Good morning, and welcome to the Peoples Bancorp Inc. Conference Call. My name is Ailey, 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 31, 2021. [Operator Instructions]. 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 Peoples' 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 Peoples' Securities and Exchange Commission's filings. Management believes these forward-looking statements made during the call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples' disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' Fourth Quarter 2021 Earnings release was issued this morning and is available at peoplesbancorp.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, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year. Participants in today's call will be Chuck Sulerzyski, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Thank you, Ailey. 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 Bancorp, 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 noninterest-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 Peoples. 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 $0.04 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,…

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 have 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 yields, while reducing net interest margin by 4 basis points. For the fourth quarter, accretion income, net of amortization expense from acquisitions added 9 basis points to net interest margin, while PPP income provided 7 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 6 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 portfolio. 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…

Thank you, Katie. I am more optimistic about our business now than I have been at any time during my nearly 11 years with Peoples'. Based on feedback both internally and externally, we are doing well servicing our clients, taking care of our communities and providing a top-notch workplace for our associates. Our success not only comes from our financial performance, but from the impact we make throughout our organization and helping our associates and making a meaningful contribution to our communities. We completed the biggest acquisition in our company's history during 2021 and also brought in a high-yielding experienced leasing business. We are benefiting from our acquisitions and already seeing success as we expand new services to our new clients. We've experienced teams in place who work well together to focus on doing what's best for our clients throughout our footprint. Our market teams are happy to share clients between lines of business, creating an active pipeline of referrals to grow, not only our banking income, but also our fee-based income. I would also like to note, as we customarily view that our first quarter expenses are generally higher due to a few expenses that are typically expect to recognize during the first quarter, which include employer contributions to health savings accounts, stock-based compensation expense for certain employees, higher payroll taxes and annual merit increases. We also recognized insurance contingent income annually during the first quarter of the year, which will benefit our fee-based income. As far as our performance for 2022, we gave some early guidance last quarter, which excluded non-core items, and I would like to refresh. We expect loan growth to be between 6% and 8% excluding PPP loans. We anticipate a stabilization in credit costs as the economy becomes less impacted by the pandemic. We…

[Operator Instructions]. Our first question today comes from Scott Siefers with Piper Sandler.

I was hoping we could start on the margin, either Chuck or Katie for your view, just maybe some of the nuance regarding how the margin advances from the fourth quarter's 3.36% up to that 3.50% to 3.60% range as the year progresses. What are you thinking on excess liquidity deployment, deposit betas, et cetera?

Sure. So I'll start with North Star Leasing, we commented in here. It had lower accretion income, which I think hit margin about 4 basis points from the third quarter to the fourth quarter. And that was some correction or some cleanup as we finalize the accounting as it relates to North Star. So I think we'll get some of that back. You can see the yields on a year-to-date basis, it's closer to the 18% in that portfolio versus the fourth quarter, we printed a little under 16%. I think next year, you can expect something closer to the yearly yield of 17% to 18% on that portfolio. And then on the cash deployment, again, we quoted 18 basis point impact in the fourth quarter for the excess liquidity cash. We had anticipated that cash would kind of go down quarter-to-quarter for the reasons we noted last quarter where our seasonal governmental deposits declined, and those did, but we saw significant growth in noninterest-bearing deposits. So assuming some of that cash does get deployed in the loan growth and potentially a little in the investment portfolio, but hopefully in the loan growth. That will help. And then some -- as we talked last quarter, asset mix shift. So we'll fund some of the loan growth, both in leasing and the other businesses with the investment portfolio. As we do strive to get that percentage right now. We're sitting at 24% of our assets are in investments. We'd like to get that closer to the range we've quoted before of 18% to 20%. So those are the big items.

Yes. That's great. Additionally, maybe a couple of other margin-related sort of cleanup questions. You have sort of good rule of thumb regarding how you would think of the margin or NII benefit for each 25 basis point hike from the Fed. And then the final one is I think last quarter, we were thinking maybe 10 to 15 basis points in purchase accounting accretion this year. Is that still round about of where you're thinking?

Sure. So I'll start with the 25 basis point hike. We quantify that on a pretax basis, that impact would be about $1.5 million on an annual basis. So again, the forecast is March will be the first time we see that. So we wouldn't get the full year benefit in '22, but we've got a large portion of that $1.5 million, I just quoted. And then -- sorry. Okay. And then as far as the purchase accounting accretion added 9 basis points in the fourth quarter, again, that was reduced a little bit by the North Star leasing adjustment that I noted. So I think the 10 basis point range is a fair estimate for that line as well.

