Peoples Bancorp Inc.

Good morning and welcome to the People's Bancorp, Inc. conference call. My name is Eilee and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and fiscal year ended December 31st, 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 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 filing. Management believes these forward-looking statements made during the 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 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 and 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 Siluriski, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Siluriski, you may begin your conference.

Thank you, Eileen. Good morning, everyone. Thank you for joining us. We are excited to report our earnings for the fourth quarter, which included the full quarter impact of Premier Financial Bank Corp Inc. acquisition. We have many positives, including record earnings for the quarter at $27.9 million. Net interest income grew 28% compared to the linked quarter and was up 24% for the full year compared to 2020. Our fee-based income improved 13% compared to the linked quarter and 8% compared to the full year of 2020. Total revenue increased 24% compared to the linked quarter, 43% compared to the fourth quarter of 2020, and 19% compared to the full year of 2020. Our cost of funds declined to 17 basis points for the fourth quarter, which is our best ever. The efficiency ratio, both reported and adjusted for non-core items, declined compared to the linked quarter. We had considerable loan growth in our core portfolio, along with our acquired businesses. Demand deposits stood at 47.9% of total deposits, an all-time high, and our non-interest-bearing deposits comprised 28% of our total deposits at December 31, 2021, and We met our year-end target of 90% forgiveness of SBA PPP loans originated by people. To summarize our financial performance, we reported earnings of $0.99 per diluted share for the fourth quarter and net income of $47.7 million, or $2.16 per diluted share for the full year. Our results were positively impacted by four cents per diluted share for the fourth quarter due to the gain of approximately 60 million of loans acquired from Premier that we sold at par. This loan sale represented an opportunity to improve credit and concentration metrics. Of the 60 million we sold, 52 million were considered criticized loans, 19 million of the sold loans fell within hospitality category, reductions of which we see as an opportunity to reinvent in other areas. The sale will reduce our revenue by around $3 million annually, but the upgrades in credit and segment concentration are more favorable to our shareholders going forward. As you have seen over the past five years in our investor deck, our criticized and classified portfolios have been below the Midwest average for several years. We believe that this sale of loans is a move in maintaining our very high credit quality standards while also improving our capital ratios. Acquisition-related costs reduced diluted EPS by 3 cents for the fourth quarter and 76 cents for 2021. Our COVID-19-related expenses negatively impacted diluted EPS by 2 cents for the fourth quarter and 4 cents for the year. Additionally, we had a revision in the expenses associated with the renegotiation of our core processing and digital banking contracts, which resulted in a benefit of two cents per diluted share for the fourth quarter. For the fourth quarter, we released nearly $8 million in provision for credit losses, which positively impacted diluted EPS by 21 cents. This was driven by the $60 million in loans we sold during the quarter, for which we released around $6 million of related allowance, reducing provision for credit losses. Our view of the economic forecast improved relative to the linked quarter, further reducing the provision for credit losses. We continue to take a conservative approach to the assumptions within our CISO model and work to reflect what we believe are the most reasonable economic indicators. At year end, our allowance for credit losses comprise 1.5% of total loans, and we believe there may be opportunities for future reduction. Compared to the end of the third quarter, our loan balances declined 12 million. As I mentioned earlier, we completed the sale of about 60 million of loan balances, and we also received 49 million in PPP forgiveness payments during the fourth quarter. Excluding the loan sale and PPP balances, loan growth was $95 million, or nearly 9% annualized compared to September 30, 2021. We had over a half billion dollars of commercial loans originated during 2021, which is over $100 million more than our best previous year. Our commercial and industrial loans led the increase with $82 million in growth or 45% annualized, excluding PPP loans and loans sold. At the same time, our construction balances grew 35 million, or 80% annualized, and our leasing business added 11 million, or 40% annualized. As we have noted in previous earnings call, the line of credit utilization rates have remained below historic levels since the beginning of the pandemic. During the fourth quarter, we grew our commitments on the commercial lines of credit by $50 million and expanded our commercial lines of credit utilization rate from 34% at the end of