Peoples Bancorp Inc/OH M&A announcement

Thank you, Nick. Good morning, everyone, and thank you for joining our call today. We are excited to announce that we have entered into an agreement to acquire Rockville, Maryland-based Capital Bancorp Inc. We view this as a transformational combination, not simply because of the additional scale, but because of what Capital adds to our franchise and the opportunities the combination creates going forward. Before I get into the transaction, I want to recognize Capital's management team, their board of directors, and the organization they have built. Ed Barry and his team have created a high-quality franchise with a differentiated set of businesses, a strong track record of growth and profitability, and a talented team across the company. Just as importantly, we have been very impressed with the way that they have approached this process.

Our interactions throughout the discussions and diligence have been thoughtful, collaborative, and constructive and have reinforced our confidence in both the cultural fit and the opportunity we see in bringing these organizations together. There are a few highlights I want to point out regarding the transaction. First, strategic fit. As I mentioned, Capital has built a differentiated and high-performing franchise anchored by a strong relationship-based commercial bank in Washington, D.C., in the metropolitan area, complemented by several established and profitable specialty businesses with national capabilities. Those businesses include OpenSky, a consumer credit card platform that provides secured, unsecured, and partially secured credit cards nationwide, which are digitally originated and served. Windsor Advantage, a loan service provider that offers community banks and credit unions a comprehensive outsourced SBA and USDA platform.

Capital Home Loans, which originates conventional and government-guaranteed residential mortgage loans primarily for sale into the secondary market, and a government-guaranteed lending platform with a particular expertise in areas including solar and renewable energy. These are established businesses with experienced leadership teams, and importantly, they add capabilities and sources of earnings that we do not have today. Capital has demonstrated an ability to translate their differentiated business model into consistently strong financial performance. The company has generated attractive profitability, including a last 12 months return on average assets of approximately 1.58% and return on average tangible common equity of approximately 16%, while also producing strong balance sheet growth. Over the last three years, Capital has grown assets, loans, and deposits at approximately 20% annually, well above peer averages. We believe that this combination of diversified capabilities, strong growth, and demonstrated profitability is particularly compelling.

We are acquiring a business that is performing well today. The merger will create additional opportunities to enhance that performance through the scale, products, and resources of our combined organization. Capital also brings an attractive deposit franchise, including specialized national deposit verticals that complement our traditional relationship-based funding base and provide additional avenues for growth. We believe our expanded product suite and expertise, including wealth management, insurance, equipment finance, premium finance, and other commercial capabilities, creates opportunities to deepen relationships across Capital's customer base. We also see opportunities to expand a number of Capital specialty businesses across our broader franchise. Notably, none of these revenue opportunities are reflected in our modeling assumptions. Our financial projections are based on the businesses largely as they operate today. We view successful execution against these opportunities as potential upside to the returns we included in our investor presentation.

This transaction gives us meaningful scale and a more diversified financial profile. On a pro forma basis, we expect to have approximately $14 billion of assets, $10 billion of loans, and $11 billion of deposits. Just as importantly, the combination creates a more balanced earnings mix. We retain a predominantly relationship-based community banking franchise while adding multiple national lending, deposit, and fee-generating businesses. On a pro forma basis, approximately 23% of revenue would come from fee income, providing greater diversification in our sources of earnings, which we see as key to our future. An important part of that scale is the $10 billion asset threshold. We have been preparing for this threshold for a number of years, investing in our systems, infrastructure, talent, risk management, and governance. During due diligence, we thoroughly reviewed the existing infrastructure of Capital to ensure it conformed to our needs for passing the threshold.

This transaction allows us to cross $10 billion with meaningful scale and earnings capacity rather than simply growing incrementally over the threshold. Our standalone projections already contemplate the approximately $11 million of Durbin-related revenue impact associated with our existing business, including the pending Citizens merger, while Capital adds very little incremental debit card exposure. We believe this is a financially efficient way to move through that threshold and position us for our next phase of growth. We believe the financial returns are very compelling. We have spent significant time understanding Capital and each of its businesses. Our diligence process was broad and cross-functional, with a particular focus on credit and the specialty businesses, including an extensive review of OpenSky. The work we completed gives us confidence in both the quality of what we are acquiring and our ability to successfully integrate the organizations.

Ultimately, we believe this combination accelerates the strategy we have been pursuing for a number of years and validates our watchwords of strategic patience that we have repeated with our investors for the past few years. This transaction gives us greater scale and significantly amplifies our current business in the D.C., Maryland, and Virginia markets. It also adds attractive and complementary businesses, improves and diversifies our earnings power while creating meaningful opportunities for continued growth and shareholder value. I will now turn the call over to Katie for some additional background on performance metrics of the proposed deal.

Thank you, Tyler. The proposed transaction is for full stock consideration with a fixed exchange ratio of 1.11 shares of Peoples for each share of Capital. Based on our 20-day average price, that represents an aggregate transaction value of approximately $728 million. Following the close, we expect our existing shareholders will own around two-thirds of the combined company, and Capital shareholders will comprise the remaining third on a diluted basis. Additionally, three current directors from Capital will join our board. We anticipate completing the transaction during the first half of 2027, subject to shareholder and regulatory approvals along with customary closing conditions. As Tyler mentioned, we believe the financial characteristics are attractive. Based on our current assumptions, we expect fully phased in 2027 EPS accretion of approximately 19%.

Initial TBV dilution is approximately 10.8%, with an earn back period of less than three years, and the modeled IRR is greater than 25%. We will continue to maintain a strong capital profile after the transaction and are estimating a CET1 ratio of approximately 11.9%, providing meaningful capital capacity as we integrate the businesses and continue to grow the combined franchise. I would like to highlight some of the assumptions used within our projections. We are modeling cost savings equal to approximately 30% of Capital's non-interest expense, with approximately 70% phased in during 2027 and the full amount realized in 2028. Again, we have not modeled any revenue synergies despite the opportunities that Tyler discussed.

We are currently estimating approximately $56.5 million of pre-tax transaction expenses and have incorporated a 3% gross credit mark on Capital's loan portfolio, along with the other purchase accounting adjustments outlined in the presentation. We believe those assumptions appropriately reflect the diligence completed thus far and provide a sound basis for the financial returns we have included in the presentation. We expect that our interest rate risk profile will be relatively unchanged after the merger and will be consistent with our position for the last few quarters. I will now turn the call back over to Tyler for his closing comments.

Thanks, Katie. While we are in the process of completing our merger with Citizens, we have an established record of being able to close and convert multiple mergers within a short period of time. We announced this Monday that regulatory approvals have been received, and we are on schedule to close Citizens on October 30th. We are confident that we have the capabilities and workforce to successfully complete both mergers and begin realizing their benefits in the near future. We are focusing on a streamlined close and conversion process for both of our mergers while working to bring our collective clients together with our expert associates to provide products and services that not only meet but exceed their needs. Our culture is relationship-based at its core and will continue to be the primary driver of our day-to-day interactions with our clients.