Peoples Bancorp of North Carolina (NASDAQ:PEBK) Q3 2026 Earnings Call

0:00 We believe our loan growth will be between 3% and 5% compared to 2026, which is dependent on the timing of paydowns on our portfolio. We anticipate similar charge-offs and net charge-off rate for 2027 compared to 2026, which includes projected increases related to the addition of the citizen's portfolio. We look to have a strong close to our 2026 performance and continue to be optimistic about our strategic plans and ability to execute on the pending mergers and future growth.

0:51 Laying out a path beyond the $10 billion threshold is the culmination of years of strategic planning and patience. The investments we have made in people, technology, and infrastructure are in place today and operating as if we have already crossed that milestone. We have proven our ability to provide reliable results for our shareholders and improve performance both organically and through acquisitions. We will continue to place importance on the value we provide as an investment to our shareholders and the return that we produce. We will focus on being a top-notch employer and sharing our culture with our new associates from our mergers. We will make meaningful investments in the communities we serve and provide high-quality, trusted solutions for all of our clients.

1:39 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 health facilitator. 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. The first question today is from Ryan Payne with D.A.

2:26 Davidson. Please go ahead.

2:30 Good morning. This is Ryan Payne on for Jeff Roulis today. Heard you on the expected citizens close later this month. Any update on close timing for capital next year?

2:45 Yeah, our expectation is sometime very end of first quarter, beginning of second quarter. Got it.

2:54 And on the security sale, maybe some more detail on that. What was the timing of that during the quarter, the yield on those securities, and as well as the expected impact on them going forward?

3:13 Yeah, so it happened in August, and the yield on the amount we sold was about 1.5%. and the impact to margin on a go forward, I think was the third part of your question. I think we expect a slight increase of a few basis points.

3:38 Last for me, Durbin impact, we last heard an 11 million annual hit to those fees beginning July 2028. Just wanted to confirm that or if anything has changed there.

3:52 No, that's still the number. And again, as a reminder that we noted in the capital announcement that they have minimal impact to our Durban into interchange income. So the number has not really changed.

4:08 Understood. Thanks, guys.

4:10 Thank you.

4:11 Thank you, Ryan. The next question is from Tim DeLacy with Raymond James. Please go ahead.

4:16 Hey, good morning, Tyler. Good morning, Katie. Just filling in for Danny this morning. Hey, morning. Hey, Tyler, maybe starting off on loan growth, you know, growth is obviously relatively modest this quarter. You kind of laid out some of the factors that played in there and kind of laid out the 3% to 5% target for next year. You know, just curious how the commercial pipelines are looking today, you know, where you're seeing the drivers of growth coming from in the near term, and, you know, whether you're expecting some of those payoff headlines to start easing as we move into 27 here.

4:48 Thanks for the question. My hope is, yes, we will see some of that easing. Let me lay out a few thoughts for you as to demand. This was actually our third highest quarter ever of commercial production, and I really like the kind of mixed shift into CNI that we've seen throughout the year. And so demand remains really positive. For reference, we expected this year about $480 million in payoffs. and through three quarters, we've seen about $460 million in payoffs. The vast majority of that, about 40% is via sales of primarily a multifamily projects that which says that there's a high demand for the high quality stuff that our folks are producing.

5:37 And for the remainder of the year, there's probably about $150 to $180 million of expected forecasted Payoffs, and whether that materializes in the fourth quarter or materializes kind of or pushes into the first quarter is one of the main questions weighing on that loan growth for the forward guidance. So did I miss anything in your question there?

6:08 No, no. No, that was very helpful, Culler. I appreciate that. and, you know, maybe Katie, just, you know, flipping over to the margin, you know, appreciate the guidance for 2027. You know, with the REIT increases that you guys are assuming for next year, just curious about how you're thinking about, you know, what we should expect for betas on the deposit side that should be factored into the 2027 guide.

6:30 Yeah, non-interest or non-maturity betas inclusive of non-interest bearing is about 30%.

6:41 Okay, appreciate that. And then maybe just finishing up, you know, just Tyler, maybe one on credit, you know, outside of the few relationships you highlight in the presentations, you know, are you seeing any meaningful changes in credit trends across the broader commercial portfolio or, you know, any particular areas you're keeping your eye on more closely with the recent moving rates?

7:01 No, not so far. Thankfully, commercial credit remains very strong. Last quarter, we were talking about the slight increase in credit size. That's come down. Now we see the slight increase in classified. As we guided, we expect those to pay off and exit the bank with minimal losses. So the core commercial credit remains incredibly strong. The significant reduction in the small ticket leasing is also extremely positive. I would say the one area where we've seen a slight increase in delinquency on the indirect portfolio is I think there's some pressure on consumers in that area, which is also weighing on the production with interest rates and fuel prices increasing. So that is an area where we're watching, but we continue to generate that demand.

7:56 Production at near 750 credit scores consistent with our past practices. So very cautiously optimistic on credit overall and particularly in the commercial space.

