Good morning and welcome to Peoples Bancorp Inc.'s Conference call. My name is Rocco and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter and fiscal year ended December 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's filings. Management believes 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' fourth quarter 2023 earnings release was issued this morning and is available on 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 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, Rocco. Good morning and thank you for joining our call today. In the fourth quarter, we reported record quarterly earnings of $33.8 million, while our diluted earnings per share improved to $0.96 compared to $0.90 for the linked quarter. This includes $1.3 million of acquisition-related expenses for the Limestone merger, which reduced diluted EPS for the fourth quarter by $0.03. Overall, our fourth quarter results included many highlights such as growth in our return on average stockholders' equity, which was 13.4% compared to 12.6% for the linked quarter. Our efficiency ratio improved to 56% from 58.4% for the linked quarter. Our loan-to-deposit ratio declined slightly compared to the linked quarter end. Our non-performing assets declined 8% compared to the linked quarter end and are at their lowest level as a percent of total loans since the Great Recession. Our book value per share improved to $29.83 compared to $28.06 at September 30, and $27.76 at year-end 2022. While our tangible book value per share grew to $18.16 compared to $16.52 and $16.23 respectively. Our tangible equity to tangible asset ratio increased to 7.3% compared to 6.9% at the linked quarter end, and we completed a $3 million share repurchase during the quarter. On a full year basis, our net income was $113.4 million, and our diluted EPS was $3.44 compared to $3.60 for 2022. This includes acquisition-related expenses of $17 million during 2023, which negatively impacted diluted EPS by $0.40, and a $2.4 million pension settlement charge associated with the final termination of our pension plan, which negatively impacted diluted EPS for 2023 by $0.06. Some highlights for the full year of 2023 include net interest income was up 34% compared to 2022. This increase was driven by the limestone merger and higher market interest rates, improving our…

Thanks, Chuck. During the fourth quarter, our net interest income was lower than the linked quarter due to higher deposit costs, which were partially offset by improved investment yields. Our net interest margin was 4.44% for the fourth quarter compared to 4.71% for the linked quarter. The lower net interest margin was partially due to our margin being higher during this linked quarter as a result of acquisition-related adjustments to accretion, which totaled $1.9 million and added 10 basis points to our third quarter net interest margin. During the fourth quarter of 2023, we recognized a $1.3 million increase to accretion income related to refinements in our fair value marks from our Limestone merger, which added seven basis points to net interest margin. Also contributing to the decline in net interest margin compared to the linked quarter were higher deposit costs, as we offered short-term higher rate CDs that were part of a successful deposit acquisition strategy. We partially offset this increase with higher investment yields for the quarter. For the fourth quarter, our deposit costs were 1.66% and excluding brokered CDs were 1.33%. Accretion income, net of amortization expense totaled $9.3 million for the fourth quarter compared to $9.5 million for the linked quarter. Accretion income positively impacted our net interest margin by 47 basis points for the fourth quarter and 52 basis points for the third quarter. Compared to the prior year quarter, our net interest income grew 25%, while our net interest margin remained flat as improved investment in loan yields were offset by higher deposit costs. For the full year of 2023 compared to 2022, our net interest income increased 34% and net interest margin grew 59 basis points. Net interest income was positively impacted by the Limestone merger compared to 2022. Most of the increase…

Thanks, Katie. For the fourth quarter, our fee-based income was up 12% compared to the linked quarter and was driven by higher lease income. Compared to the fourth quarter of 2022, our fee-based income grew 35% and on a year-to-date basis, was up 18%. The increase compared to these prior periods was a result of higher lease income and insurance income and was also impacted by the Limestone merger, which improved electronic banking income and deposit account service charges. A bright spot for us this quarter has been our ability to generate deposits. Compared to the linked quarter end, our total deposits grew $115 million or 2%. The largest contributor to the growth was retail CDs, which were up $245 million. We acquired a lot of these CDs with our deposit pricing strategy, utilizing short-term higher rate CD offerings for customers. Money market accounts grew $45 million during the same period, while we had some declines in other interest-bearing deposits. Our non-interest-bearing deposit balances were relatively flat, while we reduced our position in brokerage CDs, which were down $33 million. Our demand deposits were 38% of total deposits at quarter end compared to 39% at September 30. At quarter end, our deposit composition included 80% in retail deposit balances, which is comprised of consumers and small businesses and 20% in commercial deposit balances. Our average retail customer deposit relationship was $24,000 at year-end, while our median was $2,500. While we think about 2024, I would like to give some updated guidance for the next year. We expect net interest income to benefit from the full year impact of the Limestone merger but to also be impacted by the projected market interest rate reductions in 2024. With that being said, based on our most recent model runs, we have some preliminary…

