Earnings Call Transcript - PEBO Q1 2025

Operator, Operator

Good morning, and welcome to Peoples Bancorp Inc.'s conference call. My name is Sagar, and I will be your conference facilitator. Today's call will cover a discussion of results of operations for the quarter ended March 31, 2025. 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 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' first quarter 2025 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 15 to 20 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year. Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Tyler Wilcox, CEO

Thank you, Sagar. Good morning, everyone, and thank you for joining our call today. For the first quarter, our diluted earnings per share were $0.68. We had many positives for the first quarter compared to the linked quarter. Our annualized loan growth was over 4%. We had improvements in asset quality metrics, including reductions in our annualized net charge-off rate, nonperforming assets and criticized and classified loans. Deposit balances grew 2%, which was driven by higher money market and governmental deposit account balances, while we reduced our brokered CDs by $96 million, resulting in core deposit growth of over 3%. Our book value per share grew 2% to $31.90 at quarter end, while our tangible book value per share improved 4% to $20.68. Our tangible equity to tangible assets ratio improved to 8.34% at March 31 compared to 8.01% at year-end. We announced an increase to our quarterly dividend for the tenth consecutive year. Our reported net interest income was down 1% compared to the linked quarter, and our net interest margin was down 3 basis points. However, on a core basis, which excludes accretion income, net interest income grew while net interest margin expanded 3 basis points. Fee-based income grew over 2%, and total noninterest expense increased slightly, but was impacted by annual first quarter one-time expenses, including stock-based compensation expense related to the annual forfeiture rate true-up on stock invested during the first quarter, along with upfront expense on stock grants to certain retirement-eligible employees totaling $1.3 million, which reduced diluted EPS by $0.03 per share and employer health savings account contributions totaling $724,000, which negatively impacted diluted EPS by $0.02. At March 31, our key credit quality metrics improved compared to year-end. As we had anticipated, our annualized net charge-off rate declined compared to the linked quarter and was 52 basis points for the first quarter compared to 61 basis points for the fourth quarter. While we experienced a meaningful decline per our previous guidance, net charge-offs continued to be driven by our small ticket leasing business, which comprised 31 basis points of the first quarter rate and was 49 basis points of the fourth quarter rate. As we noted last quarter, we expected the fourth quarter to be our peak quarter of charge-offs for the leasing portfolio. And in turn, these net charge-offs declined by over $2 million during the first quarter as compared to the linked quarter. Our nonperforming assets decreased over $3 million and were 50 basis points of total assets compared to 53 basis points at year-end. These improvements were driven by lower balances of loans that were 90 days or more past due and accruing, which was largely due to administrative delinquencies in our leasing and premium finance portfolios at year-end. Criticized and classified loans both declined compared to year-end and were down $14 million and $5 million, respectively. Our delinquency rates were stable, as well as the portion of our loan portfolio considered current at quarter end was 98.5% compared to 98.7% at year-end. Our overall allowance for credit losses grew nearly $2 million to 1.01% of total loans. Our provision for credit losses increased nearly $4 million compared to the linked quarter and was primarily driven by net charge-offs during the first quarter. The growth in our allowance for credit losses was attributable to a deterioration in the macroeconomic conditions used within our models, an increase in reserves on individually annualized loans and loan growth during the quarter. While there is much uncertainty around tariffs and the market, current actual impact to our clients and our business has so far been nominal. As far as business sentiment in our markets and from our clients, we see continued optimism around the regulatory and tax outlook. Recent headwinds of uncertainty with tariffs have led to declines in confidence nationally reflected in various small business indexes. Notwithstanding national declines in consumer confidence in the past couple of months, those declines have not materialized as reductions in consumer demand in our lines of business during that same time period. We have undertaken extensive reviews of our various portfolios in order to better understand the potential impacts of tariffs and executive orders on our loan demand or credit. Thus far, no material impact has been observed. Our portfolio assessment has focused on commercial relationships with credit exposure over $3 million, automotive dealer exposure and our continued focus on our small ticket leasing business. The recent pause in tariffs will allow any impacted clients some additional time to address any concerns they may have and allow us to continue to refine our assessments. We will continue with our heightened monitoring and analysis while uncertainty remains. On a positive note, we could see some long-term benefit from reshoring in our markets. Moving on to loan balances. For the first quarter, we had 4% annualized loan growth, which was in the range of our 2025 guidance. Commercial real estate loans led the increase, contributing $75 million of growth, while our residential real estate loans were up $13 million, and consumer indirect loans grew $10 million. Some of this production was offset by declines in commercial and industrial loans, leases and construction loans. The decline in lease balances was driven by net charge-offs in the small ticket leasing portfolio during the quarter. The reduction in our construction loans was due to movement to commercial real estate loan balances as projects were completed. At quarter end, our commercial real estate loans comprised 35% of total loans, about 35% of which were owner-occupied, while the remainder were investment real estate. At quarter end, 47% of our total loans were fixed rate, with the remaining 53% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Katie Bailey, CFO

