Peoples Bancorp Inc.

Good morning, everyone, and welcome to People's Bancorp, Inc.' 's conference call. My name is Jamie, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and nine months ended September 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 and one on your telephone keypads and questions will be taken in the order in which they are received. If you would like to withdraw your question, you may press star and two. Please also note today's event is being recorded. If you do object to the recording, please note that you may disconnect at this time. Please be advised that the commentary in this call will contain projections and 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 files. 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 may be required by applicable legal requirements. People's third quarter 2021 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 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 at peoplesbankcorp.com in the investor relations section for one year. Participants on today's call will be Chuck Solerski, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Silerski, you may begin your conference.

Thank you, Jamie. Good morning, everyone. Thank you for joining us. We are delighted to have officially closed our merger with Premier Financial Bank Corp. Inc. on September 17th, 2021, and welcome their associates and clients to our organization. We have successfully converted all systems with minimal customer impact. All of our team members worked hard to accomplish a smooth conversion. We are excited about the opportunities the acquisition has created for us and our ability to execute on our strength of interactions between lines of business. At this point, we have already had customers within the Premier footprint who had worked with our insurance and wealth management groups and are now able to move their banking from other institutions to people's with our expanded network of banking locations. We have also engaged wealth management and insurance talent to help facilitate the open lines of communication between the new office locations. For the third quarter, we had several highlights I would like to mention, including our premium finance and leasing divisions both had over 60% annualized growth in loan and lease balances compared to the linked quarter. Our net interest margin was positively impacted by the leasing division during the quarter while we maintained our focus on controlling funding costs. I am enthusiastic about our fee-based businesses as we have had great growth this year in trust and investment income of 22% and insurance income of 9% compared to 2020. We had a nice surprise as our deposit account service charges recovered this quarter and were up 25% compared to the linked quarter. Our fee-based income from our leasing division has also been a wonderful addition, adding $716,000 year-to-date. We continue to have growth in our total revenue, which increased at an annualized rate of 26% compared to the linked quarter. Our loan-to-deposit ratio declined to 77% at September 30th, and our regulatory capital level ratios improved compared to the linked quarter end, which had been negatively impacted by the acquisition of North Star Leasing earlier this year, which was an all-cash deal. The common equity Tier 1 ratio improved 72 basis points to 12.1%, and our total risk-based capital ratio improved 84 basis points to 13.6 percent compared to June 30th. Moving on to our financial performance, we reported a net loss of $5.8 million, or 28 cents per diluted share, for the third quarter. We had anticipated reduced earnings due to the acquisition-related cost incurred, as well as the provision for credit losses needed to establish the allowance for the acquired loan. For the first nine months of 2021, earnings for diluted share were $0.99 compared to $0.70 for 2020. We had several one-time items during the quarter, which were primarily acquisition-related costs, which totaled $16.5 million for the quarter and $20.8 million year-to-date. These costs impacted diluted earnings for share by $0.62 for the third quarter and by 81 cents per share for the first nine months of the year. We recognize one-time expenses of 1.9 million for professional services related to our renegotiation of our core processing in digital banking contracts, which will provide us cost savings over the next several years. These costs reduce DPS by seven cents for the quarter. During the third quarter, we recognized an additional $425,000 of other non-interest expense as our projections for the leasing division indicated that production would exceed our original expectations, leading to potentially higher subsequent earn-out payments related to the acquisition. I would like to add more color around our increased provision for credit losses for the quarter. The acquired loans had a significant impact, driving the increase in our allowance for credit losses during the third quarter. At the acquisition date, the purchase credit deteriorated loans that we acquired contributed $22.3 million to the allowance for credit losses, which are not a part of our provision for credit losses, as they are part of the acquisition accounting. As a result of the premier acquisition, we recorded $11 million of provision for credit losses to establish the allowance for credit losses for the acquired non-purchase credit deteriorated loans. The remainder of the change in provision for credit losses was a reduction and was mostly attributable to continued improvement in economic loss factors and loss drivers utilized within the CECL model. As far as PPP lending, We continue to be in the forefront and are well ahead of most in receiving forgiveness proceeds. We anticipate that we will have received 90% of the PPP income by the end of the year, with