Good morning and welcome to Peoples Bancorp Conference Call. My name is Daniel and I will be your conference facilitator today. Today's call will cover a discussion of the results of operations for the quarter and fiscal year ended December 31, 2016. [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, Peoples' ability to leverage the system upgrade without complications or difficulties; the success, impact and timing of the implementation of Peoples' business strategies, including the system upgrade. 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 and effect of Federal and/or state banking, insurance and tax regulations 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 operation. 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 legal requirements. Peoples' fourth quarter 2016 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 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 please begin your conference.

Thank you, Daniel. Good morning and thanks for joining us for a review of our fourth quarter and full year 2016 results. Earlier this morning we released our fourth quarter 2016 results and our quarterly dividend which we were pleased to increase to $0.20 per share. During the quarter we completed the planned system upgrade of our core banking system. As anticipated, the quarter was impacted by onetime system upgrade items which were in line with our previous projections. The majority of the impact was in non-interest expense. However, we did waive some account services charges in November which impacted non-interest income. We believe substantially all of the associated onetime costs have been recorded and any upgrade cost in the future periods should be minimal. Net income for the fourth quarter of 2016 was $0.41 per diluted share compared to $0.43 per diluted share in the third quarter. The decrease was largely due to onetime system upgrade cost coupled with a decline in non-interest income. System upgrade impacts for the quarter totaled $831,000 and $1.3 million for 2016 and were up $408,000 from the prior quarter. For the full year of 2016, net income was $1.71 per diluted share, compared to $.61 per diluted share during 2015. Net income per diluted share and adjusted for non-core items was $.44 for the fourth quarter of 2016, compared to $.45 for the third quarter of 2016 and $.18 for the fourth quarter of 2015. For the full-year of 2016, net income per diluted share adjusted for non-core items was $1.76 in 2016 compared $1.04 in 2015. Loan growth during the fourth quarter of 2016 was 10% annualized. This increase contributed to the 7% growth for the full-year which was higher than we expected. Commercial loans provided $43 million of growth during the…

Thanks, thanks, Chuck. During the fourth quarter net interest income grew 2% and was up 7% for the full year. Compared to the fourth quarter of 2015, net interest income increased 3%. Loan growth during the year has been the main driver of our higher net interest income. Average loan balances increased $50 million or 2% in the fourth quarter compared to the third quarter and were up approximately $180 million or 9% compared to the full year of 2015. Net interest margin remained fairly stable and was flat compared to the third quarter of 2016 while it declined only 2 basis points from the fourth quarter of 2015. For the full year of 2016, it expanded one basis point compared to 2015. Our ability to grow net interest income and maintain net interest margin during the year was a result of a sustained shift in the mix of the balance sheet for both assets and liabilities coupled with restructuring of certain borrowings during the second quarter of 2016. The increase in interest rates by the Federal Reserve in December is expected to provide an additional $0.02 to $0.03 increase in EPS for the full year of 2017. Accretion income, net of net amortization expense from acquisition, increased to $874,000 during the fourth quarter, adding 11 basis points to net interest margin, compared to $801,000 and 10 basis points in the third quarter. The increase during the fourth quarter compared to the third quarter was mainly due to payoffs in the commercial loan portfolio and the related discount associated with those loans which is recorded as additional income. For the full year, accretion income added 11 basis points to net interest margin and was $3.5 million compared to $4.8 million and 17 basis points in 2015. As expected, we continue…

Thanks, John. On Monday we announced that Dan McGill, our Chief Commercial Banking Officer will retire at the end of March. Dan has been leading the commercial banking business line since he joined us in 2009. Dan has played an important role in our success and growth and we wish him well in his retirement. We have also announced his replacement, Doug Wyatt, who joined us in April of 2016 and has been serving as Executive Vice President, Commercial Banking. We feel that Doug's experience and leadership will facilitate the continued success of our commercial banking business line and ensure a smooth transition. As mentioned earlier, we recently completed our system upgrade and our associates and clients have been using the new system for a couple of months. We had minimal disruption to our clients and have been getting positive feedback from them about the new systems capabilities. While the system upgrade has been a time consuming endeavor, we now have increased system capacity and capability for expansion. We now have the ability to provide an even better service to our current customers while we remain focused on growing our business. This project sidelined our ability to execute bank acquisitions during 2016. However, in 2017 we expect to give greater consideration to a bank acquisition then we did in 2016. When I look at 2016, I see several accomplishments in our organization. We reported record earnings in 2016 with net income of $31.2 million. Additionally, we have been able to successfully control expenses, generate quality loan growth, increase net interest margin by one basis point, growth fee income by 10% compared to 2015, and effectively manage our credit cost and quality with only 9 basis point of net charge-offs for the year. With the closing of 2016, I think it's…

[Operator Instructions] Our first question comes from Scott Siefers with Sandler O'Neill. Please go ahead.

