Good morning, and welcome to the Peoples Bancorp Inc. Conference Call. My name is Kate, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period ended March 31, 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 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' first quarter 2023 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, Kate. Good morning and thank you for joining our call today. Based on our diversified business model and strong core deposit franchise, we are pleased to report strong quarterly earnings. In our earnings release earlier this morning, we inadvertently underreported our weighted average diluted shares by 618,965 shares. As a result, our diluted earnings per share was $0.94, which was $0.02 lower than we reported in our earnings release of $0.96. We will issue an 8-K with a new release today. Katie will review our excellent results a little later in the call. In light of the current events in the banking industry, we will start our discussion with deposits, liquidity, credit and capital. Our deposit base is a key strength of Peoples. At quarter end, only 32% of our deposit balances exceeded FDIC insurance limits. This is down from 33% at year end. We routinely pledge investment securities against certain governmental deposit accounts, which covered nearly $700 million of uninsured deposit balances at quarter end. Excluding our uninsured deposits that are covered by pledged investment securities, our uninsured deposits were only 19% of total deposits at quarter end. Our liquidity position more than covers the remaining uninsured deposits. Our deposits are comprised of 75% retail deposits, which includes consumers and small businesses and 25% commercial balances. Our average customer deposit relationship was $30,000 at quarter end. At the same time, our median retail customer balance was a little over $3,000, while our median commercial customer balance was approximately $65,000. We effectively controlled our cost of deposits, which was 40 basis points for the quarter, compared to 19 basis points for the linked quarter. At the same time, our cost of funds was 72 basis points, compared to 36 basis points for the linked quarter. Excluding our brokered…

Chuck always steals the earnings discussion, and I am delighted to report the following good news. Our earnings improved compared to the linked quarter and were highlighted by diluted EPS totaling $0.94 per share, which was negatively impacted by $0.02 for acquisition-related expenses versus consensus estimates of $0.91. Continued improvement in our net interest income, which was up 3%, and net interest margin expansion of 9 basis points. Fee-based income growth of 9%, which was primarily due to the annual performance-based insurance income we receive in the first quarter of each year. Our pre-tax, pre-provision, return-on-average assets grew 5 basis points to 2.11%. We also had 4% annualized total loan growth compared to year-end. Our deposit costs, excluding brokered CDs, remained low and only grew 13 basis points compared to the linked quarter. Our tangible equity to tangible assets ratio improved to 7.1% and was up 41 basis points compared to year-end. At the same time, our tangible book value per share improved $1.14 compared to year-end and was $17.37. For the quarter, our net income was impacted by expected additional expenses we typically recognize in the first quarter of each year. As a result, our total non-interest expense for the quarter included employer contributions to health savings accounts of $591,000 and stock-based compensation expense for certain employees of $1.1 million. Combined, these additional expenses reduced our diluted EPS by $0.05. We also incurred $551,000 in acquisition-related expenses for the quarter, which negatively impacted our diluted EPS by $0.02. Our net interest income grew compared to the prior period, as the higher market interest rates benefited our interest income, outpacing the increase in our funding costs. Compared to the linked quarter, net interest margin grew 9 basis points. Accretion income declined over $220,000 and added 13 basis points to margin,…

Thank you, Katie. We had another strong quarter and continue to look forward to our future. At the same time, we are working to assess our readiness to cross the $10 billion asset threshold. We are in no hurry to cross the threshold, however we want to be prepared as soon as possible, so that we do not restrict ourselves from seizing opportunities that could be beneficial for our future success. With this in mind, we have engaged a third-party accounting and consulting firm to assist with our analysis and preparation process. As far as our merger with Limestone, we are on track as far as timing, and we expect to hit our internal metrics on projected cost savings. We have received regulatory approval and the plan to close the merger as of the close of business on April 30. We have a separate conversion date in the third quarter for our core processor and are coordinating our processes and those of Limestone between the close and conversion dates with our operations teams. For months, we have been engaging with the clients and communities served by Limestone. We are actively ensuring our full suite of products will be available in the Limestone markets, including indirect lending, mortgage, dealer floor plans, insurance, trust and specialty finance opportunities. We are optimistic about our combined future, and we are excited about the talent we are picking up in the merger. We want to finish up with our guidance for the remainder of 2023. These projections include the impact of the pending Limestone Merger, but exclude acquisition-related expenses. During the rest of 2023, we expect our net interest income to continue to grow due to the impact of the Limestone Merger, as well as the full-year benefits of higher market interest rates as our…

[Operator Instructions]. Our first question is from Brendan Nosal of Piper Sandler. Please go ahead.

Hey! Good morning, folks. Hope you're doing well.

Hi, Brendan.

Hi, Brendan.

Maybe just to start off on funding costs here. I mean, they remained remarkably benign for you folks over the course of this tightening cycle. I'm just curious you know, if given all of the changes for the bank space over the past few months, is there a point at which there's a larger catch up, just kind of given where the yield curve is versus your current funding costs, and then also the need to maybe more actively maintain deposit balances?

Nothing crazy. Nothing more than what you've seen already. I think the difference between this quarter and last quarter, I think you might expect that going forward, but nothing more severe than that. And again, I think it's a testament to the markets that we serve, where a lot of places that a lot of people have left large competitors.

Okay, perhaps one more for me. You folks mentioned getting prepared internally for $10 billion in assets, and I was just kind of wondering what that process looks like in terms of your appetite for M&A in the near term, whether that kind of pushes out a desire to do deals as you get ready internally.

Well, the process review – to answer the first part of the question of what that process looks like, it's a comprehensive review of all of our processes as it relates to compliance, credit, accounting, operations, systems, etc. As far as our appetite for M&A in the short term, we'd like to get limestone closed this week and converted in August and make sure that's up and sailing. We’re in, as I said, no hurry to cross $10 billion, but we don't want to leave – we don't want to be left not able to take advantage of a situation that should something that we view as strategically important come along. So, if we could pick it, we'd cross $10 billion a couple of years out, but we may not have that ability to pick it.

Yeah, understood. Thank you for taking the questions.

Thank you.

Thank you, Brendan.

The next question is from Daniel Tamayo of Raymond James. Please go ahead.

Hey! Good afternoon, everyone.

Hi Danny!

Hi Dan!

Maybe first, just following up on the funding discussion. Just curious kind of how you're thinking about the interplay between when you are using the wholesale funding, if it's brokered CDs, if it's FHLB, how you're thinking about that? And then how far out you're going in terms of maturities with those fundings?

Sure. So, as you saw in the results for the first quarter relative to the fourth quarter, we did access the brokered CD market as that pricing was advantageous compared to what our primary source historically and continues to be the FHLB for our overnight funding needs, so we did use the brokered. And they're generally going – we're going out three to six months on the brokered side, so not real long given the current expectations on the rates.

Understood, that makes sense. And then a follow-up is around Limestone. I saw their release this morning. I didn't see anything on their office exposure was. Was just curious if you had a sense for how much Limestone would add to the $107 million you mentioned in terms of overall office and if that's mostly Louisville.

Yeah. They have a little bit more heavy weighting in office than we do. If you give me a minute or two we'll come up with a number for you. But yes, on the geography question, it's more – so, they have $51 million extra in office than we have more in Central Kentucky, Louisville, Lexington focused.

Got it, okay. All right, that's helpful. Yeah, that's all I had. Thank you.

Great! Thank you.

The next question is from Terry McEvoy of Stephens. Please go ahead.

Hi! This is Brandon Rud on for Terry.

Hi Brandon!

My first question here, can you just kind of talk about your thoughts on the non-interest bearing deposit flow and where those could bottom as a percent of total deposits?

I think the trend that we've seen in terms of a percent of total deterioration this quarter, was not quite a percent. If you look at since the beginning of the rate rises, I think that that continuing for a little bit is likely. But I don't think you're going to see massive changes in the ratio between the interest bearing and the non-interest bearing DDA. Those are pretty stable, long-term customers.

Okay, perfect. And one, I think in your NIM guide, you said 4.40% to 4.60% for the year, 2Q coming in lower than that. I get there's some movement with the merger, but do you think on a core basis or on a standalone People's basis, the margin has peaked or is there further room for expansion there?

I think it's about where it's going to get to, if you take the noise out with the acquisition.

Okay. Just one on credit quickly, the criticized loan increase, I think in the release it said C&I. Did you give any specifics on which industries those credits were in?

It was the, it was there in the DLF flow plan.

Okay. And sorry, just one last one. So the decision to restructure the securities portfolio, what point in the quarter was that? Was it in mid-March – was mid-March the catalyst for that or is that prior to all the events?

Yeah, it was prior to all of that. Actually, there was a piece of it done in mid to late February, and then a piece was done very early in March.

Okay, perfect. Those are the questions I had. Thank you.

Thank you.

[Operator Instructions]. The next question comes from Manuel Navas of D.A. Davidson. Please go ahead.

Hey! Good morning.

Good morning.

How should we think of deposit growth was on a core basis for the year? What are kind of some of the puts and takes there?

I think there's some seasonality in our deposits, some flows with public funds. I think at 82% loan-to-deposit ratio, I think that we have a fair amount of room. We don't need to price more aggressively than we're pricing. So I expect minimal deposit growth outside of the Limestone acquisition and I think that's, that will help us from a margin perspective.

And I would say there will likely continue to be a mix shift within the portfolio as you've seen the last few quarters, out of kind of the lower cost deposits into more of the CDs. When I say CDs, I'm thinking retail kind of CDs, customer CDs. We'll continue to look at the brokered market as a funding source and I know that rolls up into deposits, but that's viewed more as funding than kind of customer deposits per se.

I appreciate that. Kind of a bigger picture, what kind of shifts in your thinking if a recession hits, like second half of the year in terms of some of your guidances? And not to be so negative, where are some of the opportunities where your guidance can be almost conservative?

So which knife do you want us to slit our throat with? Okay, I don't see a recession. We don't have a great deal of optimism on the economy baked into those numbers. You know, we're in markets that don't grow. Our proposition is very simple. The only way we can grow is to take business away from the competition. That doesn't change in good times or bad times. So in some ways it's a little recession. It's independent of any recession. What I would say is that the leasing businesses that we have may do a little better in harder times than the core business. So that'll help offset any flows. But we don't have a lot of great growth in there in terms of based off of the economy. Does that help you?

Yes, that helps. I feel like – I think we've kind of covered most other things, so I really appreciate the color.

No, thank you. Thank you.

The next question is a follow up from Brendan Nosal of Piper Sandler. Please go ahead.

Hi! Just one more for me. Thank you for the commentary on the margin, just in terms of kind of where the 2Q lands versus the full year guide. I guess looking beyond that, does the margin move back up in the third quarter given that 2Q pressure is on kind of purchase accounting noise or is that just a reset lower that kind of carries through the rest of the year?

No, it resets higher. And what we're just giving heads up to in the second quarter is, as you're well aware, we go through day one valuation and they'll be preliminary. It's 630 [ph] that we're using to record off of and there'll be likely true ups that happen in the third quarter. So there will be some noise in mostly the accretion income that is recorded in each of those periods. So that's why there's a potential that Q2 might be lower than the guidance, and then it'll bounce back in that range in the third and fourth quarter.

Got it, but it sounds like all of that noise will be purchase accounting and not the core margin, correct?

Correct. And we'll disclose it as we always do.

Perfect. Thank you for taking the follow-up.

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

Yes, I'd like 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 www.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.