Good morning, and welcome to Peoples Bancorp Inc. Conference Call. My name is Betsy, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly and fiscal year ended December 31, 2022. 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 or future events. These statements are based on management's current expectations. The 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 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 may be required by applicable legal requirements. Peoples' fourth 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, Betsy. Good morning, and we appreciate you joining our call today. We are pleased to report that our net income totaled $26.8 million for the fourth quarter or $0.95 in diluted earnings per share. For the full-year, our net income more than doubled compared to 2021 to $101.3 million or $3.60 in diluted EPS. This is record annual net income for our company. Our fourth quarter results included several highlights. We had record quarterly total revenue compared to prior periods of over $90 million, which was nearly $3 million higher than the linked quarter. We were able to expand our fourth quarter net interest margin by 27 basis points compared to the linked quarter as we closely managed our deposit costs while our yields improved. We had annualized loan growth of 8% compared to the linked quarter. We lowered our reported efficiency ratio to 56.7% compared to 57.2% for the linked quarter. We generated positive operating leverage compared to the linked quarter. For the full-year of 2022, we grew our total revenues by 37%, while growing our expenses by 13% compared to 2021, resulting in positive operating leverage. We had record pretax pre-provision net revenue as a percent of total average assets, which was 2.06% for the fourth quarter and 1.77% for the full-year of 2022. Our return on average stockholder equity grew to 13.9% compared to 12.9% for the linked quarter and was 12.7% for the full-year of 2022 compared to 7.2% for 2021. Our fourth quarter return on average assets improved six basis points from the linked quarter to 1.51% and we maintained our fourth quarter total noninterest expense, excluding acquisition-related expenses within the range we previously had guided. Our allowance for credit losses was relatively flat compared to the linked quarter and was down 17%…

Thank you, Chuck. Our net interest income continued to grow and was up 5% compared to the linked quarter and our net interest margin expanded 27 basis points to 4.44%. Our loan and investment yields increased compared to the linked quarter and continued to be positively impacted by the higher market interest rate environment. Accretion income, net of amortization expense from acquisitions was $2.2 million, adding 14 basis points to margins, compared to $2.8 million and 16 basis points respectively for the linked quarter. Our funding costs were up 12 basis points and were driven by higher borrowing costs and increased borrowing balances, while we raised our deposit rates marginally. Our control deposit costs, which were 19 basis points for the fourth quarter, compared to 16 basis points for the linked quarter has continued to help our margin expand at a high rate in recent quarters. Compared to the prior year quarter, net interest income grew 29% and net interest margin expanded 107 basis points. We continue to see improvement from our core growth and the increases in market interest rates. Quarterly loan yields improved by 116 basis points, while our investment security field was 70 basis points higher than the prior year quarter. Funding costs doubled and were tied to higher borrowing costs and balances and the increase in our deposit rate. For the full-year, our net interest income grew 47%, while our net interest margin expanded 56 basis points compared to 2021. The majority of the increase was driven by the Premier merger and Vantage acquisition coupled with organic growth and higher market interest rates during 2022. We are currently in an asset-sensitive position as it relates to our balance sheet and we expect a slight reduction in asset sensitivity once we complete the Limestone merger. As it…

Thank you, Katie. We have improved our performance considerably during 2022, along with reaping the benefits of the market interest rate increases and prior acquisitions. We were recognized by Newsweek as the 2023 Best Small Bank in the State of Ohio. We were also recognized by American Banker as The Best Bank To Work For in 2022. This is the second year in a row we have received this honor, and we are one of only 90 banks to receive the award in 2022. We have positioned ourselves to continue to provide a profitable return for shareholders during 2023, while also expanding our business into larger markets in Kentucky and the pending – with the pending Limestone merger. We have been able to capitalize on our recent mergers and acquisitions, substantially reducing our efficiency ratio, building on our positive operating leverage by growing revenues, while offering state-of-the-art technology to our new clients. As we look to our future, we are refreshing our guidance for 2023, which includes the impact of the pending Limestone merger, but excludes the acquisition-related expenses. During 2023, we expect our net interest income to continue to grow to the Limestone merger, as well as full-year benefits of higher market interest rate as our loans repriced to the newest rate. We expect net interest margin expansion to slow as we will need to increase our funding costs in future periods. With that being said, we believe net interest margin for 2023 will be between 4.5% and 4.65%, which assumes relatively flat rate for 2023, as compared to year-end 2022. We anticipate loan growth of between 25% and 30%, including the new Limestone balances, while we believe our annual organic growth without the acquired loans will be between 5% and 7%. We expect fee-based income percentage growth to…

[Operator Instructions] The first question today comes from Brendan Nosal with Piper Sandler. Please go ahead.

Hey, good morning, folks. How are you?

Good morning. Great, good morning.

Good morning.

