Peoples Bancorp Inc (PEBO) 2008 Q3 法說會逐字稿

Good morning, and welcome to Peoples Bancorp conference call. My name is Mike, 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 September 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 Bancorp's future financial performance. These statements are based on management's current expectations. The statements in this call which are not historical fact are forward-looking statements and involve a number of risk 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 Peoples Bancorp's Securities and Exchange Commission filings.

Although management believes that the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management's knowledge of Peoples' business and operations, it is possible that actual results may differ materially from these projections. Peoples Bancorp disclaims any responsibility to update these forward-looking statements. Peoples Bancorp's third-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 participants in today's call will be Mr. Mark Bradley, President and Chief Executive Officer and Mr. Ed Sloane, Chief Financial officer and Treasurer and both will be available for questions following opening comments. Mr. Bradley, you may begin your conference, sir.

Thank you. Good morning, and welcome to Peoples Bancorp's conference call. Today Peoples Bancorp reported third-quarter 2008 net income of $3 million or $0.28 per diluted share compared to $5.1 million or $0.49 per diluted share for last year's third quarter. Despite the lower net income on a comparative basis Peoples Bancorp's third-quarter results of operations show year-over-year growth in net interest income, net interest margin, non-interest income and meaningful control over operating expenses. We improved our risk profile through active investment portfolio management which included the sale of our remaining Fannie Mae preferred stock in early July.

However, loan quality suffered due to ongoing challenges caused by the struggling economy and weakened commercial real estate market. As a result, non-performing loans increased from June 30 levels and third-quarter earnings were reduced by a higher provision for loan losses due to downgrades of a few commercial real estate loans. Despite these challenges we have preserved our strong capital position and remain comfortably above well capitalized standards at September 30.

As I mentioned, People's loan portfolio has not been immune to the credit quality issues that many in the financial services industry face due to the struggling real estate market and the economy in general. During the third quarter we downgraded certain commercial real estate loans through our normal loan review process and evaluation of the borrower's financial condition. As a result of these downgrades we increased the allowance for loan losses to $19.2 million or 1.72% of total loans at September 30, compared to $15.2 million or 1.38% at June 30.

We recorded a third-quarter provision for loan losses of $6 million compared to $6.8 million for the second quarter of 2008 and $1 million for the third quarter of 2007. Net charge-offs were $2.1 million or 0.74% of average loans in the third quarter as compared with $7.5 million in the second quarter and $1 million in the third quarter of last year. Approximately $1.1 million of third-quarter's 2008 net charge-offs were related to a commercial loan that moved to non accrual status during the quarter. Excluding this charge off other charge-off levels were consistent with that experienced in last year's third quarter?

In addition to commercial loan downgrades we experienced increases in nonperforming assets and loans. At September 30 People's nonperforming assets were $36 million or 1.88% of total assets, up from 1.13% at June 30, 2008 while nonperforming loans stood at $35.7 million or 3.21% of total loans up from 1.92% at the linked quarter end. This marked the third consecutive quarter of increases in our nonperforming loans and as was the case in the prior two quarters, the increase was due to isolated issues with certain larger customer relationships.

In the third quarter three specific commercial real estate loan relationships totaling $14.4 million were placed on non accrual status because of deterioration in the borrower's financial condition from the weakened real estate market and the overall economy. The first of these relationships involves a group of commercial real estate loans to a single borrower secured by office complexes and raw land properties in central Ohio. These various loans are season loans dating back as far as 2003. During the third quarter these loans were exhibiting signs of impairment as the liquidity of the borrower became strained due to many vacancies in office complexes securing loans.

As a result, these loans totaling $5.5 million were placed on non accrual status. The loan to value ratio in all these loans was 85% or less at the time of origination, and we are currently in the process of updating our analysis and collateral values on this relationship.

The second relationship is a commercial real estate credit originated in 2004 and secured by carwashes in various cities in Indiana and a shopping center in northern Ohio. After appraisals and analysis the loan was charged down by its previously accrued specific reserve amount of $1.1 million reflecting the underlying collateral's current market value. The remainder of the loan totaling $2.2 million was placed on non accrual status during the third quarter.

