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spk08: Good morning and welcome to PeopleBankCorps Incorporated's conference call. My name is Gary and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly and six-month period ended June 30th, 2022. Please be advised that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star 1 on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, please press star 2. 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 people's 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 People's 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 people's business and operations. However, it is possible actual results may differ materially from these forward-looking statements. People's disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. People's second quarter 2022 earnings release was issued this morning and is available at peoplesbandcorp.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 is included at the end of this 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 peoplesbandcorp.com in the Investor Relations section for one year. Participants in today's call will be Chuck Solorizky, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer. and each will be available for questions following opening statements. Mr. Solarisky, you may begin your conference.
spk11: Thank you, Gary. Good morning, and thank you for joining our call today. Earlier this morning, we announced net income of $24.9 million in diluted earnings per share of $0.88 for the second quarter. This is an improvement over the length quarter and the prior year quarter. Our net income nearly doubled during the first half of 2022 compared to and our net income for the first half of 2022 was more than our net income for the full year of 2021. We benefited from our recent acquisitions and organic growth. We had positive operating leverage compared to the linked quarter, prior year quarter, and first six months of 2021. Our net interest income was up 13% compared to the linked quarter and has benefited from the recent rise in market interest rates coupled with the accretion income from the leases acquired from Vantage Financial. We controlled our total non-interest expense, which came in at the low end of the range we provided in our guidance from last quarter. Our reported efficiency ratio improved to 58.8%. This is our lowest in decades. Our reported return on average assets improved to 1.4% for the second quarter and the first half of 2022. Our pre-provisioned net revenue as a percent of total average assets improved to 1.8% annualized for the second quarter and 1.5% for the first half of 2022. Our reported return on average stockholders' equity grew to 12.6% for the second quarter and was 12% for the first half of 2022. Our asset quality remained stable compared to the linked quarter and year ends. There are some one-time items reported within our results for the second quarter, which included acquisition-related expenses totaling $602,000, which reduced diluted EPS by $0.02, and the recognition of a death benefit of the cash surrender value of a bank-owned life insurance policy, which added $248,000, or $0.01, to diluted EPS. Our allowance for credit losses decreased compared to the linked quarter end, and we reported a 780,000 release of provision for credit losses, which added two cents to diluted EPS for the quarter. For the first half of 2022, the release of provision we reported added 21 cents to diluted EPS. Contributing to the provision reduction were changes in our lost drivers this quarter, coupled with a reduction in reserve for individually analyzed loans. Our allowance for credit losses comprise 1.1% of total loans at quarter end compared to 1.2% at March 31, 2022, and 1.4% at year end. If we had a normalized provision for credit losses this quarter, it would have negatively impacted our diluted earnings per share by approximately 4 cents. still resulting in us beating consensus EPS estimates by $0.08. Moving on to our loan portfolio, our loan balance has increased by nearly $41 million, or 4% annualized, compared to the length quarter end, excluding purchase accounting adjustments related to branches and PPP loans. We had a reduction of $27 million of loan balances due to PPP forgiveness during the quarter. The majority of growth compared to the linked quarter was in consumer indirect loans, which increased 38 million, or 29% annualized. Our consumer indirect loans had the best quarter of production ever, as we booked over $100 million of new balances. At the same time, our lease balances were up 33 million, or 49% annualized, excluding purchase accounting adjustments. Premium finance loans also grew at an 18% annualized rate. During the quarter, we had reductions in our previously acquired loan balances of $95 million, which included payoffs and normal amortization. We continue to experience payoffs in our commercial portfolio, which is holding back growth from our strong new loan originations. We were optimistic about our commercial loan production during the second half of the year, However, we do not participate significant growth in commercial loans for the third quarter due to expected payoffs. These payoffs are driven by businesses being sold, commercial real estate going quicker to the permanent market, and our desire to maintain excellent credit results. At the end of the second quarter, we only had $15 million in PPP loans remaining. which will be less impactful as we move through the remainder of 2022. We continue to have strong pipelines and believe we can capitalize on these commercial loan opportunities in future quarters. With this in mind, we are projecting loan growth for the full year of 2022 of a 4% to 6%. From a credit quality perspective, we continue to have stable metrics compared to the linked quarter end. Our non-accrual loans declined by nearly 3 million or 8% compared to March 31st, 2022. The portion of our loan portfolio considered current stood at 98.8% and was stable compared to the linked quarter end and year end. Our quarterly annualized net charge off rate was 14 basis points for the second quarter and was 15 basis points for the first half of 2022. Our criticized loans declined by nearly $9 million, or 5%, compared to the linked quarter end, while our classified loans grew by almost $6 million, or 5%. These fluctuations in criticized and classified loans were driven by several small relationships. Our loans 90 days plus past due and accruing grew $2 million compared to the linked quarter, driven by leases and residential real estate loans. However, our nonperforming assets as a percent of total loans declined one basis point to 64 basis points. Commitment to our communities where we do business is one of our top priorities. Our charitable foundation donated over $300,000 during the first half of 2022. Since the launch of our foundation in 2003, we have contributed over $6 million to our communities. I mentioned on our last call that we were delivering 120 acts of kindness for our 120th anniversary this year. Our team has completed 72 acts of kindness so far and are having a great time doing so. We have received positive feedback from our communities and are proud of the difference our contributions can make. I will now turn the call over to Katie for additional detail around our financial performance.
