Earnings Call Transcript - PEBO Q1 2022

Operator, Conference Facilitator

Good morning, and welcome to the Peoples Bancorp's Incorporated Conference Call. My name is Chuck and I'll be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period ended March 31 of 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. 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. 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 filings. Management believes that 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 first quarter 2022 earnings release was issued this morning and is available at peoplesbancorp.com under the Investor Relations tab. 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 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 peoplesbancorp.com in the Investor Relations tab section for one year. Participants in today's call will be Mr. Chuck Sulerzyski, President and Chief Executive Officer and Ms. Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Chuck Sulerzyski, President & CEO

Thank you, Chuck. Good morning, everyone. Thank you for joining us. As it relates to our results for the first quarter, we have several positives to point out. Our net interest margin expanded four basis points compared to the linked quarter. Excluding the Vantage acquired loans, pay-offs of previously acquired loans and forgiveness of PPP loans, our loan growth for the quarter was 12% annualized and our asset quality remains stable with meaningful reductions in non-accrual loans since year-end and improvements in delinquency rates. To summarize our financial performance, we reported earnings of $23.6 million or $0.84 per diluted share for the quarter. As I mentioned in our guidance last quarter, our first quarter results are impacted annually by certain expenses, which include stock-based compensation expense for certain employees, which was $926,000 or $0.03 per diluted share, and employer contributions to health savings accounts totaling $620,000 and negatively affecting diluted EPS by $0.02. We also had acquisition-related expenses totaling $1.4 million, which reduced diluted EPS by $0.04. During the quarter, the completion of the Vantage acquisition also increased our expenses, which was not included in our guidance from our call last quarter. Our allowance for credit losses declined since year-end and we reported a release of provision for credit losses of $6.4 million, adding $0.18 to diluted EPS for the quarter. This amount includes $341,000 for the establishment of the allowance for credit losses for the leases acquired from Vantage. We had several previously acquired Premier loans pay-off during the quarter, which further reduced the required allowance. We continue to see improvement in the economic forecasts and loss drivers and when compared to the linked quarter, these contributed to the release of provision for credit losses. Our allowance for credit losses comprises 1.2% of total loans at quarter-end, compared to 1.4% at year-end. While we could experience modest decreases in our allowance in the remaining quarters of 2022, we do not anticipate it dropping meaningfully below current levels. Moving on to our loan portfolio, compared to year-end, our loan balances grew $66 million, which was driven primarily by the Vantage acquisition. We acquired $140 million in lease balances, which is net of purchase accounting adjustments at the close of March 7. Excluding the acquired leases, total loans declined by $87 million, which was driven by the pay-offs of some previously acquired Premier loans since year-end and forgiveness of PPP loans. The total pay-offs and amortization of the acquired loans during the first quarter was over $166 million, while PPP loans declined $45 million. While we are disappointed by the lack of loan growth, we remain optimistic about the full year. Our strong commercial production was more than offset by the fourth quarter loan sale and the first quarter pay-offs from the Premier acquisition. We