Peoples Bancorp Inc (PEBO) 2015 Q4 法說會逐字稿

Good morning and welcome to the Peoples Bancorp's conference call. My name is Emily and I will be your conference facilitator today. Today's call will cover a discussion of the results of operations for the quarter ended December 31, 2015.

(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 on this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are managed on management's current expectations. The statements in this call which are not historical fact based -- 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 strategic initiatives; the successful completion and integration of acquisitions; the competitive nature of the financial service industry; the interest rate environment; the effect of federal and/or state banking, insurance, and tax regulations; and changes in economic conditions. 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 projections. Peoples disclaims any responsibility to update these forward-looking statements after this call. Peoples' fourth quarter 2015 earnings release was issued this morning and is available peoplesbancorp.com.

This call will include about 20 to 30 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. 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 Emily. Good morning and thanks for joining us for a review of our fourth-quarter results.

I would like to begin this morning's conference call by introducing Peoples' new Chief Financial Officer and Treasurer, John Rogers. John has been in financial services industry for over 30 years. Most recently serving as the Risk Executive for PNC Financial Services Group. And previously, CFO of PNC's Retail Banking Business. His skills, experience, and proven leadership make him the ideal choice to lead our company and execute on our strategic plan. John officially started with the company on November 30. We are delighted to have John as our new CFO.

This morning we reported our fourth-quarter 2015 results. This quarter, like the previous two was significantly impacted by a large provision for loan losses that was recorded related to the one problem C&I loan relationship we had been dealing with throughout the year. While our recovery efforts continue, the provision expense expenses for the load is behind us. As our net recorded investment in the load has been charged down to zero. The provision for this troubled loan relationship overshadowed the progress we've made in the second half of the year on managing expenses and growing loans. Non-core expenses for the quarter were $1.3 million. Which put our core operating expenses at $26 million. For the second quarter in a row, we beat our core expense goal of $26.5 million. Which again, contributed to us generating positive operating leverage for the quarter. Our adjusted efficiency ratio was 24.7% which was an improvement from our adjusted ration of 65.3% in the third quarter of 2015.

Given the slight growth in our net interest income and fee-based revenue, we generated positive operating leverage for the quarter. We had another strong quarter of loan growth of $40 million, or 10% annualized during the quarter. Excluding the loans acquired from NB&T. For the year, we hit the low end of our targeted range of 7% to 9% organic loan growth. Commercial loans were up $67.3 million, or 8% for the year. Non-mortgage consumer loans increased $49.1 million or 26%. And personal mortgage loans were relatively flat. Indirect lending significantly contributed to the loan growth during the year. These loans increased $52.1 million or 45%.

Our asset quality metrics were negatively impacted by a few key factors during the quarter. The charge off on the large C&I relationship was more than offset by two commercial loan relationships being downgraded to criticize data. Also, a CRE relationship in the skilled nursing sector was placed on nonaccrual status. While we have seen some negative developments in asset quality over the past couple quarters, these trends are being driven primarily by a few large credits in our portfolio. We are not experiencing similar effects across the portfolio on a high volume number of loans.

The provision we recorded for the quarter, was a primarily to cover the charge off of the large C&I relationship. However, it also was to build reserves against the three large credits referenced previously, and the normal growth in loans we experienced during the quarter. Excluding the charge off on the large C&I relationship, our net charge-offs would've been $2 million or 10 basis points for the year. At the end of 2015, our loss reserves would provide coverage for approximately 8.5 years, based on the 2015, 10 basis point charge off rate.

Moving to acquisitions, we would like to clarify our performance regarding our acquisition activity. We have acquired six banks over the course of the past three years. Of these, the first five have met or exceeded our targets for expense reduction and revenues. The National Bank and Trust transaction, the largest and most recent of the deals, has missed on revenue targets despite exceeding our expense take out commitments. The NB&T acquisition, including total loans outstanding of approximately $390 million, when it closed on March 6, 2015. During the year, loans declined to a low of $366 million. Of this runoff, $12 million was the result of planned exits resulting from prudent portfolio management decisions, concerning asset class, concentration limits, and seasonal borrowings.

