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spk02: Good morning and welcome to the People's Band Incorporated conference call. My name is Danielle and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter ended March 31st, 2024. 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 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 disclaims any responsibility to update these forward-looking statements after this call, except as be required by applicable legal requirements. People's first quarter 2024 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 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 session, which I will facilitate. An archived webcast of this call will be available on peoplesbankcorp.com in the investor relations section for one year. Participants in today's call will be Tyler Wilcox, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer. and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.
spk04: Thank you, Danielle. Good morning, everyone, and thanks for joining our call today. I want to start off by thanking Chuck Solarisky for his service over his 13-year tenure with the bank as he retired effective March 31st. Chuck was instrumental in moving us into the future, cleaning up our credit quality after the Great Recession, driving shareholder value through improved performance, both organically and through acquisitions, advancing our technology to match that of our largest competitors, and probably the most important part of his legacy, leaving behind a culture that promotes the well-being of associates, which creates a better customer experience and focuses on giving back to our communities in a meaningful way. Thanks, Chuck, for everything you've done. Moving on to our first quarter performance, Earlier this morning, we reported earnings of $29.6 million, while our diluted earnings per share were 84 cents compared to 96 cents for the linked quarter. As we noted in our last quarter, we have annual expenses that we recognized during the first quarter of each year, which included employer contributions to health savings accounts and stock-based compensation expense for certain retirement-eligible employees. These additional costs totaled $2.6 million and negatively impacted diluted EPS by six cents for the first quarter. We had many positives for the quarter and are pleased with our results. Our net interest margin compressed only five basis points compared to the linked quarter, excluding the impact of accretion income from acquisitions. We had stable fee-based income as annual performance-based insurance commissions offset declines in lease income. Our non-interest expense was down compared to the linked quarter, excluding the annual first quarter increases for stock-based compensation and employer contributions to health savings accounts. Our loan-to-deposit ratio declined to 84.7% compared to 86.1% at year-end. Deposit balances increased 2% compared to year-end and were largely driven by retail CD growth. Our tangible book value per share improved 23 cents and was $18.39 at quarter end. We announced an increase to our quarterly dividend for the ninth consecutive year, and we completed another $3 million share repurchase during the quarter. Moving on to our credit quality, our allowance for credit losses grew to 1.05% of total loans at quarter end. The increase in our allowance was driven by moderate deterioration in the macroeconomic conditions in our CECL model, higher reserves on our individually analyzed loan portfolio, and loan growth. Our net charge-off rate for the quarter declined slightly compared to the last quarter and was 22 basis points annualized for the first quarter. While consumer indirect and leasing net charge-off trends are elevated compared to prior year quarters, They are more consistent with historical pre-pandemic averages, and we remain satisfied with our risk-adjusted returns on these businesses. Non-performing assets grew to 50 basis points of total assets at quarter end compared to 43 basis points at year end. Most of the increase was related to higher non-accrual balances. The portion of our loan portfolio considered current at quarter end improved to 98.7% from 98.6% at year end. Criticized and classified loans both increased during the quarter and were driven by the downgrade of two acquired commercial and industrial loan relationships. We view our credit quality as a strength despite some specific downgrades this quarter. The collateral and guarantor support on the loans in question is strong and these relationships are not indicative of an overall trend in our commercial credit quality. Our portfolio strength is evidenced by the low delinquency rates this quarter. As far as loan concentrations, we continue to have no material exposure in commercial office space, hospitality, or assisted living. Our multifamily loans remain relatively unchanged from year end, as these loans stood at $522 million at quarter end, compared to $520 million at year end. As we have noted before, These properties are primarily located within growth markets with strong economic metrics and notable sponsor support. Compared to year end, our total loan portfolio grew $44 million, or 3% annualized. Most of the growth was driven by increases in our commercial real estate, premium finance, and commercial and industrial loan balances, which were up $112 million in total. This growth was partially offset by declines in construction loans, which were down $49 million, and our consumer direct and consumer indirect loans also combined for a $31 million decrease compared to the length quarter end. Part of the decline in loan balances was driven by the renewal cycles of acquired limestone loans that were paid off. At quarter end, our commercial real estate loans comprised 36% of total loans, nearly 40% of which were owner-occupied, while the remainder were investment real estate. At the same time, our total consumer loans, which include residential real estate and home equity lines of credit, were 28% of total loans. Commercial and industrial loans were 20%, specialty finance totaled 11%, and construction loans were 5%. At quarter end, 48% of our total loans were fixed rate, with the remaining 52% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.