anticipated losing a portion of the Premier acquired loans over time. Going forward, we continue to see robust pipelines and a slowdown in Premier pay-offs. Despite the large volumes of pay-offs we experienced, we do like the improvement in our credit quality over the last six months and the reduction in out-of-favor portfolios. For instance, our hotel portfolio declined $19 million due to our fourth quarter loan sale and another $11 million from recent pay-offs. For the full year of 2022, we are lowering our projected loan growth from 6% to 8% to 5% to 7%. These pay-offs muted the progress we made in loan production. Excluding these declines, commercial and industrial loans grew $33 million or 16% annualized. While construction loans increased over $28 million, premium finance loans were up $10 million or 28% annualized and non-acquired leases grew nearly $8 million or 25% annualized. We have also seen some growth from the new geography added by the Premier acquisition, as we continue to develop and cultivate relationships with vehicle dealerships. We added over 20 new dealerships and over $2 million in consumer indirect loans during the first quarter. From a credit quality perspective, our metrics remained stable compared to year-end. Our non-accrual loans declined by nearly $3 million or 8% compared to December 31, 2021. Contributing to the decline was a $1.5 million commercial relationship that paid off during the quarter. The portion of our loan portfolio considered current stood at 99% compared to 98.8% at year-end. As we have indicated in our guidance last quarter, our quarterly annualized net charge-off rate increased to 17 basis points as we have been experiencing low levels of net charge-offs in recent periods. For the quarter, we had a $463,000 charge-off of one acquired commercial and industrial relationship from Premier. Our criticized and classified loans were relatively stable for the quarter. We did have an increase in our loans 90 plus days past due and accruing, which was driven by the addition of the Vantage leases. On March 7, we completed the acquisition of Vantage Financial LLC, which is a specialty equipment leasing business. This addition builds up the capacity and growth potential we have already seen in our Leasing division. We're excited to expand our specialty finance business suite and we are equally pleased with the talent we gained from Vantage. As I previously mentioned, we continue to seek acquisition opportunities within our fee-based businesses. I am happy to announce that as of April 1, we completed the acquisition of an insurance agency with five offices that’s located in Eastern Kentucky, which serves thousands of clients. The footprint of this agency complements the geographic locations of our branch offices in that area, as well as adding opportunities in our insurance and other lines of businesses for all clients. As far as our community involvement, during the first quarter our charitable foundation awarded grants to nonprofit organizations totaling $158,000. We also contributed $100,000 to a Junior Achievement Financial Literacy Program that will take place over three years for high schools throughout Ohio. We continue to strive to make meaningful investments in our communities and within our company. We take pride in providing a quality workplace for our associates and we're a 2022 recipient of Top Workplaces USA National Award from Energage, a technology company that empowers workplace excellence. We were recognized for providing an exceptional workplace culture and we're one of 1,100 organizations acknowledged for their people-first culture. This year, we are celebrating our 120th anniversary and in celebration, our teams are delivering 120 Acts of Kindness throughout our footprint. We will continue to seek opportunities to improve our workplace and make a positive impact in our communities. I will now turn the call over to Katie for additional details around our financial performance.

