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

Scott Siefers - Sandler O'Neill & Partners Michael Perito - KBW Daniel Cardenas - Raymond James.

Good morning and welcome to Peoples Bancorp'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 quarter and nine months ended September 30, 2016. Please be advised that all lines have been placed on mute today to prevent any background noise.

After the speakers' remarks, there will 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 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, the interest rate environment, the effect of Federal and/or state banking, insurance and tax regulations and changes in economic conditions and our 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 legal requirements. Peoples' third 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 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 the opening statements. Mr.

Sulerzyski, you may begin your conference..

Thank you, Racko. Good morning and thanks for joining us for a review of our third quarter results. During the third quarter, we’ve demonstrated the strength in our core performance. We have made or exceeded several of our objectives, while devoting a large amount of resources to the November system upgrade.

We’ve been able to maintain net interest income; end margins, gain momentum and fee based revenues and continues focus on reducing expenses. Net income declined slightly for the third quarter of 2016 and was $7.8 million or $0.43 per diluted share.

The decrease was largely attributed to the system upgrade cost of 423,000 for the quarter, totaling $513,000 so far this year. These costs are less than half of the 1.4 million that we expect to incur during 2016. Earnings per diluted share excluding the system upgrade costs grew to $0.45 per diluted share through the third quarter.

Non-interest income grew 1.2 million or 9% compared to the linked quarter. This growth was driven by increases in most categories. Non-interest income for the nine months of 2016 grew 10% compared to 2015.

Electronic banking income was the largest contributor while commercial loans swap fee income, bank owned life insurance income, and trust and investment income also grew meaningfully compared to the prior year.

Non-interest expenses grew 1% during the third quarter of 2016 and were essentially flat when adjusted for non-core charges compared to the linked quarter.

Although, the number of full-time equipment employees declined during the quarter, salaries and employee benefits increased due to higher performance based incentive compensation and increased medical costs.

As previously mentioned, we recognized $423,000 of system upgrade costs during the third quarter, compared to $90,000 in the second quarter of 2016. Professional fees declined during the third quarter of 2016 and were mostly related to reduce legal expenses and the timing of certain professional services.

Non-interest expenses for the nine months of 2016, decreased 8.2 million or 9% compared to 2015. However, when adjusted for non-core charges, non-interest expenses increased 2% compared to the first nine months of 2015.

Most of the increase was due to the full nine months of operating expenses related to the NB&T acquisition that occurred in March of 2013. We noted last quarter that we had closed one branch. On December 30, 2016, we'll close two additional branches.

We'll continually monitor our branch network to maximize efficiencies while still being able to deliver exceptional products and services to clients. The efficiency ratio adjusted for non-core charges was 63.3% in the third quarter of 2016 compared to 64.9% in the linked quarter and 65.3% in the third quarter of 2015.

Year-to-date, the efficiency ratio adjusted for non-core charges was 64.1% compared to 68.5% in 2015. We were able to generate positive operating leverage for all periods. Total revenue growth exceeded growth in non-interest expenses by at least 2% in each of the comparative periods.

We remain committed to growing revenues faster than expenses, and we believe we'll achieve this for the full year of 2016 compared to 2015. Period-end loan balances grew 40.4 million or 8% annualized compared to June 30, 2016. Unlike prior quarters, this growth was more evenly split between commercial and consumer balances.

Commercial loan balances increased 23.7 million while indirect loans provided 23.2 million of consumer growth during the quarter. Commercial loan growth was funded late in the quarter and therefore did not have a meaningful impact on the average balances for the third quarter.

Once again, indirect lending provided annualized growth of 45% for the quarter compared to June 30, 2016. The growth in the indirect lending was the result of diversification in the portfolio beyond just automobile loans as well as the expanded footprint over the recent years in Southeast and Northeast Ohio.

We’re pleased with the continued strong growth in indirect lending; however, we do not expect this rate of growth in the future. We plan to see continued balance growth between commercial and consumer loans in the portfolio.

