Earnings Call
Peoples Bancorp Inc (PEBO)
Earnings Call Transcript - PEBO Q4 2024
Operator, Operator
Good morning, and welcome to Peoples Bancorp Inc.'s conference call. My name is Nick, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter and fiscal year ended December 31, 2024. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that 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 fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission's 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' fourth quarter 2024 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. 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 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 one 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. Wilcox, you may begin your conference.
Tyler Wilcox, President and CEO
Thank you, Nick. Good morning, everyone, and thank you for joining our call today. Our diluted earnings per share for the fourth quarter was $0.76, and for the full year of 2024, it was $3.31. As we look ahead to 2024, I want to highlight some key takeaways. Our net interest income increased by 3% compared to 2023, while our net interest margin remained strong at 4.21%, outperforming most in our industry. Fee-based income rose by 10%. Our efficiency ratio was 58%. Our book value per share grew by 5% to $31.26 and our tangible book value per share increased by 10% to $19.94. We saw a favorable shift in our loan portfolio mix, with commercial and industrial loans growing relative to our commercial real estate loans. Commercial and industrial loans rose by $163 million, increasing from 19% to 21% of our portfolio, while commercial real estate loans decreased from 36% to 34% from 2023 to 2024. Our loan-to-deposit ratio fell to 84%, down from 86% at the end of 2023. Criticized loans improved to 25% of our total risk-based capital at year-end, compared to 27% in 2023, highlighting the stability of our commercial loan portfolio. We experienced deposit balance growth of $443 million, or 6%, compared to 2023. Our tangible equity to tangible assets ratio improved to 8.01% at year-end, up from 7.33% in 2023, and we consistently surpassed diluted EPS estimates, which were $0.75 for the fourth quarter and $3.30 for the full year of 2024. Regarding our credit quality at year-end, our overall allowance for credit losses was 1% of total loans. Our provision for credit losses declined in the fourth quarter, influenced by a reduction in individually analyzed loan reserves, partially offset by charge-offs. Our annualized net charge-off rate was 61 basis points for the quarter, up from 38 basis points in the previous quarter; this was primarily driven by leasing charge-offs, which accounted for 49 basis points of the quarterly rate. For the entire year, our net charge-off rate was 37 basis points compared to 15 basis points for 2023, with the leasing business contributing 22 basis points to the annual rate for 2024. We provided guidance over the last two quarters about elevated charge-offs in our small ticket leasing business and anticipated these would peak in the fourth quarter. We took a proactive stance on these credits during the fourth quarter, leading to higher net charge-off rates as collection strategies brought some charge-offs forward. Although improvements from the fourth quarter peak are expected, we anticipate a gradual decline towards our expected charge-off rate of 4% to 5%. We had already established reserves for many of these credits in prior quarters, which mitigated the impact on the provision for credit losses in the fourth quarter. To give context on our small ticket leasing, over the two years leading up to 2024, net charge-offs in that portfolio increased from about 1.5% to our current rate of 6.7%. The historical average net charge-off rate for small ticket leasing was around 4.5% prior to our ownership. Moving forward, our strategy is to target origination yields between 18% and 20%, with net charge-offs expected to be in the range of 4% to 5%. We believe the adjustments we've made in origination and credit focus are steering us back to the average historical levels of net charge-offs. For further details on our small ticket leasing, please check our accompanying slides. Our non-performing assets decreased by $21 million and represented 0.53% of total assets at year-end. We mentioned last quarter that there were administrative past due lease accounts and premium finance accounts awaiting expected proceeds from carriers on canceled policies; most of these issues cleared up in the fourth quarter, returning our non-performing asset levels to normal at year-end. Criticized and classified loans remained relatively stable compared to the end of the third quarter. Our delinquency rate improved compared to the previous quarter, with 98.7% of our loan portfolio considered current at year-end, up from 98.5% at September 30. In terms of loan portfolio concentrations, there were no significant changes during the fourth quarter. Our total investment in commercial real estate exposure at year-end was 36% of $4.6 billion in our commercial loan portfolio, which declined to 183% of our total risk-based capital. We are pleased with our multifamily portfolio metrics, which decreased to $562 million or 8% of total loans at year-end. These loans are concentrated in quality metropolitan areas within our core markets, which enjoyed average annualized rental rate growth of 3.1%, job growth of 1.25%, median household income growth of 3.1%, and a population growth of 0.93%. Our exposure in specific lending concentrations remains minimal, including land development at 1.4% of total loan balances at year-end, office loans at 1.7%, and hospitality loans at 2.7%. In terms of loan balances, we saw 5% annualized growth during the fourth quarter, with commercial and industrial loans increasing by over $97 million, and residential real estate loans increasing by $57 million compared to the linked quarter. Commercial real estate balances fell by $24 million due to payoffs and sales exceeding new loan growth. Lease balances declined by $26 million, reflecting lower originations and charge-offs in our small ticket leasing business. At quarter-end, commercial real estate loans comprised 34% of total loans, nearly 40% of which were owner-occupied, while the rest were investment real estate. At year-end, 47% of our total loans were fixed-rate, while the remaining 53% were variable-rate. I will now turn the call over to Katie for a discussion of our financial performance.
