Peoples Bancorp Inc (PEBO) Q2 2019 Earnings Call Transcript

PEBO earnings call for the period ending June 30, 2019.

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Peoples Bancorp Inc (NASDAQ:PEBO)
Q2 2019 Earnings Call
Jul 23, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Peoples Bancorp Incorporated 2019 Second Quarter Earnings Conference Call. My name is Ben, 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 30th, 2019. [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 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 integrate the business of First Prestonsburg Bancshares Incorporated, and any other future acquisitions, which may be unsuccessful or may be 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 service industry; changes in the interest rate environment; and the effect of the current inverted yield curve; slowing or reversal of the current US economic expansion; uncertainty regarding the nature, timing, cost and effects 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 and adverse changes in economic conditions and/or activities.

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 the forward-looking statements after this call, except as may be required by applicable legal requirements.

Peoples' second quarter 2019 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations. Any reconciliation of the 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.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you, Ben. Good morning, thank you for joining us for a review of our second quarter and year-to-date results. During the second quarter of 2019, we made progress in several key areas; including the successful close and conversion of First Prestonsburg; net interest income growth of 6%, compared to the first quarter of 2019; net interest margin grew to 3.78% for the first six months of 2019, compared to 3.7% for 2018. Increase of 13% in non-interest income, excluding net gains and losses, compared to the second quarter of 2018. The efficiency ratio adjusted for non-core expenses improved to 60.2%, compared to 62.2% for the first quarter of 2019 and quarterly annualized net charge-off rate of 3 basis points for the second quarter of 2019.

Earlier this morning, we reported net income of $9.6 million, $0.46 per diluted share, compared to $0.73 for the linked quarter and $0.41 a year ago. For the first six months of 2019, diluted EPS was $0.19, compared to $0.04 for 2018. During the second quarter of 2019, we recognize the majority of the additional one-time costs related to the First Prestonsburg acquisition. These costs totaled $7 million for the second quarter of 2019 and were $7.3 million for the first six months of 2019. These costs reduced diluted EPS by $0.28 and $0.29 respectively. The First Prestonsburg acquisition positively impacted diluted EPS by 2% during the second quarter of 2019.

During the second quarter of 2018, we recognized acquisition cost of $6.3 million, which reduced diluted EPS by $0.25. For the first six years [Phonetic] of 2018, these costs totaled $6.4 million and negatively impacted diluted EPS by $0.27. During the first quarter of 2019, we recognized a recovery of $1.8 million on a previously charged-off loan, which added $0.07 to diluted EPS. We also recognized income of $787,000 related to the sale of restricted B -- restricted Class B Visa stock, which added $0.03 to diluted EPS during the first quarter of 2019.

The efficiency ratio was 73.2% for the second quarter of 2019, which was impacted by acquisition related expenses. This is compared to 62.7% in the first quarter of 2019 and 75% in the second quarter of 2018. Our adjusted efficiency ratio, which excludes non-core expenses was 60.2% for the second quarter of 2019, compared to 62.2% in the linked quarter and 62% in the second quarter of 2018.

Asset quality continues to be strong as we focus on sound lending practices and closely monitoring the credit quality of our portfolio, while being proactive at identifying and remedying delinquencies. Our non-performing assets increased $1.9 million, compared to March 31st, 2019, grew $700 million -- excuse me $0.7 million from year-end and were up $2.1 million, compared to June 30th, 2018. The increase compared to March 31st, 2019 was partially due to acquired loans from First Prestonsburg, which comprise $0.7 million of non-performing assets at June 30th, 2019, with the remainder due to smaller relationships that have become past due and are still accruing.

Our non-performing assets as a percent of total loans and OREO ratio was 0.71% at June 30th, 2019, compared to 0.67% at March 31st, 2019 and June 30th, 2018 and 0.71% at year end.

Criticized loans and classified loans increase, compared to March 31st, 2019, largely due to the First Prestonsburg acquisition. The acquisition added $16 million in criticized loans and $6 million in classified loans as of June 30, 2019. Excluding the acquired loans, we were able to reduce our criticized loans by 10%, while our classified loans increased mostly due to two commercial relationships being downgraded during the quarter.

Delinquency trends improved as loans considered current comprised 99% of our portfolio, compared to 98.6% at March 31st, 2019 and 98.5% at December 31st, 2018, but were down slightly from 99.1% at June 30, 2018. Our quarterly annualized net charge-off rate was 3 basis points for the second quarter of 2019, compared to a negative 15 basis points in the first quarter of 2019, and the net charge-off rate of 11 basis points for the second quarter of 2018.

