Peoples Bancorp Inc.

Good morning and welcome to People's Bank Corp, Inc.' 's conference call. My name is Ilie and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and six months ended June 30th, 2021. 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 1 on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press star then 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, Securities, and Exchange Commission's filings. These include, but are not limited to, the completion and integration of current and planned acquisitions, including the pending merger with Premier Financial Bancorp Inc., and any future acquisitions which may be unsuccessful or may be more difficult, time-consuming, or costly than expected. and the risk of expansion into new markets, people's ability to obtain all remaining regulatory approvals of the proposed merger with Premier Financial Bank Corp, Inc., or on the proposed terms and schedule and the adoption of the merger agreement by the shareholders of people. The ever-changing effects of the COVID-19 pandemic on economies and markets and on our customers, counterparties, employees, and third-party service providers as well as the effects of various responses of the governmental and non-governmental authorities to the COVID-19 pandemic, including public health actions directed towards the containment of the COVID-19 pandemic and the development, availability, and effectiveness of vaccines. 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 and the implementation of related economic stimulus packages which may adversely impact interest rates, the interest rate yield curve, interest margins, 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 the commercial and consumer lending activities in light of the continuing impact of the COVID-19 pandemic on customers' operations and financial condition. 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 in connection with the current expected CECL, the continuation of the 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 of timing costs 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 bonds 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 2021 earnings release was issued this morning and is available at peoplesbankcorp.com under investor relations. A reconciliation of the non-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 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 peoplesbankcorp.com in the Investor Relations section for one year. Participants in today's call will be Chuck Solarisky, 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.

Thank you, Eileen. Good morning, everyone. Thank you for joining us. We have some exciting news to share with you regarding our second quarter, which includes total loan balances declined 1% for the quarter. However, we had loan growth of 4% annualized compared to the linked quarter and excluding PPP loans and the lease balances. Net interest income growth of 11% compared to the linked quarter with a 19 basis point expansion of our net interest margin. Our fee-based business income increased 10% compared to the second quarter of 2020. Our total revenue grew 13% compared to the second quarter of 2020, and our efficiency ratio adjusted for non-core cost improved compared to the linked quarter. During the last three months, we have also integrated and streamlined processes with our North Star Leasing Division which is a division of People's Bank. We acquired North Star at the end of March, but began accounting for it on April 1st. This division is growing as we had anticipated and benefited both our net interest income and margin during the second quarter. This division has added over $12 million to lease balances since acquisition, resulting in an annualized growth rate of 59% for the quarter. They also provided over $4 million of interest income and added 29 basis points to net interest margin for the quarter. We have spent a lot of time in recent months visiting and planning with our partners at Premier Financial Bank Corp. and their two banking subsidiaries, Premier Bank and Citizens Bank. We have developed plans on integration, training, client impact, and are working to communicate with both the associates and the clients of Premier Financial to make this a seamless transition. At this point, we are on target to meet our anticipated expense reductions. We continue to move forward and plan to close the merger late in the third quarter of 2021, subject to the satisfaction of customary closing conditions, including approval from the Ohio Department of Financial Institutions and people's shareholders. In addition, in May, we acquired a small insurance agency located in Pikeville, Kentucky. This complements insurance services we already provide in that geographic area. Recently, we were recognized by Forbes magazine as the second best in state bank in both states of Ohio and West Virginia, and are one of 16 banks in the country to be recognized in two or more states this year. We are the smallest as far as asset size of the banks being recognized in two states. Overall, there were nearly 5,000 banks eligible for the awards from Forbes. We are also honored with the top workplace designation from Cleveland.com and Cincinnati.com. The recognition that we have received, both from these designations and others, proves that we work hard to do the right thing for our clients, associates, communities, and shareholders. Moving on to our financial performance for the second quarter, we reported diluted earnings per share at 51 cents and net income totaling 10.1 million. While diluted EPS declined compared to the linked quarter, this was mainly due to a higher provision for credit losses driven by the establishment of the allowance for credit losses related to the North Star leases. At the same time, We had significant growth in net interest income and net interest margin, both due to the acquired leases. Acquisition-related costs totaled $5.5 million for the quarter and worth $7.6 million for the first half of 2021. These costs reduced diluted EPS by 22 cents for the quarter and 31 cents for the first six months of 2021. As we have noted previously, we anticipated that earnings would experience volatility related to our provision for credit losses in future quarters. For the second quarter, our allowance for credit losses was relatively unchanged in terms of dollars, while the addition of the acquired leases required us to record provisions to establish the allowance for credit losses on that