Katie Bailey, Chief Financial Officer

Thank you, Chuck. Our net interest income for the quarter declined 1% compared to the linked quarter, while our net interest margin grew by 4 basis points. The decline in net interest income was largely due to lower loan income, driven by pay-offs of loans during the quarter. At the same time, our loan yields increased by 4 basis points with the increase driven by higher accretion on commercial real estate loans. Our quarterly loan yields were also impacted by the addition of Vantage, which had outstanding leases with a lower yield than our historical lease portfolio, but still much higher than our typical loan product yield. The recent increase in the Federal Reserve benchmark interest rate was not meaningful for our first quarter results, but we should start to see some of our variable-rate loans repricing soon and making a positive impact on net interest income and margin in future quarters. Accretion income net of amortization expense from acquisitions was $2.7 million compared to $1 million in the fourth quarter, adding 17 basis points and 6 basis points, respectively to margins. PPP income is becoming less impactful and only added 5 basis points to net interest margin for the quarter compared to 6 basis points for the linked quarter. Our average cash balance declined compared to the linked quarter, reflecting the impact of the Vantage acquisition payment, but still continue to be a drag on margins, negatively impacting it by 17 basis points for the quarter. As we noted last quarter, we did not anticipate that our cash balances will decline significantly in the first quarter of 2022 as we continue to have strong core deposit trends. For the second quarter of 2022, we expect to have some run-off of governmental deposits due to seasonality along with the reinvestment of cash into investment securities, anticipated loan growth, and pay-off of some of the acquired Vantage borrowings during the second quarter. Our net interest income grew by 53% compared to the first quarter of 2021 and our net interest margin expanded by 15 basis points. The improvement has been driven by our acquisitions coupled with core growth. Loan yields improved by 24 basis points compared to the first quarter of 2021, which was driven by the addition of the lease portfolio. Our investment portfolio yield improved 33 basis points as we have worked to reinvest into higher yielding securities during recent quarters. We closely controlled our funding costs and our deposit cost declined 19 basis points compared to the prior year quarter. For the quarter, our reported efficiency ratio increased to 66.8% compared to 62.7% for the linked quarter. When adjusted for non-core items, our efficiency ratio was 64.8% and also grew compared to 61.5% for the linked quarter. However, we anticipate that this metric will improve as the year progresses, contributing to the increase in the adjusted efficiency ratio for the quarter were the annual items we noted earlier, such as the stock-based compensation expense and health savings account employer contributions. For the first quarter, our fee-based income grew $1 million or 5%. This increase was driven by higher insurance income, which resulted from annual performance-based commissions that we typically recognize in the first quarter of each year. These annual performance-based commissions totaled $1.3 million for the first quarter of 2022. In recent months we have seen an increasing referral pipeline for trust and investment customers from the new Premier footprint and are actively gaining new fee income from this geographic area. Compared to the prior year quarter, our fee-based income was up $2.8 million or 16%. Deposit account service charges grew 73% as we have benefited from increased customer activity along with a higher number of accounts associated with the Premier acquisition. Electronic banking income grew 34% compared to the prior year quarter due to more customer activity in the acquired Premier account. Moving on to our expenses, total non-interest expense increased 8% compared to the linked quarter. A large portion of the growth was in salaries and employee benefits, which was impacted this quarter by higher base salaries due to annual merit increases that occur at the beginning of each year, increased medical costs, which were up $724,000 over the linked quarter and were driven by the health savings account employer contributions that Chuck mentioned earlier, along with higher payroll taxes and stock-based compensation. Typically, our payroll taxes are higher in the early part of the year, then decline to maximums as the year progresses. We also had increased professional fees in conjunction with the Vantage acquisition that we completed during the quarter. Compared to the prior year quarter, our total non-interest expense grew 36%. The increases were in almost all categories and were largely due to our recent acquisitions and associated ongoing costs. From a balance sheet perspective, most of our asset growth compared to year-end was related to the Vantage acquisition. We maintained our investments to total assets ratio at 24%, consistent with year-end. As we had anticipated, we had further deposit growth during the quarter, which was up $140 million or 2% from year-end. The majority of this increase was driven by seasonally higher governmental deposits, which grew $118 million. From a capital perspective, our regulatory capital ratios declined compared to year-end, and were driven by the Vantage acquisition, which was an all-cash deal and added risk-weighted assets. Our tangible equity to tangible asset ratio was 6.8% at quarter-end and declined compared to year-end. Our book value per share was $28.41, which also declined compared to year-end. These decreases were driven by the Vantage acquisition in which we issued no equity, while we added assets, including intangible assets compared to the prior period. And we also had a large swing in our accumulated other comprehensive loss, which was further reduced by nearly $51 million and was driven by the increased interest rate environment. In an effort to continue to provide an excellent return to shareholders, earlier this morning we announced an increase in our dividend to $0.38 per share. We are pleased to be able to grow our dividend for the seventh consecutive year and we'll continue to monitor our dividend payout ratio.

