Good morning and welcome to the Peoples Bancorp’s Inc. Conference Call. My name is Gary and I will be your conference facilitator. Today’s call will cover a discussion of the results of operations for the quarterly and 6-month period ended June 30, 2022. [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 filings. Management believes the 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 maybe required by applicable legal requirements. Peoples’ second 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 this 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, Gary. Good morning and thank you for joining our call today. Earlier this morning, we announced net income of $24.9 million and diluted earnings per share of $0.88 for the second quarter. This is an improvement over the linked quarter and the prior year quarter. Our net income nearly doubled during the first half of 2022 compared to 2021, and our net income for the first half of 2022 was more than our net income for the full year of 2021. We benefited from our recent acquisitions and organic growth. We had positive operating leverage compared to the linked quarter, prior year quarter and first 6 months of 2021. Our net interest income was up 13% compared to the linked quarter and has benefited from the recent rise in market interest rates, coupled with the accretion income from the leases acquired from Vantage Financial. We controlled our total non-interest expense, which came in at the low end of the range we provided in our guidance from last quarter. Our reported efficiency ratio improved to 58.8%; this is our lowest in decades. Our reported return on average assets improved to 1.4% for the second quarter and the first half of 2022. Our pre-provision net revenue as a percent of total average assets improved to 1.8% annualized for the second quarter and 1.5% for the first half of 2022. Our reported return on average stockholders’ equity grew to 12.6% for the second quarter and was 12% for the first half of 2022. Our asset quality remained stable compared to the linked quarter and year-end. There were some onetime items reported within our results for the second quarter, which included acquisition-related expenses totaling $602,000, which reduced diluted EPS by $0.02 and the recognition of a death benefit of the cash surrender…

Thank you, Chuck. Our net interest income grew 13% compared to the linked quarter, and our net interest margin expanded 43 basis points. Our loan yields were positively impacted by accretion, which added 34 basis points, while the recent increase in market interest rates also positively impacted our loan yields compared to the linked quarter. Most of the increased yields are tied to our variable products repricing such as commercial loans and home equity lines of credit. Our deposit costs remained stable, and we continue to control these costs as closely as we can to remain competitive while responding to market forces. At the same time, our borrowing costs grew 57 basis points and were largely driven by the acquired long-term borrowings from Vantage. For the quarter, PPP income only added 2 basis points to net interest margin. Accretion income net of the amortization expense from acquisitions was $3.9 million compared to $2.7 million for the linked quarter, adding 25 basis points and 17 basis points, respectively, to margin. Our quarterly average cash balance continued to be inflated but has declined by nearly half compared to the linked quarter. Our large cash balances reduced net interest margin by 9 basis points for the quarter. Compared to the second quarter of 2021, net interest income grew 55% and net interest margin expanded 39 basis points. The improvement has been driven by our acquisitions, core growth, and the increases in market interest rates. Loan yields expanded by 44 basis points, while lease yields came down due to the Vantage acquisition having lower rates than our North Star Leasing portfolio. We continue to control our deposit costs, which decreased 15 basis points. At the same time, our borrowing costs grew 82 basis points and was driven by the acquired Vantage borrowings and the…

Thank you, Katie. As we move into the second half of the year, we will continue to focus on growing our business, including our recent acquisitions. The Premier acquisition continues to provide opportunities for growth, and our teams are actively working with our clients to expand the products and services available to them. During the quarter, we added two commercial bankers in Washington, D.C. market, which will help us expand our presence and capabilities within that market area. We recently acquired Vantage and expect to grow our leases at a higher rate relative to the size of our overall loan portfolio. We hope to gain additional referrals between lines of business on our recent insurance acquisition giving those clients a more diversified product suite. For the remainder of 2022, here are our current expectations: we expect loan growth between 4% and 6%, excluding PPP loans; we continue to anticipate stabilization in credit costs and believe that our annual gross charge-off rate, including leases, will likely return to a more historic level of between 20 to 30 basis points as a percent of the balances for the second half of 2022. From a net interest income perspective, if we get seven rate increases of 25 basis points, five of those being in the third quarter and the remainder in the fourth quarter, this would result in a benefit of approximately $3 million for the last half of the year. This amount does not include the increase we expect from the prior rate hikes this year, which will also benefit the last 6 months of the year. Fee-based income growth is expected to be between 12% and 16% compared to 2021, which includes the impact of the acquisition this year. We are maintaining our projected quarterly total non-interest expense guidance of between $50 million and $52 million, which includes the cost of Vantage and insurance acquisitions, and we are still on track to have an efficiency ratio below 60% for the full year of 2022. We expect our earnings over the next two quarters to be similar to this quarter. While we have had recent releases and provision for credit losses, we do not anticipate this will be the reason we achieved similar earnings in the last two quarters of the year. Given our share price and market conditions, we repurchased $6 million in shares during the second quarter of 2022. We will continue to evaluate our repurchase strategy in future quarters. This concludes our commentary, and we will open the call to questions. Once again, this is Chuck Sulerzyski and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator.