In the commercial line of business, we have identified less than $4 million in lost business. The remaining $8 million is due to normal paydowns. Most of our runoff has been in commercial and residential real estate portfolios. Our original acquisition model called for total loans to be flat for the first year of operations. At year-end, the loan balances and NB&T markets totaled about $380 million. We anticipate loans in the NB&T markets ending the first quarter of 2016 much closer to the starting point, based upon recent loan closings and the strength of our loan pipeline. The unforeseen reduction in loan balances in the NB&T portfolio cost us approximately $600,000 in pretax earnings in 2015. We are now seeing loan growth in our West region, and we expect that to continue throughout 2016.

We remain optimistic that the NB&T acquisition will prove to be a valuable investment for Peoples Bank and our shareholders. We have a assembled a talented team which has helped drive more recent loan growth. And we believe we can surpass our two-year earnings expectation. In 2016, we will monitor performance of NB&T and prior acquisitions as core operations.

I will now turn the call to John to provide more color around net interest income margin, and balance sheet and capital activities.

Thanks Chuck.

Net interest income comprised 68% of our total revenue for the quarter which was consistent with the third quarter. We experienced net interest income growth of 1%, which was primarily due to increased interest income on investments as our average investments securities grew 3% over the [lane] quarter. The growth resulted from the strategy we implemented during the third quarter to deploy excess cash of $50 million in the investment portfolio. In 2016, we anticipate the investment portfolio to be between 25% and 27% of total assets.

We will continue to seek opportunities to execute a mix shift on the asset side of our balance sheet to reduce the relative size of our investment portfolio, to partially fund our expected loan growth. Our net interest margin increased slightly during the quarter to 3.56%. The core margin, which excludes net accretion income was 3.4% compared to 3.37% last quarter, an expansion of 3 basis points. This improvement in margin during the quarter was largely a result of reduced funding costs from the third quarter 2015, caused by the paydown of a $12 million term loan.

On the liability side of our balance sheet, our period and core deposits which excludes CDs, increased $17 million or 1% compared to the third quarter. We experienced growth in savings accounts of $10 million, and non-interest-bearing deposits of $7 million. We continue to grow our net core [DVA] accounts at an exceptional pace. For 2015 our growth was 2.4%. Our non-interest-bearing deposits remained at 28% of total deposits during the quarter, compared to 26% at year-end 2014.

Regarding capital, given our excess capital position, and a pause in our acquisitions, we have looked for ways to effectively manage our capital. Late in 2015, we approved the share repurchase program. Given the activity in the stock market in early 2016, specifically that relates to our stock price, we executed purchases under the program, during January and will continue to evaluate additional purchase opportunities as we continue through 2016. In January, we invested $1.5 million repurchasing shares, which is anticipated to have a slight accretive impact in our earnings per share going forward.

I will now turn the call back to Chuck for an outlook on 2016 and his final comments.

Thanks John.

Looking at the year in total, I am pleased with the results we reported for the second half of the year, with the exception of the provision we recorded for the one large C&I relationship. In both the third and fourth quarter, we had significant organic loan growth of 11% and 10% respectively. For the year, we had 7% organic loan growth. We effectively manage expenses in the back half of the year, which led to an adjusted efficiency ratio in the fourth quarter below our target of 65%. Our pre-tax, pre-provision net revenue, when adjusted for non-core charges, improved $5 million or 28% during the second half of 2015 compared to the first half of 2015.

The challenges for the year, were the problems C&I relationship and the lack of stability in the loan balances in the Western region of our footprint. We also faced headwinds in our revenue streams related to the absence of meaningful interest rate increases, a soft insurance market, and continuing regulatory challenges. We're optimistic that we can build on the progress made in the second half of 2015, and show significant improvements in 2016. Looking at 2016, we expect point-to-point loan growth of 6% to 8%.

The key driver to achieving our expected loan growth will be the strength of our commercial loan pipeline which is currently at $240 million. We currently have scheduled fundings of $54 million in commercial loans during the first quarter, which are expected to be partially offset by payoffs of $36 million. We anticipate continued growth in our consumer loan balances, which will continue to be driven largely by indirect lending. We expect our net charge-off rate and provision for loan losses to normalize in 2016.

Our net interest margin is estimated to be in the low [350s] given the interest rate movement. On the revenue side, we anticipate between 4% and 6% revenue growth at the normalizing 2015 for a full-year impact of NB&T driven largely by the loan growth and growth in our fee-based businesses. Within non-interest income, we anticipate revenue growth in the mid-single digits when normalizing 2015 for the full year impact NB&T.