Let's see. I appreciate the guidance for '17. Just a couple of questions. First on fees, I know there were some aberrations in the fourth quarter. Just curious, basically when you sort of wade through the noise, how the underlying trends felt to you, Chuck, versus what you might have anticipated? And then if you could sort of go through, in the expectations for 4% to 6% fee growth in '17, what do you see as the main drivers.

Sure. Our fee growth obviously was down. We did have the core conversion and we waived some fees. We have extraordinary swap income in the third quarter. We didn’t see as much as that in the fourth quarter, I think we may see a little bit more in the first quarter. So all total, I think that you are not going to see the first, second quarter be as abnormal or down as the first quarter was. When we talk about 4% to 6% fee income growth, we from multiple years now have had double digit growth in our investment businesses and we expect that to continue. You will see growth in the insurance business that we expect to see more swap income. I think we have the possibility, potentially for more mortgage income then we have had in the past just kind of across the board the electronic banking fees that we see, is how I would see it.

Okay. All right. That's perfect. Thank you. And then just so I'm clear on the guidance for both fees and expenses. Are those all off the reported numbers for full year 2016, so specifically it would be fee income of 4% to 6% growth off the $51.1 million in '16 and then expenses growth off of $106.9 million?

Yes.

Yes.

Our next question comes from Kevin Fitzsimmons of the Hovde Group. Please go ahead.

Was just wondering, you've said for a couple of quarters now, Chuck, about the indirect auto probably continuing to grow but at a slower pace. What kind of slowdown are you expecting in that piece? I mean it's been very strong. Are we expecting it just to ratchet down a little or to be cut in half, the piece of growth we have been seeing?

No, no, no. We will continue doing what it is that we are doing, which is basically getting a little bit more penetration across the footprint and getting deeper business with the dealers. But as a percentage growth, the percentage growth will begin to slow because the denominator is getting bigger. You bring up indirect and we are just very excited about the growth that we have had. In the fourth quarter our average FICO score was 735, which is the best that we had and for the year, we averaged 725 where that’s up from 695 four years ago and it's kind of headed in the right direction. So we are comfortable with the volume. We are comfortable with where it fits in our portfolio and we think the dollars will continue to grow.

Okay. So it's really not about you guys downshifting; it's more about it just getting bigger and growing less as a bigger piece, okay.

Your percentage of growth will continue to decline a little bit.

Got it. Just if I could ask, I appreciate the comments on acquisitions being something you may focus on more in '17 than '16. If you can just remind us what your appetite would be in terms of, in an ideal world, what kind of geography, what kind of size bank you would look at? And then maybe if you could touch on non-banks as well. I know that's an area you've continued to look at. Thanks.

Yes. We continue to look at things that will round out our insurance business on the non-bank side, I will start there first. I think you will see some minor deals being done in the upcoming months. Anything that gives us more geographic coverage in the things that we do, we would be excited about in both insurance and investment and things that add to our capabilities excite us also. The insurance business in particular, meaningful business. In terms of bank acquisitions, the ideal situation would be something in market where we would have the cost take-out and the market share gain or secondary to that, adjacent markets. Probably the only market expansion that I think we would be up for considering, would be going to Louisville. There is a lot of opportunities there. We think it’s a good strong market. But obviously there will be a lot of competitors for deals there, as kind of witnessed in some other recent transactions.

Yes. And I would add Kevin on size. Our preference probably is half a billion to a billion dollars but for their core conversion our preference still probably is to do something on the smaller [indiscernible] initially. But you can't always dictate exactly what you do, you submit to what the market gives you from that perspective.

Is there a certain amount of time you want to get past that systems conversion before you would think about doing something bigger? Is it six months, a year?

No, I think we are fine. Fine to go now. I am not saying that we are going to do anything but in terms of where we are with that system conversion, there is nothing in it that would prevent us from doing a deal if we had the right opportunity today.