Finally, the third relationship which has some common guarantors with the loan I just described is a commercial real estate credit of $6.8 million originated in 2006 on a hotel in Northeast Ohio. This loan was placed on non accrual status during the third quarter after the borrower reported continued losses from operations in 2008. A recent appraisal indicates that the loan is adequately collateralized at this time. So at September 30 the majority of our $35.7 million in nonperforming loans is attributable to a few large customer relationships that continue to be monitored except for a loan for about $0.5 million where we are in third position, we are in first lien position on all of these relationships.

We have been working diligently with our legal counsel and cooperatively with the management of these entities to work through the issues. Outside of our commercial real estate portfolio our consumer loans which include one to four family real estate and personal loans continue to have manageable delinquency and charge-off levels and are not materially different than our experience over the last few quarters, if not slightly improved in certain categories compared to year end 2007. Despite the elevated levels of nonperforming loans we believe that the overall risk in the loan portfolio remains manageable. We continue to monitor and proactively address our entire loan portfolio in light of the changing market and borrower conditions.

The steps taken to increase our allowance for loan losses and preserve our healthy capital position during the third quarter should allow us to weather the storm of the current credit cycle. However, there can be no assurance that our allowance will be adequate to cover future losses, especially considering the current economic uncertainty and its potential impact on Peoples Bancorp's loan portfolio. Third-quarter loan balances grew more than expected as total loans were up $8.8 million from June 30. Declines in commercial loans were offset by stronger gains in real estate construction, home-equity and personal loans.

While our loan portfolio is still more weighted toward commercial real estate loans we have had some modest growth in consumer loans over the past several quarters. We continue to sell one to four family mortgages to the secondary market which has limited growth from that category, but we've seen the decline slow over the last quarter as we've been keeping more mortgages on our balance sheet. We expect loan growth to continue to be challenged over the remainder of 2008 and into 2009, although we have been seeing some increasing opportunities as capital markets have seized up.

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

Thank you, Mark. On the investment side of the balance sheet we continue to enhance our credit and interest rate risk profile through active portfolio management during the third quarter. As Mark mentioned, early in the quarter we sold our remaining $1.9 million in Fannie Mae preferred stock exposure at a pretax loss of $594,000 or $386,000 after-tax. As a result of this sale People's completed its exit strategy from Fannie Mae and Freddie Mac preferred stock.

Despite the short-term reduction in earnings resulting from the sale of these securities, we avoided even steeper possible losses and reduced our investment portfolios long-term credit exposure through this proactive decision. The Fannie Mae preferred stock losses incurred during the third quarter were partially offset by net gains totaling $479,000 or $311,000 after-tax from the sale of various investment securities, primarily obligations of US government-sponsored enterprises, and tax-exempt municipal bonds with an aggregate book value of $21.4 million.

These securities were sold as part of the ongoing management of People's credit and interest rate risk profile. At September 30 People's available for sale investment portfolio totaled $598 million, of which $51 million was classified as corporate obligations and other securities, and consists of the following. $21 million of US government-backed student loan pools, $23 million of individual bank trust preferred securities of which $12 million were investments in institutions rated BBB or higher, and $11 million in non-rated institutions. $1 million in bank equity investments and $6 million of CDOs and income notes which are performing as we expected after write-downs in the second half of 2007.

We continue to closely monitor the credit quality within our portfolio and make adjustments as appropriate in the circumstances. Although the CDOs and income notes pose some concerns, we believe the quality of the investments included in the corporate obligations and other securities segment of our portfolio are good long-term investments for the company.

As Mark mentioned, net interest income and margins were both bright spots for the third quarter. Net interest income increased 11% to $14.6 million, and net interest margin expanded 24 basis points to 3.5% compared with the prior year's third quarter. The majority of these improvements was due to reductions in funding costs that outpaced declines in asset yields due to the repricing of many liabilities to lower short-term market rates and the widening of credit spreads.

In addition, deposit growth during 2008 has allowed Peoples to reduce higher cost wholesale funding. Specifically, People's third-quarter cost of funds was 3.01%, down 103 basis points from last year's third quarter while earning asset yields declined only 69 basis points to 6.15%. Through the first nine months of 2008 net interest income has grown 9% over 2007 and net interest margin was 3.54% versus 3.29%. Our third-quarter net interest income and margin include loan prepayment fees, interest reductions for loans placed on non accrual status and interest collected on non accrual loans that reduced net interest income by $241,000 or 5 basis points of margin. As we expected, third-quarter net interest income and margin were pressured by some assets repricing downward and limited opportunities to reduce funding costs.

