Peoples Bancorp Inc (PEBO) 2008 Q2 法說會逐字稿

Good morning and welcome to Peoples Bancorp's conference call. My name is Ryan 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 June 30, 2008. Please be advised 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 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. The statements in this call which are not historical fact are forward-looking statements that 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 regulation; the effects of technological changes; the effect of economic conditions; the impact of competitive products and pricing; 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 bounds 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' second-quarter 2008 earnings release was issued this morning and is available at PeoplesBancorp.com. This call will include about 20 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 Peoples Bancorp.com.

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

Mr. Bradley, you may begin your conference.

Thank you. Good morning and welcome to Peoples Bancorp's conference call. Today Peoples Bancorp reported second-quarter 2008 net income of $2 million or $0.19 per diluted share compared to $5.3 million or $0.51 per diluted share from last year's second quarter. Peoples' second-quarter results included higher net interest income, stronger net interest margin, positive deposit growth, and maintenance of our well-capitalized equity position. However, as we disclosed last week in a Form 8-K filing, earnings were negatively impacted by a higher provision for loan losses related to a single credit relationship within our commercial loan portfolio.

Second-quarter earnings included an additional provision for loan losses of $4.5 million or $0.28 per share after tax related to a single commercial real estate loan of $12.6 million which was identified as impaired as of June 30, 2008. This specific loan was originated in 2006 when an Ohio-based customer had a $14.8 million real estate construction project in the Tampa, Florida area. The purpose of the loan was to finance the purchase of an apartment complex and subsequent conversion of the apartments to condominium units. When the loan was originated, the project had an appraised value on an as completed basis which assumes the planned renovations would be completed of approximately $21 million or a loan to value ratio of 70%.

In the second quarter 2008, this loan was exhibiting signs of impairment as the housing market in Florida continued to deteriorate and the liquidity of the borrower became strained. Management's review of updated information received on this loan and discussions with the borrower indicated that the borrower may be unable to meet its contractual payment obligations; therefore, the loan was placed on nonaccrual status as of June 30.

Through management's review of a new appraisal received in mid July, we determined the value of the property had declined substantially which caused the loan to be undercollateralized. At that point, the loan was determined to be impaired and charged down to fair value of the collateral of $6.5 million, less the estimated selling cost of $300,000 resulting in an adjusted loan balance of $6.2 million. The allowance for loan losses at June 30, which included a general reserve of approximately $1.8 million on the loan, was therefore impacted by a charge-off of $6.4 million.

Additionally the second-quarter provision for loan losses was increased by $4.5 million and we recorded interest reversals of approximately $170,000 as a result of placing the loan on nonaccrual status. We have considered the status of this loan in our quarterly loan-loss reserve analysis and believe the remaining balance to be adequately collateralized. However, there can be no assurance that the allowance for loan losses will be sufficient to cover all future possible losses. We were proactive and moved quickly and aggressively to address the situation rather than allowing the uncertainty to linger.

Some good news regarding this loan is that the property is in good condition and sales of the condo units securing our loan have recently increased. The proceeds from the sales come directly to Peoples Bancorp. There is capable management on-site at the project. The apartments provide some positive monthly cash flow as well. We will soon be communicating with the borrowing guarantors to discuss next steps.

As I mentioned, this particular loan was related to a property based in Florida, which is outside of our primary market areas of Ohio, West Virginia, and Kentucky. Our other loan exposure attributable to Florida real estate is limited to three unrelated relationships with an aggregate principal balance of $2.2 million at June 30, 2008. These three loans are performing in accordance with their original terms.

Our real estate loans outside our three state market area total $39 million at June 30 with our largest exposure other than collateral in Florida being in Arizona with $10 million with all other markets being less than $5 million each in exposure. The majority of the Arizona properties are retail and office centers in the Phoenix area, securing loans to an experienced Ohio-based real estate developer.

We will continue to monitor and proactively address our entire loan portfolio in light of changing market and borrower conditions. Our consumer loans, which include one to four family real estate and personal loans continue to have reasonable delinquency levels that are not materially different than our experience over the last few quarters and even slightly improved in certain categories compared to year-end 2007.

At June 30, 2008, our allowance for loan losses stood at 1.38% of total loans which when combined with our capital position gives us strength to weather this economic storm.

Also on a positive note, bright spots for the second quarter were net interest income and net interest margin which were $14.9 million and 3.61% respectively. Net interest income was up 12% and net interest margin increased a healthy 30 basis points over last year's second quarter and was up 10 basis points over the linked-quarter. The major driver of the increases has been a steady reduction in our cost of funding that has outpaced declines in earning asset yields.

