Good morning, and welcome to Peoples Bancorp Inc.'s 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 three and nine months ended September 30, 2024. 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' third quarter 2024 earnings release and earnings conference call presentation were issued this morning and are 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 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 Tyler Wilcox, President and Chief Executive Officer; and Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Wilcox, you may begin your conference.

Thank you, Gary. Good morning, everyone, and thank you for joining our call today. For the third quarter, our diluted earnings per share improved to $0.89 compared to $0.82 for the linked quarter. Diluted EPS for the first nine months of 2024 was $2.55 compared to $2.47 for 2023. As we reflect on our performance for the third quarter, here are a few highlights compared to the linked quarter. Our net interest income improved 3% and our net interest margin expanded 9 basis points. Fee-based income grew 5%. Total non-interest expense declined 4%. Return on average assets for the third quarter improved to 1.38% compared to 1.27%. Return on average stockholders' equity improved to 11.5% from 11%. Our efficiency ratio improved to 55.1% compared to 59.2%. Compared to June 30th, our deposits increased $185 million, with over $100 million of client deposit growth. Our tangible equity to tangible assets improved 65 basis points to 8.25%. Compared to the linked quarter end, our book value per share improved 4% to $31.65, while our tangible book value grew 7% to $20.29. Our regulatory capital ratios improved compared to the linked quarter end, as earnings exceeded dividends paid. We also surpassed consensus estimates for diluted EPS for the third quarter, which were $0.82 compared to our reported results of $0.89. As far as our credit quality, compared to June 30th, our criticized loans declined as a result of pay downs and upgrades during the quarter. Our classified loans increased during the third quarter, primarily due to the downgrade of two commercial relationships totaling nearly $10 million combined from criticized to substandard. Our delinquency was comparable to the prior quarter with the portion of our loan portfolio considered current at September 30th was 98.5% compared to 98.8% at June 30th. We continue to prudently…

Thanks, Tyler. Compared to the second quarter, net interest income improved 3% for the third quarter and net interest margin expanded 9 basis points. The improvement was driven by higher accretion income, which totaled $8.1 million for the third quarter and added 39 basis points to net interest margins compared to $5.8 million and 28 basis points for the second quarter. This positive impact to the third quarter will lower our future accretion income to be recognized. For the first nine months of 2024, net interest income increased 4%, while net interest margin declined 36 basis points. Our loans repriced more quickly than our deposits as the Federal Reserve raised rates in prior periods, so the decline in net interest margin compared to the prior year was driven by the catch-up of deposit costs. Accretion income totaled $20 million for the first nine months of 2024, adding 33 basis points to margin and with $16 million adding 29 basis points for the same period in 2023. Moving on to our fee-based income. We had growth of 5% for the third quarter compared to the linked quarter. Most of the improvement was driven by higher lease income as we recognized some early termination gains on leases that paid off, totaling $1.1 million. These terminations are hard to predict and are driven by client activity. We also had an increase in mortgage banking income due to higher loan production, which was partially offset by lower bank owned life insurance income. Through the first nine months of 2024, fee-based income grew 13%. We had several improvements, including higher lease, trust and investment, and insurance income. We also had increases due to the full year impact of the Limestone merger. As it relates to our non-interest expenses, we came in lower than we had…

Thank you, Katie. We have mentioned before our focus on being a great employer. In July, we received awards from the U.S. News & World Report for Best Companies to Work for Banking and Best Companies to Work for at Midwest. We also strive to contribute meaningfully to the communities we serve. In September, we partnered with Washington State College of Ohio and celebrated the official opening of the Peoples Bank Foundation student market. The market will provide a variety of nutritious food options for students and their families at no cost. In October, several executives and I attended a groundbreaking ceremony of a specialized women and children's hospital with Marietta Memorial Hospital in Southeastern Ohio, for which we pledged a meaningful multiyear donation from our Foundation in support of bringing worldclass healthcare to our area. As 2024 comes to a close, we would like to update our guidance for the fourth quarter. Assuming 50 basis points in rate reductions by the Federal Reserve during the fourth quarter, we expect net interest income and net interest margin to modestly decline. This would result in a net interest margin of between 4% and 4.1%. We anticipate our fee-based income will normalize for the fourth quarter and exclude the early termination gain on leases we reported for the third quarter. We expect quarterly total non-core -- non -- excuse me, we expect quarterly total core non-interest expense of between $67 million and $69 million for the fourth quarter. We anticipate full year loan growth to come in between 4% and 6% with this reduction in our forecast, including potential paydowns, charge-offs and selective lease balance growth for the fourth quarter. We anticipate a full year net charge-off rate of between 30 basis points and 35 basis points, primarily driven by trends in…

[Operator Instructions] Our first question is from Daniel Tamayo with Raymond James. Please go ahead.

