Q2 2024 Earnings Summary
- Expansion of a Profitable Small Ticket Leasing Business: Management highlighted growing the portfolio from $80 million to over $220 million, with the business showing a pretax return of over 2 ROA and pricing structured to normalize charge-offs around 4.5%.
- Operational Efficiency Gains from Technology Investments: The rollout of a new customer relationship management system has already reduced processing times from hours to minutes and improved cross-business integration, which can enhance overall revenue generation.
- Stable Funding Base with Improved Deposit Cost Outlook: Deposit costs appear to be near their peak, with a shift toward retail deposits (including CDs with an average remaining life of 5 months) that could allow the bank to benefit from any future rate cuts in a timely manner.
- Margin Compression Risk: The guidance indicates that accretion income, which contributed 28 basis points in Q2, is expected to decline by about 2-4 basis points each subsequent quarter, potentially compressing the net interest margin further.
- Elevated Leasing Charge-Offs: The small ticket leasing segment is experiencing normalized charge-off trends around 4.5%, and although management is making adjustments, continued elevated net charge-offs in this higher-risk portfolio could negatively impact earnings.
- Rising Funding Costs: There is concern about increased deposit costs—as noted by a 9 basis point rise in Q2—combined with a shift in the deposit mix that might pressure funding costs if rate cuts or other mitigating factors do not materialize promptly.
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Margin Outlook
Q: Trends in CRE & C&I yields decline?
A: Management noted that accretion income has diminished, leading to a 2–4 bps decline, yet core margins remain stable despite acquisition impacts. -
Margin Compression
Q: How significant is margin compression?
A: They expect consistent compression of about 2–4 basis points each quarter, contributing to a total accretion benefit of 25–30 bps for the year while keeping core margins largely stable. -
Deposit Costs
Q: How high can deposit costs peak?
A: Deposits costs increased by 9 bps and appear near their peak, with prospects for relief if rate cuts materialize later this year. -
Noninterest Income
Q: What is your fee income target?
A: They aim to restore fee-based income to historical levels near 30% of revenue, leveraging insurance and trust segments to hit around $20 million annual revenue in that line. -
Leasing Charge-Offs
Q: What is the leasing charge-offs guidance?
A: Management expects charge-offs in small ticket leasing to remain stable in the third and fourth quarters, maintaining risk-adjusted returns despite slight delinquency upticks. -
Leasing Drivers
Q: What drives leasing charge-off normalization?
A: Upgrades and paydowns, especially in classified loans, are normalizing charge-offs to around the expected 4.5%, reflecting pricing based on historical performance. -
Leasing & Rates
Q: Will lower rates improve leasing quality?
A: A decline in rates should help ease current pressures on leasing, although the fixed-rate nature means dramatic changes are unlikely. -
Leasing Balance
Q: Will leasing balances decline significantly?
A: The core small ticket leasing business remains robust, and any decline in balances is expected to be nominal due to ongoing strong production. -
Tax Outlook
Q: What is the tax rate expectation?
A: The tax rate is anticipated to remain consistent in the back half of the year, around 22–22.5%, similar to early quarter performance. -
M&A Environment
Q: What is the current M&A outlook?
A: There is cautious activity with many boards waiting on rate and election outcomes, suggesting more M&A conversations may emerge next year. -
Liquidity Flexibility
Q: How do unpledged securities aid liquidity?
A: By relying on unpledged securities, cash reserves were reduced without sacrificing liquidity, as these assets can be quickly sold if needed. -
Technology Impact
Q: How do tech investments affect expenses?
A: New systems have significantly cut processing times by integrating operations, promising efficiency gains and stable expense forecasts going forward.
Research analysts covering PEOPLES BANCORP.