Good morning and welcome to the Peoples Bancorp Inc.'s Conference call. My name is Anthony and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the Three and Nine Months Ended September 30, 2023. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [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 and future events. These statements are based on management's current expectations. Statements in this call, which are not historical facts are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission's filings. Management believes that the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' businesses 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 2023 earnings release was issued this morning and is available on peoplesbancorp.com under Investor Relations. 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 peoplesbancorp.com in the Investor Relations section for one year. Participants in today's call will be Chuck Sulerzyski, 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. Sulerzyski, you may begin your conference.

Thank you, Anthony. Good morning and thank you for joining our call today. We are starting to realize the benefits of our Limestone merger along with our strong organic growth, which is evidenced in our record earnings for the third quarter. Compared to the linked quarter, our net interest income grew 10% and our fee-based revenue increased 3%. Our return on average stockholder equity improved to 12.6% for the quarter, while our return on average tangible stockholder equity was 23%. Our return on average assets also increased to 1.44% for the third quarter. Our net charge-off levels remained low and were 15 basis points of average loans on an annualized basis. We had strong loan growth of $110 million or 7% annualized compared to the linked quarter end. We had increases in our deposit balances of $78 million compared to the linked quarter, which was mainly due to our successful campaign for retail CDs during the quarter. Our loan to deposit ratio stayed flat compared to the linked quarter at 86%. We generated positive operating leverage compared to the linked quarter, prior year quarter, and first nine months of 2022. Our earnings for the quarter totaled $31.9 million and increased 51% compared to the linked quarter and 23% from the prior year quarter. Diluted earnings per share were $0.90 and were negatively impacted by $0.15 of onetime cost during the third quarter, which included: Limestone acquisition related expenses of $4.4 million resulting in a $0.10 decrease in diluted EPS; a $2.4 million pension settlement charge associated with the final termination of our pension plan, which negatively impacted diluted EPS by $0.05. We will no longer be recognizing any future ongoing cost or settlement charges related to our pension plan as a result of this final termination. Moving on to our…

Thanks, Chuck. Our fee-based income improved 3% compared to the linked quarter, was 15% higher than the prior year quarter, and grew 13% compared to the first nine months of 2022. The increases were driven by the additional accounts from the Limestone merger, which resulted in higher deposit account service charge income compared to the linked quarter and prior year periods, as well as higher electronic banking income compared to the prior year periods. Our insurance income has increased considerably this year, mainly due to client acquisition efforts and hardening insurance markets. We also recorded a debt benefit associated with our bank owned life insurance during the third quarter of 2023, which totaled around $400,000. During the quarter, we recorded $1.3 million of operating lease income, which drove the increase in other non-interest income. At the same time, our lease income declined $1.8 million compared to the linked quarter as we recognized the unwind of a residual premium related to two leases from the Vantage acquisition, which paid off during the quarter. The residual premiums were a result of the fair values associated with the acquisition accounting for the Vantage acquisition. Moving on to our deposit book, we increased our deposit balances by $78 million compared to the linked quarter end. Our retail CDs grew $248 million as a result of our recent campaigns, which more than offset the decline in our non-interest bearing deposits. We typically have seasonal increases in our governmental deposits during the third quarter of each year, which contributed to growth of $56 million. As we mentioned last quarter, we have utilized brokered CDs in recent periods as a funding mechanism as it provides us with a lower funding cost than the FHLB borrowings we might otherwise use, and the brokered CDs do not require us…

Thanks, Tyler. Our net interest income continues to grow as we benefited from a full quarter of the Limestone merger, organic growth, high market interest rates and our controlled funding costs. Compared to the linked quarter, net interest income was up 10% and net interest margin expanded 16 basis points to 4.70%. During the quarter, our net interest income and margin increased as we refined the fair value marks from our Limestone merger and related accretion income, net of amortization expense. This resulted in an additional $1.9 million in accretion income from May and June being recognized during the third quarter of 2023. For the third quarter, accretion income totaled $9.8 million and positively impacted our net interest margin by 49 basis points. A higher accretion income for the quarter benefited our loan yields and helped offset increases in our funding costs. As Tyler mentioned, we had retail CD growth from our recently advertised specials. However, we controlled the rates we offered and held the increase in our funding costs relatively low for the quarter. Our total deposit cost was 128 basis points for the third quarter, compared to 87 basis points for the linked quarter. Excluding brokered deposits, our total deposit cost for the quarter was 94 basis points compared to 63 basis points for the linked quarter. Compared to the prior year quarter, our net interest income grew 39%, while our net interest margin expanded 53 basis points. On a year-to-date basis, our net interest income increased 37% and margin grew 93 basis points. Since the beginning of 2022, the Federal Reserve has increased rates a total of 5.25% and over the same time period, our interest-bearing deposit rates have gone up 1.45% and are up 1.1% if you exclude brokered CDs. At the same time, our deposit…

