Peoples Bancorp Inc.
Q1 2021 Earnings Call Transcript

Published: 20 Apr 2021

[Operator:]

Good morning, and welcome to Peoples Bancorp Inc. Conference Call. My name is , and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and March 31 of 2021. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary on 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. These include, but are not limited to, the completing and integration of planned acquisitions including the pending merger with Premier Financial Bancorp Inc. and acquisition of North Star Leasing Company and any future acquisitions which maybe unsuccessful or maybe difficult, time-consuming, cost expected and the risk of expansion into new markets.

[Chuck Sulerzyski:]

Thank you, Chuck. Good morning. I am glad you are able to join us for the discussion of our first quarter results. Earlier this morning we’ve released our earnings at 6 AM. This version of our earnings release included inaccuracy in certain reported amounts and we issued an updated earnings release at 9

[Katie Bailey:]

Thank you, Chuck. Our net interest income grew 4% compared to the linked quarter and 3% over the prior year quarter. Actions that we took in the fourth quarter to reduce the impact of premium amortization on our investment securities income had a positive impact for the quarter. Our net interest margin improved by 13 basis points over the linked quarter and was largely due to PPP loans. We were able to keep our margin excluding PPP income stable compared to the linked quarter.

[Chuck Sulerzyski:]

Thanks Katie. As we look to increase our market share with our announced acquisitions we are also anticipating creating efficiencies that will contribute to our future profitability. We are pleased with the fact that the Premier acquisition should be immediately accretive to earnings and should have a relatively short earn back period for tangible book value of 2.6 years; even more exciting is that these two deals should add $0.75 to $0.80 to EPS in 2022. We continue to focus on driving shareholder value and during 2020 we completed share repurchases in each quarter and raised our dividend which provides an attractive yield. We also just announced another penny increase to our dividend this morning. During 2021 with market conditions changing we are leveraging our capital base to complete two acquisitions and will continue to be opportunistic as it relates to capital deployment. Turning back to our results for the quarter. Some of the highlights were positive operating leverage on an adjusted basis compared to the first quarter of last year, improved net interest income and margin compared to the linked quarter, loan growth at 3% annualized compared to year end excluding PPP payoffs, a 1% improvement in tangible book value per share compared to year end, stable credit quality compared to prior quarters, increased households compared to both year end and March 2020, and we are proud to report that our associates donated nearly $34,000 to local food banks that served our existing footprint during the first quarter of 2021. We also surpassed $5 billion in assets at March 31. I would like to share a couple of thoughts as it relates to 2021. We anticipate our second quarter core non-interest expenses including North Star Leasing will be between $37 million and $38 million. We expect to produce loan growth of between 3% and 5% annualized for the second quarter excluding PPP loans and acquired leases. However, that will be dependent on line of credit utilization rates remaining stable. We are optimistic about the economy and we have a healthy pipeline. We believe our gross charge-off rate will be between 25 basis points and 35 basis points given our historic gross charge off rate of between 15 and 25 basis points and the North Star Leasing historic charge-off rate of between 3.5% and 4%. We are very optimistic about our ability to grow income in 2022 versus 2021. Our two acquisitions should give us EPS growth of $0.75 to $0.80 in 2022. This represents an increase of around 35% compared to current 2021 estimates. 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 to the hands of our call facilitator.

[Operator:]

Thank you. We will now begin the question and answer session. The first question will come from Scott Siefers with Piper Sandler. Please go ahead.

[Scott Siefers:]

Good morning everybody. Thanks for taking the questions.

[Chuck Sulerzyski:]

Hey Scott.

[Scott Siefers:]

Hey. Let's see Katie maybe first one for you. I think if we, if I did the math correctly if we remove PPP and purchase accounting benefits looks like the sort of the core margin is running around 294 currently. Maybe some thoughts on where that goes from here and I guess what you would be including in a perfect world if we could include the leasing transaction in there just as you look for second quarter but sort of I'm all ears on what you're thinking.

[Katie Bailey:]

Yes. I think on the core side we have to see what these deposits do. We will have some of the governmental deposits run off as we noted there seasonally here in the first quarter and kind of will fade as we get through the quarter. So that will help us from a liquidity perspective to get some of that cash off the balance sheet with the core margin as we said. I think that costs us about five basis points for the quarter. So gets us somewhere in the core being around 3% and I think we'll have, maybe a little bit more upside on the investment book as it relates to yield there with the restructuring that we noted in the release and as we've noted the leasing acquisition those are gross yields of about 18% we brought on $86 million and I think they'll have some growth from that starting point in the second quarter.