[Operator Instructions] Our first question is from Scott Siefers with Piper Sandler. Please go ahead.

Good morning, everybody. Thanks for taking the questions.

Hi, Scott.

Hey, I was hoping we could walk through the fee guide and the delta there. It seems kind of a substantial down shift from – I think you guys were saying 25% to 30% fee growth last quarter with the introduction of Vantage. So I just want to make sure what the sort of apples-to-apples comparison is if we’re thinking 12% to 16% growth there. And maybe just sort of the puts and takes, in other words, what’s going better and/or worse than maybe we thought 90 days or so ago at this time?

Sure, Scott, and I’ll take this one. So it is all predominantly related to Vantage. And as we noted on the call last time, there is residual assets associated with that, and as we work through the purchase accounting for that, that is what is impacting fee income. So historically, they would have recognized gains on the sale of residuals, but with purchase accounting, we have to mark that to fair value at acquisition date, and therefore, are not getting the fee income. But we are seeing it through the accretion on the net interest income side. So it’s a geographical switch from fee income to accretion income that you’re seeing there. And otherwise, the guidance we’re providing now is consistent with what we would have provided prior to Vantage.

Okay. So basically, the – I guess the revenue contribution from Vantage should still be the same, but geographically, it’s going into NII versus fees. Is that a fair presumption?

That’s right, Scott.

Okay. Perfect. And then the – so the 4% to 6% loan growth, that’s not a year-over-year expectation, is it? That’s simply from hereon now we would expect 4% to 6% sort of annualized growth rate. Is that correct read?

Yes. It’s from December to December.

Okay. So, basically, take the 4Q ‘21 end-of-period loan number, add 4% to 6% on, and that’s what we would be expecting total for the full year ‘22? Is that – is it as simple as that?

Yes.

Okay. Perfect. Alright. Good. Thank you very much.

Thank you.

Thanks Scott.

The next question is from Tim Switzer with KBW. Please go ahead.

Hi. Thanks for taking my questions.

Hi Tim.

So, the first one I had was also on loan growth. Just sort of with the economic uncertainty, I am curious on what you are hearing from your customers, particularly your commercial customers. Like, is there business confidence? Has that – are they a little bit more worried at all? Have you seen slowing investment, spending or anything like that, or do you expect that to occur maybe later in the year just because of the Fed tightening?

At this point in time, we really do not see any business slowing. In fact, to the contrary, in Ohio, in particular, 60% of our business is still based in Ohio, a little bit more than 60%. We see a lot of signs, real positive. You have heard about Intel, you saw Ford Motors investment, you saw the Chinese battery farm and those are just big companies with big, big names, but there are dozens and dozens of efforts across the geography, manufacturing related, bringing things back onshore. So, I actually am very optimistic about the environment that we are in for several quarters. And while you want to skew question towards commercial consumer from everything that we see in terms of automobile lending and home equity lending seems to be spending money big time. So, it may slow down, but I can’t tell you that we are seeing it or feeling it.

Okay. That’s good to hear. And it sounds like the pay-downs are really limiting some of the net growth you are getting. What – are you expecting that to moderate at all within your guidance over the next couple of quarters, or are you expecting that to remain pretty elevated from here?

I think you will see it elevated in the third quarter. I think we will return back to normal in the fourth quarter. That assumes that the deals that we know about happen in the timeframe that we anticipate. And they are not – these are not competitive situations. There are people getting permanent financing on real estate. It’s companies being sold. And in some cases, we continue to improve the portfolio. We have had about a $50 million reduction in hotels, and we will always have our credit quality for growth. And you can see what we did in terms of margin. We have the faster growth rates in the higher-margin products, and that allows us a lot of opportunity to continue to focus on credit quality and continue to focus on earnings growth.

Right. Okay. And since it’s a lot of people moving to permanent financing, it’s not like the higher rate environment is going to really slowdown the pay-downs. It’s more just you kind of got to work through the loans you have in there right now.

Yes. I would agree with that.

