Good morning, and welcome to Peoples Bancorp’s conference call. My name is Chad, and I will be your conference facilitator today. Today's call will cover Peoples Bancorp's discussion of results of operations for the quarter ended March 31, 2013. [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 may contain projections or other forward-looking statements regarding future events or Peoples Bancorp's future financial performance. These statements are based on management's current expectations. The statements in this call, which are not historical fact, are forward-looking statements and involve a number of risks and uncertainties, including, but not limited to the success, impact and timing of strategic initiatives, the impact of competitive products and pricing, the interest rate environment, the effect of federal and/or state banking, insurance and tax regulations. Changes in economic conditions and other risks detailed in Peoples Bancorp's Securities and Exchange Commission filings. Although management believes that the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management's knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections. Peoples Bancorp disclaims any responsibility to update these forward-looking statements. Peoples Bancorp's first quarter 2013 earnings release was issued this morning and is available at peoplesbancorp.com. 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. Peoples Bancorp’s participants in today's call will be Chuck Sulerzyski, President and Chief Executive Officer; and Ed Sloane, Chief Financial Officer and Treasurer; and each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Thank you, Chad. Good morning, and welcome to our call. Earlier today, Peoples Bancorp reported net earnings of $5 million or $0.47 per share for the first quarter of 2013. These amounts were up 30% over the linked quarter, compared to the prior year, first quarter earnings were down 25% due mostly to a smaller reserve release. Also, our annual insurance contingent income was 45% lower than the prior year. We achieved successes in several key areas during the quarter. First, our fee-based revenue stream remains strong and growing. We’ve also made further progress toward restoring asset quality. Our operating expenses were lower than projected and lastly, low-cost core deposit balances experienced continued growth. In contrast, total revenue was challenged by the prolonged low rate environment and lack of loan growth. As we discussed in last quarter’s call, one of our 2013 goals is to grow period end loan balances by 8% to 10%. Consumer lending activity is expected to generate over half of this growth. We are pleased to report good progress with our consumer lending in the quarter. Non-mortgage balances experienced 28% annualized growth. On the commercial side, new production has remained strong. In the first quarter, we originated over $65 million of commercial loans comparable with the prior quarters. However, we continue to experience some sizable payoffs that offset new production. These included 2 CRE loans with principal balances totaling just over $4 million. Additionally, competition has intensified with some competitors offering structures that we believe carry excess credit risk such as higher loan to value or less restrictive covenants. We are committed to sound underwriting and superior asset quality. Thus, we chose not to compromise our credit discipline simply to achieve short-term growth. Loan balances were impacted by us losing some deals in the first quarter.…

Thanks, Chuck. In addition to the first quarter successes Chuck mentioned, we are pleased to make further progress towards growth through acquisitions. Earlier this month, we completed our second insurance acquisition in 2013 with the purchase of a small agency in Jackson, Ohio. The acquired customer accounts consist entirely of employee benefit plans. The pricing of this transaction reflects a pay for performance concept, the base purchase price was 1.6x the current annual revenue of $450,000. However, only 40% of this amount was paid at closing. The remaining 60% will be paid out over 3 years, subject to phase-out should revenue decline. The deal structure also includes incentives to grow revenue. We believe this approach ensures an appropriate return on our investment relative to its risk. Given the size of this transaction, we will not have a significant impact to our bottom-line or at tangible capital levels. However, it adds some diversity to our insurance revenue. Prior to this transaction, property and casualty insurance sales accounts for over 90% of our total insurance revenue. Now the mix is closer to 85% P&C. In addition to revenue diversity, we gained a talented well-established producer within the employee benefits area. The added expertise will help us expand our benefits practice across our footprint. As a result, we believe meaningful growth opportunities exist. With the 2 acquisitions, thus far in 2013, we’ve grown our annual insurance revenue by $2 million or nearly 20%. Turning back to first quarter results, one of our biggest challenges continues to be the flat yield curve. This condition places significant downward pressure on both net interest income and margin. As a result, our balance sheet management emphasizes growing net interest income and thus bottom-line earnings more than simply expanding margin. It was this focus that led to the…