spk01: Thank you, Chuck. Our net interest income grew 13% compared to the linked quarter, and our net interest margin expanded 43 basis points. Our loan yields were positively impacted by accretion, which added 34 basis points, while the recent increase in market interest rates also positively impacted our loan yields compared to the linked quarter. Most of the increased yields are tied to our variable products repricing, such as commercial loans and home equity lines of credit. Our deposit costs remain stable, and we continue to control these costs as closely as we can to remain competitive while responding to market forces. At the same time, our borrowing costs grew 57 basis points and were largely driven by the acquired long-term borrowings from Vantage. For the quarter, PPP income only added two basis points to net interest margin. Accretion income, net of amortization expense, from acquisitions with $3.9 million compared to $2.7 million for the linked quarter, adding 25 basis points and 17 basis points respectively to margin. Our quarterly average cash balance continued to be inflated, but has declined by nearly half compared to the linked quarter. Our large cash balances reduced net interest margin by nine basis points for the quarter. Compared to the second quarter of 2021, Net interest income grew 55%, and net interest margin expanded 39 basis points. The improvement has been driven by our acquisitions, core growth, and the increases in market interest rates. Loan yields expanded by 44 basis points, while lease yields came down due to the Vantage acquisition having lower rates than our North Star leasing portfolio. We continued to control our deposit costs, which decreased 15 basis points. At the same time, our borrowing costs grew 82 basis points and was driven by the acquired Vantage borrowings and the recent rise in interest rates. For the first half of 2022, our net interest income and margin both grew and were up 54% and 27 basis points, respectively. We had a 34 basis point increase in loan yields, which was partially offset by higher borrowing costs. Our reported efficiency ratio improved to 58.8% for the quarter compared to 66.8% for the linked quarter and 68.6% for the prior year quarter. When adjusted for non-core expenses, our efficiency ratio was 58%, an improvement compared to 64.8% for the linked quarter and 64% for the prior year quarter. For the first half of 2022, the adjusted efficiency ratio improved to 61.3% compared to 64.6% for 2021. Our fee-based income declined 2% compared to the linked quarter. This decrease was driven by the recognition of annual insurance performance-based commissions totaling $1.3 million in the first quarter of 2022. We had many improvements in fee-based income that partially offset the decline. including the one-time death benefit we recognized related to bank-owned life insurance. We also had growth of 3% in electronic banking income, while service charges on deposit accounts were up 4% and swap fee income increased. Compared to the prior year quarter, our fee-based income was up 21%. The biggest driver of the increase was higher deposit account service charges which were up 74%, along with higher electronic banking income, which increased 23%. We have had increased customer activity in recent periods, coupled with a higher number of accounts associated with the Premier acquisition. Our swap fee income more than tripled to $270,000 for the second quarter of 2022, as demand grew during the quarter compared to prior periods. Also included in other fee-based income is income associated with our leasing division, which contributed to the growth compared to the prior year quarter. At the same time, our insurance income grew 9% and was supplemented by our recent acquisitions. For the first half of 2022, fee-based income grew 19% compared to the prior year. Nearly half of the increase was due to higher deposit account service charges, which were up 73%. The remainder of the increase was driven by growth of 28% in electronic banking income, 6% in trust and investment income, as well as higher swap fee and bank-owned life insurance income. As a note, we added $30 million to our bank-owned life insurance policies during the second quarter, which will impact our run rate of bank-owned life insurance income in future quarters. As it relates to total non-interest expense, we experienced a 3% decline compared to the linked quarter. We are pleased to have come in slightly below our $50 to $52 million quarterly expense guidance from our last call. The majority of the decline was driven by lower acquisition-related expenses. We had declines in expenses associated with other loan expenses, net occupancy and equipment, FDIC insurance, and marketing expenses. Compared to the prior year quarter, our total non-interest expense grew 25% and was up 30% for the first half of 2022 compared to 2021. These expense increases reflect the