Thanks, guys. Good morning, everyone.

Hi. Good morning.

Good morning, Danny.

I appreciate all the detail on the credit outlook and on the third quarter impact from leases, Tyler. Maybe we can start there and just -- is there anything else that you can provide in terms of where you see the credit outlook specifically for leases going? I think you said you're looking for charge-offs similar to what you had in the third quarter over the next two quarters, I believe?

Yeah.

Yeah. If you could just kind of give us an idea of the type of charge-offs you're expecting over in that time period and then what would be bringing that down beyond that?

Sure. Thanks for the question, Danny. I guess the first thing I would say is, I expect that the lease charge-offs in the small ticket leasing will peak in the fourth quarter. And we've done, obviously, a lot of analysis of the kind of pipeline and the assets within that portfolio. And so I think we'll end the year with a full year net charge-off rate of between 5% and 6%. And so you'll see a, I'd say, a modest increase in the fourth quarter and then more in line with the second and third quarter in the first quarter of next year. That's based on what we know today. But we've done a pretty deep dive into the portfolio. From an outlook perspective, if you look at the accompanying slide that we put in there, we've been at, kind of, I would say abnormal lows relative to that type of business and relative to the pricing that we're getting in that business. And so we expect it to normalize somewhere in the low to mid-4%s. Again, we've said for years we price it at 4.5%. I wish we were at 1.5% net charge-offs in that business forever, but it's on a risk-adjusted return basis at 4.5%. As we noted, it's incredibly profitable. So that would be the normalization that I would expect, and I would expect that because of the changes that we've made to some of the segments. You can see that production is somewhat challenged because we've curtailed some of the broker business, and we feel like we have a really good handle on the ongoing production, and production is being focused on where we see less charge-offs over time.

Okay. That's very helpful. And I guess just to follow-up there, the -- I think you said you eliminated some larger broker relationships, and then I think you also said some specific industries within the leasing business. What industries are you backing away from at this point?

Sure. No, we are -- we backed out of titled fleet over the road trucking, garment printers. We've reduced -- pretty significantly reduced hotel and hospitality and all of that in favor of investments that we have made and will be making in the sales force in that area to kind of focus on some of the core examples, which the core kind of positives are these $30,000 to $40,000 loans and manufacturing equipment, landscaping equipment, plumbing, areas like that.

Okay. That's interesting. Thanks. And then finally, again, on that topic, but on the loan growth side, just curious how the slower loan growth within the leases -- what kind of impact that's having on your overall loan growth forecast coming down?

It didn't help in the third quarter. We probably saw a reduction of about $10 million relative to where it had been, but that we were seeing double-digit growth in that portfolio this time last year. So the swing is probably $15 million to $20 million swing as to kind of where we might have expected to be otherwise.

Okay, perfect. Well, thanks for taking all my questions.

Thank you.

Thanks, Danny.

The next question is from Brendan Nosal with Hovde Group. Please go ahead.

Hey, good morning, folks. Hope you're doing well.

Hey, Brendan.

I just want to start off on the commentary for positive operating leverage in 2025. I guess, if somebody, like, unpack the parts of the guide, it looks like expenses will grow like 4% or 5%, kind of, using your guidance off of the core '24 number. So just kind of curious what you're seeing on the revenue side, especially within NII, that would allow you to outpace that level of cost growth? Thanks.

Yeah. I think on the expense number you just quoted, I think that's a little higher than what we're anticipating. I think you quoted 4% to 5%. I'd say we're probably closer to the 2% to 4%. So somewhere in the middle there. And then on the expense side, I'd say it's -- so we do expense balance growth on the loan portfolio, even though, as we noted, maybe some steadiness or contraction on the margin slightly. And then I think we expect some meaningful fee income growth. I think we expect mortgage to recover a bit. And then our other businesses, including wealth management or trust and investment services and insurance, I think we expect handsome growth out of them in 2025 relative to 2024.

Okay. All right. That's helpful. Thanks. Maybe kind of pivoting from here to capital and the M&A environment. Just kind of curious how you perceive the M&A environment today, the pace of conversations and your own appetite for additional deals at this point?