Thanks, Tyler. Our net interest income declined 1% this quarter compared to the linked quarter end and was attributable to lower accretion income during the first quarter. Net interest margin was 4.12% compared to 4.15% for the fourth quarter. And on a core basis, which excludes accretion income, our margin expanded 3 basis points. During the quarter, we were able to reduce our deposit and borrowing costs, which more than offset the decline in interest income from loans and investments, excluding accretion income. Our interest-bearing deposit costs declined 12 basis points for the first quarter compared to the fourth quarter. Our average retail CD balances grew compared to the linked quarter and repriced at a lower rate during the first quarter, contributing to the lower deposit costs. Moving on to our fee-based income. For the first quarter, we had growth of 2%, which was primarily due to performance-based insurance commissions we typically record during the first quarter of each year. This growth was partially offset by lower commercial loan swap fees, deposit account service charges and electronic banking income. As it relates to our noninterest expenses, we had a slight increase compared to the linked quarter. The key drivers of the increase was one-time costs that Tyler mentioned earlier that we typically record in the first quarter of each year related to stock-based compensation expense and employer health savings account contributions. These expenses totaled $2 million for the first quarter. We experienced declines in many of our expense categories, which nearly offset the increased expense for the first quarter. As we have indicated, outside of the first quarter items and potential non-core expenses, our quarterly expense run rate is expected to be between $69 million and $71 million for the remainder of 2025. Our reported efficiency ratio was 60.7% and was up compared to 59.6% for the linked quarter. The increase was driven by our higher costs during the first quarter that I mentioned, along with lower accretion income compared to the fourth quarter. Looking at our balance sheet at March 31. Our loan-to-deposit ratio stood at 83% and was relatively consistent with year-end. Our investment portfolio declined $40 million and was 20.3% of total assets compared to 20.7% at year-end, as we were able to reinvest proceeds into loan growth during the quarter. Our target range for investments as a percent of assets is between 18% and 20%. Compared to year-end, our deposit balances grew 2% or $145 million. The most significant growth within our money markets, governmental deposits, and retail CDs. We had seasonal growth in our governmental deposits, which contributed to the quarterly increase. During the first quarter, our average new retail CDs and renewals were originated at a rate of about 20 basis points lower than our fourth quarter average rate. We also had nearly $19 million of balance increase in our noninterest-bearing deposits, which while we reduced our brokered CDs by over $96 million compared to year-end. While the Fed funds rate increased 4.25% from the fourth quarter of 2021 through March 31, our deposit rates have only increased 1.7% over the same period. Our demand deposits as a percent of total deposits were flat at 34% for both quarter-end and year-end. Our noninterest-bearing deposits to total deposits were 20% for both periods as well. Our deposit composition was 76% in retail deposit balances, which included small businesses, and 24% in commercial deposit balances. Our average retail client deposit relationship was $26,000 at quarter end, while our median was around $2,900. Moving on to our capital position. We are proud to announce another increase to our quarterly dividend, which is now at $0.41 per share. This is our tenth consecutive year of increasing our dividend. We continually evaluate our ability to provide a solid return for our shareholders, and this new dividend rate results in an annualized yield of 5.95%. We continue to have strong regulatory capital ratios, which improved compared to year-end. Our tangible equity to tangible assets ratio improved to 8.3% compared to 8% at year-end. This growth was due to earnings outpacing dividends, as well as reductions in our accumulated other comprehensive losses related to our available-for-sale investment securities. Our book value and tangible book value both grew compared to year-end and were up 2% and 4%, respectively. Finally, I will turn the call over to Tyler for his closing comments.