growth of our business through acquisitions as we see increases across the board through our expense categories. From a balance sheet perspective, Our balance sheet has expanded by $2.2 billion or 44% compared to June 30th, 2021. Our investments to total assets ratio has remained stable the last few quarters at 24%. After the recent acquisitions, our total loans to deposits ratio is 77% compared to 80% at June 30th, 2021. Total deposits declined $74 million or 1% compared to the linked quarter. Most of the reductions were in CDs and other higher-cost interest-bearing deposits, while our non-interest-bearing deposits only declined $5 million. From a capital perspective, we had improvements in our regulatory capital ratios compared to the linked quarter end. At June 30, 2022, our common equity Tier 1 capital ratio was 11.6%, our total risk-based capital ratio was 12.8%, and our leverage ratio was 8.4%. At the same time, our tangible equity to tangible assets ratio continued to be impacted by higher unrealized losses on our available for sale investment portfolio, and with 6.6% at June 30th, 2022. Our book value per share also declined to $27.81. Compared to March 31, 2022, the accumulated other comprehensive losses included in stockholders' equity grew by $31 million, or 50%. Our tangible book value, if you exclude the accumulated other comprehensive losses, grew at a 20% annualized rate compared to the linked quarter end. The current interest rate environment is driving the unrealized losses and will continue to do so as market interest rates rise as projected in future quarters. I will now turn the call back to Chuck for his final comments.
spk11: Thank you, Katie. As we move into the second half of the year, we will continue to focus on growing our business, including our recent acquisitions. The premier acquisition continues to provide opportunities for growth, and our teams are actively working with our clients to expand the products and services available to them. During the quarter, we added two commercial bankers in Washington, D.C. markets, which will help us expand our presence and capabilities within that market area. We recently acquired Vantage and expect to grow our leases at a higher rate relative to the size of our overall loan portfolio. We hope to gain additional referrals between lines of business on our recent insurance acquisition, giving those clients a more diversified product suite. For the remainder of 2022, here are our current expectations. We expect loan growth between 4% and 6%, excluding PPP loans. We continue to anticipate stabilization in credit costs and believe that our annual gross charge-off rate, including leases, will likely return to a more historical level of between 20 to 30 basis points as a percent of the balances for the second half of 2022. From a net interest income perspective, if we get seven rate increases of 25 basis points five of those being in the third quarter and the remainder in the fourth quarter, this would result in a benefit of approximately $3 million for the last half of the year. This amount does not include the increase we expect from the prior rate hikes this year, which will also benefit the last six months of the year. Fee-based income growth is expected to be between 12% and 16% compared to 2021, which includes the impact of the acquisition this year. We are maintaining our projected quarterly total non-interest expense guidance of between 50 and 52 million, which includes the cost advantage and insurance acquisitions. And we are still on track to have an efficiency ratio below 60% for the full year of 2022. We expect our earnings over the next two quarters to be similar to this quarter. While we have had recent releases in provision for credit losses, We do not anticipate this will be the reason we achieved similar earnings in the last two quarters of the year. Given our share price and market conditions, we repurchased $6 million in shares during the second quarter of 2022. We will continue to evaluate our repurchase strategy in future quarters. This concludes our commentary, and we will open the call to questions. Once again, this is Chuck Celerewski. 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.
spk08: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
spk04: Our first question is from Scott Seifers with Piper Sandler.
spk08: Please go ahead.
spk09: Good morning, everybody. Thanks for taking the question. Hey, Scott. Hey, I was hoping we could walk through the fee guide and the delta there. It seems kind of... substantial downshift from, I think you guys were saying 25 to 30% fee growth last quarter with the introduction of Vanto. So I just want to make sure what the sort of apples to apples comparison is, if we're thinking 12 to 16% growth there, and maybe just sort of the puts and takes. In other words, what's going better and or worse than maybe we thought 90 days or so ago at this time?
