Good morning, and welcome to the Peoples Bancorp's Conference Call. My name is Ed, and I will be your conference facilitator today. Today's call will cover discussion of the results of operations for the quarter and year ending December 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’ future financial performance. These statements are based on management’s current expectations. 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’ Securities and Exchange Commission filings. Although management believes that the expectations in these forward-looking statements are based on reasonable assumptions within the bound of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections. Peoples disclaims any responsibility to update these forward-looking statements. Peoples’ fourth quarter 2013 earnings release was issued this morning and is available at peoplesbancorp.com. This call will include about 20 to 30 minutes of prepared commentary, followed by a question-and-answer period, which I'll 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 Ed Sloane, 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, Ed. Good morning, and welcome to our call. Ed Sloane and I have much to share with you today. In addition to the quarterly results, our comments will cover the recently announced bank acquisition and our expectations for 2014. We are excited about the direction of our company and are glad you chose to join us this morning. I want to start with our most exciting news, that is the planned acquisition of Midwest Bancshares. We are pleased to have this opportunity to expand our presence in Jackson County, Ohio. As you may recall, we entered this market in mid-2013 through our insurance business. With the acquisition of a strong franchise like Midwest Bancshares, we were able to expand our product offerings to customers in the area. The transition team is already working to make the change seamless for our soon-to-be customers. Turning now to our 2013 results. Peoples Bancorp reported earnings of $17.6 million or $1.63 per share for the year. These amounts were lower than last year due mostly to the $2 million tax expense from surrendering our BOLI during the third quarter. Taking a closer look at fourth quarter results, our earnings were $0.47 per share, meaningfully stronger than the $0.36 earned a year ago. Many of our 2013 successes were the result of the investments made in our sales process over the past 2 years. Our sales culture has improved and it's starting to show. There is greater teamwork across our business lines, which has led to a higher cross-sell rate for our company. At year end, our customers were using 5.5 services per household on average, up from 5.1 a year ago. Digging a little deeper into our sales success, our retail banking business generated 3.7% net checking account growth in 2013. What…

Thanks, Chuck. As Chuck mentioned, we're excited to make further progress on the M&A front, with our planned acquisition of Midwest Bancshares and its subsidiary, First National Bank of Wellston. Overall, we believe this is a very attractive deal for us. It complements the insurance acquisitions we completed in the first half of 2013 and adds density to our existing footprint. It also provides a good return on the capital being deployed. In terms of the financial impact, we are very early in the transition phase, and some key assumptions still need to be finalized. The information I'm sharing today is based on our estimates derived from the extensive due diligence. Overall, we think you'll find this transaction to be very positive for us. As noted in the press release, we will use a mix of stock and cash with this transaction. This structure helps minimize the impact on our tangible capital levels, while still providing good earnings accretion potential. As a result, we could see anywhere from 1% dilution of our tangible book value to actually slight accretion. The reduction in our TCE ratio should be less than 20 basis points. These amounts consider a total discount on the loan portfolio of around 4% to 5%, plus the impact of acquisition costs. In total, we estimate the acquisition costs to be $1.4 million. The majority of this amount would be recognized in our second quarter earnings. On the earnings side, the annual pickup should be around $0.06 to $0.08 per share. This range assumes cost savings of 40% to 45% and excludes the possible synergies with our current insurance operations. Thus, we should earn back any capital dilution in the first full year. We will look forward to updating you on our progress with this transaction during next quarter's…

