Peoples Bancorp Inc.

Good morning and welcome to the People's Bancorp's Incorporated conference call. My name is Chuck and I'll be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period ended March 31st of 2022. 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, please 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's Securities and Exchange Commission's filings. 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 four looking statements after this call, except as may be required by applicable legal requirements. People's first quarter 2022 earnings release was issued this morning and is available at peoplesbankcorp.com under the Investor Relations tab. A reconciliation of the non-generally accepted accounting principles or gap financial measures discussed during this call to the most directly comparable gap 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 the peoplesbankcorp.com and the investor relations tab section for one year. Participants in today's call will be Mr. Chuck Solarisky, President and Chief Executive Officer, and Ms. 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, Chuck. Good morning, everyone. Thank you for joining us. As it relates to our results for the first quarter, we have several positives to point out. Our net interest margin expanded four basis points compared to the linked quarter. Excluding the Vantage acquired loans, payoffs of previously acquired loans, and forgiveness of PPP loans, our loan growth for the quarter was 12% annualized and our asset quality remains stable with meaningful reductions in non-accrual loans since year end and improvements in delinquency rates. To summarize our financial performance, we reported earnings of 23.6 million or 84 cents per diluted share for the quarter. As I mentioned in our guidance last quarter, our first quarter results are impacted annually by certain expenses which include Stock-based compensation expense for certain employees, which was $926,000, or 3 cents per diluted share, and employer contributions to health savings accounts totaling $620,000 and negatively affecting diluted EPS by 2 cents. We also had acquisition-related expenses totaling $1.4 million, which reduced diluted EPS by 4 cents. During the quarter, the completion of the Vantage acquisition also increased our expenses, which was not included in our guidance from our call last quarter. Our allowance for credit losses declined since year end, and we reported a release of provision for credit losses of 6.4 million, adding 18 cents to diluted EPS for the quarter. This amount includes $341,000 for the establishment of the allowance for credit losses for the leases acquired from Vantage. We had several previously acquired premium loans pay off during the quarter, which further reduced the required allowance. We continue to see improvement in the economic forecast and lost drivers, and when compared to the linked quarter, these contributed to the release of provision for credit losses. Our allowance for credit losses comprise 1.2% of total loans at quarter end compared to 1.4% at year end. While we could experience modest decreases in our allowance in the remaining quarters of 2022, we do not anticipate it dropping meaningfully below current levels. Moving on to our loan portfolio, compared to year end, our loan balances grew 66 million, which was driven primarily by the Vantage acquisition. We acquired $140 million in lease balances which is net of purchase accounting adjustments at the close of March 7th. Excluding the acquired leases, total loans declined by $87 million, which was driven by the payoffs of some previously acquired premium loans since year end and forgiveness of PPP loans. The total payoffs and amortization of the acquired loans during the first quarter was over $166 million, while PPP loans declined $45 million. While we are disappointed by the lack of loan growth, we remain optimistic about the full year. Our strong commercial production was more than offset by the fourth quarter loan sale and the first quarter payoffs from the Premier acquisition. We anticipated losing a portion of the Premier acquired loans over time. Going forward, we continue to see robust pipelines and a slowdown in Premier payoffs. Despite the large volumes of payoffs we experienced, We do like the improvement in our credit quality over the last six months and the reduction in out-of-favor portfolios. For instance, our hotel portfolio declined $19 million due to our fourth quarter loan sale and another $11 million from recent payoffs. For the full year of 2022, we are lowering our projected loan growth from 6% to 8% to 5% to 7%. These payoffs muted the progress we made in loan production. Excluding these declines, commercial and industrial loans grew 33 million, or 16% annualized. While construction loans increased over 28 million, premium finance loans were up 10 million, or 28% annualized, and non-acquired leases grew nearly 8 million, or 25% annualized. We have also seen some growth from the new geography added by the premier acquisition as we continue to develop and cultivate relationships with vehicle dealerships. We added over 20 new dealerships and over $2 million in consumer indirect loans during the first quarter. From a credit quality perspective, our metrics remain stable compared to year end. Our non-accrual loans declined by nearly 3 million or 8% compared to December 31st, 2021. Contributing to the decline was a $1.5 million commercial relationship that paid off during the quarter. A portion of our loan portfolio considered current stood at 99% compared to 98.8% at year end. As we have indicated in our guidance last quarter, Our quarterly annualized net charge-off rate increased to 17 basis points, as we have been experiencing low levels of net charge-offs in recent periods. For the quarter, we had a $463,000 charge-off of one acquired commercial and industrial relationship from Premier. Our criticized and classified loans were relatively stable for the quarter. We did have an increase in our loans 90-plus days past due in accruing, which was driven by the addition of the Vantage leases. On March 7th, we completed the acquisition of Vantage Financial LLC, which is a specialty equipment leasing business. This addition builds up the capacity and growth potential we have already seen in our leasing division. We're excited to expand our specialty finance business suite, and we are equally pleased with the talent we gained from Vantage. As I previously mentioned, we continue to seek acquisition opportunities within our fee-based businesses. I am happy to announce that as of April 1st, we completed the acquisition of an insurance agency with five offices located in Eastern Kentucky, which serves thousands of clients. The footprint of this agency complements the geographic locations of our branch offices in that area, as well as adding opportunities in our insurance and other lines of businesses for all clients. As far as our community involvement during the first quarter, our charitable foundation awarded grants to nonprofit organizations totaling $158,000. We also contributed $100,000 to a junior achievement financial literacy program that will take place over three years for high schools throughout Ohio. We continue to strive to make meaningful investments in our communities and within our company. We take pride in providing a quality workplace for our associates, and we're a 2022 recipient of Top Workplaces USA National Award from Energage, a technology company that empowers workplace excellence. We were recognized for providing an exceptional workplace culture and were one of 1,100 organizations acknowledged for their people-first culture. This year, we are celebrating our 120th anniversary, and in celebration, our teams are delivering 120 acts of kindness throughout our footprint. We will continue to seek opportunities to improve our workplace and make a positive impact in our communities. I will now turn the call over to Katie for additional details around our financial performance.