In addition, we did not experience the same level of prepayment fee income in the third quarter and saw an increase in non accrual loans which combine to reduced earning asset yields as compared with the first half of 2008. Current interest rate conditions should continue to challenge net interest income and margin. However, we are continuing to manage our balance sheet position to optimize People's income stream while also minimizing interest rate and credit risk.

Our GAAP position remains relatively neutral in the one year time horizon. So we do not expect to see much benefit from recent reduction in short-term interest rates. We anticipate slight contraction of net interest margin in the fourth quarter and look for margin to be in the mid 340s in the fourth quarter and into the early parts of next year. This guidance excludes the effects of any possible prepayment fees or interest adjustments for non accrual loans.

On the funding side of the balance sheet, People's total retail deposits, which exclude brokered CD's were essentially unchanged from $1.24 billion at June 30 of 2008 as an $8.4 million increase in interest-bearing balances was offset by an $8.8 million decline in non-interest-bearing balances. For the quarter retail CD balances grew $5.7 million while money market and savings balances added $3.1 million and $2.1 million, respectively.

The growth in retail interest-bearing deposits was impacted by single commercial customer transferring $14 million in retail money market deposits to overnight repurchase agreements in late September, which are classified as borrowings on balance sheet. On a year-to-date basis Peoples Bancorp's total retail deposit balances have increased $114 million or 10% due mostly to higher interest-bearing deposits including approximately $70 million in CD funding from customers outside our primary market area instead of using relatively higher costing brokered CDs. Non-interest-bearing deposits have grown by $9.4 million or 7% annualized over year end 2007 while money market accounts have gained $22 million and savings have added $11 million.

This strong growth in deposits has allowed Peoples to reduce higher cost wholesale funding over the course of the year and has strengthened our liquidity position. At September 30 we had approximately $349 million in available wholesale funding capacity which we measure as a combination of our borrowings limits plus brokered CD capacity and unpledged investment securities.

The third quarter saw Peoples Bancorp continue to progress on our strategy to diversify revenue streams through growth in our noninterest related revenues. Total non-interest income was $8.2 million for the quarter, up $462,000 or 6% over the same period last year. Growth was driven mainly by increases in insurance commissions and service charges on deposits which were up 9% and 8%, respectively over the third quarter of 2007. Electronic banking income which includes debit card interchange income was up 13% while revenues from our fiduciary and brokerage businesses grew 5%.

These positives were offset by a decline in mortgage banking income, corresponding with the slowdown in secondary mortgage production. Operating expenses were controlled with third-quarter noninterest expense totaling $13.2 million, up just 1% compared to the second quarter of 2008. Increases in professional fees and electronic banking expenses were offset by declines in amortization of intangibles and marketing expense. On a year-to-date basis total noninterest expense for 2008 was up just 2% over last year while total revenues have increased by 7%. As revenue growth has outpaced expense growth, Peoples Bancorp's 2008 year-to-date efficiency ratio has improved by almost 200 basis points over last year to 56% and continues to compare favorably with peers. We look for our efficiency ratio to continue to be in the 55% to 57% range in the fourth quarter of 2008.

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

Thank you, Ed. Right now our focus is on loan quality capital strength and maintaining or enhancing liquidity. In spite of the increased loan loss provision in 2008, Peoples Bancorp's capital position has remained strong and our regulatory ratios far exceed those required for well-capitalized institutions. People's September 30, 2008 total risk-based capital ratio was 13.68%, up from 13.33% at June 30 and 13.23% at year-end.

Our tangible equity and tangible assets ratio was 7% at September 30 and speaks to our ability to weather the storm of the current credit and economic cycles. We remain focused on preserving our capital and continuing our quarterly dividend payments. Thus far in 2008 our dividend has grown 3% over last year and we are proud of our 42 year history of dividend growth for our shareholders. We continue to see many positives in our business fundamentals in the third quarter including net interest margin expansion over the prior year, continued revenue diversification and cost control. We were also able to grow deposit balances. Like many in our industry, we saw deterioration in asset quality although the majority of our increase in nonperforming loans in 2008 is related to a small number of commercial credits.

