Chuck Sulerzyski - President & CEO John Rogers - CFO & Treasurer.

Brendan Nosal - Sandler O'Neill and Partners Kevin Reevey - D.A. Davidson Michael Perito - KBW Daniel Cardenas - Raymond James Kevin Swanson - Hovde Group.

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 right, Friday the 13. This was our first acquisition in over three years and the first on our new core banking system. We spent a lot of time and effort preparing to ensure a seamless transition for our new clients on conversion day.

We have very experienced folks who have been through many acquisitions and they successfully executed our process. We also had a team of associates who travel and spend extended periods of time at our acquired locations, working with their new colleagues, training, and answering questions.

We have a thorough game plan that we continue to perfect during each acquisition. We're excited to offer the clients of ASB a full suite of products including insurance and investment products.

The ASB acquisition provided us with six full service branches and two loan production offices that complements our current footprint in Southern Ohio and Northern Kentucky. We also gained a mortgage origination group operating out of the Cincinnati area which specializes in originating and selling mortgage loans to the secondary market.

At the acquisition date, American Savings Bank had $275 million in total assets, $240 million in loans, and $199 million in total deposits after preliminary fair value adjustments.

We are working on forging relationships between the American Savings Bank's associates who now call Peoples Home and our current associates to facilitate our referral process. We have enjoyed positive traction from commercial referrals within the ASB footprint.

As a result, we have already closed one loan and anticipate closing another loan in the very near future. Our organic loan growth continues to be a positive indicator. For the quarter, commercial loans grew 10% annualized, while consumer loans provided 8% annualized growth.

Commercial real estate loans including construction grew $25 million, while commercial and industrial loans were up $11 million. Compared to June 30, 2017, our commercial and industrial loan balances have grown 16% excluding acquired loans. As of June 30, 2018, the ASB acquisition added $229 million to our loan balances.

The acquired loans were comprised of mostly consumer loans which totaled $154 million at June 30, 2018, while commercial loans were $75 million. We have worked to diversify our commercial loan balances and have reduced the concentration we once had in commercial real estate.

CRE balances represent 41% of total loans at June 30, 2013, compared to 36% at June 30, 2018. As a result, our commercial and industrial loan balances excluding acquired loans have grown 155% in the last five years. This demonstrates our ability to grow organically.

Consumer loan growth was preliminarily attributed to a higher indirect lending balances which increased at a 30% annualized rate for the second quarter. Indirect consumer loan comprised 31% of total consumer loans at June 30, 2018. Quarterly average loan balances increased $252 million or 11% compared to the first quarter of 2018.

On a year-to-date basis, average loan balances grew $244 million or 11% which included less than three months of ASB acquired loan balances in the average for 2018. Total non-interest expense grew 27% compared to the first quarter of 2018.

The majority of this increase was due to acquisition expenses related to ASB coupled with the ongoing expenses of running the acquired ASB franchise. We also experienced fraud-related expenses during the quarter related to an ATM skimming incident and incurred losses of $207,000.

During the first six months of 2018, total non-interest expense increased 19%. This increase was led by acquisition expenses of $6.2 million, coupled with additional ongoing expense of operating the ASB franchise.

As we mentioned last quarter, salaries and employee benefits were impacted by a one-time stock award to employees and merit raises increases during 2018. During the second quarter, we were not able to generate positive operating leverage due to acquisition expenses.

However we anticipate being able to generate positive operating leverage for the second half and full-year of 2018 compared to the 2017 periods. Our efficiency ratio for the second quarter of 2018 was 75% compared to 61.8% for the first quarter of 2018 and 61.2% for the second quarter of 2017.

For the first six months of 2018 the efficiency ratio was 68.5% compared to 63.0% for the same period in 2017. Our efficiency ratio during the second quarter of 2018 was heavily impacted by the acquisition expenses. Absent these expenses, it would have been 62% for the quarter and 61.7% year-to-date.