Net charge-offs for the first nine months of 2016 were essentially flat, compared to 2015, and were 9 basis points as a percentage of average loans for 2016. Non-performing assets increased to 0.72% of total assets, while the allowance for loan losses increased to 18.2 million at September 30, 2016.

The increase in non-performing assets was largely due to a single commercial real estate loan that was placed on non-accrual status during the third quarter. Criticized loan showed continued improvement in the third quarter and declined 7.9 million, while classified loans were relatively flat compared to the second quarter.

Provision for loan losses increased during the quarter while the allowance for loan losses as a percent of originated loans, net of differed fees and cost declined slightly to 1.13% compared to 1.16% at June 30, 2016.

I will now turn the call over to John, to provide additional details around net interest income and margin, non-interest income, balance sheet and capital activities..

Thanks, Chuck. Net interest income declined slightly during the quarter, mostly due to lower income from the investment securities. Net interest margin was 3.54% for the third quarter, compared to 3.57% in the second quarter and 3.55% a year ago.

Year-to-date, net interest income increased 9% while net interest margin increased to 3.55% compared to 3.49% in 2005. Recent loan growth and the full-year impact of NB&T coupled with reduced cost of deposits and borrowings, has driven the increase in net interest income and margin.

Accretion income, net of amortization expense from acquisitions declined during the quarter to $801,000 compared to $886,000 in the second quarter and 1.4 million in the third quarter of 2015. This reduction was driven by lower accretion income for the run-offs of the recorded portfolio as we had expected.

Year-to-date, accretion income was 2.6 million compared to 3.6 million in 2015. Non-interest income comprised 34% of total revenues during the third quarter, compared to 32% in the second quarter. Commercial loan swap fee income more than double during the quarter and was $569,000, compared to $263,000 in the second quarter.

As we mentioned last quarter, we made additional investment in bank-owned life insurance, which showed the higher income during the third quarter. Overdraft and non-sufficient fund fees lead to an increase in deposit account services compared to the second quarter of 2016.

Electronic banking income grew 8% during the quarter, and it related to the increase of consumer debit card activity while mortgage banking income increase to 61% due to higher mortgage loan originations during the third quarter. Year-to-date, non-interest income increased 10% and was 33% of total revenue in 2016 and '15.

Electronic banking income and trust investment income increased 20% and 11% respectively from 2015. We recorded higher commercial loan swap fee income as seen most of the year, which totaled $997,000 for the first nine months of 2016 compared to 284,000 in 2015.

The investment securities portfolio was 25% of total assets at September 30, 2016, compared to 26% at June 30, 2016. This decrease was a result of principle pay downs on investment securities outpacing the reinvestment of cash into the portfolio, coupled with declines in market values due to higher rate environment at the end of this quarter.

The investment security yield also declined 5 basis points for the quarter to 2.68%, and year-to-date was 2.71% compared to 2.76% in 2015. Period-end core deposits, which exclude 423.6 million of CDs, increased 3% or 58.6 million from the linked quarter.

This increase was mostly due to higher non-interest bearing deposits, driven largely by a single customer maintaining a higher balance than normal at September 30, 2016. Compared to year-end, core deposits increased 98.8 million or 5%.

This increase was driven by all core deposit categories and was led by non-interest bearing deposits, which increased 27.5 million. Non-interest bearing deposits were 29% of the total deposits at September 30, 2016, and increased from 28% at June 30, 2016 and year end.

For the first nine months of 2016, our net core DDA accounts grew at an annualized rate of 2.7%, compared to 2.4% for the full 12 months of 2015. We're able to reap the benefits of the actions taken during the second quarter restructured our borrowings, as our borrowings costs declined 9 basis points from the second quarter to 1.61%.

Our capital position improved during the quarter as our tangible equity to tangible assets ratio increased 3 basis points to 9.13% at September 30, 2016, compared to the linked quarter. This ratio also increased 44 basis points from year-end and was 25 basis points higher than at September 30, 2015.