Our second-quarter cost of interest-bearing liabilities was down 39 basis points over the linked-quarter to 3.13% due in large part to recent reductions in short-term interest rates along with decreases of certain deposit rates and normal repricing of maturing liabilities to lower current market rates. Our cost of funding also benefited from strong deposit growth during the second quarter as period end total deposit balances were up 10% annualized over the linked quarter.

On the other side of the balance sheet, our earning asset yield was 6.36% for the second quarter, down just 25 basis points from the linked quarter. Earning asset yields benefited from the net impact of $226,000 of loan prepayment fees offset by reduced interest income from nonaccrual loans. The net impact of these two items was an increase of 5 basis points of net interest margin.

In comparison, first-quarter '08 net interest income included net prepayment fees of $126,000, which added 3 basis points to the margin while second-quarter 2007 net interest income and margin were reduced by $309,000 and 7 basis points respectively due to loan and investment interest reductions.

Second-quarter net interest income and margin exceeded our expectations due to wider credit spreads, maintaining asset yields and positive deposit growth, lowering funding costs. However, we expect net interest margin to be somewhat pressured in the near-term by asset yields remaining somewhat flat and limited opportunities to lower funding costs.

Our balance sheet has become more neutral in the one-year time horizon and we continue to focus on positioning our balance sheet to optimize Peoples' net interest income stream while also minimizing the impact of future rate changes on our earnings. In addition, we do not anticipate the same level of loan prepayment fees in the second half of '08 compared to earlier this year. Therefore, we estimate net interest margin may decline a few basis points in the third quarter into the low 350s with earning asset balances similar to second quarter 2008 levels.

As we expected, loan growth continued to be a challenge in the second quarter as period end gross loan balances were down $10.9 million from the linked quarter and average loan balances were essentially flat. Gains in consumer loans, home equity loans, and commercial loans were offset by declines in real estate and real estate construction loans. Construction loans were down $19.2 million for March 31, 2008 due to some large payoffs that we had anticipated and the write-down of the previously mentioned impaired loan.

Our loan production and pipeline continues to be steady but we anticipate loan growth to continue to be challenged throughout the third quarter and the rest of the year. We look for another period of flat loan growth in the third quarter with possible slight declines in total balances especially with our continued selling of many one to four family loans to the secondary market.

Back to asset quality, primarily as a result of the new impaired loan discussed earlier, our June 30, 2008 nonperforming loans increased $3.7 million over the prior quarter end and totaled $21.2 million or 1.92% of total loans at the end of the second quarter. Net charge offs were $7.5 million for the quarter or 2.70% of annualized loan balances.

Provision for loan loss expense was $6.8 million, up $5.3 million from the linked quarter and $5.9 million more than last year's second quarter. For the third and fourth quarters of 2008, we expect the quarterly provision for loan losses to range between $2 million and $2.4 million each each quarter, which is about what we expect in the recently completed second quarter before the impaired loan required further attention and an increase in loan-loss provision.

We are intensely focused on loan quality and continue to apply a disciplined approach to the loan approval process as well as continuously monitor our entire loan portfolio for signs of further deterioration. Although we are not pleased with the recent rise in nonperforming assets, the majority of this increase is isolated to two specific customer relationships and we believe that the overall quality of our loan portfolio remains sound. We believe that the risk associated with the specific problem loans is manageable and is reflected in our level of loan loss reserves as of June 30.

Now I will turn the call over to Peoples Bancorp CFO, Ed Sloane, for his comments on second-quarter results.

Think you, Mark. We have spent some time on our loan portfolio in this call and now would like to spend a few minutes discussing our investment portfolio and more specifically, our Fannie Mae and Freddie Mac preferred stock exposure.

Several months ago, management made a determination that our $12.1 million of Fannie Mae and Freddie Mac preferred stock was a credit risk not worth maintaining and began reducing our level of exposure. During the first quarter, Peoples sold $7.2 million of Fannie and Freddie preferred stocks at a loss of $199,000.

During the second quarter, we continued our exit strategy and sold another $2.7 million of Fannie Mae and Freddie Mac preferred stock at a pretax loss of $191,000. We recorded an impairment charge of $260,000 on the remaining preferred stock that we owned, which reduced the value of the remaining investment to $1.9 million at June 30. The remaining preferred stock was subsequently sold in July at a pretax loss of $594,000 or $386,000 after-tax. As a result of the July sales, Peoples Bancorp no longer owns any preferred stock issued by either Fannie Mae or Freddie Mac.

While the losses associated with these securities have lowered Peoples Bancorp's earnings in the short-term, we believe that actions were necessary to reduce our investment portfolio's long-term credit exposures and to reposition our portfolio going forward.

