Peoples Bancorp Inc.

Good morning and welcome to the People's Band Incorporated conference call. My name is Danielle and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter ended March 31st, 2024. 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 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 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 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 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 disclaims any responsibility to update these forward-looking statements after this call, except as be required by applicable legal requirements. People's first quarter 2024 earnings release was issued this morning and is available at peoplesbandcorp.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 included at the end of the earnings release. This call will include about 15 to 20 minutes of prepared commentary, followed by a question and answer session, 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 Tyler Wilcox, President and Chief Executive Officer, and Katie Bailey, Chief Financial Officer and Treasurer. and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Thank you, Danielle. Good morning, everyone, and thanks for joining our call today. I want to start off by thanking Chuck Solarisky for his service over his 13-year tenure with the bank as he retired effective March 31st. Chuck was instrumental in moving us into the future, cleaning up our credit quality after the Great Recession, driving shareholder value through improved performance, both organically and through acquisitions, advancing our technology to match that of our largest competitors, and probably the most important part of his legacy, leaving behind a culture that promotes the well-being of associates, which creates a better customer experience and focuses on giving back to our communities in a meaningful way. Thanks, Chuck, for everything you've done. Moving on to our first quarter performance, Earlier this morning, we reported earnings of $29.6 million, while our diluted earnings per share were 84 cents compared to 96 cents for the linked quarter. As we noted in our last quarter, we have annual expenses that we recognized during the first quarter of each year, which included employer contributions to health savings accounts and stock-based compensation expense for certain retirement-eligible employees. These additional costs totaled $2.6 million and negatively impacted diluted EPS by six cents for the first quarter. We had many positives for the quarter and are pleased with our results. Our net interest margin compressed only five basis points compared to the linked quarter, excluding the impact of accretion income from acquisitions. We had stable fee-based income as annual performance-based insurance commissions offset declines in lease income. Our non-interest expense was down compared to the linked quarter, excluding the annual first quarter increases for stock-based compensation and employer contributions to health savings accounts. Our loan-to-deposit ratio declined to 84.7% compared to 86.1% at year-end. Deposit balances increased 2% compared to year-end and were largely driven by retail CD growth. Our tangible book value per share improved 23 cents and was $18.39 at quarter end. We announced an increase to our quarterly dividend for the ninth consecutive year, and we completed another $3 million share repurchase during the quarter. Moving on to our credit quality, our allowance for credit losses grew to 1.05% of total loans at quarter end. The increase in our allowance was driven by moderate deterioration in the macroeconomic conditions in our CECL model, higher reserves on our individually analyzed loan portfolio, and loan growth. Our net charge-off rate for the quarter declined slightly compared to the last quarter and was 22 basis points annualized for the first quarter. While consumer indirect and leasing net charge-off trends are elevated compared to prior year quarters, They are more consistent with historical pre-pandemic averages, and we remain satisfied with our risk-adjusted returns on these businesses. Non-performing assets grew to 50 basis points of total assets at quarter end compared to 43 basis points at year end. Most of the increase was related to higher non-accrual balances. The portion of our loan portfolio considered current at quarter end improved to 98.7% from 98.6% at year end. Criticized and classified loans both increased during the quarter and were driven by the downgrade of two acquired commercial and industrial loan relationships. We view our credit quality as a strength despite some specific downgrades this quarter. The collateral and guarantor support on the loans in question is strong and these relationships are not indicative of an overall trend in our commercial credit quality. Our portfolio strength is evidenced by the low delinquency rates this quarter. As far as loan concentrations, we continue to have no material exposure in commercial office space, hospitality, or assisted living. Our multifamily loans remain relatively unchanged from year end, as these loans stood at $522 million at quarter end, compared to $520 million at year end. As we have noted before, These properties are primarily located within growth markets with strong economic metrics and notable sponsor support. Compared to year end, our total loan portfolio grew $44 million, or 3% annualized. Most of the growth was driven by increases in our commercial real estate, premium finance, and commercial and industrial loan balances, which were up $112 million in total. This growth was partially offset by declines in construction loans, which were down $49 million, and our consumer direct and consumer indirect loans also combined for a $31 million decrease compared to the length quarter end. Part of the decline in loan balances was driven by the renewal cycles of acquired limestone loans that were paid off. At quarter end, our commercial real estate loans comprised 36% of total loans, nearly 40% of which were owner-occupied, while the remainder were investment real estate. At the same time, our total consumer loans, which include residential real estate and home equity lines of credit, were 28% of total loans. Commercial and industrial loans were 20%, specialty finance totaled 11%, and construction loans were 5%. At quarter end, 48% of our total loans were fixed rate, with the remaining 52% at a variable rate. I will now turn the call over to Katie for a discussion of our financial performance.