Our tangible book value per share was $16.14 at September 30, 2016 compared to $15.93 at June 30, 2016 as improved over $14.86 a year ago. We continue to maintain capital level higher than well-capitalized status, and our capital ratios improved slightly compared to June 30, 2016.

At December 30, 2016, our common equity Tier 1 capital ratio was 3.04%, our Tier 1 capital ratio was 13.34%, and our total risk-based capital ratio was 14.24%. We're committed to our return for investors and are pleased to have announced earlier today that we’ve increased our quarterly dividend to shareholders to $0.17 per share.

We will continue to consider repurchasing common shares as opportunities arise through the remainder of the year. Now, I will turn the call back to Chuck for his final comments..

Thanks, John. For the last several months, we’ve been working on the system upgrade, training our associates and providing information to our clients related to the upgrade. We’re pleased with the progress we have made.

We believe, overtime, this upgrade will provide enhanced product offerings and capabilities to our clients, operations and customer facing teams. We hope to have a little disruption to services as possible during the transition for our client.

We anticipate $1.4 million of total one-time cost related to our system upgrade and expect to record approximately $900,000 in the fourth quarter. During 2016, we’re continuing to see the benefits of our prior acquisitions as demonstrated by consistent loan and fee income growth. Additionally, we’ve enhanced our ability to control operating expenses.

For the remainder of 2016, we still anticipate point-to-point loan growth of 6% for the year. The growth in the third quarter was promising and will help us achieve this metric. We remain resolute managing our credit quality as we grow our loan portfolio. We expect to generate positive operating leverage for the full year of 2016.

While we’re pleased with our growth in non-interest income for the quarter, we do not expect additional increases in non-interest income during the fourth quarter. We also do not expect the commercial loans, swap fee income to continue at the third pace.

We believe that our adjusted efficiency ratio will remain in the 65% range, unchanged from our previous guidance. As we’ve noticed in the third quarter, the compression of our net interest margin is leading us closely to the guidance we’ve provided during the year, as we still expect to be in the low 350 for the full year.

We also believe, net charge-offs will begin the low-end of our 20 to 30 basis points historical rates for 2016. Some early thoughts on 2017, which we will update during our fourth quarter call in January. We expect point-to-point loan growth of 5% to 7%.

We expect an increase in credit cost in 2017 as we do not expect to replicate the levels of recoveries experienced in 2016. Net interest margin is targeted to range from 345 to 350. Fee based revenue growth is expected to be between 3% to 5%. We expect the as reported expense grow to be between 1% and 3% for 2017.

Our target efficiency ratio for 2017 is below 65%. Given the rebound in our stock price and the system upgrade being behind us, we believe there is a potential for a bank acquisition in the coming year. We’re still working on acquisition opportunities within our insurance and trust and investment businesses.

We will continue to be diligent with maintaining our core principals as we grow our business, while building long term shareholder value. 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 will now turn the call back to the hands of our call facilitator. Thank you..

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Scott Siefers of Sandler O'Neill and Partners. Please go ahead..

Chuck, I was just hoping, if you could spend a quick second talking about the commercial real estate credit or credits that led to the higher non-accruals in the three quarter.

Just curious whether you sense for I guess level of concern loss potential et cetera?.

The additional real estate that went into the non-accruing category was related to a previously discussed nursing home operator. We do not expect to have losses. If there were losses on this addition, the dollar value of those losses would be net against the accruals that we have against it would be de minimis, so not really material.

We continue to feel good about the portfolio and continue to feel good about this nursing home operator in terms of -- if you remember, it got delays and filings from the state and it slow out of the blocks, and the census continues to build, and they continue to make progress. So, from our perspective, not an issue..

Okay, good. So, since this is the one that we've discussed previously, I think that moves a lot of the concern. And it seems like there's probably more a transitory issue then than anything else. That's helpful color.