September to 39% at the year end. Compared to December 31, 2020, our loan balances grew 7%, excluding premier, PPP, and lease balances. At year end, our PPP loans stood at $87 million, which included $23 million acquired from Premier. As far as PPP forgiveness, we are over 90% forgiveness of all PPP loans originated by people. While it's early in the first quarter, we expect our loan growth for the first quarter of 2022 to be in the mid to high single digits on an annualized basis. From a credit quality perspective, many of our metrics improved compared to the linked quarter end. Our quarterly annualized net charge-off rate improved seven basis points compared to the linked quarter and totaled 11 basis points for the fourth quarter. Our non-performing assets declined 5 million, or 9%, compared to the linked quarter, while our criticized and classified loan balances also decreased. The current portion of the loan portfolio stood at 98.8% compared to 98.9% at September 30th. For the full year of 2021, our net charge-off rate was 13 basis points, an increase compared to five basis points for 2020. This increase was driven by net charge-offs from the new leasing portfolio along with recoveries recognized during 2020, lowering the net charge-off rate for that year. Our non-performing assets declined $5 million compared to the linked quarter, and while our criticized and classified loans were down 17% and 25%, respectively, over the same period. As I mentioned earlier, the loan sale improved these metrics during the fourth quarter. As a preferred SBA lender, we are proud to report that we ranked in the top five in Ohio, top 10 in West Virginia, and top 15% nationally in terms of SBA 7A approved dollars for the fiscal year ending September 30th, 2021. We are also working to grow our business in the premier footprint, and our teams have successfully added new business and continue to have strong referral activities. We have had success introducing insurance, investment, treasury management, indirect lending, and other opportunities that were not previously available to premier clients. Since the acquisition, we have closed business in each of these areas and expect growth in each of our businesses going forward. As we have done over the past two years, we are trying to be proactive in reducing the exposure to COVID for both our associates and clients. At this time, 80% of our associates are fully vaccinated. As an employer, we were recognized by the American Banker as one of the best banks to work for in 2021, of which only 90 banks nationwide were included on the list, and only 12 of these banks were our size or larger. We continue to make our associates a high priority, and our positive culture has been a key to our various accomplishments. As we have done on occasion previously, we granted shares to our associates who were up to the assistant vice president level during the fourth quarter of 2021. While this comes at a cost, we value the opportunity to make our associates shareholders of the company and provide them with an ownership stake, both to reward their efforts and to align their interests with the success of the organization. In an effort to help our local communities, our associates have collectively donated $117,000 to local food banks during 2021 and a total of $233,000 since the beginning of the pandemic. Our commitment to our communities as an organization starts with our associates who take deep pride in helping others and taking care of their communities. Additionally, in the wake of the tornadoes that impacted Kentucky in recent months, Our foundation, along with our employees and third-party partners, donated nearly $53,000 to immediate relief efforts associated with communities impacted by the tornadoes. I will now turn the call over to Katie for additional details around our financial performance.

Thank you, Chuck. For the fourth quarter, our net interest income improved by 28% compared to the linked quarter, reflecting the full quarter impact of the premier acquisition. At the same time, we had some noise in our net interest margin, which was 13 basis points lower than the linked quarter and was driven by high cash balances, which were at an average balance of $350 million for the quarter and negatively impacted margin by 19 basis points. We anticipate our cash balances will continue to be inflated for the foreseeable future as we continue to see strong core deposit growth trends and seasonal governmental deposit increases will also put upward pressure on cash balances. We also had lower lease accretion income, which declined $676,000 compared to the third quarter, driving down our lease yield while reducing net interest margin by four basis points. For the fourth quarter, accretion income, net of amortization expense, from acquisitions added nine basis points to net interest margin, while PPP income provided seven basis points. Compared to the linked quarter, we had an 11 basis point decline in our net interest margin due to the lower PPP income as we had fewer loans forgiven during the quarter and therefore less income on deferred fees and costs recognized. We continue to be proactive in managing our funding costs as we have been throughout the pandemic, which declined another six basis points compared to the linked