Good morning, and welcome to Peoples Bancorp, Incorporated Conference Call. My name is Mike 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, 2020. [Operator Instructions] 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 ever-changing effects of the COVID-19 pandemic on economic and market conditions and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and non-governmental authorities; changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity; the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the expansion of commercial and consumer lending activity; the competitive nature of the financial services industry; the impact of estimates and inputs used within models, which may vary materially from actual outcomes, including in connection with the current expected credit loss model or CECL model; the discontinuation of LIBOR and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; uncertainty regarding the nature, timing, cost, and effect of federal and/or state banking insurance and tax legislative or regulatory changes or actions and changes in accounting standards, policies, estimate, or procedures. 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' second quarter 2020 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 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 Mr. Chuck Sulerzyski, President and Chief Executive Officer; and Mr. John Rogers, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Sulerzyski, the floor is yours sir to begin. Thank you.

…at this time and I wish for the continued well-being of you, your families and colleagues. We continue to monitor the COVID-19 pandemic and make adjustments as necessary. As the states in which we operate have relaxed some of their restrictions, we have also moved forward in our own reopening process. On June 22, we opened all branches with services being provided during normal business hours. We also started to bring back a portion of our operational workforce. We continue to have some associates temporarily working from home as we have limited spacing in certain portions of our offices that do not allow for adequate social distancing. We are supporting our employees and communities during this challenging time and plan to continue this practice. We will monitor developments and adjust our responses accordingly. We have had many bright points in the last few months and our execution for our clients has been the most meaningful. We have closed nearly $500 million of loans under the Small Business Administration's Paycheck Protection Program or PPP. Approximately 40% of the total number of loans made have been to new clients who were previously [indiscernible] with other banks that were unable to help them as quickly as we could. We've had some successes in cross-selling other financial products to our new relationships. This will be a continued focus for the remainder of the year. We grew the number of households served every month during the quarter despite limited branch access. We had originated loan growth of 4% annualized compared to March 31, 2020. This excludes the impact of PPP loans in our previously acquired loan portfolios. We had significant unexpected record production in consumer indirect lending, which had 31% annualized growth compared to the linked quarter end. We implemented a new consumer and a…

Thanks Chuck. During the second quarter, our net interest income increased by 1% compared to the linked quarter and was down 3% compared to the prior year second quarter. Compared to the linked quarter, interest income on loans increased slightly and efforts in managing our deposit costs served to more than offset a decline in investment income. While the PPP loans benefited net interest income during the quarter, our dependence on LIBOR for the pricing of our variable-rate loans had a negative impact on our net interest income. The one month LIBOR moved from 1.73% at the beginning of 2020 to 0.16% at the end of June. Our net interest margin declined 32 basis points compared to the linked quarter and was heavily impacted by lower loan yields, which were impacted by the PPP loans included in commercial and industrial loan balances. These loans earned a stated interest rate of 1%. For the quarter, we recognized $2.8 million in total for interest and fees on these loans. Our investment yields declined, which were affected by the lower interest rate environment driving premium amortization higher during the quarter. We recognized an increase of $720,000 in premium amortization compared to the linked quarter with reduced net interest margin by 6 basis points. We worked to offset these declines by reducing our deposit cost by 38% compared to the linked quarter. Our cost of funds declined from 84 basis points during the prior year second quarter to 43 basis points for the second quarter of 2020. Finally, we had a negative carry on our short-term borrowings in the fore part of the quarter as we have larger cash balances for funding of loans and potential draws on lines of credit. Our net interest margin declined 58 basis points compared to the prior year…

Thank you, John. Through the recent turmoil we have found the silver lining. Our associates, even though many had been working from home are working more closely than before. Our teams are dedicated to doing what is best for our clients and are doing as much as possible to help out during this difficult time. We remain committed to our communities and through payroll deduction our associates have donated over $40,000 to local food banks in recent months. As an organization, we have also donated $250,000 during the quarter to local food banks and pantries throughout our footprint. In addition, we recently donated $25,000 to the Heisman Trophy winner and Number 1 NFL Draft Pick by the Cincinnati Bengals Joe Burrow's Hunger Relief Fund, which was designed to make a difference in food and security across Southeast Ohio. We will continue to look for meaningful ways to give back to our communities. We are excited to be working with the new Premium Finance team and look forward to the acquisition of complementing our current business structure while also giving us the flexibility to offer additional services to our clients. As we move forward, we continue to place importance on our credit functions as we closely monitor our portfolio and work to proactively identify issues and work with our clients to accommodate modifications. As we disclosed publicly in June, we will not be providing financial expectations for the foreseeable future during the historic period of economic uncertainty. Overall, we view our financial strength as fee income, which comprise 30% of total revenue for the second quarter of 2020; our low-cost of deposits, which were 34 basis points for the quarter, a 21 basis point decline compared to the linked quarter; our loan-to-deposit ratio, which stood at 84% on June 30, 2020; our non-performing assets as a percentage of loans in OREO, which was at 80 basis points and improved 14 basis points compared to the linked quarter end; our strong capital position, which even on distress scenarios provides a great source of strength; and our ability to maintain a high stable dividend rate. This concludes our commentary and we will open the call for questions. Once again, this is Chuck Sulerzyski and joining me for the Q&A session is John Rogers, our Chief Financial Officer. I will now turn the call back to the hands of our call facilitator.