On the expense side, after normalizing 2015 and adjusting for acquisition related charges, we expect expense growth in the low single digits in 2016 which will result in positive operating leverage for 2016. As a result, we are targeting an efficiency ratio of slightly below 65% for 2016. In 2016, we anticipate acquisitions will be primarily focused on growing our fee-based businesses. We're optimistic about 2016, and remain committed to profitable growth of the company, and building long-term shareholder value. Our focus on extraordinary service to our customers and communities, coupled with disciplined execution of our strategies, will allow us to succeed and continue to build something special here at Peoples.

This concludes our commentary and we will open the call for questions. Once again, this is Chuck Sulerzyski and joining me for 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.

(Operator Instructions).

Our first question is from Scott Siefers of Sandler O'Neill.

Good morning guys.

Good morning, Scott.

Morning. Chuck can you please go into a little more detail on the credits that were added either to [NPA] or to criticize specifically the CRE loan added to NPA and then the to commercial relationships added to criticize. And, specifically want to be looking for size geography. Are they legacy PEBO or were they acquired? Things of that nature? And perhaps if you can expand a bit and talk about what you are seeing in terms of the overall health of your markets.

Sure. I would be glad to. I will start with the reference to the nursing home loan, which is in the neighborhood of $6 million. That was the one on nonaccrual status. It is a build out that was slow in getting the regulatory approval, so it got a late start.

We need the census to increase. We ended the year with 44 beds filled in January. We are up to 50 beds filled. We're reasonably confident that this loan by the end of 2016 -- we are trying to get up to 75 beds by the end of 2016. We should be okay on that.

These are folks that have some experience. So it is a problem situation, but it is not a perilous situation. If worse comes to worse, Scott I'll stick some staff members to fill up the beds.

On the other two loans that we have, that you'd mentioned that were downgraded. The first one by the way is a long-standing Peoples Bank customer.

The second one, there is two big loans, one about $9 million one about $8 million, that were downgraded. The $8 million one is a heavy equipment company. They primarily do demolition work, and their results are tied to what's going on with scrap metal. Again, a long-standing customer that survived the 2008, 2009, 2010 environments in the same condition that they are now. This is a full relationship. These are competent people who know what they are doing.

And the final piece, a $9 million piece, is a company that is involved in fracking. Again, this is all of these core Peoples Bank relationships. This is a company that has shown resilience in difficult times before. They have $4 million to $5 million of cash with us. We have good collateral positions. They have some good contracts and relationships. Obviously, it is a difficult time with the oil and gas. But I have confidence that these folks will get through it.

In your questions about what are we seeing in general and how do we feel about the portfolio in total. We've got two, three, four chunky loans that are causing us issues. We understand what the issues are. We are comfortable and confident.

But we are not seeing stress across dozens of loans. A lot of the releases have talked about credit concerns. We are concerned about these handful of loans that we are working on. But there is nothing here that has me fearful that we are at the early stages of more significant problems.

Okay. That's good color. I appreciate it.

Thank you.

Our next question is from Kevin Fitzsimmons of Hovde Group.

A good morning everyone.

Good morning Kevin.

Chuck could you give us a sense for, I know you mentioned your energy exposure. But how many other loans do you have that are fracking loans like this one that went to criticized?

And if you could expand into how you guys have viewed or assessed indirect risk. So maybe not something you would call a direct energy loan. But something, whether it is real estate or non-energy commercial something that would be impacted by the current cycle. Thanks.

Yes. I will give some comments, and if it doesn't hit exactly what you are looking for, ask a follow-up. Our energy portfolio has roughly commitments of about $41 million, and outstanding's of $30 million so it represents about 1.7% of our portfolio. We have reserves against that of about 6.3%.

We have one fracking organization, and we are very selective in the opportunities that we have. I will tell you that several others that we looked at are no longer in business, and I do believe the folks that we are with will persevere. I am not too worried there. So we have a very small energy portfolio.

You are asking about some of the other names or what some of the color is in that $43 million. There is a lot of surface-level drilling companies. There is some companies that are related to shipping, gasoline.

