Peoples Bancorp Inc.

Good morning and welcome to People's Bancorp, Inc. conference call. My name is Sarah and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and annual period ended December 31st, 2020. 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 then one 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 then two. 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. These include, but are not limited to, the ever-changing effects of the COVID-19 pandemic on the economic and market conditions and on our customers' counterparties, employees, and third-party service providers, as well as the effects of various responses of governmental and non-governmental authorities to the COVID-19 pandemic, changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors, and or the fiscal and monetary policy measures undertaken, which may adversely impact interest rates, the interest rate yield curve, interest margin, loan demand, and interest rate sensitivity. The success, impact, and timing of the implementation of people's business strategies and people's ability to manage strategic initiatives, including the expansion of commercial and consumer lending activities in light of the continuing impact of the COVID-19 pandemic on customers, operations, and financial conditions. the competitive nature of the financial services industry, the impact of assumptions, estimates, and inputs used within models, which may vary materially from actual outcomes, including the connection with the current expected credit loss model or CECL model, the discontinuation of the London Interbank Offered Rate, LIBOR, and other reference rates which may result in increased expenses and litigation and adversely impact the effectiveness of hedging strategies, uncertainty regarding the nature, timing, cost, and effect of federal and or state banking insurance and tax legislative or regulatory changes or actions, and changes in accounting standards, policies, estimates, or procedures. 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 fourth quarter 2020 earnings release was issued this morning and is available at peoplesbankcorp.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 included at the end of the earnings release. This call will include about 30 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 peoplesbankcorp.com in the investor relations section for one year. Participants in today's call will be Chuck Sulazewski, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Sulazewski, you may begin your conference.

Thank you, Sarah. Good morning. Happy New Year, and thanks for taking the time to be with us this morning. The year 2020 ended much differently than it began. Our business, like many businesses, was heavily impacted by COVID-19 pandemic, and the way in which we function and provide our services has changed dramatically over the past 12 months. For periods of time, our lobbies have been accessed by our clients as appointment only. Our meetings became virtual. A portion of our associates have been working from home and only coming into the office periodically. While the pandemic continues to have an astonishing impact on our industry, we have been adept at modifying our practices and adapting to a new situation that arises. The Paycheck Protection Program from the Small Business Administration, through which we offered loans to small businesses, resulted in our associates working night and day to process applications. Our sales teams continue to have meaningful conversations with customers. We remain determined to deliver our high quality services to whatever means necessary. Earlier this morning, we reported record quarterly net income. Looking to our results, we reported diluted EPS of $1.05 in the fourth quarter, compared to 51 cents in the linked quarter, and 72 cents for the fourth quarter of 2019. For the full year, we reported diluted EPS of $1.73 compared to $2.63 for 2019. During the fourth quarter, we recognized certain non-core transactions, which included severance and COVID-related expenses, which negatively impacted diluted EPS by $0.03 and $0.01, respectively. Proceeds from the sale of restricted Class B visa stock and low-income housing low-income housing tax credit investments, which positively impacted EPS by $0.03 and $0.01, respectively. For the full year of 2020, our non-core transactions included acquisition-related costs, which reduced EPS by $0.06, COVID-related expenses, which decreased EPS by $0.05, severance expenses, pension settlement charges, and income tax expense true up from prior years each of which negatively impacted EPS by 4 cents, and proceeds from the sale of restricted Class B Visa stock, which positively impacted EPS by 3 cents. As it relates to our reported performance, we generated positive operating leverage for the full year of 2020 compared to 2019. This means that we grew our revenues at a faster rate than our expenses compared to the prior year. When adjusted for non-core expenses, we did not achieve positive operating leverage compared to 2019 because of the decline in net interest income due to the