Good morning. And welcome to Peoples Bancorp Incorporated 2019 Second Quarter Earnings Conference Call. My name is Ben, and I will be your conference facilitator today. Today's call will cover a discussion of the results of operations for the quarterly period and six months ended June 30, 2019. 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 session 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 fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. These include, but are not limited to, the success, impact and timing, of the implementation of Peoples' business strategies, including the ability to integrate the business of First Prestonsburg Bancshares Incorporated and any other future acquisitions, which may be unsuccessful or maybe more difficult, time consuming or costly than expected; the success, impact and timing of the expansion of consumer-lending activity; the competitive nature of the financial services industry; changes in the interest rate environment; and the effect of the current inverted yield curve; slowing or reversal of the current U.S. economic expansion; uncertainty regarding the nature, timing, cost and effects of federal and/or state banking, insurance and tax legislative or regulatory changes, or actions; the effects of easing restrictions on participants in the financial services industry; changes in policy and other regulatory and legal developments and adverse changes in economic conditions and/or activities. 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 the forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' second quarter 2019 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations. Any reconciliation of the non-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 John Rogers, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Thank you, Ben. Good morning. Thank you for joining us for a review of our second quarter and year-to-date results During the second quarter of 2019, we made progress in several key areas, including the successful close and conversion of First Prestonsburg; net interest income growth of 6% compared to the first quarter of 2019; net interest margin grew to 3.78% for the first six months of 2019 compared to 3.7% for 2008; increase of 13% in non-interest income, excluding net gains and losses compared to the second quarter of 2018; the efficiency ratio, adjusted for non-core expenses, improved to 60.2% compared to 62.2% for the first quarter of 2019; and, quarterly annualized net charge off rate of 3 basis points for the second quarter of 2019. Earlier this morning, we reported net income of $9.6 million or $0.46 per diluted share compared to $0.73 for the linked quarter and $0.41 a year ago. For the first six months of 2019, diluted EPS was $1.19 compared to $1.04 for 2018. During the second quarter of 2019, we recognized the majority of the additional one-time costs related to the First Prestonsburg acquisition. These costs totaled $7 million for the second quarter of 2019 and were $7.3 million for the first six months of 2019. These costs reduce diluted EPS by $0.28 and $0.29 respectfully. The First Prestonsburg acquisition positively impacted diluted EPS by 2% during the second quarter of 2019. During the second quarter of 2018, we recognized acquisition costs of $6.3 million, which reduced diluted EPS by $0.25. For the first six years of 2018, these costs totaled $6.4 million and negatively impacted diluted EPS by $0.27. During the first quarter of 2019, we recognized the recovery of $1.8 million on a previously charged off loan, which added $0.07 to…

Thank you, Chuck. Based on our initial valuation, the First Prestonsburg acquisition added $289 million of assets after preliminary fair value adjustments. The acquired assets and liabilities primarily consist of $138 million of investment securities; $130 million of loans and $270 million of deposits. The total purchase price was $43.7 million and included the special dividend declared by First Prestonsburg immediately prior to the closing of the acquisition. We recorded preliminary goodwill of $23 million. The preliminary fair value adjustment to loans resulted in a higher discount than we had originally forecast. As credit quality had deteriorated since we performed due diligence, this higher discount, coupled with somewhat lower loan balances acquisition date, drove much of the increased goodwill that we recorded. Our net interest margin during the second quarter of 2019 declined slightly to 3.77% compared to 3.80% for the linked quarter, but was higher than 3.74% in the second quarter of 2018. During the quarter, our higher cost for time deposits and governmental deposits exceeded the positive impact of improving loan yields compared to the linked quarter. Compared to the second quarter of 2018, our increases in loan yields suppress the growth in our total cost of funds, which benefited net interest margin. For the first six months of 2019, our net interest margin was 3.78% compared to 3.70% for 2018. Both the second quarter and first six months of 2018 benefited from proceeds of $248,000 and $589,000 respectively on investment security for which we had in previous years recorded an other-than-temporary impairment, which added 3 basis points to net interest margin for each period. Net interest income increased 6%, compared to the linked quarter and was 10% higher than the second quarter of 2018. The growth stemmed from increased interest income from loans, while our deposit costs…

