Good morning and welcome to the Peoples Bancorp First Quarter 2020 Earnings Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chuck Sulerzyski, President and CEO. Please go ahead.

Thank you, Kate. Good morning and welcome to our call. Clearly, our world has changed dramatically since our last call. We hope you, your family and your colleagues are healthy, safe and secure. I would like to start with some good news. Today we announced an agreement to acquire a premium finance company which has approximately $100 million in assets. We are excited about the opportunity to further diversify our product offerings and believe this acquisition will complement our insurance business. We announced our earnings earlier this morning which were a loss of $0.04 per share. Our results were heavily impacted by recent developments related to COVID-19 and the actions taken by governmental authorities and others. The changes that the pandemic has had on our industry have been widespread and sweeping. It has changed the way we provide our products and services which is now more electronic and by appointment. It has required us to be nimble and provide relief for our clients, which includes quickly setting up the administration of recently announced loan programs while a substantial part of our workforce works remotely. The decision to lower interest rates to zero or near zero has and will continue to have a negative effect on our results. The implementation of the CECL accounting standard and economically sensitive accounting approach is having a significant impact on our results. What sets us apart from other institutions is our intense determination on execution coupled with our creativity and long-term focus. We are frequently calling our clients and checking in on them. We are being accommodating and helpful in their time of need by providing loan modification, payment deferrals and by granting fee waivers. We have worked closely with the small business administration to begin offering the paycheck protection program. As of April 17,…

Thanks, Chuck. Our net interest income declined 1% compared to the linked-quarter, which was partially impacted by one less day in the first quarter. Also compared to the linked quarter, our net interest margin declined 5 basis points. Our loan yields declined mostly due to the current interest rate environment. Our investment yields have continued to be impacted by higher prepayment speeds which are associated with securities backed by underlying mortgage loans, which has increased our premium amortization. As we had planned, we actively managed our funding cost by lowering interest rates on deposit accounts, which declined by 11 basis points. Accretion income, which is net of amortization expense, added $1.1 million to net interest income or 11 basis points to net interest margin during the quarter compared to $1.8 million or 18 basis points to margin in the linked-quarter. Compared to the prior year, our net interest income grew by 2%, this was partially due to the First Prestonsburg acquisition. Our higher interest income amounts coupled with our close management of funding cost more than offset the decline in investment securities income. The net -- the decreased investment securities income was mostly related to higher premium amortization associated with faster prepayments speeds. Our net interest margin decreased by 29 basis points and was largely driven by lower investment security yields coupled with decreased loan yields. Accretion income added $722,000 to net interest income or 8 basis points to net interest margin in the prior-year quarter. The most recent changes in interest rate environment are a challenge that we are actively managing. We continue to look for ways to lower our funding costs and we'll continue to do so in future periods. Promotional deposit products that were offered in the prior year will be repricing as the year progresses, and…

Thank you, John. We are fortunate to have diversified revenue streams which can help us weather the storms. Our insurance, trust and investments and other fee-based businesses complements our banking revenue sources during economic downturns. We continue to place importance on growing this revenue. We believe the impact of the pandemic on our loan portfolio will be manageable based on the diversity of our portfolio, the quality of the underwriting and proper portfolio management. While we do expect to suffer some losses, we are not heavily concentrated in the hardest hit businesses such as hospitality, restaurants, childcare facilities and nursing homes. We will continue to closely monitor our portfolio and will take measures to help our clients when we have the ability and it is prudent to do so. While it's very hard to predict what may happen for the remainder of 2020, we want to provide just a few thoughts at this time. This excludes any large market changes and the impact of the PPP and the premium financing company acquisition. We currently anticipate a net interest margin between 3.3% and 3.45% for the last nine months of 2020. We expect total non-interest expense, excluding one-time cost of between $33 million and $34 million per quarter for the remainder of the year. We project fee income to average $16 million per quarter for the last three quarters of 2020. We expect loan growth to be between 0% and 2% for 2020 compared to year-end with the potential for growth in the latter half of the year. We anticipate that businesses and consumers will take a cautionary stance after restrictions put in place to slow the spread of COVID-19 are lifted and the economy begins it's recovery. As it relates to the SBA PPP, we believe we will earn approximately…

[Operator Instructions] The first question comes from Scott Siefers of Piper Sandler. Please go ahead.

Hey guys. How are you doing? Thanks for taking the question.

Doing well, Scott. How about yourself?

Good, good. Doing well, thank you. I was hoping -- I appreciate the commentary on sort of the stressing and other stuff you guys have done. I was hoping John you might be able to go into some of the key assumptions forming the basis of the reserve. For example, just GDP contraction rate, unemployment rate, some of those factors that went into there?