[Scott Siefers:]

Okay. Perfect. Thank you. And then maybe Chuck just sort of the nuance of the that loan growth expectation ex-PPP -- to I think we've all been a little surprised that some of this access will clearly hadn't gotten drawn down more quickly and we haven't seen line utilization. Just sort of when you're talking to your customers sort of what gives you confidence in accelerating trends and sort of what are you seeing out there?

[Chuck Sulerzyski:]

Well, I think what gives us confidence is that the new business that we've been able to do. I mean under normal circumstances our loan growth with the production we've had the last few quarters would be low double digits. So they're really fighting some headwinds. The line utilization, the liquidity. I meant the deposits are like 27% higher than they were a year ago. People are getting all this PPP money paying off stuff. So it's just a lot of headwinds but I am really excited and optimistic in terms at some point that line utilization is going to go the other direction and that's going to be wind in our sales. We've also been able to bring in a lot of customers and we will eventually get their insurance and we will eventually get their retirement plan. So it's a little we feel like we're running on a treadmill super fast and not getting that much but at some point those trends are going to reverse and it will be pretty positive.

[Scott Siefers:]

Yes. Okay. Perfect. Thank you guys very much.

[Chuck Sulerzyski:]

Thank you.

[Katie Bailey:]

Thanks Scott.

[Operator:]

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

[Stephen Moss:]

Good morning.

[Katie Bailey:]

Good morning.

[Stephen Moss:]

I am just following up on in terms of the pipeline here. Do we think it's primarily as focused and consumer in commercial real estate just kind of curious those dynamics that you're seeing outside maybe the C&I commitment group.

[Chuck Sulerzyski:]

Well, on the consumer side our indirect business has seen a tremendous amount of growth and we believe that that will continue. The unknown there is really inventory as car dealers don't have much inventory at this point. Also on the consumer side the mortgage business is hampered by inventory but we think that it will continue to do well. On the commercial side we've enjoyed good C&I growth and CRE growth. It's pretty balanced for us and we're optimistic that it can continue.

[Stephen Moss:]

Okay. That's helpful and then just in terms of the investment securities with the restructuring and the additional purchases, kind of how do we think about the yield on that portfolio here for the upcoming quarter?

[Katie Bailey:]

Yes. I think what we've been buying has a yield of around 1.5% to 2%.

[Stephen Moss:]

Okay. And so between the purchases and the restructuring look for that to head higher just to some extent here I guess.

[Katie Bailey:]

Yes. I think it'll inch up. It won't be as drastic as probably what we saw from Q4 to Q1.

[Stephen Moss:]

Okay. Okay that's helpful and just in terms of just the reserve ratio here just kind of curious you guys kind of hinted at more reserve releases here. How do we think, what do you think could be the bottom on the reservation. Do you think about the day one the initial reserve as kind of maybe where it head longer term?

[Katie Bailey:]

Yes. I think day one was pretty optimistic outlook. I think the economy was kicking along at a pretty good clip at that point. I think getting to that level will be a while if ever. So I think we're, I think to your point we still have some room potentially to go if loan balances were to hold flat but that's not the expectation with the growth that we have forthcoming. Yes and then with the leasing company as we noted their loss rates are historically higher than what the core bank has been. So that'll increase that percentage or that coverage ratio.

[Stephen Moss:]

Right. That's fair. Okay. Great. Thank you very much. I appreciate all the color.

[Chuck Sulerzyski:]

Thank you.

[Katie Bailey:]

Thank you.

[Operator:]

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

[Russell Gunther:]

Hey good morning guys.

[Katie Bailey:]

Good morning.

[Russell Gunther:]

I appreciate the color on the near term outlook for expenses. Maybe a bit bigger picture and assuming no change at the short end of the curve. What's the outlook for the efficiency ratio with these two acquisitions fully in the run rate and expenses realized? Is there a target that you're or a range you're shooting for?

[Katie Bailey:]

Yes. I think in the deck that we put together back when we announced the two acquisitions on March 29, we said about a 60% efficiency ratio was the all in.

[Russell Gunther:]

60 was at the end of 2022. Got it. And then assuming some help at the short end of the curve we could see that positive operating accelerate a bit?

[Katie Bailey:]

That would be nice.

[Russell Gunther:]

That would be nice. So to that end could we talk about loan floors and again maybe getting ahead of ourselves in terms of when the Fed may move but with say 25 or 50 are there floors that need to be worked through that mitigate some asset sensitivity in the early innings of a rate hike cycle?

[Chuck Sulerzyski:]

In terms of rate flaws on a rate height, I'm not quite following. I mean if the rates are going up. We've hit floors some floors now on some of our customers but if the rates went up we'd be moving away from the floors.