There is nothing really meaningful in terms of exposure size. So it is a very small portion of our portfolio other than the one large credit. I think that we will be fine.

The area did have a -- you are asking about secondary impacts. The area did enjoy in the 2013, 2014 a lot of positive economic things related to the oil and gas exploration. That being said, a lot of land contracts we are giving out. They have an annual annuity that is helping our deposit businesses. It is helping our investors business.

It is helping the outflow of cash into these communities. It is helping create some economic energy in some areas that have been depressed for a long time.

I will remind those of you from outside of the area, Ohio's an employment rate is well below the national numbers. Times are pretty good. In our Ohio franchise, which is the vast majority of where our branches and bankers are located. Hopefully that helps.

Yes that's very helpful. Thanks Chuck. And one additional follow-up.

I was just wondering with the recently announced merger with Huntington and FirstMerit, is that something that you look at as a potential opportunity whether it is from getting business, getting employees, getting talent, any of the above? Thanks.

Yes, yes, and yes. We are real excited about that. Like many banks, community banks, or small little regional banks and who we compete against. The [Parks], the West Bank Co, the Uniteds, the Community Bank and Trust. We don't really have a lot of success taking business away from those banks that I just mentioned.

But I think all of those banks live at gathering business from the Huntington's the FirstMerits, the Keys, the Fifth Thirds, the Chases et cetera. So right now when we have two of them in turmoil, there is opportunity to take customers. There's opportunity to take bankers and we hope to do some of both.

Got it. Thank you. Thanks very much.

Our next question is from Michael Perito of KBW.

Good morning.

Good morning.

Couple of questions. Maybe I will jump over to the expense line items. I was wondering if you could give a little bit more color, Chuck on some of the non-core expenses in the quarter. It looked like there was another $800,000 of merger charges $400,000 of other and some pension settlement charges.

What is the continuous driver of some of these non-core expenses? I mean NB&T closed about nine months ago. Is there considerably more merger charges still to come as we move into 2016? And maybe some color also on what the $400,000 of other non-core expenses would be helpful.

Yes. This is John. I will take that.

The non-core, [solution-wise] I believe we think most of those are behind us. We don't anticipation anything of this size in the future. Generally they're related to some smaller system conversion that happened at the end of the thing. So, we think that's pretty much behind his at this point in time.

There is about $400,000 or so of [search] and severance charges that when they're given some of the personnel moves that were taking place. Mostly probably related to yours truly. So that has been the majority of it from there so I think that covers most of it that you are looking for.

Is the pension settlement charges, is that nearing the end as well? I think it's been kind of going on for the last almost 2 1/2 years. It seems to be hitting the non-core expenses. Is that still ongoing or is that something that is generally done with as well?

Generally I think it's ongoing, the amount fluctuates from time to time based upon the valuations that we receive. We continue to look at, in this environment is pretty tough to terminate the plan. We've looked at those options, it's very expensive these days with rates being so low.

In fact, you have to buy annuities to take basically care of that. But we are looking at other options to see how we can control that. They do vacillate from time to time. It's hard to predict.

Okay. And then maybe a follow-up to the previous question. Obviously the talent and customer takeaway opportunities could be quite large from the deal. There has been also I've heard from some local competitors of yours that there has been some rumblings of some deposits and branches may be coming for sale. And in HHI related issues. Is that something you would consider in the Canton-Akron markets where you are less built out if something came available?

While we will certainly look at it. We certainly like Akron and the business that we have there and we certainly would have an interest of getting it to Canton. But the notion of buying branch locations with deposits without loans, probably not going to be very appealing to us at this point in time. But we will take a look.

It would all depend upon what the package looks like. With deposits and loans, yes. If they are trying to sell a number branches that might be a little bit more than we want to handle. We will have to see what they are trying to accomplish.

Okay. And then one more question. I appreciate the commentary, John about the buyback [at the] start of the year.

Anything holding you back from getting more aggressive with the buyback? And can you remind us I guess how much you have left and how much you think you guys can realistically accomplish to start the year here?

I think the filing indicated that we had a $20 million package. We have done $1.5 million. I think how much we do depends on the stock price. We will look at it opportunistically and go from there.

I'm sorry go ahead, John.