The losses incurred during the second quarter due to preferred stocks were partially offset by net gains totaling $138,000 from the sale of mortgage-backed securities with an aggregate book value of $18.7 million. These securities were sold as part of the ongoing management of Peoples' interest rate risk profile.

In regards to funding, total deposits excluding brokered CDs at June 30 increased $32 million on a linked-quarter basis and were up $114.5 million or 20% annualized over December 31 of 2007. On a year-to-date basis, Peoples grew noninterest-bearing deposits by $18.2 million, money markets by $18.7 million, interest-bearing transaction accounts by $10.7 million, and savings accounts by $9.1 million. We are very pleased to see our customer centric strategic plan paying off in the form of stable long-term core deposit funding especially with noninterest-bearing deposits being up 10.4% on a year-to-date basis.

Included in the $114.5 million of non-brokered CD deposit growth was approximately $58 million in out-of-market CD relationships. These CD relationships are mainly with school districts, municipalities, and credit unions located throughout the Midwest and do not require pledging. These CDs have been an excellent somewhat low-cost funding alternative to brokered CDs, which should improve margin going forward.

As a result of the strong deposit growth that we have experienced this year, we have reduced our reliance on borrowings and brokered CDs, which have a relatively higher cost higher cost than retail deposits. Average borrowings and brokered CDs declined $40 million from the first quarter to the second quarter of 2008, which helped to lower funding costs.

Now for a look at our noninterest income and operating expenses for the quarter. Noninterest income was $7.9 million for the second quarter of 2008, unchanged from the prior year quarter. Fiduciary income and card services revenues showed strong growth for the quarter with increases of 9% and 13% respectively, compared to the second quarter of 2007, while insurance revenues and deposit account service charges were down slightly.

Second-quarter noninterest income comprised 35% of Peoples' total revenues and continues to be a major component of our earnings stream. Growing our fee-based revenue remains a strategic priority as it reduces our reliance on interest rate driven sources of income.

Noninterest expense was $13 million for the second quarter, a 1% decrease in comparison to the same period in 2007 and a 5% decrease on a linked-quarter basis. We continue to focus on operating efficiencies in these challenging economic conditions. The decrease over the first quarter of 2008 was due mostly to lower salaries and benefits as stock-based compensation typically granted during the first quarter and incentive accruals based on corporate performance were lower in the second quarter.

Peoples' efficiency ratio for the first half of 2008 improved to 56.3% from 58.6% last year as revenue growth outpaced expense growth. Our efficiency ratio continues to compare favorably with our peers and we remain focused on both topline revenue growth as well as efficiency to optimize shareholder return.

Looking ahead to the remainder of the year, we expect our efficiency ratio to be in the 55% to 57% range for the second half of 2008 as cost control remains a priority. We will continue our strategic focus on efficiency through ongoing evaluation of our retail branch network to identify potential opportunities for office consolidation, if any, in preparation for future expansion.

I will now turn the call back over to Mark for his final comments.

Thanks, Ed. I think that with recent events in the economy and the news surrounding banks lately, it's important to comment on the strength and stability of Peoples Bancorp. Although we have not been immune to the impact that the struggling economy and declining real estate values have had on bank loan portfolios, Peoples Bancorp remains profitable, well-capitalized, and adequately reserved for loan losses.

It has been said that capital is king and we agree with that comment. We have been protecting and growing our capital levels in light of the unpredictable nature of current financial markets.

At June 30, 2008, our tangible equity to tangible assets ratio stood at 7.30%, up from 7.14% at year-end 2007. We've also enhanced our regulatory capital ratios over last year and remain strongly above well-capitalized levels, as evidenced by our total risk-based capital ratio of 13.33% at June 30.

While some financial services companies have been cutting dividends, Peoples Bancorp's capital position has allowed us to raise our dividend to shareholders in the first half of 2008.

Despite the increase in the provision for loan losses, we see many positives to the second quarter including net interest margin expansion, continued revenue diversification, and cost control. As expected, loan growth continued to prove difficult but we were able to grow deposits and reduce borrowed funds. Like many in our industry, we saw deterioration in asset quality although the majority of our increase in nonperforming loans in the first half of the year is related to two larger commercial credits and we think we are adequately collateralized on those nonperforming loans.

Year-over-year revenue growth was driven by higher net interest income in margin and expense growth was contained. Our thoughts for earnings in the second half of the year are tough to predict, but we will share our thoughts anyway. Assuming a loan-loss provision of $2 million to $2.4 million per quarter and some stability in net interest margin, we look for third-quarter earnings per share to be in the $0.43 to $0.45 range, which includes $0.04 of losses or $386,000 after tax from sales in the third quarter of Fannie Mae and Freddie Mac preferred stocks, as we described earlier.