spk01: Thanks, Tyler. For the first quarter, our net interest income declined 2%, mostly due to lower accretion income, net of amortization expense from our acquisition. Improvements in loan and investment income offset higher deposit expense for the quarter. Our net interest margin was 4.27% for the first quarter compared to 4.44% for the linked quarter. The change in net interest margin was driven mostly by the decline in accretion income, which contributed 32 basis points to our margin this quarter compared to 45 basis points last quarter. For the fourth quarter, we had refinements in our fair value marks for limestone that contributed an additional seven basis points to margin. We continue to expect our accretion to normalize in the coming months as some of the initial noise around refinements to fair values and portfolio activity subsides. The small remaining decline in net interest margin compared to the linked quarter was mostly due to excess cash on hand during the quarter, which negatively impacted margin by six basis points. For liquidity purposes, we are holding cash on our balance sheet that we had previously were holding off balance sheet. We continue to run CD specials in the first quarter of 2024. We will evaluate our position and look for opportunities to lower our rates while keeping the duration of term on our retail CDs on the shorter end to retain flexibility. Moving on to our fee-based income, We were down 1% compared to the linked quarter, which is driven by declines in our lease and electronic banking income and partially offset by higher insurance income. We typically recognize higher insurance income in the first quarter of each year due to annual performance-based insurance commissions, which totaled $2.2 million compared to $1.5 million for the prior year quarter. As it relates to our non-interest expenses, they were up slightly compared to the linked quarter. However, when excluding the additional cost of $2.6 million related to employer contributions to health savings accounts and stock-based compensation expense for certain retirement eligible employees, our non-interest expenses were down compared to the linked quarter. Compared to the prior year quarter, non-interest expense grew 21% and was heavily impacted by the larger footprint and ongoing operating costs of the additional offices from Limestone. For the first quarter, our reported efficiency ratio was 58%, compared to 56% for the linked quarter. When adjusted for non-core expenses, our efficiency ratio was 58.1%, compared to 54.9% for the linked quarter. The increase was related to higher non-interest expense, mostly due to our additional annual first quarter expenses, coupled with lower net interest income due to declined accretion income. Moving on to our balance sheet, our investment securities portfolio to total assets was relatively stable compared to year-end, and was at 20.1% at March 31st. At the same time, our loan-to-deposit ratio declined to 84.7% from 86.1% at year end. We continue to have a healthy level of liquidity and have been holding more cash on our balance sheet in recent months. We mentioned last quarter that we utilized the Federal Reserve's Bank Term Funding Program And while additional funding has been restricted, we currently have $163 million outstanding that we anticipate holding until maturity in January of 2025, as long as rates continue to make this advantageous. From a deposit perspective, we grew our balances 2% from year end. We were able to increase our retail CDs by 16%, governmental deposits by 14%, and money markets by 11%. We implemented a deposit pricing strategy last year, utilizing short-term, higher-rate CD offerings for customers, which continued to bolster our CD balances into the first quarter. While we want to retain the deposits we have generated, we also want to control our deposit costs long-term. The increase in governmental deposits during the quarter was related to seasonal influxes of cash. Our demand deposits declined to 35% of total deposits at quarter end, compared to 38% at year end, and has been impacted by our retail CD growth in recent quarters. At quarter end, our deposit composition was 76% in retail deposit balances, which included small businesses, and 24% in commercial deposit balances. Our average retail customer deposit relationship was $24,000 at quarter end, while our median was $2,800. Moving on to our capital position, we are confident in the value of our stock and repurchased another $3 million of shares during the first quarter. Additionally, we remain confident in our performance and raised our quarterly dividend by a penny this morning, making this the ninth consecutive year of a dividend increase. Our 40-cent dividend represents a yield of 5.6% per share. At quarter end, our capital ratios remained strong. Our common equity Tier 1 capital ratio was 11.7%. Our total risk-based capital ratio was 13.4%, and our leverage ratio was 9.4%. Our tangible equity to tangible assets ratio improved to 7.4% compared to 7.3% at year-end due to increased retained earnings. This calculation has been negatively impacted in recent quarters by the excess cash we have been holding on our balance sheet. For several quarters, our accumulated other comprehensive losses have reduced this ratio, which stood at $109 million at quarter end. Our tangible book value per share grew to $18.39 at quarter end, compared to $18.16 at year end. Finally, I will turn the call over to Tyler for his closing comments.
