Good morning, and welcome to the Peoples Bancorp Inc.'s Conference Call. My name is Rocco 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 fiscal year ended December 31st, 2017. [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's filings. These include, but are not limited to, the success, impact and timing of the implementation of Peoples' business strategies; the successful integration of future acquisitions and the expansion of consumer lending activity; the ability to integrate future acquisitions, including the pending manager with ASB Financial Corp.; the ability to obtain regulatory approval of the proposed merger with ASB on the proposed terms as scheduled; and the approval of the merger by the shareholders of ASB; the competitive nature of the financial services industry; changes in 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 developments accompanying the current presidential administration, including the recently enacted Tax Cuts and Job Act and uncertainty or speculation pending the enactment of such changes; uncertainties in the preliminary review of and additional analysis of the recently enacted Tax Cuts and Jobs Act and changes in the 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' fourth 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 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 Investor Relations section for one year. Participants at 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, Rocco. Good morning and thank you all for joining us for a review of our fourth quarter and full year 2017 results. Earlier this morning, we reported fourth quarter net income of $9 million or $0.49 per diluted share. This compares to $10.9 million or $0.60 per diluted share in the third quarter and $7.4 million or $0.41 per diluted share in the fourth quarter of 2016. For full year 2017, net income was $38.5 million or $2.10 per diluted share. Net income was $31.2 million or $1.71 per diluted share for the full year of 2016. The fourth quarter of 2017 includes investment security gains of $764,000, which was -- which added $0.03 to earnings per diluted share in the fourth quarter of 2017. These gains were partially offset by two non-core items that resulted in additional non-interest expense during the fourth quarter. These items included acquisition-related cost of $341,000 and a pension settlement charge of $243,000. The non-core noninterest expense items resulted in a reduction to earnings per diluted share of $0.02 during the fourth quarter of 2017. The fourth quarter of 2017 was also impacted by the recently enacted Tax Cuts and Jobs Act. This resulted in additional $897,000 of income tax expense during the fourth quarter of 2017. This additional income tax expense resulted in a reduction of earnings per diluted share of approximately $0.05 for both the fourth quarter and the full year of 2017. John will discuss the new tax legislation in more details in a few minutes. During the third quarter of 2017, we recognized investment security gains which added $0.07 to earnings per diluted share during the third quarter. Compared to 2016, our net income for the full year of 2017 grew 23%. We are pleased with this improvement. The…

Thanks Chuck. As it relates to the two additional nonrecurring items, similar to last year, we continued to reduce our position in certain bank equity investment securities. This led to the $764,000 gain on investment securities during the fourth quarter compared to $1.8 million during the third quarter. Beginning in 2018, fluctuations in market value of equity investment securities we recognized on the income statement. Our main imposition could pose some volatility in future quarters, depending upon market values at the end of future reporting periods. As of December 31st, 2017, we were required to record a reevaluation of our deferred tax assets and liabilities under the recently enacted Tax Cuts and Jobs Act. Previously, we had to recognized our deferred tax assets and deferred tax liabilities at a federal income tax rate of 35% and the new law requires us to use a 21% federal income tax rate. As a result, we wrote down our net deferred tax assets by $897,000 which had a direct impact on our income tax expense during the fourth quarter of 2017. Going forward, we will benefit from recording income tax expense at the lower federal income tax rate. We anticipate our effective tax rate during 2018 will be approximately 19%. Moving on to net interest income, margin, and fee-based income. Net interest income was down slightly compared to the third quarter. This reduction was largely due to the recognition during the third quarter of $611,000 of proceeds received at our investment security for which we had previously recorded and other than temporary impairment. Excluding the third quarter proceeds, net interest income increased 2% during the fourth quarter of 2017 compared to the linked quarter. For the full year of 2017, net interest income benefited from proceeds received on this investment security of $814,000.…