We had many positives related to asset quality during the second quarter. We experienced our best delinquency rate within our loan portfolio since 2007. Our non-performing asset ratio all decreased compared to March 31, 2018, and have experienced significant improvement since June 30, 2017.

Our non-performing assets as a percent of total loans in OREO ratio was 0.67% at June 30, 2018, compared to 0.72% at March 31, 2018, and 0.88% at June 30, 2017. We have placed great emphasis on improving our non-performing assets ratios which is evidenced in the continued decline.

Provision for loan losses declined during the quarter and totaled $1.2 million. The reduction compared to the first quarter was related to the charge-off of a single acquired commercial loan relationship we mentioned in last quarter's call.

The increase in provision for loan losses compared to the second quarter of 2017 was largely due to loan growth as we have experienced improved asset quality metrics. For the first six months of 2018 provision for loan losses doubled compared to 2017.

Loan growth has driven much of the increase provision coupled with the charge-off acquired commercial loan relationship from last quarter. Criticized loans decreased to 4.5% of total loans at June 30, 2018, compared to 4.8% on March 31, 2018, and 4.9% at June 30, 2017.

At June 30, 2018, criticized loan balances increased $5 million compared to March 31, 2018, while classified loans increased $11 million. The increase in criticized loans was mostly due to acquired ASB loans which were partially offset by upgrades of $11 million.

The increase in classified loans was largely due to acquired ASB loans coupled with downgrades of two commercial loan relationships during the quarter. Delinquency trends improved during the second quarter as approximately 99% of our portfolio was considered current at June 30, 2018, compared to 98.8% at March 31, 2018, and 98.9% at June 30, 2017.

I want now turn the call over to John to provide additional details around the ASB acquisition and income statement and balance sheet categories..

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 2017.

As I stated, loan growth has provided the largest increase while income and investment securities has benefited from rising rates and the proceeds on the investment security for which we had previously recognized an other than temporary impairment.

Our net interest margin increased eight basis points and was 3.74% compared to 3.66% in the first quarter of 2018. Our earning asset yield grew 17 basis points mostly due to higher loan yields which benefited from increase in LIBOR during the linked quarter and outpaced the 12 basis point increase in deposit costs.

Interest bearing deposit costs were $53 million for the quarter, up from 41 basis points in the first quarter of 2018 and 36 basis points in the second quarter of 2017. Compared to the second quarter of 2017, our net interest margin was 12 basis points higher. For the first six months of 2018, net interest margin grew 12 basis points compared to 2017.

This increase was due to higher loan yields which had benefited from rising interest rates while we have been able to maintain relatively low deposit cost.

The proceeds from the investment securities for which we had previously recognized an other than temporary impairments added three basis points to net interest margin during the first six months of 2018 compared to one basis point in 2017.

Accretion income from acquisitions which is net of amortization expense declined $43,000 compared to the first quarter of 2018. While we recorded additional accretion income of $210,000 from the acquired ASB loans, we also recognized amortization of $218,000 on the ASB CDs which more than offset the accretion income.

This premium has a very short life and is expected to be fully amortized in the middle of 2019. Compared to the second quarter of 2017, accretion income was down $212,000 and was down $475,000 for the first six months of 2018 compared to 2017.

Accretion income added six basis points in net interest margin during the second quarter, seven basis points during the first quarter of 2018, and 10 basis points in the second quarter of 2017. For the first six months of 2018, accretion income added six basis points which is lower than the 10 basis points during the same period of 2017.

For both the second quarter and first six months of 2018, losses were heightened mainly due to $205,000 related to the ASB acquisition and exit strategies for previously closed branches. Total fee income declined compared to the first quarter.

We received annual performance based insurance commissions in the first quarter of each year which drives much of the reduction in the second quarter. Total fee-based income was down 7% compared to the first quarter largely due to a 28% decrease in insurance income.

