Good morning and welcome to Peoples Bancorp’s Conference Call. My name is Amy, and I will be your conference facilitator today. Today’s call will cover Peoples Bancorp’s discussion of results of operations for the quarter ended June 30, 2012. [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 may contain projections or other forward-looking statements regarding future events or Peoples Bancorp’s future financial performance. These statements are based on management’s current expectations. The statements in this call which are not historical fact are forward-looking statements and involve a number of risks and uncertainties, including but not limited to the interest rate environment; the effect of federal and/or state banking, insurance and tax regulations; the effect of technological changes; the effect of economic conditions; the impact of competitive products and pricing, and other risks detailed in Peoples Bancorp’s Securities and Exchange Commission filings. Although management believes that the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections. Peoples Bancorp disclaims any responsibility to update these forward-looking statements. Peoples Bancorp’s second quarter 2012 earnings release was issued this morning and is available at peoplesbancorp.com. This call will include about 15 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. Peoples Bancorp’s participants in today’s call will be Chuck Sulerzyski, President and Chief Executive Officer; and Ed Sloane, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Thank you, Amy. Good morning and welcome to our call. Early today, Peoples Bancorp reported net earnings of $5 million or $0.47 per common share for the second quarter. Both of these amounts were significantly higher than the $2.7 million and $0.26 earned in last year’s second quarter. Through 6 months, our earnings per common share were $1.10 versus $0.38 a year-ago. 2012 results continue to be stronger than last year due to improved performance in our core businesses. We also are benefiting from the continuation of favorable credit trends. During the second quarter, we released $1.1 million of our allowance for loan losses, bringing the year-to-date release to $3.3 million. Last year, we recorded $7.6 million of provision expense through the end of June. While focus on positive operating leverage is producing higher pre-provision net revenue in 2012, this growth is taken place even though we incurred $660,000 or $0.04 after-tax of merger and other non-core expenses during the second quarter. Absent these expenses, operating cost would have been up only slightly year-over-year while total revenue grew 4%. We are comfortable with the higher expenses in the first half of 2012 given the level of revenue growth that has occurred. In contrast, second quarter 2012 earnings were lower than the linked quarter because of the smaller reserve release and nearly $1 million of annual insurance contingent income recognized in the first quarter. As we have discussed in recent calls, improving our business line performance is a key strategic goal. We are also looking to supplement this growth with acquisitions given our capital strength. Many smaller banks are finding it harder to survive as operating conditions become even more challenging. As a result, we are seeing more opportunity to merge within our footprint. Along these lines, we are being more…

Thanks, Chuck. During the second quarter, we achieved positive results in several key areas, including revenue growth, higher loan balances and good expense management. We also had to deal with several ongoing challenges facing the entire banking industry. Most notably, yield curve flattened substantially in response to renewed economic concerns in both the U.S. and Europe. The resulting lower long-term rates intensified the downward pressure on our net interest margin. We are pleased to have maintained a stable net interest margin in the second quarter, given the tougher interest-rate conditions. This success reflects our disciplined balance sheet management and pricing. Our margin also benefited from higher average loan balances both sequentially and year-over-year. During the quarter, total funding costs fell 12 basis points from 1.06% last quarter, and were 45 basis points lower than last year’s second quarter. This improvement is being driven by the continued mix shift from higher-cost funding to low-cost core deposits. Second quarter 2012 funding costs also reflect a full quarters impact of debt restructuring, we completed in mid-first quarter. On the asset side of the balance sheet, our asset yields are being impacted by higher principal runoff from the investment portfolio due to the lower interest rates. In the second quarter, our monthly cash flow exceeded $12 million, 13% higher than prior quarter and up over 30% from a year-ago. We also were losing at least 1% in yield on the reinvestment of these funds. On the other hand, modest loan growth occurred during the second quarter, which helps to stabilize asset yield. Period-end balances were up $11 million, while average balances were $13 million higher than the prior quarter. For the second half of 2012, improving loan mix and quality will be equally as important as growing total loan balances. On the funding side,…