Thank you, Katie. We continue to have strong earnings, asset quality and many other positive metrics compared to prior periods. We believe in our business model and work hard to execute our strategic initiatives daily. We have consistently mentioned how we are positioning ourselves to cross $10 billion in assets. We are making many investments in systems, associates, and processes in order to have a successful transition. Along those lines, we have hired senior talent that will allow us to execute our plan. As far as the cost, we estimate that we have already incurred more of that expense at this point than we have left to pick up. We continue to make investments in our systems in order to have best-in-class systems. These include the current process of implementing a new customer relationship system and replacing our e-mail and communications software with Microsoft. Moving on to our expectations for the full year of 2023, excluding acquisition-related expenses, we anticipate our net interest income and margin will experience some compression in the fourth quarter compared to the third quarter, but we still believe it'll be between 4.5% and 4.7% for the full year. Excluding the acquired Limestone loans, we believe our annual organic loan growth will be between 6% and 8%. We expect fee-based income percentage growth to be in the low to mid double digits compared to 2022. We are still anticipating a 22% to 24% increase in our total noninterest expenses for 2023, excluding acquisition-related expenses compared to the full year of 2022, which continues to assume we achieve our anticipated cost savings associated with Limestone merger. This assumes our fourth quarter noninterest expense is between $65 million and $67 million. We still expect our efficiency ratio excluding one-time expenses to be between 55% and 57% for the…

We will now begin the question and answer session. [Operator Instructions] Our first question will come from Daniel Tamayo with Raymond James. You may now go ahead.

Good morning, guys. Thanks for taking my questions. Maybe we start on the margin and particularly the loan yields, which remained very high. Obviously, you had the onetime benefit from accretion in the third quarter. But just curious if you think we're nearing a peak there? Or if not, kind of how that plays out assuming rates are relatively stable here over the next few quarters? And if you could just fill us in on your thoughts on accretion as well going forward?

I'll start with the yields and I'll have Katie talk about accretion. Our yields weighted average for the quarter were 8.5%. We think there's still some room to improve there, a little bit, but we're nearing the top. Your guess is as good as mine on rate increases. I wouldn't surprise me if there is another rate increase in the next quarter or two. But if there is, we'll see even higher yields.

Yes. And Daniel, as it relates to accretion, so as noted in the script and in the earnings release, there was a true-up in the third quarter, which $1.9 million of that should have been recorded in the second quarter, but we're using an estimate in the second quarter. And as we refine the purchase accounting, are finalizing some of those numbers. So, I would say as quoted in the script, it was 49 basis points of accretion was the benefit in the third quarter. If you take out that piece that related to the second quarter, it would have been closer to 40 basis points impact. And I think we can expect that 35 to 40 in the first quarter of benefit. If we go back to kind of day 1 purchase accounting for the Limestone acquisition, about 85% of our mark on loans was related to interest rates, and the other 15 related to credit. So again, the rate environment created a much bigger discount than we've seen in prior deals when rates were relatively low and stable. So we'll continue to see some higher accretion numbers as those loans continue to pay down. I would say we haven't seen a lot of payoffs in that portfolio. So much of that is just the normal accretion that we'll get on a quarterly basis as that portfolio matures and has principal payments.

And then I guess on the other side of the equation, the CD maturities that you have, just curious -- sorry, the CDs that you already have on the book, just curious maturities on those, if anything is going to be maturing in the next few quarters. I apologize if you mentioned that in the comments. And then not sure if you have any kind of overall thoughts on where the margin may end up next year as it kind of comes down from a high here?

Yes. So on the CDs, the specials, we've been running anywhere from kind of 7 to 14 months. So they will start to mature in the coming quarters, and we continue to remain active on our marketing efforts and price or yields on those. As it relates to margin going into the fourth quarter and into 2024, as we quoted, we do expect some compression in the fourth quarter and I think we expect it to kind of hit bottom there, but hold relatively stable from that point into the '24 period. So I think that we've quoted -- we guided to 2023 for the full year will be $4.50 to $4.60 or $4.70, and I think you'll see us a little south of that range for the '24 year.

Our next question will come from Terry McEvoy with Stephens.

Katie, maybe a question for you. Could you just talk about managing the size of the balance sheet? Will you continue to pay down short-term borrowings and are there additional actions within the securities portfolio for additional restructuring?

