Peoples Bancorp Inc.

Good morning and welcome to People's Bancorp, Inc's conference call. My name is Kate and I will be your conference facilitator. Today's call will cover discussion of the results of operations for the three and six months ended June 30th, 2023. 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. Questions will be taken in the order they are received. If you would like to withdraw from the question queue, 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 facts, are forward-looking statements and involve a number of risks and uncertainties detailed in people's securities and exchange commission 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 Disc claims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. People's second quarter 2023 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 25 to 30 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 Soloreski, President and Chief Executive Officer Tyler Wilcox, Chief Operating Officer, and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Soller-Rusty, you may begin your conference.

Thank you, Kate. Good morning, and thank you for joining our call today. Earlier this month, Peoples communicated my retirement in March of 2024, and Tyler Wilcox was announced as my successor. The Board completed a diligent succession process Tyler has done admirably in increasingly complex roles. For the last three years, he has been running all of our businesses. I am fully confident he can take us to even greater heights. Turning to our results, earnings were awesome for the quarter. They were impacted by one-time limestone acquisition-related expenses. They were also impacted by the provision for credit losses to establish the allowance for the acquired loans from limestone. Net income for the quarter totaled $21.1 million, and diluted earnings per share was $0.64. For the quarter, we recognized $10.7 million in acquisition-related expenses, which reduced diluted EPS by $0.25. We anticipate an additional $4 to $5 million in acquisition-related expenses during the third quarter when our conversion of the limestone systems is scheduled to take place. At the same time, we recorded higher provision for credit losses this quarter, specifically related to the limestone merger. We established the allowance for credit losses for the acquired loans that were not considered purchase credit deteriorated. This additional provision totaled $10 million, which negatively impacted diluted earnings per share by 23 cents. For the second quarter, some highlights of our performance included net interest income of 12 million, or 16%, compared to the linked quarter, fee-based income growth of 1.6 million, or 8%, compared to the linked quarter. Excluding non-core expenses, our adjusted efficiency ratio was 53.3%, a reduction from 57.2% for the linked quarter. Also excluding non-core expenses, we generated positive operating leverage compared to the linked quarter as total revenue growth outpaced total non-interest expense growth. As it relates to our credit quality, our allowance for credit losses was 1.02% of total loans at quarter end. We had an increase in our allowance related to the loans acquired in the limestone merger. The increase added around $11 million to the allowance this quarter. This was partially offset by reductions in the allowance from a release of nearly $2 million in individually analyzed loan reserves due to the related loans either being paid off or no longer meeting the criteria to be individually analyzed. We refreshed our loss drivers in our CECL model, which will last updated in 2021. and contributed to a $1 million reduction in our allowance. We also had a $1 million reduction in our allowance from improvements in the economic forecast. Nonperforming assets improved to 0.48% of total assets compared to 0.58% at March 31st. At the same time, our nonperforming assets declined to 0.7% of total loans in OREO at June 30th compared to 0.9% at the linked quarter end. A portion of our loan portfolio considered current at quarter end was 99%, an improvement from 98.8% at March 31st. Our quarterly annualized net charge off rate was nine basis points for the second quarter, an improvement from 13 basis points for the first quarter. Our growth charge-offs were relatively similar between the periods, but we had a net recovery in commercial and industrial loans during the quarter. Our classified loans improved to 1.88% of total loans, while our criticized loans declined to 3.7% compared to the linked quarter. We are continuing to actively monitor commercial office space, even though it is a very small portion of our loan portfolio. Our total outstanding balance was $120 million at quarter end and represented 2% of our total loan portfolio. The top 10 borrowers represented 55% of the outstanding commercial office-based loan portfolio. These top borrowers averaged $7.1 million in commitments and $6.6 million in outstanding balances. Our concentration mix has shifted modestly since the acquisition of the limestone loan portfolio. We have seen an increase in exposure within construction, retail facilities, and hospitality following the limestone merger. Construction and land development has been an area of growth with $443 million in outstanding balances on $775 million in total commitments at quarter close. Land development remains a small percentage of the portfolio, reported at $101 million, or 1.7% of total loans at quarter end. Multifamily balances have grown from $235 million at the end of the first quarter to $406 million at the end of the second quarter. At June 30th, 21% of the total outstanding balances in our multifamily portfolio were located within central Ohio. Our top 10 multifamily loans account for 26% of the funded multifamily portfolio. These projects are located within growth markets with strong metrics and notable guarantor support. We continue to see no major problems with our construction projects. While there has been an occasional permitting or construction delay, these projects have largely been leasing up at the desired speeds, with most of them at rents higher than projected in the initial pro formas. Hospitality balances increased from 125 million to 201 million for the second quarter and compromised 3.36% of the total loan portfolio. The growth in balances was due to the limestone merger. We do not plan to increase our hotel exposure as a percentage of total loans in a meaningful way, and will continue to be highly selective within the industry. Our market diversification is now extended within the portfolio as these hotels are primarily located in metropolitan areas driven by Columbus and Cincinnati and Ohio with additional exposure now in the Lexington and Louisville, Kentucky market. The top 10 borrowers represent 49% of the hospitality portfolio and the top 10 hospitality exposures ranged from $8 million to $14 million in deal size. At quarter end, the weighted average loan-to-value of the hospitality portfolio was 62%. Occupancy trends within the portfolio remain above its market competitors, with trailing 12 and trailing three-month occupancy reported at 76% and 75%, respectively. In addition, for the majority of the projects, we have notable sponsor support, including liquidity and net worth. At quarter end, our loan balances included $1.1 billion related to loans acquired from Limestone. Excluding Limestone, acquired balances, our organic loan portfolio grew $146 million, or 12% annualized compared to the linked quarter. Growth was led by our construction loans, which were up $71 million. We also had increases in commercial and industrial loans, which grew $25 million or 6% annualized. Our commercial real estate loans also increased $23 million or 23% on an annualized basis. Compared to the linked quarter, lease balances grew $23 million or 26% on an annualized basis. At quarter end, our commercial real estate loans comprised 35% of total loans, over a third of which were owner-occupied, while consumer loans were 30%, commercial and industrial loans were 19%, specialty finance totaled 9%, and construction loans were 7%. At June 30th, 55% of our total loans was fixed rate, and the remaining 45% at a variable rate. In its debut performance, I will now turn the call over to Tyler for further details about our quarter and the limestone merger.

