Good morning, and welcome to Peoples Bancorp Incorporated Conference Call. My name is Michelle and I will be your conference facilitator today. Today's call will cover a discussion of the results of operations for the quarterly period ended June 30, 2018. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [Operator Instructions]. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical facts, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. These include, but are not limited to the success, impact, and timing of the implementation of Peoples' business strategies; including the successful integration of acquisitions and the expansion of consumer lending activity; the ability to integrate acquisitions, including the merger with ASB Financial Corp.; the competitive nature of the financial services industry, changes in the interest rate environment; uncertainty regarding the nature, timing, cost, and effects of federal and/or state banking insurance and tax legislatives or regulatory changes or actions, changes in policy and other regulatory and legal developments accompanying the current presidential administration, including the recently enacted Tax Cuts and Jobs Act and uncertainty or speculation pending the enactment of such changes; uncertainties in Peoples' preliminary review of and additional analysis of the impact of the Tax Cuts and Jobs Act and 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 these forward-looking statements after this call, except as maybe required by applicable legal requirements. Peoples' second quarter 2018 earnings release was issued this morning and is available at peoplesbancorp.com under the Investor Relations tab. A 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 15 to 20 minutes of prepared commentary, followed by question-and-answer period, which I will facilitate. Any archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for one year. Participants in today's call will be Chuck Sulerzyski, President and Chief Executive Officer; and John Rogers, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Thank you, Michelle. Good morning. Thank you for joining us for a review of our second quarter and year-to-date results. We are pleased with the progress made during the second quarter. We had several key accomplishments including the successful conversion of ASB Financial Corp, strong organic loan growth, maintained relatively low cost of total deposits, continued improvement in our net interest margin, increased pre-tax income compared to the linked quarter excluding acquisition costs, and improvements in several assets quality metrics including a reduction in charge-off levels and improvement in delinquency trends within our loan portfolio compared to the linked quarter. As far as our results for the second quarter, our quarterly net income was $7.9 million or $0.41 per diluted share. During the first quarter of 2018, net income was $11.7 million or $0.64 per diluted share and was $9.8 million or $0.53 per diluted share in the second quarter of 2017. Through the first six months of 2018, net income was $19.6 million or $1.04 per diluted share. This compares to $18.6 million or $1.02 per diluted share in 2017. During the second quarter, we recognized acquisition cost of $6.3 million which reduced earnings per diluted share by $0.25. This amount included $205,000 of losses and $6.1 million of non-interest expense incurred. For the first six months of 2018, these costs totaled $6.4 million and resulted in a reduction of $0.27 per diluted share. Income tax expense decreased during the second quarter of 2018 as we released a valuation allowance we have been carrying of approximately $800,000. This resulted in an increase in earnings of $0.04 per diluted share. John will provide additional color around this valuation release a little later in the call. During the quarter, we converted American Savings Bank which took place on April 13. That's…

Thanks, Chuck. According to our early analysis, the ASB acquisition after preliminary fair value adjustments, added $275 million in total assets as of April 13, 2018, was primarily consisted of $19 million of investment securities, $240 million in loans, and $199 million in total deposits. Purchase price totaled $42 million which was higher than we originally expected based on a higher ratio of stock to cash consideration and our higher stock price at the acquisition date compared to original projections. We recorded preliminary goodwill on the transaction of $18 million as well as $2 million in core deposit intangibles which were higher than we had originally projected. Our preliminary fair value adjustments to loans ended up being our larger discount than we had originally forecast as interest rates had moved higher than we originally modeled for the transaction. We had also projected about $13 million of goodwill and the higher purchase price and loan discount coupled with lower market values on brand properties drove most of the increase in goodwill. Overall, ASB added approximately $0.03 to earnings per share during the second quarter of 2018. With regard to our first quarter results, net interest income was a positive, big positive for us this quarter as it grew 12% compared to the first quarter. This increase was driven by higher loan balances both from the acquired loans as well as organic loan growth. During the quarter, we also benefited from additional proceeds of $248,000 that were received on an investment security for which we had previously recorded an other than temporary impairment. These proceeds added three basis points to net interest margin during the second quarter of 2018. Compared to the second quarter of 2017, net interest income grew 17% and was up 13% compared to the first six months of…