Chuck Sulerzyski, President & CEO

Thank you, Katie. With our recent acquisitions, we are poised for success and growing lines of business with opportunities from our many new clients. We maintain a focus on providing the large bank products and services, but in a community bank setting. We also offer our clients a diversified product offering, including insurance, investments, leasing and premium finance, which differentiates us from competitors. We pride ourselves on doing the right things for our clients. We win clients because our go-to-market proposition is different from others and our associates genuinely care about our clients and their needs. We are excited about the potential positive impact that future interest rate hikes will have on our earnings as we proceed throughout the year. While there are no guarantees, we believe the improvement in net interest income and net interest margin resulting from rate increases could be substantial. The remainder of 2022 is promising. Here are a few updates to our guidance. We expect loan growth between 5% to 7%, excluding PPP loans and potential growth from the Vantage acquisition. We believe the anticipated stabilization in credit costs will occur this year and I want to reiterate that our annual gross charge-off rate, which includes leases, will likely return to a more historical level of between 25 to 40 basis points as a percent of balances. While there is much uncertainty around the potential of interest rate increases this year, we estimate that for every 25 basis points increase in interest rates, net interest income will benefit by $1.5 million annually. If we get eight maybe nine additional rate increases during 2022, we estimate that the benefit to net interest income will be between $6 million and $6.5 million in 2022. Fee-based income growth is expected to be between 25% and 30%, compared to 2021, which includes the impact of the acquisitions this year. We are increasing our anticipated quarterly total non-interest expense guidance to between $50 million and $52 million, which is consistent with our prior guidance, but includes the cost of Vantage and insurance acquisition. And we are still on track to have the efficiency ratio of below 60% during the latter half of the year and for the full year of 2022. This concludes our commentary and we will open the call for questions. Once again, this is Chuck Sulerzyski 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, Conference Facilitator

We will now start the question-and-answer session. The first question will come from Scott Siefers with Piper Sandler. Please proceed.

Scott Siefers, Analyst

Good morning, everybody. Thanks for taking the question.

Chuck Sulerzyski, President & CEO

Hi, Scott.

Scott Siefers, Analyst

Hey. Chuck, I was hoping you could expand upon your loan growth comments, sort of the small downshift in expectations from the old 6% to 8% to the new 5% to 7%. How much of that would you say is noise from Premier pay-offs and sales and how much is there any change in the demand side that you're seeing or in other words, the go-forward outlook?

Chuck Sulerzyski, President & CEO

It's more Premier than it is the market. To be honest with you, Scott, several years ago we got out of the blocks slow in the first quarter and we said we would still make the numbers and you all beat me up every quarter. We did make the numbers at the end of the year and I didn't want to lose that again, so I lowered it to 5% to 7%, but we feel pretty good.

Scott Siefers, Analyst

Okay, perfect. And then just for clarity, so it sounds like the 5% to 7% loan growth this year, that does not include growth from Vantage and it's also exclusive of PPP. Do you have, just, I guess, for simplicity's sake, just sort of an all-in expected loan growth kind of expectation for the year?

Chuck Sulerzyski, President & CEO

Yes, it's probably close to 9%, between 8% and 9%.

Scott Siefers, Analyst

Okay. And that would be sort of off of the year-end '21 base, is that correct?

Chuck Sulerzyski, President & CEO

Yes, correct.

Scott Siefers, Analyst

Perfect. All right, thank you very much.

Chuck Sulerzyski, President & CEO

Thank you.

Operator, Conference Facilitator

The next question will come from Ben Gerlinger with Hovde Group. Please go ahead.

Ben Gerlinger, Analyst

Good morning, everyone.

Chuck Sulerzyski, President & CEO

Hi, Ben.

Katie Bailey, Chief Financial Officer

Hi, Ben.

Ben Gerlinger, Analyst

There is a lot of guidance, especially with the mix shift planned for 2Q and then also the rate hike net benefit. I was curious, if you could give us kind of a spot rate, so to speak, once you sort of changed the average earning assets and then, assuming the couple of rate hikes here in the second quarter, do you guys have an idea where your margin might be? And then kind of juxtapose against that, Chuck, you said the upside on an annualized basis, is that kind of even throughout the 12-month period or is that kind of more front-loaded?

Katie Bailey, Chief Financial Officer

Yes. I'll begin with the margin. We reported a margin of 3.41% for Q1, which was influenced by rate increases and some shifts in our mix. With the inclusion of Vantage for the entire quarter, we anticipate that it could rise to between 3.45% and 3.55% in the second quarter. This will also involve some cash deployment. As you noted, we retained a significant amount of cash in the first quarter, and we allocated some towards Vantage. We will utilize a bit more for Vantage and to settle some debt that was outstanding as of March 31.