And Chuck, just post election with this surge we've seen in stock prices. What's your sense on -- does that make it more likely that there will be sellers? Does it make it less likely? I mean we've heard for years the rationale for M&A was that it's such an awful environment that sellers were going to look to get out and throw in the towel. Is it possible that some are going to say, well, everything is great, rates are going up and we are getting more of a spread and we'll stay in? What's your sense?

Well, I think that fundamentals on the economy may change but we certainly aren't seeing any great change. I mean I think the GDP number came out today back to the modest growth numbers that we were seeing. It's still pretty tough to grow revenue and I think for a lot of smaller banks, getting sustained long-term positive operating leverage is pretty much a challenge. So I don’t think, particularly for smaller banks that maybe not publicly traded or don’t have much flow, that aren't taking advantage of this uptake, I think they have got to look at trading into more robust currency. So I don’t think much will change. It's still an emotional item trying to figure out whether to sell or whether to go along. So I think that if I had to see a slight uptick in the number of deals in 2017 versus '16 but not a great uptick in the number of deals.

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

I apologize if I missed anything. I have had a few calls that all happened to happen at the exact same time. But I wanted to touch on the margin guidance. I think it was 3.45% to 3.50% was the range that you provided. Curious, if you guys can give any color on kind of what the interest rate backdrop that you guys are assuming is behind that. And maybe just an updated comment to start the new year here on just rehashing how you guys feel you're positioned for higher rates.

Yes. I think in that guidance we have assumed one rate increase in the middle of the years. So if there is additional increases that would be somewhat beneficial to us. I do think we are just slightly asset sensitive. We have been that way for a while now and might look at that a little bit as we move forward but there is some benefit like I mentioned in the guidance, you know $0.02 to $0.03 for the one that was in December. And that’s kind of where we are positioned at this point in time.

Okay. And piecing together all the guidance, you kind of get to a certain number but, Chuck, curious what your thoughts are as we kind of look at the profitability profile of the bank, which obviously improved dramatically in 2016 back to levels more similar with 2013, 2014 on the ROA and ROTCE. Just any kind of thoughts as M&A seems to be coming back into the cycle here for you guys? Is the hope to expand that organically and then M&A could be juice on top of that? Any kind of thoughts on longer term targets that you think are realistic?

In terms of targets that are realistic, you don’t mean institutions, I am assuming. But...

No, profitability targets. I'm sorry.

Okay. I am sorry, yes. No, I mean we are pretty excited about where we are. Six quarters in a row of positive operating leverage is good. You heard that we are saying low single digit expense growth and we have been growing our revenues organically over the last few years, 7%-8%. And if we can continue to do that, we are going to continue to move up from an ROA standpoint and continue to deliver better earnings for the shareholders. So we are enthusiastic about what it is that we can do. You know we continue 10% annualized loan growth in the fourth quarter was pretty sweet. We feel good with where we are right now at the end of January with what we are seeing in the loan portfolio. So I would say that we are optimistic.

[Operator Instructions] Our next question comes from Daniel Cardenas with Raymond James. Please go ahead.

Just a quick question here. Given the loan growth that we saw in the fourth quarter and given your guidance of 5% to 7% for '17. Could your local economy support growth beyond that range that you've given us for 2017?

Well, I don’t think the environment is really changing. I think that [ours] is about taking the business away from the guys across the street. So we have been growing that loan portfolio in that high double digit, occasionally low single digit area, for four years now. And it's certainly not in the growth in footprint. It's from taking the business away from the guys across the street and that’s kind of what we are about. We don’t expect that to change. If the consumer gets more enthusiastic, we see some wage growth, consumers controlling 70%-68% of the economy. You know the economy could begin to pick up and we would love that. But we are prepared if that does not happen. If we get some wind in our sales, wind that are back, that’s only icing on the cake from our perspective.

Okay. Good. And then geographically, is there any one area that you expect to see more loan growth coming out of?

You know we have been fortunate. We have done well up in the northeast, recently in Akron/Cleveland area. A little market disruption with Huntington and FirstMerit. We have added some talent. We have had some major wins in the southwestern portion of Ohio. Some consistent good performance in our core West Virginia, Ohio, Southeast Ohio market. So it's getting more balanced. Some years it hasn’t been, some of the years we have had five of our markets be relatively lackluster and one booming. That’s not the case. It's been pretty consistent.