low rate environment. For the fourth quarter of 2020 compared to the fourth quarter of 2019, we did have positive operating leverage when adjusted for non-core expenses. As far as our involvement in the SBA Paycheck Protection Program, we received some proceeds from the payoffs of loans forgiven by the SBA during the fourth quarter. At the end of December, our PPP loan balances had declined by $94 million, or 20%, from September 30, 2020. During the fourth quarter, we recognized $3.7 million of interest income on the amortization of the net deferral loan fees and costs from the PPP loans. At the end of December, we had 7.9 million of remaining net deferred loan fees and costs, which will be recognized as income through the respective maturities of the loans or the forgiveness by the SBA. We continue to have opportunities to introduce our PPP clients to our other lines of business to determine additional products and services that align with their needs. At December 31st, 2020, We had new deposit accounts totaling nearly $50 million and $35 million of loans associated with these PPP clients. We have also added approximately $250,000 of annual fee income from PPP clients. Regarding our provision for credit losses, we recognize the recovery of provision for credit losses of $7.3 million during the fourth quarter. Our provision for credit losses totaled $26.3 million for 2020. The reduction in the provision of credit losses compared to the link quarter reflected the most recent Moody's economic forecast utilized in our CECL model at the end of December, which had improved compared to the economic forecast at the end of September. Compared to the economic forecast from September, The December forecast for the next four quarters included an improvement of approximately 2% in U.S. unemployment, approximately 4% in Ohio unemployment, and approximately 3% in Ohio GDP. Meanwhile, compared to the full year of 2019, our provision for credit losses increased significantly. This increase reflected the utilization of the CISO model which is driven by forward-looking expected losses and largely based on economic forecasts from Moody's that deteriorated due to the pandemic. During the first half of 2020, the increase in allowance for credit losses has been driven by economic forecasts from Moody's that showed high rates of unemployment, which improved in the latter half of the year. To the extent economic factors for Moody's continue to improve, which include unemployment and GDP rates, and the credit quality metrics remain strong, we would anticipate having additional releases of provision in future periods. Regarding loan modifications, at the end of December, the balance of loans on COVID-related modifications totaled $22 million, representing less than three-fourths of 1% of our outstanding loan balances. Last quarter, we mentioned that the level of modifications would increase compared to September, as we were processing additional requests for payment relief at that time. The breakdown of the outstanding loans on payment deferral plans as of December 31, 2020, include $5 million in consumer loans and $17 million in commercial loans. At this point, the vast majority of our COVID-related deferrals are paying on time. Of the commercial loans under an active payment relief plan, almost two-thirds were with customers operating in the lodging sector. The other borrowers with active loan modifications operate in industries of transportation, childcare, amusement and recreation, and restaurants and breweries. While we are processing additional requests for payments relief, We expect the aggregate COVID-related loan modifications to increase slightly at the end of the first quarter to comprise around 1% to 2% of outstanding loan balances. The anticipated increase is being driven by additional relief in the lodging and commercial real estate portfolios, primarily relating to three clients. The lodging industry has been heavily impacted by the pandemic, resulting in clients requesting additional deferments for more than six months. Our total exposure to the lodging industry was $81.7 million at the end of December, which excludes $2 million of PPP loans. To date, we have provided payment relief to 80% of our lodging portfolio, but only two customers remain on active deferment. Given the stress in the industry, we anticipate additional clients will seek payment relief in the coming quarter. This portfolio consists primarily of 13 properties with an average loan-to-value of 64%. Ten of these properties are flagged, meaning they are part of a national franchise. Two of the properties that are not flagged consist of cabin rentals, which have performed relatively well during the past eight months. The guarantor liquidity is strong on half of the properties within the lodging portfolio. Additionally, the top three relationships with the within the portfolio account for 69% of the total exposure. These relationships are also supported by guarantor strength and by an SBA guarantee. Approximately $10 million of the exposure under these relationships remains advanced as the