During the second quarter of 2019, we experienced lower growth charge-off rate than we have seen in recent history. The negative net charge-off rate during the first quarter of 2019 was impacted by the recovery of $1.8 million recorded on a previously charged-off commercial loan. For the first six months of 2019, our net charge-off rate was negative 6 basis points, compared to 22 basis points in 2018.

Total loans grew $96 million, compared to March 31st, 2019. The increase was driven by the acquisition. Organic total loans, which exclude the impact of loans acquired from First Prestonsburg declined $29 million, compared to March 31st, 2019. This decline includes decreases of $16 million in construction loans, $11 million in commercial and industrial loans, and $10 million in residential real estate loans, which will partially offset by a $9 million increase in indirect loans. While our commercial production levels have been higher than previous period, they have not outpaced the large pay off experienced during the first half of 2019.

I would go into more detail on this in a few minutes. Compared to year-end, total loans increased $105 million as a result of the First Prestonsburg acquisition. Organic total loans decreased $21 million with the decline driven by the reductions of $27 million in construction loans, $16 million in commercial real estate loans, and $8 million in home equity lines of credit. These declines are partially offset by increases of $17 million in commercial and industrial loans, and $12 million in indirect loans.

Total loan balances increased $147 million, compared to June 30th, 2018, while organic loan -- while organic total loans grew $22 million. This growth was primarily in commercial and industrial loans and indirect loans, which was partially offset by reductions in commercial and residential real estate loans.

As I mentioned, our loan originations during the first six months of 2019 have been strong and they've exceeded the originations that occurred during the first half of 2018 by nearly 40%. Our pay-offs on commercial real estate in commercial and industrial loans during the first half of 2019 will more than triple the pay-offs during the first half of 2018, and more than double those for the same period in 2017. While the increased originations have been positive, the pay-offs have exceeded origination volume. The payoff that we have experienced are not the results of customers leaving the bank for another institution, they are a function of commercial real estate loans moving to the permanent finance market, as was the expectation of the loan origination, coupled with the sale of our client’s companies or commercial real estate properties. We will not adjust our underwriting standards to achieve loan growth.

Quarterly average loan balances grew $96 million, compared to the linked quarter and $203 million from the second quarter of 2018. Most of the increase, compared to the linked quarter and second quarter of 2018 was driven by the recent acquisition, partially offset by the pay downs in the organic loan portfolio. For the first six months of 2019, average loan balances grew $281 million, driven by the recent acquisition, coupled with the organic loan growth experienced during 2018.

I will now turn the call over to John to provide the additional details around the income statement and the balance sheet.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Thank you, Chuck. Based on our initial valuation, the First Prestonsburg acquisition added $289 million of assets after preliminary fair value adjustments. The acquired assets and liabilities primarily consist of $138 million of investment securities; $130 million of loans and $270 million of deposits. The total purchase price was $43.7 million and included the special dividend declared by First Prestonsburg immediately prior to the closing of the acquisition.

We recorded preliminary goodwill of $23 million. The preliminary fair value adjustment to loans resulted in a higher discount than we had originally forecast, as credit quality had deteriorated since we performed due diligence. This higher discount, coupled with somewhat lower loan balances acquisition date, drove much of the increased goodwill that we recorded.

Our net interest margin during the second quarter of 2019 declined slightly to 3.77%, compared to 3.80% for the linked quarter, but was higher than 3.74% in the second quarter of 2018. During the quarter, our higher cost for time deposits and governmental deposits exceeded the positive impact of improvement loan yields, compared to the linked quarter. Compared to the second quarter of 2018, our increase in loan yields surpassed the growth in our total cost of funds, which benefited net interest margin.

For the first six months of 2019, our net interest margin was 3.78%, compared to 3.70% for the -- for 2018. Both the second quarter and first six months of 2018 benefited from proceeds of $248,000 and $589,000 respectively on an investment security for which we had in previous years recorded an other-than-temporary impairment, which added 3 basis points to net interest margin for each period. Net interest income increased 6%, compared to the linked quarter and was 10% higher than the second quarter of 2018. The growth stemmed from increased interest income from loans, while our deposit costs have been relatively controlled.

The acquisition of First Prestonsburg positively impacted net interest income, compared to linked quarter and second quarter of 2018. For the first six months of 2019, net interest income increased 13%, compared to 2018. The growth in interest income was driven by higher loan yields resulting from interest rate increases, loan growth and recent acquisitions. This growth outpaced the increase in deposit costs, which was due to recent acquisitions and increased competition for deposits.