Our next question comes from Tim Switzer with KBW.

If I could add one more on kind of the NII and NIM impacts that we were talking about. What is the kind of breakdown between floating rate and fixed rate among your earning asset portfolio across securities in the loan book?

On the loan portfolio, it's about 50-50. And on the investment portfolio, it's largely fixed.

Okay. Great. And then if we could move on to the Premier acquisition. You guys talked about how you've had some pretty good revenue opportunities, it sounds like across the different business lines, offering some new products. Can you talk about that a little bit? And I don't know if you're able to quantify anything yet, now that it's closed, but if you can just kind of talk about how it could maybe provide some upside to 2022?

Well, a couple of different thoughts just kind of go through the lines of business. On the retail operation, they did not provide home equity loans. I think we've already done over $0.5 million of home equity loans. And I think that number will grow as the employees become more comfortable with it. They didn't have insurance options, and they did not have investment options, in particular, the 401(k) plans and we have closed some of those already. And I think that will accelerate. Those are long lead times in terms of getting sales completed. So as the time goes on, we'll see more and more of that. And on Commercial, we are the largest McDonald's lender in the state of Ohio, and they really didn't have any of that opportunity in their footprint. Deal floor plan, which is a good business for us, is something that they did not have the capability out and we've already gotten a couple of those to the finish line. That plus the -- simply just the larger capacity where our health limit is $30 million. And theirs is -- was quite a bit less. And then finally, just the treasury management capabilities, our capabilities are much more robust and just kind of packaged into how we do the things that we do. So all of that is just upside gravy for us.

Our next question comes from Bryce Rowe with Hovde Group.

Maybe I wanted to follow up on the questions around NIM and asset sensitivity. One more for you, Katie, in terms of the disclosures there in the 10-Q. You noted what the impact would be from an increase by the Fed. What kind of deposit beta assumption do you have baked into that analysis?

Yes. Of course, it varies by products, but I would say, on average, it's about a 25%.

Okay. That's great. That's helpful. And then just around kind of deposit mix. And obviously, you all see seasonal flows from time to time with -- from the government deposits. Just curious how your -- how your product offering kind of stacks up, your pricing kind of stacks up, to retain deposits across the deposit portfolio? And do you kind of expect the same level of seasonal inflows that you generally see from the government side?

I think on the governmental side, we do expect the same seasonality. It ramps up, it will be at a high point in March and then again in September and it's kind of the low point is usually December 31.

Okay. Great. And then maybe one more on the guidance. I appreciate all the updates or the refresh that you've given here. The 14% to 16% increase in the noninterest income or the fees. Can you talk a little bit about maybe what's driving that? What line items within that fee income are driving that? That seems like a nice -- certainly a nice number ahead and would help drive earnings as we look forward.

Sure. So we saw some significant growth -- well, sizable growth in the fourth quarter. And again, we'll have Premier -- the Premier acquisition in there for the full year next year. So that will provide on almost 3 full quarters increment to what we had in 2021. So that's some growth both in the electronic banking line item you can think and then the deposit account service charge line as well. A couple of other things I'll note is, as it relates to the Commercial loan swap fee income that we recorded this year was pretty light for us given the environment. And so we expect some recovery in that line item and you can look at the past trends where we've been. It's been higher than what we saw this year. The other line or the other item I would note is just the leasing business that we acquired back in April. There is some opportunity there to get some fee income from that and we expect to see some growth there. Again, we'll have them for another quarter and their production continues to increase year-over-year.

Yes. The other thing that I would add to that is in '21, our investment business had fee growth over 20%. So our 14% to 16% may sound ambitious than it is. It's very much in the realm of possibility.

[Operator Instructions]. Our next question comes from Steve Moss with B. Riley Securities.

Maybe just -- I apologize if I missed it here, Chuck, but just on the loan growth guide of 6% to 8% for the year. It sounds like to me like a good chunk of that's going to be driven on the Commercial side. Just kind of if you could just go through the drivers underneath it there?

I think you're right, it will be heavily on the Commercial, including the leasing and the premium finance business during the course of the year. I think that the consumer side, I'm hopeful cooks up in the second half of the year, but I'm not counting on it at this point in time.

Okay. That's helpful. And then just in terms of maybe just looking at the bigger picture here. Now that you've closed a couple of deals this year. Just kind of curious as to what your thoughts are around doing a transaction this year and how -- what level of chatter you're hearing out there?

Well, when you say a transaction, are you -- explicitly a bank transaction or any transaction?