spk01: Sure, Scott. And I'll take this one. So it is all predominantly related to Vantage. And as we noted on the call last time, there is residual assets associated with that. And as we work through the purchase accounting for that, that is what is impacting the income. So historically, they would have recognized gains on the sale of residuals. But with purchase accounting, we have to mark that to fair value at acquisition date. And therefore, are not getting the fee income, but we are seeing it through the accretion on the net interest income side. So it's a geographical switch from fee income to accretion income that you're seeing there. And otherwise, that guidance we're providing now is consistent with what we would have provided prior to Vantage.
spk09: Okay. So basically, I guess the the revenue contribution from Vantage should still be the same, but geographically it's going into NII versus fees. Is that a fair presumption?
spk01: That's right, Scott.
spk09: Okay, perfect. And then the 4% to 6% loan growth, that's not a year-over-year expectation, is it? That's simply from here on out we would expect 4% to 6% sort of annualized growth rates. Is that the correct read?
spk11: Yeah, it's from December to December.
spk09: Okay, so basically take the 4Q21 end-of-period loan number, add 4% to 6% on, and that's what we'd be expecting total for the full year 22. Is it as simple as that? Yes. Okay, perfect. All right, good. Thank you very much. Thank you. Thanks, Scott.
spk08: The next question is from Tim Switzer with KBW. Please go ahead.
spk07: Hi, thanks for taking my question. Hey, Tim. So the first one I had was also on loan growth, just sort of with the economic uncertainty. I'm curious on what you're hearing from your customers, particularly your commercial customers, you know, Like, is their business confidence, has that, you know, are they a little bit more worried at all? Have you seen them slowing investment spending or anything like that? Or do you expect that to occur maybe later in the year just because of the Fed tightening?
spk11: At this point in time, we really do not see any business slowing. In fact, to the contrary, in Ohio in particular, you know, 60% of our business is still based in Ohio, a little bit more than 60%. You know, we see a lot of signs real positive. You know, you've heard about Intel. You saw Ford Motors investment. You saw the Chinese battery farm. And those are just, you know, big, big companies with big, big names. But there are dozens and dozens of efforts across the geography, manufacturing related, bringing things back on shore. So I actually am very optimistic about the environment. that we're in for several quarters. And while you want to skew the question towards commercial, the consumer, from everything that we see in terms of automobile lending and home equity lending, seems to be spending money big time. It may slow down, but I can't tell you that we're seeing it or feeling it.
spk07: Okay, that's good to hear. And it sounds like the paydowns are really limiting some of the net growth you're getting. Are you expecting that to moderate at all within your guidance over the next couple quarters, or are you expecting that to remain pretty elevated from here?
spk11: I think you'll see it elevated in the third quarter. I think we'll return back to normal in the fourth quarter. That assumes that the deals that we know about happen in the time frame that we anticipate. And, you know, they're not – these are not competitive situations. There are people getting permanent financing on real estate. You know, it's companies being sold and – In some cases, you know, we continue to improve the portfolio. You know, we've had about a $50 million reduction in hotels. And, you know, we will always err on the credit quality for growth. And you can see what we did in terms of margin. You know, we have the faster growth rates and the higher margin products. And that allows us, you know, a lot of opportunity to continue to focus on credit quality and continue to focus on earnings growth.
spk07: Right. Okay. And since it's a lot of people moving to permanent financing, it's not like the higher rate environment is going to really slow down the paydowns. It's more just you kind of got to work through the loans you have in there right now. Yeah, I would agree with that. Okay. And the last question I had was on the NIM, there's, you know, helpful giving us the, you know, what you're expecting from the coming rate hikes, but what's the impact that you estimate from the rate hikes we've already had? Like what was in the Q2 NIM and what do you think is the expansion in Q3 from the more recent hikes?