Katie Bailey, Chief Financial Officer
Thank you, Tyler. In the fourth quarter, net interest income decreased by 3% from the previous quarter due to a drop in accretion income. The net interest margin was 4.15%, down from 4.27% in the third quarter. This margin compression was caused by lower accretion income, which amounted to $4.9 million and contributed 23 basis points to the margin for the fourth quarter, compared to $8.1 million and 39 basis points in the prior quarter. On a core basis, when excluding accretion impacts, we saw a net interest margin expansion of 4 basis points. During this quarter, we successfully lowered our interest-bearing deposit costs by 6 basis points, attributed to reduced rates across all deposit categories. We also fully settled our borrowing from the Bank Term Funding Program, which helped decrease our short-term borrowing costs. For the year, net interest income rose 3%, although net interest margin fell by 34 basis points. As noted before, the reduction in net interest margin relative to 2023 was largely because deposit cost increases were slower than the higher loan repricing. From an interest rate risk perspective, we are in a neutral position with a strong net interest income profile, relatively unaffected by interest rate changes. Moving on to fee-based income, we experienced a growth of 5% compared to the previous quarter, largely due to an increase in commercial loan swap fees, which rose by nearly $1 million, though this was partially countered by a decrease in mortgage banking income. For the full year, fee-based income grew by 10%, driven by better lease, trust, investment, and insurance income, along with the full-year impact of the Limestone merger. In the fourth quarter, we recognized a $1.2 million loss on a property classified as real estate owned, which is part of our non-performing assets, based on a recent property appraisal. Regarding net interest expenses, we saw a 7% increase compared to the previous quarter. This was mainly due to higher non-interest expenses and reduced corporate expenses recognized last quarter. Over the year, non-interest expenses rose by 3%, owing to higher operating costs from the Limestone acquisition, which were partially balanced by decreased acquisition-related expenses in 2024. In the fourth quarter, our efficiency ratio was reported at 59.6%, higher than 55.1% from the previous quarter. The increase in fee-based income for the quarter did not keep pace with the decline in net interest income and rising non-interest expenses, leading to a higher efficiency ratio. For the year, our efficiency ratio stood at 58%, an improvement from 58.7% in 2023, thanks to lower acquisition-related costs. Looking at our balance sheet at year-end, our loan-to-deposit ratio remained unchanged at 84% compared to the previous quarter. We saw growth in our investment portfolio as we secured higher yields and longer durations by moving investments to our held-to-maturity securities. As highlighted in our slides, deposits grew by $112 million compared to September 30, with significant increases in noninterest-bearing deposits and interest-bearing transaction accounts, although governmental deposits saw a decline. These deposits typically experience seasonal fluctuations, being higher in the first and third quarters. Our retail CDs increased compared to the previous quarter, along with brokered CDs, which we consider an additional funding source that has offered competitive rates compared to FHLB advances in recent times. We anticipate that our deposit costs will continue to decrease as they did in the fourth quarter. Our year-end CD specials were around 4%, compared to rates between 4.75% and 5.25% a year prior. Although the Fed funds rate rose by 4.25% from late 2021 to year-end 2024, our deposit rates only increased by 1.8% during the same time. At quarter-end, demand deposits accounted for 34% of total deposits, consistent with the previous quarter, while noninterest-bearing deposits grew to 20% of total deposits, up from 19%. By year-end, our deposit structure consisted of 79% retail deposits, including small businesses, and 21% commercial deposits. The average retail client deposit relationship was $26,000 at quarter-end, with a median around $2,500. Regarding our capital position, most of our capital ratios saw improvement compared to the previous quarter, benefiting from earnings that outpaced dividends. Our tangible assets to tangible equity ratio decreased to 8% from 8.3% as of September 30, primarily due to higher accumulated other comprehensive losses linked to our available-for-sale investment securities. Our book value and tangible book value improved by 5% and 10%, respectively, versus December 31, 2023. As we manage our capital levels, we are committed to providing strong returns to our shareholders, currently reflected in a dividend yield of 5.11%. Now, I’ll turn the call over to Tyler for his concluding remarks.
