Peoples Bancorp Inc.

Good morning and welcome to the People's Bancorp, Inc.' 's conference call. My name is Matt and I will be your conference facilitator. Today's call will cover a discussion of results of operations for the quarterly and nine-month periods ended September 30, 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'd 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'd like to withdraw your question, please press star then 2. This call is 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 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, details in the People's Securities and Exchange Commission filings. Management believes that 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 third quarter 2022 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 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. Solariski, you may begin your conference.

Thank you, Matt. Good morning, and we appreciate you joining our call today. Earlier this morning, we announced a merger with Limestone Bank Corp, Inc. Limestone has $1.5 billion in assets and operates 20 branches in 14 counties in Kentucky. We anticipate closing the merger during the second quarter of 2023. We're excited about this partnership and our expansion into strategically important markets in Kentucky. Limestone's management team, led by John Taylor, has a very similar culture and credit discipline as us. We believe this merger will benefit all shareholders, employees, and clients of both institutions. I will go into more details on the merger later on the call, and would like to highlight our results issued this morning. For the third quarter, we reported an increase in our net income, which totaled $26 million, while our diluted earnings per share were 92 cents. As we anticipated, our reported earnings improved for the third quarter. Most notably, our efficiency ratio improved to 57.2% compared to 58.8% for the linked quarter. We generated positive operating leverage, meaning revenues grew faster than expenses compared to the linked quarter. Our return on average stockholders' equity grew 31 basis points to 12.92%, while return on average assets increased five basis points to 1.45% compared to the linked quarter. We had our highest ever quarterly pre-tax, pre-provision net revenue as a percent of average assets which stood at 1.96%. Our net interest income was up 9% over the length quarter to 67.1 million with net interest margin at 4.17%. We continue to control our deposit cost, which was 16 basis points and only up two basis points compared to the length quarter. Rebase income also grew and was up 4% over the length quarter. This was our highest quarterly revenue ever reported. We also had improvements in our credit quality compared to the linked quarter end with reduction in both criticized and classified loans. Our allowance for credit losses grew by 1% compared to the linked quarter end. For the third quarter, we recorded a provision for credit losses of 1.8 million, which reduced diluted EPS by 5 cents for the quarter. Year-to-date, we have recorded a release of provision totaling $5.8 million, which has added $0.16 to diluted EPS. Most of the increase in our allowance for credit losses compared to the linked quarter was driven by deterioration in macroeconomic forecasts, which were partially offset by improvements in reserves for individually analyzed loans. Our allowance to credit losses comprised 1.15% of total loans at quarter end, compared to 1.14% at June 30, 2022, and 1.43% at year end. Moving on to our loan portfolio, excluding PPP loans, our loan balances increased by over $35 million, or 4% annualized, compared to the linked quarter end. Leading the growth this quarter was our consumer indirect loans, which were up 29 million, or 21% annualized. Our commercial and industrial loan balances increased by 19 million, which is net of an $11 million decline in PPP balances due to forgiveness received during the quarter. Our remaining balances of PPP loans stood at 4 million at the end of September, so these loans should have little impact going forward. premium finance loans were up $15 million, while our construction loans grew $13 million. At the same time, our commercial real estate portfolio declined over $36 million and partially offset our other loan growth for the quarter. We have had strong production levels for new loan originations as we had anticipated. We continue to focus on strong credit quality and some of the reductions in our loan portfolio reflect our effort to maintain high credit standards. From a credit quality perspective, we have improved metrics compared to the linked quarter end. The biggest improvement was reduction of both our criticized and classified loans compared to linked quarter end. Our criticized loans declined nearly 17 million, or 9%, compared to linked quarter end. This was driven by $18 million in paydowns and $7 million in upgrades, which were net of $10 million in downgrades, half of which was due to two commercial and industrial relationships. At the same time, our classified loans decreased $21 million, or 18%, and was mostly due to the upgrade of a $12 million hospitality relationship from substandard to special mention and the payoff of three larger commercial relationships that were acquired. Compared to September 30, 2021, our criticized and classified loans were down $70 million, or 30%, and $48 million, or 33%, respectively. Our non-performing loans also declined compared to the linked quarter end due to reductions in our non-accrual loans of nearly $2 million, which were partially offset by increases in loans 90-plus days past due and accruing. A portion of our loan portfolio, considered current, stood at 98.9%, which was an improvement from 98.8% for the linked quarter end and year end. Our quarterly annualized net charge-off rate was 15 basis points for the third quarter and first nine months of 2022. Compared to the linked quarter, prior year quarter, and first nine months of 2021, Our net charge-off rates are relatively consistent. For the past six years, our quarterly net charge-off rate has averaged 12 basis points. We are confident in our credit quality for future periods, but we are keeping a close eye on the impact of high interest rates and economic conditions. We remain disciplined from a credit perspective and will not compromise credit standards for loan growth. I will now turn the call over to Katie for additional details about our financial performance.

