Peoples Bancorp Inc (PEBO) 2006 Q1 法說會逐字稿

Good morning, and welcome to Peoples Bancorp's conference call. My name is Dee, 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, 2006.

Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers, remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). This call is also being recorded. If you object to the recording, please disconnect at this time.

Please be advised that the commentary on this call may contain projections or other forward-looking statements regarding future events or People'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 interest rate environment; the effect of federal and/or state banking; insurance and tax regulations; the effect of technological changes; the effect of economic conditions; the impact of competitive products and pricing; and other risks detailed in People's Securities and Exchange Commission filing.

Although management believes the expectations in this these forward-looking statements are based on reasonable assumptions within the bounds of management's knowledge of People's business and operations, it is possible that actual results may differ materially from these projections. People disclaims any responsibility to update these forward-looking statements.

Peoples' first-quarter 2006 earnings statement was released this morning and is available at PeoplesBancorp.com under the Investor Relations section on the left-hand side of People's homepage.

This call will include about 20 minutes of prepared commentary followed by a question-and-answer period, which I will facilitate. And archived webcast of this call will be available on PeoplesBancorp.com.

Peoples Bancorp participants in today's call will be Mark Bradley, President and Chief Executive Officer, and Jack Conlon, Chief Financial Officer. Both gentlemen will be available for questions following opening statements.

Mr. Bradley, you may begin your conference.

Thank you. Good morning, and welcome to those joining us on the phone and on the Internet. We appreciate your interest in Peoples Bancorp. Today, Peoples Bancorp reported earnings per share of $0.56 per diluted share on net income of $5.9 million for the quarter ended March 31, 2006. The results exceeded our expectations, and represent a 27% increase over the first quarter of 2005. As a result of the higher net income, return on average assets and average equity also showed improvement, with ROA at 1.30% and ROE of 13%.

Compared to the same period last year, our stronger start in 2006 is attributable to the continued strength in asset quality, and therefore, lower loan loss provision; higher levels of noninterest income, which were due primarily to higher property and casualty insurance revenues from performance-based commission income, better known as contingency income, which is earned on an annual basis; and finally, enhanced net interest margin and higher net interest income.

First, I would like to focus on what continues to be a highlight -- asset quality. At March 31, 2006 total nonperforming assets were just 0.33% of total assets, down slightly from year-end 2005. Total nonperforming loans of $6 million represents a low 0.56% of the $1.1 billion loan portfolio at quarter end. The allowance for loan losses was 243% of total nonperforming loans at the end of the first quarter of 2006 compared to 225% three months ago. Net charge-offs of $316,000 for the current quarter were significantly lower than the $550,000 reported in the fourth quarter of last year and $499,000 in the first quarter of 2005. As a result of these and other factors, our provision for loan losses, including losses from our overdraft protection program, was just $268,000 during the current quarter. This was a reduction of $673,000 from the first quarter of 2005 which included a $500,000 specific reserve for an impaired commercial credit relationship.

Our asset quality is a direct reflection of the approach we've taken in growing our loan portfolio -- use sound underwriting practices to ensure good credit quality. We believe our team of lenders is best in class, and continued to deliver quality loans that allow us to execute on our strategy of balancing steady growth with strong asset quality.

In addition, we have a number of controls in place to manage losses from our overdraft protection program. These controls include new, tougher account screening, as well as active management of problem accounts within the retail offices. Although we expect our asset quality to remain strong, it is also prudent to expect that our provision for loan losses may return to more historic levels for the rest of 2006.

Next, I'd like to touch on another driver of first-quarter earnings growth, higher non-interest income, which totaled $8.1 million in the first quarter, an increase of 15% over the fourth quarter of 2005 and 14% over the prior year's first quarter. A major factor in the increase was higher income from our nontraditional banking businesses.

