Good morning and welcome to Peoples Bancorp Inc’s Conference Call. My name is Chris, and today I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and nine months ending September 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 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. These include, but are not limited to the success, impact and timing of the implementation of Peoples' business strategies; including the ability to identify, acquire or integrate acquisitions, which maybe 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 yield curve; slowing or reversal of the current U.S. economic expansion; uncertainty regarding the nature, timing, costs, effect 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, adverse changes in economic conditions and/or activities; adverse changes in the conditions and trends in the financial markets; and changes in accounting standards, policies, estimates or procedures including the impact of new Current Expected Credit Loss, or CECL rule. 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 2019 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations. A reconciliation of 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 Investors 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, Chris. Good morning. Thank you for joining us for a review of our third quarter and year-to-date results. Our performance this quarter was highlighted by several positives in key areas, which included a 17% increase in net income compared to the third quarter of 2018, relatively stable net interest income even though interest rates have experienced a recent decline in net interest margin compressed 11 basis points compared to the second quarter of 2019. Growth in total non-interest income excluding net gains and losses of 5% compared to the linked quarter and 14% from a year ago. We had organic loan growth of $26 million or 4% annualized compared to the linked quarter end. We continue to have strong credit quality, which included a quarterly annualized net charge-off rate of 11 basis points for the third quarter, which remains well below our through the cycles historical charge-off rates of 20 basis points to 30 basis points. We grew our core deposits by $66 million compared to the linked quarter end, which included an increase of $34 million in non-interest bearing deposits and our tangible book value increased 2% from June 30, 2019 and 14% compared to September 30, 2018. For the third quarter of 2019, we’ve reported net income of $14.9 million, or $0.72 per diluted share, compared to $0.46 for the linked quarter and $0.65 a year ago. For the first nine months of 2019, diluted EPS was $1.91 compared to a $1.69 for 2018. Impacting the third quarter of 2019 were acquisition related costs of $189,000. During the second quarter of 2019, we recognized acquisition related costs of $7 million, bringing the total for the first nine months of 2019 to $7.4 million. These costs reduced diluted EPS by a penny for the third quarter of…

Thank you, Chuck. Our net interest income declined by 1% compared to the linked quarter and was up 7% from the prior year. Our net interest margin declined by 11 basis points compared to the linked quarter and was down 2 basis points from the prior year. The recent decline in interest rates has started to impact our loan and investment securities portfolio. Approximately 40% of our loan portfolio is subject to changes in LIBOR or prime rate, which decreased this quarter. Our demand – our deposit rates increased slightly compared to the linked quarter, which was partially offset by lower borrowing cost. However, we have already taken steps to bring deposit pricing down and are prepared to do more if necessary. Compared to the third quarter of 2018, the increase in net interest income was mostly due to the loan growth in the First Prestonsburg acquisition and higher loan yields, while net interest margin declined due to higher deposit costs. For the first nine months of 2019, net interest income grew 11%, while net interest margin was 5 basis points higher than 2018. Driving the increases were the acquired First Prestonsburg and American Savings Bank loan portfolios and higher loan yields, which were partially offset by growth in deposit cost. Muting the net interest income and margin expansion were the proceeds of $589,000 received during the first nine months of 2018, an investment security that had previously been written down to other than temporary impairment in previous periods, which added 2 basis points to net interest margin. Accretion income from acquisitions, which is net of amortization expense, was $1.2 million for the third quarter of 2019, which was flat compared to the linked quarter and doubled from $612,000 a year ago. Accretion income from acquisitions added 12 basis points…

Thank you, John. The recent decline in interest rates demonstrate why it's important for us to diversify our revenue streams. As a bank, we are highly dependent on the interest rate environment, but our ability to maintain and grow our non-interest income is a key priority for us. The opportunity to introduce new products and services to our clients help sets us apart from other financial institutions. It allows us to provide a more robust experience for our clients, while also generating stronger shareholder value. Although declining interest rates have presented a challenge, we have been able to make a positive impact to the first nine months of 2019, which include the following. We grew net income by 20% compared to 2018, with relatively flat one-time cost in both periods. Our net interest income increased 11% compared to 2018 and our net interest margin expanded 5 basis points. Total non-interest income excluding net gains and losses grew 11% compared to 2018. We generated positive operating leverage, excluding non-core items on a year-to-date basis compared to 2018. Our year-to-date return on assets, when adjusted for non-core cost improved to 1.44%, an increase of 10 basis points compared to 2018 and our tangible book value increased 8% to $19.80 compared to December 31, 2018. As we continue to finish up 2019, we have updated guidance for the fourth quarter and full-year 2019, which excludes non-core cost. We currently anticipate organic loan growth of 2% to 4% for the full-year of 2019. We anticipate the fourth quarter credit cost will be relatively similar to those incurred in the third quarter of 2019. We believe net interest margin will be between 3.65% and 3.7% for the full-year, which incorporates rate cuts that the Federal Reserve has made and will make during the fourth quarter…

Thank you. [Operator Instructions] Today's first question comes from Kevin Reevey of D.A. Davidson. Please proceed.