Thanks John. 2017 has been a very good year. In recent years, we have completed multiple acquisitions, invested in systems, people and facilities, and worked hard at improving our core business. We did all of this while continuing to focus on our clients and communities. I believe our dedication has paid off and is evident in our results. This is just the beginning and we are not yet satisfied. Some of our most notable accomplishments during 2017 have been generating positive operating leverage with revenue growth of 6%, outpacing expense growth of 1% compared to 2016, reducing our efficiency ratio by almost 300 basis points from 2016, achieving average loan growth of 8% compared to the full year of 2016, reducing our non-performing assets by 32% compared to December 31st, 2016, growing our deposit balances 9% with 13% growth in checking account balances compared to December 31st, 2016, increasing our return on average assets to 1.1 -- 110 [ph] from 2017 compared to 94 for 2016, growing return on average stockholder equity of 8.54% for 2017 compared to 7.2% for 2016, improving our tangible book value per share by 8% to $17.17 at December 31st, 2017 compared to the year-end 2016, increasing our dividend by 53% or $0.09 per share compared to $0.17 in the fourth quarter of 2016, and completing an insurance agency acquisition and announcing our first bank acquisition post system upgrade. While we are pleased with our results, we will continue to maintain our focus and momentum going into 2018. With that in mind, here are our thoughts around 2018 which excludes the anticipated benefits of our announced acquisition. We expect point-to-point loan growth of 5% to 7%. We expect an increase in credit cost in 2018. We believe net interest margin will be approximately 3.60. Fee-based…

And thank you sir. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Michael Perito of KBW. Please go ahead.

Hey, Chuck, John, good afternoon.

Good morning Mike.

How are you doing Mike?

Few questions for me. So, appreciate all the help in the guidance. It's all very helpful. But I guess, Chuck, before thinking kind of the efficiency ratio and everything else, I mean, they're obviously ranges, right? And I guess, as you think about the 61% to 63%, can you maybe give us a little color on what some of the differences could be that get you on the lower end versus the higher end of that range as we move to 2018?

Yes, I mean, that just sound stupid, but there's two pieces to it, the revenues of the expenses I mean, if revenues are strong and we see some kind of pick up more than what we give guidance to in terms of loans, we could be in the higher end of it. We're pretty certain on the expenses is probably less of the chance of variance there. So, that would be my reaction to that.

All right. So, you would say the range is more driven by revenues whether it be margin or growth performance, you mean on the expense side, there's no initiatives or anything that could really be big variables as we move through next year?

I think if you look at the last few years, I mean, 1% expense growth this year, low single-digit the year before, we've been managing expenses pretty tightly for several years now. So, I don't see us going through a big expense initiative with relatively minimal expense growth over the last few years.

Yes, Mike, this is John. I think our approach is that we always look at expenses continuously, but we don't have any major work effort or special emphasis on reducing expenses. As Chuck said, we'll continue to look at branch network and those types of things. But I think that's kind of become part of our business as usual approach as we proceed through every year the challenge everything we're doing and to see where we can find some nickels and dimes along the way to control our expenses.

And everybody in the company understands and is focused on positive operating leverage. So, that's really what we're driving from an internal cultural standpoint.

And every branch gets the P&L, so they're focus on that. They see their revenue, they see expenses, and if one's not showing up, they know they need to watch the others.

Got it. Thank you. And then Chuck on the capital side of the equation, I saw the release this morning about the dividend, it looks like it should, I guess, depending shakes out more of the quarter but kind of keep you guys in that 40%, a little higher range on payout next year. But can you maybe help us with kind of the high-level thoughts on capital now. I mean, presumably, the tax reform should give you guys, call it, 10 to 15 bp lift on the ROA and you'll be generating more capital internally. I mean, this dividend rates would seem to kind of near-term help the longer term. I think there's still going to be a lot more capital being generated. How are you guys kind of thinking about the capital deployment side of it post tax reform at this point?

Well, the tax reform is a big help and because of how we managed our investment portfolio historically, we will have more than average benefit to the tax reform. You all see our dividend, I believe over time, continue to increase and you all see us try to put capital to work intelligently through acquisitions like we have done in the past.