We earned insurance contingency income of just over $1 million during the quarter compared to about $500,000 in last year's first quarter, due primarily to a lower customer loss experienced at our insurance agency and also from combining the books of business of our acquired agencies at certain insurance carriers, which led to more economies of scale, and therefore, larger potential income generation from contingency revenue.

Also we saw year-over-year growth in regular revenues from property and casualty insurance, brokerage, and fiduciary activities. Total deposit account service charges were down slightly from the fourth quarter 2005 due to seasonality, but improved by 8% over last year's first quarter, due primarily to a $2 per item increase in overdraft fees implemented in January of this year.

We are steadily progressing on our strategy to diversify our revenues and become less dependent on net interest income, and therefore, the interest rate environment. Our Peoples Insurance Agency has become more integrated into our universal financial services offering, and we're working together to serve all of our customers' financial needs. We have an active internal referral system among our banking and nontraditional lines of business which allows us to capitalize on cross-sell opportunities with our current clients.

We also have been successful in tracking new customers with the help of our deposit acquisition program launched in late 2005, which is driven by a repetitive direct-mail campaign and free gifts. The number of checking accounts has grown by 7% over the prior year quarter end, with a 12% annualized growth rates during the first quarter of 2006.

The growth in our checking account base allows us more opportunities for fee income and additional cross-sales while providing Peoples with an account that is typically a lower-cost funding source. Early program results indicate a cross-sell ratio of over 20% to total checking accounts opened since the beginning of the program in October 2005, which means that for every five checking accounts opened, we also booked a loan or other product.

We see continued opportunities to modestly grow non-interest revenues throughout 2006, with the exception of insurance contingency revenue, which is normally paid during the first quarter of the year.

Shifting gears to a discussion of the final driver of improved earnings, is net interest income and improved net interest margin. Peoples reported net interest income of $13.5 million in the first quarter of 2006, which was equal to the fourth quarter of 2005 despite a slight decrease in average earning assets. Net interest margin was 3.40% for the quarter, which is a 1 basis point increase compared to the fourth quarter of 2005 and 13 basis points better than the first quarter of 2005. The key to improved net interest margin was enhanced asset yields by 64 basis points compared to first quarter '05 versus cost of interest-bearing liabilities increasing only 59 basis points. Plus we have seen modest growth in non-interest-bearing deposit accounts.

One of our major strategic initiatives for 2006 is to change our balance sheet mix as opportunities arise to do so. We have a goal of increasing our proportion of loans to total assets and reducing our dependence on wholesale borrowing sources. Part of this strategy includes using investment cash flows to fund loan growth or to pay down borrowings, when appropriate, from an interest rate risk management perspective. This strategy should result in the return of our balance sheet to a more typical mix.

Period-end gross loan balances rose by $8 million and total investment balances declined slightly from year end 2005. Much of the net loan growth was realized late in the first quarter. As expected, higher-than-normal loan payoffs tempered loan growth for the quarter, which did not allow us to use a higher portion of our investment cash flows to aid in our strategy to reduce our investment portfolio to fund loans. The remainder of the cash flows from the investment portfolio was reinvested at current, and sometimes better, market rates.

The largest portions of loan growth for the quarter came from business loans and indirect personal loans, growing $10 million and $3 million, respectively. As mentioned earlier, average earning assets declined slightly from the prior quarter; however, total interest income grew by $368,000 due to improved asset yields.

On the loan side, we continue to see opportunities to make new loans, especially in our more vibrant markets in central Ohio. Our newest loan production office in Westerville, Ohio, just outside Columbus, led all offices during the first quarter of 2006 with over $11 million in average loan growth over the linked quarter.

In accordance with our balance sheet strategy, we will continue to use investment cash flows to fund new loan demand as warranted during the remainder of 2006 and beyond as appropriate. In the next three to six months, we still see the potential for larger-than-normal commercial loan payoffs, so net loan growth will be challenged.

On the liability side of the balance sheet, we experienced good deposit growth during the first quarter of 2006. Period end deposit balances grew $50 million or 5% over the linked quarter, while total borrowings decreased by $47 million. Most of the deposit growth was in interest-bearing deposit; however, non-interest-bearing deposits, which continue to be a primary focus, increased more than $4 million.

