Good morning and welcome to the Peoples Bancorp Inc. Conference Call. My name is Denise and I will be your conference facilitator today. Today's call will cover a discussion of the results of operations for the quarter and six months ended June 30, 2017. [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 fact, 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 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 regulations, changes in policy and other regulatory and legal development, including uncertainty or speculation about the enactment of changes by the current presidential administration, Peoples' ability to leverage the core banking system upgrade that occurred in the fourth quarter of 2016, without complications or difficulties 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 may be required by applicable law requirements. Peoples' second quarter 2017 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 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 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 sir.

Thank you, Denise. Good morning and thank you for joining us for a review of our second quarter 2017 results. This morning, we reported record quarterly net income of $9.8 million or $0.53 per diluted share. This is nearly $1 million or 11% higher than the net income in the first quarter, and $1.8 million or 23% higher than a year ago. For the first six months of 2017, net income was $18.6 million or $1.02 per diluted share compared to $16 million or $0.88 in 2016. This is an increase of $0.14 per diluted share or 16%. During the quarter, we had many accomplishments. This included a 4% increase in net interest income and a 7 basis point expansion in net interest margin compared to the prior quarter. We also grew fee based income and were able to shrink non-interest expense compared to the prior quarter. The efficiency ratio decreased to 61.2% compared to 64.9% in the first quarter. Loan growth during the second quarter was at 8% annualized, with an increase in both commercial and consumer balances. Our strong loan growth continued this quarter, as commercial loans provided $32 million or 10% annualized growth. Consumer loans provided $13 million or 5% annualized growth, largely due to indirect lending increases, which we have been experiencing over the last couple of years. During the second quarter, our annualized growth rate for indirect consumer lending slowed to 32% compared to 49% in the first quarter. Non-performing assets decreased $1.8 million or 8% during the second quarter, and were 0.88% of total loans in OREO at June 30, 2017. The decline was mostly due to payoffs and improvements leading to loans resuming accrual status or becoming current. Criticized loans increased during the quarter, primarily because two commercial relationships were downgraded to special…

Thanks Chuck. Consistent loan growth over the past several quarters, coupled with recent interest rate increases, has provided considerable increases to net interest income. During the quarter, net interest income compared to the prior quarter and 7% compared to the second quarter of 2016. Net interest margin grew 7 basis points compared to the first quarter and 5 basis points compared to the prior year. For the first six months of 2017, net interest income grew 6% and net interest margin expanded 3 basis points compared to 2016. Loan yields have benefitted from recent increases in interest rates, while the positive growth has provided relatively low cost funding. The combination of loan growth, increased non-interest bearing deposits and reductions in higher cost deposits is outpacing increases in our wholesale borrowing costs. This quarter, including some prepayments on investment securities that we do not expect to receive in the third and fourth quarters. We also made some slight increases to certain deposit rates late in the second quarter. As a result, we are expecting a net interest margin of 3.55% to 3.60% for the remainder of 2017. Accretion income, which is net of amortization expense from the acquisitions, continues to decline. During the quarter, accretion income was $735,000 compared to $829,000 in the first quarter and $886,000 in the second quarter of 2016. Accretion income added 10 basis points to net interest margin during the margin, compared to 11 basis points in the prior quarter and 12 basis points last year. Year-to-date, accretion income totaled $1.6 million and added 10 basis points to the net interest margin, compared to $1.8 million and 12 basis points respectively in 2016. As Chuck said, fee based income was positive for this quarter. Leading the increase for the quarter was commercial loan swap fee income,…