little remaining to be recognized next year. Our credit quality metrics remain stable post-acquisition. The current portion of the loan portfolio stood at 98.9%, down slightly from 99.1% at June 30th. Our quarterly annualized net charge-off rate grew to 18 basis points. This increase in charge-offs was driven by a half million dollar charge-off of one commercial and industrial loan relationship, coupled with higher indirect consumer loan charge-offs. Our non-performing assets nearly doubled compared to the linked quarter end, with the increase being driven by the Premier acquisition. Premier had a much higher other real estate owned balance at around $11 million compared to a few hundred thousand dollars for people historically. Most of the increase in non-performing loans was in the non-accrual category, which increased $13 million due to acquired loans. Our loans Our allowance for credit losses as a percent of total loans grew 30 basis points compared to the linked quarter end and was driven by the accounting for the acquired loan portfolio. Moving on, our total loan portfolio grew by 33% compared to the linked quarter and was driven by the premier acquisition. At September 30th, the acquired loans totaled $1.1 billion. We had an exceptional quarter with respect to our new premium finance and leasing divisions. The premium finance division added nearly $18 million in loans during the quarter, equating to 60% annualized growth compared to the linked quarter end. At the same time, our leasing division added almost $16 million in leases, or 66% annualized growth compared to the linked quarter end. We have been pleased with the production results and total loan quality of these two new lending areas and have the ability and focus to continue to allow them to grow in the future quarters. If you exclude the acquired loans and PPP loans, our loan growth was 6% annualized compared to the linked quarter end. Our commercial and industrial balances grew nearly $14 million, while our construction loans increased almost $10 million. Our PPP loans now stand at about 135 million, which includes acquired PPP loans. We have received forgiveness on over 80% of the PPP loans we had originated, excluding the acquired loans. Another bright spot for the quarter was our line of credit utilization rates increased, resulting in about $10 million of higher commercial line of credit outstanding balances at September 30th compared to June 30th. Half of the increase in balances was an advance we anticipate will be repaid by year end. We are finally seeing recent utilization rates start to recover after bottoming out during the first quarter of the year. I will now turn the call over to Katie for additional details around our financial performance and the acquisition.

Thank you, Chuck. Our net interest income continued to improve in the third quarter, increasing 7% compared to the linked quarter and 21% over the prior year quarter. At the same time, our net interest margin expanded by five basis points and 36 basis points, respectively. Contributing to the increases over the linked quarter were higher loan yields, mostly due to the leases and premium finance loans. Our continued decline in deposit costs, which increased three basis points, also positively impacted net interest margin compared to the linked quarter. Compared to the prior year quarter, the leading cause of the higher net interest margin was the positive impact from our new lease portfolio, which had a yield of 19.4% for the quarter. We have had strong control over our funding costs, which declined 13 basis points compared to the third quarter of 2020. During the quarter, we recognized $3.1 million of income related to deferred fees and costs on the PPP loans, compared to $3.4 million for the linked quarter. In total, PPP income added 18 basis points to net interest margin for the quarter, compared to 15 basis points for the linked quarter. Compared to the first nine months of 2020, our net interest income grew 13%, and our net interest margin increased 14 basis points. Again, these improvements were driven by our leases and premium finance loans benefiting loan yields, while we worked hard to reduce our deposit costs. CPP deferred fee and cost income totaled $11.2 million for the first nine months of 2021, compared to $3.8 million during 2020. For the quarter, our reported efficiency ratio grew mostly due to the non-core items, which were significant during the third quarter, as Chuck previously mentioned. When adjusted for non-core items, our adjusted efficiency ratio was 63.9%, which is flat compared to the linked quarter. On a year-to-date basis, our adjusted efficiency ratio was 64.3% and 62.4% for 2020. Our fee-based income, which is non-interest income excluding gains and losses, grew 4% compared to the linked quarter. Our deposit account service charges had a substantial increase and were up 25%, or $505,000, which was driven by higher customer activity associated with overdraft and insufficient fund fees. Our leasing division also had significant growth during the quarter and generated a 50% increase in their fee-based income. Compared to the prior year quarter, fee-based income was up slightly. We had considerable growth in trust and investment income, which was up 21%, followed by higher electronic banking income and deposit account service charges. These increases were nearly offset by lower mortgage banking income, which declined 71% after the high refinance and purchase volume during 2020, which has diminished in recent quarters. For the first nine months of 2021, fee-based income grew 7% and was led by a 22% increase in trust and investment income. Also contributing to the growth was higher electronic banking income, which was up 20%, while insurance income increased 9% compared to the prior year. The