I think we will continue to look at other ways to deploy the capital. So what are alternatives we have and continue to evaluate that. I think incrementally at times, we might do some. But I don't think we will do it in a large extra-large buckets and do it [also]. We will be very cautious of what we do and evaluate that as we move down the path here during the course of the year. (multiple speakers) It is a $20 million authorization in total.

So it sounds like, obviously growth remains number one in terms of capital deployment. Then is it fair to continue down the pecking order. It sounds like fee income acquisitions may be number two. Dividend three. Buyback still four. Is that still accurate and judging how you're reviewing capital deployment today?

Don't be giving me these complex multiple-choice questions. You are certainly in the right neighborhood.

Okay. I appreciate it. Thanks guys.

Our next question is from Eric Grubelich of Bank Investor.

High good morning. Chuck. I have a couple of questions for you maybe to tag onto the question that Mike Perito just asked you about the buyback. What kind of cash do you have at the holding company and what is your capacity to pull cash of the bank up to the holding company right now?

We probably have about $5 million to $10 million in cash at the holding company. Right now we have just switched our regulators. We may need to get permission from the State to do that. But they've indicated no issue with that. They understand our strong capital position. Their rules are different than the OCC's. We don't perceive any really restrictions on pulling money out of the bank and up to the holding company to take care of anything.

Okay that's fine. So, obviously given where your stock is you are way out of the box to do any acquisitions at this point. But you did mention, at least bank wise, I would think. You did mention that you would target perhaps fee-based companies. Could you elaborate a little bit more on that and with us just be cash deals?

Yes they would be cash deals. They would be small insurance agencies that complement our footprint. And they would be small investment or brokerage opportunities that complement our footprint. And we've done many of those in the last few years. We did a very small $200,000 deal to start the year in the first quarter. We look at those opportunities all the time.

So there would be nothing then again, given that your valuation has dropped so much in the last six months, nine months. There shouldn't be any worry from our part that there's going to be any tangible book value dilution event coming up.

Shouldn't be any tangible book value --

If you do a cash deal you're always going to get book value dilution. But, what you are suggesting is as you'd be buying smaller companies or fee-based. It's probably not likely at this point that you would be out there trying to buy another bank.

Yes I would agree with that. It is unlikely that we would buy another bank. If we were to buy another bank -- if we were to see an opportunity, we would not be using stock.

Okay. That's fine. The other question I had going back to credit is actually two questions. Let me start with the one.

Those two credits that you moved to the criticize category. I don't know if I saw that in the press release or maybe I missed what you said. What category did they move into? And what was the issue or what was the prompting that made that happen?

They moved into special mention. When you say what was the characteristics that happened --

The impotence, yes.

One of them is heavy equipment company, dependent on demolition scrap metal and so forth. And just changes in the cash flows is what drove that.

The other one, is as I mentioned, involved in the fracking business. And obviously, with the oil prices being where they are and the slowdown in exploration I think that was a prudent thing to do.

Both of these companies are very well capitalized. And the fracking organization has I think $4 million to $5 million in deposits with us.

You had mentioned that. I picked that up. The other one, the scrap metal company, is it your security there just as sound in a relative sense? Or not?

Yes. For sure. This is a meaningful company. One that we have been with for many years. And we have all of these -- it is heavily collateralized.

Obviously, the value of the collateral is as good as the market conditions when one goes to sell it. I don't think we are going to get to that. This company's has been around for a long time. It will go through peaks and valleys. And these folks are pretty smart at managing their assets, and liquidating when they need to so like a bit of an accordion operation.

They can expand relatively rapidly, they can shrink relatively rapidly. And they're smart business people. So I'm not too worried there at all.

That's good color. And then, the last question I had is little bit more macro.

So, from a risk management perspective, you mentioned that you've got three or four of these chunky loans that are causing you issues. But there is not a broad-based issue portfolio.

Is this causing you were anybody else on the risk management side. Maybe that is John now to some degree, to rethink the size of the credits you want to put on at the bank going forward. Do you think we might see any change there or not?

I think that is a good question and something that we actively think about. But to put it in perspective, I have been here almost five years and I joined when we had all kinds of credit issues in the 2011ish after the tail end of the major downturn. At that point in time the house limit was $20 million and our legal lending limit was $26 million.

