Good morning, and welcome to Peoples Bancorp conference call. My name is Denise 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, 2014. [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 the 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 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 planned 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 2014 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 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 Ed Sloane, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Sulerzyski is attending a banking conference this week, and is on the phone from that location. Mr. Sulerzyski, you may begin your conference.

Thank you, Denise. Good morning, and thanks for joining us for a review of our fourth-quarter and full-year results. 2014 has been an incredible year for Peoples. We are proud of our quality organic growth and 4 acquisitions we announced during the year. This growth has made a stronger, more profitable company. We successfully completed 3 bank acquisitions, and are nearing the close of the NB&T transaction in March. These bank deals, combined, add over $1.1 billion in assets and 34 branches to our Company. After NB&T is completed, Peoples will exceed $3.2 billion in assets with 81 branch locations throughout the states of Ohio, West Virginia, and Kentucky. We will discuss acquisitions in more detail later. Turning to the financial results, earnings for the fourth quarter were $4.2 million or $0.28 per share. This included pre-tax, one-time costs of $2.2 million, primarily related to the North Akron transaction. Combined, these one-time costs reduced earnings per share by $0.10. For the year, earnings were $16.7 million or $1.35 per share, and included pre-tax, one-time costs of $6.8 million. Excluding such costs, earnings for the year were $21.1 million or $1.71 per share. Much progress was made during the year in pursuit of becoming the best community bank in America. Our acquisition strategy has been a big part of this pursuit. The integration process is well organized, repeatable, and focused on providing the best possible experience for our customers. The bottom line is we are a strong operator. As we integrate deals, we’re elevating them to our production levels in a relatively short period of time. New markets in North Akron, Beachwood, and Coshocton are focused on building loan and deposit growth synergies from our expanded suite of products and services. We have fully trained the salesforce in these new markets…

Thanks, Chuck. It was another busy quarter of acquisition activity, as we successfully closed the North Akron Savings Bank transaction on October 24. The acquisition added $112 million in loans and $108 million in deposits, and consisted of 4 banking offices located just south of Cleveland in the Ohio communities of Akron, Munroe Falls, Cuyahoga Falls, and Norton. We expect to achieve if not exceed our desired financial results from the North Akron transaction. The earn-back of tangible book value dilution is expected to be less than 4 years, with earnings accretion of approximately 5%. Cost savings were immediately phased in at closing to achieve a 40% reduction of North Akron's annual operating expenses. The final credit mark was a 2% discount on the acquired loan portfolio. These key assumptions were in line with our expectations. Our initial modeling of this transaction was conservative, and assumed no revenue synergies or loan accretion. As we fully integrate North Akron, we expect to surpass our original expectations. Our retail and commercial salesforces are in place with the recent addition of a high-quality commercial banker to drive loan growth in these vibrant Northeast Ohio markets. Client-facing associates have completed extensive sales training, and we are in the process of refreshing and rebranding each of the 4 North Akron banking offices. The NB&T transaction, which was announced August 4 of 2014, is scheduled to close and convert on March 6, 2015, subject to closing conditions, including approval of shareholders of Peoples and NB&T. All regulatory approvals have been received at this point. As of September 30 of 2014, NB&T had $650 million in assets, $397 million in net loans, $558 million in total deposits, and $260 million in trust assets under management. We are very excited about entering this new market in Southwest Ohio,…

Thanks, Ed. As we end 2014 and look ahead to 2015, we are excited about entering the year from a position of strength. Ed commented on exceeding expectations in loan growth and margin. We also managed to maintain a slight positive gap, excluding one-time costs, between revenue and expense growth in 2014, which was a real challenge considering the acquisition activity. In last quarter's conference call, we provided 2015 guidance. The guidance has not changed. We are confident in our ability to navigate through the acquisition activity of 2014, and the NB&T transaction in the first quarter, to achieve the expected results. Reviewing our 2015 guidance, organic loan growth is expected to remain strong, within a range of 7% to 9%, based on period-end balances. This range assumes commercial loan growth of 8% to 10% and consumer loan growth of 3% to 5%. We are expecting mortgage production to be consistent with 2014 levels. Asset quality trends should remain favorable. We maintain strong underwriting standards and a disciplined approach to managing the loan portfolio. The net charge-offs trends are expected to normalize in 2015 as the prospects of large recoveries diminish. We are planning for a net charge-off rate of between 20 and 30 basis points. The efficiency ratio is expected to improve to below 65%, excluding one-time cost, in the second half of 2015. With the closing of NB&T transaction in March, we expect related cost savings to be fully phased in during the second quarter. Net interest margin is expected to remain stable in the low 3.50s throughout 2015. Loan growth will again be a key driver in stabilizing asset yields, along with a continuation of our asset remix strategy. We expect to reduce the relative size of the securities portfolio to 25% of total assets by year-end.…