Thank you, Chuck. For the third quarter, our net interest income grew 9% compared to the linked quarter, and our net interest margin expanded to 4.17%, up 33 basis points from the linked quarter. Our loan yields continued to be positively impacted by the higher interest rate environment, and were up 33 basis points from the linked quarter. At the same time, our investment yields grew by 17 basis points, Our funding costs rose two basis points compared to the linked quarter, and we continued to control our deposit costs, which were relatively flat, while also responding to competition for deposit balances. Accretion income net of amortization expense from acquisitions declined to $2.8 million compared to $3.9 million for the linked quarter, adding 16 basis points and 25 basis points respectively, to net interest margin. PPP income has been nominal in recent periods and only added one basis point to net interest margin for the quarter. Compared to the prior year quarter, net interest income grew 57% and net interest margin expanded 67 basis points. The improvement continued to be driven by our acquisitions, core growth, and increases in market interest rates. Loan yields expanded by 71 basis points, and we controlled our deposit costs, which were down five basis points. Our increased borrowing costs were due to the acquired Vantage borrowings, coupled with the recent rise in market interest rates. Our net interest income and margin grew 55% and 40 basis points, respectively, through the first nine months of 2022 compared to 2021. The majority of the increase was driven by the Premier and Vantage mergers, coupled with higher market interest rates during 2022. Our reported efficiency ratio improved to 57.2% for the third quarter, compared to 58.8% for the linked quarter, and 94.7% for the prior year quarter. On a year-to-date basis, our efficiency ratio improved to 60.7% from 78.4% in 2021. When adjusted for non-core expenses, our efficiency ratio was 56.6%, a sizable improvement over 58% for the linked quarter and 63.9% for the prior year quarter. Year-to-date, the adjusted efficiency ratio improved to 59.6% compared to 64.3% for 2021. We are very pleased by how quickly we have been able to lower our efficiency ratio, which has been a main focus for us this year. Compared to the linked quarter, our fee-based income grew 4%. Other non-interest income grew $1.2 million, which was due to the additional fee-based income from the leasing businesses. Deposit account service charges were up mostly because of customer activity. At the same time, our trusted investments Electronic banking and bank-owned life insurance income declined. The decrease in our trust and investment income was primarily due to lower market values of trust and investment assets managed, which were not able to be offset by the new accounts we have added. Our lower bank-owned life insurance income was driven by a one-time death benefit we recognized during the link quarter, about half of which was offset by the additional policies we purchased last quarter. Compared to the prior year quarter, our fee-based income was up 21%. Other non-interest income contributed a large portion of the growth and was up because of the fee-based income from the leasing businesses. Deposit account service charges also experienced a significant increase and were up 50%, while electronic banking income increased 22%. Both of these items grew as a result of the acquired Premier accounts coupled with increased customer activity in recent periods. Other growth in fee-based income was within insurance, bank-owned life insurance, and swap fee income. As we noted last quarter, we purchased an additional $30 million in bank-owned life insurance during the linked quarter, which contributed to the increase. Through the first nine months of 2022, fee-based income was up 19% compared to the prior year. Other non-interest income grew $2.5 million, which was primarily due to fee-based income from the leasing businesses. Deposit account service charges were up 64%, followed by electronic banking income, and served as the main contributors for the growth. We had increases in all other categories with the exception of mortgage banking income, which was directly related to the higher interest rate environment during 2022 compared to 2021, driving down demand from customers. Moving on to our total non-interest expense, we had a 5% increase compared to the leaked quarter. Professional fees, marketing expense, and data processing and software expense experienced the largest increases. Our professional fees grew as we have engaged third parties to help create efficiencies and implement new software in an effort to support enhanced processes of our operational teams. We also recorded $339,000 of acquisition-related expenses during the quarter. Our FEIC insurance premiums declined, coupled with lower electronic banking expense and amortization of other intangible assets. Compared to the prior year quarter, our total non-interest expense declined 10%. Decrease was largely due to the acquisition-related expenses associated with Premier, which totaled $16.2 million for the third quarter of 2021. We had increases in nearly all categories of expense, excluding acquisition related expenses, which reflected our recent growth through acquisition. Our professional fees declined $3.6 million compared to the third quarter of 2021, which had been driven by acquisition related expenses last year. For the first nine months of 2022, total non-interest expense grew 13% compared to 2021. This increase was mainly due to the growth in our size and footprint over the last year, driven by acquisitions. From a balance sheet perspective, we were able to deploy a large portion of our cash and shrink our investment portfolio and total balance sheet compared to the linked quarter end. We utilized the proceeds to fund our loan growth while also paying down a portion of our short-term borrowings. our deposits declined 1% compared to the linked quarter end. More than half of the reduction was in retail CDs, with decreases in both money markets and non-interest bearing deposits being partially offset by higher interest bearing checking and governmental deposit accounts. In looking forward to year end, I would note that we typically experience some seasonal declines in our governmental deposit balances during the fourth quarter of each year. From a capital perspective, our regulatory capital ratios continued to improve compared to the linked quarter end. At September 30, 2022, our common equity Tier 1 capital ratio was 11.8%, our total risk-based capital ratio was 13%, and our Tier 1 leverage ratio was 8.6%. Our tangible equity to tangible asset ratio declined slightly to 6.5% from 6.6% at the linked quarter end. During 2022, improvements in this ratio from higher earnings have been more than offset by increased unrealized losses on our available for sale investment portfolio, which stems from the higher market interest rate environment. While we are monitoring this decline and continually considering our investment options, we do not expect this to be a permanent impact on our ratio. Our unrealized losses on the available for sale investment portfolio grew $42 million resulting in a reduction to our stockholders' equity during the third quarter of 2022. Compared to year end, this decline was $123 million. Our tangible book value, if you exclude the accumulated other comprehensive losses, grew at an 11% annualized rate compared to the linked quarter end. I will now turn the call back to Chuck for additional comments.