spk04: Thank you, Katie. As we move forward into 2024, Our main goal is to continue making progress on our strategic initiatives. We intend to invest in our infrastructure and technology, be unwavering in our high-quality credit standards, take care of our clients and communities, focus on our associates and being a great employer, drive shareholder value by consistently providing solid performance and total return on our stock, and continue to be acquisitive when it is beneficial in the future. As it relates to our financial performance for 2024, we anticipate net interest income to benefit from the full year impact of the limestone merger. We expect our quarterly net interest margin to be between 4.1% and 4.3%, assuming that there are no significant short-term interest rate changes in 2024. We believe our fee-based income growth will be between 6% and 8% compared to 2023. We expect quarterly total non-interest expenses to be between $67 million and $69 million for the second, third, and fourth quarters of 2024. We believe our loan growth for 2024 will be between 6% and 8% compared to 2023. As we noted last quarter, we anticipate an increase in our provision for credit losses with the anticipated loan growth and return of some of our net charge-offs to pre-pandemic levels. As we move through the year, we are anticipating a full-year net charge-off rate of around 20 basis points. Our first quarter earnings continued to beat expectations, and our diluted EPS of 84 cents exceeded the consensus analyst's estimate of 80 cents for the quarter. I could not be more proud of what our associates and teams have done in recent quarters in terms of preparing for expected growth, implementing new technology, integrating our most recent merger, and driving organic growth while taking care of each other and our clients. We will continue to build upon our successes into 2024 and beyond, all with the goal of making Peoples the best community bank in America. 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.
spk02: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question comes from Brendan Nozzle from HubD Group. Please go ahead.
spk08: Hey, good morning, folks. Hope you're doing well.
spk02: Good morning, Brendan.
spk04: Good morning, Brendan.
spk08: Maybe just to start off here on an update for the internal prep for $10 billion in assets. Just kind of curious what inning you're in, how much more run rate costs you need to bake in, and then maybe some early thoughts on the Durbin impact as well.
spk04: Yeah, Brendan, thanks for the question. I would say from an inning perspective, I'd say in terms of preparation, we're in the ninth inning, and we're ready to go. If the correct opportunity came by, we feel confident in the investments that we've made and the preparation that we've made, both in people, systems, and preparation for the regulatory environment. So from that perspective, it's just a matter of finding the right opportunity in order to cross. I believe the second part of your question was related to the expenses.
spk01: Yeah, and I think the expense base for the first quarter includes all of the expenses we would anticipate. There are some minor enhancements we'll make as it relates to risk management and so forth, but nothing from a material perspective yet to be added. in the expense space.
spk08: Okay, fantastic. That's helpful. Maybe to pivot over to the deposit side of things, just kind of curious for your latest thoughts on where noninterest-bearing balances might bottom. I know it's tough to pinpoint, but any comment there would be helpful.
spk01: Yeah, as you saw, we had some decline in the first quarter. What I can say is we expect to experience a little more continued runoff as we proceed through 24. significant and the good news to date for the month of April we're actually showing some stability in that category so I hope would like to see that trend continue but from a forecast perspective I think we still expect some migration out of non interest-bearing deposits as we proceed through 24 all right perfect thanks for taking the questions thank you the next question comes from Daniel Tamayo from Raymond James please go ahead
spk03: Thank you. Good morning, everyone. Good morning, Danny. Maybe first on the NII and the NIM guidance, maybe, Katie, if you could give us an idea of, you know, what's baked into that 4.1% to 4.3% NIM guidance, what may, you know, push you towards the lower end versus the higher end. And then if you have any more questions, thoughts or detail on how much pressure you're expecting on accretion, that'd be great as well.
spk01: Yeah, I think the big variable in the NIM is deposits and the migration and the cost that it takes to retain those. So that would drive us to the lower end. I think from a rate forecast, I think as we noted in here, we're relatively neutral from our balance sheet position and therefore, you know, a 25 basis point, you know, a couple of those I think we can manage pretty effectively to maintain that range. So I think that's kind of the main drivers. From an accretion perspective, we printed a 33 basis point impact of accretion this quarter. I think last quarter it guided to 30 to 35. I think we'll be in that range, 30 to 35 for the second quarter. We might go dip below that in the back half of this year. as those loans continue to renew either in our portfolio or out of our portfolio.
spk03: Okay. But fair to say you're still expecting, I guess, some core NIM pressure in your baseline assumptions?