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

Good morning, guys. Let's see, Ed, Chuck, and apologize if I missed this is the prepped remarks. But could you give just a little more color on that commercial relationship, the C&I loan that was moved to nonaccrual status during the quarter? I guess to the extent that you can, things like either industry, size of the total relationship; how much, if any, it's been charged down; and the outlook for it?

You got it, Ed?

Go ahead, Chuck. You were going to say something?

Go ahead.

No. Why don't we come back to that? Why don't you go on to a couple other questions? Let me pull that out.

Okay. And then you gave some good color on the margin, which I appreciate. It sounds like, if anything, as others might expect, the main pressure point for this year and the quarter would be the challenging long end of the curve. But Ed, as you look at things, obviously remix of the acquired portfolios has been a big helpful factor, and then of course you'll have TAAs. Just as you look into the full year, what do you see as the main opportunities and main pressure points on the core margin?

Sure. Yes, I think you hit on it, Scott. The remix on the balance sheet – that continues. I put a couple of those very positive ratios on there. Not too long ago, we were up over 35% securities to assets, and now at the end of the year at 28%. So I think that flowing into the loan portfolio was a big opportunity for us with the acquisitions that we took advantage of. As we move ahead to 2015, I see more of the same. I think we'll have opportunity with NB&T coming on to continue that remix a bit. I commented down to about 25% to total assets by the end of the year in the securities portfolio, so that's a positive sign. And I think with the potential pressures in the marketplace, reducing the size of our investment portfolio is a big plus in that regard. What I mean by that is the low interest rate environment, the flattening of the yield curve; I think if that flattening of the yield curve is sustained down below that 1.8% on a 10-year to 1.9%, we could potentially see some pressure on the margin as a result of that, prepayment speeds possibly increasing. Even though we believe that we would have a bit of a burnout factor on those prepayments going into next year, there's still the prospects of that putting some pressure on the margin next year, or for 2015.

Okay, perfect. I appreciate that. And then maybe, Chuck, had a couple of questions for you. Just one, if you could comment as to the organic growth rates. Just in Ohio, specifically, you've had some countervailing comments with some pretty bullish, and 1 or 2 of the larger regionals pulling back, suggesting that pricing and competition has gotten kind of rough. As you look forward, and within the scope of the guidance that you gave, 7% to 9% end-of-period growth, where do you see the biggest opportunities? And what kind of things are you seeing from a pricing and competitive standpoint?

We are more optimistic now than I was 90 days ago on both the commercial side and the consumer side. On the commercial side, we ended the year slightly higher than I would've guessed. Our pipeline remains robust. Yes, the competition has been frothy for many, many quarters now. And you've got to pick your shots, and walk away when it doesn't make sense. But if you look at our production levels the last few years, they've been really strong. And what's allowed the portfolio to start to grow faster is the stabilization of the core customer base as we have remixed a little bit, walking away from some relationships that didn't have the credit quality characteristics that we desired for the long-term. On the consumer side, I'm actually more optimistic, again, that I was 90 days ago. We're seeing some greater signs of mortgage activity than I would have expected. A little bit of a – I wouldn't call it a refinance boom – but we are seeing activity. So I wouldn't be surprised right now to see us beat both of them. And – which I'm pleased at. So the competition – as long as we stay to our own disciplines, avoid the crazy pricing, we won't deviate on structure, we are pretty comfortable that we can exceed some of those. At least, right now, I feel we'll be in the high end of those ranges, if not potentially above them.