Fierce competition in our markets continues to challenge our ability to grow core deposits, as most of our deposit growth in the first quarter was short-term CDs. We also increased our brokerage CDs by $18 million in the first quarter, and now have $60 million of brokerage CDs on the books, as this funding source has proven to be an efficient and cost-effective method of funding earning assets. Due to the increase in short-term rates and the expected upward repricing of certain wholesale funding sources during the first quarter, the weighted average cost of interest-bearing liabilities increased 21 basis points over the linked quarter to 3.34%.

We are optimistic about the prospects of growing core deposits during the rest the year as we continue with our deposit acquisition program and also open a new retail banking office in Lancaster, Ohio. This additional central Ohio office is scheduled to open next month, giving us the ability to better serve our existing loan customers as well as being able to offer Peoples comprehensive portfolio of banking products to new customers.

In regards to our thoughts for second-quarter net interest margin, we expect that our ability to maintain net interest margin in the near term will be challenged by the repricing of existing funding sources, pricing competition, and the flat yield curve. Our ability to change our balance sheet mix could mitigate these factors, but it has become tougher to lag deposit price increases. And in recent weeks, we have taken steps to increase our deposit pricing in response to competitive pressure. Therefore, we look for the net interest margin to compress slightly in the second quarter and be in the mid 3.30s with similar earning asset averages as seen in the first quarter of 2006.

Now to touch on operating expenses for the first quarter -- total non-interest expense increased 2.5% compared to the same quarter last year. Expense growth was mainly due to normal annual base salary increases, higher incentive plan accrual due to increased earnings, and $124,000 of compensation expense related to the new stock option accounting rules on stock options granted during the first quarter of 2006. Also Peoples Bank, our subsidiary, contributed $125,000 to the Peoples Bancorp Foundation, which is higher than a typical quarter's contribution of 30 to $50,000. The Peoples Bancorp Foundation continues to serve charitable organizations in our markets.

Intangible asset amortization expense declined by $64,000 from last quarter, meaning the fourth quarter of 2005, due to the slowing of the accelerated method of recognizing amortization, and will continue to modestly decline throughout 2006.

We anticipate total operating expenses to remain relatively stable during the rest of 2006, but will continue to look for opportunities to reduce costs when efficiencies can be gained.

And finally, please note that in 2006, our effective income tax rate will approximate 28.4%, up slightly from last year's 27.1%. The higher effective tax rate is due to a higher level of pre-tax income and lower tax credits available in 2006 compared to 2005.

Looking back on the first quarter of 2006, we had a strong quarter in spite of a challenging interest rate environment in competition for loans and deposits in all of our markets. The larger-than-expected revenues generated from annual insurance contingency income, which are unpredictable, were a pleasant surprise. Loan growth was modest, but net interest margin and net interest income improved due to earning asset yields improving more than increase in rates of interest-bearing liabilities. Increases in noninterest income from our insurance and investment business lines, as well as year-over-year growth in account service charge revenue, also added to our earnings growth.

Continued strength in asset quality kept our provision for loan losses at historically low levels, while operating expenses remained in check. We continue to see opportunities to make new loans in markets, although we already know some commercial loan payoffs will occur in mid 2006 as customers take their loans to the capital markets for more attractive long-term fixed rate pricing. Consequently, we think loan growth will continue to be challenged in the coming months.

In the second quarter of 2006, we expect non-interest income, excluding insurance contingency income, to modestly increase due to higher fee income on the banking side plus good prospects for growth on the insurance and investment side. Loan loss provision could tick upward as credit costs return to more normal historical levels. We also expect second quarter 2006 operating expense levels to be similar to the first quarter.

While we expect challenges for the rest of '06 due to the flat yield curve and no near-term deposits in borrowings repricings, we look for full-year earnings in 2006 to be on the higher end of our $2.04 to $2.09 earnings per share range provided at the beginning of the year.