Tyler Wilcox, CEO

Thank you, Katie, and our apologies for the call dropping. We're not sure what happened there. Hopefully, we're coming in loud and clear. As I think about how much our business has changed over the last few years, one thing remains the same: Our dedication to being the best at what we do. We have very high standards for our associates, both those who serve our customers and those who serve internally. Our culture makes us a place where great people want to work, which is evident in our track record of being a top employer. We recently received recognition from USA TODAY for a top workplace for the fourth year in a row. We have the ability to partner with other institutions during mergers, with a proven success integrating them into our processes and systems. We are committed to service within our communities, ensuring that all of our associates have the opportunity to make a difference in causes that matter to us and our clients. These are the characteristics that define Peoples, and in turn, drive solid results and shareholder value. We were also recognized by Forbes for the second year in a row as one of America's Best Banks, 2025. In the past 12 months that I've been President, I've been in awe of how our associates take care of our clients, each other, shareholders and our communities. We intend to keep this momentum going and keep our focus on these core strengths. As we move through the remainder of 2025, here are some of our expectations for the full year of 2025, which exclude non-core expenses. We expect to achieve positive operating leverage for 2025 compared to 2024. Assuming a 25 basis point reduction in rates from the Federal Reserve during mid-2025 and another 25 basis point reduction in the fourth quarter, we anticipate a full year net interest margin of between 4% and 4.2%. We are positioned so the declines in interest rates have a minor impact on our net interest margin and the timing of the rate reductions has little impact on our projections for 2025, as we have meaningfully reduced our asset sensitivity compared to prior periods and are now in a relatively neutral position. We believe our fee-based income growth will be in the mid-single-digit percentages compared to 2024. We expect quarterly total noninterest expense to be between $69 million and $71 million for the second, third and fourth quarters of 2025. We believe our loan growth will be between 4% and 6% compared to 2024. While our first quarter provision for credit losses was higher, we anticipate the quarterly run rate for provision for credit losses to normalize during the second half of 2025 and be similar to our 2024 quarterly rate, excluding any potential negative impacts to our forecasts. While we cannot control the macro environment or predict the uncertainty of policymakers, we remain committed to our core operating performance and principles, which are collecting and deploying high-value deposits into quality lending businesses, managing our credit risk responsibly and ensuring that our quality mix of businesses work together, bringing to bear every financial tool we have for the benefit of our clients. We will continue to evaluate our risks while sticking to our strengths and executing our strategic plan. 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 comes from Brendan Nosal from Hovde Group.

Brendan Nosal, Analyst

Maybe just starting off here on loan growth. I mean for the quarter, you hit the 4% to 6% guide that you laid out earlier in the year, and it seems like you stuck to that outlook for the rest of the year. I would just love some color on how you view the balance of risks to the loan growth outlook, just given all the tariff cross-talk and then what you're seeing from an actual activity standpoint after tariffs were announced earlier this month?

Tyler Wilcox, CEO

Thanks, Brendan. A couple of thoughts going into a few different directions. Traditionally, the first quarter is one of our softer quarters. So if we were in a normalized year, I'd be maybe a little bit more optimistic. I will say our visibility into the second quarter pipeline is strong, and that pipeline looks strong. I expect we'll have good production. We'll also probably see a little bit higher payoff activity in the second quarter than we saw in the first quarter. And so our reiteration of our guide is really based on what we're seeing today. I think all of us are asking the questions of what impact will the tariffs have or not have. That's one of the reasons why we mentioned the kind of confidence in our markets. I think there is a lot of optimism. There continues to be optimism in the small business space, which is where we play. And so we’ve seen some surprises despite, as I mentioned, despite consumer confidence being at an all-time low since the pandemic. We still saw record production and had the highest production in March that we've ever had in indirect. If that's maybe a temporary bounce, that's possible. But I think there's some reasons for optimism in all those portfolios. But like we said, we can't control the macro environment. So that's our best estimate as of today from what we're hearing from our sales pipeline and from our salespeople. And the last thing I would add is that we continue and have continued to add talent throughout all those markets where we want to deploy our loan balances, both in specialty finance and in the core bank. And so that addition of talent is also a tailwind.

Brendan Nosal, Analyst

Okay. Great. That's helpful color, Tyler. I appreciate it. Maybe then pivoting to North Star and leasing overall. While losses remain elevated, it starts to move in the right direction, like you telegraphed last quarter. Just kind of curious to your thoughts on how long do you think it takes to get back down to that normalized range for that business? And if there are any knock-on effects to the yield in that portfolio as you kind of work the credit quality side of the business?