Okay. That's great color and I appreciate it. One last question for you, Chuck. So it sounds like you guys are still interested in transactions. And I appreciate the color on where, and size, and everything. But maybe within the scope of the conversations that you have had, if you can give any anecdotal color on how things are feeling from a pricing standpoint, competition for good deals, things like that.

Obviously the trends in the pricing have been increasing over time. We continue to have many conversations on negotiated deals. I think folks are looking at us as a preferred partner. And I think that you'll see us be able to do deals where potentially people aren't grabbing the last penny, but trying to buy the appreciation in the stock because they believe in what and how we're doing and want to be a part of that. So, competition for deals? We're not seeing a whole ton of books. And most of the – I think we've been more active than most in approaching people and having conversations. So, yes, I'm optimistic that we'll be able to continue to do deals that strengthen the franchise and give us good returns.

Okay, perfect. Thanks.

Scott, just wanted to follow up with you on your first question.

Perfect, thank you.

Regarding the nonaccrual loan, yes. It was 1 item, 1 loan, about $1.2 million, I believe, is what that loan was. And we had a reserve – we set up a reserve on it for about $300,000. So, very isolated.

Okay.

I'll confess, I feel better. When you said 1 loan shift, I was thinking something sizable. And I had no recollection of anything sizable. Not that $1.2 million isn't meaningful, but I was sitting here in beautiful Phoenix, Arizona, wondering what I was missing.

Okay, perfect. Didn't mean to cause any palpitations. Yes, just was curious, since you guys had called it out in the release. But no, that's good. And I appreciate the color, Ed.

Our next question will come from Chris McGratty of KBW. Please go ahead.

Hey. Good morning, guys.

Good morning.

Good morning, Chris.

Ed, maybe you can help me on the expense outlook. I guess where your efficiency ratio stands today versus the guidance that you're giving a couple quarters out, that's a sizable improvement, going from 70 to call it sub-65. Can you help me with maybe the absolute ballpark of expense run rates, maybe for the first half of the year, once the deal comes on, and once the deals – it sounds like all the cost saves will be in by Q2. Maybe that's a good starting point. Thanks.

Yes, sure. I'd like to go off of it from an efficiency ratio standpoint. So we ended up the year and the fourth quarter, and actually for the full year, right around – a little over 69% as an efficiency ratio. And I would expect it to, in the first and second quarter, start to move down a little bit. And then with all the cost take-outs – and I think we were estimating around 33% cost take-out on the NB&T transaction, which is roughly 33% of their operating expenses – to come out. And so that would clear the path, then, to bring us down under that 65% in the second half of the year. So, you're going to see it bounce around a little bit from the third to the fourth quarter into the first. We're still very much in the process of integrating the acquisitions that we put on in the second half of the year. So there is some noise around the numbers, so you can expect that moving through the first and the second quarter.

Just a comment on that from my perspective. Feel free to go back and look at the script. I know that relative to consensus we're off on the expenses, particularly in this quarter. But it's not – we're not off from what we said. So that reduction in that expense rate – you might see some of it in the first and second quarter, but not a whole lot. You will see it kind of fall off. And the assumption that Ed and I are making in these comments is that we don't have another deal, because obviously we'll have the more one-time cost. We'll do another deal if there's an opportunity that makes sense, but we have a great deal of confidence in what we're doing. We really like our organic growth rates. And you top on the acquisitions, and you take out these expense numbers, it gets very powerful, very quick. So we'll see what the third and fourth quarter looks like. And hopefully, from my perspective, we'll have another opportunity to improve the franchise along the way.

Great. And maybe one follow-up. I'm a little bit surprised, Chuck, with the comments about looking for more deals, given the traction you've gotten. You exceeded your loan growth expectations for the year. You're getting the – you've got a lot of integrations underway, and a set to be in the first half of the year. Is there any particular reason that M&A is still as high priority as it appears to be, given what the improving Midwest economy may lend to by itself, on a stand-alone basis?

