Good morning, and welcome to the Peoples 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. [Operator Instructions] 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 detailed in the Peoples 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 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 third quarter 2022 earnings release was issued this morning and is available at peoplesbancorp.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 peoplesbancorp.com in the Investor Relations section for one 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, Matt. Good morning and we appreciate you joining our call today. Earlier this morning, we announced the merger of Limestone Bancorp 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. I would like to highlight our results issued this morning. With the third quarter, we reported an increase in our net income, which totaled $26 million, while our diluted earnings per share were $0.92. 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 5 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 linked 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 2 basis points compared to the linked quarter. Fee-based income also grew and was up 4% over the linked quarter. This was our highest quarterly revenue ever reported. We also had improvements in…

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 continue 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 continue 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.…

Thank you, Katie. The Limestone merger will move us into key markets within Kentucky. Louisville is the ninth largest manufacturing city in the United States, and the Limestone footprint covers some other high-profile Kentucky markets including Lexington, Frankfurt and Owensboro. The merger will put our organization at six in terms of Kentucky deposit market share among community banks. The culture and credit profile of Limestone is very similar to ours, which makes us even more attractive. They have topnotch talent with a knowledgeable management team that has a great mix of big bank and community bank experience. We think the partnership and the integration between our associates and the Limestone associates will be seamless. Our diversified product and service suite including a higher lending capacity will benefit the Limestone clients. This merger will also give our current clients more locations to more easily service their needs. We look forward to partnering with the Limestone associates to deliver high quality customer service, while also providing a topnotch workplace. This deal is estimated to be valued at $210 million and consideration is 100% stock with a 0.9 fixed exchange ratio. As far as assumptions, we anticipate realizing 30% cost savings associated with this transaction, 75% of which will be realized in 2023 and 100% realized in 2024. Based on our pro-forma, we expect these savings to drive continued improvement in our efficiency ratio. We have completed a lot of work as far as projected fair values on the loans and deposit portfolios. Our pro-formas included in the investor deck we published this morning are inclusive of marks on the loans, investments and borrowing portfolios, which also illustrate the core deposit intangible, which is up heavily at 3.6% due to the current rate environment. We have also sensitized these marks to account for…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Brendan Nosal with Piper Sandler. Please go ahead.

Hi, good morning, Chuck and Katie. How are you guys?

Good morning, Brendan.

How are you doing?

Perfect. Maybe to start off, could you offer us a little bit of background on how the Limestone deal came about and thoughts on why now is the right time just given how the market is perceiving bank deals today just due to these heavy area remarks?

Yes. So we've been talking to Limestone for many years. We have been very interested in joining - getting more in central Kentucky, Louisville, Lexington, Frankfurt, et cetera. Obviously, as time has gone by, several of the targets have disappeared. So there is a scarcity value, I think from the Limestone perspective. They have had conversations with different institutions and thought we were the right partner for the long term, which we're very, very grateful. As far as timing, to me, it's a very, very good deal and very strategically important deal. And right now, we were the obvious buyer for them. There are other banks that have been acquiring banks in the area that are tied up right now and waiting, this may not have been there. So we saw the scarcity value. I think we paid a respectable price. I think earn back is reasonable. And we are tremendously excited about the future. We have a lot of capabilities, investments, insurance, leasing, indirect, larger lending limits. We're just going to bring a lot to the market, to their customers. They have a great team of people. They're a great mix of community banks within, we use the term big bank refugees, but they have a lot of people with lot of large institution, capability and we just think there's tremendous upside.

All right. Fantastic. That's helpful color. And then maybe moving on, can you just walk us through a lot of the work that Limestone has done in recent years to rectify the credit issues they experienced kind of during and in the aftermath of the last downturn and then your overall comfort with their book in credit quality today?

First of all, I think Limestone has done an extraordinary job, all of the folks who have been working on it. We're not associated with the issues that they had. Those are very talented, very skilled capability. The quality of their credit portfolios very much mimics the quality of our credit portfolios. So we have no concern about their credit. I think that's indicated in the credit mark on the deal.

All right. Fantastic. Thanks for taking the questions.

Thank you.

Thanks, Brendan.

Our next question will come from Tim Switzer with KBW. Please go ahead.