Yes, Mike, I think that's right. I mean dividend I think it's important. I think we see that we will have a big lift in income and return and we can afford little bit maybe higher dividend payout ratio than we traditionally have had. We've always said we've targeted between 40% and 50%, but right now, we're leaning a little bit into their stock repurchases at the current levels. We don't really seem like it's economically viable for us at this point. And in the long run, acquisitions will be a way employ our capital as well.

Does it ever get to a point where if we're here a year from now and there's no been other bank deals that have made sense and TC started to drift up towards 10%, you guys will consider share repurchases? Or is the pipeline, I guess, on the deal side full enough at this point where you're hopeful that there's stuff out there that will make sense and you guys can continue moving with that direction in addition to the organic growth of the dividend?

We are open to share repurchases in the future. We're not that's set against doing share repurchases. It's just that at 192 [ph] times tangible book. I just don't see us doing it at that price.

And if we're doing acquisitions, we're really locked out from doing a share buyback. So, right now, we're back out so we can't do that, given the rules. So, it's going to be [Indiscernible].

Yes, makes sense. Thanks. And then just one last one just on that topic. Just Chuck, can you just give us on the topic of the Ohio M&A backdrop here as we move into next year with a tax reform now finalized. I mean, conversations pick up? How are you feeling about the opportunity there once you know you guys kind of move pass ASB to continue finding some partners that make sense?

Yes, well obviously, that's a big piece of our strategy. I think that this would give everybody -- the tax reform will give everybody a sense of optimism. So, I'm not so sure it's going to accelerate deal flow, if anything, it might have the opposite effect. I think the institutions that are in C corps may look at the world little differently than they had in the past. And we continue to have dialogue. I can't say that it's heavier than it has been in the past, but it is -- there are conversations being had.

But as Chuck mentioned, Mike, our first priority right now is ASB and the conversion of that and bringing that bank on the customers and the employees of ASB. That's kind of our priority here as we go through the first part of the year.

Got it. Great. Thanks. Good year.

Thanks. Thank you.

Thanks Mike.

And our next question today comes from Kevin Reevey of D. A. Davidson. Please go ahead.

Good morning gentlemen. How are you?

Doing great Kevin.

Good Kevin. How are you?

Good. Thanks. So, first question related to the strong growth that you saw in the quarter in your commercial vertical. Can you talk about where geographically we're seeing a loan growth come from? And then what does the pipeline look like if you go into the first quarter of this year and how does that compare to the comparable year-ago period?

I would say that in calendar year 2017, we had more of our commercial growth in the Northeast portion of our footprint. I will tell you that our commercial growth over my tenure, which is getting close to seven years, has really varied from year-to-year. It's a -- we've only had a few years where it's been pretty even across the footprint and usually, every year, there's some geography that's hitting it out at the ballpark. The second part of your question, pipeline is looking good and I would say relative to last year, it's probably slightly higher than where it was last year.

And then the 5% to 7% loan growth that you outlined, do you expect to see that come more on the commercial side in 2018 versus, let's say, commercial real estate or residential mortgage lending?

Well, we have been shrinking our relative share of commercial real estate over a long time period growing both the consumer and growing the C&I and we see that trend continue. Our commercial real estate as a percentage of capital, not in terms of exposures but in terms of lines and commitments, is well less than 200%, about 180%. And we continue to take a lot of pride in the construct of our portfolio between consumer and commercial and the subcategories within that portfolio. So, we did give guidance to 5% to 7%. You might note in the script that we've said over the last 5 years, we range from 6% to 12%. I would hope that we are able to be on the high side of that guidance or maybe potentially beat it. But I will tell you that we don't see any great increase in loan demand so far and it's early off of this tax law change. You saw in the marketplace loan growth decreasing in the third and fourth quarter. Year-over-year 8% loan growth on a full year average basis, we feel good about and hopefully, you'll see similar types of numbers.