project is on hold due to COVID. We have one criticized relationship and one classified relationship in this portfolio, which we're performing at a satisfactory level prior to COVID. These two relationships account for an aggregate of $10.7 million, or 13% of the lodging portfolio, excluding PPP loans. The pandemic has further stressed overall cash flow of these specific operators, which led to the downgrade. We do not anticipate any losses on our lodging portfolio through the first half of 2021. Given the extension on PDR relief, we will work with our borrowers as much as possible until stabilized occupancy and cash flows return. Excluding 55 million of PPP loans, our exposure to restaurants was 171 million at December 31st, 2020, which included 137 million to McDonald's franchisees. Excluding PPP loans, Our loans to operators of non-McDonald's franchise restaurants accounted for 34 million of our total restaurant portfolio exposure at December 31st, 2020. In total, this portfolio accounted for 8 million of the 114 million in total deferments to restaurant operators that we have provided during the pandemic. The non-McDonald's franchise restaurants include 5 million in loans with a government guarantee enhancement. These specific clients benefited from the CARES Act as funding was used to support the customer principal and interest payments for an aggregate of six months during the year. We provided over $27 million in PPP loans to these non-McDonald's franchise restaurants. At December 31, 2020, we had two loans remaining on active deferment with $1.5 million in outstanding balances. With the passage of the Consolidated Appropriations Act of 2021, eligible borrowers under the SBA loans will receive an additional three months of funding for loan payments, beginning with their February 2021 payment. High impact industries, such as restaurants, will be eligible for an additional five months after the three-month payment period ends. While we have anticipated an increase in our delinquencies related to the pandemic, we continue to see a stabilized delinquency rate. At the end of December, 98.9% of our total loan portfolio was considered current, compared to 98.6% at December 31st, 2019. During the fourth quarter, we also saw improvements of our non-performing assets, which declined 1.5 million from the end of September. Our quarterly annualized net charge-off rate was 10 basis points compared to 8 basis points for the linked quarter and 16 basis points for the fourth quarter of 2019. We recognized a $508,000 recovery on a previous charged-off commercial relationship during the fourth quarter of 2020. Our net charge-off rate for the full year of 2020 was 5 basis points compared to 4 basis points for 2019. Compared to the end of September, our classified loans declined 3.5 million. This decline was driven by the upgrade of three commercial relationships totaling 5.4 million, coupled with the payoff and amortization of other classified loans. This improvement was partially offset by the downgrade of one commercial relationship with an aggregate balance of 4.5 million that was downgraded from special mention to substandard during the quarter. Our criticized loans increased 3.4 million, which was mostly due to the downgrade of two larger commercial relationships totaling $8 million. These downgrades were partially offset by payoffs of amortization of other criticized loans during the quarter. All of the downgraded relationships I mentioned were COVID-related. Our total COVID-related downgrades that occurred during the quarter were 12.4 million. As it relates to our loan portfolio, our loan balances declined 2% from September 30, 2020. This decline was related entirely to the forgiveness of our PPP loans, which were down 20%. This was partially offset by higher commercial real estate loans, which grew 7% annualized, and our premium finance loans, which were up 41% annualized compared to the late quarter end. Excluding PPP loans, our loan growth was 3% annualized compared to the end of September. As we expected, our consumer indirect loans grew at a slower pace during the fourth quarter than in prior quarters, which was impacted by seasonality. From a commercial loan perspective, 2020 was one of our best production years. However, this growth was muted by our clients' low utilization rate of commercial lines of credit, which resulted in million decline in commercial line of credit balances compared to December 31st, 2019. At December 31st, 2020, our client's commercial line of credit utilization rate was 39% compared to 55.2% at the end of 2019. At the same time, we grew our commitment on the commercial lines of credit by over 100 million from December 31st, 2019. We are currently participating in the latest round of PPP. As of Friday, we have over 500 applications for over $80 million in potential loans. Our participation in the program has allowed us to grow our loan balances and future income related to fees, which have been beneficial as the loans are forgiven. I will now turn the call over to Katie for additional details about our financial performance.