Thanks, Ed. Overall, we had mixed success overcoming the challenges facing all banks in the first quarter. Our strong growing fee-based revenue stream remains a major asset in this flat interest rate environment. Asset quality trends also have remained favorable. However, loan growth is not occurring at the rate we desire for 2013, which is pressuring net interest income. As we begin the second quarter, we remain confident in our ability to generate positive operating leverage in 2013. Recent strategic investments in our people and processes have created a robust and expansive infrastructure. As such, we have the capacity to be a much bigger company with significantly larger transaction volumes. Putting that excess capacity to work is paramount to growing revenue. Banking acquisitions remain an integral part of our plans for doing so. We also are creating a better client experience with our office remodeling and added talent to our professional staff. These actions demonstrate our effort to build a different kind of bank. We have the sophistication and product offering of the larger national banks but maintain a customer-centric sales approach. This is a combination that we believe will drive meaningful revenue growth for many quarters to come. With that said, we are mindful of the need to be disciplined with our operating expenses. Growing revenue can take some time, especially with low interest rates. Thus, we intend to remain patient and hold the line on expenses that do not limit revenue growth. In terms of 2013 loan growth, we are maintaining our outlook for 8% to 10% point-to-point increase in the year-end balances. As our first quarter shows, achieving this goal will be a bit more challenging than we had anticipated. We are encouraged by the progress within our consumer lending and are working to maintain this momentum. On the commercial front, our pipeline is strong with nearly $40 million in new loans likely in the coming quarters. We have another $40 million of approved loans which will be funded over the next 6 months. The majority of this amount is for commercial construction loan build outs. At the same time, we are working to limit the outflow of existing loans. Success in all these areas are key to achieving our growth goal. Operating conditions are expected to remain challenging over the rest of 2013. Our ability to overcome these challenges will require a continued focus on the levers on success: asset quality, expense management, revenue growth and capital strength. We intend to be successful in achieving our strategic goals and generating favorable returns for our shareholders. 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 Ed Sloane, Chief Financial Officer. I will now turn the call back to Chad, our call facilitator.

[Operator Instructions] Our first question comes today from Scott Siefers with Sandler O’Neill.

I guess, just a couple of questions, I guess first, Ed, on the margin. You gave the range of $3 to $3.20, depending on loan growth. I guess, just given this quarter’s decline, I mean, do you see if we were to continue to come under pressure would 3 kind of be a bottom for the margin or do you see any risk that could dip below that level and I guess, what in your mind are the biggest risks to the margin at this point? I mean, obviously loan growth there is going to be a real wild card. But as you see things what are the biggest risks to the margin going forward?

We are just going out a quarter on the estimates, Scott. So I would say 3 at the bottom, without the loan growth. But the other key risk is definitely in the securities portfolio. If curve flattens even more, then we could see some additional pressure in that area. Keep in mind that we were clear to outline that the strategy that we put into place to do some restructuring, we restructured about 10% of the portfolio to take out some of that volatility. So I think that will help us to stabilize us moving forward.

Okay. And do you view this, I know kind of qualitatively you mentioned sort of what it will take in terms of loan growth to stabilize growth, but do you feel like the $13 million FTE NII that you generated this quarter is kind of a bottom as well?

Again, it’s hard to say with those factors that I just described to you. Our view is, we are very confident in the loan growth numbers. We put out there an 8% to 10% point-to-point, beginning of the year to end of the year loan growth and that is still our expectation moving into the second quarter. We continue to see very positive signs that way. But I think that’s going to be a big help. Also keep in mind, Scott, and let’s talk about revenue as a whole, that we do have the fee-based business. I think good credit from your group on that for the quarter in your preliminary look. We are seeing some growth in that area. We expect that to continue and be very similar to what we had last year.

Okay. And then I guess, along those lines, so I think on a core basis you did basically 10% fee income growth last year, if I am recalling correctly. Do you think that’s something that then you can duplicate because I guess the crux of my question is I think revenue growth is going to have to accelerate pretty fairly substantially to hit the operating leverage. So can you generate double-digit fee growth again this year?

We saw double-digit growth in both insurance and then our trust and investments segment in the first quarter year-over-year. I think those are big positives. I think also mortgage banking income is showing some significant increases. Production levels are up year-over-year in the residential real estate about 22%. I think that’s going to be a driver right along with it, plus we put on the acquisitions with the insurance business, the one in Pikeville and then also the one in Jackson, Ohio, that’s giving us nice boost to the revenue piece as well.

Ed, if I can -- go ahead Scott, I am sorry.

Sorry, Chuck. Go ahead.

No, I say if I can piggyback on that and just -- a little bit more optimism on the loan front, as I mentioned in the comments, we’ve got the $40 million of construction loans that will be built out between now and the end of the year. So those loans are approved and projects are on their way and so forth, permitting is done. So we knew that going into the year that we have that to look forward too. So that makes us optimistic as it relates to the positive operating leverage. I think that you’ll see more revenue and the revenue as it relates to the expenses. We had some small minor adjustments during the quarter that I think make our first quarter expense could have been even better than that they were if not for some minor accounting treatment. So I think that, we are pretty optimistic, the expenses were good. The fee income is good that we had headlined earlier the contingent piece. We’ve got the full year effect of the acquisitions and so I am feeling pretty confident about it.