Thanks, Tyler. I would like to thank the employees of Peoples for producing another record quarterly earnings report. This is my final earnings call as a point of personal privilege I would like to reflect back on my time at Peoples. Looking at our stock performance as of year-end 2023, there were several key highlights. Over my nearly 13-year tenure, we have beaten the KBW Bank Index by over 4% on an annualized basis. For the last three years, we have beaten the S&P by 3.4% and the KBW Bank Index by 10.4% annualized. In 2023, we beat the KBW Index by 27%. More important than these results are the distinctive characteristics that make Peoples a differentiated high-performing community bank. With apologies to David Letterman, I'd like to share my top 10 reasons why Peoples has been and will continue to be a great choice for investors. Number 10, we are the epitome of a community bank. We make meaningful investments of time and money to help make our communities better. We provide capital to individuals and businesses that promote economic growth and employment. As a result, we are trusted and have deep and meaningful relationships with our customers. Number 9. Our employees are our most valuable asset. For the last three years, we are proud to have been recognized as one of the American Bankers best banks to work for. We have a distinctive culture characterized by a passion for constant individual and organizational improvement, frequent coaching and an attention to performance numbers at a corporate and individual level. Number 8. We have a diverse set of businesses. In addition to traditional banking, we have meaningful earnings contributions from insurance, investments, leasing and premium finance. As a result, we are better protected than the average community bank should one…

Thank you. [Operator Instructions] Today's first question comes from Daniel Tamayo with Raymond James. Please go ahead.

Good morning, everyone.

Good morning.

Chuck, congratulations on your last call. I guess, first of all, thank you for all the detail, Tyler, on the margin and the sensitivity. I think I missed the last part of that guidance, if you don't mind just repeating it, I got all the way through the 150 basis points of rate cuts and I think you had one more line in there.

Sure. Daniel, I'd said that our primary uncertainty at this point is the potential impact to deposit rates as competition may slow the corresponding reduction in deposit rates if market interest rates were to decline. So, in the down 150 basis points rate environment, we would anticipate net interest income and margin to be further compressed, but we would not anticipate net interest margin to fall below 4% for the year in this scenario unless the Federal Reserve were to cut rates more drastically than expected. That's the part you're referring to.

I think so, yes. So I got it. Yes. No, I appreciate that. So I guess the bottom line of that in terms of guidance is, you're assuming that really, I mean, assuming kind of what we -- most folks are baking in now in terms of rate cuts in the back half of the year that there's not too big of an impact on either margin or NII as a whole for 2024, that starts to -- or I guess, may I ask you, does that start to then impact negatively on 2025? Or how should we think about that?

I don't think it will have a meaningful negative on '25. I don't see the Fed bringing rates back to where they were. They'll stop 2.5% to 3%. And depending on the shape of the curve, we should be fine.

Okay. And just a clarification on the commentary on the hospitality loans. I think you said $174 million at year-end, did you say that you exited on post year-end? Is that correct?

No. We said we exited an out of market one during the fourth quarter.

During the fourth quarter, okay. So, that $174 million is carrying into the first quarter. Okay.

We continue to decrease that portfolio.

Okay. Okay. And then I guess, lastly, just on repurchases. You repurchased a small amount in the fourth quarter, the stock has done well, by and large, valuation you've got a stronger valuation in the market. How are you thinking about what's a reasonable valuation when repurchasing shares?

Yes. We continue to evaluate each quarter. As you can see from the prices we quoted. We are willing to go beyond kind of what we would do for an earn back of a bank deal slightly on the share repurchase, given the less risk. But again, I don't think we would expect to take a meaningful position and do a large volume of repurchase in any one quarter as we -- we'll continue to keep it relatively small and continue to support the stock.

Understood. Okay. Thank you. That's all I had. Appreciate it.

Thank you, Danny.

And our next question today comes from Terry McEvoy with Stephens. Please go ahead.

Hi, good morning Chuck, Tyler, and Katie. Chuck, I've enjoyed working with you and our ongoing debate on people's deposit costs, which I must say it's an argument you won and the market rewarded your company last year so, congratulations on winning there.