As always, we will continue to manage Peoples Bancorp for the long-term while making the best of s he challenging operating environment. This concludes our commentary. We will open the call for questions. Once again, this is Mark Bradley and joining me for the Q&A session will be Ed Sloane, Chief Financial Officer.

I will now turn the call back into the hands of our call facilitator. Thank you.

(OPERATOR INSTRUCTIONS) [Philip King], [Trufftan Investment Management].

The problem loan in this quarter and the problem loan in the previous quarter, these were both fairly large loans relative to your capital. I was wondering what is your house limit?

Our legal lending limit is in the $22 million to $23 million range. We don't have an established house limit. Typically we look at once the deal is in the $15 million range is about where we would go. We occasionally would go a little bit more of that based on guarantor strength. But really any deal in the $10 million to $15 million range is typically as large as we go, but we have gone higher than that previously.

So how many loans, $10 million to $15 million do you have in your portfolio offhand?

I would say a handful. Relationship-wise -- you say loans -- this is Mark Bradley, by the way -- relationship-wise probably in the five to six range. When I say relationship meaning one customer or a group of guarantors.

Okay, the loan in the first quarter would be one and then the Florida condominium would be two and then you mentioned a $10 million loan in Arizona and then a couple more beyond that.

That is correct, yes.

Is what you are saying. Okay. And for this condo project, just curious what was the debt to cash flow that you are looking at that when you originated the loan? It probably had to be on a prospective base. What were some of the other characteristics of that loan apart from the LTV which was 70% I think you said?

Correct, 70%.

Did you just look at the LTV or did you look at prospective cash flow as well?

I don't have those numbers right here at my fingertips, Philip, but we looked at the value of the property, the cash flow that was expected to be created from the sales of those condos. The original appraisal was based on a much faster absorption rate than this most previous appraisal. So a lot of things have changed in that market that changed the value of that property very quickly.

Okay, let's see. How many of the condos have been sold? Do you know?

Yes, I do. The number is in the 20 to 25 range over the life of the project. There's probably -- the entire project did not convert to condos. Half of it roughly is still apartments, so there's probably 40 to 50 of condos that could still be sold that are either renovated or partly renovated. So it's still half -- these are actually separate buildings. They're not just one building per se. So there are still apartments located on the property.

And you expected a lot more units to be sold by now obviously?

Yes, we did.

Okay, thank you.

Jason Werner, Howe Barnes.

I guess just to kind of clarify it a little bit, the Florida credit here, that originally was a construction loan. At this point all the buildings are finished?

Yes, the buildings were already up. They were being converted to condos, so it was a construction loan as categorized on our balance sheet. They did not convert all the condos or all the apartments to condos.

Okay, then the other, the $2.2 million other Florida exposure, what types of loans are those?

Those are -- the majority of that would be a warehouse loan that is actually owner occupied and then there's a couple of other condo units. They are smaller dollar amounts.

Is it actual -- to individuals, not necessarily a development?

That I don't know for sure.

Okay, just to clarify the Arizona exposure, that is one relationship?

That is one relationship. That is correct.

Okay, and you said that was retail and office space?

That is correct.

Now this quarter you offset some of the security losses with some sales and had some gains and the mortgage stuff. What is the likelihood you could do that in the third quarter to offset some of the losses that you already incurred?

This is Ed Sloane. We continue to look for opportunities in that particular area. We have not pinpointed anything specific in terms of gains to offset, but we continue to evaluate the portfolio for that.

Okay, so the guidance that you gave would not necessarily include that already. That could change if you do find something?

Correct.

That is correct. We are pleased to be out of the Fannie and Freddie situation that we were in at the start of the year.

What about the CMO that you guys had that you previously had in other than temporary write down? Where is that? Is that still there?

Yes, it is, Jason. That is about a $6 million value on our books. Based on our cash flow analysis and the credit stress and analytics that we did, we believe those book values fairly represent the cash flows of the underlying securities. If you remember, it's a blend of bank insurance, REIT, there is some age on some of them. So we continue to do a lot of analysis on those. But our total exposure on that is limited to $6.1 million.

Okay, that is all I have.

Michael Lipman, FTN Financial.

I just wanted you -- if you could possibly give us a little update on the banquet center NPL from 1Q '08? How is that proceeding? Do you expect any resolution in the near term?