Tyler Wilcox, President and CEO
Thank you, Katie. As we move into 2025, I'd like to reflect on some of our achievements during 2024. We continue to be recognized as a top employer by many publications, allowing us to attract and retain top talent. We contributed to our communities in meaningful ways, including donations, volunteering and through our scholarship programs. These activities are key to our market presence and competitiveness within our markets. We continue to leverage the investments we have made to prepare to surpass $10 billion in assets. We were recognized as being in the top 15% of banks nationally in the Small Business Administration's 7(a) approved loans. We are reiterating our guidance for the full year of 2025, which excludes non-core expenses. We expect to have positive operating leverage for 2025 compared to 2024. We expect to have improvement in our return on average assets for 2025 compared to 2024. Assuming an additional 50 basis point reduction in rates from the Federal Reserve during 2025, spread over the first nine 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 of 1 basis point or 2 basis points 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 $69 million and $71 million for the second, third and fourth quarters of 2025, with the first quarter of 2025 being higher due to the annual expenses we typically recognize during the first quarter of each year. We believe our loan growth will be between 4% and 6% compared to 2024. 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 the full year of 2025 to be modestly lower than the rate we experienced for the full year of 2024. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.
Operator, Operator
Thank you. Our first question today will come from Brendan Nosal with Hovde Group. Please go ahead.
Brendan Nosal, Analyst
Hey, good morning, folks. Hope you're doing well.
Tyler Wilcox, President and CEO
Hey, Brendan. It's good to hear from you.
Katie Bailey, Chief Financial Officer
Good morning.
Brendan Nosal, Analyst
Maybe just to start off on loan growth. I was just kind of curious, what was the driver of the divergence between end of period and average for the quarter? I mean it seemed like the period-end number was quite healthy, but the average was down a bit. I'm just kind of curious, is that timing or were there payoffs earlier in the quarter that dragged down the average? Any color there would be helpful.
Tyler Wilcox, President and CEO
Brendan, just so I understand your question, kind of relative to the first three quarters, is that what you're asking, or...
Brendan Nosal, Analyst
I mean, I guess if I look at average loans, they were down a couple of percent annualized for the quarter, whereas end of period was up 5% or 6% annualized for the quarter.
Tyler Wilcox, President and CEO
I believe it was mainly a timing issue, as many of our borrowers completed their deals in December. However, I want to emphasize that demand remains strong across all of our portfolios.
Brendan Nosal, Analyst
Great. Then maybe turning to the deposit base. I get that you guys have a much more retail-oriented base than others. But just kind of curious how long you think it takes for you to get more beta out of that deposit base and kind of the timing on that to squeeze more of that 100 basis points out of the Fed on to your own pricing.
Katie Bailey, Chief Financial Officer
Yeah. I mean, I think we started a little ahead of the Fed cutting in September, and we have been actively managing it through the cycle of the fourth quarter and we'll continue to do so into the first quarter, even if no rate cuts are experienced in the first quarter.