Yes. So as -- short-term borrowing is a function of loan growth and deposit flows. And so we'll continue to manage that on a daily basis as we have historically. On the investment securities, as we referenced in the script, we continually evaluate opportunities to restructure that portfolio. As you might recall, we did a meaningful amount in the first quarter and took a loss of about $2 million at that time, and to the extent there are securities which we experienced. That said, that gains, we will likely offset those to clean up some of the lower yielding securities and offset the loss there. We will continue to evaluate that trade. And when we look at that, we look at it from what is the loss we are willing to accept in the quarter as well as what is the payback on that and kind of locking in the payback somewhere between 1.5 years to 2 years is kind of where we range -- where we look at the range for the payback on that trade as it relates to the investment security restructuring option.

Thanks for that. And then just Limestone, I know this was touched on throughout the call, but are cost savings tracking in line with expectations, anything to comment on deposit or loan runoff? I think you said on the lending side that hasn't happened. And any maybe early comments on business synergies between some of the businesses and products that you bring to the table with those new customers?

Costs are tracking, probably slightly, maybe above where we expected them to be at this point in time. The loans as you indicated are where we thought they would be. Deposits coming back together, we may be in the beginning saw a little bit more run out than we would have. I'm not so sure if it's related to the deal or related to the market situation. And in terms of synergies, with the leasing and the investments and the insurance stuff, I think we see more each passing week as the newer associates become more familiar with what we do and how we do it.

Our next will come from Tim Switzer with KBW.

Hey, I'm on for Mike Perito. Thanks for taking my question. I wanted to ask a quick follow-up on the net interest margin and your guidance for it to be lower on a full year basis versus '23, and that makes sense given the compression we see. But passing in Q4, you guys are growing loans mid to high single-digits what’s I would assume a lot of help there from the leasing portfolio. Can you help quantify for us like how the NIM -- like the trajectory should look over the course of '24 assuming the Fed holds on to rates? Like how many basis points of expansion do you think we could see over the course of the year?

I mean from a quarterly basis, I think we could see 5 basis points to 10 basis points of expansion from beginning to end on a quarterly basis.

Like 5 basis points to 10 basis points each quarter?

No, I'd say more in total, so a few basis points each quarter.

I got you. Q4 over Q4. Okay. That's helpful. And let's say it's a scenario where the Fed cuts rates sometime next year, what -- if this is after deposit costs have settled out from the rate hikes, do you have an idea of kind of like the sensitivity of your balance sheet to that and what NII would look like in that scenario?

Yes, I would say we have positioned our balance sheet to be relatively neutral. We have taken much of the benefit from rising rates into our base case scenario and therefore have hedged on the lower side, predominantly through the investment securities portfolio and what we have put on over the last few quarters.

Okay. That's helpful. And what are like the economic assumptions you have for your loan growth expectations next year? And which categories should be the leaders and maybe what are the risks of not achieving that, given the macro environment?

Well, we will still see some growth in real estate as construction projects come to completion, but we will not see as much CRE volume of new business as we have been seeing. We do not see a slowdown in our C&I customers, so we expect to see good C&I growth. Auto will be -- we'll get a few percentage of growth out of it. The leasing businesses are seeing -- as is typical one, you see leasing businesses do better in higher rate environments or slower economic environments and we expect that to continue. We are very optimistic in the ability of our premium financed folks to have good, strong 20-plus percent growth. So it's really a lot of little actions across many different portfolios. We have some opportunities on things like a very large McDonald's franchise lender in the State of Ohio. We'll be able to do that in Kentucky with the acquisition. So a lot of granularity to the portfolio, which we think is great for origination and great for risk management.

[Operator Instructions] Our next question will come from Manuel Navas with D.A. Davidson. You may now go ahead.

Hey, good morning. Just to get on the -- with your NIM expectations next year, what do you kind of contemplate deposit costs going to, especially if the rate environment stays where they are? Just kind of what are your deposit beta assumptions with it?

Yes, I think historically we've set our deposit betas have run all inclusive, non-interest bearing and otherwise, about 25%. I don't think we have in our projections getting quite to that high, but we definitely have us getting pretty upwards of 18% to 20%.

What are the CDs coming on at, the kind of the promotional CD rate? And I apologize if you said it during the prepared comments.

Nope, no need to apologize. We didn't say it. Some of the tenors that we've put out there have a 5% handle.

Okay. Are you seeing -- and you're keeping it pretty short. Are you seeing most of the CD funding coming from current customers? Are you gaining some customers? How are you thinking about that just strategically?

Yes. We're seeing a fair amount of the production in CD specials coming from new clients. Somewhere between 40% and 45% I would say is kind of new money, and maybe -- I guess, maybe not always new clients, but new money to the institution.

And historically, you have pretty strong metrics that those turn into nice cross-sells and more permanent customers.

Yes, that is the strategy.

Can you walk me through the earn back on the securities transaction this quarter? It sounded like it was even a faster earn back than you kind of target usually? But it's within a year, right? Or did I misread it a little bit?