That's a good question, Michael. Just for the callers who may be joining us for the first time, the other large nonperforming loan in our portfolio is I think Michael called it a banquet facility. It is a lifestyle spa treatment center, banquet facility. It is a $7 million nonperforming loan for us, which we wrote down by $1 million in the first quarter. It is still in operations, Michael. We are working with those borrowers. We are meeting with them on a frequent basis. They are adding new members as they try to work their way to breakeven.

There is a new management team in there that we are working with, so there is nothing new to report. I don't expect any resolution to it certainly in the next three months.

Okay, great. I missed it earlier but can you kind of go over the margin expectations again and how many basis points in the next quarter or next two quarters are you expecting?

Yes, this is Ed Sloane. On the margin, that has been -- it has been a great story for us this year as we've seen considerable expansion of that margin during the course of the year in the area of 30 basis points. And so for -- on a year-to-date basis margin at approximately 361 -- and that was a nice surprise for us in the second quarter. Really what we have seen so far this year is a much lower cost of funds than what we originally anticipated. And then asset yields holding up nicely as credit spreads have widened. We mentioned some of that in the press release.

So we -- it has been a nice growth in revenue for us in that particular category. Expectations for the rest of the year, we are looking in the low 350s. As we have repriced most of our liabilities, our interest-bearing liabilities down so we are not expecting to get a lot of additional benefit out of that. On the asset side, we should see some downward pressure on our asset yields, our loan yields. In particular and of course the wild card remains whether or not we will see any prepayment fees additionally in the second half of the year.

So we have recognized the fact that we could see a little bit of additional pressure on margin in the second half.

Michael, this is Mark. To add to that, we don't expect any loan growth, so if we have some shrinkage in the portfolio, it would probably be putting earning assets on in a slightly lower yield. Then combined with the fact we don't really see a lot more pickup on the liability side, I think that's where our guidance comes in. We expect it to be in that 350 to 353 range.

Okay, will you expect the majority of the compression to be in this next quarter, though? And some stability thereafter?

I would say it is probably spread over the final half of the year. Obviously everybody is waiting for rates to change at some point. So we're working to get our way in that position.

Okay, great. Thank you, Mark and Ed.

Philip King, Trufftan Investment Management.

Just as a follow-up, when do you put loans on nonaccrual? After how many days?

That really changes from loan to loan. This is Mark. I think we are probably as I look around the world or the country here, I think we are probably pretty quick to put things on nonaccrual if we think there are problems with repayment. So there is no hard and fast rule like 90 days past due. In fact, I don't think the Florida condo loan was at 90 days past due yet and they actually sold some units in June.

So we don't have a hard and fast rule here. When we see that there is no documentation that we can find that we can clearly identify repayment of our loan, that is when we start looking into it and considering impairment.

How about a range of days? Are you willing to go out for half a year, 180 days?

I have been here 17 years and I have never seen that. That is not going to be -- no, I would say when we are at 30 to 40 days, the nervous level starts. When we are at 60, the nervous level is much higher. When we are at 90, we know we have issues.

But you are aware that there are some banks that are at 180 days?

I am totally aware of that. That is why I say I think we are a little different than others that we proactively analyze and take action on these loans.

Do you have any loans that are 90 days past due and still accruing?

A very, very small amount. It's actually -- we are all fumbling through our earnings release here.

Yes, it is noted on the earnings release. This is Ed Sloane. Loans 90 days or more past due are $290,000.

$290,000, so it's a small number.

Very low level.

We don't --

How about delinquencies, 30 to 60 days, do you happen to have that number?

Yes, I do. Those have decreased compared to year-end and they are also roughly similar to what we saw 12 months ago. So the business category has jumped up just a little bit, but the other categories are doing well. So delinquencies have not significantly increased for us.

But they have gone down since the start of the year is what you are saying compared to December 31?

Yes, they have. I am just verifying, yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Philip King, Trufftan Investment Management.

Sorry about that, just one more follow-up. Could you just describe how the auto industry, how prominent that is in your neck of the woods? You are closer to West Virginia, but how important is the auto industry to the economy in your general area?

Good question. This is Mark. The automobile industry itself, manufacturers don't really -- are not prevalent in our market. They do employ some people that work for automobile or related industries, but we are south enough I will call it from a lot of those that we don't -- we are not heavily dependent on that.

But I was just saying I'm sure we have some consumer loans that are related, their employer of choice is either automobile or related industries, so that is where we watch that. There are some manufacturers throughout our market but we are not dependent on it. We are actually pretty diversified.

Okay, thank you.

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

Yes, I just want to thank everyone for participating, especially Philip. Very good questions. 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 good day.

This will conclude today's conference call.