portfolio. This resulted in 3.2 million of provision for credit losses during the second quarter. After the additional portfolio, our provision for credit losses would have been minimal for the quarter. Moving on to our loan modifications. At the end of June, our COVID-related loan modifications stood at over 17 million. Nearly all of this amount represented commercial modifications consisting of two relationships, while consumer modifications totaled $500,000. The increase in commercial loan modification balances, which were around 12 million at the end of March, was related to one hotel operator. However, the aggregate payment relief totaled six months, which is consistent with our approach to other customers operating in this industry. Both commercial relationships are set to resume normal principal and interest payments this quarter, and no issues are anticipated. We continue to be pleased with our credit quality metrics. The current portion of our loan portfolio was 99.1%, which was higher than at the linked quarter end. Our quarterly annualized net charge off rate was nine basis points, which improved from 13 basis points in the linked quarter. This rate included the least net charge offs, which were lower than we anticipated, and were around 2% of lease balances for the second quarter. Our non-performing assets grew 1.1 million compared to the length quarter end. Compared to the end of March, our non-accrual loans declined 1.7 million, or 7%, and was largely due to many smaller relationships. Also compared to the length quarter end, our loans 90-plus days past due in accruing increased 2.7 million, and was driven by 1.5 million of past due leases. In addition, we had one commercial loan of 1.4 million move into 90-plus days past due in accruing category during the second quarter. Compared to March 31st, our criticized loans decreased by nearly 3 million and was due to the payoff of several smaller commercial relationships. Additionally, our classified loans declined almost 7 million as we had an upgrade of one commercial relationship and the payoff of some smaller relationships. As for our loan portfolio, balance declined over $37 million compared to the length quarter end. Although we added the lease portfolio during the quarter, which totaled around $96 million at quarter end, and had loan growth in other categories, These were more than offset by a $162 million decrease in PPP loan balances. For our PPP loans, we have originated to date, we have had 70% in terms of dollars of those loans either paid off, paid down, or forgiven by the SBA. If you exclude PPP loans and leases, our loan growth compared to March 31st was 4% annualized. Our construction loan balances increased $22 million, while our consumer indirect loans grew $18 million for the second quarter. The leasing division added over $12 million in leases during the second quarter. At the same time, our commercial loan production for the first half of this year was at its highest level in our company's history. However, our loan growth, which has been muted by the low line of credit utilization rates, which finally stabilized during the second quarter, albeit at a historically low level. Instead of drastically decreasing, it increased 3 million compared to the end of March. When compared to utilization rates at the end of December 2019, we are still down nearly $80 million in outstanding line of credit balances. We continue to grow our number of total households during the second quarter, Our total households are up 2% compared to June of last year. I will now turn the call over to Katie for additional details around our financial performance.

Thank you, Chuck. As Chuck mentioned, the leases had a positive impact on our net interest income and margin during the quarter. Our net interest income grew 11% compared to the linked quarter, and our margin expanded by 19 basis points. The leases provided over $4 million of interest income and 29 basis points to margin. During the quarter, we recognized $3.4 million of income related to deferred fees and costs on the PPP loans, which was a decline of $1.4 million compared to the linked quarter. The recognition of PPP income during the second quarter added 15 basis points to net interest margin compared to 28 basis points for the linked quarter. Our net interest margin, excluding the impact of leases and the PPP loans, was flat compared to the linked quarter. Along with the improved loan yields, we were able to grow our investment yields by recent decisions to restructure some of our portfolio. In addition, we reduced our cost of deposits to 24 basis points, which is the lowest we have had in the last five years, while also reducing our funding costs to 27 basis points, which is the lowest in our history. The positive impact of these measures was offset by the excess liquidity we had during the quarter, which resulted in inflated cash balances and reduced our net interest margin by 13 basis points. We continue to monitor and look for opportunities to grow our margin, which has been challenging in this low-rate interest environment. Compared to the second quarter of 2020, our net interest income increased 14%, and our margin grew by 26 basis points. Again, the lease division provided a significant portion of this improvement while our investment yields were challenged and our funding costs were controlled. For the first half of 2021, compared to the prior year, our net interest income grew 8% and margin was up two basis points. Through the first six months of 2021, we have recorded $8.1 million of income related to deferred fees and costs on the PPP loans compared to 1.9 million during the first half of 2020. For the first half of 2021, the PPP loan income added 21 basis points to net interest margin, and for the first six months of 2020, reduced net interest margin by one basis point. For the first six months of the year, we maintained higher cash balances due to excess liquidity, which negatively impacted net interest margin by 12 basis points. For the second quarter, Our reported efficiency ratio improved to 68.6% compared to 70.4% in the linked quarter, but was still higher than 62.3% a year ago. For the first six months of 2021, our reported efficiency ratio grew to 69.5% compared to 64.5% for 2020. Compared to the second quarter and first six months of 2020, the increases in our efficiency ratio were driven by the higher non-core costs recognized during 2021. On an adjusted basis, which excludes non-core costs, our