Maybe just to start off on the margin, obviously, fantastic performance this year at composite cost that Bailey budged. I was hoping for the outlook for next year. You can kind of walk through the quarterly progression that gets you into that 450 to 465 for the year. I would imagine that some funding costs have had to accelerate more meaningfully just to reflect where rates are today. Just kind of curious how that moves throughout the year.

Let me just say a couple different things, and then I'll let Katie give some thoughts on it. First off, the value of this franchise is the deposit book and the low rate environment over the last decade really hasn't given an opportunity for that to shine. Rates have gone up 4% and our deposit costs have gone up five basis points. Yes, you tell me how much more rates are going to go up. My guess would be another half of a point to 25 basis points increases and our deposit cost may go up 10 to 20 basis points more during the course of 2023, but not a whole lot more.

Yes, the other things I would note are, as it relates to the year-over-year benefit just from the rates as they rose throughout 2022, we'll get the annual benefit of that and quarterly see that come through in 2023. Also, the asset mix changes with our leasing portfolio, which you're well aware has a meaningfully higher yield than other core bank portfolio. So, as we continue to see strong growth in those specialty businesses, we'll see some benefit through margin, as well.

Got it. Okay and then one more for me. I appreciate the guide on expenses, including Limestone. Maybe for those to those plus you are not getting modeling the deal. Could you offer kind of standalone PEBO cost guide? I think last quarter you said $56 million to $58 million per quarter for 2023?

Yes, I think that’s still of a core PEBO expectation for 2023 on a quarterly basis, close to $56 million to $58 million.

Thanks, Katie. Thank you so much.

Thank you.

The next question comes from Ben Gerlinger with Hovde Group. Please go ahead.

Hey guys. I just had one quick question. I wanted to follow up on that margin. You said 4.5 to 4.65. But Chuck, you also included some things that were inclusive of Limestone. Was that margin inclusive of Limestone or not?

Yes.

And then, I appreciate you kind of going through the color of Fed plus 25 and then assuming another plus 25. I am just kind of thinking that the 15 basis point spread is pretty big. The deposit cost, the biggest, I don't know, variable, I guess, you could say, between the high end and the low end? Or is it more of a mix on the asset side?

And then what we're paying for alternative funding too comes into the equation. I'd tell you, I'd lean towards the high side of the range, but Katie will kick me.

Yes, I mean I think it's – as you pointed out, it's largely contingent about where we see the loan growth and also to on the deposit costs, what kind of moves we have to do there as rates rise, as well as alternative funding.

Got you. I appreciate it. Thank you.

Thank you.

The next question comes from Michael Perito with KBW. Please go ahead.

Hey Chuck. Hey Katie. Thanks for taking the questions.

Hey Mike.

Hey Mike.

I had a couple. I wanted to start – Katie kind of mentioned, depends on the loan growth. So just on the loan growth side here, I mean what are some of maybe the areas that can put you at the higher or lower end of the 5% to 7% range? And then maybe as a follow-up, Chuck, just on the leasing and some of the premium finance, some of the stuff you guys are doing there. I mean how, if at all -- and maybe the answer is, it hasn't, but how, if at all, has kind of some of the uncertainty of 2023 and the funding changing environment and everything impacted your kind of near-term outlook for those businesses? Just curious if there has been any kind of change relative to the last time we spoke.

No. I think the specialty finance business is all optimistic on 2023. I would say that some of those leasing businesses will do better. They are almost anti cyclical in harder times as people leave things as opposed to purchase. We have been – as the script indicated, since 2013, we've grown organically 5% to 11% every year. Last year was tough for us with only 5%. We have, in the guidance, the organic pieces being 5% to 7%. I think some of the things that will determine whether it's at high end or higher have to do with what happens in the real estate markets with the higher rates. Do people take things to the permanent market a little bit faster, I think that could impact us some, but our pipelines are robust. We had a great year of originations in 2022. If we can do as well with originations in 2023, we'll have simply more growth because we are going to see some of the moves we made to improve the portfolio by encouraging some credits to go elsewhere.

Helpful. And then, just kind of big picture, we are hearing on other calls that bank M&A has slowed. Obviously, you guys had a bit of activity recently. Just can you maybe give us an update near term on kind of the capital priorities for the bank in 2023? And is there a period here where there is some digestion, some growth that platforms acquired that you guys would like to see occur? Or is there still enough dislocation where there are opportunities that externally that would be enticing for you guys to consider?

Well, certainly, we have been active with M&A and we see M&A as an important part of the business. We do not have plans to do a deal in 2023. But having said that, we talk to banks all the time, and it's analogous to a portfolio manager running a portfolio they always have to make your contacts. In terms of capital priorities, we have that really robust dividend and we’ll retain that. We have blocked out some share buybacks because of the acquisition. Although certainly at this price, we think the stocks are still and we just would like to continue to build our capital levels.