Thanks, Ed. In 2013, we continued our work towards building a unique community bank. As part of these efforts, we saw meaningful improvements in revenue generation in each of our lines of business. There were 2 key factors for this success. The first is our ability to execute better than the bank across the street, the other is a positive progress with acquisitions. In terms of sales execution, we are starting to see payoff of prior investments in our people, processes and branch renovations. Our associates are having much richer dialogues with clients. These conversations have helped many clients make progress with their financial goals. Foot traffic within our branches has also remained steady versus the declining trend occurring with many banks. Another major success in 2013 was the strong organic loan growth. We continue to have a solid commercial pipeline, and consumer lending activity is growing steadily. As we have stated in prior calls, our new loan production continues to be capable of generating annual growth of 5% to 10%. We also are focused on building a more diversified portfolio. This will require consumer lending to be a larger contributor than it was prior to 2013. As we start 2014, we are already working to sustain the progress made with several strategic priorities in 2013. At the top of this list is generating positive operating leverage every year. As Ed already mentioned, we are confident this will occur in 2014. Our focus continues to be on growing revenue rather than reducing expenses. With that said, we intend to be disciplined with operating expenses. Our long-term goal is to widen the gap between revenue and expense growth beyond the 1% to 2% we are expecting for 2014. By doing so, we believe our efficiency ratio would improve by 1% to…

[Operator Instructions] Our first question comes from Scott Siefers of Sandler O'Neill & Partners.

This is Brendan Nosal on the line for Scott. I was just hoping you can give us a general sense in outlook for 2014. And more specifically, if that outlook includes PAAs? Or is that more of a core net interest margin?

I'm sorry, Brendan, I didn't hear the question.

Yes, I got it.

Okay, Ed.

If you don't mind. Brendan, this is Ed Sloane. Core net interest margin in the first quarter we indicated it to the mid- to upper 3.30s. So does that include purchase accounting or a higher [ph] commerce transaction? Is that your question?

Yes, exactly.

Yes, it does.

All right. And I was hoping I could ask you guys another one. With regards to your fee income outlook for 2014, with insurance and trust income, do you guys -- how do you see that area progressing in the coming year?

Fee revenue growth, very similar to what you've seen in the prior year. In the investment business, double digit. This year's growth was in the insurance business. And 2013 was helped by the acquisitions, but hampered by the lower contingent. We expect the contingent in the first quarter of this year to return to normal. So you should see pretty similar percentage growth.

All right. And then finally, what do you guys view as the main drivers of the double-digit loan growth that you guys are projecting for 2014?

I think there's a couple of different things. One is we've started to focus on areas that historically we did not, in particular, consumer lending and C&I. Second, we have hired and continue to hire proven producers from competitors that are looking to be at a place where they can take care of a client's needs. And many of those additions made in 2012 and 2013 are providing benefit to us now. Third is, in many of our markets, larger loans are handled from quite a distance, be it Columbus or Pittsburgh or Cincinnati. And we have capable, experienced people at the point of contact. And customers in the market respond to nimbleness and agility. And we're able to make decisions quick. So I think those 3 factors will -- have served us well and will continue to serve us even better in the future.

Oh, that's great to hear. And then just one more, if you have the time. Do you guys feel comfortable releasing additional reserves, given that the reserve-to-loan ratio is now below 1.5%?

This is Ed. I would say, there -- it really depends on the risk profile of the loan portfolio. We've been very fortunate, to date, to have some fairly large recoveries come back in and keep our gross charge-off rate at a reasonably low level. As long as that continues to be the trend, I could see, potentially, some additional reserve release. It's -- as you know, it's hard to -- it's a hard thing to measure. And it's really going to depend on how the metrics continue to improve. Take a look at our NPAs, Brendan. We're down 38% in nonperforming assets during the course of 2013. And that's a pretty good indicator of how we've been able to take some of the risk out of the loan portfolio. Again, we'll continue along those metrics and look for opportunities to release reserves.

Our next question comes from Chris McGratty of KBW.

This is actually Mike stepping in for Chris. I thought I'd start -- I noticed a comment in your release about focusing on -- in 2014 about perhaps lessening your long-term exposure to rising rates and how you're looking for opportunities to do that. I was wondering if you could give us any more detail on what you guys are looking at and just -- and how you're thinking about that impact on your margin going forward.