We see them as separate issues. If we see the organic growth slow, if we see the quality of our execution suffering, if we see the differential in the fee income percentage get much lower than our stated long-term targets, we'll slow the M&A. We have made the investments in operations, in talent, in people, to execute, and to be able to do these things effectively. We want to utilize the capacity that we've built to do that. We think this is a pretty unique time. You look at the economics between banks at the $5 billion to $10 billion rate versus those at the $2 billion to $3 billion rate, it's compelling. You look at the expense reduction possibilities we picked up from the deals that we've done, it's 5%, 6%, in terms of efficiency ratio. We've done some modeling that we could see ourselves at potentially $5 billion or $6 billion a couple years down the road, and an efficiency ratio potentially approaching the 50s. It's not impossible. So, we think that there are some economies of scale. We know that there's opportunities in the market for us to add franchises that make sense for us. And, frankly, we don't want to miss the opportunity. So that's what our thinking is.

Okay. Understood, thank you. One last one. What's the – what kind of a tax rate, Ed, should we be using for the year, effectively?

Say, 31% to 31.5% is a reasonable rate.

All right. Thank you very much.

[Operator Instructions]. The next question will come from Rick Weiss of Boenning Scattergood. Please go ahead.

Okay, thank you. Good morning.

Good morning.

Good morning, Rick.

I was wondering, could you talk a little bit about the deposit gathering? First, with the acquisitions, have you been retaining the deposits of the acquired banks? And also, going forward, how do you expect to grow the core deposits?

We've done a pretty good job retaining the deposits of the acquisitions. In the script, moving off of the acquisitions, we mentioned that we grew our DDA 4.5%, and that excludes acquisitions. And that's really our focus: getting our branches, getting our commercial bankers to get those DDA accounts. Now, that's not dollar percent growth – I think the deposits had to go up like 2% last year – but the number of accounts. We keep expanding. I think the year before, in 2013, we did 3.7% DDA growth. Keep in mind that DDAs are decreasing nationally. Keep in mind that our markets are not known for their growth. So we're really proud of our ability to move consumers, move businesses from the guy across the street to our place, because that's the only way you grow share here. And, clearly, if rates go up at some point in time, money will flow out of non-interest-bearing. I think our non-interest-bearing is at 25% of deposits now. But if we can gather DDAs both through acquisition and through the effectiveness of our salesforce, we are very, very optimistic about the long-term viability of the franchise because our loan-to-deposit ratio continues to increase. It is still in a modest 84%, but much higher than it was a few years ago. But at some point, we're all going to be fighting for deposits, a couple of years down the line.

Are you getting these accounts – not the acquisition ones – through different kinds of pricing compared to…

I'm really, really, really psyched about it. We're not giving them away; we are not marketing. Our proposition is sitting down with a customer, trying to understand what their issues are. They generally fall in a couple of buckets. It's usually some kind of debt consolidation conversation, or it's usually some kind of investment, savings, retirement conversation. And those conversations, when people hear something that makes sense to them – and we tell our people to treat the customer like family, and get them – try to help them; try to help them overcome their concerns and issues, or reach their goals. And we get a lot of referral business. We're getting more and more bank-at-work type of DDA openings. I just think that we are not shoving product down the client's throat. We have a little bit of a different proposition. While I boast about the 5.58% cross-sell versus 5.1% a year ago, the truth of the matter is nobody in our Company is measured on their cross-sell rate. The branch managers are not measured on cross-sell rate. It's an outcome of a set of behaviors that is, I believe, a better way of treating customers.

All right. And then, so – and you are able to cross sell a certain percentage of the new depositors, I guess?

Absolutely, absolutely. The banks we acquire generally do not have investments. The banks we acquire generally do not have insurance capabilities. We have a robust suite of electronic services. We have a lot to offer.

Okay.

What's really cool to see – if you don't mind the add-on – right now, we're training NB&T folks, and we started training the acquisitions before the deal is closed. We actually got some of the employees of the bank tweeting that they can't wait for March for the conversion. They're excited about what it is that they can bring to the client. So, I'm optimistic that you'll see better results over time.

Okay, great. Let me ask you, [with a] investment securities decreasing as a percentage, are you letting those roll off, or are you actively selling some of the portfolio?