Our management team is focused on creating lasting shareholder value. We will continue to manage Peoples Bancorp to achieve long-term success for all of our stakeholders, and make the best of a challenging interest rate environment.

This concludes our commentary, and we will now open the call for questions. Once again, this is Mark Bradley. And joining me in the Q&A will be Jack Conlon, Chief Financial Officer. I will now turn the call back into the hands of our call facilitator and operator, who will once again explain the Q&A session and the steps necessary to ask your questions. Thank you.

(OPERATOR INSTRUCTIONS) Steven Alexopoulos, Sandler O'Neill.

I am curious, following the big increase we saw in the insurance and investment commissions -- now am I understanding this right? Is that sustainable going into the rest of the year, or are you going to lose 1 million roughly in the insurance contingency fees next quarter?

Steve, this is Jack Conlon. And I think your question -- and I want make sure that I understand it -- is, you wonder if contingency income which we recognized in the first quarter can be sustained quarter after quarter through the balance of this year?

And the real answer to that is no. It primarily is a first-quarter event. It was this year, and it was last year. We may see a little bit more in the second quarter. But it would be very nominal.

And that was $1 million this quarter?

It was 1 million, that is correct.

Okay. Could you run through again the increase in the salary and benefits quarter to quarter? The increase was a little bigger than I was thinking.

And secondly, how are you thinking about expenses overall with balancing the need to invest in the franchise for the rest of the year? I know you said you were looking for stable expenses, but how are you balancing that with the need to open new offices and invest in the franchise?

Those are good questions, Steve. This is Mark. If you look at first quarter to fourth quarter -- so if you look at the linked quarter, the salaries and benefits are up. And there are a few reasons why. Number one, the fourth quarter of 2005, we had a much lower medical insurance expense. We are self-insured, and we had a very good results in 2005. So that skewed that number down a little bit.

Then in the first quarter, you get the annual what we call merit increases which add a few percentage points to base salaries. And then finally with the higher earnings, we had a higher incentive accrual for year-end bonus-type payments. So that is a timing issue there. So the combination of those would have caused that increase that you're asking about.

Your second question about continuing to invest in our future -- obviously, we are doing exactly that when we open this Lancaster office next month. We think our expenses are -- we think we have a good efficiency ratio. We're not done yet. But we do stay long-term focused and look for areas of investment such as the Lancaster market. And we have a couple of other places where we are looking.

We're also continuing to invest in new technology such as Internet banking. And we are actually thinking of other consultants to maybe spruce up our deposit offering.

So the moral of the story is we are continuing to invest in the future. We're just really making sure if we don't have to spend the money on other items, we are not.

When you refer to stable expenses, are you implying basically flat with current level?

That is our goal for 2006. We would not expect expenses to go much higher than what you saw in the first quarter of 2006.

Okay. Just a final question. Looking at the commercial loan growth, it looks like the C&I loans were up about $47 million, right, from quarter to quarter? What drove that?

Well, the numbers sound odd to me. So I'm now looking it up, Steve. This is Mark.

I am looking at $182.8 million this quarter and last quarter was 136.3 -- a 34% increase.

I think some of that, Steve, has to do with some reclassifications we made internally on our general ledger. I think it's not an indication of the actual loan growth in those categories. It would probably be a change between the mortgage line item and the commercial other line item that you see there in earnings release.

So I think that's an internal coding issue as we try to refine our information for the tens of different ways that our different bank examiners want to see it.

Is there any way for us to get a sense for how the commercial loan growth was in the quarter?

Yes, we alluded to that rather quickly in our prepared comments. Commercial loans were up $10 million in the quarter. And then indirect was up a little bit. The offset, obviously, would be -- we continue to see smallish reductions in our real estate and our Equiline portfolio. We are still selling a lot of those loans in the secondary market. So what we pick up in the commercial and indirect, some of it is sliding out the back door on the real estate side on our balance sheet.