Tyler Wilcox, CEO

Yes. Thank you. Again, we continue to remain committed to the business. We continue to invest in that business, and so we believe in the long term. I feel good coming to you and coming to the Street and saying that we are exactly where we thought we would be with respect to the charge-offs in the first quarter and actually a hair under. So when do we normalize? I think that continues to decline throughout the remainder of the year. One of the key drivers that we've talked about is kind of those high balance accounts. And the high balance accounts comprised a significantly higher portion of that portfolio in 2024. By the end of this year, we believe that portion of the portfolio will be between $8 million and $10 million, down from over $50 million last year. So the high correlation there between — that's why we have a high degree of confidence that it will ramp down. And if we think of it like a bell curve, we kind of hit the top of that curve, and we're on our way down. So it won't be in the second quarter that we return to that historical norm. And I'd just remind everybody that we were historically low at 1.5% charge-offs for a couple of years that I don't think was ever going to be sustainable. And we haven't originated any high balance accounts for a number of quarters now. So what you're seeing is kind of the cleaning out of the portfolio. And the go forward, even though the portfolio size has declined, overall, we're okay with that because we're making that compromise for credit quality, and yields have held up.

Daniel Tamayo, Analyst

I wanted to inquire about the fee income guidance as it seems to have been slightly lowered. Could you provide some insight into the reasons behind this reduction?

Katie Bailey, CFO

Sure. In the first quarter, insurance income was slightly lower due to performance commission-based income compared to the prior year, which contributed to the reduction. On the mortgage side, more income is being retained on the balance sheet instead of generating gains that were previously anticipated based on our earlier guidance. Additionally, income from wealth management or trust and investments is somewhat dependent on market performance, and given the volatility, there might be some adjustments in the figures.

Tim Switzer, Analyst

I really appreciate the color you guys have given on the potential impact of tariffs and how you haven't really seen anything too notable in regards to loan demand or credit. But just given your exposure to retail deposits, I thought you guys might have a good sense of how consumers have reacted, if at all, to the tariffs and economic uncertainty, if you've seen any notable changes to consumer behavior spend?

Tyler Wilcox, CEO

Yes, Tim, I have a few thoughts. First, we've experienced notable growth in our indirect lending business, which I believe is partly due to manufacturers and dealers offering incentives on vehicles. There's also a sense among consumers to secure a vehicle before prices are expected to rise, as well as a trend toward purchasing used vehicles for better value. We are seeing an increase in deposits, as consumers seem more inclined to save their money rather than invest in equity markets. Additionally, the mortgage pipeline remains very strong, even with no changes in interest rates. Overall, these factors are contributing positively to our consumer businesses. And then HELOC balances and new originations are significant. So we see a lot of consumers tapping into significant increases in the equity in their homes that they've developed over the past few years.

Terence McEvoy, Analyst

Given the news this morning, how should we consider consumer lending in light of student loan borrowers facing mandatory collections next month? Does this pose any risk to your consumer loan portfolio or affect your approach to underwriting consumer credit?

Tyler Wilcox, CEO

It will certainly factor into our initial credit evaluations when we are underwriting consumer loans. We already overcame a challenge when the previous loan forgiveness or freezes ended, and I recognize that this is another challenge now. However, we will always assess the debt to income ratio. This may influence some individuals to tap into their home equity, but I don't believe it will significantly impact us. We will maintain our underwriting standards across all consumer loan businesses, so I do not expect any substantial changes as a result.

Nathan Race, Analyst

Going back to the margin front. Just curious, as you look at some of the opportunities to reduce non-maturity deposit pricing going forward, can you guys just speak to what those opportunities look like, just following the Fed cuts in the back half of last year? And just assuming the Fed remains on pause, at least through the second quarter?

Katie Bailey, CFO

Yes. For many months last year, we were running a 5-month special. Towards the end of the year and into this year, we had something closer to an 11-month special. I think it varies, but there is significant opportunity each month as we approach maturities through 2025, considering the special rate we had and the production we experienced. Even without any rate cuts, I believe there are still substantial opportunities for us regarding CD deposit repricing.

Tyler Wilcox, CEO

Thank you, Katie. I really appreciate the insights. We're committed to strategically managing our relationship with deposit pricing to navigate through the current economic conditions efficiently.

Operator, Operator

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

Tyler Wilcox, 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, 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.