Thank you, Terry. Don't bet against the mighty PEBO

I learned that last year. A couple of questions here. On the criticized loans, any common theme among the CRE downgrades. And I'm wondering if you built up reserves for that portfolio last quarter?

It was a combination of C&I and CRE. We feel really good about our portfolio. We have our lowest levels of NPAs and lowest level of classified. So, we did have an uptick in charge-offs in Q4, which Q4 charge-offs are usually a little higher than the rest of the year. But we remain extremely optimistic on the credit portfolio.

And as it relates to the allowance, as you would expect, each quarter, we go through and evaluate whether Q factor, qualitative factors are necessary. And as you noted, we did establish a qualitative factor in the third quarter, and we continue to evaluate the use of that as we proceed, but it remains.

And then as a follow-up, the expense levels ending 2024, will most of the expenses related to crossing $10 billion be in the run rate by the end of this year.

Yes.

And then maybe I ask one last one. What -- the loan growth at 6% to 8% is the target. How are you thinking about areas within the portfolio that should support that loan growth in 2024?

And I will comment that we had a good year in 2023 with 10%. I think you'll see the traditional C&I business continue to perform strong. We'll see some increase in balances as some of these projects move to create start to completion on the commercial real estate front, our specialty finance businesses will continue to be strong. I think we'll see a little less growth in the indirect portfolio than we've seen historically.

Great. Thanks for taking my questions.

Thank you

Thanks, Terry.

Thanks, Terry.

Thank you. And our next question comes from Nick Cucharale with Hovde Group. Please go ahead.

Good morning, everyone and congratulations, Chuck.

Thank you. Hi, Nick.

Good morning.

I wanted to start on fee income. The leasing line was quite volatile across 2023, and you pointed to the large buyout in 4Q. Can you help us think about a more normalized number for that business and how it may play out over the course of 2024?

Yes. And as we had kind of noted when we bought this leasing company. This is the one we bought in early 2022. There is some kind of volatility to the fee income associated with that business as they do periodically experience buyouts in which case they generally recognize meaningful gains, which is what you saw in the fourth quarter. This is kind of the first quarter we have had them under our ownership where we've seen this, but it's kind of at the customer's discretion when those transpire. So I would say they'll be less frequent, but it's kind of contingent upon how the customer wants to engage with us.

So if you were to think about a more normalized level for that business, is it closer to the first half of the year?

Yes, I think the fourth quarter was kind of inflated by about $2 million.

That's helpful. Thank you. And then on the short-term higher rate CD offerings are you still running those campaigns? And if so, what rate are you paying for new money?

So we have continued to run them. They're kind of evaluated each month. The rate currently is just over 5%, and we continue to manage that as we meet, like I said, every other week. And we're keeping them short-term. So the terms on those are anywhere from 7 to 11 to 14 months. And the rate is different for each, each term.

Okay. Great. And then just lastly for me, just a follow-up on the loan growth commentary. The leasing portfolio grew 20% in 2023. Is your expectation for a similar rate of growth in 2024?

Yes. I think that they will have double-digit growth, mid- to high teens. I think it's probably more likely.

Thank you for taking my questions.

Thanks, Nick.

Thanks.

Thank you.

And our next question comes from Tim Switzer with KBW. Please go ahead.

Hey, good morning. Thanks, again. And Chuck, congratulations on your career.

Thank you.

I appreciate all of you guys really detailed guidance on the NII by different scenarios. And so is the right way to think about it? Is that a rate cut in the near-term is negative to the margin just because there's limited offset in the deposit side due to competition right now, whether a cut later in the year, it's a little bit easier to digest as the competition moderates. Is that kind of what you guys are talking about in your guidance?

Yes. I think that's consistent.

Okay. And then with your comment that there was minimal impact to NII if there's reductions in mid-2024. Is that just meaning that the full year NII would be flattish relative to 2023?

Yes. I think we'll see some compression 2023 to 2024 is kind of what we're expecting given that we do expect rates. I think we ended 2023 at something like a 4.5% net interest margin, I think, what we said is if you expect a 75 basis point cuts, which is kind of generally what some people expect for 2024, we ended something closer to the 3%. And some of that is being driven by kind of accretion adjustments in 2023 -- accretion reductions in 2024 relative to 2023.

Right. Sorry, just a bit more specific. I mean that NII in 2024 is flat with 23% in that scenario.

Yes, I think it will still be up. Net interest income would still be up. I mean, we will have the additional four months of the Limestone acquisition in our numbers.