We've been thinking about it a couple of different ways. This is Ed, Mike. Investment portfolio is probably the key focus to reducing that exposure on long-term interest rates. We did indicate in the conference script that we'll look to get that percentage of investments to total assets down below the 30% mark. We think that, that's a key driver. Also bringing in duration within the investment portfolio where we can is another key factor. And probably, the third is to make sure that we're managing loan growth along with deposit growth. And if we see more loan growth than deposit growth and we have to go to the borrowings area, then we'll look to potentially extend some maturities in our borrowings to create more of a match funding-type of an approach on the balance sheet. So we're very cognizant of our interest sensitivity. And those are very clear strategies that we've addressed here at the bank that will be employed as we go through next year.

And do you guys -- another follow-up on that. Happen to know your recent loan growth, the breakout between what's fixed or variable or, like, the duration on -- is it predominantly 5-year -- any details there would be helpful.

Yes, I would have to say that it's, probably, for the most part, within the 5-year range, especially in the commercial portfolio. Don't have specific numbers for you. I'd be glad to follow up with you on that after the call.

Okay, great. And then one more, if I could. I remember on your 3Q slide deck, the capital targets were about 8% to 9% on the TCE and 13% to 14% on the Tier 1. With the OCI swing this quarter and you guys dipped below those targets a little bit, I was just wondering if you can give us an update on how you're thinking about capital, especially with the loan growth that you're anticipating and the size of the balance sheet maybe moving forward?

Great. You pointed it out. Really, the OCI or the AOCI component is a big part of that. And some of the volatility that we've seen in that, especially with the steeping of the yield curve, that's the area that we're really trying to focus our attention on and bringing that number in a bit. That will create some stability to the capital, especially the TCE-type ratio. On a go-forward basis, we're an active acquirer. And we definitely look at tangible common equity and the deployment of capital in terms of acquisitions and what those acquisitions bring to us going forward. So we're willing to allow tangible common equity to drop off to where it's at. We're quite comfortable with where it's at. And we'll even allow it to go a little bit lower, as long as what we're putting on, in terms of future earnings, makes good sense to us. You'll notice with the Midwest acquisition, that we brought stock into the transaction. We created some stability to the capital ratios through that. And then the earnback associated with whatever dilution was out there is very, very short term, so we're within a 1-year time frame of it. And that's a really good example of the discipline that we'll employ moving forward with our capital ratios.

Okay, great. And then if I -- just one quick follow-up to an earlier question. Chuck, I think you mentioned some hires that you guys made in '12 and '13. Are you anticipating any more additional hires in this year, especially in light of the Midwest deal and the Ohio Commerce deal? Are you guys comfortable with the team you have in place for the most part?

Well, I'm comfortable with the team that we have in place, but we are always recruiting topflight bankers, and we would anticipate adding additional commercial producers during the course of the year.

Our next question comes from Jason Selch of Iroquois Capital.

Chuck, I'm wondering how the Utica Shale has impacted your bank so far, and how you anticipate that it will impact the bank going forward? In particular, have you seen any increases in your deposits as a result of the Utica Shale? And do you have a wealth management business in place to handle the additional capital that's going to be generated to local people as a result of the Utica Shale developments?

Yes, yes and yes. We are seeing activity from it. We're seeing higher levels of deposits, higher level of investment sales. We have a branch that basically has been static with deposits for many, many years that grew its deposits over 10% last year. And it's kind of in the middle of this area. We expect that to continue. We've also seen lending opportunities from this. So our area continues to do well in terms of all unemployment levels compared to historic levels, relative to the state and relative to the country, are better than normal. So the oil and -- the gas and the shale play has been helpful to us and will be for many, many years to come.

Our next question comes from Daniel Cardenas of Raymond James.

Just a couple of quick questions on the security portfolio. What's your duration right now? And I mean, where do you see that trending over the next couple of years? And then lastly, any thoughts about moving more securities in the held-to-maturity column?