[Operator Instructions] And the first question we have will come from Scott Siefers of Piper Sandler. Please go ahead.

John was hoping you could - I know you provided some detail in your prep remarks, but I haven't seen the deferred personnel costs in this fashion before. I guess we're all going through new stuff with the PPP, but just curious if you can expand upon how that plays out. That does not sort of structurally lower the expense base going forward by like $900,000 a quarter, right? That's just something that happened in the quarter in which those loans were originated. Is that correct?

That's correct. I mean, this is all under basically FAS 91 which requires you to defer your origination income as well your origination cost. So as we originate all those loans you defer those set costs, right, just like you're deferring the fees that we got from SBA. So you amortize those over that two-year period and when these come to a - the loans gets forgiven, you'll recognize all that, the fees and the expenses at that time. But it only happens when you originate the loans not an ongoing quarterly cost.

And then when those, I guess the way we'll see those costs is just on a net basis through the margin, is that right? It sounded from your prepared remarks, like the - but the fees and expenses get sort of netted within NII. Did I hear that correctly?

That's correct. That's correct. All those FAS 91 fees get run - they get deferred and run through the margin.

And then the final one, apologies if I missed this in your prepped remarks but as for forgiveness of the PPP loans, what is your sense for timing and sort of total percent that ultimately could be forgiven?

We think the vast majority of it will be forgiven hopefully in this calendar year, maybe 80%, 85%of it this year. But it's hard to give an answer to a question like that, since there is no clarity as to what the forgiveness process is. That's what our thinking is.

Yes, okay.

Definitely upside as they come up with the dollar threshold that they're going to automatically basically forgive, right so that would help move things along. But right now we're thinking anywhere, as Chuck mentioned, give or take - 80% give or take could happen this year.

Your next question now will come from Michael Schiavone of KBW.

So you guys are one of the few banks to repurchase shares this quarter. Can you talk about the decision to continue with the buybacks and your comfort with the reserve and capital levels? And then do you expect to pause the buyback from here?

First off at this price, we think our stock is a steal. If we're not willing to buy it why would an investor be willing to buy it? We have high capital. I think we're going to continue to analyze stock purchases. We're not buying in excessive amounts at any one point in time. So we'll continue to review it. And I don't think it's the last buyback we will ever do. And I sure hope that the value of not only our company, but all of these community banks begins to reflect in the stock price, what they're worth. So, we like - it's hard not to like the stock at this price.

And on the NIM, should we expect the excess liquidity and the resulting drag on the margin to stick around for the next few quarters, given limited opportunities to deploy the cash?

Well, I would say that we brought down our own cash that we're holding during the course of the second quarter. We're holding a little less at quarter-end than we were definitely in the April, early May time frame. But given the current situation, things - the economy, I think the potential further shutdowns and those types of opportunities, I think, we do need to be careful, right? So, I think you need to keep a decent amount of cash. As far as the deposits and the inflow of deposits that we've had, a lot of that depends upon timing of these forgiveness where our customers are actually dealing with the cash that they have. I'm expecting deposit balances to be pretty strong, at least throughout the remainder - a good chunk for the remainder of the year as that holds in there. We have the premium finance company too. We're optimistic that to grow. And when we actually bought that at July 1st officially, they're kind of at a seasonal [wall] [ph]. They have a strong pipeline that kicks off early in the third quarter, so the July, August, September is a very strong origination period, so we know we're going to have some funding related to that as well. And - so that's kind of how we see things playing out currently. But I do think with all the deposits and everything else, it's very difficult to see how all these plays out over the next few periods.

Right. Okay. Thank you. I think, can you just provide some color on the consumer indirect loan production and where the demand came from and kind of what are some of the credit parameters around those loans?

Sure. I'd be glad to help you. I'll be damned if I can tell you where the demand comes from. I mean, buying vehicles in a pandemic would not have been on my top 10 things to do. But nonetheless, volumes for - nationally, call volumes are pretty close to where they were before. In our footprint, they are a little bit higher. So that helps us. There is not much inventory out there in terms of new cars. So it was a little bit more tilted to used cars than what we have seen historically. And the average FICO production for Q2 was 734. So we had good credit quality with good growth. So, it's kind of like the perfect storm.