Thanks, John. We are pleased to have completed our recent acquisition of ASB in the beginning to reap the benefits. We're excited about the addition of the preferable mortgage origination business which provided a healthy increase to our fee-based income during the quarter. We are excited that the new associates and clients that have joint Peoples family. Our results during the second quarter were heavily impacted by acquisition costs related to ASB conversion. However our core business has continued to improve which has been a main focus for us over the last several years. I would like to reiterate a few highlights from the second quarter. We had annualized organic loan growth of 9% compared to March 31, 2018. Our quarterly cost of interest bearing deposits was 53 basis points in the second quarter of 2018 with total deposit costs being 42 basis points. Our net interest income grew 12% compared to the first quarter with net interest margin increasing eight basis points. Our second quarter net charge-off rate was 11 basis points annualized and our tangible book value per share increased to $17.17 compared to $17.04 at March 31, 2018. We continue to closely monitor our performance and strive to provide an improved return for our shareholders. As it relates to the remainder of 2018, we have updated our expectations for the third and fourth quarter and we expect the following: annualized organic loan growth of 5% to 7% in the second half of 2018, quarterly credit cost to be slightly higher than those recognized during the second quarter due to anticipated loan growth, net interest margin in the low 370s, quarterly fee-based revenue between $13 million and $14 million, non-interest expenses per quarter of approximately $30 million, quarterly efficiency ratio between 61% and 63%, a 19% effective tax yield for the last half of 2018, and remaining acquisition costs related to ASB of approximately a $0.5 million. We believe our recent acquisition and conversion have been a success. As a result of the investments in infrastructure the last several years, we are more capable of handling additional deals and offering enhanced products and services. We will continue to search for additional acquisition opportunities. In the meantime we're still focused on growing our core business as well as continuing to grow the newly acquired ASB client base. 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, Chief Financial Officer. I would now turn the call back to the hands of our call facilitator. Thank you.

We will now begin the question-and-answer session. [Operator Instructions]. We show that the first question comes from Scott Siefers with Sandler O'Neill and Partners. Please go ahead.

Good morning guys. Brendan on the line from Scott's team. How are you?

Good morning, Brendan. How are you?

Hi, Brendan.

Good, good. Just wanted to start off on the fee income guide. I think I heard you correctly you said $13 million to $14 million per quarter through the remainder of the year, is that right?

Yes.

All right. So then if I look at this quarter if you kind of add back in the $700,000 related to the equity securities portfolio and in fact more or less goes away due to the fact that you liquidated that book it gets you to roughly $14.5 million for the 2Q in terms of run rate fee. So I'm just curious what would drive the decline from that core $14.5 million level to something like you're saying $13 million to $14 million in the back half of the year?

Yes, Brendan. I think first of all there was a loss of $2.36 in the securities book. The $700,000 maybe might be your delta from the first quarter to the second quarter that would put it around $14 million I believe.

Got it. Okay, that makes sense. All right very good, very good that's helpful. And then looking over to the NIM I'm assuming that the low 370s outlook for the rest of the year is it all in NIM including accretion income, so I'm just curious, what is your outlook for the core NIM ex the accretion kind of off of this quarter's 3.65% base?

Yes, I think -- I think the core NIM should probably -- should be pretty steady to maybe slightly up. We have seen a this run up in LIBOR in the first quarter which definitely helped us to get this boost in the second quarter that we saw. We continue to see, I wouldn't say it intense competition for deposit and deposit rates but I would say there is a general rise and more competitiveness happen in the marketplace. So we would anticipate some increase in our deposit cost during the course of the quarter as we look to perhaps change rates in some of our base pricing but we should continue to see loan yields grow as the Fed continues to move like everybody else we expect them to go in September and December and we'll still see some benefit in the third quarter from what happened -- the increase that happened near the end of June with the Fed, since a lot of our stuff takes a little bit of time for that to come through.

The next question comes from Kevin Reevey from D.A. Davidson. Please go ahead.

So first question is related to your organic CRE loan growth which was pretty strong compared to what we've seen from other banks that are reported this quarter, can you kind of give us some color as far as the type of CRE loans you're booking and can you talk about competition?

I think that much whether it's CRE or just our regular growth a lot of it is just more business from existing clients. We have been selective I think we may be the beneficiary of being relatively low on the percentage of capital. So I think that some people, some other institutions are kind of slowing down and we have the opportunity to look at deals, I think we'll still be at the end of the quarter at 166% of capitals much lower than the peer group. So we've been able to get decent pricing on what it is that we've been doing and we feel very good from the quality of the deal, the quality of the borrowers, the balance sheet that they have. And so hopefully we continue to be the beneficiary of those type of deals going forward.

And can you talk about your experience since closing the ASB deal as far as customer and talent retention?