Thank you, Chuck. Our net interest income for the quarter declined 1% compared to the linked quarter. while our net interest margin grew by four basis points. The decline in net interest income was largely due to lower loan income, driven by payoffs of loans during the quarter. At the same time, our loan yields increased by four basis points, with the increase driven by higher accretion on commercial real estate loans. Our quarterly loan yields were also impacted by the addition of Vantage, which had outstanding leases with a lower yield than our historical lease portfolio, but still much higher than our typical loan product yield. The recent increase in the Federal Reserve benchmark interest rate was not meaningful for our first quarter results, but we should start to see some of our variable rate loans repricing soon and making a positive impact on net interest income and margin in future quarters. Accretion income net of amortization expense from acquisitions was $2.7 million compared to $1 million in the fourth quarter, adding 17 basis points and six basis points, respectively, to margin. PPP income is becoming less impactful and only added five basis points to net interest margin for the quarter compared to six basis points for the linked quarter. Our average cash balance declined compared to the linked quarter, reflecting the impact of the Vantage acquisition payment, but still continued to be a drag on margin, negatively impacting it by 17 basis points for the quarter. As we noted last quarter, we did not anticipate that our cash balances would decline significantly in the first quarter of 2022, as we continued to have strong core deposit trends. For the second quarter of 2022, we expect to have some runoff of governmental deposits due to seasonality, along with the reinvestment of cash into investment securities, anticipated loan growth, and payoffs of some of the acquired Vantage borrowings during the second quarter. Our net interest income grew by 53% compared to the first quarter of 2021, and our net interest margin expanded by 15 basis points. The improvement has been driven by our acquisitions coupled with core growth. Loan yields improved by 24 basis points compared to the first quarter of 2021, which was driven by the addition of the lease portfolio. Our investment portfolio yield improved 33 basis points as we have worked to reinvest into higher yielding securities during recent quarters. We closely controlled our funding costs and our deposit costs declined 19 basis points compared to the prior year quarter. For the quarter, our reported efficiency ratio increased to 66.8% compared to 62.7% for the linked quarter. When adjusted for non-core items, our efficiency ratio was 64.8% and also grew compared to 61.5% for the linked quarter. However, we anticipate that this metric will improve as the year progresses. Contributing to the increase in the adjusted efficiency ratio for the quarter were the annual items we noted earlier, such as the stock-based compensation expense and health savings account employer contributions. For the first quarter, our fee-based income grew $1 million, or 5%. This increase was driven by higher insurance income, which resulted from annual performance-based commissions that we typically recognize in the first quarter of each year. These annual performance-based commissions totaled $1.3 million for the first quarter of 2022. In recent months, we have seen an increasing referral pipeline for trust and investment customers from the new Premier footprint and are actively gaining new fee income from this geographic area. Compared to the prior year quarter, our fee-based income was up 2.8 million or 16%. Deposit account service charges grew 73% as we have benefited from increased customer activity along with a higher number of accounts associated with the Premier acquisition. Electronic banking income grew 34% compared to the prior year quarter due to more customer activity in the acquired Premier account. Moving on to our expenses. Total non-interest expense increased 8% compared to the linked quarter. A large portion of the growth was in salaries and employee benefits, which was impacted this quarter by higher base salaries due to annual merit increases that occur at the beginning of each year. Increased medical costs, which were up $724,000 over the linked quarter and were driven by the health savings account employer contributions that Chuck mentioned earlier. along with higher payroll taxes and stock-based compensation. Typically, our payroll taxes are higher in the early part of the year than decline as associates meet maximums as the year progresses. We also had increased professional fees in conjunction with the Vantage acquisition that we completed during the quarter. Compared to the prior year quarter, our total non-interest expense grew 36%. The increases were in almost all categories and were largely due to our recent acquisitions and associated ongoing costs. From a balance sheet perspective, most of our asset growth compared to year-end was related to the Vantage acquisition. We maintained our investments to total assets ratio at 24% consistent with year-end. As we had anticipated, We had further deposit growth during the quarter, which was up $140 million, or 2% from year end. The majority of this increase was driven by seasonally higher governmental deposits, which grew $118 million. From a capital perspective, our regulatory capital ratios declined compared to year end and were driven by the Vantage acquisition, which was an all-cash deal and added risk-weighted assets. Our tangible equity to tangible asset ratio was 6.8% at quarter end and declined compared to year end. Our book value per share was $28.41, which also declined compared to year end. These decreases were driven by the Vantage acquisition in which we issued no equity while we added assets, including intangible assets compared to the prior period. We also had a large swing in our accumulated other comprehensive loss, which was further reduced by nearly $51 million and was driven by the increased interest rate environment. In an effort to continue to provide an excellent return to shareholders, earlier this morning we announced an increase in our dividend to 38 cents per share. We are pleased to be able to grow our dividends for the seventh consecutive year and will continue to monitor our dividend payout ratio. I will now turn the call back to Chuck for his final comments.