Could you elaborate on the elevated net charge-offs related to the small-ticket leasing business?
A: Tyler Wilcox, CEO: The small-ticket leasing business inherently involves higher-risk segments like hospitality, restaurants, and transportation. We priced for about 4.5% charge-offs based on historical data. During 2021 and 2022, charge-offs were less than 1%, but we are now seeing a return to normalization. Despite the increase, we remain satisfied with the risk-adjusted return of this business.
Q: What are you embedding for charge-offs in the leasing business for the back half of the year?
A: Tyler Wilcox, CEO: We expect the third and fourth quarters to be relatively consistent from a charge-off standpoint in the small-ticket leasing business. Delinquency in that portfolio has ticked up, and we have tightened our portfolio accordingly.
Q: Can you provide some color on the overall M&A environment?
A: Tyler Wilcox, CEO: There is a lot of discussion around M&A, but many management teams and Boards are in a wait-and-see mode regarding interest rates and the upcoming election. We expect more M&A activity next year than this year and continue to have promising conversations.
Q: Why did the average yields on CRE and C&I loans decline quarter-over-quarter?
A: Kathryn Bailey, CFO: The decline is primarily due to diminishing accretion on those portfolios, especially from the Limestone acquisition. We expect slight compression in accretion quarter to quarter as the book continues to pay down.
Q: How are technology investments and infrastructure improvements built into your expense outlook?
A: Tyler Wilcox, CEO: The expenses for technology investments are already baked into our forward guidance. These investments have provided efficiency gains by integrating operational aspects into a unified system, reducing internal service times, and eliminating additional third-party systems.
Q: What is the outlook for the tax rate in the back half of the year?
A: Kathryn Bailey, CFO: The tax rate for the back half of the year will be consistent with the first quarter, around 22 to 22.5%, after adjusting for the $1.1 million tax benefit quoted in Q2.
Q: How might a change in the macro environment and lower interest rates impact credit trends in the leasing sector?
A: Tyler Wilcox, CEO: A decline in interest rates would help alleviate some pressure in the leasing sector. While the loans are fixed rate, lower rates could provide relief elsewhere. The leases are generally short-duration, so they tend to burn off more quickly.
Q: Do you have a target for fee income as a percentage of total revenue?
A: Tyler Wilcox, CEO: Historically, we were up in the 30% range, and we aim to get back there. We continue to grow our insurance and trust and investment businesses and are open to acquisitions in these areas to increase our fee income.
Q: Can you discuss your thoughts on deposit costs and how they might react to a rate cut?
A: Kathryn Bailey, CFO: We are close to the peak on deposit costs and expect them to stabilize. If rate cuts transpire, we can take the benefit in short order due to our short-term promotional products with an average remaining life of five months.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