Great. And then just lastly for me, I know you guys gave kind of the broader – the guidance and outlook for 2023, but you guys have quite a few contributors in that pot and I'm curious, Chuck, if I had to put you on the spot, I mean any particular area where you think maybe there could be some upside or some optimism about dislocation or growth opportunities for next year on the non-interest income businesses?

Well, obviously, the stock market has put a dent in our investment businesses last year. We were pretty much neutral from a revenue standpoint. If the market turns around, those earnings will increase. Last year was one of the few years over my career where you had a double whammy of stocks being down and bonds being off. That's pretty unusual. I don't expect that to happen again this year and I think our investment business has potential upside.

Cool. Thank you guys. I appreciate you taking my questions and hope you are well.

Hey, thank you.

Thank you.

The next question comes from Terry McEvoy with Stephens. Please go ahead.

Thanks. Good morning, Chuck. Good morning, Katie.

Good morning, Terry.

Good morning.

Maybe the first question, have you scheduled a conversion date for Limestone? And what I am getting at is trying to understand kind of the cost savings and what you foresee happening in 2023 and if there is any kind of follow-through into 2024?

Yes. We have a date in August. I think it's August 5 for – scheduled for conversion. I will tell you that we will get the vast majority of the expense saves in 2023. We'll get some year-over-year benefit in 2024, but it's been our history to get the expense saves pretty quickly.

And then as a follow-up, in the press release I think it was favorable funding source was the brokered CDs and you’ve done a really good job holding kind of the non-interest bearing deposits relative to what I have seen across the industry. What’s your thoughts on kind of the mix shift of deposits and we continue to rely on brokered CDs in your view in 2023?

It's part of the mix. It's not a dependency by any stretch of the imagination. I'll just reiterate some of the points that were made. A lot of the deposit activity, the decrease was seasonality. We are going to get a great deal of those deposits back in the first quarter. We have a phenomenal deposit book. It's the advantage of being in the communities that we serve that frankly most of the – many of the competitors have vacated. So it's not by accident.

And I would just say, we evaluate broker in conjunction with our FHLB opportunity for funding and whoever price is best gets our business.

Yes.

Okay. Understood. And then, maybe one last question. Can you remind me, have you made any changes to your overdraft fees or consumer fees? And if not, are you contemplating anything there?

We have made a few changes of – a few adjustments over the last few years, nothing substantial. I think we have a change going in that's going to – that we've budgeted that's going to hurt us about $400,000. We continue to examine it, but I don't see anything radical at this point in time.

Thanks for taking my questions.

Thank you.

Thank you.

The next question comes from Manuel Navas with D. A. Davidson. Please go ahead.

Hey, good morning.

Good morning.

Where should we think the kind of loan-to-deposit ratio creeps up to and where kind of you thinking you're going to target it over time?

Well, that’s an interesting question. I think it will continue to go up a couple percents a quarter. Keep in mind that we have the Limestone acquisition coming in. I don’t think we will hit the – I don’t think we will hit the 90s this year. I think that, I would like the loan-to-deposit ratio generally to be in the low to mid-90s. But again, I think it will improve, but I don't think we'll hit 90.

Okay. The lease book has phenomenal yields. It's about 10% this quarter. That should continue to kind of creep up, right? Is that the right way to think about it?

Yes, it will go up from there in future quarters. Again, what you've seen over time is some reductions in what we were booking. The North Star acquisition that we did in 2021 had higher yields. That's micro-ticket book. Then the deal we did in 2022 has, which is more of a small mid-ticket book and so you've seen some reduction based on that shifts or the combination of those two portfolios together, but I think the opportunity for 2023 is the expansion in that yield.

Okay. It’s helpful. I am good for now. Thank you guys.

Thank you.

Thank you.

[Operator Instructions] The next question is a follow-up from Brendan Nosal with Piper Sandler. Please go ahead.

Thanks. One more follow-up for me on the margin. Could you maybe offer some color on how much NPAs are underneath that 4.50 to 4.65 margin for 2023? And then how much of those total PAAs are coming from Limestone?

Purchase accounting, you're asking about?

Yes, how much of the margin is purchase accounting in your thinking.

Yes. So we expect that to continue to be in the range of 10 to 15 basis points as we move into 2023 on a quarterly basis.

Okay. I was kind of thinking with Limestone, just given the marks from the rate environment, there would be a bigger pickup there. Is that not the case given the pullback in rates? How should I think about that?

Well, I think you have some runoff of the portfolios that we've already – or the acquisitions we've already done. So you'll see some reduction for the kind of seasoned acquisitions and then you'll see an offsetting increase for the Limestone acquisition. But by nature it's going to diminish over time and so it stays relatively steady.

Got it. Okay. That’s super helpful. Thank you.

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.