Thank you, Chuck. Our results for the quarter improved as the benefit of the recovery of provision for credit losses impacted many of our performance metrics. Our quarterly return on average assets and return on average stockholders' equity both improved and were higher than a linked quarter and prior year quarter. Compared to 2019, these annual ratios declined, mostly due to the provision for credit losses recorded during the first half of 2020. Our pre-tax, pre-provision ROA increased from the linked quarter compared to the prior year quarter and full year of 2019, this ratio declined. The decreases were driven by the sustained impact of the low interest rate environment on our net interest income during 2020. The reported efficiency ratio improved compared to the linked quarter, but was higher than the prior year quarter. The reported efficiency ratio also improved compared to the full year of 2019. The increase compared to the prior year quarter was largely due to a decline in net interest income along with increased data processing and software costs and higher FDIC insurance expense. The increase in FDIC insurance expense reflected the fact that credits had been received during 2019, which continued into early 2020, and then ran out. The impact of the PPP loan balances on our leverage ratio also increased our FDIC assessments during 2020. While we can reduce our FDIC assessment for the PPP loans by pledging them to the PPP lending facility, we have chose not to utilize this type of funding source as we have other lower cost funding available. The adjusted efficiency ratio, which excludes non-core expenses, decline compared to the linked quarter, and prior year quarter. These improvements were driven by lower core non-interest expense compared to prior periods. The adjusted efficiency ratio increased for the full year of 2020 compared to 2019, which was mostly due to the decline in net interest income compared to the prior year. Net interest income decreased 2% compared to the linked quarter and prior year quarter. Net interest margin was stable compared to the linked quarter, but declined 43 basis points compared to the prior year quarter. Compared to the linked quarter, we had additional fee income of $1.8 million recognized related to the PPP loans that were forgiven during the quarter. This benefited our commercial loan yields, which were up 81 basis points from the linked quarter. The reduction in our net interest margin compared to the prior year quarter was mostly due to due to an increase in amortization within our investment securities portfolio. This was driven by prepayments, along with the decline in accretion income net of amortization expense from acquisitions. During the fourth quarter, we took action to reduce our exposure to the increased prepayment speed. As a result, we sold several investment securities to mitigate future high premium amortization which resulted in a net loss of $751,000 on investment securities recorded during the quarter. October and November prepayment speeds on investment securities continued to increase relative to prior months, while December slowed somewhat compared to prior months. For the fourth quarter of 2020, we had premium amortization of $4.9 million compared to $4.6 million for the linked quarter and $3.4 million for the prior year quarter. Compared to the full year of 2019, net interest income decreased $1.9 million, or 1%, which reflected the repricing of most of our variable rate loans within the portfolio. This decline included the $10.7 million benefit from the income recorded on the PPP loans originated during 2020. Compared to 2019, we have cut our interest expense by 38%, as we have been proactive in reducing our deposit pricing while monitoring our borrowing costs. At the same time, net interest margin declined 45 basis points as loan yields have been impacted by the low rate environment while investment yields have declined due to prepayments. For 2020, PPP loans added 10.7 million of net interest income and two basis points to net interest margin. At the same time, premium finance loans added $2.9 million to net interest income and two basis points to net interest margin. We continue to closely watch our deposit costs, which were 29 basis points for the fourth quarter compared to 66 basis points for the prior year quarter. Accretion income, net of amortization expense, declined during the quarter to $207,000 and totaled $2.8 million for the full year. Our accretion income has been impacted by residential real estate loan portfolios we have been purchasing, for which we have been paying a premium and are now seeing some of those loans pay off in recent months. Accretion income added two basis points to net interest margin for the quarter and seven basis points for the full year of 2020. Fee-based income, which is non-interest income excluding gains and losses, grew 3% compared to the linked quarter and was flat compared to the prior year quarter. The growth compared to the linked quarter was mostly due to the sale of restricted Class B visa stock, which resulted in $680,000 of other income. We also had proceeds from low-income housing tax credit investments of $334,000 in the fourth