Yes. Yes, we used a model that's very similar to what others in the industry use. We are tied to the Moody's forecast. We use the Moody's baseline scenario that's there. So, US unemployment was up quite a bit, like for next three months up to 8.66%. Iowa unemployment was close to 10%, 9.74%. Most of our portfolio is tied to US unemployment; the largest piece of that, about 65% -- 66% of our portfolio is related to that factor. Ohio unemployment drives a lot of the other portfolio. Ohio unemployment alone, about 13% of our book in Ohio unemployment and Ohio GDP is about 17%, so you can see how that plays out there. So, Ohio GDP was expected to drop off quite a bit to 3% in the next three months; so that kind of drove a lot of our projections on the CECL model and the impacts that it had.

Okay, perfect. Thank you. And then, also you talked about -- and forgive me if I missed some of these, I was trying to catch up with some of what you said. But just in terms of stressed industries, do you guys have sort of an aggregate number that they add up to? For example, as a percent of the loan portfolio, just the industries that you would consider vulnerable, like energy, retail, CRE, kind of non-essential stuff, things like that?

In terms of what all those industries added up together would look like or…

Yes, exactly.

Well, the -- I think the top six pieces that we would have, that people would question would be about $612 million. But I think that -- I really encourage everybody to just take a caution. Everybody has built these models; all these models make the same assumption. The assumption is that a C&I loan is the C&I loan and so forth. And there is so much difference between the different portfolios but let's take the worst-case scenario; let's take restaurants, for instance, which would be normally considered pretty problematic. We have a $170 million restaurant portfolio and that could make somebody scream but $130 million of it is in McDonald's and McDonald's nationally is operating at 70% of revenue. In Ohio they are -- or in our markets they are doing 75% to 80%, their revenue is staying constant because of the tenancy they use to drive in. All of those franchisees took advantage of the PPP program and all of those are franchisees we've been able to help them in terms of deferring payments, so they're going to be just fine. So our non-McDonald's -- and by the way, to my knowledge, McDonald's has never failed anywhere. And then the other piece of the portfolio, which is relatively small, you could look at it and a good chunk of it has an SBA guarantee on it. We're a Top 100 bank in the country in terms of 7A, and I'm sure you're probably listening to hundreds of banks in this earnings season telling you why the models or the models and why they're going to be above average, and that's what I'm trying to do. But we feel really good about where we are, and it will be as scary and pervasive [ph] as this illness is and the tragedy that it's causing; I think that we'll be able to differentiate our performance over the next 18 to 24 months.

Okay. Perfect. Thank you. And I guess last question, just -- you described broadly that you guys are going through a number of different scenarios to kind of come up with -- you know, comfort around the dividend, your capital levels, etcetera. Do you have a sense or do you offer a sense for what type of cumulative losses you would have under some of those? And are those scenarios similar to like the DFAST scenarios that some of the larger banks would go through or how you come at that sort of concept?

No, we don't have the sophistication of a DFAST model. We kind of -- we will tweak our credit stats into drive provision and losses. So those types of things, Scott, different income assumptions, margin assumptions etcetera to drive things do and see the impact of that with the pluses and minuses and different capital actions and what happens there or so; so we can try to box different scenarios and see what happens there. So, it's not as complicated as the CCAR or DFAST process but I think the main component that we're stressing at the end of the day is probably our credit stats, and the resulting cost of credit, which is our biggest variable.

Obviously, we have a boatload of capital.

Okay, perfect. Thank you, guys.

The next question is from Michael Schiavone of KBW. Please go ahead.

Hi, good morning. Thanks for taking my question.

You are welcome.

Can you guys give us a little more background on the Premium Finance acquisition; some color on how it fits into the overall business? And maybe some color on what you paid and the impact to book value and capital?

The price was not disclosed. It was a cash transaction, it is based in Kansas City. It is a business -- you know, one man's trash is another man's gold. It was a business that was perhaps stalked [ph] in the previous owner, we like the characteristics of the business and are hopeful of being able to grow it at a faster rate. Premium financing in hard times makes more sense as more businesses need the assistance or want the assistance; so we're excited about it. As it relates to the portion of your question as it ties into our other businesses, probably not that much; initially, we are in the insurance agency business and we use premium finance and so there is an opportunity there to move that business over. Overtime, we'll look to see if we can provide some ancillary services and also help potentially with some insurance financing of agencies.

Okay, thank you. And do you have any thoughts on your near-term operating expense run rate?

Yes. I think it was in the script. I think we said $33 million to $34 million.

Right. $33 million to $44 million in the quarter for the last three.

$33 million to $34 million.

$33 million to $34 million.

Got it, thanks.

I can't believe you weren't [indiscernible].

[Operator Instructions] The next question is from Russell Gunther of D.A. Davidson. Please go ahead.

Good morning, guys.