Okay. I got you. And if rates are flat throughout the year, is it NIM down in the first quarter or two and then NIM rebounding back up towards the end of the year?

I think our uncertainty there remains around deposit competition. I think, the expectation we have is if rates hold flat throughout the year, deposit competition will remain fierce. And will continue to be pressured on deposit costs throughout the year.

Okay. And the last question I have is on the loan yield, a lot of the reported yields are lower quarter-over-quarter, most of the categories, except for CRE and leases are down quite a bit. I know some of that might be like moderating purchase accounting and stuff. Can you maybe walk us through that, what you're really seeing on an underlying basis?

Yes. Let us pull, so I think to your point, there is some noise in the yields as you see them by category in the earnings release because of accretion is at the segment level. But as far as loan origination yields, we did see improvement, I would say, in the total portfolio, we were up 31 basis points in the third quarter to the fourth quarter in origination yields?

Okay. That's helpful. Thank you, Katie.

Thank you.

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

Hi. Good morning. Congrats, Chuck. I just wanted to follow-up on the CDs. Are these mainly coming from -- is it new money to the bank? Is it new customers? Is it new customers bringing funds over? Do you have any other color on kind of where the funds are coming from?

Thank you, Manny. It's primarily existing customers bringing us new money to the bank would be the biggest category.

Okay. That's helpful. Is the plan to kind of shift to this funding vehicle as the brokered runs off? Just any color on kind of those two pieces together.

Yes. I mean, I think we would prefer customer deposits over brokered deposits -- and I think that, again, our evaluation of broker deposits is more a function of pricing as it relates to comparable alternatives to us, such as kind of FHLB overnight as our primary source for overnight funding.

Okay. The short earn-back on some securities exchange you had, what kind of was a shift in yields? And is there potential for more down the road?

Yeah. I mean, we lower yield of things securities, and we reinvested in yield over 6% at certain times during the quarter. We will continue to evaluate, as you saw, I think we did an investment kind of restructure in the first quarter. We followed up in the fourth quarter with another one. As we said in the script, we'll be opportunistic as it relates to future opportunities there. We won't extend the earn back much past two years, if at all. And again, we'll keep the loss in a quarter relatively reasonable.

So the new securities are about 6%. That's across the whole quarter, any reinvestment you do?

Those are what we just reinvested in the fourth quarter with this transaction, yeah. We have not been actively buying each consistently throughout the quarter. As you saw, our assets -- or our percentage of investment securities to assets went down this quarter relative to last quarter.

Yes. And I'm sorry, did you give what the new loan yields were? I know you said they're up about 31 basis points quarter-over-quarter to what?

881.

That's great. And I guess, is there any other kind of big picture wild cards in your outlook besides deposit costs?

I think we feel really good about the underlying operating details in all of the businesses, and we're optimistic on the outlook that we've presented.

That's great. I really appreciate it, guys. Thank you.

Thank you.

Thank you.

And the next question comes from Daniel Cardenas with Janney Montgomery Scott. Please go ahead.

Good morning, everybody. Chuck, congratulations on a nice run here.

Thank you.

Quick question, just given where valuation levels are right now, what are your thoughts on the M&A front?

We continue to have dialogue with institutions in good times and bad times. So we're pretty persistent and consistent on talking to people. I think the accounting complexities make M&A less attractive today. I think that a lot of institutions are looking at where they are and wondering about whether it makes sense to join an institution that has a little better currency, both in terms of performance and in terms of volume of shares, greater liquidity. And I think some people are beginning or some institutions are beginning to get more realistic with premium expectations. That being said, if you're asking me to guess for the industry, I think you'll see a slightly more deals in 2024 than 2023, but it will not be a return to some of the historic levels.

All right. Good. Got it. Thanks for that color. And then, Katie, what can -- what kind of accretable income can we expect from the Limestone transaction in 2024?

Yeah. I think for the fourth quarter, we had accretion added about 47 basis points to margin. I think we'll -- and again, that included some true-ups as we continue to refine the purchase accounting for that transaction given we're within that year window. But I think we would expect it to be somewhere probably between 30 to 35 basis points on a quarterly basis benefit to the margin as we proceed through 2024. And again, there's a lot of volatility there. I'm not telling you anything you probably don't know, but to the extent any of these deals kind of rewrite or pay off there could be swings in that in any given quarter, but that's what we would expect a state.

Got it, got it. Okay. Perfect. I think all my other questions have been asked and answered, so I'll step back. Thanks guys.

Thanks, Dan.

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.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.