Based on our projections, we anticipate the impact of a 25 basis point reduction in interest rates by the Federal Reserve would result in a decrease of approximately $1 million annually in net interest income. Of course, the shape of the yield curve in the LIBOR market could have an impact on this estimate. Accretion income from acquisitions, which is net of amortization expense was $1.2 million for the second quarter of 2019, compared to $723,000 for the linked quarter and $523,000 for the second quarter of 2018.

Accretion income from acquisitions added 13 basis points to net interest margin during the quarter, compared to 8 basis points for the linked quarter and 6 basis points for the second quarter of 2018. The increase in accretion income from acquisitions, compared to the linked quarter was largely due to the First Prestonsburg acquisition and the related loan discount that was accretive during the quarter.

Accretion Income from acquisition was $1.9 million for the first six months of 2019, compared to $1.1 million for 2018. The accretion income from acquisitions added 10 basis points in -- to net interest margin for the first six months of 2019 and 6 basis points in 2018.

For the second quarter of 2019, total non-interest income, excluding net gains and losses increased slightly, compared to the linked quarter and 13%, compared to the second quarter of 2018. We are pleased that in the second quarter, we are able to make up for the decline in the annual performance based insurance commissions for which we recognized $1.4 million of income in the first quarter.

Also during the first quarter of 2019, we had recognized additional non-interest income of $787,000 related to the sale of restricted Class B Visa stock, which we had been carried at zero balance, due to the litigation liability associated with the stock.

Our most notable improvement was deposit account service charges, which grew $636,000 compared to the linked quarter, mostly from higher overdraft and non-sufficient fund charges, coupled with higher deposit account fees. We are now benefiting from a new deposit account fee schedule that was implemented in March of 2019, coupled with the additional accounts acquired from First Prestonsburg. We anticipate that the increased deposit fees associated with the new fee schedule will diminish some over time as our customers adjust their behavior to avoid the fees in the future.

In addition, customer demand for commercial loans swaps increased during the quarter as our fee income more than tripled, compared to the linked quarter. The drop in interest rates spurred; increased customer demand to lock in interest rates. Trust and investment income and electronic banking income each increased 9%, while mortgage banking income increased [Phonetic] 27%, compared to linked quarter, due to higher seasonal sales volumes of residential real estate loans to the secondary market. Compared to the second quarter of 2018, deposit account service charges grew 25%, electronic banking income increased 17%, and swap fee income more than tripled.

Non-interest income, excluding net gains and losses increased 9% for the first six months of 2019, compared to 2018. Deposit account service charges grew 18%, electronic banking and mortgage banking income increased 12% and 35% respectively, compared to 2018. Swap fee income also more than doubled, compared to 2018, these increases were partially offset by a $550,000 decline in Small Business Administration Income.

Acquisition related expenses impacted total non-interest expense and were $6.8 million during the second quarter of 2019, compared to $6.2 million for the second quarter of 2018. Core non-interest expense, which excludes the impact of acquisition related expenses, grew 2%, compared to the linked quarter and 7%, compared to the second quarter of 2018. The increase compared to the linked quarter was driven by higher expenses in most line items, which were partially offset by reductions in salaries and employee benefits and marketing expense.

While non-core interest expense had increased, it was the result of running the larger company and our core efficiency ratio continued to improve. Compared to the second quarter of 2018, core non-interest expense increased, due to higher salaries and employee benefits cost, which were partially offset by lower professional fees. The increases in salaries and employee benefits were driven by the higher medical insurance costs, due to medical claims; the First Prestonsburg employees and key employees that have been added in the last 12 months for future growth.

For the first six months of 2019, non -- core non-interest expense increased 10%, compared to 2018. The increase was largely the result of higher salaries and employee benefits cost, which was partially offset by the client professional fees. The higher salaries and employee benefit costs were impacted by the American Savings Bank and First Prestonsburg acquisitions, higher medical claims and key employees added in the past year.

We have also made investments in technology, which have also increased expenses, compared to the first six months of 2018. Compared to the second quarter of 2018 and excluding one-time acquisition related expenses, we generated positive operating leverage of nearly 3%, also excluding one-time acquisition related expenses, we generated positive operating leverage of 1.5% for the first six months of 2019, compared to 2018.