It's really the – some of it is rolling into loan growth, to basically fund loan growth. And then, of course, we evaluate with the acquisitions, Rick. We evaluate the portfolio when we bring it across, determine whether or not it requires any restructuring from there. So I'd say it could be a combination of things.

Okay. And then 1 final question. Just if you could talk a little bit about big picture of the economy. Has it been changing at all as a result of falling oil prices in any of your markets? Is that going to have an impact?

It will have an impact, and it will be balanced. Certainly, we're in the middle of the shale play in the eastern portion of our market. You see a decrease in leasing, going roughly from $6,000 an acre to $3,000 an acre. So you see some slowdown in activity. But long-term, the activity is going to continue because prices will rebound at some point. But I'm very optimistic about the free cash flow in terms of gas prices in our area. Our average income, household incomes, are lower than the country by a meaningful percentage. And it helps our people more than it would where average incomes are much higher. So, net-net, I think it's a positive. We have a very small percentage, a little over 2% of our loan portfolio, energy-related. We have done a thorough review on all those credits, and remain optimistic. Most of what we're dealing with, or all of what we're dealing with, are suppliers to the oil industry, kind of secondary services. So we feel good about that. Unemployment rates are low. And for the most part, our area is doing better than it's done in generations.

Okay, that's all I have. Thank you very much.

The next question will come from Daniel Cardenas of Raymond James. Please go ahead.

Good morning, guys.

Good morning.

Good morning, Dan.

Just a couple quick questions here. In terms of one-time charges related to the North Akron, were those all taken in Q4? Or could we see a little bit of a bleed in the first quarter?

I would say that the very large majority of those were taken in the fourth quarter. Obviously, there could be a little bit of bleed, but it wouldn't be anything material.

Okay. And then to the degree that you can comment – I'm sure you've taken a look at the fourth-quarter numbers for NB&T. Are those pretty much in line with your expectations? Any surprises there?

Certainly in the neighborhood. Yes.

Good. And then maybe if you could remind me, just what is the size of your auto portfolio? And then maybe some comments on the overall health of that portfolio, and whether or not you see any weakness, or we could expect to see an increase in reserve levels on it?

We feel good about it. It has certainly been a source of growth for us. As it has grown, certainly the vintage analysis, the aging of what we've done, has been positive. We finished the year with an indirect portfolio of $115 million. Now, that is primarily auto, but there are a few other things in it, like motorcycles. It's up meaningfully from $76 million in the fourth quarter. It's a high-quality portfolio. The percentage of loans that we're underwriting that are sub-640 is decreasing over time, and the average credit score is increasing, so we feel good about it. And I think some of the comments I made about the gas prices will help cash flow. And our average credit score in the fourth quarter was 720. Now, that's higher than what most of our quarters have been. I think for the year, we were like 708. But we think the trends are very favorable.

Is there any one part of your footprint that is showing better growth than the others, or is it just footprint-wide?

No. We've been in this business for a long time. Historically, most of the dealers that we do are within a 50-mile radius of Marietta. With the NB&T acquisition, we have opportunities there. And we've also have added talent over the last 12 months to help us build relationships with dealers in the Huntington-Ashland area, as well as Akron and Cleveland. So, yes, we think that we can continue to grow this business in a prudent fashion.

Okay, great, great. And then last question. How was the non-bank deal pipeline looking for you guys? I know you're always looking to build on your fees…

Well, to be truthful with you, it frustrates the living bejesus out of me. It's a lot easier to do the bank deals than it is to do the non-bank deals. We have a couple conversations going on with some small insurance agencies, some that may give us some capability, but frankly aren't sizable enough to get you guys excited. We do have some conversations on the investment side going with some firms that are sizable. But we've been down the altar a couple of times, and I keep – I can't get the deal done, and they're different. The insurance guys are pragmatic. They understand earn-out. They understand that we're not going to buy the company and have them walk away. The investment guys, in contrast, are – perhaps it's more of an emotional issue to them. And I'm optimistic we'll get something done. But it's certainly – I've not done a good job in the last 12 to 18 months, despite a great deal of time and energy put into it.

Okay, fair enough. All right, thanks, guys.

At this time there are no further questions. Sir, do you have any closing remarks?

Yes. Just let me 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 great day.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.