spk01: I think there's a few basis points of compression that we might experience next quarter. Nothing to the tune of what we experienced this quarter. We didn't have kind of a true-up in accretion this quarter like we did in the fourth quarter. So I think we'll still be, from a creation perspective, we'll still be in that 30 to 35 basis points. I think it'll be the deposit cost. We might continue to see a few more basis points of compression, but nothing significant from my perspective.
spk03: Got it. Okay. Thank you. And then in terms of the excess cash on the balance sheet, what's the plan for how long that sticks around?
spk01: Yeah, some of that will migrate off as we have public funds balances roll off. As we've noted before, seasonally in the first quarter, public funds are at a high watermark. And those are collateralized through investment securities being pledged to them. So as those migrate off, we'll be able to reduce the pledged securities and therefore maintain some of that liquidity off balance sheet through unpledged investments. So that'll be one of the strategies. So you'll see some of that come off in the second quarter. And we have some other activities we're deploying that we expect to see benefit as we proceed through the third quarter. Okay.
spk03: But that's all kind of contemplated in the high-level net interest margin path you were talking about?
spk01: That's correct, yes. Okay.
spk03: All right. Thanks so much for the color. Thank you. Thanks, Sandy.
spk02: The next question comes from Terry McEvoy from Stevens. Please go ahead.
spk05: Hi. Good morning, Tyler. Good morning, Katie. Good morning, Terry. Just kind of big picture, Tyler. In the release, you said demand for C&I loans and leasing remained strong. And then later in the release, there was, you know, increase in the provision connected to a deterioration in the economic condition. So, Tyler, can you just talk about the healthier markets and where you're seeing the C&I loan growth in particular?
spk04: Sure, Terry. So, a couple of thoughts just to maybe make some distinction there. You know, the provision relief did include some macroeconomic considerations where we take into consideration, you know, employment nationally. We take into consideration a key factor there of CRE nationally. I would distinguish that with, you know, our view on our book of business. And so, you know, we see the growth coming from a broad-based business. segment of our markets one of the reasons why we are satisfied with our kind of overall loan portfolio and our production is because of the breadth of the breadth of geography that we have and the breadth of different businesses that we have that portfolio of businesses approach that we've developed so notwithstanding some of the small ticket leasing you know having a slight uptick in credit issues We see demand nationally in the leasing businesses. We saw good growth, and we expect to continue to see good growth in the national premium finance business. And then, you know, on the CNI and CRE side, we continue to kind of have, again, that broad-based market of Louisville, Lexington, Washington, D.C., Columbus, Cleveland, Cincinnati, and so forth. So I guess I would say the confidence in that 6% to 8% guidance comes from the strength of the pipeline that we're seeing today. And historically, we've seen a little bit slower out of the gate. But if you look at the raw production, we think we have a chance to hit those numbers. That's pretty realistic.
spk05: Appreciate that, Tyler. And then as a follow-up question on commercial real estate, specifically the non-owner-occupied What's the amount that matures over the next year or two years, and how have you stress-tested that just to prepare the borrower for higher interest rates?
spk04: Yeah, we're pretty satisfied with our processes in terms of how we stress-test the book. Obviously, in the last couple years particularly, we've had a lot of discipline around that. In the next year, there's about 185 million borrowers that's coming due over the next year. And we feel good about kind of the strength of those borrowers. And about $130 million in 2025, a very manageable amount. And again, our kind of internal credit disciplines of reviewing the strength of the borrower, looking at debt service coverage ratios, and all of the rest of the financial disciplines lead us to those conclusions.
spk05: Great. Thanks for taking my questions and appreciate the forward-looking financial guidance provided earlier. Thank you.
spk02: Thanks, Terry. The next question comes from Tim Switzer from KBW. Please go ahead.
spk06: Hey, good morning. Thanks for taking my questions. The first one I have is with your NIM guidance, assuming no meaningful changes to short-term rates, what would be the impact if in late 2024 or early 2025, we start to get a series of rate cuts, say, you know, three to four, 25 basis point cuts. How do you think the NIM would trend over the next year? Is it, you know, down initially, you know, loans repriced lower, and then maybe some relief as deposits start to reprice? How are you guys thinking about that?
spk01: Yeah, I think that's right. I think as long as they stay in 25 basis point increments and don't do a meaningful cut at one meeting, which I think is our expectation on the go forward, I think the impact will be relatively minimal, you know, maybe somewhere around 5%, so not significant to the – sorry, five basis points, not significant to the extent if they keep it to, you know, 25 for a couple meetings. And I think, to your point, I think as we proceed through time, I think we'll be able to recover some of that back through margin to the point you made on deposits. So our retail CD production is relatively short-term. We won't get the immediate benefit of those repricing lower, but in relatively short order, we'd be able to see some benefit and relief on that funding.