At this point in time, our legal lending limit is in the low $40 millions and our house limit is $20 million. And the percentage of our assets that is in the large credit is pretty conservative.

Most of what we do is $2 million to $5 million or $2 million to $10 million loans. We don't do participations, we're not buying large participations. These are generally long-standing customers.

The last company you asked me about, the one in the heavy equipment, that will be a customer for the next 20 years and I am sure it is been two or three of those years in the same situation. And we will stand with them. I am not too worried there. So hope that helps.

I just wanted to hear what your take was on that. Thanks very much for all of the answers to my questions.

Thank you for the questions.

You are welcome.

Next question is from Daniel Cardenas of Raymond James.

Good morning everybody.

Hey Dan.

Just a little bit going back to the energy portfolio, maybe a little more color of the -- so you have $30 million in outstandings. About $9 million of that is criticized correct? What is the status of that other $21 million or so? And then maybe how many relationships make up what is left in that portfolio?

How many relationships make up what's left with that portfolio. Give me a minute. I would say it is probably somewhere around 15.

And these are all performing?

Yes. I am looking down the list here. I believe that all of these customers have been with us for a reasonably long time. And most of them, all but one, has been with us since before I got here.

A lot of them are surface well companies. This company that Peoples Bank has formed in 1902 by a bunch of oil and gas guys doing surface wells. This is stuff we have been doing forever and it is performing. There is nothing of any significance of it. Most of it is solid performing credit.

Have you done any stress analysis on the portfolio?

In terms of when you talk about that terms of prices of oil in particular?

Correct.

Obviously all of them were performing at [28] and I think that they would be fine. A lot of them are in pumping and equipment and moving stuff from point A to point B.

There is no reserve base loans, so it is relatively free and independent of the commodity price. As long as stuff is moving from point A to point B they will make money. And so it's pretty solid stuff.

All right. And then, in terms of the margin guidance, Chuck that you gave towards the end of your prepared comments. That low 350 range, is that including yield accretion or is that on a core basis?

Yes. That is including the accretion.

It included the yield accretion. As we said in the release, is about 17 basis points for the year. We would expect that to drop some during the course of 2016.

We expect accretion amount to be similar to 2015, because we have a couple more months of NB&T in 2016. But we'd expect that to drop down if you basis points during the course of the year. It's tough to give an exact number. It vacillates based upon cash flows and expectations.

Okay. That will do me for right now. Thanks guys.

Thank you.

(Operator Instructions).

Our next question is a follow-up from Scott Siefers of Sandler O'Neill.

Chuck, I wanted to switch gears a little and ask to expand on your comments on the renewed momentum from the legacy [NBTF] franchise. With it nearly a year old at this point, I wonder if you could do a post mortem on why you think it came in, at least from a revenue standpoint, why it is come in weaker than you had anticipated? And then, maybe some more specifics on why you are confident that it is getting up to snuff, so to speak.

Sure. As I indicated in my comments, half of that decline was stuff that we expected. Land-based stuff, hotels, stuff that we didn't necessarily have a strong appetite for. We did have some other shrinkage.

You may remember that we lifted out a team of folks from KeyBanc in the late spring last year. Those folks are beginning to hit their stride. And we really were very fortunate to get some quality lenders from NB&T. Folks that had been trained and experienced in larger institutions, but were capped in terms of the size loans that they could do.

So when I look at their pipelines, what I see, what is happening in the marketplace for those of you again not familiar. The demographics of the southwestern part of the state much stronger than southeastern corner of the state. Land between Cincinnati and Dayton is rapidly growing. Has several of the fastest-growing counties in the state.

So we're in a little bit of a more attractive marketplace. We've been fortunate enough to bring in some real quality seasoned folks. We are fortunate to have folks there that now have more capabilities. Not only in terms of the lending limit but in terms of ancillary products like retirement plans and insurance and more solutions for their customers.

I think we will end the first quarter right where we started, which is what we expected, minus the temporary $25 million $30 million dip.

Okay. That's helpful. Thank you very much.

The next question is a follow-up for Michael Perito of KBW.

Hey guys thanks for taking the follow-up. It's related to Scott's question. Have you guys evaluated and considered maybe getting a little leader in that legacy NB&T footprint? I think when you closed the deal it was just under about a third of your branches.