Thank you, John. We are happy to have successfully integrated and on-boarded another acquisition. While each acquisition is individual in nature, we have streamlined our processes and planning procedures to make each one more efficient and seamless than the previous. First Prestonsburg has given us an opportunity to go deeper and wider with their clients, as well as our current insurance clients within the market. We are able to offer products and services that are competitive with larger banks, and diversified products that many local financial institutions do not offer. Although we reported acquisition related costs during the quarter, which negatively impacted earnings, we have been able to improve our results in the following areas. Our return on average assets adjusted for one-time acquisition related costs was 1.47% for the first six months of 2019, compared to 1.34% for the same period of 2018. We experienced lower gross charge-off rates than we have seen in recent history. Non-interest income, excluding net gains and losses, increased slightly, compared to the linked quarter, making up for the $2.2 million decline in income from annual performance based insurance commissions and the sale of restricted Class B Visa stock, which we recognized in the first quarter of 2019. Our efficiency ratio adjusted for non-core expenses, improved to 60.2% for the quarter and 61.2% for the first six months of 2019, compared to prior periods. Excluding acquisition related expenses, we generated positive operating leverage, compared to the second quarter of 2018 and the first six months of 2018. And we successfully lowered our loan-to-deposit ratio to 84% from 92% at year-end giving us additional capacity to grow. We have updated our expectations for the remainder of 2019, which exclude acquisition-related costs and currently anticipate organic loan growth of 3% to 5% during the full-year 2019.…

Thank you, Chuck. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers of Sandler O'Neill. Please go ahead.

Good morning, guys. This is actually Jeanie on for Scott. So just quickly, what are the main puts and takes in the core NIM performance in the 2Q as you guys see it?

Can you repeat -- did you say NIM, Jeanie?

Yes, the core margin performance this quarter?

Yes, I mean, I think the margin was pretty close to what we expected. We did have a security that became due early and we incurred a premium amortization about $200,000 on that, which hurt the core. And First Prestonsburg came in they were pretty much 50%-50% in securities to loans, which hurt us a -- which helps our liquidity, and we're really happy about that. But it did have a little bit of an incremental hit to our margin. And so I think overall, I mean, it's not unexpected from what happened, given that premium amortization we hit, we took. We've been getting these benefits and their OTTI for last year for a while this one, kind of, went to the opposite direction for this quarter. So we hopefully think that things will somewhat stabilize. But as we've mentioned, we do anticipate the -- some rate decreases as we move forward here, right? So I think the market's pretty much about 95% for July here, and we're also anticipating another one in September as well.

Okay, OK, great. And then just separately, at what point would you guys be able to reduce deposit costs, if we were in a declining rate environment?

Yes. So we've given that some consideration already and had some preliminary discussions on that. And we think, we were decently aggressive in raising deposits over, somewhat in '17, a little bit more in '18. And we see that we could pull back on some of those rates as we proceed throughout '19 here in the right environment that we look at there. We can consistently look at our rate reports that we get from services and while others are doing, and we feel as though there's probably some room in a number of products to cut back somewhat.

Our next question is from Kevin Reevey with D.A. Davidson. Please go ahead.

So first question is what strategies are you implementing or do you plan to implement in order to defend your margin going forward, especially given the fact that's almost sure, believe that we're going to get at least one rate cut this year?

I mean, I would just say a couple of different things. You know, obviously it's both sides of the balance sheet, in terms of getting as much loan yield as we can, and moving deposits -- we're fortunate to have a relatively low cost of deposits, a very high percentage of DDA, and while we have been running some specials and things to help with the loan to deposit ratio. We can slow down that activity and the investment book in terms of the duration of the investment book, we should be able to be pretty flexible in terms of making adjustments. So we're not uncomfortable that's what I'd said. John anything you want to add.

Yes, and we can the swap rates are actually pretty low in today's world. We can do we've done some transactions with respect to that to lower our funding costs on that side. We've talked about a good chunk of our appropriate CDs there relates to CDARS, which we've been kind of using as an alternative to overnight funding, because it's a lower rate. So those are a short-term maturity, relatively short. We know we can get rid of those and go to overnight or whatever, cheaper funding sources, race decline. So there are some actions that we can do to control some of our costs, as well as deposit costs, we can look to decrease that and keep our eyes on the market and what's going to happen there. But we were on our base rates that we have, we were decently aggressive and in the marketplace. And so we feel like we can cut some of those back over time as time progresses. As I mentioned to the last question.

And then Chuck did I hear you correctly that your NIM guidance for $370, $375 for the full year? Does that assume two rate cuts or is it one rate cut?

Two rate cut.

And so how should we think about that, assuming we get one rate cut. Would you be more at the upper end of the $370, $375 range.

Yes.

But because, I mean, the first cut is July, right? So you're going to get that for half the year, right? The next one that goes into effect in September that really has a couple of months versus impact that kind of flows through your assets over time.

Our next question is from Michael Perito with KBW. Go ahead.