(OPERATOR INSTRUCTIONS) David Darst, FTN Midwest Securities Corporation.

You commented on your new location in Westerville (multiple speakers) loan growth there was 11 million?

On average for the quarter. That office continues to add loans fairly quickly, and they're usually sizable loans. I haven't looked at the numbers lately, but I would say just that office is around $40 million already in less than 18 months. So it really has an impact on our quarterly averages as larger loans are added through that office.

Are you still there, David?

Sir, it looks like he came out of the queue.

Okay. David, if you can get back in the queue, we will answer all of your questions that you may have.

Mr. Darst, you're back in queue.

Okay, thank you. Could you comment on what your originations were if you broke them out between the Marietta market versus Columbus and central Ohio?

That is a good question, David. I don't know if we have that at our fingertips here, Jack -- it probably tilts more toward the central Ohio markets.

Yes, we really don't have those numbers right at our fingertips, David. And this is Jack Conlon. It definitely would be significantly more coming from that Columbus area and also from the Lancaster area. Marietta -- we get a reasonable amount of commercial loan growth but it is nothing like those dynamic markets up in central Ohio.

Okay, what about the lending team and the structure of your commercial lenders? Can you give us a sense of where they're based?

Yes, the lending management is housed right here in the Marietta area. But we have different senior vice presidents that are in the central Ohio and eastern Ohio area. From there, we have different lenders reporting up through them. So they are actually pretty well dispersed over our market.

Currently, we have several lenders that actually are housed in that central Ohio markets. So probably up to a third of our commercial lending staff is in that central Ohio market, which is one of the reasons we are seeing a lot of growth and opportunity out of that area.

So it's really a flat, I would call it, management group. We put as much decision-making and underwriting in their hands as possible, which is one of the reasons we can quickly turn deals around. But that is probably one of the main reasons we're seeing so much production out of that area, is we have a third of our lenders working that market.

Okay. And do you expect to fund that growth [with] securities -- cash flows for the year? So does that leave you at below market from your deposit pricing structures?

David, this is Jack Conlon again. What we want to do is definitely decrease the investment portfolio. So we're going to use a significant amount of the cash flow that will roll off from the investments. Obviously, we're also going to try to grow deposits -- and I think I'm responding to your question, which was kind of two-sided. We want to grow those. Those are really going to hopefully replace borrowings that we have used in the past.

So the answer, David, is both. The investment portfolio -- obviously, I would like to see it roll right into lending. But we don't want to rely on wholesale borrowing sources for the rest of our careers here. So we are also looking to grow deposits as well. So you actually see a change on both sides of our balance sheet. That's our goal for the year and for the next year and the year after that until we get back to a more typical-looking company.

Okay. And then can you give us any sort of sense of what the dollar amount of payoffs you're expecting is?

In the commercial loan portfolio?

Yes.

It moves around, but it's in the 5 -- it could be up to 15 million. There's another even larger credit that's floating around out there that would probably be paid off. So in the next three to six months, it could be up to 20 million.

But we also have a good pipeline out there where we're seeing deals and getting deals done. So that's why loan growth this year will be challenged. I think holding our own will be something we can do. (multiple speakers) But they are a little unpredictable. You hear rumors that we will be paid off, but it doesn't always happen. And then you have ones that come out of the blue. So it's truly an unpredictable thing to talk about.

So given securities -- cash flows funding what is going to be a relatively weak organic loan growth, we're looking at pretty stable to maybe 1 to 3% increase in average earning assets for the year?

Yes, we're actually probably modeling a flat earning asset. We want to change the mix. We have leveraged our equity pretty strongly in the last few years. We don't want to leverage it to the point where we can't do any acquisitions that presented. So probably we model our earning asset base to stay relatively flat -- just change the mix.

At this time, there are no further questions. Gentlemen, 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 and have a good day.

This will conclude today's conference call. You may disconnect your lines at this times.