Our investment portfolio grew 13%, compared to March 31st, 2019, it was up 14%, compared to year-end. This increase was due to the acquired securities from First Prestonsburg. These securities increased our portfolio to 23% of total assets at June 30th, 2019, compared to 22% in March 31st, 2019. Core deposits, which exclude $823 million of CDs, grew 4% from March 31st, 2019, 11% from year-end and 9% from June 30, 2018. This growth was largely due to the attractive deposits we acquired from First Prestonsburg. The increase from acquired deposits was partially offset by reductions of $32 million in governmental deposits, due to seasonality, $25 million in interest bearing demand deposit accounts and $29 million in non-interest bearing demand deposit -- demand accounts.

Demand deposits as a percentage of total deposits declined to 37% at June 30th, 2019, compared to 38% at March 31st, 2019 and 40% at year-end and 39% in June 30th, 2018. Quarterly average total deposits increased $217 million, compared to linked quarter, and $344 million, compared to the second quarter of 2018.

Our average total deposits for the first six months of 2019, increased $338 million from 2018. Most of the growth compared to prior periods was related to the acquired First Prestonsburg deposits. Our loan to deposit ratio was 84% at June 30, 2019, compared to 87% at March 31st, 2019 and 92% at year end, and 91% at June 30th, 2018. As we had anticipated the acquisition positively impacted our liquidity position, which will position us well for the loan growth during the second half of 2019.

Our capital ratios continue to remain strong. Our common equity Tier 1 ratio was 3.8% at June 30, 2019, compared to 14% at March 31st, 2019 and 13.6% at December 31st, 2018. Our Tier 1 capital ratio was 14%, while our total risk based capital ratio was 14.8% at June 30th, 2019. Our tangible equity to tangible assets ratio declined 14 basis points, compared to March 31st, 2019, but was up 21 basis points for year-end and 75 basis points on June 30, 2018.

Our tangible book value per common share was $18.89, compared to $19 at March 31st, 2019, $18.30 at year-end and $17.17 at June 30th, 2018. The recent acquisition and goodwill recorded impacted these metrics, compared to March 31st, 2019. Earlier this morning, we also announced another 34% dividend per share to shareholders, this represents a payout of 46% of earnings per diluted share in the second quarter, excluding acquisition related cost.

I will now turn the call back to Chuck for his final comments.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you, John. We are happy to have successfully integrated and on-boarded another acquisition. While each acquisition is individual in nature, we have streamlined our processes and planning procedures to make each one more efficient and seamless than the previous. First Prestonsburg has given us an opportunity to go deeper and wider with their clients, as well as our current insurance clients within the market. We are able to offer products and services that are competitive with larger banks, and diversified products that many local financial institutions do not offer.

Although we recorded acquisition related costs during the quarter, which negatively impacted earnings, we have been able to improve our results in the following areas. Our return on average assets adjusted for one-time acquisition related costs was 1.47% for the first six months of 2019, compared to 1.34% for the same period of 2018. We experienced lower gross charge-off rates than we have seen in recent history.

Non-interest income, excluding net gains and losses, increased slightly, compared to the linked quarter, making up for the $2.2 million decline in income from annual performance based insurance commissions and the sale of restricted Class B Visa stock, which we recognized in the first quarter of 2019.

Our efficiency ratio adjusted for non-core expenses, improved to 60.2% for the quarter and 61.2% for the first six months of 2019, compared to prior periods. Excluding acquisition related expenses, we generated positive operating leverage, compared to the second quarter of 2018 and the first six months of 2018. And we successfully lowered our loan-to-deposit ratio to 84% from 92% at year-end giving us additional capacity to grow.

We have updated our expectations for the remainder of 2019, which exclude acquisition-related costs and currently anticipate organic loan growth of 3% to 5% during the full-year of 2019. We expect an increase in credit costs during the remainder of 2019. We anticipate the third and fourth quarter levels to be somewhat similar to the quarterly levels from 2018. We believe net interest margin will be between 3.7% and 3.75% for the full-year, as we anticipate two rate cuts will occur during the remainder of 2019.

Quarterly non-interest income, excluding net gains and losses, is expected to be between $15 million and $16 million for the remaining two quarters. We expect non-interest expense in the third and fourth quarter of 2019 to be between $32 million and $33 million. Our target efficiency ratio for 2019 is between 59% and 61%. We expect to generate positive operating leverage adjusted for one-time cost for the full year, and we anticipate our effective tax yield to be between 19% and 19.5% for 2019.