Brendan Nosal, Analyst
Okay. Perfect. Maybe one last one for me. Just on asset quality, broadly and, I guess, especially outside of the leasing book, I mean, numbers outside of leasing look really, really solid. So, I'm just curious what you're seeing more broadly on both commercial and consumer credit trends.
Tyler Wilcox, President and CEO
Thank you for the question, Brendan. I have a few thoughts. I agree with you that the overall asset quality is very strong, with about 97% of that portfolio performing well. As we mentioned last quarter, we saw a return to normal levels in non-performing assets, and the delinquency rates are showing a positive trend. The criticized classified loans as a percentage of capital have decreased. For the year, the contribution from the commercial book amounted to 2 basis points in charge-offs. We anticipate that credit quality will remain strong due to the diversity of our loan portfolio and the quality of our credit monitoring efforts. In the consumer sector, we have noted some elevation in charge-offs, particularly in the indirect portfolio, as well as an increase in the value of individual charge-offs. However, we have observed a declining trend over the past four months in the charge-off rate, with a drop of about 30 basis points in the fourth quarter for the indirect portfolio. Overall, on the commercial side, we are effectively using low-cost deposits in quality markets, which gives us a high level of confidence in the entire portfolio.
Brendan Nosal, Analyst
All right, fantastic. Thank you for taking the questions.
Tyler Wilcox, President and CEO
Thank you.
Katie Bailey, Chief Financial Officer
Thank you, Brendan.
Operator, Operator
And your next question today will come from Tim Switzer with KBW. Please go ahead.
Tim Switzer, Analyst
Hey, good morning. Thank you for taking my question.
Tyler Wilcox, President and CEO
No problem. Great to hear from you, Tim.
Tim Switzer, Analyst
Good to hear from you. My first question is about the 53% of loans that you mentioned are variable rate. Can you remind us if they all reprice quarterly, or does some of that have a longer lag?
Katie Bailey, Chief Financial Officer
Most of it is monthly, with a portion of it quarterly, and a very small portion later than that, but the majority is monthly.
Tim Switzer, Analyst
Okay. That's great. And then offsetting that, given you guys are pretty great neutral, can you review what your shorter-term funding sources are, particularly like on the deposit side? I know you have some CDs that are maturing over the course of the year that are probably helping...
Katie Bailey, Chief Financial Officer
Right. Well, I'd say our retail CD book is pretty short in nature, I'd say, generally less than a year. Brokered deposits, again, as we stated in the call, we use those. But again, we keep those relatively short, three-, six-, nine-month tenures, generally speaking. And then, our primary sources and overnight funding source through the FHLB.
Tim Switzer, Analyst
Okay, I got you. And you guys have been talking about deposits a little bit already, but could you provide some details on maybe like the customer response to you lowering deposit rates fairly broadly across your different sources there? And do you expect that to change at all with how Fed rate expectations have come up a little bit?
Katie Bailey, Chief Financial Officer
We've begun to reduce our special rate CD prices in line with the Federal Reserve's adjustments. We were somewhat proactive in this regard, and we have not yet fully realized the impact due to the repricing schedule. However, we are still observing growth in this area, as reflected in our quarterly results. We haven't experienced significant customer attrition and we believe we are maintaining a competitive stance in the markets we operate in.
Tyler Wilcox, President and CEO
And yeah, although we're largely retail focused there, we saw some healthy growth, for example, in commercial. So, keeping up as well, so keeping up with the competition the results kind of speak for themselves in terms of how the clients are reacting.
Tim Switzer, Analyst
Okay. Yeah, that makes sense. And the last question for me, it might be a little early for this, but with the change in administration occurring yesterday, there's a lot of different puts and takes on kind of the macro outlook and the impact of tariffs and where rates will go. Are you seeing that result in any caution from some of your C&I borrowers at all, or maybe even the other direction in certain industries where they're a little bit more bullish? Has it impacted like your loan pipeline in any way?