Thanks John. We believe we are building momentum and are realizing the benefits of our disciplined approach to sales and service and expense management. How are we building this momentum? Our go-to-market proposition is to provide consultative advise to consumers and businesses in the areas of banking, insurance and investments. Internally, we are organized by market teams with professionals from all lines of business. At its best, this complex proposition provides that higher level experience for clients. We have been at this for several years and see with each passing day, that it provides us a unique competitive advantage. Furthermore, we continue to see improvement in earnings, while we continue to invest in the future. Over the past few years, we have installed a new mortgage system, a new core banking system, and we are currently installing a new dealer floor plan system. These investments will help ensure our future competitiveness. We are extremely pleased with the progress we have made on key financial measures during the first half of 2017, including return on assets, return on stockholders' equity and tangible equity, and the efficiency ratio. In addition, our pre-provision net revenue grew 15% compared to the first quarter and 23% compared to the second quarter of 2016. Our pre-provision net revenue to total average assets increased to 1.72% at June 30, 2017 compared to 1.52% at March 31, 2017, and 1.48% at June 30, 2016. We continue to remain diligent and show improvement in our fee based income. However, we do not expect a fee income in future periods to contain the loan sale again that we had in the second quarter. We mentioned in the fourth quarter call in January, that we were going to focus on decreasing the $26 million in non-performing assets. We are pleased that…

[Operator Instructions]. And your first question will be from Scott Siefers of Sandler O'Neill and Partners. Please go ahead.

Hey Chuck, hey John, this is Brendan on the line for Scott. How are you guys?

Good Brendan.

Doing good.

Good. Hoping to start off on the margin; I appreciate the specific guidance that you guys offered for the second half of the year. I was wondering if you could offer the size of the securities prepayment benefit, the EBITDA margin in the 2Q?

Yeah, we looked into that. It's approximately 4 basis points impact on the margin for the quarter.

Okay, great. So that will come out and then --

Right. We have gotten those previously, but you cannot expect them. But we expect it to have a benefit to the quarter of around 4 basis points.

All right. Fantastic. And then, if we could switch over to the indirect consumer book for a minute. Growth here has been incredibly robust, and granted the book has one, been growing off of a relatively low base, and then two, the diversification into RV and motorcycle has helped that with growth here. Just trying to get a sense of what the growth outlook is in this portfolio, and kind of how far along into this diversification, into those other asset classes are you?

Well we continue that strategy of diversifying the portfolio. We have been pretty much consistent with above 20% of the originations being in non-auto. And we believe we can continue to grow this portfolio meaningfully. We have historically been growing it close to our headquarters in Marietta, and as we have spread our geography out over a larger distance, we are now penetrating much more successfully across the footprint, our penetration in Ashland and Huntington is as good as it is in Marietta at this point, and we have opportunities to spread that into more markets. So for the time being, we are comfortable. We like the fact that we continue to improve the habituated credit score in the portfolio and so, we think we are in a good place.

All right. Fantastic, thanks for taking my questions.

Thank you.

Thank you.

Your next question will come from Kevin Reevey of D.A. Davidson. Please go ahead.

Good morning Chuck. Good morning John. How are you guys?

Doing well Kevin.

Doing great.

Great. So just following up to the last question, can you give us some guidance as to kind of what exactly the FICO scores have been on average for those new loans that you are putting on? And then what yields have they been at, than in the LTVs? This is with respect to the indirect loan portfolio?

Our FICOs over the last few quarters have been in the high 720s to high 730s. The average FICO in the portfolio is 723. So over the last few years, four years, we have been pulling up that average score, and expect to continue to be able to do that over time. In terms of gross yield, are you interested in gross or are you kind of interested in net yield? You asked the question about what kind of yield we are getting on the portfolio?

Yeah. Both would be helpful.

The gross is about the high fours, 4.7, 4.8, and the net is about 2.25 to 2.3, 2.4 in that area each quarter.

And then, the two commercial relationships that were downgraded to special mention; was there any comment to where it is [ph] as far as industry or geography?

No. Those are two really long term customers. I have no concerns about either one of them. One of them is in kind of heavy equipments, is kind of seeing a bit of a downturn. One of them is in a business that has gone through a restructuring. I expect to see improvement in both of them within a 12 month period of time, then there is a lot of -- one has a strong guarantee and one has very strong people involved in it. So I am not really focused on that, I am a lot more excited about whacking down the NPAs that we have been talking about for the last few quarters.

And then my last question is related to deposit concentrations? I know you -- there was a movement in your non-interest DBA related to a large depositor. Can you give us some color as to any other large deposit concentration, specifically in your non-interest and interest DBA?

Our non-interest bearing DBA remains about 29% of total deposits. There are a handful of customers that have more than $10 million with us, but it's a very small handful. I don't think that there is any concentration by industry that's meaningful. I think there is a great deal of granularity to the deposit base.