We believe the recent acquisition has and will continue to benefit our shareholders. We remain prudent in our acquisitions and we'll continue to seek other promising opportunities. Our focus is on serving our current client base, which now includes the First Prestonsburg clients to the best of our ability. We strive to provide exceptional service and individualized client experience, and are thankful to attract and retain talented associates, who can garner the trust of the people within the markets we serve.

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 into the hands of our call facilitator. Thank you.

Questions and Answers:

Operator

Thank you, Chuck. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Siefers of Sandler O'Neill. Please go ahead.

Jeanie Dwinell -- Sandler O'Neill -- Analyst

Hi. Good morning, guys. This is actually Jeanie on for Scott.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Good morning.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good morning, Jeanie.

Jeanie Dwinell -- Sandler O'Neill -- Analyst

So just quickly, what are the main puts and takes in the core NIM performance in the 2Q as you guys see it?

Charles W. Sulerzyski -- President and Chief Executive Officer

Can you repeat -- did you say NIM, Jeanie?

Jeanie Dwinell -- Sandler O'Neill -- Analyst

Yes. The core margin performance this quarter?

Charles W. Sulerzyski -- President and Chief Executive Officer

Yes, I mean, I think the margin was pretty close to what we expected. We did have a security that became due early and we incurred a premium amortization about $200,000 on that, which hurt the core. And First Prestonsburg came in, they were pretty much 50%-50% in securities to loans, which hurt us a -- which helps our liquidity, and we're really happy about that. But it did have a little bit of an incremental hit to our margin. And so I think overall, I mean, it's not unexpected from what happened, given that premium amortization we hit, we took. We've been getting these benefits on their OTTI for last year for a while this one, kind of, went to the opposite direction for this quarter. So we hopefully think that things will somewhat stabilize. But as we've mentioned, we do anticipate the -- some rate decreases as we move forward here, right? So I think the market's pretty much about 95% for July here, and we're also anticipating another one in September as well.

Jeanie Dwinell -- Sandler O'Neill -- Analyst

Okay, okay, great. And then just separately, at what point would you guys be able to reduce deposit costs, if we were in a declining rate environment?

Charles W. Sulerzyski -- President and Chief Executive Officer

Yes. So we've given that some consideration already and had some preliminary discussions on that. And we think, we were decently aggressive in raising deposits over, somewhat in '17, a little bit more in '18. And we see that we could pull back on some of those rates as we proceed throughout '19 here in the rate environment that we look at there. We consistently look at our rate reports that we get from services and what others are doing, and we feel as though there's probably some room in a number of products to cut back somewhat.

Jeanie Dwinell -- Sandler O'Neill -- Analyst

Okay, great. Thank you for – for the answers.

Charles W. Sulerzyski -- President and Chief Executive Officer

You're welcome.

Operator

Our next question is from Kevin Reevey with D.A. Davidson. Please go ahead.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning, Chunk. Good morning, John. How are you?

John C. Rogers -- President, Chief Executive Officer and Treasurer

Doing great Kevin.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good, Kevin. How are you?

Kevin Reevey -- D.A. Davidson -- Analyst

Good, thanks. So first question is what strategies are you implementing or do you plan to implement in order to defend your margin going forward, especially given the fact that it's almost sure, believe that we're going to get at least one rate cut this year?

Charles W. Sulerzyski -- President and Chief Executive Officer

I mean, I would just say a couple of different things. You know, obviously it's both sides of the balance sheet, in terms of getting as much loan yield as we can, and moving deposits. We're fortunate to have a relatively low cost of deposits, a very high percentage of DDA. And while we have been running some specials and things to help with the loan to deposit ratio, we can slow down that activity and the investment book in terms of the duration of the investment book, we should be able to be pretty flexible in terms of making adjustments. So we're not uncomfortable that's what I'd say. John anything you want to add.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Yes, and we can -- the swap rates are actually pretty low in today's world. We can do we've done some transactions with respect to that to lower our funding costs on that side. We've talked about a good chunk of our brokerage CDs where it relates to CDARS, which we've been kind of using as an alternative to overnight funding, because it's a lower rate. So those are the short-term maturity, relatively short. We know we can get rid of those and go to overnight or wherever, cheaper funding sources as rates decline. So there are some actions that we can do to control some of our costs, as well as deposit costs. We can look to decrease that and keep our eyes on the market and what's going to happen there. But we were on our base rates that we have, we were decently aggressive in the marketplace. And so we feel like we can cut some of those back over time as time progresses. As I mentioned to the last question.

Kevin Reevey -- D.A. Davidson -- Analyst

And then Chuck did I hear you correctly that your NIM guidance for 3.70%, 3.75% for the full year? Does that assume two rate cuts or is it one rate cut?