Thanks for taking my questions. I want to start on loan growth. Just obviously, the pay downs to your prepared remarks, Chuck, have been higher in the first half of the year. I mean, you mentioned in the earnings release that originations were strong. You're not losing any clients. But I guess, for the 3 to 5 point-to-point growth for the year at First Prestonsburg. I mean, now we're kind of suggests an upper single-digit type growth rate for the back half of the year according to my math. And I'm just curious if what insight you have? I mean, you've got a month down in the third quarter I guess into the slowdown of the pay downs. And if rates start to come down, do you think that -- as potential that that could go all the other way on you.

It's a tricky question, because some of you, I don't think you might. But some of the folks on the phone probably can remember going back a number of years where we were flat at half time, and said we would get to 6%, and we'd get very few and got to 6%, I kind of get [indiscernible] down to the 5%. But all of the folks that are -- are the folks that are in the business of generating loans are still shooting for the 6%. What gives me some confidence about it is the analysis of the pipeline, the size of the pipeline, you've seen the 40% more, which is larger originations. We just need to catch a break on the pay-offs, and I think that's possible given the real estate portfolio that we have and projects that could be taken to the permanent market. I don't think we're as deployed positioned in the second half as we were in the first half. We had a couple of company-owned based size of the relationship that private equity purchased, which took us out of roughly $15 million that could always happen, but I'm hoping that we can forego that. So while we're saying 3% to 5%, I'll be pissed if we don't beat that and so I think you will see some good numbers in the second half.

And a couple of years and not necessarily total geographical overlap, but a couple of your smaller Ohio peers have talked about commercial customers acting with a bit more caution and a little bit less demand to extend lines of credit and do expansion efforts, etc. I mean, is that anything that you've seen in any of your footprints from your commercial customers?

I don't think so. I think it's really been more of the same. I think that, we've been pretty steady now for many, many years. I don't see a decrease in the mindset of our clients relative to the economy. So certainly less noise about trade wars would be helpful to our clients and helpful to our activities. But I hopefully we see some stability there.

And then just secondly, more of a big picture strategic question, but you know, I mean, as we think about the outlook today, I mean, do you guys are now factoring a couple of rate cuts, so the NIM becomes a bit more challenging loan growth should rebound. But, with that, I think your credit costs in the first half of the year were probably a bit lower than normal and now should normalized, as you mentioned, in your guidance. As we think out to 2020 earnings growth year-over-year, obviously it becomes a bit more challenging. You have other things on the fee and expense side, you just I guess my question is, as you look at your capital levels, especially post Prestonsburg, I mean, it really did the deal really had a minimal impact on your capital? I mean, levels are still really strong today. What do you guys, I guess, kind of waiting for? What's the thought process around, maybe broadening that capital deployment to beyond the dividend? I mean, at some point in the trade environment, does it make sense with your capital levels and profitability to kind of have a regular share repurchase or at least some method of share repurchase in the capital deployment stack? Or you guys still thinking that doesn't make sense at this time?

While a couple of the obvious statements. First, it's always a lot more fun to wide margin up than to ride margin down. I think that we're dedicated to three fundamental themes; and one being credit quality, which I believe we have demonstrated; two being deposits and I think you see that in the loans-to-deposit ratio at 84 versus 92 at year end; and the third being positive operating leverage and I'm confident that once again this year, we'll have positive operating leverage, if you take out the one-time expenses. And those are the things that guide us in how we think about it. As it relates to share repurchase, we view the math on that very similar to acquisitions, in terms of what the earn back is, and we will buy shares, if we can get an earn back that is in line with what we look at in acquisitions, which is, we don't want it to be more than three to four years. And that's kind of what guides us, so we have a program in place. I hope the stock never gets low enough that we've got to utilize it. But if it does, we will do so. And it's not very far away and I'm not going to get more specific than that. It's not very far away from where we are. So that would be my thoughts on that.

Can I push back a little, I mean, why don't you say it's fair? I mean, it's obviously the earn back is important, but the risk profile of an M&A deal in buying back your own stock are very different. I mean, do you guys take that into consideration at all when trying to allocate capital accordingly?

And the opportunity is also a lot different, it's a lot different, an acquisition can help strengthen our competitive framework, give us a better, stronger footprint from which to go forward. So there is pluses and minuses on both sides.

Yes, I mentioned not in place, so obviously well priced strategic M&A is always -- has much greater opportunity to be more additive than repurchasing your own stock. I meant it more as, I mean, if the TC start approaching 10%, I mean, is there a level where, maybe that it makes sense to expand that viewpoint to incorporate a more diversified capital deployment approach, because it will start to eventually way on your ROEs, which are very good right now?

Not to be difficult with it, but if we announced a deal with a five year earn back, you'd hate it, alright. And so if we did a share repurchase with a five year earn back, why would you love it?