Tyler Wilcox, President and CEO
Yes, there are various factors to consider. We do have some clients focused on commercial and industrial sectors who may feel the effects of tariffs. However, when examining the national data, which aligns with what we're hearing from our clients, there is a notable level of business optimism. Recently, there has been a significant increase in the small business optimism index, which appears to be indicative of the sentiments across our markets. Therefore, I would describe the situation as one of cautious optimism.
Tim Switzer, Analyst
Okay, great. Thank you, guys.
Tyler Wilcox, President and CEO
Thank you.
Katie Bailey, Chief Financial Officer
Thank you, Tim.
Operator, Operator
And your next question today will come from Terry McEvoy with Stephens. Please go ahead.
Terry McEvoy, Analyst
Thanks. Good morning.
Tyler Wilcox, President and CEO
Good morning, Terry.
Katie Bailey, Chief Financial Officer
Good morning, Katie.
Terry McEvoy, Analyst
Maybe just start over with a couple of small questions from the quarter. Could you just expand on the acquisition-related expense? I mean, Limestone closed almost two years ago. I was curious to see that pop up. And then, just the swap fees, which you called out in the press, how much were those in the quarter? And is that taken into consideration in your 2025 outlook?
Katie Bailey, Chief Financial Officer
Yeah. So, as it relates to the acquisition cost, that is related to a legal contingency that represents the anticipated settlement of a lawsuit that we inherited with the Limestone acquisition. And then, as it relates to the commercial loan swap fees, that was about $1.2 million for the quarter, compared to about $200,000 in the third quarter. Again, that's all customer demand, and we've seen spikes like that in other times. I would say we don't necessarily anticipate each quarter in 2025 to be at the $1 million range, but we think that the year might land somewhere around that.
Terry McEvoy, Analyst
Could you discuss the C&I growth and identify any specific markets or industries that contributed to the quarterly growth? Additionally, what type of headwind do you expect from CRE paydowns in 2025? Will you continue to manage down the leasing portfolio or North Star?
Tyler Wilcox, President and CEO
Sure, let me address those questions one by one. Regarding the C&I growth, it was widespread across all our markets without any particular area standing out, which is what we prefer. As for your second question, I apologize, I’m a bit slow, Terry.
Terry McEvoy, Analyst
The CRE paydowns and runoff of leasing?
Tyler Wilcox, President and CEO
Thank you. We have approximately $350 million of commercial real estate maturing in 2025. We've conducted a thorough analysis of this. As mentioned in earlier calls, paydown activity has been more significant this year compared to previous years, driven not only by permanent financing but also by sales. The sales market is robust, which reflects the quality of the markets we are involved in, as there is strong demand from investors, especially for multifamily projects. Now, regarding your question about North Star leasing, could you please remind me what you meant by small ticket leasing?
Terry McEvoy, Analyst
Will you continue to manage down that portfolio? I believe in the past, you've talked about shrinking it and we did see some runoff in the fourth quarter.
Tyler Wilcox, President and CEO
Yeah. At year-end, that stood at about $191 million, that will likely decline notwithstanding. We expect originations to pick up a little bit. Just to give you a little bit of color on that overall, we believe the worst is behind us. As we clean up the portfolio, there's still some work to do. So, we're not returning. Just for clarity, we went from 1.5% charge-off to over 6%. Over 6% is too high, but under 4% was probably too low from a historical perspective, and we look to ramp back down over the year closer to that 4% net charge-offs. So that will continue a little bit of pressure on that portfolio size, while originations, we hope will pick up.
Terry McEvoy, Analyst
All right. Thanks for all the insight. Appreciate it.
Tyler Wilcox, President and CEO
Thank you.
Katie Bailey, Chief Financial Officer
Thanks, Terry.
Operator, Operator
And your next question today will come from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo, Analyst
Thank you. Good morning, everyone.
Tyler Wilcox, President and CEO
Good morning, Daniel.
Katie Bailey, Chief Financial Officer
Good morning.