Chuck Sulerzyski, President & CEO

And as far as the loan growth question, second quarter will be stronger than the first quarter, third quarter will be stronger than the second, and the fourth quarter should have growth, but probably not as much as the growth between the second and third quarter.

Ben Gerlinger, Analyst

Got you. And I'm sorry, and then just to finalize it here. You said the net rate hike benefit on an annualized basis, is that something we should expect, what kind of even keel that now is really going to be hard to measure because we're seeing 8 or so?

Katie Bailey, Chief Financial Officer

Yes, so we quantified that a 25 basis point rate hike would have a $1.5 million benefit to us annually. Again, the eight to nine rate hikes we quoted in here change pretty regularly as you have experienced. So there had been one in March, I think we estimated the two in May, two more in June and then 25 basis points thereafter. So again, that's $6 million to $6.5 million we quoted would be the benefit of those rate hikes in the calendar year of '22, not an annual number. I mean annual number for '22's impact, but you would have been a benefit going into '23 for the full year benefit of those rate hikes in that period.

Ben Gerlinger, Analyst

Got you. Okay. Yes, I think I understand what you're saying. And then finally, when you think about your share price today, is there any sort of ranking order of how you would view things, would you share repurchases or would you potentially think another small bolt-on deal in the near future, any kind of guidance on what you would put at the top of the list?

Chuck Sulerzyski, President & CEO

We just increased the dividend, so we're committed to it. I don't foresee any bank mergers or acquisitions with the stock at its current price in the near future. I would say the priority would likely be dividend buyback first, followed by M&A.

Ben Gerlinger, Analyst

Okay, that's great, I appreciate it. Congratulations on a good start to the guidance; it seems like you have an upward revision here.

Operator, Conference Facilitator

The next question will come from Steve Moss with B Riley Securities. Please go ahead.

Gates Schwarzmann, Analyst

Hi, this is Gates Schwarzmann, Steve's associate subbing in for him today. Thanks for taking my question. I guess the first question I have is, ex the acquisition expenses, we still are looking at this quarter's expense has been $50 million or so, picked up the guidance a little bit, $50 million to $52 million, so we are still at that lower end. Just sort of curious, is that something that you guys expect the expenses are going to feel a little bit more pressured in the second half if some of the loan growth drivers start to pick up?

Katie Bailey, Chief Financial Officer

Let me just get a little bit of clarity for you on the expense base. So, the expense base, as you quoted, for the first quarter on a core excluding acquisition costs, like you said is the $50 million, that does include as we had referenced in the fourth quarter and in the script here today, that does include Q1 expenses that are not recurring for the remaining three quarters of the year, that being the $920,000 of stock expense and then there is a $620,000 expense related to employer contributions to health savings accounts for employees. So that brings the expense base down a little bit from Q1 to Q2. But on the flip side of that, then you'll have the full quarter impact of Vantage, given you only had a partial month in the first quarter. So that's how you get from our guidance of $46 million to $48 million that we gave in the fourth quarter, so that’s $50 million or $52 million that we gave this quarter.

Gates Schwarzmann, Analyst

Okay, awesome, very helpful. So, just following up as well, it feels like rates have moved a lot year-to-date. So just sort of curious, I mean, should we still think of the portfolio is still being about 50-50 in terms of variable and fixed and any changes to the deposit beta assumptions here?

Katie Bailey, Chief Financial Officer

No, I’d say, those are all still fair and the deposit betas are still running about a 25% deposit beta.

Gates Schwarzmann, Analyst

Okay, awesome. And then last question from me, just a cleaning question, I may have missed it in the release, but just curious if you guys could give me the PPP loan balance.

Katie Bailey, Chief Financial Officer

The PPP loan balances are about $43 million, $42 million and it was about $87 million at December 31, so it went down about half in the quarter.