spk06: Okay, that's helpful. And your expenses this quarter were a bit better than your guidance to be above that $67 million, $69 million range. Is there an opportunity you think for the rest of the year for you to be kind of at the low end of that $67 million to $69 million range in your guide? And what kind of drove the better trends there?
spk01: Yeah, I think there's a chance for a quarter or two we might be on the lower side. I think we'll be somewhere in the midpoint of that range pretty consistently through the year. I think some of the main drivers is medical costs for us in the first quarter came in a little softer than we had anticipated, which isn't a bad thing, but I think generally those kind of grow as we proceed through the year, which is why I don't think we'll see that benefit we saw in the first quarter each quarter going forward.
spk06: Okay, got it. And then the last question for me, your non-luxurious income guide of up 6% to 8%, is that excluding net gains and losses? Yes. Okay. Thank you.
spk01: It's excluding gains and losses on investment security sales as well as kind of any other assets we would sell.
spk06: Great. Thank you. That's all for me.
spk01: Thanks, Tim.
spk02: As a reminder, if you have a question, please press star 1. The next question comes from Manuel Navas from DA Davidson. Please go ahead.
spk07: Hey, good morning. Just a follow-up on that fee guide. It's a little bit lower than before. Can you just talk about the drivers there?
spk01: Yeah, I think the big driver for that is electronic banking income. I think we've seen, and consistent with what we've seen in industry publications, some compression or some reduction in electronic banking income, which is probably the main driver in that category. And couple that with a little bit softer mortgage market than what we had anticipated, although I think we see some signs that we might get some relief in that in the coming quarters. But those are the two main drivers.
spk07: Okay, great. And you talked about the criticized and classified increases. Did I catch that right? It's mainly to acquired loans? And any extra color there would be great. I'm
spk04: Sure, I'll take that one. So two loans, CNI loans that happen to be acquired loans. We feel really good about the acquired book, I will say. One of them is part of the equine portfolio out of the limestone acquisition and well-collateralized by property and inventory. We feel good about our ability to continue with that one. And the second is a senior living facilities operator. Again, good collateral and guarantor support. So we view these as, I know it's a cliche, but we view these as one-offs, particularly because the rest of those books, both in our core and in the acquired books, are performing to expectations.
spk07: Okay, that's really helpful. Last quarter, you were able to give, switching over to MIM and NII, You gave some nice ranges for a little bit larger moves in Fed funds. Do you have any updates there? If you don't, I can move on. But just wondering if you have any updates for like a steeper decline in Fed funds.
spk01: Yeah, I'd say, back to the previous comment, to the extent we experience a two or three 25 basis point decrease over the next few quarters, I think that guidance would still hold in that 410 to 430. again, our asset position, our balance sheet's relatively neutrally positioned. So I don't think we have a huge impact up or down to the extent rates move 25, 50, 75 basis points over a few meetings.
spk07: Okay. So as long as the pace doesn't increase, you can adjust to it. That makes sense. My last question is, you talked about potentially being acquisitive when beneficial, how would you term M&A discussions currently, just kind of what you're hearing in the market, and what would you look for to be beneficial?
spk04: Yeah, thanks for the question. A couple of thoughts on that. Beneficial would be the right partnership at the right price. right size and right geography. And I think there's a number of factors that could make it right. You know, obviously the ideal scenario that everybody talks about is one large acquisition to kind of leapfrog over. The universe of those banks is smaller than the kind of $1 billion to $2 billion universe. So I think we'll be opportunistic if there were a large bank that was willing to partner with us to, you know, To leap over that $10 billion, we'd be interested there. If there were two to three banks in the $1 to $2 billion range that we could do successive acquisitions, we would be interested with that. We've shown an ability in the past to execute on those and to do that well, so we think both paths are absolutely viable. There's obviously a lot of conversations going on throughout the industry about We continue to be active in all times in terms of having those conversations with potential acquisitions, and we will continue that. So we're going to be opportunistic when the right move presents itself.
spk07: I appreciate that. Thank you. No problem.
spk02: Thank you. At this time, there are no further questions. Sir, do you have any closing remarks?
spk04: 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 Relations section. Thank you for your time and have a great day.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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