Daniel Tamayo, Analyst
You guys have talked about this already, but maybe just a little bit more specifically, Katie, on the margin guidance, given the neutral balance sheet sensitivity and it seems like the goalpost of the 4% to 4.20% will be driven by deposit repricing and payoffs perhaps. Curious if that's kind of how you're thinking about it as well? And if so, is there like a range of betas on the way down that you think kind of fit those goalposts? Or just curious kind of how you were thinking about it in the budgeting process.
Katie Bailey, Chief Financial Officer
Yes, to clarify, the 4% to 4.20% includes accretion income as it has historically for us. As we have indicated before, we expect in the first half of the year a range of about 15 to 20 basis points, aiming to stay within that range for the full year, with a slight downward adjustment as the year progresses. Also, regarding your point, we have insight into deposit betas, and we anticipate a continued reduction in our costs as we move through the first quarter, even without any Fed rate cuts in the first half of the year. It's worth noting that we were slow to raise our deposit rates, leading to some lag compared to loan pricing trends during that cycle. We're on track to decrease, but it’s happening more slowly, as we were still experiencing increases when the Fed began lowering rates.
Daniel Tamayo, Analyst
Got it. Thanks for that color. And then, maybe just kind of high-level thought on credit. You sounded pretty bullish relative to where you've been. You've got the leasing book being cleaned up. I mean, if you had to say there's one area that you think is the biggest risk to guidance in 2025 from a credit perspective, is it just kind of a longer tail on the leasing portfolio, or do you think it's now kind of moved beyond that and more focused on the typical commercial and consumer portfolios?
Tyler Wilcox, President and CEO
From a credit standpoint, it largely depends on the direction of rates and inflation. This has likely contributed to the growth we've observed in small ticket leasing, which tends to have a higher concentration of start-ups and businesses that may be more at risk. We anticipate some fluctuations in our criticized and classified assets, as seen this year with alternating quarterly performance, but they have remained relatively stable and consistent, which is what we expect moving forward. Overall, we consider our loan portfolio to be high-quality and well-diversified. Even though we are seeing a reduction in small ticket leasing as we adjust to more realistic expectations for credit losses, I remain very confident in the strength of the portfolio.
Daniel Tamayo, Analyst
Terrific. All right. Well, thanks for taking my questions, Tyler and Katie.
Tyler Wilcox, President and CEO
Thank you.
Katie Bailey, Chief Financial Officer
Thanks, Danny.
Operator, Operator
And your next question today will come from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race, Analyst
Hey, Tyler and Katie. Thanks for taking the questions.
Tyler Wilcox, President and CEO
Good morning, Nathan.
Katie Bailey, Chief Financial Officer
Hi, Nathan.
Nathan Race, Analyst
Question just on kind of the trajectory for loan yields going forward within the context of the guidance you provided going forward. Assuming the Fed's on hold at least over the next quarter or two, just curious what you guys are seeing on in terms of new loan pricing, perhaps on a weighted average basis these days?
Tyler Wilcox, President and CEO
Yeah. On a blended basis, we ended the year at, make sure I get the number right, 7.14% yield across the entire portfolio, including loans and leases. Commercial has been positive up there at about 7.71% for the full year average. And our specialty finance businesses drive that a little bit higher and our consumer is a little bit lower. So, we expect yields to remain strong, but we are also not following any competition when it goes into terms or rates that don't kind of comport with our expectations for the business. And I think you'll see consistency there.
Nathan Race, Analyst
Okay. Great. And just going back to credit, I appreciate the guidance around provisioning at a similar level relative to last year. And it sounds like, as you described, charge-offs, particularly in the leasing segment peaked in the fourth quarter. So just curious if you guys have any kind of goalpost minds in terms of where you want to see the reserve get back up to maybe by the end of this year relative to loans.
Katie Bailey, Chief Financial Officer
I think the 1% is a reasonable target for an audited institution, and our current position seems appropriate. We may see a slight increase in a few basis points, but historically, we have operated in the range of 1% to 1.1% or 1.25%. Therefore, I expect we will remain within that range for 2025.
Tyler Wilcox, President and CEO
Assuming the forecast continues kind of as is from an economic perspective, our provision has some factors in it relative to unemployment and so forth that can drive the formulaic results, but I think it's been consistent over the years, as Katie mentioned.