And then separately, John, John and talk appreciate the guidance or the early look at next year, just curious if you guys have embedded any rate hikes into your expectations or sort of how you're thinking about overall rate sensitivity at this point?.

We're still slightly asset sensitive in that position with of the maneuvers we've made and borrowings were a little bit more than we were before, but not much. And our projection basically assumed one rate hike in December kind of the consensus market data that we use would say, and that's what we've gone away for the purposes of our 2017 budget.

So, nothing in '17, just a one I think that the market is basically saying, it's going to happen in December meeting..

And our next question comes from Michael Perito of KBW. Please go ahead..

Two questions from me, maybe starting one on the efficiency ratio and kind of the expense picture, what are you guys looking at now? I mean, is there anything else in terms of maybe branch network or FTEs to help maybe net-net reduce some expenses, or at this point now I mean is everything pretty much moving in the upper direction?.

I think over time, we still have opportunities to trim the branch network. We continue to look at that and that's ongoing process. In terms of FTEs, the system upgrade that we are going through will give us some opportunities, add some efficiencies going forward. So, we see that as an opportunity.

And we're -- our headcount is about 799 at the end of the quarter. And that's down from 847, I think at the end of the first quarter of 2015. So, obviously we've been working at it and we'll continue to work at it..

And is this something I mean as we -- should we be thinking about something where you guys come out and announce several fresh closers or something like a form of some type of expense initiative or just more kind a one-off as we move through 2017?.

I think it is business as usual. I think it’s the environment that we’re in. There is relatively low loan demand, relatively low spread. You got to work really hard to take business away from the guys across the street, and we got to work really hard to run a more efficient company.

And the management team is dedicated to do in both sides of the equation, growing the revenue and managing the expenses. But you will not see us come out with a grand announcement where you're incorporating it into day-to-day activities..

Okay, thanks. And then maybe a question on the consumer, the indirect growth that you're seeing, can you maybe tell us a little bit more about some of the new non-auto products you guys are offering now? And then also, I mean, it seems like the charge-offs in the consumer book were up in the third quarter.

Obviously, you guys are seeing strong growth there, so maybe just some of the talk or some of the dynamics of that portfolio as you continue to grow it?.

Yes, sure. First off, we have been doing motorcycles and altering vehicles for awhile, so it’s not necessarily new for us. It’s just something that we see more opportunity in from a margin standpoint, from a credit quality stand point. Perhaps, I fear to say this, but perhaps a hair less competitive then the auto business itself.

So, that’s really what our focus has been on growing that business faster than the auto business, and we've been able to do that..

And then comment on the increasing charge-offs, I guess in the quarter? Was there specific items that drove that or?.

No, I think that number has bounced around a little bit from a year-to-date standpoint, 56 basis points we're comfortable. With that, we continue our new booking in terms of average FICO score for the third quarter and it was 728, which is the highest that we’ve had. We continue to see upward migration in the quality of the stuff that we’re on.

We continue to see the improving quality in the book of what it is, that we’re able to put on, we’re optimistic and confident..

Yes, Mike, it's John on. Our recent trends throughout couple of months are showing improving diligences in that, so I think part of this third quarter charge-offs just related to the growth that we've seen. Of course, we would expect next year to see higher. I think, overall, charge-offs given the facts that the portfolio is grown so much, right.

So, our percentage basis, helpfully it’s somewhat similar..

Okay, thanks. And then one last one for me, I appreciate the outlook commentary, Chuck, on M&A. Obviously on the non-bank side you guys have been pretty consistent there. On the bank side, curious to hear your thoughts, we've seen a couple of deals in the Ohio, general Ohio landscape, where pricing seems to have been rising.

And it does seem like there's potentially some organic disruption that you guys might be able to take advantage of with some of the other larger acquisitions that have occurred.

So curious a little bit deeper dive into how you see the bank M&A environment evolving over the next 12 months for you guys, and if there are other opportunities on the -- maybe hiring lenders or picking up new clients from some of the other dislocation?.