Charles W. Sulerzyski -- President and Chief Executive Officer

Two rate cut.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Two.

Kevin Reevey -- D.A. Davidson -- Analyst

And so how should we think about that, assuming we get one rate cut. Would you be more at the upper end of the 3.70%, 3.75% range.

Charles W. Sulerzyski -- President and Chief Executive Officer

Yes.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Yes.

Kevin Reevey -- D.A. Davidson -- Analyst

Okay, thank you.

John C. Rogers -- President, Chief Executive Officer and Treasurer

But because, I mean, the first cut is July, right? So you're going to get that for half the year, right? The next one, as that goes into effect in September that really has a couple of months versus impact as that kind of flows through your assets over time.

Kevin Reevey -- D.A. Davidson -- Analyst

Great. Thank you.

Operator

Our next question is from Michael Perito with KBW. Go ahead.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good morning, Mike.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Hey, good morning, guys. How are you doing?

John C. Rogers -- President, Chief Executive Officer and Treasurer

Great.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good morning.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Thanks for taking my questions. I want to start on loan growth. Just, I mean, obviously, the pay downs to your prepared remarks, Chuck, have been higher in the first half of the year. I mean, you mentioned in the earnings release that originations were strong. You're not losing any clients, but I guess, for the 3 to 5 point-to-point growth for the year ex Prestonsburg, I mean, that would kind of suggest an upper single-digit type growth rate for the back half of the year, according to my math. And I'm just curious if what insight you have, I mean, you've got a month down in the third quarter, I guess, into the slowdown of the pay downs and if rates start to come down, do you think that that – essentially that that could go the other way on you.

Charles W. Sulerzyski -- President and Chief Executive Officer

It's a tricky question, because if some of you, I don't think you might, but some of the folks on the phone probably can remember going back a number of years, where we were flat at half time and said we would get to 6% and we’d kind of get ridiculed and got to 6%. I kind of get pig wrestled down to the 3% to 5%. But all of the folks that are -- all the folks that are in the business of generating loans are still shooting for the 6%.

What gives me some confidence about it is analysis of pipeline, the size of the pipeline. We’veseen the 40% more, richer, larger originations. We just need to catch a break on the pay-offs, and I think that that's possible given the real estate portfolio that we have and projects that could be taken to the permanent market. I don't think we're as poised, positioned in the second half as we were in the first half. We had a couple of company-owned based sizable relationship that private equity purchased, which took us out of roughly $15 million. That could always happen, but I'm hoping that we can forego that. So while we're saying 3% to 5%, I'll be pissed if we don't beat that and so I think you will see some good numbers in the second half.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Got it. And a couple of years and not necessarily total geographic overlap, but a couple of your smaller Ohio peers have talked about commercial customers acting with a bit more caution, a little bit less demand to extend lines of credit and do expansion efforts, etc. I mean, is that anything that you've seen in any of your footprints from your commercial customers?

Charles W. Sulerzyski -- President and Chief Executive Officer

I don't think so. I think it's really been more of the same. I think that, we've been pretty steady now for many, many years. I don't see a decrease in the mindset of our clients relative to the economy. So certainly less noise about trade wars would be helpful to our clients and helpful to our activities. But I -- hopefully we see some stability there.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Okay, helpful. And then just secondly, more of a big picture strategic question, but you know, I mean, as we think about the outlook today, I mean, you guys are now factoring a couple of rate cuts, so the NIM becomes a bit more challenging. Loan growth should rebound, but with that, I think your credit costs in the first half of the year will probably be lower than normal and those should normalized, as you mentioned, in your guidance.

As we think out to 2020 earnings growth year-over-year, obviously it becomes a bit more challenging. You have other things on the fee and expense side, obviously your disposal. But I guess my question is, as you look at your capital levels, especially post Prestonsburg, I mean, it really did the deal, it really had a minimal impact on your capital? I mean, levels are still really strong today. What are you guys, I guess, kind of waiting for? What's the thought process around, maybe broadening that capital deployment to beyond the dividend?

I mean, at some point in the trade environment, does it make sense with your capital levels and profitability to kind of have a regular share repurchase or at least some method of share repurchase in the capital deployment stack? Or are you guys still thinking that that doesn't make sense at this time?