Your line of business.

Yes. I'm not dying to do a bank transaction. I'm up to see us do some insurance transactions, investment transactions, specialty finance transactions that would be more exciting. For me, we'd still like to digest the bank that we acquired. That being said, I wouldn't be surprised if some deal got announced this year, but I do not see us closing a deal -- a bank deal this year. And I would say the level of chatter is modest, it's -- relative to different points in time, but it is ongoing with certain institutions and I remain optimistic.

Our next question is a follow-up from Scott Siefers with Piper Sandler.

Just wanted to ask on loan growth, just to make sure I'm sort of squaring the circle directly. On the 6% to 8%, is that off the fourth quarter end-of-period base? And does that also sort of absorb the $60 million in loan sales? In other words, would reported -- or excuse me, would underlying growth be stronger than the 6% to 8%? Or is the 6% to 8% sort of exclusive of the loan sale?

Yes. That loan -- we're going from the end of the year balances and the loan sale is already out of the balances from that standpoint.

All right. Perfect. So that's just a clean totally sort of free and clear type number. That's good. And then, Chuck, I was hoping, I imagine it's sort of putting two and two together, I'm guessing there's some relationship. But there was another of your competitors that hired a team away from the legacy Premier. Maybe just a thought or two on sort of where you are in terms of sort of the lenders that legacy Premier sticking around, sort of where you are in terms of how you feel about the overall credit quality of that portfolio, et cetera?

Yes. I mean, obviously, when you do a deal, you hope that people stick, but that doesn't necessarily always happen. If we look at the portfolio and the things that we like about it and the things that we don't like about it, they had a greater concentration of hotels than we would like, in a lot of specialty real estate or single-purpose real estate that we're not particularly filled up. And they probably -- we put money out the door more on appraisal values than cash flows than we may be inclined to. So that's not stuff that we're comfortable doing, and it's probably better for us and better for them that the associates who are comfortable originating that business and grateful that they took our portfolio at par. I mean, anytime you can unload $60 million of assets, $52million of which is criticized and classified and to do so at par, that's a pretty good day. So we feel very good about the loan sale. We feel very good about the colleagues who are with us and what they can do. We feel very good about the associates that we're adding and we feel very good about the market opportunity in front of us. And as far as the credit quality outlook, as indicated earlier in comments, we got 1.5% reserve against the portfolio. And I think that, that is high. And I think you'll see that decrease over time. So we're very excited about the improvements in all of the credit metrics that we went through and we feel really good about it.

Our next question comes from Daniel Cardenas with Boenning and Scattergood.

So just kind of a quick follow-up on the loan sales. Is that kind of a one and done? Or should we expect additional sales going forward?

That's the first loan sale that we've done in the 11 years that I have been here. I -- if somebody wants to buy the $60 million, $52 million of which is criticized has been classified and at par, I do it again. Do I think that's likely? I don't. So I think we're probably done, but I'll never say never.

Excellent. All right. And then in terms of your loan growth outlook, I guess, more specifically, looking to see if there's any categories of loans that perhaps you're going to try to avoid over the near term as you grow that portfolio?

Well, I think we'll stick to our disciplines of what we've been doing. We're very heavily focused on C&I. Our CRE stuff is generally multifamily in good markets. We like some of the ancillary stuff that we've added like the McDonald's franchise business, that stuff that we like. The dealer floor plan, we're comfortable. I think that one of the things that distinguishes our portfolio is the diversification of asset classes. And obviously, we've bolted on the premium finance and the leasing. So I think we're going to stay in the lanes that we're in and just try to get bigger and better.

Okay. Good. Good. And then as I look at your capital levels, nice increase on a sequential quarter basis. What are your thoughts about capital deployment as we look forward?

Well, we obviously like the dividend, and we'll continue to support the dividend over time. We -- in terms of buybacks, we kind of look at the buyback as an acquisition and really focus on what the earn-back is. And at the current price, we're not comfortable buying back shares currently. And we remain focused on looking at acquisitions and we're happy to see all of the capital levels improving and the tangible book value per share increasing.

Okay. And just a reminder, what's left in your current buyback program?

I think it's about $20 million. I don't think -- we went out with a new plan last -- in January of last year, and we have not used anything under it.

Okay. Great. My other questions have been asked and answered.

At this time, there are no further questions. Sir, do you have any closing remarks?

Yes. I want to thank everyone for joining our call this morning. Please remember to root for the [indiscernible] this weekend. Please remember that our earnings release and webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time. I wish everyone good health, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.