And then my last question, Chuck, is related to your NIM guidance of 3.60 for 2018. How many rate hikes are you assuming in the 3.60, if any at all?

We have -- let me turn that over to John, and we have, I believe, one in there.

Yes, well, the impact of December one that happened and we anticipate one more in June.

Great. Thanks guys. Appreciate it.\

You're welcome.

Thank you.

[Operator Instructions] Today's next question comes from Daniel Cardenas of Raymond James. Please go ahead.

Hey, good morning guys.

Hi Dan.

Good morning Dan.

Just a quick question, Chuck. In your 2018 guidance, you've kind of alluded that credit costs are going to be higher. Is that just kind of a cautionary statement? Or is there something that you're seeing in your footprint that's giving you pause for concern?

No, if you read the scripts over the last few years, I say that every year because I think we're living in a fantasy time. I don't think that the loss ratios that you've seen for us or for the industry should be taken for granted. If you look at what we've done over the course of the year in terms of lowering the NPAs. I even mentioned in the script that we saw a good movement in terms of moving some credits out that may not have positive long-term aspects and I mentioned earlier the construction of the portfolio, we collectively remain very mindful about credit quality. Last time around, we were bottom quartile performer during the credit downturn and this time, we very much, kind of in a perverse way, almost look forward to it, but we're very much want to be a top quartile performer in terms of credit quality during the next downturn.

Yes good. Good. All right. And then maybe -- I know it's probably still early, but any thoughts you can -- or guidance you can give us as to expectations of what you guys are going to do with the tax windfall that you're going to see, how much of that is going to get put into investments into the franchise, et cetera?

Well, it's not only the dividend that you saw as a piece of that. I think that there's upside on the dividend going forward. I think that we have been very good at making investments in the business. We've done the core, we've done the deal, the floorplan, we've done the mortgage system. We've been doing systems with regularity. We've been doing facilities with regularity. So, it's not like we have a high amount of deferred maintenance. It's not like we have 63 million things to spend money on that we have neglected. And so I think that the shareholder will see some of the benefit and I believe the employees will see some of the benefit.

Okay. Great. And then maybe as it goes to the margin and the most recent rate hike. How much of that is expected to kind of get passed on to the depositor? And then what kind of competitive pressures are you guys seeing on the deposit side right now?

I'll let -- I'll take a stab at that and let John fine-tune it. We have done some modest deposit rate increases in 2017. We still have capacity from a loan-to-deposit ratio. I think that the larger institutions will be more hard-pressed for deposit rate increases and building deposits. And from a competitive standpoint, we won't let them get far ahead of us. But we'd like to preserve the margin while being appropriately competitive from a client standpoint.

Dan, I think Chuck's right. Competitively, we hear occasionally some smaller institutions that are offering higher rates, et cetera, but we really don't see a lot of pressure from the major competitors that we deal with on the rate side. We continue to watch it. We would anticipate the new product and put out there -- someone came with interest-bearing checking. We gave it a -- there's nothing special as far as the rate goes, but I'd say it would be higher than we had in our offering before. We would anticipate that might be good for a period of time here into next year. We continually look at CDs, money market rates, et cetera and what we can do there. But we don't hear a lot of customer complaints, et cetera. We can move some people perhaps into an investment product and insurance CDs or money markets, but we don't hear them with a lot of pressure to leave the bank for higher rates someplace else. We're just not seeing it yet. We keep our eyes on it. At some point, I would think it will move, but I have a hard time trying to project that and I don't think a lot of deposit data information we've seen so far indicates, yes, that they're moving, but they're not moving that progressively yet, either.

Yes, John brings up a good point on the investment side. We have good deposit growth, as we reported, yet during the course of the year, we had $87 million of referrals -- sold referrals from the retail system to our investment business. So, that synergy between the investment business and the banking businesses and the insurance business is a key part of what we're about and I think a meaningful differentiator between us and others. And that I think has been very beneficial still for us as our investment businesses had 9% year-over-year revenue growth.

