Peoples Bancorp Inc. (NASDAQ:PEBO) Q3 2019 Earnings Conference Call October 22, 2019 11:00 AM ET Company Participants Chuck Sulerzyski – President and Chief Executive Officer John Rogers – Chief Financial Officer and Treasurer Conference Call Participants Kevin Reevey – D.A. Davidson Jeanie Dwinell – Sandler O'Neill Michael Perito – KBW Scott Beury – Boenning & Scattergood Daniel Cardenas – Raymond James Operator Good morning and welcome to Peoples Bancorp IncÂ's Conference Call. My name is Chris, and today ...

Financial Data and Key Metrics Changes - Net income for Q2 2019 was $9.6 million or $0.46 per diluted share, compared to $0.73 for the linked quarter and $0.41 a year ago [11] - Net interest income grew by 6% compared to the first quarter of 2019 and was 10% higher than Q2 2018 [31] - Net interest margin for the first six months of 2019 was 3.78%, up from 3.70% in 2018 [30] - The efficiency ratio improved to 60.2% for Q2 2019 compared to 62.2% for the first quarter of 2019 [10][13] Business Line Data and Key Metrics Changes - Non-interest income, excluding net gains and losses, increased by 13% compared to Q2 2018 [36] - Total loans grew by $96 million compared to March 31, 2019, driven by the acquisition of First Prestonsburg [19] - Organic total loans declined by $29 million compared to March 31, 2019, with notable decreases in construction, commercial, and residential real estate loans [19][21] Market Data and Key Metrics Changes - Non-performing assets increased by $1.9 million compared to March 31, 2019, largely due to the acquisition [15] - Delinquency trends improved, with loans considered current comprising 99% of the portfolio compared to 98.6% at March 31, 2019 [17] - Demand deposits as a percentage of total deposits declined to 37% at June 30, 2019, compared to 40% at year-end [46] Company Strategy and Development Direction - The company aims for organic loan growth of 3% to 5% for the full year 2019, despite anticipated credit cost increases [55] - The acquisition of First Prestonsburg is expected to enhance service offerings and competitive positioning [51] - The company is focused on maintaining credit quality, managing deposits, and achieving positive operating leverage [83] Management's Comments on Operating Environment and Future Outlook - Management anticipates two rate cuts in 2019, which may impact net interest margin [55] - The company expects non-interest income for the remaining quarters to be between $15 million and $16 million [56] - Management expressed confidence in loan growth potential in the second half of 2019, despite challenges from payoffs [78] Other Important Information - Acquisition-related expenses totaled $7 million for Q2 2019, impacting diluted EPS by $0.28 [11] - The company recorded preliminary goodwill of $23 million from the First Prestonsburg acquisition [28] - The tangible book value per common share was $18.89, slightly down from $19 at March 31, 2019 [49] Q&A Session Summary Question: What are the main puts and takes in the core NIM performance in Q2? - Management noted that premium amortization from a security impacted the core margin, but overall performance was as expected [62] Question: What strategies are being implemented to defend margin going forward? - Management indicated they can adjust deposit rates and control funding costs to defend margins [66] Question: What is the outlook for loan growth given the higher paydowns? - Management expressed confidence in achieving the 3% to 5% growth target, citing a strong pipeline [78] Question: How does the company view share repurchase in relation to acquisitions? - Management stated they would consider share repurchase if the earn-back period aligns with their acquisition criteria [84] Question: What percentage of the loan portfolio is variable rate tied to prime and/or LIBOR? - Approximately 80% of the commercial side is tied to LIBOR [97] Question: What is the competitive landscape like in the marketplace? - Management observed a slowing of deposit programs and noted that the market remains stable overall [102]