[Russell Gunther:]

Do you -- you would break through any remaining floors with a 25 basis point increase in Fed fronts and capture the full benefit to the commercial yield on the floating rate?

[Chuck Sulerzyski:]

Okay I hate to be thick here but let me go ahead and try. So rates, if rates rise you're going to move further away from the floors and it help us.

[Russell Gunther:]

It sounds like Chuck that you there are no floors in place that would mitigate receiving the full benefit of rising rates. Is that correct?

[Katie Bailey:]

Say that again. I'm sorry.

[Russell Gunther:]

Are there any floors in place on your loans that would mitigate the impact of the short end of the curve moving higher?

[Katie Bailey:]

No. I don't think there's any floors that you're describing on our loan portfolio.

[Russell Gunther:]

Got it. Thank you.

[Chuck Sulerzyski:]

If you're asking if there are any flaws in the money now not many. Just a very small amount.

[Russell Gunther:]

Yes. Thank you guys. Switching gears to the loan growth I appreciate the guidance you put out for this year ex-PPP. Could you talk a little bit about how the recent acquisition as excess liquidity is out of the system? All else being equal do you expect that to be a creative to the legacy growth rate at PEBO or just perhaps diversified from a geographic perspective but the growth rate is similar?

[Chuck Sulerzyski:]

I think it's a combination of different things there. In the deck that we did we modeled a 3% growth rate in the acquisition. I think parts of those markets are going to grow much faster as you get in and around the D.C. Area. A lot of it is very similar to what we have and be consistent with what we have. We do expect the leasing company to grow faster than the bank and the premium finance company to grow faster than the banks.

[Russell Gunther:]

Okay. Very good guys. Thanks so much for taking my questions.

[Katie Bailey:]

Thanks Russell.

[Chuck Sulerzyski:]

Thank you.

[Operator:]

Thank you. Our next question will come from Michael Perito with KBW. Please go ahead.

[Michael Perito:]

Hey guys thanks for taking my questions. Appreciate it.

[Chuck Sulerzyski:]

Hey Mike.

[Michael Perito:]

A lot of my question has been asked. I do want to just clarify and I apologize you touched on this in the opening remarks and kind of jumping back and forth between calls here but with the North Star deal closing at the end of close on the 31, Katie I was wondering if you could just kind of walk through if any of the metrics or anything like closed was different than you guys kind of communicated initially and if you could maybe just share with us the final goodwill numbers as we try to kind of think about the 2Q book value starting point with that transaction now closed?

[Katie Bailey:]

Sure. So that -- we're in process of getting all the financials in order for Q2. Like you said it closed and the business on the 31, we'll record it in our financial statements including the goodwill on effective April 1. So we don't have goodwill at this time but I think that what we bought or what we announced on March 29 is consistent with what we acquired on March 31.

[Michael Perito:]

Okay. So I mean it's fair. Can you just remind me with the, I'm sorry the purchase price was on North Star was about? Sorry I'm just trying to look it up here. Do you have a number?

[Katie Bailey:]

It was $47.5 million plus we paid off a line that they had with another institution that was almost $70 million. So they're in our balance sheet at $331 there is about $116 million sitting in other assets for those two items that we paid on March 31.

[Michael Perito:]

And then just conceptually then, I mean the goodwill would minimally have to probably be $45 million – $50 million. Is that fair? I mean it could be more than I mean just because I'm not trying to lock in the numbers. Is there any kind of conceptual thoughts you could share on how that impact could be impacted by the purchase price and then the liabilities that you paid off?

[Katie Bailey:]

Yes. I don't, I think your number is high. I think it's going to be less than half of that.

[Michael Perito:]

Okay. All right. That's helpful. And then just a question for Chuck, just a quick one here. I think I saw on press release this morning that you guys increased the dividend by another penny to $0.36 in the second quarter. Curious just if you have these deals you're increasing the dividend just any updated thoughts on capital going forward? I mean it would seem like close North Star closed, closed Premiere dividends just increased organic growth hopefully accelerates. Is that kind of the playbook for the next two to three quarters and then re-evaluate at the end of the year? Is that fair?

[Chuck Sulerzyski:]

Yes I think that that's fair. I think that, I think the earnings potential with these deals behind us is quite high and I think that next year we have the opportunity to re-examine the dividend and hit our historic targets of 40% to 50% payout and got upside to increase the dividend further.

[Michael Perito:]

Great. Thank you guys. I appreciate it.

[Chuck Sulerzyski:]

Thank you.

[Katie Bailey:]

Thanks Mike.

[Operator:]

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

[Chuck Sulerzyski:]

Yes. I want to thank everyone for joining our call this morning. Please remember that our earnings release and 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:]

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