Yes, yes and yes. I'll try to answer some of those. We're working at picking up on some of the market disruption. We're actively hiring lenders and have been a number of years and see that as a very attractive way of growing.

In terms of acquisitions, the highest priority is to find something that helps in the current footprint where we perhaps could have some costs takeout opportunities.

We also, from the market expansion standpoint, if we were to expand -- we see some of the opportunities in Kentucky as attractive, in particular Louisville and Lexington There's no -- we do compete and go into Cincinnati and Columbus and Cleveland, and obviously there're some strong competitors domiciled in each of those towns where Louisville is a little bit more wide open.

But if we do a deal, great, we'll do it at the price that makes sense for us. If we get to the end of next year, when we haven't done a deal, I'm not going to be disappointed. So, we want to be selective, we want to find opportunities that help us from delivery standpoint..

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

A couple of questions going back to the loan portfolio, as I look at your indirect, your consumer indirect, are you at about 11% of total loans? Is there kind of a hard line in the sand that you won't cross in terms of percentage of total loans?.

We've a way to run there. We kind of look at it more from a percentage of asset standpoint, but if you want to do it on a total loan standpoint, it's somewhere in the high teens, Dan. So, we've a way that we could go still.

I think that we get more comfortable with the indirect portfolio piggybacking on the earlier question, 21% of what we originated last quarter was non-auto. And so it's not just auto, and then when you look at the auto, we're originating more used auto then we're new auto, which is not quite as price in same as some of the new auto is.

So, we remain optimistic and know that the growth rates are huge. Keep in mind; we're expanding a footprint here. We -- NB&T five years before we acquired them had a $75 million indirect book. When we acquired them, they had no indirect book.

They had gotten out of the business and were trying to put that back together as well as covering parts of our franchise that were not previously covered. So, some of this growth is the benefit of the relatively small denominator..

Okay.

And then in terms of competitive factors, are you seeing increased competition from the larger organizations or not necessarily so?.

I mean, it’s pretty widely covered. We had some good business in the west, some good business up north, and some good business in our legacy franchise, which actually like the question, it's an unusual answer. It's usually, one area is doing really well and everybody else is kind quite, but that was a kind of nice quarter for us.

We had good winds all over..

Okay.

And in the terms of just competitive factors, I mean, are you seeing increase competition from the larger organizations or not necessarily so?.

I would say that the environment is pretty much as it has been, it is comparative. We tend to get more of our business from the larger organizations. If you look at the small community banks are not really able to do that much. If you look at, I don’t know what you want to call mid-tier banks, but like a Park or WesBanco or United.

We all try to take each other's customers, but truthfully I think we all do a pretty good job and there isn't much business going back in forth between that level. But I think we're all of us are surviving off of the larger institutional, the larger institutions that are in Ohio and Kentucky and West Virginia..

Okay.

And then just changing gears to the provision that you took this quarter, how much of that was related to the charge-offs and how much of that was related to just pure growth?.

About 500,000 of it was related to the charge-offs and the rest of it was related for the growth..

And then on the expense, your salary and benefit expenses, you said you saw an increase and medical cost, is that expected to kind of subside in Q4, assuming everyone stays healthy?.

If you guarantee the healthiness, I will guarantee the medical cost, but let’s hope they all stay healthy..

Traditionally, we’re seeing the third quarter being in the high over the last couple of years and it's little bit less in the fourth quarter. But as Chuck mentioned, I don’t think we can guarantee that..

Right and then just general reminder, what’s left in your stock repurchase program?.

$15 million. You said that one, I lost all credibility there. But we, if something happened in the market and the stock dipped, we would buy. But at this price, we would enter and we have a plan. But, it's out that this price is not opportunistic..

At this time, there are no further questions.

Sir, do you have any closing remarks?.

Yes, thank you. I want to thank everybody 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 thank you, sir. This concludes today’s conference. You may now disconnect your lines and have a wonderful day..