Good morning, Russell.

Just a follow-up on comments, Chuck, you made earlier in terms of the total number of deferrals; could you just re-clarify for me. Is that $500 million in total? And that would include both commercial and consumer or is there perhaps better granularity you could share there?

Yes, I can give you -- the number that we quoted over, approximately $500 million was talking about the commercial space. If you want more color on that; the McDonald's that I mentioned earlier, was about 20% of that, a little bit more than 20% of it, that's far and away the largest chunk of it. In terms of consumer actions; that was much smaller dollar amount, many more customers -- 945 installment loans with $17 million in balances, 333 mortgages with $29 million in balances. So total in process and down is about $46 million in our consumer portfolios, about a billion trades [ph]; so much smaller percentage of the dollars but many more touches, if you will.

Got it. I appreciate that, Chuck. And then, based on the outreach that you've been able to undergo late this quarter, would you expect those deferral balances to increase significantly in 2Q when we're having this conversation again? And then, are you providing a specific reserve here?

No. We were very proactive from the get go in terms of reaching out to customers, and helping them with the deferrals. We also are very active in reaching out with the PPP program. I think when this is done I think we'll be among some of the higher performing banks in terms of PPP loans as a percentage of the embedded book. So, between the arrangements we made for the commercial customers and the infusion of the capital from the PPP loans, we think our customers are going to be in pretty good shape, particularly when you add to that the granularity of our portfolio. And so, we're going to help them as much as we can and feel pretty good about it.

Very good. And then just on the PPP check, the $426 million is in addition to the $500 million of commercial deferrals? Question one. And then question two, from a P&L perspective, the $13 million pre-tax income you quoted from PPP is that a fee income or spread income event?

The origination fee that was -- is accounted for and throw up as spread income.

But the other thing is, that $13 million is just the origination splits that we're getting, it's not -- I mean, it's only -- you know, we're only getting 1% on these loans and we've got costs of 35 basis points but we are going to get 65 basis points on a couple of hundred million dollars average balance for a period of time, so that's going to help also.

Russell, I would say so that -- that's kind of the current accounting but I do know that this is -- the accounting for PPP loans is a topic at the FASB. So maybe how it shows up, where it shows up, that could change but it's currently a topic of FASB.

Yes, understood. And I appreciate you addressing that. Thank you. And then last question would just be a follow-up to one of the original questions, which was in regards to the internal stress testing that you guys performed. I just did try to get a sense for understanding that the sophisticated DFAST model is not what you're running and wouldn't expect that but in terms of potential aggregate loss rates within your various commercial and consumer buckets, are you able to share what type of assumptions you make in that analysis?

I don't have those currently with me but they're pretty high level. But we're up there pretty high into the -- well into the high single-digits of losses that would occur overtime. So, pretty stressed levels of what we're doing; so not -- nothing -- we're relatively aggressive in what we're looking.

Yes. No, it sounds like it. Alright guys, thank you so much. I appreciate all of the help.

You're welcome.

The next question is a follow-up from Scott Siefers of Piper Sandler. Please go ahead.

Hey guys, thanks for taking the follow-up. I just was hoping you might be able to help us to frame that triumph transaction a little more. I definitely get the EPF [ph] accretion but presumably that will be mostly in fees; just any color you can give on expected fee income or overall revenue? And then, the expense impact we should be modeling in there would be helpful.

Mainly margin income, the fees are just a small percentage. It's about $100 million of loans -- about 7%, right.

It's about 7% gross, and then there are some origination fees that come off of that, Scott. And -- it kind of what operates a little bit like an indirect book where you have a buy rate, you've charged above that at times, and then you also -- all kind of the agents a little bit of cash that help you like originate the loans like -- with an auto dealer. And then, a repeated amount of late fees and those things that flow through as well; so it's pretty good business, it produces a pretty good ROA. And expense-wise, most of the expenses are basically commissions that are paid. It's a relatively small workforce, about half a dozen people that crank this out; so not a lot of fixed expense, mostly variable tied to your volume.

Okay. Any sense for what a typical efficiency ratio looks like in or overhead ratio looks like in that business?

It's a little bit better than we would be. It would definitely be more profitable, they will be accretive to efficiencies, they will be accretive to ROA. But given the size, it's not a big piece to us so it's not going to have a huge pick up to that, right; it's not a $1 billion, it's $100 million.

But I think if you look at the next three to five years, it'll grow faster than the bank does; forgetting bank acquisitions if you will, it has better growth potential than the bank.

Okay. Perfect. Thank you, guys.

Thank you. You're welcome.

At this time, there are no further questions. Sir, do you have any closing remarks?

Yes. Thank you for taking the time today. Please remember that our earnings release and webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Again, I wish you all good health. Thanks for your time, and have a good day.

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