leasing division also provided $716,000 of fee-based income for the six-month post-acquisition. These increases were partially offset by lower mortgage banking income and commercial loan swap fees, coupled with decline in deposit account service charges. For the expense side, our total non-interest expense was up 45% from the linked quarter. The third quarter included non-core expenses of $18.4 million, which were mostly related to the Premier acquisition and vendor contract negotiation expenses, and drove much of the increase. Our FDIC insurance expense increased $481,000 compared to the linked quarter. This increase was associated with our lower leverage ratio for the second quarter of 2021, which is a part of the FDIC insurance calculation. We anticipate this increase to be temporary as our leverage ratio recovered during the third quarter. The remainder of the increase in our non-interest expenses compared to the linked quarter was driven by the additional operating costs of the expanded footprint following the Premier acquisition along with the additional $425,000 of expense in connection with the increased production estimates for the leasing business, driving a higher anticipated earn-out payment. Compared to the prior year quarter, total non-interest expense grew 69%, and again was heavily impacted by non-core expenses associated with the Premier acquisition. Also contributing to the overall increase was higher amortization of intangible assets associated with other recent acquisitions, along with increased data processing and software costs. We have the continued operating costs of the recently acquired businesses, which have also increased our total non-interest expense by nearly $3 million over the prior year quarter. Higher salaries and employee benefit costs, along with increased marketing expenses also impacted total non-interest expense compared to the third quarter of 2020. For the first nine months of 2021, total non-interest expense grew 35%. As I mentioned, the non-core expenses were much higher this year, along with continued operating costs of the acquired businesses. Our amortization of intangibles continues to grow as we complete acquisitions, and our data processing and software costs have increased compared to the last year. Salaries and employee benefit costs continue to add to the overall increase as we have worked toward increasing our corporate minimum wage, along with implementing higher 401 matches, while we also recognize higher medical costs and incentive costs associated with the increased production. Our FDIC insurance expense grew $879,000 compared to the first nine months of 2020, as our assets continued to grow, coupled with a lower leverage ratio during the second quarter of 2021. further impacting this calculation. During early 2020, we utilized credits related to our FDIC insurance, which lowered our expense for the first nine months of 2020. We view the increased costs that we have incurred in recent periods as part of the necessary process to grow our business. While these costs are high, they are one time and help us to position ourselves to provide greater shareholder return in future. Our overall balance sheet grew nearly $2 billion from June 30th, mostly due to the Premier acquisition. The investment portfolio grew by nearly 50% from the linked quarter end, which was due to the acquired investments. At the end of September, our investments to total assets ratio was 22%. Our investment portfolio is a little higher than we would like it to be, which is due to our excess liquidity and the Premier acquisition. We anticipate that as loan growth materializes and our line of credit utilization rates increase, we should be able to decrease the size of our investment portfolio relative to total assets over time. The acquisition accounting for Premier is preliminary at September 30th. The overall impact of the Premier acquisition included total assets acquired of over $2 billion, liabilities assumed of $1.8 billion, core deposit intangibles of $4.2 million, and goodwill of around $71 million. Our total deposits at quarter end included acquired balances of $1.8 billion. We had some runoff in our organic deposits, which we had anticipated as deposit balances from customers had been inflated due to the pandemic, coupled with reductions in our brokered CD balances. At the end of the third quarter, we also had higher governmental deposits, which is a seasonal increase, and we anticipate much of that running off during the fourth quarter. With the acquired deposit balances, our demand deposits as a percent of total deposits grew to 46%, up from 45% at the linked quarter end. Our capital ratios improved compared to the linked quarter end, mostly due to the Premier acquisition. The acquisition of the North Star Leasing business had a negative impact on our capital ratios during the year as it was an all-cash deal, but our ratios improved upon completion of the Premier acquisition. The non-core items during the third quarter also had a negative impact on our ratios as we recorded a net loss, but we anticipate future quarters to continue to improve our ratios as we move away from the costs associated with the Premier acquisition. Our common equity Tier 1 capital ratio improved 72 basis points to 12.1 percent. Our total risk-based capital ratio increased 84 basis points to 13.6 percent, and our leverage ratio grew to 11 percent at quarter end. At September 30th, our leverage ratio was inflated due to the partial quarter impact of the premier assets on our average assets, and we anticipate the full quarter impact during the fourth quarter will cause the ratio to decline. Our tangible book value per share also grew 3% compared to June 30th and was $18.98 at quarter end. I will now turn the call back to Chuck for his final comments.