8:15 Okay. Well, that's terrific color, guys. I'll step back. Thank you. The next question is from Nathan Race with Piper Sandler. Please go ahead.

8:26 Hi, good morning. This is Adam Krull on for Nate. Good morning, Tyler and Katie, and thanks for taking my questions. Maybe for Tyler to start, I know the loan growth guide excludes capital, but they've historically been a pretty high growth franchise. So I guess I'd be curious, you know, is there any transition period after the deal closes? were maybe growth is a little softer or just any color there.

8:59 Thanks. I would say as to capital, one of the most exciting things to me is the level of mutual engagement that we have with the capital team and the capital leadership particularly. And a big part of that is obviously the The continuity for their bankers, their clients, and their entire organization of our intent to continue the things that they're doing that made them attractive purchase in the first place. So I don't anticipate any kind of trough because the lead-in of the next four, five, six months of engagement together, that includes our bankers, our credit staff, Their leadership, their bankers, and their clients is mutually committed to continuing what it is they do.

9:51 So we do expect that their historically higher growth rates than ours are something that we can perpetuate and is part of what makes the deal appealing.

10:05 Got it. I appreciate the call there. And, Howard, I think on the last call you mentioned Small Ticket Leasing could potentially begin to grow again in 27. Is that still the case? And is any of that contemplated in the NIM Guide that you gave?

10:27 It is. It's baked in as part of our forecast, and we do believe it will grow. Now, it's not going to grow at double digits, and the growth, I think, will be more heavily weighted to the second half of the year. growing off of the now $100 million portfolio. But we have the right sales team, we have the right leadership, and we have the right credit box now that we've tested out to ensure that we grow in a positive way that we think can really impact and let it start punching above its weight again, which is the reason why we are excited about the future of that business.

11:07 Got it. Maybe one last one from me. Katie, I'd be curious to hear how we should think about provisioning in 2027, just given the likely step up in the reserve with the capital deal and just maybe longer term where you see the reserve kind of settling out.

11:27 Yeah, I mean, I think to your point, I think the last couple of quarters have been pretty nice from a provision perspective. I expect we get elevated from here. I think the coverage ratio, which is how I call it, the allowance to total loans, right now we're at 1.11%. I think we get, you know, stay in that range, go up to maybe 1.2% over time with capital coming on board. So that's where I would see us progress. Again, citizens won't have any material impact to that ratio, but capital when it comes on board will help stabilize that.

12:08 Got it. Thanks for taking my questions. No problem. Thanks. Thank you. The next question is from Brendan Nossel with Hovde. Please go ahead.

12:19 Hey, good morning, folks. Thanks for taking my questions.

12:22 Hey, no problem, Brendan.

12:24 Maybe starting off here, just kind of on prepping the balance sheet for year end, are there any other security sales that need to take place to stay under $10 billion? And I think you initially were contemplating like $300 million.

12:40 Well, as we articulated with the citizen acquisition closing here later this month, we will sell a majority of their portfolio at close or very near to close. As it relates to any more of our portfolio that we will sell, that will just be dependent on how we transition through the remainder of the year and where we are from an asset size. You know, we might take another $2 million to $3 million loss in the fourth quarter, but will just continue to evaluate the market and evaluate our asset size as we proceed through the remainder of the fourth quarter.

13:15 Yeah, okay, that's perfect. Then maybe turning to the margin, can you just narrow down kind of the NIM that you're expecting to see next quarter? There's a lot of moving pieces with kind of movement in both your and citizen security books and then their impact on both the core margin and fair value market creation.

13:38 Yeah, so I think in the next quarter we could see, you know, I'm going to project somewhere in the 8% to 10% basis point lift with the addition of citizens. Again, given the securities restructure we just talked about, their portfolio, and then just the deposit franchise, that it makes that organization very attractive.

14:00 Okay. All right. Awesome. Thanks, Katie. Moving on a kind of related note, Just thinking about your rate positioning, I think back to last quarter, I think you folks said that each 25 basis point hike was six to eight basis points of market improvement. That reads to me as being fairly asset sensitive, but it kind of sounds like now you're more neutral to only slightly asset sensitive. So I'm wondering what changed over the past couple of months.

14:27 Yeah, I think that number, I mean, it ebbs and flows with each rate increase. It varies a little bit, but I think that 25 basis points now, I think we would quantify be about five basis points of benefit to us. And so I think it's, I mean, we could debate whether that's significantly assets that's the diverse slightly, but that's where the new number is.

14:53 Yeah. Yeah. Okay. That's fair and also helpful. Okay. Thanks for taking my questions. Thanks. Thank you. The next question is from Matthew Brees with Stevens. Please go ahead.

15:06 Hey, good morning. Good morning, Matt. You know, just thinking about your loan growth guide for next year, could you give us some idea on what it contemplates for commercial real estate and leasing growth? And if it does include positive growth in those segments, you know, what type of growth are you anticipating?