Yeah. So a lot going on in the M&A world, especially with some recently announced deals that are kind of within the size range and adjacent to us geographically. So we continue to watch that space. I would say the pace of conversations is significantly increased from where it was at the beginning of the year. I still think there are some who are weighing their options in anticipation of the election results to see what happens there. We're agnostic about that. I think either way there's going to be increased M&A activity. I would say from, just to reiterate, kind of, where we stand, we're at $9.3 billion, we have made significant investments into crossing the $10 billion threshold. We have said previously that we had an appetite for maybe two parallel paths, one would be multiple smaller deals and one would be one larger deal. I'd say in the last two quarters, our thinking has sharpened maybe a little bit on that, around -- leaning more heavily towards patiently seeking out a larger deal. And because I think -- I don't believe we, as a bank, have execution risk with the ability to do multiple deals, but I think you're just seeing more -- that being a little bit more difficult in this environment. So we prefer to see what our options are, and we're having a lot of conversations, and I expect that some of those will bear fruit in the future. But we're being patient and leaning towards larger opportunities is what I would say. But open to all conversations, and we'll continue to have those.

Great. Excellent. That's super helpful color. And thank you for taking the questions.

Thank you.

Thank you, Brendan.

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

Hi. Good morning, everyone.

Hi, Terry.

Hi. First off, thanks for all your comments and insight into 2025. Much appreciated. And in terms of questions, could you just maybe run through how your competitors reacted to the Fed rate cut from a deposit pricing standpoint and how your strategy may be different from your competitors? And I'm just kind of curious the decision to kind of add some higher costing retail CDs did impact your cost of deposits, which are up a bit more than I had expected, particularly given kind of the decline in loan balances, why they need to add the CDs here in the third quarter?

Yes. Terry, I would say, the -- first of all to answer your question about the competitors, it's all over the place, is what I would say. Every time, one, we have a broad variety of geographies, and we have small irrational banks, we have larger irrational banks, and we have other banks that are very well in line with where we are. So we've really tried to remain middle of the pack and lower our special rates, which is where we've been attracting a good amount of our deposit growth over time. So -- and I can talk more about kind of the loan growth challenges a little bit, but I would say the deposit strategy has been to continue to ramp down our deposit costs over time and keep the duration short, as we have with our specials, so that we have flexibility there.

Thanks. And then maybe as a follow-up. And I guess, it's a pretty direct question to Tyler, when you think about the small ticket leasing business, do you think it's accretive to shareholder value? I mean, it is high ROA, high margins, but when times are good, we get worried times are going to get bad. And when charge-offs go up, we spent the first 10 minutes of this call talking about a portfolio that's, what, 3% of total loans. So I just kind of get your high-level view of is this portfolio, you think, the right for a publicly traded company. Again, given kind of the trends we've seen in the discussion we've had today.

I think it is, Terry. I think the bogey is obviously that it's been at an unnaturally low and unnaturally low charge-off rate over time. I think the -- if you, what is the attractiveness of our bank? It's the margin that's very powerful. It's the deployment of our low-cost deposits into profitable businesses. And so yes, it is getting some headlines. It gives us diversity. It's very granular. There's 7000 loans in there, or 7000 leases. And I realize why there's questions about it, but I'll trade off talking about it for 10 extra minutes for the profitability that's brought to our bank over time.

That's great. I appreciate your insight there. And thanks for taking my questions.

Thanks.

Thanks, Terry.

The next question is from Nathan Race with Piper Sandler. Please go ahead.

Yep. Hey, good morning.

Hi, Nate. How is it going?

Good morning, Nate.

Well, thank you. Just thinking about the margin trajectory in the next year, if you end up getting maybe more than 50 basis of cuts in 2025, maybe it's closer to 100, how do you guys kind of think the margin trends under that scenario in the back half of next year?

Yeah, I think we quoted this in the script. I think for every 25 basis points out, as you know, we run a parallel shift for our ALCO reporting. And in a parallel shift, we would expect about a 2 basis point impact for every 25 basis point cut, roughly a little under $2 million. Now, assuming some steepness to the curve or flatness to the curve even, that gets cut in about half for a 25 basis point cut. So again, if you get an extra 50, we're thinking 2 basis point to 4 basis point impact to the margin that we've set forth in the expectations.

Okay, got it. And I imagine that's under a static balance sheet scenario. So assuming 4% to 6% loan growth next year, and you're funding that with both the combination of cash flow off the bond book and deposit gathering. How do you kind of think about that kind of more dynamic impact? Is it more stable?