Gates Schwarzmann, Analyst

Okay, awesome. Thank you. Very helpful.

Operator, Conference Facilitator

The next question will come from Michael Perito with KBW. Please go ahead.

Michael Perito, Analyst

Hey, Chuck and Katie. How are you guys?

Chuck Sulerzyski, President & CEO

Okay. Hi, Mike.

Katie Bailey, Chief Financial Officer

Hi, Mike.

Michael Perito, Analyst

I have a question regarding the loan growth strategy. Considering that several deals have been completed, it appears you have different areas that can contribute. There might be a quarter where one area isn't performing well, while another is doing better. Could you provide some general guidelines on how you envision the loan portfolio expanding over the next few years? Are there specific areas, such as leasing and premium finance, that you expect to grow significantly? Also, how large do you anticipate the consumer loan portfolio could become? Any insights you can share would be appreciated.

Chuck Sulerzyski, President & CEO

Sure. The fastest-growing areas will be the specialty finance businesses, particularly small ticket and the Vantage acquisition in premium finance, all expected to grow over 20% this year. On the retail side, mortgages are facing challenges, and we anticipate a continued decline in fee income as interest rates rise and inventory issues persist. The automobile sector has performed well, and we believe that will continue, although there are supply chain concerns. On the commercial front, we expect significant funding for the construction projects we initiated last year. Commercial and industrial lending has been robust, and we foresee continued strength, especially as we engage more with auto dealers in our new markets. This should benefit not only our indirect lending but also dealer floor plan financing. There remains strong demand for commercial real estate, particularly in Central Ohio, indicating healthy growth ahead. Overall, while specialty finance is a strong performer, the mortgage segment has lagged, which isn't a major issue for us as we have never heavily focused on that sector. We anticipate a steady performance in commercial real estate and commercial and industrial activities.

Michael Perito, Analyst

Historically, in the residential real estate sector, home equity comprised a little over 40% of loans, but today, it's around 34%. Is it reasonable to consider that you maintain a 60:40 split between commercial and consumer, give or take? However, it seems the commercial segment will start shifting more towards leasing and premium finance, which are expected to grow more rapidly as you've outlined. Do you have any differing views on this perspective?

Chuck Sulerzyski, President & CEO

No, we would like it to be more balanced. In fact, if you look back at the past, when I first joined, consumer lending was minimal, but at its peak, we increased it to about 47% consumer lending. However, as we expanded into specialty finance, that shifted. We are open to more consumer lending, but currently, in home equity, we are successfully increasing origination but not utilization, although that could improve. The automobile sector has been strong for over a decade, but it's becoming more challenging as the portfolio exceeds $0.5 billion. Overall, we hope to see more consumer growth over time.

Michael Perito, Analyst

Regarding charge-offs, the range of 25 to 40 basis points seems reasonable. Chuck, you've historically been quite conservative in this area, and I've noticed that the actual figures have generally remained below this range during my time covering the company. However, with the leasing company and the new assets expected to ramp up, do you feel there's a greater likelihood of being within that range over the next few years compared to the past? I'm not suggesting that you're aiming to take on significant credit risk, but I'm interested in understanding how the loss content might change as the asset mix evolves.

Chuck Sulerzyski, President & CEO

The three specialty finance businesses have distinct risk profiles, but there is potential for higher charge-offs as a percentage compared to the overall bank. From my viewpoint, the charge-offs in the premium finance sector are primarily operational issues rather than credit-related concerns. The Vantage acquisition reported no losses last year, and the North Star Group in Beaumont has margins exceeding 15%. When adjusted for risk, it’s a solid business. Overall, I believe that the risks for all banks are heightened due to inflated asset prices in the consumer market. Currently, 82% of cars sold in the U.S. exceed their sticker prices, and significant mortgage activity on the consumer side has occurred without appraisals or inspections, often involving bidding above market prices in various areas. This is a situation that the country will need to address. Fortunately, our primary areas of operation are more conservative, and we don’t experience the same level of price volatility. However, this is a national issue that requires consideration.