Okay, good. I appreciate that color. And then I guess, just a final question on the credit side, trends just continue to be pretty good there and it looks like the charge-off base is still going to be pretty strong. I guess that maybe, what’s your outlook for the provisions because on one hand you’ve already taken down a lot of reserve, but on the other hand you still have a pretty healthy reserve, particularly in comparison to the outlook. So how you think about that dynamic?

I think, if you look at our portfolio and if you look at what’s inside our portfolio, we still have a little bit of a concentration on hotels that’s performing well and if you look at our NPA levels, that downward pressure on that provision number, where it gets to is unclear, but it’s probably 150 or south over time. I mean, relative to our peer group, our asset quality is stronger and our provision is higher. And I think that over time, that will normalize.

Okay, and when you said the 150, do you mean reserve-to-loan ratio?

Yes, correct.

Our next question comes from Chris McGratty with KBW.

This is Mike Perito on for Chris. I guess first, you guys continue to build capital levels organically and I guess you are focusing more on bank M&A. Have you guys, what are the conversations like, do you guys seen any pickup in activity? Do you think we can maybe see something next year or is it still kind of a difference in pricing?

I would be disappointed if we didn’t see something this year. We continue to have conversation. We continue to get opportunities to do due diligence. So if we are doing due diligence, we’ve got agreements in pricing. I think that, a lot of these smaller banks want to remain independent. But I think that there is some realistic conversations going on. I am excited about the insurance acquisitions that we’ve done so far. I think you’ll see more insurance acquisitions from us. I think it’s also possible you’ll see us do some investment acquisitions. So we are working hard at it. I talk to face-to-face to 2 or 3 banks virtually every week, and we haven’t gotten anything to the finish line. But I think it’s likely that we will.

Okay. And then I guess, building off of that, where do you guys see the ideal capital levels become run the bank at going forward?

It’s in the strategic plan.

Yes, just from a strategic planning perspective, we are probably close to being in that range now. Our strategic plan calls for a little bit of a buildup of capital over time. It’s a 5-year strategic plan. But for the most part, we are in that range. Just what we have reported before in some of our investor presentations is a 5-year strategic target range for TCE, tangible common equity and tangible assets in the 9% to 10% and we are approaching that at this point. So I think we are kind of at the bottom of that and allow for a little bit of build up in capital over time. That answers the question, Mike?

Yes, yes, perfect. And I guess, one last one, the 10% of the securities portfolio that you guys redeployed into the 2% yield. Is the majority of that effect going to start in the second quarter? Was that later in this quarter or?

Yes, we did that right towards the end of the first quarter. So the second quarter is where you will see the full impact of that.

Our next question comes from Eric Grubelich with Highlander Bank Holdings.

I had a question just to get a little bit more color about your earlier comments on the loan portfolio. I think you mentioned that you had a couple of larger payoffs and you also noted some increasing competitor pressure with regard to the maybe the quality of the loan that was being underwritten. So could you provide a little bit of color about what you are seeing? What sort of the issue on the credit side with the loans you’ve lost? And can you provide a little bit of color on the types or rates that you are putting on with new loans into the portfolio versus what has been rolling off?

First off, in terms of the credit quality, on the loans that we’ve lost, we’ve obviously, if you look at over the last 2 years, we really had a tremendous improvement in our credit quality. So the loans that we’ve lost primarily have been less desirous than the ones we’ve retained and the ones that we bought in. In terms of rates, we’ve seen things in the market on apartment building in Columbus, we had a deal where they went for 210 over LIBOR and we opted not to do that. That’s more -- there is not a return on equity that we see in a deal like that, that’s consistent with our returns. Other things that we are seeing are deals where the amount of equity into the deal but the principal is not consistent where we want to be. For instance, a medical office building where the principals were putting in less than 10% of the capital into that, and that’s the type of stuff that we are going to stay away from. Having said that, though it’s always been a competitive business, we know we were going into the year that it’s a competitive business. We feel good about the pipeline that we have. We feel good about the construction projects that we have that haven’t yet funded. So while first quarter was disappointing to us in the commercial loan category. Right now, our balances in commercial loans are $14 million more than they were at the end of the quarter. That combines with where we are on the pipeline that combined with the construction loans, that combined with the consumer lending being out of the box a little stronger than we’ve thought. We still have this confident that 8% to 10% point-to-point growth year-end to year-end is within reach.

So is that point-to-point goal, is that going to be more a function of how successful you are on the C&I and the commercial real estate? I mean, you couldn’t possibly make that up on the consumer side right?