So what we did in Q1, so we sold -- I can't remember the volume, $70 million maybe. We saw that equated to about a loss of about $2 million. What we've said -- I guess it was closer to $97 million of balances we sold for about a $2 million loss in the first quarter, and what we stated at that time was that would pay back within the calendar year. So yes, it was less than a year payback on that strategy.

And you're willing to kind of play around up to 2 years if you see opportunities and the balance sheet needs it?

Correct. And we'll be confident that the securities would stick around for those 2 years to make that earn back hold true.

Leasing has been in really strong trends. Can you just focus in on that for a moment, just what are your expectations next year? You talked about with higher rates, more folks are interested in leasing. And also just kind of big picture, credit expectations there, just kind of a reset on expectations for that business?

We have 2 leasing companies. One is a small ticket lease, where the average ticket is about $50,000. The average yield of originations for those leases at this point in time are north of 19%. We see growth in that business. And the second one, which I'll talk about in the second, in the neighborhood of 20-plus percent. Obviously, at 19%, you are pricing in some room for charge-offs. For the last couple of years have been less than 1.5%. Those charge-offs may go as high as 3% to 4% over the next 24 months. But obviously, we're getting well compensated for that. The second leasing business is our Vantage business in Minnesota, the average ticket size there is about $270,000. They have an emphasis or a focus on technology. Many of their clients are publicly traded companies, well positioned school districts, some of the leading hospitals in the country. We expect -- we have had very little charge-off expectation with that business. We expect to have very little charge-off activity in the next 24 months. Their yields are currently on originations in the neighborhood of 9%.

And there's some seasonality here, right? Is there a seasonality towards the end of the year with those two businesses?

Seasonality, not -- yes, there's a little bit of seasonality, but not that much that it makes that much of a difference.

And I'm just making sure I confirm that, 19% yields and 9%, right?

Yes. More or less.

Our next question will come from Daniel Cardenas with Janney.

I may have missed this, I joined a little bit late here. But on your leasing income for the third quarter, I noticed a significant drop. Can you give us a little bit of color as to what drove that and what's the potential for a bounce back in leasing income in the fourth quarter?

Sure Dan. That relates to the purchase accounting related to the Vantage transaction that we did last year. They have residual values on their books and when we went through purchase accounting, we had to mark those as we have to mark the whole balance sheet to fair value. And so we had to put on a premium related to that portfolio. And as those come to term, we have to realize that premium against any gain that would otherwise be recorded. So that is what you see about $1.8 million -- $1.7 million, $1.8 million premium amortization in the third quarter. In prior quarters, it has not been that significant, but it is choppy on a quarterly basis, just given when those leases kind of come to term.

And then on the credit quality front, good to see some improvement in the nonperformers, but did notice that your 90 days past due were up a bit there. Can you give us some color as to where that was coming from categorically?

Yes, the majority of that is coming from this small ticket leasing business.

And then how are trends, how are watchlist trends looking for that business?

Look, the trends in delinquencies are increasing. The charge-off rate, we do expect it to increase. As I mentioned earlier, we've had multiple years with like 1.5% or less charge-off rates. Obviously, at a 19% yield, you're not going to get over a cycle 1% to 1.5% charge-off rates, and we're very comfortable. We frankly price that stuff to a 4.5% charge-off rate. We do not see ourselves getting near that 4.5% charge-off rate. But if it creeps up to the 2s and the 3s, we're perfectly comfortable with that.

And then on the lending front -- thank you for the guidance for 2024. Are there any areas that you're maybe tapping the brakes a little bit on in terms of growing those portfolios? And then how should we be thinking about your provision on a go forward basis?

How should we be thinking about our provision? We've never been a lover of hotels. We are acquisitive and we pick up hotels and we try to run -- tighten up that space a little bit. That being said, if somebody has built hotel that's cash flowing and good sponsors, we will certainly look at it, but it's not our favorite place to land. But for the most part we're open for business. We think we're benefiting from that. We're seeing some competitors having to pull back because of liquidity issues. At the 86% loan to deposit, we have room. So, we're hoping to see the benefits of that over 2024.

Yes. And as it relates to provision, I think, it's safe to assume that we'll follow what the forecast does. So that to the extent the forecast worsens, we will likely be building reserves. And otherwise, we'll just be reserving on the growth that the rates are kind of at, that you see on as it relates to the coverage ratio.

And then last question, I guess with competitors pulling back somewhat, is that being reflected in current yields?

I think it'll be more reflected in future yields than current yields. I don't think we've got a ton of books -- a ton of business on our books in the first three quarters from competitors pulling back. We tend to see more and more of that more recently. And I expect that, that will continue.

At this time, there are no further questions. Sir, do you have any closing remarks? End of Q&A:

Yes. I want to thank everybody for joining our call this morning. Please remember that our earnings release and the webcast of this call will be archived at peoplesbancorp.com under the Investor Relationship 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.