quarter of 2020. Compared to the linked quarter, we had growth in swap fee income, trust and investment income, and deposit account service charges, which were more than offset by lower mortgage banking interest mortgage banking, and insurance income. The decline in insurance income reflected the impact of the additional $591,000 of insurance income recorded during the third quarter due to the timing of the recognition of revenue related to contracts. Compared to the fourth quarter of 2019, our fee-based income experienced growth provided by mortgage banking and trust and investment income. This was coupled with the the restricted Class B Visa stock sale improving other non-interest income. Nearly offsetting these improvements were declines in all other categories, many of which were a result of the pandemic. Compared to the full year of 2019, fee-based income decreased 1%. We had significant growth in mortgage banking income, which was up 50% compared to the prior year due to the low interest rate environments. We also had increases in electronic banking and trust and investment income compared to 2019. More than offsetting these increases were reductions in deposit account service charges, which were heavily impacted by the pandemic, PPP proceeds, and fiscal stimulus, along with lower insurance, swap fee, and bank-owned life insurance income. The higher bank-owned life insurance income during 2019 was due to $482,000 of debt benefit proceeds received during that year. Fee-based income improved to 34% of total revenue for the fourth quarter compared to 32% for the linked quarter and 33% for the prior year quarter. Compared to 2019, fee-based income was stable at 32% of total revenue for both periods. Total non-interest expense declined 3% compared to the linked quarter and was down 1% compared to the prior year quarter. We incurred severance expenses of $771,000 in the fourth quarter, which, as we mentioned last quarter, will give us some cost savings going forward. Contributing to the reduction from the linked quarter were declines in salaries and employee benefit costs, net occupancy and equipment, and electronic banking expense. Compared to the prior year quarter, our total non-interest expense was impacted by lower other non-interest expense, which was driven by decreases in travel and entertainment expense and supplies. We also had declines in other loan expenses, professional fees, and net occupancy and equipment expense. These declines were partially offset by higher FDIC insurance expense which was impacted by credits that had been utilized during 2019 and were fully used by early 2020. Compared to the prior year quarter, we also had increased data processing and software expense. These additional costs were related to the implementation of new software along with an increase in our core processing costs. Total non-interest expense declined 3% compared to the full year of 2019. This was mostly due to the non-core expenses recorded during 2019 related to the acquisition of First Prestonsburg. The reduction in acquisition-related expenses in 2020 was, however, partially offset by an increase in other non-core expenses recorded during 2020. Excluding non-core expenses, total non-interest expense was relatively flat compared to 2019. Poor deposits, which exclude CD balances, grew 2% compared to the linked quarter end. We continue to see increases in savings, interest-bearing demand, non-interest-bearing demand, and money market accounts. This growth has been beneficial as these are all relatively low-cost deposit sources. Our deposit balances continue to be impacted by the pandemic as our clients are maintaining higher-than-normal balances. Demand deposits grew to 43% of total deposits at quarter end, an increase from 42% at September 30th, 2020, and 40% at December 31st, 2019. During the fourth quarter, we repurchased another $4.3 million of shares as our stock price remained relatively low. We continue to maintain capital levels that are above well capitalized and believe in strong returns for our shareholders. While we have made nearly $30 million in share repurchases this year, we are prudent in our approach and will not sacrifice the strength of our capital position to continue buying shares. As far as any future repurchase plans, we are closely monitoring and stressing our capital levels as we have done previously to determine the most appropriate action. As it relates to CECL. Our allowance for credit losses stood at 1.48% of total loans at December 31st, 2020. This is a reduction compared to 1.67 at September 30th as the economic forecast had improved. Our allowance for credit losses declined 13% compared to the linked quarter end. Our allowance for credit losses as a percent of total loans was negatively impacted by 18 basis points at December 31st, 2020 due to the PPP loans for which no allowance for credit losses is recorded as a result of the full guarantee by the SBA. Our allowance for credit losses as a percent of loans doubled compared to December 31st, 2019, as we implemented the CECL model during 2020, coupled with the impact of the pandemic on the underlying assumptions. I will now turn the call back to Chuck for his final comments.