Yeah, I think it is more stable. I think we do expect deposit growth to continue as we proceed and as we saw in the third quarter and as we proceed into next year and as we noted those special rates are coming down and have been coming down even before the Fed cut rates. So we will continue on that path to make that growth profitable for us.

Got it. And any thoughts on a good starting point for accretion income for the fourth quarter and just expectations for next year and kind of how that plays into overall NII growth expectations under the discussion we just had around NIM.

Yeah, so the quarter -- for the third quarter, just to level set it out at about 28 basis points to margin. I think, you could expect in the fourth quarter and first half of next year it's probably between the 20 basis points and 25 basis points a quarter trending down over that time horizon and then we probably go 15 basis points to 20 basis points the back half of 2025.

Okay, got it. And assuming charge-offs remain kind of in that 30 basis point to 35 basis point range into next year, how do you think about providing in terms of provisioning to cover those charge-offs and also just given the loan growth expectations?

Yeah, I think we're -- as we noted in here, we have -- we feel good that we have much of the small ticket leasing charge offs reserved for adequately as we sit here at 930 and I would say the charge offs that we're expecting otherwise within the portfolio are largely covered within the reserve coverage ratios we already have for those portfolios and I would say plus in excess of those. So I think we're adequately reserved as we sit here today and under the assumption that the charge-off rates stay relatively stable in '25 as they are in '24.

Okay, great. I appreciate all the color. Thank you.

Thanks for your questions.

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

Hey guys, thank you for taking my questions. I had a follow-up on the margin trajectory in your guide, I guess asset sensitivity given the guide to 2 basis points for every 25 base point cut with 53% of loans variable rate, can you kind of walk us through the offsets on the liability side of the balance sheet, particularly the deposits. I know you have a pretty short CD portfolio that can help but where else would you be able to kind of offset that 50% of loans that reprice relatively quickly as well?

Yeah, I think there you're seeing some money markets at higher rates in the deposit book, and we do have some funding that is relatively short in nature as well that will help offset, I would say, on the loan side there are floors in all or majority of our variable-rate loans as well. So those -- depending how drastic cuts we observe over the next few quarters, they may or may not kick in, but they are in there as a stopgap.

Can you provide any color on how low those floors are relative to current rates?

Yeah, they vary by borrower and by segment.

Okay. And what's kind of like the overall deposit beta assumption you guys have over the course of the cycle? And does that change as you get deeper into the cycle?

Yeah, historically we've said it's around 25%, but that includes non-interest bearing. So, I think what we've seen is something closer to the low 30% deposit beta. And I would again say that's kind of the benefit of our franchise, very granular, low-cost deposit franchise, providing the benefit to margin that you see. So I would think there is some lag, as you note that some of our pricing, higher pricing products in the deposit portfolio are sitting in five-month CDs. So it takes a short time for those to reprice, but they will reprice in relatively quick manner.

Okay. And do you guys project the margin to kind of dip below that 4% level and then recover back to the 4% to 4.2% or just kind of stay around there after Q4, I wasn't sure what you guys meant by stabilize.

Yeah, I think we would expect to see a four-handle in much of -- in all of '25. Again, that includes the accretion estimates that I just quoted on a previous question that was raised. So I do think the four to 4.10%, 4.20% that we guided is reasonable. And I don't expect that we dip meaningfully or at all below four.

Okay, great. And my last question, appreciate all the details. What kind of, like, leasing revenue and mortgage banking assumptions do you have embedded in your guide? Because with your outlook for modestly lower NII but positive operating leverage that implies still strong revenue growth overall. So I was wondering what assumptions you guys have in there?

Yeah, I don't -- I didn't mean to quote that net interest income would be lower next year than this year. I said we'd see a compression in margin. But with the growing balance sheet, I think we expect net interest income to be relatively stable with a slight upside. And then on the fee income side, I think we quoted mid to high single digit growth in '25 relative to '24, I would say lease income is comparable to that in '24 with maybe a little bit of an upside. I'd say the -- more of the growth is on the mortgage, which again, you saw some benefit in the third quarter, which I say we would expect to kind of continue into the fourth and through '25. But trust and investments and insurance are the other two driving meaningful growth year-over-year in the fee income businesses.

Got you. My bad for misunderstanding and I got it there. Thanks for all my -- thanks for answering the questions again.