Partially offsetting this decline was higher mortgage banking income which almost tripled compared to the first quarter of 2018 and was directly due to the ASB acquisition, the acquired mortgage origination business, which have been mentioned in previous call.

The decline in other non-interest income was largely due to reduction in the market value of equity investment securities compared to March 31, 2018. In the first quarter of 2018, we've recorded $460,000 of income on investment securities and during the second quarter of 2018, we recognized a reduction in income of $236,000.

We sold most of the remaining position in these equity securities during the second quarter, so future impacts of the swing in market value will be minimal, if any. Compared to the second quarter of 2017, fee-based income grew 2%.

Increases in mortgage banking income and trust and investment income for this period were partially offset by reduced commercial loan swap fee income. Additionally, during the second quarter of 2017, we recognized a fee of $437,000 associated with the sale of a government guarantee portion of a loan.

For the first six months of 2018, total fee-based income was 7% higher than 2017. We have had a lot of success in several of our lines of business, so the growth was spread across trust and investment income, insurance income and mortgage banking income. The first six months of 2017 also included the $437,000 fee I mentioned related to the loan sale.

Compared to the first six months of 2017, we did see a reduction in swap fee income which declined 71% as there has been lower customer demand for these types of products so far in 2018.

As Chuck mentioned earlier, we released a valuation allowance on deferred tax asset that we have been carrying which reduced our income tax expense this quarter by approximately $800,000. This valuation allowance was related to historical tax credit we invested in during 2015.

Our recent sell-off of the equity investment securities and the related capital gains realized for tax purposes were large enough to offset the capital loss we anticipate in 2021 resulting in a release of the valuation allowance. There are no more remaining valuation allowances recorded.

Moving to the balance sheet, we're able to reduce our investment securities portfolio to 22% of total assets this quarter. This was largely due to our acquisition of ASB coupled with the sales of some of the acquired investment securities.

Our investment portfolio yield was up slightly compared to the first quarter of 2018 and was up 20 basis points during the first six months of 2018 compared to 2017. Our core deposits which exclude $670 million of CDs were flat compared to March 31st and were up 5% to June 30, 2017.

Total demand deposits were 39% of total deposits at June 30, 2018, compared to 41% at March 31, 2018, and 40% at June 30, 2017. Our period end total deposits grew $136 million or 5% compared to March 31, 2018. At June 30, 2018, the ASB acquisition added $168 million to our deposit balances.

This included $62 million in CDs, $52 million of demand deposits, $35 million of money markets, and $119 million of savings accounts.

Excluding ASB deposits, our deposit balances declined $32 million compared to March 31, 2018, which was due to a decrease of $37 million in governmental deposits which are seasonally higher in the first quarter of each year.

Our quarterly average total deposits were up 8% compared to the first quarter of 2018 and increased 10% over the second quarter of 2017. Our average total deposits for the first six months of 2018 grew 8% compared to 2017. We continue to build and maintain healthy capital levels.

We had large increase of $43 million compared to March 31, 2018, which was mostly due to the ASB acquisition coupled with earnings exceeding dividends paid. Our tangible equity to tangible asset ratio declined 16 basis points compared to March 31, 2018, and 26 basis points compared to June 30, 2017.

Our tangible book value per common share increased 1% compared to March 31, 2018, and 2% compared to June 30, 2017. We continue to maintain sound capital ratios exceeding well-capitalized status including the required capital buffer.

Our common equity Tier 1 capital ratio was 13% at June 30, 2018, while our Tier 1 capital ratio was 13.3%, and our total risk based capital ratio was 14%.

The decline in our capital ratios compared to March 31, 2018, was primarily due to the addition of ASB and the related risk weighted assets which outpaced the additional capital net of goodwill intangibles recorded for the acquisition. Earlier this morning, we announced our quarterly dividend which remains at $0.28 per share.

This dividend rate represents a payout of 42% of earnings per diluted share in the second quarter excluding acquisition costs. I will now turn the call back to Chuck for his final comments..

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..