In terms of clients, I think that we're very happy with the reception I think I mentioned in the script that we've got a couple of deals that have closed this month from that which are in the neighborhood of $20 million of sizable opportunities for us. In terms of customers, we have this much more capability than the bank that we've acquired in terms of investment opportunities, insurance opportunities. I think in terms of staff it is because we have so much more capability it can feel a bit overwhelming. We have been able to maintain the vast majority of the client-facing people which is what we desire to do and I'm optimistic about the future of what we can do in these markets.

And then my last question is related to your manufacturing client base you've been reading about some of the challenges that they're facing off late with worker shortages and as well as higher input costs as a result of recent tariffs from the administration. Can you -- are any your clients are feeling any of this?

Yes, I think we’re seeing some concern about the tariffs in two portfolios. We have a very small ag portfolio and soybean is the major crop in the western part of the state. That being said most of our ag clients have very meaningful balance sheets and investment relations with us. So we don't have a high level of anxiety. We also have a large number of customers who make products out of aluminum and out of steel, so they're seeing their cost rise at this point in time, we're not seeing any of them showing any wear and tear in terms degradation of credit quality, we are seeing some of them slow down in terms of capital investment.

The next question comes from Michael Perito with KBW. Please go ahead.

Hey guys. Thanks for taking my questions.

Welcome Mike.

Hi, Mike.

I had a couple. I wanted to start maybe more an outlook type question on the non-interest income side obviously been a big piece of your business for kind of taken the mid -- mid-ish point of your guidance for the back half of the year maybe you'll do roughly $56 million on a core basis this year I’m just curious what some of the highlights are in terms of growth opportunities for that, as we look forward may be the next 6, 12, 18 months what are some of the things you guys are targeting to help drive further fee growth and any general thoughts have you could provide us on what performance expectations you guys have in that regard?

Well, we have historically had a high percentage of fees and would very much like to retain that. We think the American Savings Bank mortgage business will help us a little bit. We think the work that we're doing with SBA and government programs will help us to the extent that if rates continue to rise. I think we'll still see some perhaps more swap activity but those would be the major things that come to mind. Obviously we would like to do acquisitions in insurance and investments that would help -- that would help fee growth also.

And thanks Chuck. And then generally speaking just in the acquisition front I mean, can you give us maybe a little update on the state of the market I mean have you noticed a better velocity of opportunities and I mean as we've gotten a couple quarters away now from the tax reform and the big profitability bump, have prices start to -- started to get a little bit more reasonable or just any thoughts there that you can give us.

Mike in general, the tax law changes make all of us CEOs feel that we’re smarter than we were a year ago. And I think that it probably had people leaning more towards independents than they would be a year ago but I think that as time goes on and people are looking at year-over-year improvements or quarter-over-quarter improvement after all the tax stuff is in, I think the difficulty of this business continues. You've got a relatively flat yield curve, relatively sluggish loan demand, and you've got a lot of pressure on expenses in terms of labor costs which is pending on the bank more than 50% of that -- of the cost. So I think right now in 2018, first half of 2019, you might see a little less, I think that's what the macro numbers are showing but I think that it will pick up in the second half of 2019, we are seeing a few opportunities, we came in and we didn't win the prize on a couple of them but we want to stay disciplined in terms of buying opportunities at the right cost that benefit the shareholder.

Thanks, Chuck, helpful color. And then just one last question for John and till I understand if you guys aren't quite there yet but just curious if you had any initial thoughts you can share with us on Cecil and how that could potentially impact your credit outlook and provisioning and reserve levels etcetera?

Yes, you're correct. I don't really have that much on it. We are definitely working on it. We have a team of cross-disciplined team across the organization that's focused on it. We are implementing the vendor solution like a lot of community banks would be doing. We hope to be in a pretty good shape by the end of the year early first quarter could be running numbers and at some point in 2019, I think we’ll be ready to give a better indication of what we believe the impacts are but at this point that I can't quantify anything at this point in time.

The next question comes from Daniel Cardenas with Raymond James. Please go ahead.

Hey good morning guys.

Good morning, Dan.

Good morning. Congrats on a nice quarter everyone in the series.

Thanks Dan.

Thank you.

A quick question on credit quality, I mean the numbers are good and nothing out there that seems to be causing me any concern but is there anything as you look at on the horizon that perhaps is peaking your interest a little bit and given you pause on the credit side?