The first question, effective duration is approximately 4.5 in the investment portfolio. And I noted this earlier, Dan, we are -- we do have strategy in place to bring that duration in over a period of time, let's say, out a year. So that's a key strategy. And as far as your second question, available for sale into held-to-maturity, no plans at this point to do that. The held-to-maturity activity that we have right now is municipal-type securities. And we've grown those, but relatively slow. So that's where we stand.

All right, good. And then in terms of loan growth outlook for 2014, it sounds like you still see a lot of opportunities within your footprint. I mean, are you seeing less competition as you come into '14? I mean, how do you balance loan growth objectives with maintaining the margin kind of in that 3.30-ish range?

Well, we've kind of stated what we see the loans doing, and we've been able to expand our margin. I wouldn't say it's a function of less competition. I think we're expanding our indirect lending business at a relatively fast rate that's helping our margin. On the commercial basis, I think that we are able to win more deals by taking away from the competition. It's not as if the marketplace is growing loans 10-plus percent. We just are able to gain share by providing a high-quality professional and a more responsive manner. And I don't see any reason for that to change.

Okay. And how are you ensuring that you're not grabbing somebody else's problem loans as they're exiting one bank and moving into yours?

Well, I think if you take a look at our credit metrics over the last 3 years, you'll see some pretty extraordinary story. We're OCC-regulated, and I think that puts a stamp of -- that makes a pretty strong statement that the numbers are as reported. So I think we have experienced underwriters, proven credit professionals making those decisions. So I sleep very well at night with the credit decisions we're making.

Excellent. And then on the indirect side of it, who are your main competitors in that segment?

It's a lot of the national players, the Chases, the Wells Fargos, the Huntingtons, the Fifth Thirds. Where we're able to differentiate ourselves a little bit in our footprint is we're able to put a liaison in the dealerships. And most of the dealerships in our footprint are small, hard to get to. And they're not the places where these banks are sending their dealers. They're concentrating their dealers -- their dealer reps on larger, urban markets that have bigger car dealerships. So we're a little bit more responsive is what I would say.

And then as I look at your TCE, I mean, you said you're willing to go a little bit below where you are right now. I mean, what's the lower end of your comfort zone on your TCE ratio?

I think, I -- Dan, this is Ed, I think I stated in the last call -- last quarter's call, the -- into the upper 6% range, we're comfortable with that without any trouble at all. Again, I think the way we -- we're structuring deals today and then moving forward, we'll be very cognizant of where that number is. But I'm comfortable with it dropping into the upper 6s.

Our next question comes from Eric Grubelich of Highlander.

I just wanted to follow up on the last question about your indirect business. So it looks like you've been -- I guess, on the consumer portfolio putting on, round numbers, $8 million to $10 million a quarter there. I'm just curious, given your comment about what you just -- some, like, the smaller dealers maybe off the beaten path. What does the pricing look like on the loans that you're putting on? And then the second question is you mentioned the word "liaison", could you define that or expand that a little bit more? Is that a bank employee, or what...

Yes, yes. It's a bank -- it's basically a route runner. It's someone who's touching the dealers periodically, discussing deals, just knocking on doors. It's pretty commonly utilized in the business. Up until a couple of years ago, we did not have anybody doing that. We now have 2 people full time. So as a result, we're getting more business from our existing dealers, as well as adding dealers to it. Also monitoring the flow and the hit rate from dealers, so that we're eliminating activity from dealers that are not productive for us. In terms of our yields roughly from the indirect business, it varies, but we've been in the low 4s kind of on a net basis the recent months.

Okay. And are you, just in a related way, as part of doing this and again, you can't tell this from the numbers, but are you picking up any other dealer-related lending services to the dealer, or not right now?

We do have some floor plan relationships, but those floor plan relationships have not expanded as fast as the consumer lending nor do we expect them to.

[Operator Instructions] 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 webcast of this call will be archived on peoplesbancorp.com under the Investor Relations section. Thanks for your time, and have a great day.

This will conclude today's conference call.