quarter. Compared to the fourth quarter of 2020, Our net interest income grew 59%, which was driven by the acquired lease and premier portfolios. Our net interest margin grew 24 basis points compared to the prior year quarter. The leasing business added 23 basis points to margin compared to the fourth quarter of 2020, while we cut our funding costs nearly in half, which was offset by lower PPP income. Again, cash was a drag on the margin for the fourth quarter and reduced margin by 18 basis points compared to six basis points for the fourth quarter of 2020. For the full year of 2021, net interest income grew 24% as we completed the leasing and premier acquisitions, coupled with the full year impact of the premium finance acquisition and our own core growth. Our net interest margin expanded 15 basis points compared to 2020. We actively managed our funding costs, which were down 18 basis points, but the positive impact was muted by our high cash balances, which reduced margin by 15 basis points for 2021 compared to seven basis points for 2020. For the year, PPP income added 15 basis points to margin compared to two basis points for 2020, while the leasing portfolio added 21 basis points during 2021. For the quarter, our reported efficiency ratio declined significantly as we experienced much lower acquisition-related expenses compared to the linked quarter. When adjusted for non-core items, our adjusted efficiency ratio improved to 61.6% compared to 63.9% for the linked quarter. We expect to continue to see this metric decline as we reap the benefits of our recent acquisitions and associated cost savings. We continue to focus on our fee-based businesses as we benefit from diversified sources of revenue. Compared to the linked quarter, our fee-based income grew 2.2 million, or 13%. This was driven higher by our increased electronic banking income and deposit account service charges. both of which were bolstered by the Premier acquisition. We have also seen some growth in recent periods in our deposit account service charges, excluding the acquired account. Fee-based income grew 10% compared to the fourth quarter of 2020, which was positively impacted by electronic banking income and deposit account service charges. also benefited from higher income from our trust and investment and insurance divisions, which were up 16% and 7%, respectively. For the full year, our fee-based income grew 8%, as higher electronic banking, trust and investment, and insurance income drove much of the increase. These were partially offset by reductions in mortgage banking income and commercial swap fee income, both of which were impacted by the interest rate environment and client demand. Moving on to our expenses, total non-interest expense was down 17% compared to the linked quarter, mostly due to the acquisition-related expenses recognized last quarter. At the same time, our run rate of expenses was higher due to the premier acquisition. Acquisition and COVID-19-related expenses totaled $1.5 million for the fourth quarter. Professional fees also declined due to the third quarter recognition of the expense associated with our contract negotiations for our core processing and digital banking contracts. Total non-interest expense increased 44% compared to the prior year quarter and was up in nearly every category due to our recent acquisitions and associated ongoing costs. For the full year, our total non-interest expense grew 36%, and was driven by the acquisition-related expenses of $21.4 million and COVID-19-related expenses of $1.2 million, coupled with the associated ongoing costs of our recent acquisitions. From a balance sheet perspective, our investments grew over $100 million compared to the linked quarter. At December 31st, our investments to total assets ratio was 24% and grew compared to the linked quarter end as we reinvested cash from securities that we acquired from Premier and sold late in the third quarter. Our total deposits grew by $31 million, most of which was due to an influx of non-interest-bearing deposits that grew $82 million. The increase was partially offset by reductions in our governmental deposits, which were seasonally higher last quarter, along with lower retail CDs. Excluding acquired deposits, our core deposit growth was 11% annualized compared to the linked quarter end and was up 5% from December 31, 2020. During the fourth quarter, our capital ratios continued to improve and were positively impacted by our higher net income. Our common equity Tier 1 ratio was 12.7%. Our Tier 1 ratio was 13%. and our total risk-based capital ratio was 14.1%. As we had anticipated, our leverage ratio declined to 8.8% as it was inflated last quarter due to the full capital impact of the shares issued to acquire Premier, while our average assets only reflected a half-month of the acquired assets. Our tangible equity to tangible assets ratio improved to 8.1% at December 31, 2021, and continues to be impacted by the remaining PPP loans, which negatively impacted this ratio by 11 basis points at year end. Our book value per share improved 44 cents or 6% annualized compared to the linked quarter end, while our tangible book value per share grew 41 cents or 9% annualized over the same period. I will now turn the call back to Chuck for his final comments.