Good morning, and welcome to Peoples Bancorp Inc. Conference Call. My name is Arlee, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and six months ended June 31, 2021. 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 on 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 completing and integration of current and planned acquisitions including the pending merger with Premier Financial Bancorp Inc., and any future acquisitions which maybe unsuccessful or maybe more difficult, time-consuming or costly than expected and the risk of expansion into new markets. Peoples’ ability to obtain all remaining regulatory approvals other proposed merger with Premier Financial Bancorp Inc. or Premier on the proposed terms and schedule and adaption of the merger agreements by the shareholders of Peoples. The ever-changing effects of the COVID-19 pandemic on economies and markets, and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental or non-governmental authorities to the COVID-19 pandemic, including public health actions directed towards the containment of the COVID-19 pandemic and the development, availability and effectiveness of vaccine. Changes in the interest rate environment due to economic…

Thank you, Arlee. Good morning, everyone. Thank you for joining us. We have some exciting news to share with you regarding our second quarter, which includes, total loan balances declined 1% for the quarter, however, we had loan growth of 4% annualized compared to the linked quarter-end, excluding PPP loans and the lease balances. Net interest income growth of 11% compared to the linked quarter, with a 19 basis points expansion of our net interest margin. Our fee based business income increased 10% compared to the second quarter of 2020. Our total revenue grew 13% compared to the second quarter of 2020, and, our efficiency ratio, adjusted for non-core cost improved compared to the linked quarter. During the last three months, we have also integrated and streamlined processes with our North Star Leasing division, which is a division of People's Bank. We acquired North Star at the end of March, but began accounting for on April 1. This division is growing as we had anticipated, and benefited both on net interest income and margin during the second quarter. This division has added over $12 million to lease balances since acquisition, resulting in an annualized growth rate of 59% for the quarter. They also provided over $4 million of interest income and added 29 basis points to net interest margin for the quarter. We have spent a lot of time in recent months visiting and planning with our partners at Premier Financial Bancorp and their two banking subsidiaries, Premier Bank and Citizens Bank. We have developed plans on integration, training, client impact, and are working to communicate with both the associates and the clients of Premier to make this a seamless transition. At this point, we are on target to meet our anticipated expense reductions. We continue to move forward and…

Thank you, Chuck. As Chuck mentioned, the leases had a positive impact on our net interest income and margin during the quarter. Our net interest income grew 11% compared to the linked quarter, and our margin expanded by 19 basis points. The leases provided over $4 million of interest income and 29 basis points to margin. During the quarter, we recognized $3.4 million of income related to deferred fees and costs on the PPP loans, which was a decline of $1.4 million compared to the linked quarter. The recognition of PPP income during the second quarter added 15 basis points to net interest margins, compared to 28 basis points for the linked quarter. Our net interest margin excluding the impact of leases and the PPP loans was flat compared to the linked quarter. Along with the improved loan yields, we were able to grow our investment yields by recent decisions to restructure some of our portfolio. In addition, we reduced our cost of deposits to 24 basis points, which is the lowest we have had in the last five years, while also reducing our funding costs to 27 basis points, which is the lowest in our history. The positive impact of these measures was offset by the excess liquidity we had during the quarter, which resulted in inflated cash balances and reduced our net interest margin by 13 basis points. We continue to monitor and look for opportunities to grow our margins, which has been challenging in this low rate interest environment. Compared to the second quarter of 2020, our net interest income increased 14%, and our margin grew by 26 basis points. Again, the lease division provided a significant portion of this improvement, while our investment yields were challenged, and our funding costs were controlled. For the first-half of…

Thank you, Katie. We are utilizing our skilled acquisition teams as we work to integrate the data, associates and clients of Premier. We have had great interactions with the teams from Premier, and will work towards a smooth transition for everyone. We are optimistic about our future in the new market area, and the opportunities we have to positively impact the new communities and the clients we will serve. We are pleased with the recent addition of our leasing division, and the expert team from North Star. They have blended into our organization very quickly and are picking up speed, which we expect to continue through the remainder of the year. Turning back to our results for the quarter, some of the highlights were, improved net interest income and margin compared to the linked quarter, positive operating leverage compared to the linked quarter, adjusted for the noise of the quarter we believe our expenses were well-controlled, we had loan growth of 4% annualized compared to the linked quarter-end, excluding PPP loans and the acquired lease balances, our credit quality continued to be stable compared to prior quarters, we had increased households compared to both March, 2021 and year-end, our return on average tangible equity was 14.6% compared to 2.5% for the first-half of 2020, and, our return on average assets was 1.02% for the first six months of 2021, compared to 17 basis points for the same period in 2020. I would like to share a couple of thoughts related to the remainder of 2021. We anticipate our third and fourth quarter of core non-interest expenses, which excludes the Premier acquisitions will range between $37 million and $38 million a quarter. We expect to produce loan growth of between 3% and 5% annualized for the full year, excluding PPP loans and acquired loans and leases. This will continue to be dependent on line of credit utilization rates remaining stable and any unexpected pay down activity. Although, we had anticipated a higher gross charge-off rate going forward with the added leasing division, we believe that charge-offs on this line of business might come in slightly lower than we had expected originally. While, it is early to talk about 2022, the current street consensus has our earnings per share projected at $2.99, which excludes Piper Sandler, as their estimates do not incorporate our Premier acquisition. We are highly confident that we will beat $2.99. 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 Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.