Financial Data and Key Metrics Changes - The company reported record net income of $14.4 million or $0.73 per diluted share, an increase from $13.9 million or $0.71 per diluted share in the previous quarter and $11.7 million or $0.64 per diluted share a year ago [9] - Return on average assets was 1.46% and return on average stockholder equity was 11.12% [10] - Net interest income grew by 16% compared to the first quarter of 2018, with a net interest margin expansion of three basis points to 3.80% compared to the linked quarter [10] - Total deposit growth was 6% since December 31, 2018, with a recovery of $1.8 million on a previously charged-off commercial loan positively impacting earnings [11] Business Line Data and Key Metrics Changes - Commercial and industrial loans grew by $28 million or 20% annualized compared to year-end, while consumer loans increased by $15 million or 12% annualized [24][26] - Total loans increased by $9 million compared to December 31, 2018, with organic total loans growing $19 million or 3% annualized [22] - The efficiency ratio was 62.7% for the first quarter of 2019, compared to 62% in the fourth quarter of 2018 [14] Market Data and Key Metrics Changes - The company experienced a decline in non-performing assets by $1.2 million or 6% compared to December 31, 2018, and a 5% increase compared to March 31, 2018 [15][16] - Criticized loans decreased by $24 million or 22% compared to December 31, 2018, and by $27 million or 23% compared to March 31, 2018 [17] Company Strategy and Development Direction - The company is focused on growing its core business while preparing for the First Prestonsburg acquisition, which is expected to be accretive to earnings by approximately $0.06 to $0.07 during 2019 [51][52] - The company anticipates loan growth of 5% to 7% for the full year 2019, with a strong pipeline for commercial loans [25][55] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's position, noting strong credit metrics and a solid dividend policy [80][82] - The company expects to generate positive operating leverage for the full year and anticipates an effective tax rate between 19% and 19.5% for 2019 [56] Other Important Information - The company announced a quarterly dividend increase to $0.34 per share, representing a payout of 47% of first-quarter diluted earnings per share [49] - The tangible book value per common share increased to $19.00 compared to $18.30 at December 31, 2018 [48] Q&A Session Summary Question: Discussion on fee income trends - Management noted seasonal impacts on fee income, with expectations for mortgage banking to pick up in Q2 and Q3 [60][61] Question: Insights on commercial real estate lending - Management indicated a cautious approach to commercial real estate lending, focusing on prime developers [65] Question: Impact of customer behavior on deposit service charges - Management acknowledged that customers are managing deposits more intelligently, leading to a decline in overdraft fees [66][67] Question: Loan growth expectations - Management confirmed a 20% increase in the commercial loan pipeline compared to the previous year, amounting to low $50 million [70] Question: Positioning of the company moving forward - Management expressed satisfaction with the current credit portfolio and indicated a preference for maintaining a strong capital base [82][93]

Financial Data and Key Metrics Changes - The company reported a net income of $13.9 million or $0.71 per diluted share for Q4 2018, a 50% increase compared to Q4 2017 and a 9% increase over the linked quarter [17][19] - For the full year 2018, net income increased by 20% to $46.3 million or $2.41 per diluted share compared to $38.5 million or $2.10 per diluted share in 2017 [19] - The return on average assets was 1.38% annualized for Q4 2018, with a tangible book value per share improvement of 7% from September 30, 2018 [18][59] Business Line Data and Key Metrics Changes - Net interest income grew by 17% compared to Q4 2017 and 14% for the full year 2018 [17][34] - Non-interest income, excluding gains and losses, increased by 8% compared to Q4 2017 and 9% for the full year 2018 [43][44] - Total loans increased by 16% compared to December 31, 2017, with organic loans growing by 7% [27] Market Data and Key Metrics Changes - The efficiency ratio improved to 62% in Q4 2018 compared to 62.1% in Q4 2017 [24] - The loan-to-deposit ratio grew to 92% at December 31, 2018, compared to 86% at December 31, 2017 [57] - Core deposits, excluding CDs, declined by 3% compared to September 30, 2018, but were up 3% compared to December 31, 2017 [54] Company Strategy and Development Direction - The company is focused on expanding its presence in Kentucky through the pending merger with First Prestonsburg, which is expected to close in April 2019 [16][62] - The merger is anticipated to create synergies and allow for the introduction of new products and services to clients [62] - The company plans to maintain momentum from 2018 into 2019, with an expected loan growth of 6% to 8% [64] Management's Comments on Operating Environment and Future Outlook - Management expects an increase in credit costs in 2019, reflecting a belief that the industry is experiencing unusually low charge-offs [65] - The net interest margin is anticipated to be around 3.75% for the full year, with fee-based revenue growth expected between 7% and 9% [66] - The company is optimistic about future years due to investments in human capital and technology [61] Other Important Information - Acquisition-related costs for the full year 2018 were $7.5 million, impacting earnings per diluted share by $0.29 [21] - The company maintained its dividend rate at $0.30 per share, representing 42% of Q4 diluted earnings per share [59] Q&A Session Summary Question: What do you see happening to the core margin absent moves from the Fed in 2019? - Management expects the core margin to be around 3.75%, with slight upside potential [71][72] Question: What are your thoughts on future M&A once you get First Prestonsburg behind you? - The company continues to explore opportunities and will remain disciplined in deal pricing [74] Question: Can you provide insights on the loan growth target for next year? - Management remains optimistic about loan growth, particularly in consumer and commercial sectors, despite a slow first quarter [82][86] Question: How should we think about the commercial swap fees within the fee income growth guidance? - Swap income is expected to be slightly better than 2018 but not reach 2017 levels [100][101] Question: Are there any particular subsectors of commercial real estate that you are avoiding? - The company avoids hotels and strip malls and is cautious about multi-family in Central Ohio [103] Question: How should we think about your capital management strategy in 2019? - There may be opportunities for dividend increases, and share buybacks will be assessed post-merger [105]