Great. Thank you very much.

And the next question will come from Michael Perito of KBW. Please go ahead.

Good morning Michael.

Good morning guys. Thanks for taking my question. Maybe to start here, Chuck, it sounds like with the exception of the margin range, it seems a little bit higher, but largely speaking most of the outlook commentary for the rest of the year here seems to be reiterated. But I mean I guess, it sounds like also, you guys -- you had a good quarter, feel good about where you are at. I mean, is it fair to say that you guys are feeling more comfortable that you should be at the better end of some of these ranges, as we kind of look out to the back half of the year, in terms of like the efficiency ratio and etcetera?

Well Michael, that's a tough question, you want to put a gun to my head. I will say that we have beaten consensus for six consecutive quarters. I think that there is opportunity for the investment world to view us more positively than we have been viewed. So I think we do a good job of giving out a great deal of information every quarter, and we have been focused pretty manically on positive operating leverage and good credit. And if you get positive operating leverage and you happen to grow some loans and fees along the way, good things happen. So I certainly hope to perform on the better end of the ranges, but we try to give the ranges where we think they will be.

Great. And on the expense side, if I heard you guys correctly, I think you kind of said around $27 million for the rest of the year. But I guess a more high level question is, as you guys look out, I mean, you are seeing some good growth on the loan portfolio. I mean, it sounds like, acquisitions are still something on your radar if the right opportunity comes about. How do you kind of view the infrastructure, whether it be kind of the mobile aspect, cyber security, all those things, as you guys continue to grow and we look out towards next year, in terms of any investments or expenses you guys might have to make or you are thinking about that are on the horizon?

Well first off, I think we have been very aggressive at making investments. We have put in the new -- some of the systems I am referencing in the script, the mortgage system, the core system, the dealer floor plan system. The core upgrade that we do, will allow us to add a lot of mobile capabilities. We already have much more mobile capability than most banks, less than $10 million in assets. We are committed to improving that way of handling clients. So to us, we will make long term investments as long as we can grow the revenue faster than the expenses. So we don't have -- a few years ago, I would have been able to rattle off a few things that we want to invest in, that we have not yet. But at this point in time, I think a great deal of the heavy lifting is behind us, and I think we are poised, as we have indicated in the strategic plan, to improve our ROI, we'd like to get consistently in that 115 to 120 range, and I think we took a great stride this quarter, in that direction, and hopefully in the quarters ahead, we will see good things.

And we continue to make cyber security investments. We made them in 2016, we made some in 2017. I am sure we will make some in 2018, but that's kind of part of our consistent run rate at this point in time, I would say.

All right. Thanks guys for the color. Just one more for me. Chuck, can you remind us on capital? What ratios do you guys focus on, and I guess, in terms of kind of looking at the ratios today, I mean, how do you guys think about access and kind of what -- in a perfect world, what's kind of the right level of capital for your balance sheet going forward, in terms of just trying to isolate, maybe, what's available to kind of be put towards other deployment opportunities in the future?

Yeah Michael, it's John. I will take that. I think we focus on tangible, we focus on tier-1. In today's world, we probably got about $30 million, $35 million of excess capital that we are probably comfortable with. We have a desire to acquire. And I think we'd be comfortable getting into the mid-8s, with an acquisition, the right one, [indiscernible] how strategic it was, etcetera, and we drive, how far we'd want to go on that. But I think those are the things that we are focused on and that's about how much access we believe we kind of have to work with from an acquisition perspective, as we go forward. But we have also increased the dividends [indiscernible] lately, right, so we think this will hold for a little few quarters and believe in returning some of that to our shareholders.

Great. Thanks a lot guys. Appreciate it.

Thank you.

[Operator Instructions]. Your next question will be from Daniel Cardenas of Raymond James. Please go ahead.

Hey, good morning guys.

Hi Dan.

Good morning Dan.

Just a quick question; could you repeat your comments regarding your charge-offs? I missed what you said regarding that?

In terms of the script, in terms of --

In terms of the script.