We will now begin our question-and-answer session. [Operator Instructions] Our first question today will come from Scott Siefers with Piper Sandler.

Good morning, guys. Thanks for taking the questions.

Hey, Scott.

So, let's see. So, I guess, just on the loan growth dynamics, I think, Chuck, when you were talking about utilization in some of your prepared remarks, you gave them on sort of the dollar basis. Are you guys comfortable saying sort of where your commercial utilization rates are on a percentage basis? And sort of what do you think a typical level is?

Yeah. Historically, we ran between 52% and 55%. At the end of the quarter, we were at 33.5%. So, for eternity, we we've been in the low 50% range. So it's about a 20% reduction.

Yeah. Okay. Perfect. Thank you. And then, Katie maybe just some thoughts on the margin, lot of moving parts going on these days. But if we sort of take the reported level of 3.45% now and sort of understanding you've got most recently the benefit from NSL, but then you've got kind of elevated PPP fees in there. What's your best guess for where that level ends up going from here?

Yeah. So you touched on it, and we've quoted it in the script, the 3.45% does include about 15 basis points of benefit for PPP loans. So to the extent, that continues to run off, that will continue to decline, and that declined from 28 basis points in the first quarter, so almost 30 basis points were lost because of less forgiveness. And then there is some accretion in there, and that picked up because of the NSL acquisition, but it was only 7 basis points. So, I think if you take out the 50 basis points you are at 3.30%, and again, that has the impact of the cash the excess liquidity we still have, which we continue to maintain some of that we are seeing it reduced a little bit, so we might get some benefit. But the 3.30% is kind of a good starting point and that we think will hover around there.

Okay, perfect. Thank you. And then, that I guess, presumes some ongoing level of purchase accounting benefits that will lead the way sort of slowly over time I imagined, like over a period of a few years, is that right?

That's right.

Okay, perfect. All right. And then, I guess, just final question. Maybe thoughts on drawing down the reserve from here, if we exclude the day one adjustment from NSL, you had basically no provision. I think I calculate like a $200,000 recapture, so call effectively zero. Maybe thoughts on drawing down the reserve further from here, just given what you're seeing in the credit environment?

Remember, next quarter, we're going to have the closing and have to put up the reserve for Premier. But, I would say that, that some coming back our way minimal amounts.

Okay. All right. Perfect. Thank you, guys.

Thank you.

Our next question comes from Steve Moss with B. Riley.

Good morning.

Hey, Steve.

Maybe just following up on the reserve here, Chuck, just in terms of the drivers, economy seems to be improving. And, I guess, I was thinking it'd probably be a bit more in terms of the reserve really I hear you on the day one there. But, in terms of what would it take to ex-Premier to get back towards the pre call it, what was it 90 basis points or so, before CECL was implemented?

Improvement in the forecast for GDP and unemployment, primarily in Ohio are the drivers to our model. And as they continue to improve, we will see more money come back.

Okay. Do you think it could be a pretty meaningful offset to the Premier day one provision?

Yes.

Okay. That's helpful. And then just in terms of the loan pipeline, hear you on good production, but lack of utilization. Just where are you seeing opportunities for growth on the commercial side? And it does look like your consumer business is doing well as well, just kind of what are the drivers here going forward, if you will?

Well, first off, we had great production in the first-half of the year in commercial. But, I would say that the customers are awash with liquidity and we continue to see people use cash as opposed to borrow. We're optimistic, we're going to see good growth in our Premium Finance business. We're going to see great growth in the leasing business. And we continue, as I said, had record production in the first-half of the year. So consumer businesses have been very solid. Automobile business has really had standout year. And, as long as there's a cause to be sold, they're going to be bought, and it’s obviously huge supply chain issues. So, I think under normal circumstances, we would be seeing double digit loan growth with our current production, just the payoffs and the excess liquidity.

Okay, that's helpful. And then just one more question just on mortgage here. I realized gain on sale margins came down here, just kind of curious as to the drivers for you guys, and how to think about that line of business going forward?

With selling less, we're basically keeping more than what we desire on our books.

Okay, great. Thank you very much.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Russell Gunther with D.A. Davidson.