Hi, there. Thanks for taking my question.

Good morning.

Good morning.

Good morning. I guess my first question is if you could just give us a little bit of background on the 30% cost savings, where you expect a lot of that to be coming from? And on the systems conversion, when that will occur and if they have the same system as you guys as well?

They do not have the same system. We're on FIS, they're on Jack Henry. We expect the system conversion to happen first weekend in August. We expect the deal to close in the second quarter. The savings will come, kind of a combination of systems and labor.

Okay. Great. And then, on any revenue synergies that you guys are maybe hoping to achieve? I know you talked about possible cross selling and then the higher lending ability there. Could you talk about that and the opportunities you see?

Well, first off, none of the revenue synergies are in anything that we modeled. We think that we'll have a similar experience to what we're having in the Premier, Citizen acquisition that we did last year where we're having hundreds of thousands of dollars of fee income from trust and investments. We are doing a lot more indirect lending in that marketplace than we were doing previously, beginning to evidentially introduce some leasing opportunities. So we've got a really robust retirement plan offerings. So this is a tremendous upside and the lending capacity that we bring will be helpful. But I think that it will be more just bread and butter $5 million, $10 million, $15 million customers, but we can obviously do much more than that if we need to.

Okay. Great. The last question I had is, it's really helpful giving us a range for the NIM in 2023, but could you talk a little bit about the, I guess, the path of getting there? Would you expect some NIM expansion more at the front end of, say, the end of this year and next year? And then, Kate, deposit repricing catch up when you see maybe NIM compression at the end of next year. I just want to know how you're thinking about that?

Yes. Sure. I'll take this one. So I think you're right. I think we do expect some more expansion in margin in the fourth quarter. I think we are expecting some rate increases next week and end of December. And then, there's a couple of factors at play. So the rate increases, I think we do expect some deposit cost increases. But then, if you recall, we have a mix shift on our balance sheet going on. So early this year, we put some fund, some cash in to work in the investment portfolio, but then also within our lending portfolio, we have the leases that are decently higher yielding than our core banking lending platforms provide, and so there're some stronger growth in those portfolios than what we would experience for the core bank. And so that mix shift is providing some expansion in that margin number as well.

I got you. So growth in the leasing portfolio might be able to offset some of the deposit repricing once a lot of the other asset yields have already repriced?

Correct.

And I would just add to that, that the value of our franchise is really in the quality of the deposit of book, relatively very low beta. I think you've seen some of that already. But I think you'll see more of that as the rates keep going up.

Yes. And I think you guys talked about a 25% deposit beta last quarter. Is that still a good number for you guys?

That's what we use in our model. That I would say it's not what we have been experiencing in '22 and we used that as the upper range and some projections we did. But I think that's a little higher than what we - definitely higher than what we've seen and what we expect to see at least in the next few quarters.

Got it. Understood. Thank you for taking all my questions.

Thank you.

Our next question will come from David Long with Raymond James. Please go ahead.

Good morning, Katie. Good morning, Chuck.

Good morning, David.

I wanted to follow up on the deposit discussion here. Maybe just quickly, you talked about the asset mix changing. Do you see the deposit mix changing over the course of the next few quarters, obviously excluding the acquisition?

No. I don't think we expect major shift. I think you'll see in the fourth quarter as we noted, is a seasonal low point for our governmental deposits. So they kind of peak in the March timeframe and in the September timeframe. And as you've probably - as you've seen in our numbers, we've had decent run off of our retail CDs. So excluding those two kind of the seasonality of the governmental deposits and then the run-off of the CDs, I don't think we expect much mix shift within the deposit portfolio from that - beyond that.

And I would add, 47% of the deposits are DDA, non-interest bearing and interest-bearing. That's a pretty high percentage. So I think you're going to see a more stable deposit base than normal.

Got you. Do you think that 47% sticks or can you see that - you'll see that coming down over the next several quarters?

No, I think it's fixed.

Got it. Okay. Cool. Thanks for the color. And then, I wanted to switch over to the acquisition and really just big picture with that transaction. Can you maybe talk about what you see in the Kentucky landscape from a competitive perspective and how that compares to your current footprint?