The outlook. I think we said -- I am trying to find the page, 11 basis points that we didn't expect. I am getting help here. Okay. Our net charge-off rate has been stable at 11 basis points during 2017. Gross charge-offs for the first six months of 2017 were $800,000 or 28% lower than 2016. And then at the end, I also said, we anticipate higher credit costs and do not expect to continue long term with net charge-off rates of 11 basis points, and that comment has been in our script -- the last comment has been in the script for the past seven quarters, maybe over a year now, because with this -- the 10 basis point, double digit charge-offs; 11 basis point charge-off just isn't the business that we are all in, and I am just -- expect someday that that will change. It's not that we know anything that's going to change it anytime soon.

All right. So just more of a cautionary tone, and necessarily, that do you see something coming down the pipeline that's going to cause the charge-off to move up?

I don't think they are going to stick [ph]. We are not going to tell you it's going to be lower than this. A big old fat conservative banker.

Nothing wrong with that. And then, given that all the heavy lifting that has kind of been done on the expense side, how much larger do you think you can grow organically, without having to make further substantial investments in the expense platform?

I think, in terms of organically, I think that we can go for many-many quarters, years, growing revenues faster than expenses if we are disciplined, and we have been very disciplined for several years at this. So if we happen to find an acquisition that's strategic and not the right price, that would be a great day. And if not, we will just continue to improve our returns and get bigger at the rate that the market gives us, which last few years has been in that kind of 5% to 8% range.

Okay. Fair enough. And then as you focus on the few revenue side, organically obviously, you are expecting some top line revenue growth, but what are the opportunities looking like for you guys on the fee income side, in terms of either adding new components or growing the insurance side of the equation?

Well we like the insurance business for sure, and we continue to look at acquisition opportunities that broaden our capabilities or deepen our capabilities. The insurance business has been under a little pressure over the last few years, in terms of premiums decreasing. Some of our customers have been under pressure in terms of having less assets. For instance, we insured a lot of coal trucks and coal companies have far fewer trucks today than they did a few years ago. But recently, we see signs that those trends are abating, and we are beginning to see stronger revenue growth. We are very much committed to the investment business, both our trust business did well, our brokerage business doing well, our retirement plan business is doing well. Again, we would look at acquisitions that would expand there if we could. It would be a combination of fees and margin, but if we can get into the leasing business, small equipment leasing business, we would do that. In terms of the fee income improvements, we have seen a lot in swaps this year. I think that going forward we hope to -- the swaps fees are not going to be forever, but we are certainly trying to do the best in a rising rate environment. I see that's working on an SBA program that I think can help -- that will grow fee revenue, and if the swap fees dissipate, hopefully, we can make some of that up with a good strong SBA growth.

Good. And then last question for me, just maybe some comments or color regarding the positive pricing competition in your footprint? Are you beginning to see signs of a pickup in the competitive pressures or not yet?

A little bit on the public side, but not too much on the core consumer, core business side. So my personal view, and I know we are all reading the American Bank every day or every week, there is a different article on this in there. But I just believe the rates are too low to pique consumer interest. People are going to get excited, if they are getting three-tenths of a point versus two-tenths of a point. I don't think it changes behavior.

Okay. Great. All right. Thanks guys. Good quarter.

Thank you.

Thank you.

The next question will be from Kevin Swanson of Hovde Group. Please go ahead.

Good morning guys.

Hey Kevin.

Good morning Kevin.

Just quickly on loan growth. In terms of geography, any concentrations or was it spread out, and then maybe, if I am looking for the pipeline in the same question?

Pretty much spread out, maybe a little bit stronger in Northeastern Ohio than across footprints. But that changes from time-to-time, and I would say the pipeline probably is similar to that, slightly stronger in Northeast Ohio than the rest of the footprint.

Okay. Thanks. And then just one more question; if we kind of group home equity with consumer loans, it looks like the percentage of the portfolio is now just over 21%, up from 18% last year. Is it a level that you are kind of comfortable moving to, just kind of any outlook on how the mix you think going forward?

Yeah. That causes me no discomfort. I would be happy if we could grow our mortgage portfolio and the home equity portfolio. I think that's a great asset class. But the growth has been pretty tepid in home equity. Our consumer growth is mainly coming in the indirect arena.

Okay. Thanks. That's all I had.

Okay. Thank you.

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

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

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.