Charles W. Sulerzyski -- President and Chief Executive Officer

Well a couple of the obvious statements. First, it's always a lot more fun to ride margin up than to ride margin down. I think that we're dedicated to three fundamental themes; and one being credit quality, which I believe we have demonstrated; two being deposits and I think you see that in the loans-to-deposit ratio at 84 versus 92 at year end; and the third being positive operating leverage. And I'm confident that once again this year, we'll have positive operating leverage, if you take out the one-time expenses. And those are the things that guide us in how we think about it.

As it relates to share repurchase, we view the math on that very similar to acquisitions, in terms of what the earn back is, and we will buy shares, if we can get an earn back that is in line with what we look at in acquisitions, which is, we don't want it to be more than three to four years. And that's kind of what guides us. So we have a program in place. I hope the stock never gets low enough that we've got to utilize it. But if it does, we will do so. And it's not very far away and I'm not going to get more specific than that. It's not very far away from where we are. So that would be my thoughts on that.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Can I push back a little though? I mean, weren’t you say it's fair? I mean, obviously the earn back is important, but the risk profile of an M&A deal in buying back your own stock are very different. I mean, do you guys take that into consideration at all when trying to allocate capital accordingly?

Charles W. Sulerzyski -- President and Chief Executive Officer

And the opportunity is also a lot different, Mike. It's a lot different. An acquisition can help strengthen our competitive framework, give us a better, stronger footprint from which to go forward. So there is pluses and minuses on both sides.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Yes, I mentioned not in place, so obviously well priced strategic M&A is always -- has much greater opportunity to be more additive than repurchasing your own stock. I meant it more as, I mean, if the TCE starts approaching 10%, I mean, is there a level where, maybe that it makes sense to expand that viewpoint to incorporate a more diversified capital deployment approach, because it will start to eventually weigh on your ROEs, which are very good right now?

John C. Rogers -- President, Chief Executive Officer and Treasurer

Not to be difficult with you, but if we announced a deal with a five year earn back, you'd hate it, alright. And so if we did a share repurchase with a five year earn back, why would you love it?

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

As I mentioned, I mean, this is just my personal thing. I think that the risk profile of those two transactions is dramatically different. And yes, I mean, obviously the opportunities as well. But I just think the different risk profile changes that this conversation around the earn back in my opinion. But I appreciate the thoughts, Chuck. Thank you for taking my question.

Charles W. Sulerzyski -- President and Chief Executive Officer

And just to be clear, I'm not as far apart in your thinking as I may sound. We've had some -- we have some holders with very large positions that think an earn back is insane at current prices or near current prices, and we have some others that are encouraging us. So there is no clarity to it, no right answer. At this point in time, we like the path that we're on. But as I said, you know, if you saw a depth, we might hit the price, that where -- we hit the good -- hit a green button.

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

No, that's what makes market, right. I appreciate the color. Thank you for taking my questions.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you. Got that, are you, okay.

Operator

[Operator Instructions] Our next question comes --

Charles W. Sulerzyski -- President and Chief Executive Officer

Ben, I think we -- I think we lost him.

Operator

He's still on the podium. Let me bring him back. Michael, did you have a follow-up?

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

No, I didn't. I just made a comment that, that's what makes the market. But I appreciate the -- taking my questions, guys. Thank you.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Really?

Charles W. Sulerzyski -- President and Chief Executive Officer

Do we have anybody on the call?

Operator

Yes, we do. We're still on the call.

Charles W. Sulerzyski -- President and Chief Executive Officer

Ben?

Operator

Yes, we have another question. Give me one second here. Dan Cardenas of Raymond James, we'll take your question next. Go ahead.

Daniel Cardenas -- Raymond James -- Analyst

All right. Good morning, guys. Maybe just in terms of clarification, can you remind me what percentage of your loan portfolio --

Charles W. Sulerzyski -- President and Chief Executive Officer

Hello?

Operator

Sorry Dan, hold on one second, I think we might have lost our speakers, let me go over to them. [Technical Issues] Pardon me. We have the speaker's back in the call. Let's proceed, Daniel Cardenas with Raymond James. Would you like to ask your question again?

Daniel Cardenas -- Raymond James -- Analyst

Sure. Good morning, guys.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good morning, Dan, I apologize whatever difficulties here, but our third quarter expenses should be one phone call lower.

Daniel Cardenas -- Raymond James -- Analyst

Excellent. So just a couple of cleanup questions for me. As I think about your loan portfolio, what percentage of that is variable rate tied to prime and/or LIBOR?

Charles W. Sulerzyski -- President and Chief Executive Officer

On the commercial side, it's overwhelmingly LIBOR priced, probably in the neighborhood of 80%.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Correct.