Thanks, Ed. In the second quarter, we made positive progress along several key fronts. Our diversified revenue stream is growing faster than expected. Operating expenses are being held in check. Loan balances are increasing, while asset quality continues to improve. We’ve also achieved a major milestone with the successful negotiation of 2 acquisitions during the quarter. As discussed in our year-end call, our expectations for 2012 of a modest total revenue growth and operating expenses lower than 2011 absent absolute acquisitions. Thus far in 2012, revenue growth is exceeding our expectations, while operating expenses are trending higher than expected. Looking to the second half of the year, we believe revenue generation will remain strong while operating expenses could end the year modestly higher than 2011. Our focus on expense management will result in meaningful stronger operating leverage during the final 2 quarters compared to the first half of 2012. This result reflects our commitment to grow revenue while holding the line on expenses. Further, we will look to reduce expenses in the event revenue levels showed signs of weakening. Another strategic goal for 2012 and beyond is to build a loan portfolio with better risk dynamics and greater diversity. Overall, we are pleased with the progress made thus far. Our credit quality is improving at a faster pace than expected. In addition, C&I loans are up 11% higher than one year-ago, while consumer balances are up 5%. At the same time, CRE balances have decreased 5% as we have exited several problem loans. Looking over the next 12 to 18 months, we expect to see C&I and consumer loans become even larger segments of the portfolio. Within our CRE portfolio, ongoing efforts to replace C Tier credits with A and B Tier credits will create a higher quality portfolio going…

[Operator Instructions] Our first question is from Scott Siefer with Sandler O’Neill.

Let’s see, I guess I wanted to start with Chuck, maybe just your thoughts at a top-level on overall loan growth, just in the press release you’ve cited some pay downs that will make growth in the second half of the year kind of challenging. I just want to get your overall thoughts on loan growth, does that -- are you feeling kind of more conservative or is that simply pay downs, but no, really no change in customer demand, how you're thinking about those dynamics?

Couple of comments, Scott. First, on the macro environments, there is a lot in the press about the economy slowing down. We’re not seeing it in our footprint, and for example, the unemployment rate in Ohio is 7.2%, 1% less than the national average, and I suspect the last time it was a 1% difference, I doubt you were actually in the business; you have to go back decades. So we're seeing a fair amount of growth. We feel pretty optimistic about loan demand. We have put a lot of effort into cleaning up the portfolio or origination volumes, the last four quarters have been strong, the reason why that portfolio has not grown is because of stuff that we have been flushing out. I see that slowing down in the next 4 quarters. I see our origination volume staying at least as good as it has been perhaps even better. So I think we will see more loan growth in the next 4 quarters than we have in the last four quarters. I also feel strongly about that, because of the investments that we've made in the consumer lending talent. So I’m more optimistic today, we’ve spent a lot of time in the last 4 or 5 quarters really working defensively to improve the portfolio. We've changed our underwriting practices, we've changed some of the systems that we've used, and that's behind us and is kind of becoming a set of operating norms within the lending community that we have here. So I’m more optimistic today than I’ve been since I've been here.

Okay, that's very helpful. I appreciate it. And then Ed, wanted to ask you questions on the margins. So it sounds like maybe of our 5 basis points of compression per quarter in the last half of the year. Just curious about any additional leverage you might have to pull maybe are you prepaying some borrowings and things like that. You guys are building tangible book at a pretty quick clip. So, I think you could probably tolerate any prepayment penalties and things like that. Just curious what sort of optionality there is in there?