Good morning.

Hi, Kevin.

Good morning Kevin.

So first question, John, earlier in your prepared remarks you talked about bringing your deposit rate down quickly to address declining rate environment. Could you give us some color as to which products you're focused on as far as bringing rates down and how would the rates compared to the current – the market rates in the local market?

So I think we're focused on bringing all of our rates down, some across the board, retail and commercial deposits. We took some actions in the third quarter, which probably for the most part will be seen in the fourth quarter. We've continue to take actions as things have progressed here in the fourth quarter. So we're anticipating to see our deposit cost come down. There are definitely certain things that we increased CDs during the course of the year. So money market, some specials, those will decline as those specialist kind of run their course over the next year or so, and they will progressively improve our net interest cost on deposits as we move along that spectrum. So, I think when we look at the market and see where we're at, we're pretty much right there with the market. I think other people are starting to bring down the rates, but as you're aware, Kevin, certain rates never got very high, such as interest bearing consumer checking accounts, savings accounts for consumers in regard to a very high level, so we can cut those back, but there is not an extensive cut that really available in certain products.

And then besides bringing your deposit rates down, are there levers that you can pull to manage the margins, which is managing your investment portfolio as well as utilizing floors on your variable-rate loans?

Yes, I mean so we have floors today in our loans that are there. We will manage the securities book appropriately, we believe. I do think at time to trade off right between people who always want a higher margin, but you're also trying to make sure you're growing net interest income at the same time, I believe. So it does kind of a balancing act that we continually look at and manage through it as a management team and through our ALCO processes to do that. There are certain things where we can fix some rates, there are definitely an inversion that you can get some longer-term funding cheaper than you kind of overnight funding. So we're taking advantage of that as well at this time. So we think we can pull certain levers like that, yes.

And then lastly, you talked about possibly looking at some non-bank deals to augment your fee income, which kind of businesses would you be considering?

We generally are looking at the insurance business and adding additional agencies to what we have as well as the investment business if we can find brokerage or money manager we would look at those businesses. Those are businesses that we have and feel confident in. In terms of expanding, we eventually would like to get into an equipment leasing business.

Great. Thank you very much.

Thank you.

The next question comes from Scott Siefers of Sandler O'Neill. Please proceed.

Dwinell on for Scott. So I appreciate the loan growth guide for the full-year, but would just love if you could maybe expand upon what customers are seeing? How prepayments are maybe affecting loan growth? And what do you think the puts and takes are for the fourth quarter?

Well, as we mentioned year-to-date payoffs were 68% higher than last year. So that's makes it pretty challenging to grow, very little of that is due to us walking away because of a credit quality concern or very little of it is due to competitors taking those customers. Going out and looking out for both the fourth quarter and next year, we see our origination volume staying where it has been, been very healthy with – very happy with our origination volume. We think the payoffs will slow down for a variety of different reasons, large one being that the number of commercial real estate deals that could payoff has decreased significantly, and we have new deals, some construction deals that will start to fund up. So we're optimistic going forward relative to the past three quarters.

Okay, great. Thank you. And then also on the margin, I appreciate the guide for the full-year and I know you guys mentioned that you have floors that will be coming on and that you manage the securities book appropriately, but if you could just kind of expand on that for what you guys see for the margin for the fourth quarter?

We didn't provide guidance specifically for the fourth quarter. I mean, I think we would expect the loan yields continue to be under pressure, but we'll see benefits for the deposit book we have. So we think it will be relatively similar for the fourth quarter, maybe down slightly on a core basis, but not – we think we've done more actions on the liability side that'll flow through to the fourth quarter.

Okay, great. Thank you.

Thank you.

[Operator Instructions] The next question comes from Michael Perito of KBW. Please proceed.

Hey, Chuck and John, good morning.

Good morning

Good morning.

Chuck, first, just to clarify, my line broke-up a little. Can you just repeat the 2020 initial margin expectations that you disclosed in your prepared remarks?