spk01: Yeah, I think there's a couple of factors that play in net interest margins. from second quarter to third quarter, I think you're isolating just the rate benefit. And, you know, I think that could be 10 to 15 basis points, both what's already been kind of Captured in the rates that have been announced to date as well as those that are forthcoming or expected to be forthcoming. But I would also note that there's some margin. We noted two basis points of margin impact from PPP. So that's dwindling and will continue to do so but not having a major impact. Accretion income I would say was a little elevated in the second quarter. It'll come down a few basis points. Our historical guidance was somewhere in the 15 to 20 basis points a quarter. And so I think we'll continue to be in that range. Again, the second quarter was about 25 basis points. And then we did note cash balances were still a little elevated in the second quarter. As we can deploy that, we'll get some lift in margin there. So those are kind of the puts and takes in total. But to answer just your question on the rate hikes, somewhere between 10 to 15 basis points quarter over quarter.
spk07: You're saying there's 10 to 15 basis points for the Q2 impact, or that's what you would expect in Q3 from the rate hikes we already have?
spk01: The lift from Q2 to Q3.
spk07: Okay, perfect. Thank you, guys.
spk08: The next question is from Steve Moss with B. Reilly Securities. Please go ahead.
spk06: Good morning, everybody. This is Gage Hortsman, Steve's associate. Happy to be talking to you guys. So first question I have here is, I'm curious on some updated thoughts on growth around the leasing business now that you guys have fully integrated Vantage and Premier onto the platform. Could you walk us through some of the expectations there and maybe the expected origination yield?
spk11: With North Star Leasing, we're expecting yields in the 16% to 18% range, and the growth rates have been north of 20%. With Vantage, the yields are in the 11% to 13% range with similar type of growth rates.
spk05: Gotcha. Thank you. That helps.
spk06: So I guess my next question here is more so on the funding cost side of things. I've seen a lot of peers out there have been seeing deposit costs coming a little bit hotter, some higher deposit betas. I was curious, you know, last quarter you guys were modeling 25%. I'm curious, do you guys think that that still persists here? And just, you know, where are new funding costs rolling in these days?
spk11: Our deposits were 14 basis points in the first quarter and 14 basis points in the second quarter. I think what we said last time is that we expect our deposits cost to go up 25 basis points for each 1% increase, but I think that we'll probably be able to, you know, that'll start, you know, I'd say the first point or two will probably be a little bit less than the 25 basis points.
spk06: Gotcha, that's very helpful. And then, I guess on the purchase accounting accretion here in the NIM, sorry, in net income, or interest income, I should say, I guess that – call it $4 million that it was that last quarter. Is that like a good run rate to think about it moving forward, or do you think that it decays a little bit from here?
spk01: No, I think it decays a little bit from here. I think second quarter was a little high. I think it will run somewhere around the $2, $2.5 million as opposed to the $4. I would say $2.5 is probably a good run rate for the remainder of this year.
spk05: Awesome. Very helpful. Thank you, guys. Thank you.
spk08: Again, if you have a question, please press star then one. The next question is from Terry McEvoy with Stevens. Please go ahead.
spk03: Hi, good morning. Good morning, Terry. Good morning. Maybe a question. Could you just talk about pricing competition within the indirect consumer business and whether you're seeing any loosening of credit standards there?
spk11: We're not seeing any loosening of credit standards. In fact, I am pleased and lucky to be able to tell you that our average score last quarter in terms of production was 753, which is the highest that we've ever had. I think we are seeing some retraction on some of our competitors. We're also benefiting from the expansion of our geography through the acquisition. So we feel good about what's happening in indirect. We feel good about the delinquency rates, just the overall performance. So we're pretty happy.
spk03: I apologize. I was a few minutes late for the call. Would you maybe comment on those several commercial relationships that led to the higher classified loans?
spk02: It really isn't that much. It isn't really that meaningful. It's just a handful of small deals, nothing outstanding.
spk03: And then one last question. I hate to go back to the accretion question, but if the residual gains on Vantage go to zero, that all flows through the accretion line? And maybe ask another way, what amount of the accretion this last quarter came directly from Vantage?
spk01: Give me just a moment. It was about half of the accretion that we had for the quarter would have been related to the Vantage transaction.
spk03: And the step down in the third quarter, what piece is that coming from, Vantage or other?
spk01: It's coming largely from other.
spk03: Other. Okay, that's what I thought. Okay, sorry to ask, but just wanted to have some clarity there. I appreciate it. Thank you both. Thank you.
spk08: At this time, there are no further questions. Sir, do you have any closing remarks?
spk11: 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 peoplesbankcorp.com under the investor relationship section. Thank you for your time and have a great day.
spk08: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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