Is there some type of tweaking that you can do to get the profitability up there? As to loan balances inflect and maybe improve the expense and profitability trajectory of the overall company?

Well, I think that we are looking at our expenses across the company. And I think that throughout 2015 and continuing through 2016 we've been very mindful of expenses. In fact, if you look at the expenses and you normalize as if NB&T was here for the full year, we will have no expense growth.

So, we are doing things to rationalize our expense base in NB&T and also across the footprint. So, we have many small branches in many rural communities. And as technology changes and customers expectation changes we may have future opportunities there.

All right. Thanks.

Our next question is from [Scott Berry].

A good morning guys.

Good morning, Scott.

I just had one question with regards to the fee income line. I was wondering if you could provide maybe some color on your outlook for the insurance lines specifically. It seems like it's been running relatively flat since the NB&T acquisition closed. And I was curious if your projections for that line have changed at all?

Yes I appreciate it. And as you may be aware, we have three components to that business in broad categories. The commercial piece, the personal piece and the health benefit and life pieces.

Somebody is typing if I could ask you to put your phone on mute I would appreciate it. I apologize for that.

Last year, the commercial business really took it hard in terms of hardening market prices going up. So we had some renewals where customers renewed at half the cost. That shows indications of slowing, so we think that the commercial business will do better.

Our personal business continues to do well. We continue to add resources to that. And the same with the health and benefit business. That has been doing very well for us.

We actually see an increase. We are budgeting a higher rate of growth this year in our insurance business than we did last year. So we are pretty excited about what's going on there.

Thanks. That is helpful. And one other question, with regards to the NB&T acquisition. I know you have spoken in detail about your experience with regards to retaining customers on the loan side. But I wanted to see if you had any detail on how those acquired customers, what the activity is in terms of retaining depositors?

Actually deposits are up. And that has been a good success story. We've had a lot of good news there. They had outsourced retirement plans. We have been able to pull back a couple of large $10 million plus retirement plans which has helped us.

They had exited the insurance business a number of years ago. We've been able to build several meaningful insurance relationships in their customer base.

They have been [atriding] households, and we have -- I think we mentioned in the release we're growing checking accounts 2.4%. They are not quite growing accounts yet, but they have stemmed the rate of attrition. And we are seeing them beginning to meet our level of productivity on the retail side.

One of the things that was exciting for us, if you remember the year before that the acquisitions before that. We had purchased some banks up in Northeast Ohio and we actually finished last year with two of the acquired branches finished in the top 10 of our branches. And we can see from doing these deals that it takes four to six quarters to get the level of productivity in, up to what our folks have been able to demonstrate. And we see NB&T maturing.

And we are able to bring a lot to it, the table, to help their customers. Personal loans, automobile loans, small business loans. That we are taking them a week to decision. We are getting them -- frequently decisions while the customer is at the desk. So that experience has been really powerful to their customers. And that experience has been really helpful in terms of getting there. The employees energized and excited about their ability to deliver.

We have 100% confidence that there is good things ahead in the Western franchise. I have no doubt that the Western franchise will grow faster over the next 10 year than our core franchise.

Thanks. That's really helpful color. One follow-up to that. Looking at overall deposits, relatively flat maybe up a couple percent I think on an organic basis if my math's correct, for the year.

And in the fourth quarter specifically, I think we saw some more run off. I know some of that was in the government deposits which I'm assuming it's seasonal.

Maybe if you could update me a little bit on what your outlook is on growing deposits. I know a loan to deposit ratio where it is not necessarily a vital aspect of running the business right now, but any thoughts there would be helpful.

Well for the past five years what we've been focusing on is net DDA growth, and non-interest-bearing DDA growth. Our non-interest-bearing DDA represents 28% of the deposit book. And that is where our energy is. The deposits we see is much more stable.

And I think we lost somebody around the table might help me I think we lost a $20 million county relationship was it in the third quarter, it was fourth quarter. Yes we lost a long-standing house relationship in the fourth quarter about $20 million and you know very competitive situation. Not a significant loss given the current environment from my point of view.

I would just add that our wholesale funding to core funding is around 10% or so. We haven't been that low in quite a few number of years. So when I look back to at least five or six years it is at the lowest level it has been for quite some time.

Got it.

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. Thank you for your time and have a good day.

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