15:27 Yeah, I think overall commercial growth, is about 5% or so as one of the main drivers. The leasing overall growth is probably about 6% to 7%. The drag on the loan growth is going to be coming from our expectations on the consumer book. In a rising rate environment, we're not seeing the refi business on the residential Indirect has slowed down a bit, and so that's kind of the outlook on those pieces. I will say the growth as well in commercial is probably a little bit more weighted to the CNI as opposed to the CRE, but still good CRE growth.

16:19 Okay. So you do anticipate positive commercial real estate growth next year?

16:23 We do. Okay. It is a bit of running on a treadmill, as I noted, because of the heavily weighting to the sales and the payoffs in that space particularly.

16:37 Yep. And then, Katie, just thinking about the 27 NIM guide, but including capital, if I go back to the deal deck, I think it suggested a 5% NIM or higher. Could you talk about that in the context of the updated 27 NIM guide on the standalone and Whether or not that 5% still holds and what would put you at the upper versus the lower end?

17:03 Well, I think with it not being in, capital not closing until probably, let's say, early in the second quarter or end of the first quarter, we won't have the benefit of that in the first quarter. So the full year guide with that, with capital in next year, I don't think we would get to the 5% once they close. are in our numbers on a quarterly basis. I think we will approach five, be at five or slightly around the 5% rate that we previously quoted. So for the full year, I don't think we will get to five in 2027.

17:40 Right. But you'll be in and around 5% with them and beyond. Fair?

17:44 Correct. Correct.

17:46 Okay. I hate to pickpile on the $10 billion question. but you do have some excess cash at the end of the quarter as well. I'm curious how you see kind of the cash and securities components playing out as you pull the levers and stay below 10 billion by year end.

18:04 Yes, I think you will see our cash position decrease over time. I think some of that is just on balance sheet liquidity as we approach the end of the quarter given the securities portfolio was smaller. I think you'll see it diminish especially as we kind of manage through

18:24 year end. Okay. That's all I had. I'll leave it there. Thank you. Thank you. The next question is from Emily Lee with KBW. Please go ahead.

18:36 Hey, everyone. This is Emily stepping in for Tim Switzer. Thanks for taking my question.

18:42 Sure. Good morning.

18:43 So just to go back to the NIM, I was just wondering what was the exit margin in Q3? How are deposit rates looking at the end of the quarter, too?

19:01 The exit margin on the quarter was a little higher than where we reported for the full quarter. And accretion was a similar impact for the month of September as it was for the quarter. So I think we had a slight benefit, call it five to eight basis points as we exited from where we reported for the full quarter. As it relates to deposits, I think we're starting to see some more competition in the market for deposits, and I think we'll continue to see that as this rate outlook plays out and as we start to see rates potentially move upward.

19:46 And so we've been... Slowly following that trend, and we'll continue to actively manage it as we have been in the past. And that'll continue to likely come through our retail CD pricing product. Understood. Very helpful.

20:05 And then, what does guidance imply for expenses of capital once all the cost saves are achieved? So, basically, the run rate for Q27.

20:15 So the full cost saves for capital will not be realized in 2027. They won't be fully realized until 2028. Okay. Okay, thank you. That's all for me. Thank you. Thank you. Again, if you have a question, please press star then 1. The next question is a follow-up from Brendan Nossel with Hovde. Please go ahead.

20:43 Hey folks, one more for me on kind of expenses. I was trying to bridge the gap from, you know, this quarter's $73 million in core expenses to the first quarter number, you know, at the higher end of your $80 to $82 million range. And I'm asking because it looks like Citizens is running like $4.5 million on costs. So, you know, $73 and $4.5 gets you to like $77.5. So kind of where does that other, you know, several million dollars kind of come from in the updated expense outlook for both four Q26 and then one Q27.

21:23 A couple of things. I think Q3 was a little lighter than we anticipated. I think some of that was just a timing that we'll see move into the fourth quarter. And that, again, therefore, starting at the 73, I think you're starting off a little light, a million, call it, for a round number I think then you have the annual increase in predominantly our largest expense item as it relates to salaries and benefits. And I think we are seeing a meaningful increase in benefit cost expectations for 27 over 26. I'd say those are the big factors that are probably influencing that number higher than where you just quoted, Brendan. Yep.

22:04 Yep. Okay. That's helpful, Colleen. Thank you. Thank you. The next question is a follow-up from Nathan Race with Piper Sandler. Please go ahead.

22:15 Hey, just a follow-up from me on the fee income guide for the fourth quarter. It looks like it takes a slight step down at the midpoint of $29 million, even with the contribution from citizens. So I guess I'd be curious, is that just from lower lease income or any color on the primary drivers there?

22:35 Yeah, I think you had it. I think it's lease income. As we've quoted over time, that's a little bit of a volatile, that creates volatility in the fee income when it relates to lease income as we can have some end of term transactions that result in some gains that are reflected in that number in a quarterly basis. And I think you see that to the tune of a million, million and a half in the third quarter. So I think that run rate was a little elevated versus the trend in Q3. And that's the biggest experience, I would say. Got it. Thanks, Katie. Thank you. At this time, there are no further questions. Sir, do you have any closing remarks?

23:19 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. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect