Good morning and welcome to Peoples Bancorp Inc.’s 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 3 and 6 months ended June 30, 2023. [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 balance 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 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 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 1 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, Kate. Good morning and thank you for joining our call today. Earlier this month, Peoples communicated my retirement in March of 2024 and Tyler Wilcox was announced as my successor. The Board completed a diligent succession process. Tyler has done admirably and increasingly complex roles. For the last 3 years, he has been running all of our businesses. I am fully confident he can take us to even greater height. Turning to our results. Earnings were awesome for the quarter. They were impacted by one-time Limestone acquisition-related expenses. They were also impacted by the provision for credit losses to establish the allowance for the acquired loans from Limestone. Net income for the quarter totaled $21.1 million and diluted earnings per share, was $0.64. For the quarter, we recognized $10.7 million in acquisition-related expenses, which reduced diluted EPS by $0.25. We anticipate an additional $4 million to $5 million in acquisition-related expenses during the third quarter when our conversion of the Limestone Systems is scheduled to take place. At the same time, we recorded higher provision for credit losses this quarter, specifically related to the Limestone merger. We established the allowance for credit losses for the acquired loans that were not considered purchase credit deteriorated. This additional provision totaled $10 million which negatively impacted diluted earnings per share by $0.23. For the second quarter, some highlights of our performance included net interest income of $12 million or 16% compared to the linked quarter, fee-based income growth of $1.6 million or 8% compared to the linked quarter. Excluding non-core expenses, our adjusted efficiency ratio was 53.3%, a reduction from 57.2% for the linked quarter. Also excluding non-core expenses, we generated positive operating leverage compared to the linked quarter as total revenue growth outpaced total non-interest expense growth. As it relates…

Thanks, Chuck. I appreciate the introduction and the time everyone has given to listen in to our call. Our future is bright, and I’m excited about the opportunity. I spent many years learning all aspects of our businesses, understanding our clients, associates and communities needs and what ultimately benefits our shareholders. We will continue to leverage our strengths into the future while focusing on our culture, relationships with clients, being a top employer and providing above-average financial performance. . One of the most important aspects of our business is having a diversified revenue stream, of which our fee-based income is an integral part. Compared with the linked quarter, our fee-based income grew 8%. We more than offset the decline from the annual performance-based insurance commissions of $1.5 million recognized during the first quarter. The drivers of the increase compared to the linked quarter or higher electronic banking income and deposit account service charge income, which benefited from our limestone merger, along with increased trust and investment income. Compared to the prior year quarter, our fee-based income was up 17%, and on a year-to-date basis, increased 11%. The growth was attributable to higher income in nearly all categories of fee-based income which also benefited from our limestone merger and Vantage acquisition. Moving on to our deposit book. The higher rate environment continues to show the significant value of our deposit base. We are focused on maintaining low deposit costs while also retaining as much of our deposit balances as possible. Compared to the linked quarter end, our total deposit balances grew $1.2 billion and was driven by the deposits acquired in the Limestone merger. Our total deposits, excluding brokered CDs, increased $885 million, mostly due to the Limestone merger. Excluding Limestone acquired deposits and brokered CDs, our total deposits declined $141…

Thanks, Tyler. Our net interest income improved due to the limestone merger, organic growth and increased market interest rates in recent periods. Compared to the linked quarter, net interest margin expanded 1 basis point to 4.54%. For the quarter, margin was positively impacted by accretion income from the Limestone merger, which offset declines related to the overall profile of Limestone, which we had anticipated with pull down our own margin. For comparison purposes, our margin for the first quarter of 2023 was 4.53%, while Limestone’s was 3.58% for the same period. Accretion income, net of amortization expense from acquisitions, was $4.5 million and added 24 basis points to net interest margin for the second quarter. I would note that our accretion income recorded during this period is preliminary as we work to finalize our review and processes around our acquisition accounting. Also helping to improve our net interest margin were our loan yields, which improved 43 basis points compared to the linked quarter. We more than doubled our average broker deposit balances which negatively impacted our overall deposit costs. Brokered deposits provided a lower funding cost than utilizing other funding sources. For the quarter, our total deposit costs was 87 basis points compared to 40 basis points for the linked quarter. Excluding brokered deposits, our total deposit costs for the quarter was 63 basis points compared to 29 basis points for the linked quarter. Compared to the prior year quarter, our net interest income grew 38% while our net interest margin expanded 70 basis points. On a year-to-date basis, net interest income increased 36% and margin grew 90 basis points. Last quarter, we had mentioned that we anticipated our net interest margin for the full year of 2023 would be between 4.40% and 4.60%, and we continue to expect to…

Thank you, Katie. The Limestone merger positively impacted our results this quarter, coupled with organic growth. We are pleased with our low adjusted efficiency ratio this quarter, which was 53.3%. Our net interest margin was stable at 4.54% compared to the linked quarter and the goodwill recorded from our Limestone merger was lower than we had anticipated which reduced the amount of the expected decline in our regulatory capital levels for the quarter. We are well positioned for the future. We have invested in our systems and our people as we are preparing to cross $10 billion in assets, and we are improving efficiencies with the Limestone merger. We want to finish up this call with our guidance for the remainder of 2023. These projections include the impact of the 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 benefits of a full year of higher market interest rates as our loans continue to reprice to higher rates. We continue to expect a slowdown in net interest margin expansion as we recognize the impact of Limestone for the remainder of the year, coupled with increased funding costs. We expect some minor compression in margin through the last two quarters of the year. We still believe that net interest margin will be between 4.4% and 4.6% for the full year of 2023. This projection includes one additional rate increase during the remainder of the year and would improve slightly if there was a second and third increase. A potential variable impact to our anticipated margin is the recognition of accretion income from the Limestone merger, which we are finalizing and could fluctuate based on activity for the…

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

Hey, good morning, guys. I hope you are doing well.

Good morning, Brendan.

Maybe to start off here on the outlook for expenses. You came in a little better than I was looking for in the quarter, we we’d like to see – and then, Chuck, if I heard your guide correctly, I think you said 22% to 24% for the year as merger costs, and I think the prior outlook was for a 21% increase. So just curious the moving parts of our that pushed that up just a little bit?

Yes. I think it’s investments in both people and technology as we proceed through the remainder of this year. We referenced some of those investments in the script and new system technology and client engagement system.

Got it. Okay. And that’s all for the 2022 reported cost base, correct?

Yes.

Got it. Alright. And then one more for you before I step back. Just you guys offered some commentary on preparing internally for $10 billion in assets just as you think about what you have done and what still needs to get done to get there, what inning of that preparation do you think you guys are in.

Were into mid to late innings. I think we’re in pretty good shape. I also want to reiterate, we’re in no hurry to cross $10 billion. We are in a hurry to get ready to cross $10 billion. So I just want to make that distinction.

Yes, that’s helpful. Okay, thank you for taking the questions.

Thank you.

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

Thanks, guys. First, congrats, Chuck, on your retirement and to Tyler on your promotion.

Thanks, Dani.

Thank you.

So I guess, first on the margin. I hear your comments, Katie, on – or I think it was Chuck who said that there is going to be more – or there will be compression here going forward in the margin. I think we talked about last quarter the potential for a reset hire in the third quarter from the Limestone balance sheet as well as more accretion. So just as we think as kind of the – in terms of the timing of – over the next couple of quarters of the margin, just curious if you could walk us through the moving parts within the forecast for compression.

Yes. Just going back to the commentary from the first quarter, we had put out that Q2 might come in a lower – a little lower than that range of 440 to 460 with the thought there being we might still be working through the day 1 fair value related to the Limestone acquisition. So we weren’t sure if we would have the accretion income, which you saw in the numbers that came through actuals for Q2 we had meaningful accretion. And so in light of that, the rebound that we had referenced being a possibility in the first quarter call, to happen in the third quarter, I don’t think you would expect anymore because Q2 had accretion and what we had said in the script this quarter related to Q3 as we continue to finalize those fair value marks there might be some minor adjustments in those numbers as we work through that finalization, but I wouldn’t expect a meaningful shift in accretion income between Q2 and Q3.

And the guide was the 4.4% to 4.6% for the year. We don’t see any dramatic change in the margin in the next couple of quarters.

Okay. Alright. That’s helpful. And then on the loan growth side, so you talked about low to mid double-digit loan growth, obviously, including limestone balances. So how should we think about how you’re planning to fund that? Is there some kind of letting or using cash flows from securities in that? Are you planning to let that draw down a little bit? And then within the deposit growth, just curious on the expectation for brokered balances going forward?

Yes. Just to go back to the 6% to 8% loan growth guidance that we referenced in the script here earlier today. That is, as it relates to kind of the core PEBO loans, it does not include the Limestone loans in that 6% to 8% increase. I would say as it relates to the funding of the loan growth for the back half of this year, I think it will be much of the same. You have seen some reductions in the investment portfolio, both the PEBO and then through what we acquired from Limestone. I think you would expect some of that to continue, like you mentioned, to use the cash flows of the investment book to fund the loan growth. I think on the deposit side, the story will likely remain similar with the exception of governmental deposits generally increase as we proceed through the third quarter and hit another kind of high watermark at the end of September. So, we expect some growth on governmental deposits, but we would continue to evaluate the use of brokered CDs as a funding mechanism and specifically as an alternative to an overnight source that we would otherwise use, which is generally FHLB.

Okay. And just as a placeholder here, what were you putting on CDs and broker in the second quarter or rates?

On brokered CDs, it was in the high-4s, so 5 and on customer, I think you are asking about customer deposits to on the CD side.

Yes, the retail stuff.

Yes, they were in the mid-4s.

Okay. Great. Thanks for taking all my questions.

Thank you.

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

Hey there. Good morning. I am on for Mike Perito. First off, Chuck, congrats on the upcoming retirement and to Tyler as well for the new role.

Thank you.

Thanks.

I had a quick follow-up kind of on the last line of question there. What were the blended loan yields at the end of the quarter just for like new originations?

Yes. Just give me a second, I can get you some exact numbers, assuming I can put my hands on it, but they were higher than the originations, then the portfolio, the total was 8.2%. I don’t know if you had a particular product. Commercial was 7.14%, consumer on average, at least the indirect was 7.59%.

Okay. Yes, that’s helpful. That’s great. Thank you. And then just because – so you kind of give us a good jumping off point for the NIM next quarter, we are going to have the first full quarter impact of Limestone. Do you have kind of like what the spot NIM was at the end of the quarter?

It was pretty close to what was reported for the quarter. Look up an answer, I will try to get back to you on the call.

Okay. Not a significant change, it sounds like.

No. And again, that was heavily influenced by the accretion.

Right. I guess if you look at ex the accretion, you guys reported about 4.32 core NIM. Was it still around there in June as well?

Yes, it should be yes. Yes.

Okay. That’s great. And saw your guys’ comments about being open to another deal, but not looking for one, but eventually wanting to cross the $10 billion asset threshold. Is there anything specific you would be looking for? Would you grow past $10 billion, or are you looking to acquire past the $10 billion, even if it’s a few years from now?

We have looked at it a couple of different ways. There is three ways to do it. You can do a big deal. You can do a small deal or you can grow organically. And if you look at the results of those banks a couple of years after the fact, while this prevailing wisdom is doing a big deal is the way to go 2 years, 3 years later, it doesn’t really matter that much. So, I think our focus is really to get as prepared as possible. Again, we are in no rush. We have a lot of room. We are at $8.8 billion. We can continue to take down the investment portfolio. We will continue to grow organically. We continue to have conversations with institutions of all sizes. And as we get closer, we will make the best strategic decision that is in front of us. And so maybe we have a whisker of a preference to do a large deal to shoot us over $10 billion. But I wouldn’t be crushed if we went organically, and I wouldn’t be crushed if we did a small deal.

Okay. That makes sense. That’s all for me. Thank you, guys.

Thank you.

Thank you.

The next question is from Nick Cucharale of Hovde Group. Please go ahead.

Good morning everyone, how are you?

Great. Good morning.

On the increased organic loan growth guide, can you give us a sense of the opportunities that you are seeing that give you confidence in the deeper trajectory? Is it broad-based demand across your footprint or particular segments that are driving the improved guide?

First off, the guide has been consistent at 6% to 8%. We didn’t increase the guide. The actual quarter came in at 12%, which was higher than the guide. I think we are seeing good demand across our geography. We are benefiting from some long approved multifamily construction projects that are funding, that are growing. So, we are seeing more outstanding that’s helping us a little bit, but our indirect business continues to chug along. Our specialty finance businesses continue to chug along. It really is a portfolio play, both from the product lines and from the geography.

Okay. That’s helpful. And then just a question on the insurance business. It’s a hard market, but your first half 2023 results are up 13% relative to 2022. How much do you attribute to the environment, or is it deepening relationships with your expanding customer base or both, quite frankly?

Well, I think there is three pieces to it. A whisker of it is some year-over-year impact of some very small acquisitions. Some of it is the hardening market, and some of it is really an organizational-wide focus on bringing the suite of products and services we have retirement plans, insurance, leasing, etcetera, to our business customers.

Great. Thank you for taking my questions.

Thank you.

Thank you, Nick.

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

Hi. Good morning everyone.

Hi. How are you doing?

I am doing great and congrats to both of you on the news from earlier this month, congrats. Maybe I haven’t crunched the numbers yet, but it looks like the percentage of revenue from insurance and trust and investment income on a relative basis has declined given some of the recent acquisitions, either bank or the leasing company. What are your thoughts on acquiring some businesses to grow those revenue lines?

Well, first off, we love those businesses. We are committed to them. We continue to look for acquisition candidates in both businesses. We pretty consistently have been doing very small deals in the insurance space. We would love to do more deals in the investment space. And we would love those fee-based businesses to be a higher percentage of total business. The increase in margin over the last six quarters has shrunk them on a relative basis, but hasn’t shrunk our commitment to them.

And then as a follow-up on the commercial real estate portfolio, which is over $2 billion today, do you know how much of that matures over the next, call it, 6 months to 12 months? And have you stressed and kind of evaluated what the impact of higher interest rates could be on those borrowers?

Yes. We are very comfortable with the ability of our borrowers to absorb the higher rates when these loans were underwritten. I can’t tell you that we stress them 5%, but we stress them 3%. And basically, what we are lending to proven developers, sponsors with deep balance sheet. Katie, do you have a number or Jason, do you have the number on what matures in the next I think it was – my memory is $120 million.

That’s right.

$120 million, I got it, that’s right. Not bad for 66 years of age, maturing this year and the number for next year was like some $225 million for next year.

Great. Thanks for taking my questions.

Thanks Terry.

Yes.

The next question is from Manuel Navas of D.A. Davidson. Please go ahead.

Hey. I just wanted to circle up on – did I hear right on the new loan yields at 8%, but commercial 7% and consumers around 7%. Was there a component I was missing there?

Yes, there are some leasing businesses, which helped to increase it.

Okay. So, the overall is 8%, but the other components are a little bit lower, perfect. And then roughly how much you are getting in securities cash flows per month or per quarter?

$15 million to $20 million per month.

And it’s really impressive. You are pretty low deposit betas ex the brokered deposits. Do you have an estimate there, or you are just kind of it’s pretty minimal so far. So, you expect it to stay pretty low, though it is rising somewhat.

That’s the value of the franchise. Our deposits, the places where we are, that was the comment in there about the absence of the large competitors. We have dominant market share in many small towns across places that most competitors have left and we are proud to provide service and with the rewards in times like this.

Yes. The branch stats, you are at 50 out of the 600 branches in your 90-minute drive from Marietta. Is that kind of like the core area you would want to consider acquisitions? Is that kind of the target zone, would that make sense to describe it as such?

No, I would say the area for acquisitions is broader than that. We certainly would look at acquisition in those areas. We have opportunity for cost takeout, but we are – we would like to do more in other places in Ohio. We do more in Kentucky and West Virginia. We would love to do more in D.C.-Baltimore metropolitan area. I think someday, we will probably get into Southwestern Pennsylvania, which is real close to here. I mean Southwest Pennsylvania is, 1.5 hours to 2 hours. So, we have lots of places that we can do deals. We just had to find the right partners with the right mix of business and the right philosophies.

I appreciate that. Thank you and congrats on the different promotions and moving around that’s going on with the team. I really appreciate working with all of you guys. But I am going to have you guys for a while longer, so that’s good too.

And you are going to have me for a while longer, too..

Yes, absolutely.

Thank you.

Thanks Manuel.

The next question is from Daniel Cardenas of Janney Montgomery Scott. Please go ahead.

Hey. Good morning guys.

Hi Daniel.

As we look at credit quality, can you maybe give us a little bit of color as to how watch list trends are shaping up? And if there is anything out there at the moment that’s causing you any concern?

It scares me to say, but I have very little concerns. It’s almost early too good to be true. But we had really good, as I indicated in the script, really good improvements during the quarter. You always have issues and things that you are working on, but I think we are optimistic on the vast majority of the stuff that we have. So, we don’t see any issues in the short-term.

So, then as I think about provision increase as on a go-forward basis, mostly just to cover charge-offs and expected growth. Is that kind of the best way to be looking at it near-term?

Yes, because we are going to count and design that provision system that doesn’t allow us to put money away for a rainy day. But yes, I think you have it right. How do I do, Katie? Katie is going to be glad to get rid of me.

And then on the tax side, what’s kind of a good run rate to use for you guys in the back half of the year?

At 22.5%, 23% thereabouts, it’s being driven up a little by Limestone in that acquisition.

Okay. And then last question for me. In terms of the deposits acquired with Limestone, what kind of runoff are you seeing? And is that within your projected expectations?

So far, but it’s really pretty short. We just closed May 1st. We convert next – the first weekend in August and then we will see our fees and see our systems. They really haven’t seen any of the fees of people’s bank stuff. So, I think that’s in front of us before we can give you a good answer.

Fair enough. Alright. That’s all I have. Congrats, Chuck and Tyler. I hope all goes well for both of you.

Thank you.

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

Hey guys. Thanks for taking the follow-up. Just wanted to follow-up on the cost outlook. I think if I take the midpoint of the guide, it implies $138 million or so for expenses in the back half of the year or about $69 million or so per quarter for each of the next two quarters. Just want to make sure that that is indeed how you are thinking about things? And if so, is any of that transitory as you prepare for $10 billion, or is that more or less the new run rate going forward?

That $69 million is a little high, Brendan, I would say it’s closer to the range of $66 million, $68 million in the coming quarters ‘23. And again, I think some of that is the preparation to cross $10 billion and like we mentioned, the investments in both people and systems and technology.

Got it. Thank you for clarifying.

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.