As I mentioned, I mean, this is just my personal thing. I think that the risk profile of those two transactions is dramatically different. And yes, I mean, obviously the opportunities as well. But I just think the different risk profile changes that this conversation around the earn-back in my opinion. But I appreciate the touch Chuck. Thank you for taking my question.

And just to be clear, I'm not as far as in your thinking as I may sound. We've had some -- we have some holders with very large positions that earn back is at current prices or near current prices, and we have some others that are encouraging us. So there is no clarity to it, no right answer at this point in time. We like the test that we're on. But as I said, you know, if you saw a depth, we might hit the brights, that where -- we hit the good -- hit a green button.

[Operator Instructions] Our next question comes…

Ben, I think we all think we lost him.

He's still on the podium. Let me bring him back. Michael, did you have a follow-up?

No, I didn't. I just made a comment that, that's what makes the market. But I appreciate the -- taking my questions, guys. Thank you.

If anybody on the call?

Yes, we do. We're still on the call.

Ben?

Yes, we have another question. Give me one second here. Dan Cardenas of Raymond James, we'll take your question next. Go ahead.

Maybe just in terms of clarification, can you remind me what percentage of your loan portfolio…

Hello?

Daniel one second, I think we might have lost our speakers, let me go over to them. Pardon me. We have the speaker's back in the call. Let's proceed, Daniel Cardenas with Raymond James. Would you like to ask your question again?

Sure. Good morning, guys.

Good morning, Dan, I apologize whatever difficulties here, but our third quarter expenses should be one phone call lower.

Excellent. So just a couple of cleanup questions for me as I think about your loan portfolio, what percentage of that is variable rate tied to prime and/or LIBOR?

On the commercial side, it's overwhelmingly LIBOR price probably in the neighborhood of 80%.

Correct.

Yes. On the consumer, somewhat less so…

Consumer side is mostly fixed, quickly lines of credit probably, but the only key prime base portfolio we have is consumer side.

Okay, all right. And then how about deposits, do you have any that or -- would reprice immediately with a rate cut?

No, we don't have. We might have a few deposits here and there that we kind of do in our index basis on the commercial side or the government side, but it's not anything material at all.

Okay, all right. Good, and then with First Prestonsburg under your belt now, what's kind of the environment like on the M&A side? Is there a lot of chatter going on or is that really kind of slowed? Just kind of given what we've seen with bank stock prices here recently?

I would say it's pretty quiet. Much more quiet than most of the last five plus years.

And then just last on -- just in terms of competitiveness out in the marketplace, both on the loan and deposit side. Is there been any significant reduction in the competitive factors in the last quarter or so?

I would say, we see a slowing of the deposit programs in the last maybe 30 to 45 days. And I would say from a loan rate and structure standpoint, we see more of smaller institutions getting creative with the structure. But for the most part, I think that the market in total is holding up pretty well and staying ahead of the rally.

And our next question comes to us from Kevin Reevey with D.A. Davidson. Please go ahead.

I think, I'd come back that way, you're not wasting your time…

I appreciate that we're hanging into the phone difficulties.

So I just had a couple of follow-up questions. How should we think about provisioning going forward? It looks like you're provisioning came in a lot longer than we expected?

I think we've had the first quarter was very unusual because we had a very large recovery. The second quarter, I think it was really a function of our gross charge-offs have come down quite a bit. We've had strong performance in our indirect book. We don't expect that to continue at a low -- relatively low levels that they've been at. So we would expect our gross charge-offs to kind of grow somewhat some of our recoveries probably would lessen somewhat, and we would expect that we would try to trend up more toward where we were last year on a provision basis, our loan growth or -- has been slow. So that has required as much provisioning. So we would expect to start approaching upward to where we were, kind of, on average for the last year, the quarterly provisioning.

And then lastly, I think, John, you talked earlier about, a new fee schedule that was implemented some time earlier in the quarter, which helped you and me, service charges and line item. Where would you peg your customer service fees relative to your competitors? Is it mid pack, is it the upper end of the pack or is it the bottom end of the pack?

I would say we were definitely below the 50th percentile. We are not charging there are other competitors that are definitely charging more monthly maintenance fees, more people that are charging more for paper statements and those types of things. So I don't -- do not think, we still try to maintain a community bank mentality, but we are just charging more -- a few more fees that we believe are fair rates, not high in the market. So I definitely think we're kind of below the average in total. And our requirements to wave the fees or not get those fees are probably a little bit lower than the market as well.

This concludes our question-and-answer session. I'd like to turn the conference back over to Chuck Sulerzyski for any closing remarks.

Yes. Let me thank everyone for participating. I apologize for any phone difficulties. 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.