Thanks, Tyler. For the first quarter, our net interest income declined 2%, mostly due to lower accretion income, net of amortization expense from our acquisition. Improvements in loan and investment income offset higher deposit expense for the quarter. Our net interest margin was 4.27% for the first quarter compared to 4.44% for the linked quarter. The change in net interest margin was driven mostly by the decline in accretion income, which contributed 32 basis points to our margin this quarter compared to 45 basis points last quarter. For the fourth quarter, we had refinements in our fair value marks for limestone that contributed an additional seven basis points to margin. We continue to expect our accretion to normalize in the coming months as some of the initial noise around refinements to fair values and portfolio activity subsides. The small remaining decline in net interest margin compared to the linked quarter was mostly due to excess cash on hand during the quarter, which negatively impacted margin by six basis points. For liquidity purposes, we are holding cash on our balance sheet that we had previously were holding off balance sheet. We continue to run CD specials in the first quarter of 2024. We will evaluate our position and look for opportunities to lower our rates while keeping the duration of term on our retail CDs on the shorter end to retain flexibility. Moving on to our fee-based income, We were down 1% compared to the linked quarter, which is driven by declines in our lease and electronic banking income and partially offset by higher insurance income. We typically recognize higher insurance income in the first quarter of each year due to annual performance-based insurance commissions, which totaled $2.2 million compared to $1.5 million for the prior year quarter. As it relates to our non-interest expenses, they were up slightly compared to the linked quarter. However, when excluding the additional cost of $2.6 million related to employer contributions to health savings accounts and stock-based compensation expense for certain retirement eligible employees, our non-interest expenses were down compared to the linked quarter. Compared to the prior year quarter, non-interest expense grew 21% and was heavily impacted by the larger footprint and ongoing operating costs of the additional offices from Limestone. For the first quarter, our reported efficiency ratio was 58%, compared to 56% for the linked quarter. When adjusted for non-core expenses, our efficiency ratio was 58.1%, compared to 54.9% for the linked quarter. The increase was related to higher non-interest expense, mostly due to our additional annual first quarter expenses, coupled with lower net interest income due to declined accretion income. Moving on to our balance sheet, our investment securities portfolio to total assets was relatively stable compared to year-end, and was at 20.1% at March 31st. At the same time, our loan-to-deposit ratio declined to 84.7% from 86.1% at year end. We continue to have a healthy level of liquidity and have been holding more cash on our balance sheet in recent months. We mentioned last quarter that we utilized the Federal Reserve's Bank Term Funding Program And while additional funding has been restricted, we currently have $163 million outstanding that we anticipate holding until maturity in January of 2025, as long as rates continue to make this advantageous. From a deposit perspective, we grew our balances 2% from year end. We were able to increase our retail CDs by 16%, governmental deposits by 14%, and money markets by 11%. We implemented a deposit pricing strategy last year, utilizing short-term, higher-rate CD offerings for customers, which continued to bolster our CD balances into the first quarter. While we want to retain the deposits we have generated, we also want to control our deposit costs long-term. The increase in governmental deposits during the quarter was related to seasonal influxes of cash. Our demand deposits declined to 35% of total deposits at quarter end, compared to 38% at year end, and has been impacted by our retail CD growth in recent quarters. At quarter end, our deposit composition was 76% in retail deposit balances, which included small businesses, and 24% in commercial deposit balances. Our average retail customer deposit relationship was $24,000 at quarter end, while our median was $2,800. Moving on to our capital position, we are confident in the value of our stock and repurchased another $3 million of shares during the first quarter. Additionally, we remain confident in our performance and raised our quarterly dividend by a penny this morning, making this the ninth consecutive year of a dividend increase. Our 40-cent dividend represents a yield of 5.6% per share. At quarter end, our capital ratios remained strong. Our common equity Tier 1 capital ratio was 11.7%. Our total risk-based capital ratio was 13.4%, and our leverage ratio was 9.4%. Our tangible equity to tangible assets ratio improved to 7.4% compared to 7.3% at year-end due to increased retained earnings. This calculation has been negatively impacted in recent quarters by the excess cash we have been holding on our balance sheet. For several quarters, our accumulated other comprehensive losses have reduced this ratio, which stood at $109 million at quarter end. Our tangible book value per share grew to $18.39 at quarter end, compared to $18.16 at year end. Finally, I will turn the call over to Tyler for his closing comments.