First of all, I think Ohio, West Virginia and Kentucky, right now, we're experiencing incredible capital investments. There are multiple multi-billion dollar investments going on in each state. And that is much more than what you've seen over the last 30 years. So I think that both seeing a renaissance driven by onshoring from a manufacturing standpoint. And you see the big national headlines, whether it's Intel or whether it's Ford's commitments to Kentucky on their battery plant. But there are so many more things going on. So we like - we like the Kentucky market place and we're very, very optimistic that there's going to be a positive upturn in both Kentucky, West Virginia and Ohio over the next few years.

Got it. Thanks for the color, Chuck. Thanks, again, Katie.

Thanks, David.

Thank you.

Our next question will come from Manuel Navas with D.A. Davidson. Please go ahead.

Hi. Good morning. This is actually [Cameron Sholgreen] on behalf of Manuel Navas. How are you both doing this morning?

We're good, Cameron.

We're good. How're you?

Doing well. Thank you. So sticking with the recent acquisition. Do you guys plan on seeing anymore in the upcoming future or what are your opportunities post this transaction in regards to M&A?

I think that we will take some time to digest this. We also are getting closer to $10 billion and we have no urgency to go over $10 billion. So this is certainly going to keep associated for 2023 and look forward to the benefits accruing.

Thank you. And then just one follow-up question regarding this specific acquisition. Do you expect to see any customer attrition or do you have that worked in anywhere?

You always see customer attrition in every deal that you do. Saying that you're going to retain 100% of all customers is a bit of a pipe dream, but we don't see any reason for there to be any significant customer attrition.

Thank you, both.

Thank you.

Thank you.

[Operator Instructions] Our next question will come from Terry McEvoy with Stephens. Please go ahead.

Hi. Thanks. Good morning, both.

Good morning.

Good morning.

Maybe just start with the - some of the lending in the third quarter. Maybe talk about what was behind the growth in C&I and Kate, I think you mentioned maybe some planned kind of slowing in certain areas just to manage credit risk and the one area that was down was leasing. So I didn't know if you were kind of pointing at that portfolio or something else. And if not, it sounds like your outlook for growth in the leasing portfolios, it's pretty optimistic based on some earlier comments.

Yes. I'll start on that. First off, we are optimistic on leasing and in fact have good growth in leasing and our expectation is that the leasing businesses will grow in the neighborhood of 20% next year. And we did have good C&I growth. And I would just say, it's kind of ongoing slower business over time. We also had really good indirect growth and the consumers continue to stay and look strong. And we didn't - October looks positive on the indirect front. Our pipelines are very robust. Our loan growth this year, if we had not selected some of - if we had not made some changes to existing credits for overall portfolio improvement, we would have had very robust loan growth. As it is, we're going to be in that 4% to 6% for the year, we think we're going to do a little better next year. And this portfolio that we're acquiring is significantly better than the portfolio we picked up with Premier and the Premier acquisition. So we are - we are optimistic.

And just a follow-up. The $4.40 to $4.60 margin for next year, what are your thoughts on accretion income within that outlook?

Yes. I think it stays in the range of what we saw for the third quarter. So, I think last quarter, I guided 15 to 20 basis points the quarter. I think it will stay in that range. It might dip down 13 basis points, 14 basis points. But I think around the 15 basis point impact on a quarterly basis.

Maybe one more. Could you talk about the - I think you referred to as - like enhanced efficiencies of your operational teams when you were citing the increase in professional fees, maybe. What parts of the company are you looking at? And how should we think about the potential positive kind of benefits from what you're evaluating internally?

Yes. I think it's a couple fold. It's in - again in the operational areas of credit and finance and just looking, and true operations, both loans and deposits, looking for automation, technology to support the growth. So it's not - growth is not as incremental to head count. We're not as dependent on head count going forward as we grow.

Right. Thank you, both. Appreciate it.

Thank you.

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

Yes, I'd like to thank everybody for joining us. I'd like to just reiterate that we feel extremely comfortable that we're going to beat the highest level of analyst estimates out there, and we'll do that without the help of Limestone. So if anybody needs help with their modeling, I encourage them to give Katie or I a call, and I'd love to help you see what we see. Again, thank you for joining us. Please remember that our earnings release and a webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time and have a great day.

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