Hey, good morning, guys.

Good morning.

Hey, Chuck, I'm doing great. Thanks, guys. A follow-up on the loan growth guidance, the 3% to 5% for the year ex-PPP and acquired loans and leases, just to clarify, does that assume that the utilization rate stays at these lower levels and doesn't return to something close to historical?

Correct.

Okay, very good. And then, on the efficiency ratio target, I appreciate the color you gave us there. Could you walk us through the main drivers of how you achieve that low 60? Is it largely revenue growth? Are there anticipated expense catalysts beyond the model cost saves from the deal, just some of the puts in takes there would be helpful?

A big piece of that is the Premier acquisition. And at closing, we had 30% of the expenses coming out. And we continue to make investments in our infrastructure here. But, we think we can have expense growth around 3%, excluding the acquisition. So those are the key pieces.

Okay. And then maybe just a follow-up to the revenue side of that, and the margin discussion earlier. So, I heard you 3.30% is a good starting point near-term as the PPP benefit declines. But, how do we think about the timing of the cash balance reduction that would kind of get you close back up to that 3.45%? And given the margin accretion from the leasing portfolio, if the normalized NIM something closer to 3.45%? Or, do you expect the 3.30% you are talking about to sustain for an extended period of time?

Yeah. Alright, that's what we continue to scratch our heads about is the liquidity and how long will the deposits and the cash stay with us. We quoted it in the script, I think we said that the higher level of cash added 12 to 13 basis points, or was a drag on margin of 12 to 13 basis points for the quarter. So, if you add that back, if we get back to more standard cash levels, you would get back to that 3.45% in a reasonable timeframe. It's just what is the timeframe, and unfortunately, I don't know. I think we are starting to see some of it leave not at a drastic rate or anything. So, I think it'll be here through -- a portion of it will be here through the year at least and then the next year.

We may have some opportunity on that 3.30% to the extent that the Premium Finance and the leasing businesses grow faster than we expect.

Okay, understood. Well, thank you guys for taking my questions. That's it for me. Thank you.

Thank you.

Our next question comes from Michael Perito with KBW.

Hey, Chuck, Katie, good morning.

Good morning.

I just had a couple follow-up questions maybe to ask Russell's question a little bit differently. So, I guess if we kind of take away Premier for a second, I mean, it sounds like the overall balance sheet, though, I mean, you guys would expect it to remain kind of in this $5 billion, $5.1 billion type range near-term, given everything you're seeing today. I mean, what the mix is below that obviously can shift. But, is that generally a fair assumption as you see it, for the time being?

Yes.

Okay. And then on the fee side, I was curious your trusted investment unit had another nice quarter. I know, there's some seasonality in the insurance, but you've generally seen some pretty solid growth there. Any kind of specific thoughts on the outlook for those two line items, halfway through the year here?

The investment business has been doing great and has been doing great for a long time. And as long as we have fewer days, like yesterday and more days like today, it'll continue to do great. In the insurance business, prices are hardening, and that always is to the benefit of folks that are in the agency business. So, we like how that looks right now. So we're very, very bullish on both of them. And just as a reminder, in the investment business, we have a retirement plan business, which is a little unusual to say the bank, and particularly unusual to say the bank our size. And that business well, the smallest of our three investment businesses, is continues to grow very fast.

Okay. And, I guess, just lastly for me, I mean, the expense guide near-term is pretty clear. But I was wondering if you can maybe talk about the dynamics below that a little bit more as we start to think out towards next year. I'm sure you guys are investing in your business as we go. You have us the overall kind of expense range for the next two quarters. I mean, is it fair to think that electronic banking, data processing costs, software costs, should continue to grow? And what are the offsets to some of those investments and growth? And, I guess, how long do you think you guys can continue to maintain the expense kind of range, while still investing at the rate you're investing?

I think over time, we will become more efficient, even investing at the rate that we're investing. I think that our data processing costs next year will be relatively on a percentage of -- if you measure the cost against the size of the institution, I think it will become more efficient. So yeah, I'm pretty optimistic on all of that.

Yeah, I would just echo that, I don't think we have deferred maintenance on whether it's buildings or technology. We've been investing along the way. And so, there is no major projects in the next two to six quarters that we have to undertake.

Okay, helpful. Thank you, guys. I appreciate you taking my questions.

Thank you.

Thank you.

At this time, there are no further questions. I'd like to turn the call back over to Mr. Sulerzyski, for any closing remarks.

Well, we thank you for being with us today. If you remember, nothing else about our call, please remember that we're highly confident that we will beat $2.99 next year. Thank you again for joining. And remember that our earnings release and a webcast of this call will be archived at peoplesbancorp.com on to the Investor Relations section. I wish everyone good health, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.