Not really seeing anything right now, Scott, on prepayment penalties in the borrowing side. I would have to say the leverage that we have to pull, it really tied back to what Chuck just commented on in terms of the loan portfolio. The expectation there and the focus has been around growth in the loan portfolio for the next -- for the coming quarters, and consumer lending to help fortify that, continued growth and C&I type lending in the commercial portfolio. And then, I think you go to the other side of the balance sheet and look at the deposit base. And we've had a very good success at remixing our deposits into the lower costs; core deposits almost 20% increase in non-interest-bearing DDA over the past year. And we’re expecting to see some continued remix in that area. But to your point, there will be some pressure on investment portfolio yields and it’s critical that we continue to focus on loan growth and strong pricing discipline in our loan portfolio.

Okay, perfect. And then just the final question I had. So expense guidance a little higher than you had been saying previously, if I’m understanding it correctly that’s largely just a function of the factor revenues are coming in, significantly higher than you guys have been anticipating previously in that. It sounds like you’re still pretty confident on the positive operating leverage side. But within the expense guidance, does that take into account the fact that you had some unusual expenses here in the first half or those embedded into that guidance or maybe a simpler way of asking it is that, you’ve been right around this $15 million quarterly run rate, is that something that we should expect to grow off of or can you kind of hold the line at this $15 million level absent acquisitions?

Yes, I think up slightly on that Scott for the reason that you outlined. There is a sales compensation component to it. And as we’ve seen, very strong revenue growth, 4% in revenue growth so far this year is exceeding our expectations, and 8% of that coming from fee-based businesses. That’s going to drive some of that sales compensation up. So, we would expect it to add to it.

Also, Scott, the Sistersville acquisition closes in mid September and gives us a little bit more expense in the second half of the year than we anticipated. I think that our second half 2012 expenses will be very, very close to our second half 2011 expenses.

[Operator Instructions] And our next question is from Daniel Cardenas with Raymond James.

Quick question, and with the hiring of a new Consumer Head or what are the thoughts of hiring additional consumer lenders over the next year?

Well, first that search that we just completed took us almost 1 year to complete, and we’re well excited about it. If you look at our company over the last decade, consumer lending was clearly undernourished and it was viewed as a undesirable business. I think consumer lending has more opportunity than the company has taken advantage of. I don’t see us adding much in the way of talent. In addition, we will add a person, a salesperson in the indirect business. And then the normal underwriting collection functions and other components will grow as volume grows, but I don’t anticipate us adding many FTE in the next 6 to 9 months in that area at all. So, I think there is a tremendous amount of upside here in terms of leveraging some of the embedded investments or scale that we have. And I think that we have loan book as roughly 2/3 commercial to 1/3 consumer and five years from now, I’d like to see that closer to 50/50.

Okay. All right. And then, I think you had mentioned, maybe Ed mentioned in the call that there is about $300,000 of expenses related to an acquisition that you took a look at and walked away from, was that a bank transaction or was that one of your other business lines?

It was the bank transactions primarily.

Okay. And are you seeing a pickup or substantial pickup and conversations that you’re having with other financial institutions in your footprint?

Unlike what you read in the press, we’ve had the opportunity to do several due diligences over the last couple of quarters. So, we’ve get in kind of to the point of having conversations and having agreements on pricing if when you get under the covers, and you see what’s there that has made us walk away more often and then we’ve gone forward. So we are having conversations, I think that’s the small banks in particular are overwhelmed, and I think it’s opportunity for us.

Yes. The only thing that I would add to that Dan, is we do have looks at other lines of business as well the wealth management and insurance. We’ve taken several looks at some smaller agencies in those areas. So that's just as big of a focus to us as the whole banks are.

I mean we would like to keep the proportion of our earnings coming from insurance and investments, if we were to double the size of the bank over 4-, 5-year period through acquisitions. The smaller banks are not going to bring us the insurance and the investment business.

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

I’d just like to thank everybody for being with us this morning, and please remember that our earnings release and webcast of this call will be archived on peoplesbancorp.com under the Investor Relations section. Thanks a bunch and have a good day.

This will conclude today’s conference call. Please disconnect your lines.