Charles W. Sulerzyski -- President and Chief Executive Officer

Yes. On the consumer, somewhat less so --

John C. Rogers -- President, Chief Executive Officer and Treasurer

Consumer side is mostly fixed, home equity lines of credit, probably, but the only key prime based portfolio we have is consumer side.

Daniel Cardenas -- Raymond James -- Analyst

Okay, all right. And then how about deposits, do you have any that –are -- would reprice immediately with the rate cut?

Charles W. Sulerzyski -- President and Chief Executive Officer

No, we don't have. We might have a few deposits here and there that we kind of do in our index basis on the commercial side or the government side, but it's not anything material at all.

Daniel Cardenas -- Raymond James -- Analyst

Okay, all right. Good, and then with First Prestonsburg under your belt now, what's kind of the environment like on the M&A side? Is there a lot of chatter going on or has that really kind of slowed? Just kind of given what we've seen with bank stock prices here recently?

Charles W. Sulerzyski -- President and Chief Executive Officer

I would say it's pretty quiet. Much more quiet than most of the last five plus years.

Daniel Cardenas -- Raymond James -- Analyst

All right. And then just last on -- just in terms of competitiveness out in the marketplace, both on the loan and deposit side, has there been any significant reduction in the competitive factors in the last quarter or so?

Charles W. Sulerzyski -- President and Chief Executive Officer

I would say, we see a slowing of the deposit programs in the last maybe 30 to 45 days. And I would say from a loan rate and structure standpoint, we see more of smaller institutions getting creative with the structure. But for the most part, I think that the market in total is holding up pretty well and staying ahead of the rally.

Daniel Cardenas -- Raymond James -- Analyst

Excellent. All right. That'll do it for me. Thanks guys.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Thanks.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thanks, Dan.

Operator

And our next question comes to us from Kevin Reevey with D.A. Davidson. Please go ahead.

Kevin Reevey -- D.A. Davidson -- Analyst

I think, I'd come back that way, you're not wasting your time. So --

Charles W. Sulerzyski -- President and Chief Executive Officer

I appreciate that we're hanging into the phone difficulties.

Kevin Reevey -- D.A. Davidson -- Analyst

Yes, no problem. So I just had a couple of follow-up questions. How should we think about provisioning going forward? It looks like your provisioning came in a lot lower than we expected?

Charles W. Sulerzyski -- President and Chief Executive Officer

I think we've had -- first quarter was very unusual because we had a very large recovery. The second quarter, I think it was really a function of -- our gross charge-offs have come down quite a bit. We've had strong performance in our indirect book. We don't expect that to continue at a low -- relatively low levels that they've been at. So we would expect our gross charge-offs to kind of grow somewhat some of our recoveries probably would lessen somewhat, and we would expect that we would try to trend up more towards where we were last year on a provision basis. Our loan growth or -- has been slow, so that has required as much provisioning. So we would expect to start approaching upward to where we were, kind of, on average for the last year’s quarterly provisioning.

Kevin Reevey -- D.A. Davidson -- Analyst

That's helpful. And then lastly, I think, John, you talked earlier about, a new fee schedule that was implemented some time earlier in the quarter, which helped you and me, service charges and line item. Where would you peg your customer service fees relative to your competitors? Is it mid pack, is it the upper end of the pack or is it at the bottom end of the pack?

John C. Rogers -- President, Chief Executive Officer and Treasurer

I would say we were definitely below the 50th percentile. We are not charging. There are other competitors that are definitely charging more monthly maintenance fees, more people that are charging more for paper statements and those types of things. So I don't -- do not think, we still try to maintain a community bank mentality, but we are just charging more -- a few more fees that we believe are fair rates, not high in the market. So I definitely think we're kind of below the average in total. And our requirements to wave the fees or not get those fees are probably a little bit lower than the market as well.

Kevin Reevey -- D.A. Davidson -- Analyst

Thanks, John. Helpful, congrats on a nice quarter.

John C. Rogers -- President, Chief Executive Officer and Treasurer

Thank you.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Chuck Sulerzyski for any closing remarks.

Charles W. Sulerzyski -- President and Chief Executive Officer

Yes. Let me thank everyone for participating. I apologize for any phone difficulties. We have to remember that our earnings release and a webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time and have a great day.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Charles W. Sulerzyski -- President and Chief Executive Officer

John C. Rogers -- President, Chief Executive Officer and Treasurer

Jeanie Dwinell -- Sandler O'Neill -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

Michael Perito -- Keefe, Bruyette & Woods -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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