Yes, I think we said 3.5% to 3.6% for the year – 3.5% to 3.6% and will be continuing to evaluate in that through the fourth quarter.

Right, and then I guess that's kind of where my next question goes. I know there's a lot of moving pieces here, but can you talk about the dynamic, I mean it sounds like 5% to 7% point-to-point growth next year, you expect a bit of a rebound and you talked about the payoffs already and origination expectations, but can you talk about the dynamic in the relationship between growth rebounding and kind of your margin expectations because – and how you kind of factor that into your initial outlook for 2020?

Well, I apologize if this is a little redundant, but we've been really happy this year with our originations. And given the pipeline, given what we're seeing in the marketplace, we're optimistic that we can keep the level of originations. So we get our confidence from the loan growth on the fact that the payoffs and the nature of the pay-offs, we believe will decline. So that's kind of what the loan forecast is based on. In terms of the margin, as John mentioned, we've made some corrections in deposits in the third quarter. We will see the effect of those in the fourth quarter and we'll continue to see improvement as some of the things that we put on earlier will payoff. We did some specials, but they were relatively short-term. We have a public fund book that will reprice heavily in the both first quarter. So we're optimistic that we've seen most of the deterioration – the 11 basis points that we've seen is going to be much greater than we see in the future quarters.

Yeah, I guess maybe I'll ask you the question a little differently. Can you maybe expand a little on kind of the generic asset yield assumptions you're making that drive that margin? Because it sounds like you guys have rates continue to come down. I'm just curious what you're assuming or at least your initial expectations are as it relates to kind of how asset yield trend that drive that margin output?

Well our yields have been and remain pretty handsome as – I don't – I see them coming down a little bit, but frankly, I'm surprised they haven't come down more – more already. So I don't really have anything – I don't have a major concern that we’re not able to get pricing. It's not like we – like the price that we are booking loans on relative to LIBOR or prime is deteriorating, it's just that those rates are going down. So – but the pricing we're getting our pricing for the most part and when we see things that to us aren't rational from a pricing standpoint, we continue to walk away, but that has not been as problematic as I would have thought. So, our consumer loan yields for the third quarter were 4.91% and for the second quarter they were 4.92%, so that's kind of hanging in there. Commercial saw a little bit more deterioration than the basis point they saw 12 basis points, but still handsomely over 5%.

Helpful Chuck, thank you. Couple more questions just John to clarify that the initial CECL expectation. So it seems like if we just take the midpoint – and I apologize for this echo, I'm not sure if it's on my end or elsewhere, but the 76 basis point reserve basically goes up toward 100 basis points, but two-thirds of that is related to performing acquired loans, which means the actual capital impact of that change will be dramatically less, correct?

No, it's the same impact. It will all be part of the transition adjustment on one one for that number, right. So the added reserves that go to the counter to the loan balance will all go through there, plus the unfunded commitment number that we determined. So there is all capital – but if I think I understand you right, all that will go through there. The only thing that does not go through the transition adjustment is the adjustment through the purchased impaired book, the PCIs, which go to PCDs.

And is that fairly immaterial at this point?

If I had an estimate, I would give you one. Our current mark on that purchased credit-impaired book is approximately $9 million, which is both a credit and rate mark. So at this point, I would not anticipate it being all credit, it's only a $32 million book, so...

Right, okay, all right...

That's a reclass from one account to the other, it's not part of the transition adjustment.

Exactly. Okay, that makes more sense. And then Chuck, just lastly, you mentioned that bank acquisitions have been a little slow to materialize. Just any – can you just opine a little or give us a little more color on why you think that is? And if there is any market forces that could potentially change that in 2020?

I think that, I do believe it will pick up in 2020. I think we've had – while it's been slow, I think we've had more conversations in the last couple of months than we had maybe in the first half of the year. I think, certainly, this rate environment will make it more difficult for banks to earn, to increase earnings. And so institutions that are margin dependent at a higher percentage of earnings than we are, are going to be under a lot of pressure. I think that with the normal reasons, management aging, board fatigue, demand for technology, compliance regulatory concerns will get many banks that are on the smaller side to think about finding a partner that can take care of their employees, their communities and their customers.

Got it. Thank you guys for taking my question.

Thanks

Welcome Mike.

Today's next question comes from Scott Beury of Boenning & Scattergood. Please proceed.

Hey, good morning guys.

Good morning, Scott.