[Operator Instructions] Next we have Russell Gunther of DA Davidson. Please go ahead.

A couple of follow-ups on some of the prepared remarks. But first, I wanted to clarify comments around the deferrals. So, could you give us a sense for where - maybe on a total dollar basis, where deferrals stand today versus quarter end?

Are you talking about providing loan modifications?

That's correct, yes. Just trying to track the trend for where we are. I mean, you spoke a little bit about some of the requests for a second round, but I'm just trying to track the point to point.

When you say quarter end, you mean June 30th versus today or you mean March 31st versus June 30th?

However you like to define it. I just would like to get a sense of where those modifications are today and how they've trended over the past 90 days.

I think at our peak, the deferrals were about $530 million. And I think, as we sit here, it's about $486,000. So they're coming down.

Okay. Got it. And then...

I think the key point is really that the - we keep talking to our customers, and we're not seeing a lot of demand for any reops on that side of the thing. Especially on the commercial side, there were 90 to 120 days. So people would start to have an inkling of where they're headed on that, I believe. At this point in time, they're going to need or not. So we're not seeing larger demand. So over the next 30 days, 45 days when we start to run off, so you're really not going to a large runoff yet in these months and also probably occurred well after April 13th. By the time, that process would start rolling so.

And then, along those lines, guys, thank you for that. But do you consider these customers to be higher risk given that they are in a forbearance program? And if that's the case, is that reflected in the current reserve or will we potentially see additional reserve builds for these going forward?

I do not consider the vast majority of these customers to be at higher risk. A good example would be the McDonald's portfolio, which is about $100 million of it. McDonald's is doing extremely well. The operators and abundance of caution did everything they could to increase their liquidity. So, of the $480-ish million that's out there, I feel really strong about - over $400 million of it is going to be perfectly fine. Where I feel in the last quarter's call, we went through our portfolio in detail and talked about different segments that might be stressed. Fortunately for us, the only segment that we're really feeling stressed in is in the hotel portfolio, which is a relatively small portfolio and about $40-ish million of those modifications. So, we feel pretty good about it.

I appreciate the color, Chuck. You actually got to my next question, which was, how that kind of COVID-19 ring-fence has trended? You mentioned some of the sectors that you called out last quarter. So, how would you quantify it? Beyond hotel, is that really where things stand in terms of the most amount of stress you'd expect or are there still other pockets of weakness you would include in that ring-fence amount?

Hotels is overwhelmingly the largest piece of it. We have some day care facilities that are a little stressed. We have some non-McDonald's restaurants that are a little stressed but nothing really material. And as it relates to increase in the reserves, our reserves are bigger than our net charge-offs for the last 10 years. I mean - so, I'm struggling with this new accounting convention. I would say that our reserves are extremely high relative to the rest of us in our portfolio.

And that was really to my last question, Chuck. Thank you for that. But hearing you on how you feel about the deferrals that you wouldn't expect significant negative credit migration there? Hearing you that COVID-19 loans at risk is a lower percentage than you would have characterized originally. Have we seen the provision level peak for Peoples in the first half of the year?

Well, understand how CECL works. It is based on an economic model that includes a number of components, unemployment forecasts, GDP forecast for Ohio and some for the United States. And I don't control what Moody's says to those variables. I do feel very good about our portfolio. I do feel very good about what our folks are doing. I do feel good about where our clients are. But as those economic forecast deteriorate, there's a - according to the convention, the new convention, our reserves are going to go up. And do I think that marriage the risk in the portfolio? I don't. But I don't get to make the rules.

So that's the driver going forward. There are qualitative overlays that...

The qualitative overlays, yes, qualitative overlays but you cannot - but you can modify it, but you can't like go in the opposite direction.

Okay.

I think, [indiscernible], right? So, even when the economic indicators start to level up, if that's the point and given the fiscal stimulus at the curve, I think so far this has been very untraditional three or four months a year. And I think how this plays out will be like nothing we've seen before, right, I would imagine. And you could probably wrap through on multitude of outcomes if you think through along enough. But with the economic indicators improved, you're going to start to see maybe a few credits. And then you're going to need to put up specific reserves on those credits. So, the economic factors could improve. Your core models could come down. You might need to have some specific reserves that you put up. How that one comes down, one goes up, where that levels off, and do you - it doesn't mean a net increase, a net decrease. I think that was all to the comments we decided. So predicting those types of things, I think, is very difficult. But that said, we are very confident in our portfolio. We think we've seen good signs of the modifications. We think we have good signs on consumer delinquencies. But we'll see how does it play now.

[Operator Instructions] Next, we have Steve Moss with B. Riley FBR.