Okay. And then just kind of jumping to credit quality quickly. What are your watch list trends looking like right now? And maybe some quick comments on how good of a predictive indicator your 30 to 89 day past due levels have been.

I will just make some general comments about the credit quality. We our NPAs have ticked up for four quarters in a row. I actually thought that would be first question you guys ask. But it's only $25 million. When we look at that NPA slug, a third of it is one credit which we have talked about previously, the nursing home, the group of three nursing homes. When we first started talking about that with you, the census for that was in the kind of mid to high 50s. Today's the census for those nursing homes are in the 80s, one of them is at 90 and continue to increase. So it's cash flowing today. We hope in the first to second quarter that we get government guarantee on that credit. SBA or HUD, and that will help us. If that does not occur, we anticipate that credit selling in the calendar year and we do not expect to have a loss on that of any significance. If we look at the remaining $17 million of the NPAs, it's extremely granular. Very few of them are north of a million dollars. We expect to be able to get out about $7 million to $10 million of that during the year and we think that you will see some of that in the first quarter. We think you will see more of it in Q2, Q3 and Q4, almost gave you a fifth quarter. None of that -- we are not aware of anything that’s heading that way. There always will be things that are heading that way but right now we are not aware of anything so even though our trend is not pretty, from an absolute standpoint it's fine. You talk about the delinquencies, I think those numbers are reasonable. I think that in terms of total criticized loan, we are optimistic that we will see those numbers move down meaningfully in the first half of the year. We have a couple of big relationships that are either going to move out of criticized because of improved performance or move out of criticized because they are going to take the business elsewhere. So we believe that in fourth quarter, when we are doing this call next year at this time, we believe our credit statistics will be meaningfully better.

We now have a follow up question from Scott Siefers with Sandler O'Neill. Please go ahead.

Just trying to sort of square the margin guidance. I know it's the same thing you guys said last quarter, but just given that you're up at a 3.54% currently, the core of 3.43% should be advancing presumably, and you're getting still low double-digits accretion from purchase accounting benefits. What would be the trajectory of the margins that you are expecting? And I guess why wouldn't the margin on a reported basis, come in even higher than the top end of the range for the full year of 2017?

We would certainly welcome that. And I would say that looks more like a possibility each passing day. But I would say in general, we would like to under promise and over deliver. John, I don’t know if you want to...

Yes. I mean Scott, we had 11 basis points of the accretion help us. It was like 17, I think, the prior year. I would expect that to be lower next year and that would continue to come down probably more into the high single digits of range. So that will drop somewhat there. And perhaps we are being a tad bit conservative but we think it will still take time to -- it will still be hurt a little bit on the investment securities. We only have so much that matures so kind of buy into these rates and we sold out some higher rate securities out there that would be maturing. So maybe a little bit north of the higher end of that range maybe more practical or more possible. But it's what we saw when we pulled everything together and that’s where we were at.

Our next follow up question comes from Michael Perito with KBW. Please go ahead.

Chuck, one quickly. The dividend raise to $0.20, pretty material. Obviously, this past year was pretty active. You guys raised the dividend on a couple of separate occasions. Is this, just as we kind of think about the capital return, I mean it sounds like M&A is obviously more in focus than it's been. Is this dividend kind of, I guess how should we be thinking about further dividend increases and what's the board's kind of latest overall view of the dividend policy and kind of targets you're setting?

The target that we are setting is a payout ratio in the 40% to 50% range and that’s a little higher than where we were. I think we were at 32.5% to 42.5% most recently. If you go back a few years ago, we were saying 25% to 40%. Some of that reflects the capital levels that we have. So some of that reflects some interest on some investors. I don’t see us increasing our dividend payout ratio higher than it is at this point in time. And obviously increasing dividend is going to come out of increasing earnings and we are pretty confident that we can drive the earnings. John, anything you want to add to that?

Yes. I think we did some capital planning later in the year and looked at where we are headed and looked at peer groups etcetera and kind of their payout ratios and what we have been in the past. So I think there were some comments on the call that our numbers were kind of turning back to '13, '14 and we look back to where our payout ratios were number of years ago. And we think that the 40% to 50% range makes sense. The payout and reported earnings is in the higher end of that range but if you back out the onetime items, the non-core items, I mean we are kind of in the middle of that range today. So we think it makes sense and we don’t expect to make less, we expect to make more. So we think it's a reasonable point at this point in time to be in.

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 and a nice weekend.

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