No, it’s going to be a combination of all product lines. The consumer side here has been very small. It’s growing as I mentioned in the speech, the non-mortgage consumer loans are up at a 28% annual run rate for the quarter. But we expect that -- as I mentioned in the comments the CRE portfolio has shrunk, part of that is we are remixing it. We expect that that rate of decline in the CRE portfolio to actually revert back, we’ll start to see some growth as these construction projects fund. So I think you’ll see continued growth in C&I, which has been up by I don’t know what the number was, I think 16% I said and the CRE portfolio, which has been shrinking, will start to grow. So it will be a combination of CREs, C&I, as well as to consumer. I am optimistic on the consumer as we go forward.

Okay. And then, one other thing, on the investment portfolio, I don’t know if you mentioned this or not, I got distracted for a minute, but what’s the duration of your portfolio right now given some of the recent remix you did?

Great. Effective duration is about 3. So on the securities that were restructured and we went out a little bit further than that on the duration line, but the yield that we were able to achieve is about 2%.

Our next question comes from Daniel Cardenas with Raymond James.

Just a couple questions. On the indirect side, you said, I think you mentioned you had hired a new person. How much in terms of indirect growth do you expect to contribute to the consumer growth in 2013 and then maybe if you can talk a little bit about what you are seeing on the rates and the terms out there and how competitive is it?

Yes, just a couple of different comments on that. The talent that we’ve added in indirect is a gentleman to work with dealers in our footprint. We’ve been in the indirect business for a very long time. We just have primarily been dealing with automobile dealerships within a 25-mile radius of Marriott, Ohio. Our footprint is obviously more expansive than that and our other lines of business, the insurance business and the commercial business and the dealers outside of that area and we want to be able to communicate with them and to get business from them. On the quarter, our indirect portfolio is only $54 million. So our ability to grow that, when we talk about growing at a 28% annual rate, it’s small dollars, but I think we can continue that growth for many years to come. The average life of these things are close to 3 years give or take and as we grow the portfolio we’ll see a nice increase. And in terms of margin and yield and returns, we are obviously doing tiered pricing and kind of a mix of primarily A&B credits and we are seeing all-in yields in the high 4s. And so we are very, very happy with that. So it’s actually our yield so far been higher than what we had modeled out originally. Does that help you Dan?

Yes.

Yes, I am good. I just want to make sure, it’s actually been a positive story. Again, this is a business that the bank has been in for many, many, many years in a very, very conservative fashion. It’s an opportunity for us to grow assets with a really good risk-adjusted return at higher margin and hopefully over time allow us to decrease our dependency on the investment portfolio.

Right. Okay. And then, just kind of quickly turning to the M&A side, it sounds like you are having some fairly good discussions out there. Can you give us any indication as to what seller expectations are looking like? Are they coming in a little bit or are they a little bit out of kilter with reality?

Our experiences over the last 2 years or year-and-a-half of having this conversation is a little bit different than what you read in the press. The whole thing in the press is, there is great difference between buyers and sellers’ expectations. All of our conversations, we’ve been providing a range that’s in line with what transactions have done in the Midwest and we’ve been willing to go to the high side of that range. And so we get in the door. We get agreement on price. They like what we bring, we obviously have the insurance business. The investment business is a robust suite of electronic services that most of these banks are missing. But then, for the most part, when we get on to the covers, it falls apart around the credit quality, particularly with the state chartered institutions versus the OCC institutions. There is a massive difference between what we see and what we read on the financial statements. In 2 deals recently that we got to a finalist position, one we think the buyer will have 7, 8 years of earn back on the dilution and we are not willing to go there and the other we lost out, our price was right in line with what the institution went for. We lost out to a bigger institution that had more float in the stock. So we don’t feel bad about the M&A, getting our swings at the pitch if you will. We just want to get one done or get another one done and I am reasonably confident that we will. I am not saying by that comment that I am reasonably confident that we will that we have anything that’s imminent. I just know that we are working on it. We are having lots of conversations and I am optimistic.

And do you need a transaction to get you to that 8% to 10% stated loan growth number that you threw out, or is that…

No, no, no, that we wouldn’t do to you. And we would do it to you if we thought we could get away with it Dan. Only kidding. Only kidding.

[Operator Instructions] At this time, there appears to be no further questions. Gentlemen, do you have any closing remarks?

Yes, I want to thank everybody for participating. Please remember that our earnings release and the webcast of the call will be archived on peoplesbancorp.com under the Investor Relations section. Thanks for your time and have a great day.

Thank you very much. This will conclude today’s conference call. You may now disconnect.