Nathan Race, Analyst
Got it. Just a housekeeping question. On the accretion income expectations for this year, Katie, any thoughts on what we can expect maybe in terms of accretion income in 2025?
Katie Bailey, Chief Financial Officer
Yeah, from a basis point perspective, I think we will be in that 15 to 20. We'll start the year at the high end of that and end the year at the low end of that, that's assuming kind of a normal expectation for payoffs. But I'd say $10 million to $15 million in accretion income for '25 is probably in the range of expectations.
Nathan Race, Analyst
Got you. One last one for me. Just be curious to hear if you guys are seeing any increased or feeling any increased optimism on the M&A front in light of everything that's unfolded over the last 90 days or so? And just curious what you're seeing in terms of the number of partners you're talking to and just the overall magnitude of some of those conversations?
Tyler Wilcox, President and CEO
Thank you, Nate. There are many discussions happening as we remain very active in the space, engaging with potential partners, and that trend is ongoing. I sense optimism among the larger regional banks about possible opportunities, which could lead to customer and community disruptions that we are well-positioned to capitalize on and attract talent. To address your question directly, we are indeed having a lot of active conversations and feel optimistic. We consistently emphasize to ourselves and potential partners the importance of strategic patience. We still prefer larger deals to surpass the $10 million mark and have been selective in passing on opportunities that do not align strategically or size-wise. However, if the right opportunity emerges soon, we will pursue it. If not, we're in a good position with ample headroom. Overall, we are prepared to be opportunistic.
Nathan Race, Analyst
Okay, great color. I appreciate it. Thank you.
Tyler Wilcox, President and CEO
Thank you.
Katie Bailey, Chief Financial Officer
Thank you, Nate.
Operator, Operator
And your next question today will come from Manuel Navas with D.A. Davidson. Please go ahead.
Manuel Navas, Analyst
Hey, good morning. Just kind of more big picture...
Tyler Wilcox, President and CEO
Good morning, Manuel.
Manuel Navas, Analyst
More big picture, what do you see as the biggest wildcard to that positive operating leverage target for next year positively or negatively?
Tyler Wilcox, President and CEO
The potential for significant loan growth is an opportunity, and that could lead to favorable outcomes for us. I am optimistic about our expense management as we head into the next year, so I don’t view that as a major risk.
Katie Bailey, Chief Financial Officer
No. I mean, I think we feel good about our deposit base. As we think that's one of the attractive features of this institution. Rate environment, again, we said we're relatively asset neutral or neutral to interest rates, but we'll see what happens from the Fed's perspective, I think, right now that's different than where we were six months ago. So, it's likely to change, but I think we feel good about where we sit today, but that's just something out of our control that we'll continue to monitor and manage.
Tyler Wilcox, President and CEO
Yeah. I think the threats are more external, where there to be a recession or economic downturn or persistent inflation, those types of things that would drive economic activity. That's maybe where the wildcard risks lie.
Manuel Navas, Analyst
Okay. That's more exogenous. I appreciate that. Can you dive a little bit more into the DDA trends you had? I don't think it's come up just how strong the noninterest-bearing growth was. What kind of drove that? Is it just because the C&I was up at the same time? Any more color on that in general?
Katie Bailey, Chief Financial Officer
Yeah. I mean, I think we have continued as an institution to encourage the sales force to not only look for the loans, but also to actively engage their client in the deposit conversation, too. And I think we're seeing that benefit come through in the deposit base. And that holds true for the retail franchise as well as the commercial part of the business. So, I think that's what you're seeing come through in the growth in the fourth quarter.
Manuel Navas, Analyst
And that growth indicates that some of it was from retail DDA as well as operating accounts?
Katie Bailey, Chief Financial Officer
Correct.
Manuel Navas, Analyst
Awesome. And if you're getting that 4% to 6% loan growth, do you kind of expect deposits to keep up, or will there be a little bit of a tick higher in the loan-to-deposit ratio?