No, thank you. No problem.

No. Thank you.

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

Hey, sorry to touch on the NIM trajectory. NII trajectory again. So it seems that -- is it right to think about it that there's some potential for expansion or at least once pressure diminishes with rate cuts, you could see stability to upside on the NIM, NII later next year.

Yes, I think that is correct.

And then if you add into a little more detail on CD repricing trends over the next couple of quarters, just to kind of help with the NIM guide and where you could reprice to.

Yeah, so the retail current offering that we have out there is 4 points, roughly 4.5%. Again, a five-month term on that. And I would expect as rates cut, we would move with the Fed in that as we did previously or as we did in September with the rate cut.

And then how have you seen your kind of commercial pipelines react, or the borrowers react to rate cuts? And just what are kind of some preliminary discussions there in terms of demand?

Yeah, Manuel, I would say that the story of loan growth is an interesting one. And I would say that in this quarter and this year to date, we've seen really accelerated paydowns. So especially in our investment commercial real estate book. For reference, in year to date last year, we saw $10 million total sale paydowns for stabilized properties in the investment commercial real estate. This year to date we're at $100 million. So 10 times Refi pay downs year to date are $71 million. And so I think one of the reasons for kind of a measured 4% to 6% loan growth guide for next year is the expectation that in a declining rate environment, there is the potential for more pay downs to the Refi in the permanent market on the investment commercial real estate notwithstanding the fact that demand has been good. Do I think a continuing falling rate environment can be good for demand on the loan side in all businesses? I do. But that the countervailing pressure and the particular quarter of a big chunk to swallow of pay downs where we had $148 million in pay downs this quarter in the commercial space is kind of the trend there.

And to this point, what are you seeing on commercial loan yields and just kind of competition in that space specifically? I know you're moving off from the leasing benefit a little bit, but just kind of what else are you seeing on new loan yields and competition there for the areas that you are growing?

I would say, stability. I mean, obviously, we're competing in metro areas that are -- there's a lot of players like Columbus, Cincinnati, Cleveland, Louisville, Lexington, Richmond and Washington, D.C. But, I think commercial yields in the third quarter are in the 7.5 range, and that's been pretty stable for a while now.

That's great. That's good color. I appreciate that. I'll step back into the queue.

Great. Thanks.

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

Hey good morning, guys.

Hi, Dan.

Good morning.

Just most of my questions have been asked and answered, but just a quick question on capital. I guess with AOCI continuing to -- potentially continuing to decline in the falling rate environment, and your TCE ratio poised to continue to strengthen, what are your thoughts on stock repurchase activity?

Yeah, Dan, we continue to evaluate them. I think we've given the priority, historically organic growth. We remain committed to the dividend and then depending on the environment, kind of M&A and stock buyback. So we will continue to evaluate it as the capital ratios continue to improve. But again, I think as you've seen us in past, we're pretty opportunistic as it comes to the buyback.

Right, right. No, makes sense. And then in terms of the specials, deposit specials that you ran in the third quarter, what kind of rate were you guys offering on those specials and what was the term of the product?

Yeah, the product was close to the 5%. I think it might have been a little higher than 5%. We moved it throughout the quarter and definitely moved it most meaningful when the Fed moved. But I think the special product, the highest price special was a five-month. And where that sits today is what I quoted again, we've come down on that rate now to something closer to 4.5% for a five-month CD. We do have some other 11 month out there, but again, it's a lower rate than what we're paying on the five-month.

Yeah. And additional plans for additional product offerings in Q4 or are you just going to kind of see how things kind of settle down here?

I think your question is specific to deposits. I think we'll continue on the path we're on at this point and continue to evaluate the rate on the CD specials that we offer in the terms. But I would expect us to stay relatively consistent with where we've been over the last few quarters changing the rate downward as the Fed moves.

Makes sense. And then I guess as you look at in terms of deposit costs, as you look at yourself versus your competition in some of your larger markets, do you guys typically rank in the middle of competition or higher end, lower end?

No, I think we rank pretty much middle of the road for deposits pricing.

Try to stick to our discipline and that's one of the reasons for our focus on C&I lending as well is that generally brings the whole relationship, so deposits, treasury management and so forth.

Got it. Okay, perfect. I'll step back. Thanks guys.

Thank you.

Thanks, Dan.

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

I do. I want to thank everyone for joining our call this morning. Please remember that our earnings release and a webcast of this call, including our earnings conference call presentation, 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.