Good, good. And then the last question. As I look your securities portfolio, which is around 24% of our total asset base, how much lower can you guys shrink that? And what's kind of the optimal level you want to see that at?

I would say that the move down to 24% was intentional. And I think our plan for the year is to bring that down a little bit further. And we would, with continued loan growth, we believe that it would be appropriate to bring that down. We would probably like to be eventually, if I look outward a few years, down into the 20% range, give or take, a little bit on either side of that.

Great. Congrats on the good quarter guys.

Thanks.

Thanks Dan.

And our next question comes from Scott Siefers of Sandler O'Neill and Partners. Please go ahead.

Good morning.

Good morning Scott.

I have been bouncing around a couple of calls today. Apologies in advance if you guys covered this. But I just want to get little clarity on the margin guide. So, 3.60 or so for 2018. I mean, you're basically already at or above the range. So, just curious what you guys see as the major puts and takes there as we go throughout the year and then what kind of Fed behavior is baked into that assumption.

Yes, on the Fed side, Scott, we anticipated that the December one, of course, is in there as well as one additional one in June. If they go three times, of course, that would be some additional benefit to us. Most helpful if it was in March and June. Later in the year would not provide a great increase in the margin from that perspective. The margin guidance does reflect the impact of the taxes on our muni book and tax [Indiscernible]. It's about three basis points of impact on there, but that's reflected in the 3.60 guidance that we've provided. You were breaking up slightly, so hopefully, I got all your questions.

Yes, you did. So, in the immediate term, we'd see, kind of a minus three basis points, all else equal, from the lower FTE adjustment, and then one rate increase. Anything else would kind of be gravy, right? Was that good for an estimation?

Yes, I think so. And hopefully, we -- accretion might be down slightly again this year. I mean we would anticipate that on a core basis. Of course, we'll have a pickup probably with ASB. But we really haven't reflected it in our numbers at this point yet.

Okay.

We do have some maturing debt coming due throughout the year, and that will give us a slight benefit as we roll into some forward starting swaps and that will be a positive to last year as well.

Okay. All right. And then if I can jump to fee income. You guys have very strong quarter on fees on a core basis. Just curious. You've talked about the 2% to 4% growth in 2018 versus 2017 on fees. So, first is somewhere in the neighborhood of $52 million, that's the appropriate starting point or base off what we're forecasting. And then maybe, Chuck or John, if you could walk through what you see as the major puts and takes. Presumably, we have a really strong first quarter here in insurance then that of course tapers off. But you kind of hand it off to a stronger mortgage environment as the year progresses. So, what do you guys see as the major drivers here as we look out through the course of the year?

I think we would consider -- if you -- ex the first quarter benefits from the contingent income we get in insurance, we'd expect that to continue to grow within that range that we've identified. Perhaps slightly at the higher end of that. Definitely above the range would be the trust and investment income. We would expect that to continue at a good pace, not quite at the pace of 2016 to 2017 but we would expect 2018 to be still probably the best rate of all the categories within fee income. Electronic banking income, we would expect that to grow as well. We have a small incentive plan for people to use their cards. And some of the benefit from our deposit repricing will also show up within there. And deposit account service charges, the big component in there was overdrafts. We would still expect that to be somewhat under pressure, but the account service charges in there, we would expect to see growth given our changes within there. So, that might be down a little bit on average. Mortgage banking, we continue to have growth as well, probably relatively consistent with this past year. And bank-owned life insurance, probably not a significant amount of growth. That's rate-dependent, of course. And swap fee income, I think we should have a good year above. We're also working on an enhanced business within small SBA lending and perhaps some originate and sell strategy on those as well, which should give us a little bit the bump in our fee income as well.

Okay, perfect. All right. I appreciate all the colors. Thank you guys.

You're welcome. Thank you.

Thank you. 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.

Thank you. This conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.