Katie Bailey, Chief Financial Officer
I think we saw 6% deposit growth in '24. I think that beat our expectations a little bit. I think, generally speaking, we expect deposit growth of 2% to 3% a year. So, I'd expect we would see some borrowings put on to help potentially with the loan growth.
Manuel Navas, Analyst
Okay. That's helpful. Thank you. I appreciate the commentary.
Tyler Wilcox, President and CEO
Thank you.
Katie Bailey, Chief Financial Officer
Thank you, Manuel.
Operator, Operator
And your next question today will come from Daniel Cardenas with Janney Montgomery Scott. Please go ahead.
Daniel Cardenas, Analyst
Hey, good morning, guys.
Tyler Wilcox, President and CEO
Hi, Dan.
Daniel Cardenas, Analyst
Most of my questions have been asked and answered, but just maybe a little bit of cleanup. As I look at the charge-off levels in the fourth quarter, how much of that was covered by specific reserves versus what was taken in the quarter in terms of provisions?
Katie Bailey, Chief Financial Officer
Yeah, about $3 million was covered with specific reserves that we had up at 9/30, that were then charged-off in the fourth quarter.
Daniel Cardenas, Analyst
And those are all related to the leasing portfolio?
Katie Bailey, Chief Financial Officer
Correct.
Daniel Cardenas, Analyst
And how difficult would it be to kind of build that back up? I know you kind of said that you want your reserve to loan level, maybe a little bit higher than where it is at 1%, but do you kind of envision a scenario where we can see that maybe closer to 1.10% by the end of the year?
Tyler Wilcox, President and CEO
I would say no, Dan. I'd say we've put up some very specific reserves putting on some qualitative factors relative to specifically the small ticket leasing. And our analysis thus far has been what enabled us to be able to be predictive on the fourth quarter and where we think we're going in the subsequent quarters. So, I think we have a high degree of confidence in our kind of internal analysis of that book and our expectation of how the charge-offs will potentially cascade throughout the year. And I think fourth quarter really proved that out.
Katie Bailey, Chief Financial Officer
I believe we have been reserving for small ticket leasing at historic levels throughout the process. We increased that with some specific reserves in Q3 and earlier this year. Therefore, I do not anticipate a significant increase in reserves for small ticket leasing going forward. We have been maintaining it at the 4% to 5% historic rate that we mentioned in the release. Another factor affecting the reserve, as you are aware, is the economic forecast under CECL, which looks fairly positive at the moment. If there are significant negative changes, the reserve ratio could be impacted in that quarter. However, I have no reason to believe this will happen in 2025, but it is dependent on data.
Daniel Cardenas, Analyst
Got it. Okay. And then, just in terms of talent acquisitions, as you noted, I mean, there have been a bit of a pickup in the M&A activity here recently. Have you seen that kind of result into additional discussion with teams or individuals in markets that you're either in or want to be in?
Tyler Wilcox, President and CEO
Yeah, Dan, I would say less with teams. We have historically not done kind of major lift outs, but we are as active on the talent acquisition front as we are on the general acquisition front. And I would say, for example, in the past few quarters, we've added nine additional commercial bankers across kind of what we view as our core footprints of Ohio and particularly in Kentucky and Southern Ohio kind of in the Cincinnati, basically the Columbus to Louisville corridor, if you want to call it that, and optimistic about kind of their future production, which is kind of baked into our 2025 numbers. So yeah, we will continue to be opportunistic with those hires. We're also investing in our leasing businesses. We're investing in all of our lending businesses indirect to expand that network as well. And so, we are kind of all in on talent acquisition and will continue to be because that ultimately drives our results.
Daniel Cardenas, Analyst
Got it. That makes sense. All right. Great. That's all I have for right now. Thank you, guys.
Tyler Wilcox, President and CEO
Thank you, Dan.
Katie Bailey, Chief Financial Officer
Thank you, Dan.
Operator, Operator
At this time, there are no further questions. Sir, do you have any closing remarks?
Tyler Wilcox, President and CEO
I am disappointed that none of the analysts were interested in my opinion on the Buckeye's result. But with that, I'll say 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, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.