Michael Perito, Analyst

Okay, helpful. Thank you. And then just one last one. I apologize if I missed it, I don't think I heard it, but just to Katie, any thoughts on the tax rate for the balance of 2022 here? It seemed a little high in the first quarter. I think you guys mentioned a couple of items in the script. Just curious if you have any thoughts about where that could shake out moving forward?

Katie Bailey, Chief Financial Officer

Yes, I think it's going to stay in that roughly 21% and it's mainly driven more by the addition of states that we've entered into with the specialty finance businesses in the Premier acquisition driving that rate up a bit.

Michael Perito, Analyst

Got it. Thank you very much. Appreciate it.

Chuck Sulerzyski, President & CEO

Thank you.

Katie Bailey, Chief Financial Officer

Thank you.

Operator, Conference Facilitator

The next question will come from Russell Gunther with D.A. Davidson. Please go ahead.

Russell Gunther, Analyst

Hey, good morning guys.

Katie Bailey, Chief Financial Officer

Good morning, Russell.

Russell Gunther, Analyst

I appreciate your comments in terms of growth expectations within the specialty finance businesses. Could you give us a sense of where you'd expect those related loan yields to trend that's embedded in that NII guide provided?

Chuck Sulerzyski, President & CEO

Yes, I'll give a stab on that and I'll let Katie fix me up if I blow it. The premium finance I think would be between 5.5% and 6%, the North Star Leasing business is currently around 15% and we see that trending higher, we think in the fourth quarter that will be back to the 17%, 18% level. And the Vantage yields for margin are in the 7% area, but we also get additional income from the ending of the leases and the residual values and that's about an additional 5%.

Katie Bailey, Chief Financial Officer

I would just clarify that regarding the premium finance business, the yields mentioned by Chuck are the gross yields. The rate volume variance provided in the document reflects more of the net yield, as there are some referral fees, amortization, and other factors that slightly reduce that figure.

Russell Gunther, Analyst

Thank you for the information, everyone. I have a follow-up question regarding deposit betas. Is the 25% guidance referring to total deposit beta or just the interest-bearing deposit beta? Additionally, could you share your expectations on how this would trend in the early stages of a rate hike compared to the first 100 basis points you forecast versus the subsequent 100?

Katie Bailey, Chief Financial Officer

Yes. So that's the total, and as you mentioned, I think it will be lower in the early stages of the rate hikes and will progress closer to that as we move later into the rate hikes based on what we've observed today and our understanding of where everyone stands with excess cash and substantial deposit balances.

Russell Gunther, Analyst

Great, that's it for me. Thanks for taking my question.

Katie Bailey, Chief Financial Officer

Thank you, Russell.

Operator, Conference Facilitator

Our next question will come from Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers, Analyst

Hi everyone, I appreciate the follow-up. Katie, could you elaborate on the fee guide a bit more? If I understood correctly, you mentioned a fee growth of 25% to 30% this year, compared to the earlier range of 14% to 16%. I believe the difference is due to Vantage now being a factor, but I want to clarify how we transitioned from the previous guidance to the current one, just to ensure I'm not overlooking anything.

Katie Bailey, Chief Financial Officer

No, I think you touched on it, and that's largely driven by the Vantage transaction and what Chuck alluded to, as it relates to the end of life leases and the related residual valuations there that historically they have experienced. So there may be a mix shift over time. Some of that’s currently reflected in that fee guidance that may move to margin as we refine the residual valuation going forward under our ownership.

Scott Siefers, Analyst

Okay, perfect. Thank you for the clarification.

Katie Bailey, Chief Financial Officer

Thank you.

Operator, Conference Facilitator

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

Chuck Sulerzyski, President & CEO

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

Operator, Conference Facilitator

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