efficiency ratio improved to 64.2% compared to 65.2% for the linked quarter. We are optimistic that, excluding non-core costs, we believe we can reduce the efficiency ratio to the very low 60s during 2022. During the second quarter, we were able to generate positive operating leverage compared to the linked quarter. Our fee-based income, which is non-interest income excluding gains and losses, declined 6% compared to the linked quarter. The decrease was primarily due to the annual performance-based insurance commission we recognized in the first quarter of each year. At the same time, our electronic banking income and trust and investment income each grew by double-digit percentages compared to the linked quarter. Our fee-based income grew 10% compared to the second quarter of 2020, which was also mostly due to higher electronic banking income and trust and investment income. For the first six months of 2021 compared to 2020, fee-based income increased 11% due to the growth in electronic banking income, trust and investment income, and insurance income. On a year-to-date basis, our fee-based income grew to 31% of total revenue, compared to 30% for 2020. Our acquisitions this year will negatively impact this metric. However, we continue to look for opportunities to grow our fee-based businesses, which are beneficial to our total revenue. Our total non-interest expense grew 5% compared to the linked quarter. We had non-core expenses of $2.5 million for the second quarter of 2021. Our intangible amortization more than doubled compared to the linked quarter from the intangibles associated with the North Star and insurance acquisitions. Salaries and employee benefits costs also grew compared to the linked quarter, which reflected a full quarter of the North Star division associates. Our total expenses related to the leasing division for the second quarter were around $2 million and exclude the non-core expenses. Our electronic banking expense was directionally aligned with the increased electronic banking income I already mentioned. Our total non-interest expense increased 25% compared to the second quarter of 2020 and 18% from the first half of 2020. Compared to the second quarter of 2020, Our non-core expenses increased $1.3 million and were up $2.9 million compared to the first six months of 2020. We also had the additional $2 million of expense associated with operating our new leasing division. The remainder of the increase was driven by higher salaries and employee benefit costs and data processing and software costs. Our increases in salaries and employee benefits costs were driven by the impact of the deferred cost in early 2020 from the PPP loans we originated. Also contributing to the increase were higher medical costs and sales compensation related to production, as well as an increase we made to our 401 match for associates during 2021. We had a lot of noise in our expenses compared to the prior period. If you exclude the non-core expenses and the impact of the expenses associated with operating our North Star Division during the second quarter of 2021, which totaled $2.1 million, our total non-interest expense was relatively flat compared to the linked quarter. While we did see reductions from our annual first quarter items, such as health savings accounts contributions, stock-based compensation, and higher payroll taxes, These decreases were offset by higher sales and incentive compensation associated with our increased production and higher 401k costs due to an increase in our match to employees. If you exclude the non-core expenses, the second quarter operating expenses of North Star and the operating expenses associated with the premium finance acquisition, which were $661,000 for the second quarter of 2021, Then compared to the second quarter of 2020, our total non-interest expense increased 13% and was driven by higher salaries and employee benefit costs, which grew around $3 million. The impact of deferred costs associated with the PPP originations in 2020 accounted for much of this increase, while we also had higher sales and incentive compensation from increased production, higher 401k costs due to increase in our match to employees, and higher medical insurance costs. In addition, our data processing and software costs grew $518,000 compared to the second quarter of 2020. On a year-to-date basis, if you exclude the non-core expenses, the second quarter operating expenses of Northstar, and the $1.6 million of operating expenses associated with the premium finance acquisition for the first six months of 2021, then our total non-interest expense increased 7%, mostly due to higher salaries and employee benefit costs. We had the same increases in line items as I mentioned compared to the second quarter of 2020, which were partially offset by lower stock-based compensation expense. We also recognized higher data processing and software costs in FDIC insurance expense. The increase in our FDIC insurance expense was due to the remaining credits that had been recognized during early 2020, along with higher premiums related to our PPP loans impacting our calculation. In summary, we controlled our expenses while recognizing some necessary costs to grow our business in recent quarters. Moving to our balance sheet, our investment portfolio was relatively flat compared to the linked quarter end and comprised 21% of total assets, which is slightly higher than the 18% to 20% that we typically target. Our core deposits, which exclude CD balances, declined 1% from the linked quarter end. Most of the outflows of deposits were from money market accounts, while we also saw some reductions in non-interest-bearing checking, as well as a seasonal reduction in governmental deposits, which usually carry a higher balance in the first quarter. Our demand deposits continued to comprise 45% of total deposits at June 30, 2021, consistent with the linked quarter. We strived to have strong capital levels and continued to do so at the end of June. While our ratios did decline somewhat, they were impacted by the North Star acquisition, for which we did not issue any equity. However, we anticipate that our capital ratios will improve upon the anticipated completion of the merger with Premier in the third quarter, and once we have moved past the acquisition-related cost. We will continue to look for opportunities to effectively deploy our capital while maintaining well-capitalized metrics. I will turn the call back to Chuck for his final comments.