I might think a couple of different things. If the tariffs I wish the whole discussion around tariffs would just go away. I think that's causing potential stress to two clients. A lot of talk on the economy in terms of what GDP will be this quarter but I think if you look at some of the other macro numbers you just got three consecutive months of housing declines in sales, some other factors maybe go in the other way. So I'm not exactly sure if we're going to see the growth that some people were forecasting over the next couple years. As it relates to us in our credit we -- we're pretty pleased with where we are, we're disciplined, we spend a lot of time working the portfolio in terms of making sure that it's diversified we're very pleased to be where we are with the percentage of capital in real estate, we've been growing our C&I book the bank is more balanced between consumer and commercial than it had historically been, so the portfolio makeup gives us a lot of comfort and confidence. And the quality of the underwriting is extraordinary. What we're seeing from loan review and the other sources is positive. Obviously the last credit downturn we were in the bottom quartile of credit performance and we've said our goal for a long time and the next credit downturn of being in the top quartile of credit performance. There is nothing that I know that doesn't give me complete confidence that we'll be able to do that.

Excellent. Excellent. And then as I look at your capital levels, I mean they’re building quite nicely maybe if you could give us some color as to what's an optimal capital level for you guys in absent acquisitions how do you plan on deploying any excess capital?

So I think our capital priority, our organic growth we're seeing good strength there in loans. We expect that to continue at the pace as Chuck mentioned dividends we continue to look at that and we will continue to look at dividends on a quarterly basis, currently we're probably a little bit on the lower end of the 40% to 50% range. So I think there could be some potential upside to that in the future but acquisitions definitely are what we want to do. We would like to deploy some of that through more cash in the acquisitions that we do, ASB was disappointed a little bit that cash was not taken but of course it was the right decision given the continued run up in the stock price, so we may fix that more going forward to ensure that we're using some of our capital as we deploy future acquisitions.

Okay, good. And then last question if you could just remind me what percentage of your deposit portfolio is would you consider to be interest rate sensitive?

Just give me a second and we can come up with that. Well the -- our non-interest bearing is about 20%, 25%. Our non-interest bearing deposit is $585 million out of a total of $2.9 million, about 80% is interest sensitive, I think our -- we had not seen much movement in the savings space or the interest bearing checking space which is a good chunk of that. So 40% of our stuff is DDA which we don't see very much sensitivity. So most of it that we’re seeing it more in the money market space and the CD portfolio, and if you give me a second I can kind of tell you what that percentage is in a minute.

Okay, perfect.

The money market is 13.2% of total deposit. The non-interest bearing is just a little bit less than 20% of total deposit, if that helps you.

It does.

But the overall cost of deposits is 42 basis points which is respectable.

And in terms of competitive pressures on the deposit side, are you seeing those more from community banks or the larger banks starting to get a little bit more competitive on deposit pricing?

I think we're seeing it more from the larger banks. We always have community banks doing something crazy at any one point in time but I think you see more -- a lot from the larger banks, more from the larger banks recently.

And in the community bank size is more of the smaller community banks that needs to funds in that are putting out ads or advertising. They're really low stuff and some of the large community banks, credit unions; they're obviously trying to do something as well on both the loan side or the deposit side.

[Operator Instructions]. The next question comes from Kevin Swanson with Hovde Group. Please go ahead.

Hey most of my questions have been answered but I just had one maybe kind of follow-up on credit, I think on the last call you mentioned criticized loans and MPAs will probably go down over the course of the year, I just obviously the absolute value went up with ASB but just kind of maybe a sense of what the kind of standalone PEBO did and what kind of outlook is on that? Thank you.

Yes, I mean we're optimistic between and the second half of the year I think you’re going to see some meaningful improvement of credit quality statistics, we’re obviously where things that are trending positive and what those are usually on the downsized, it's the nature of the beast, it's more of a surprise. But the -- we do expect the second half of the year to be strong. On the criticized loans, the core PEBO was down $14 million in the quarter. We expect good credit quality improvements over the second half of the year we’re optimistic that we can keep our loan growth, I think our guidance was 5% to 7% over the second half of the year that was our guidance for the full-year going into the year, we obviously did a good job of beating that in the first half of the year and hopefully we can do the same in the second half of the year. But we’re not going to declare victory until we do it and be with us and see we end the fourth quarter from our loan growth standpoint and a credit quality standpoint. I would say in answer to one of the earlier questions back to the credit quality, I would say that I think the market is remaining reasonably rationale given the lack of loan growth that you see in the industry, I think that the disciplines are holding by most institutions, I think where we see exceptions to that are kind of larger, kind of smaller banks in the billion dollar neighborhood maybe stretching here and there. But I think the large banks are being relatively disciplined in terms of structure, we see some things from a price standpoint that we walk away from but by and large it's not insane out there.

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

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

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