If you guys want to start - and just follow up with the - regarding CECL here, just kind of wondering what are your underlying assumptions with regard to GDP and unemployment?

I'm just - I had a hard time hearing your questions, Steve. You want to know what the taxes are in the model that we use?

Yes, for GDP and unemployment for example.

Yes. So, it's U.S. unemployment, Ohio unemployment and Ohio GDP are the three factors.

Right. I guess, are you using like - assuming like a high-single-digit, low-double-digits-type unemployment rates...

Well, what we use?

Yes. In kind of both the models?

Moody's forecast in June were 10 to 12 months out, the U.S. unemployment is 9.68%; Ohio unemployment, 10.34%; and Ohio GDP, plus 4.51%.

Okay.

We use the Moody's baseline scenario, right? So, I think you can go there and you'll find the number that we use for the next 12 quarters, we go out one year.

And then, with regard to funding costs for the - I apologize if I missed this. Just kind of curious where funding cost could shake out here for deposits in just total interest bearing funds in the next three to six months?

Well, I think for the quarter, they were 34 basis points. We have an excess of liquidity. I don't think that it's going to change that much, the cost of deposits over the next...

So we've done some - continuing to lower the deposit cost. We did some a little wrapping down in June that helped a little bit, but for the most part, most of our costs are at a pretty low level. We still have some promotional products, CDs, money markets that will come off throughout the year, as well as some public funds and contracts with drill supplier. So, you'll see a reduction for those, but I don't think you're going to see quite the reduction in the next few quarters that we have seen over the last few quarters. So, we're probably talking basis points as opposed to tens of basis points.

And then, just kind of in terms of - a hard one to answer, but in terms of just business activity, I'm assuming most customers are pulling back. When do you think you do have any sense of when you could be perhaps building a more commercial pipeline or how are you thinking about that further out?

Well, I think there's a couple of things. I may feel better about some of the activities than you may. First, so if you look at Ohio, Kentucky and West Virginia footprint and you look at the pandemic, of cases per 1 million are way lower and our deaths per 1 million are way lower. So, the U.S. average for cases per 1 million is 11,968. Ohio is 6,519, Kentucky 5,241 and West Virginia 2,869. So, I think that those numbers reflect state in total whereas the state got the most problems with the pandemic it's in Cleveland, Columbus and Cincinnati. So, if you look at our footprint, we're more in the rural counties. I think that our customers are probably more optimistic than Ohio on average or national on average. We did have 4% loan growth outside of the PPP between Q2 and Q1. We do have a respectable pipeline. Is it the best pipeline I've seen in my career? No. But are the deals that we're doing, that a good deals to do? Absolutely. We also have the benefit of the PPP customers that we bought in. So far, we have sold over $40 million of deposits and loans to those new PPP customers as well as close to $150,000 in fee. And I suspect, over the next 90 days, we'll be able to increase that a multiple of times as we round those customers out and welcome them to Peoples Bank. So, I don't think it's all bleak. And we'll just keep - chip it away, and I think it will be fine.

Okay. That's helpful. And then, lastly, just kind of - in terms of just going back to the hotel portfolio. You mentioned the largest source of stress. If you just remind us on the loan-to-values and kind of how you're thinking about - I'm assuming a lot of those customers are going to redefer. Just how to think about maybe restructuring those loans or what your thought process is there?

The 64% loan-to-value, obviously, those appraisals are done 1 times when they're fully operational and reflects the income of the property. Nine of the 12 were flagged. The three that aren't, two of them are cabins and people are running to cabins to get away. And they're doing great, probably better than ever. But I can't speak for the country, but I can tell you that I made my first business trip last week and stayed in two different hotels, and stayed at a 300-bed hotel. And the night I was there, it had 80 occupants, and that was the best night I had since this thing began. And you saw - if you follow the national data, you saw that hotel occupancy actually dropped last week. It had been increasing. But last week, it went back. And if you saw what the CEO of Marriott said, he views this as a problem for a long-term. So I suspect these folks are going to have difficulty. A number of them are well-capitalized, and they'll get through it. If you have asked what the scenario is, I'm sure that these properties will likely be downgraded in the second half of the year. Do I expect us to have losses in the second half of the year on these properties? I think that's unlikely. It's possible. Do I think that these properties will have losses through this pandemic? Perhaps, but I don't think it will be anything meaningful, particularly in light of whatever the number is, $54 million provision.

At this time, we're showing no further questions. Sir, do you have any closing remarks?

Thank you for listening to us go on and on and on. But thank you for participating. Please remember that our earnings release and webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Again, I want to thank - I want to wish everyone good health. Thanks for your time and have a good day.

And we thank you, sir and also to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time you may disconnect your lines. Thank you again everyone. Take care and have a great day