Most of my questions have kind of been touched on. I just wanted to go back to the CECL and kind of see if you had any feeling about like directionally what the impact is going to be on kind of the regular quarterly provision, not necessarily the initial transition adjustments?

I would say that's pretty difficult to narrow down on. A lot of that, the big impact is going to be the economic forecast that we have. We're currently in a pretty good economic state right now. I think logically, you would think the economic forecast is only going to get worse, not better. As that happens, you're going to see dramatic changes to the reserves. So when that happens, I do not know, I don't have that crystal ball in my desk drawer, but that's really the big thing. I mean if you – I said 25% to 35% with two-thirds of the kind of being the initial reserve to be put up on the purchase performing book, so the third of what we're looking at, probably is the net between the consumer book and the commercial book. So, you might be able to use that somewhat as a proxy, but that's kind of holding all things else being equal, and I can't think that all things are going to be equal as we proceed through 2020.

Sure, I appreciate that.

That may not be very helpful, but...

No, no, that is helpful.

I can’t be very fluid…

Certainly, I understand that there are a lot of moving parts here and I just wanted to get a sense of kind of how you're thinking about it because I think we're all kind of trying to figure out how it's going to play out. I guess, the only other thing I was curious about was, as you kind of look at what you're seeing in the competitive environment right now, do you have any particular feeling one way or the other about kind of the way the credit cycle is materializing? I mean I think that questions have been asked for quite some time, kind of alluding to the fact that we're near the end, but just any thoughts there as we head into 2020?

Yeah, I would say for the most part, we don't see a ton of structure in issues that cause us to shake our head. We see some, but not a ton. I would say we see more pricing moves that confuse us, but I would say that the industry as a whole is hanging in, from my perspective, much more than I was seeing a dozen years ago. So, I don't think we're going to see crashing and burning from a credit quality standpoint anytime soon.

That's helpful. Yeah, I think that's all I have for today. Thanks guys.

Thank you.

Thank you.

Our next question comes from Kevin Reevey of D.A. Davidson. Please proceed.

I was just curious given kind of the way rates are going to move directionally over the next few quarters, what your thoughts were as far as the swap fee income line item, I know it's a small percentage of your overall fee income base?

We've had a very good year with swap fee income. We had a very good third quarter. If rates stay low and continue to decline, that's going to help us. It's particularly helpful in that our originations have been robust and that's giving us opportunities for swaps. So this may be the best of time as for swaps.

So in other words, just to make sure I'm understanding you correctly, so you think that line item should be flat to down?

I would say that the third quarter was very good. We would hope to have a very respectable fourth quarter, but I would not expect it to maybe be at the same level as the third.

Great, thank you.

Our next question comes from Daniel Cardenas of Raymond James. Please proceed.

Good morning, guys.

Good morning, Dan.

Hi, Dan.

A couple of quick questions for you guys. Maybe we get a little bit of clarity in terms of optimal capital levels in the form of a TCE ratio, given that that I think everybody is probably modeling improving capital levels here on a go-forward basis. Maybe a lack of M&A opportunities in the whole banking side, I mean how do you plan on putting some of that excess capital to work, so kind of a two-part question here?

Yeah, I mean, I think our ratios are clearly continue to go up. Our earnings are still strong, good return on assets bringing a lot to the bottom line. I think we would look to try to drive that down some. We will continue, as you can see in the commentary, we did repurchase some shares. We will continue to look at that opportunity to bring our share count down and do that. So I think that's one way we plan to be in a little bit more aggressive than we had been in the prior quarters of this year. And we will always look to increase dividends at the same time. I just believe that at this point in time, we are kind of in a difficult environment at the current time with having to implement CECL. At this point in time, I do not think it's a substantial capital hit, very manageable. But we also have the economic uncertainty here and the yield curve and what happens to that in the rates over the next coming months, see how that all kind of plays out. It appears to be less – more talk that we might be closer to the end on the rate reductions. We'll have to see how that plays out in the fourth quarter given the upcoming meetings at the end of October and the one in December, and try to manage our strategy based upon where we see things headed into 2020.

Okay, good, good. And then maybe just one quick administrative question on tax rate for 2020. Should we kind of still stay in that 19.5% range, 19% range?

Yeah, I think that's fair.

All right, great. Thanks guys. That's all I have right now.

Thanks, Dan.

At this time there are no further questions in the queue. Sirs, do you have any closing remarks?

Yes. I want to thank everyone for participating. Please remember that our earnings release and a webcast of this call will be archived at peoplesbancorp.com, under the Investor Relations sub-section. Thank you for your time and have a good day.

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