Thanks, Chuck. I appreciate the introduction and the time everyone has given to listen in to our call. Our future is bright, and I'm excited about the opportunity. I've spent many years learning all aspects of our businesses, understanding our clients, associates, and communities' needs, and what ultimately benefits our shareholders. We will continue to leverage our strengths into the future while focusing on our culture, relationships with clients, being a top employer, and providing above average financial performance. One of the most important aspects of our business is having a diversified revenue stream, of which our fee-based income is an integral part. Compared to the linked quarter, our fee-based income grew 8%. We more than offset the decline from the annual performance-based insurance commissions of $1.5 million recognized during the first quarter. The drivers of the increase compared to the linked quarter were higher electronic banking income and deposit account service charge income, which benefited from our limestone merger, along with increased trust and investment income. Compared to the prior year quarter, our fee-based income was up 17%, and on a year-to-date basis, increased 11%. The growth was attributable to higher income in nearly all categories of fee-based income, which also benefited from our limestone merger and Vantage acquisition. Moving on to our deposit book, the higher rate environment continues to show the significant value of our deposit base. We are focused on maintaining low deposit costs while also retaining as much of our deposit balances as possible. Compared to the linked quarter end, our total deposit balances grew 1.2 billion and was driven by the deposits acquired in the limestone merger. Our total deposits excluding brokered CDs increased 885 million, mostly due to the limestone merger. Excluding limestone acquired deposits and brokered CDs, our total deposits declined 141 million, or 3% compared to the linked quarter end. This included our seasonal reduction in governmental deposits which were down 50 million or 6% compared to March 31st. We had a decrease in non-interest bearing deposits of 134 million, which was more than offset by an increase of 139 million in retail CDs for the quarter. Additionally, savings and interest bearing demand accounts declined 60 million and 41 million respectively. As we mentioned before, Our deposits had been inflated in recent periods due to COVID, so some of this shift was expected. On a quarterly basis, excluding acquired deposits and brokered CDs, we have performed better in terms of deposit declines compared to national trends in commercial bank deposits since the second quarter of 2022. At the same time, we have increased our deposit rates to be more competitive and retain deposit balances. Our demand deposits comprised 42% of total deposits at June 30th, compared to 46% in March 31st. At quarter end, our deposit composition included 78% in retail deposit balances, which is comprised of consumers and small businesses, and 22% in commercial deposit balances. Our average customer deposit relationship was $29,000 at June 30th. Moving on to our recent merger, we are benefiting from the impact of Limestone both financially and operationally. As of the close of business on April 30th, we completed the merger and the results we presented for the quarter are inclusive of Limestone. We will convert the Limestone core system to our system the first weekend in August. We have confidence that this will be a successful transition and will give additional functionality to our new clients. A little later on, Katie will provide more details regarding the limestone merger and purchase accounting. As Chuck mentioned during our last call, we're working diligently to prepare to pass the $10 billion asset mark and are taking a disciplined approach. We realize that there are many areas that are impacted once this threshold is crossed, including regulatory and compliance. We have worked with specialists to address the changes needed to prepare for this transition. We have also put in place the technology infrastructure, and associates to make this a successful endeavor. We are adding new email, calendar, and meeting software, which will give our associates some of the newest technology available. We are also working to implement a new customer relationship management software, which will link to our other systems and will enable a more seamless data-driven approach with our clients and partners within our businesses. At the same time, we are focused on fully absorbing limestone and we are in no hurry to grow through another bank acquisition. I look forward to the opportunity to lead our organization into the future. Constant improvement and learning is a part of our culture, which we will continue to stress in order to further improve our performance. I appreciate Chuck and his mentorship over the years, and I'm excited about our continued success. And I'm grateful to the fine team of professionals like Katie that I will get to partner with. Next up is Katie, who will cover additional financial metrics for the quarter.