Okay. And the last question I had was on the NIM, it’s helpful giving us the – what you are expecting from the coming rate hikes. But what’s the impact that you estimate from the rate hikes you have already had? Like, what was in the Q2 NIM? And what do you think is the expansion in Q3 from more recent hikes?

Yes. I think there is a couple of factors that play in net interest margin from second quarter to third quarter. I think you are isolating just the rate benefit, and I think that could be 10 basis points to 15 basis points of what’s already been kind of captured in the rates that have been announced to-date as well as those that are forthcoming or expected to be forthcoming. But I would also note that there is some margin – we noted 2 basis points of margin impact from PPP. So, that’s swindling and will continue to do so but not having a major impact. Accretion income, I would say, was a little elevated in the second quarter. It will come down a few basis points. Our historical guidance was somewhere in the 15 basis points to 20 basis points a quarter. And so I think we will continue to be in that range. Again, second quarter was about 25 basis points. And then we did note, we – cash balances were still a little elevated in the second quarter. As we can deploy that, we will get some lift in margin there. So, those are kind of the puts and takes in total. But to answer just your question on the rate hikes, somewhere between 10 basis points to 15 basis points quarter-over-quarter.

Okay. You are saying there is 10 basis points to 15 basis points for the Q2 impact or that’s what you would expect in Q3 from the rate hikes we already have?

The lift from Q2 to Q3.

Okay. Perfect. Thank you, guys.

The next question is from Steve Moss with B. Riley Securities. Please go ahead.

Good morning everybody. This is Gates Schwarzmann, Steve’s associate. Happy talking with you guys. So, first question I have here is, just curious on some updated thoughts on growth around the leasing business now that you guys have fully integrated Vantage and Premier under the platform. Could you walk us through some of the expectations there and maybe the expected origination yields?

With North Star Leasing, we are expecting yields in the 16% to 18% range and the growth rates have been north of 20%. With Vantage, the yields are in the 11% to 13% range with similar type of growth rates.

Got it. Thank you. That helps. So, I guess my next question here is more so on the funding cost side of things. I have seen a lot of peers out there have been seeing deposit costs come in a little bit hotter, some higher deposit betas. I was curious, last quarter, you guys were modeling, call it, 25%. I am curious, do you guys think that still persists here? And just where are new funding costs rolling in these days?

Our deposits were 14 basis points in the fourth quarter – in the first quarter and 14 basis points in the second quarter. I think what we said last time is that we expect our deposit cost to go up 25 basis points for each 1% increase. But I think that we will probably be able to – that will start – I would say the first point or 2 points will probably be a little bit less than the 25 basis points.

Got it. That’s very helpful. And then – and I guess on the purchase accounting accretion here in the NIM – I am sorry, net income or interest income, I should say. I guess that, call it, $4 million that it was at last quarter, is that like a good run rate to think about it moving forward, or do you think that it decays a little bit from here?

No. I think it decays a little bit from here. I think second quarter was a little high. I think it will run somewhere around the $2 million, $2.5 million as opposed to the $4 million. I would say, $2.5 million is probably a good run rate for the remainder of this year.

Awesome. Very helpful. Thank you, guys.

Thank you.

[Operator Instructions] The next question is from Terry McEvoy with Stephens. Please go ahead.

Hi. Good morning.

Good morning Terry.

Good morning.

Maybe a question, could you just talk about pricing competition within the indirect consumer business and whether you are seeing any loosening of credit standards there?

We are not seeing any loosening of credit standards. In fact, I am pleased and lucky to be able to tell you that our average score last quarter in terms of production was 753, which is the highest that we have ever had. I think we are seeing some retraction on part of some of our competitors. We are also benefiting from the expansion of our geography through the acquisition. So, we feel good about what’s happening in indirect. We feel good about the delinquency rates, the – just the overall performance. So, we are pretty happy.

I apologize, I was a few minutes late for the call. Could you maybe comment on those several commercial relationships that led to the higher classified loans?

It is – it really isn’t that much – it isn’t really that meaningful. It was just a handful of small deals, nothing outstanding.

And then one last question. I hate to go back to the accretion question. But if the residual gains on Vantage go to zero, that all flows through the accretion line? And maybe asked another way, what amount of the accretion this last quarter came directly from Vantage?

Just a moment. It’s probably – it was about half of the accretion that we had for the quarter would have been related to the Vantage transaction.

And the step-down in the third quarter, what piece is that coming from Vantage or other?

That’s – it’s coming largely from other.

Okay. That’s what I thought. Okay. Sorry to ask, but just wanted to have some clarity there. I appreciate it. Thank you both.

Thank you.

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 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.