Year-over-year revenue growth was driven by higher net interest income and margin and expense growth was contained. In the fourth quarter we look for stable to slightly lower net interest margin and noninterest income and expense comparable to third-quarter 2008 levels. Pretax income will also be increased by the approximately $250,000 in gains from the previously announced sale of our Grayson, Kentucky office, which was completed last week. We will not provide any guidance for fourth-quarter loan loss provision and therefore net income as such projections are nearly impossible considering the economy and unpredictable nature of the markets. I do lean more to the fourth quarter being another quarter of building our loan loss reserve as we see economic conditions deteriorating further before seeing any signs of improvement. We hope sometime in 2009. However, our capital as a source of strength for us, and we will continue to manage Peoples Bancorp for the long-term while making the best of a 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) Daniel Arnold, Sandler O'Neill.

Just a couple of quick questions for you. First, I was wondering -- and this is probably for Ed, but if you could just go over some of those details you gave on the securities again, I missed a couple, and particularly on the trust preferred and the income notes.

Sure, Dan. On the trust preferreds we do have, as I indicated, 23 million of bank trust preferred securities. 12 million are BBB rated or higher, and 11 million non-rated. And the trust preferreds are really a diversified group of -- it is diversified. The money, that $23 million is really diversified between several banks. They go through the same level of OTTI evaluation on a quarterly basis where we are stressing our NPA levels and those types of things. So those are -- that is pretty much what I said regarding the trust preferreds.

And you guys are carrying those at par value right now?

They are actually slightly -- yes, they are right around the par value mark, that's correct.

And are those single bank issuer, or are those pooled trust preferreds? Trying to get a sense of --

They are more single bank.

They are single bank for the most part? Okay, and then just with respect to credit quality, it looks like if you look at the total NPA levels it looks like actually absent the three commercial real estate loans total nonperforming loans came down a little bit and was offset by an increase in the 90 days past due. I just wanted to see what you guys are seeing. Have you seen any improvement or have things continued to deteriorate in the portfolio and then on the 90 days past due side, just wanted to see what was causing the increase there.

You trailed off a little bit there, Dan, but I think you are asking absent the three loans that went to non accrual status we did see a slight decrease in non accrual loans. Some of that is unfortunately through charge-offs and working out some credits. But you are correct, there is a slight decrease. The 90 days and over number did increase from $290,000 at the end of June to $1.852 million. There is no -- that is not a group of 10 or 12 loans. That is a single or a couple relationships that we are keeping our eye on.

And then just as it relates to the margin, it looked like you guys let some brokerage CDs roll off a little bit and replace those with [bob] borrowings. I imagine it is just an issue of what rates you were getting for both of those, but I wanted to see how that would affect things going forward. If you see any increase in borrowings and if those costs have continued to go up.

Yes, we are actually seeing deposit growth, and that is certainly, has certainly helped in that regard. I think we mentioned in the call that there were some outside the primary area market CDs that have been added in, and we continue to focus our attention on our deposit growth and improving or continuing to build our liquidity levels.

Then just one last question on the TARP plan. I was just wondering if you guys had given any thought to that, if you had applied for any capital from that and what you guys were thinking.

It's a good question, Dan. We are analyzing the TARP plan, and I assume you mean capital injection of preferred stock.

That's exactly right.

It is the first freshest deadline. We are analyzing it. We are talking to our regulators. We have not formulated an opinion one way or the other. We have thoughts about it such as it seems to be a pretty cheap source of capital, but trying to figure out all the strings that are attached to it. That is where the real work is. We obviously have a strong capital position, but it is something we have to look at. I think it is our duty to look at it. We don't have a lot of time to analyze it. I think we are actually somewhat lucky to have a good two or three weeks to look at it from every angle, and we are talking to our bank regulators to get their thoughts on it. So no, I can't give you guidance on which way we are going except that we are looking at it.

I appreciate that, guys.

Jason Werner, Howe Barnes.

My first question is kind of a follow-up to Dan's question about the trust preferreds that you have. You mentioned the $12 million BBB rated or higher. I was curious if any of those pieces were downgraded since you owned them.

No, sir. No downgrades.

Okay, and are any of them -- any of that $12 million or the other $11 million, have any of them suspended their dividends?

You asked about suspended dividends?

Yes.

No suspended dividends.

There are quite a few in there, but we don't think there are any suspended dividends.

Okay and you kind of outlined it the CDOs that you have that are trust preferreds that is the separate $6 million that you talked about?

That is correct. The value or the book value on those is $6.1 million, $5 million in CDOs and $1.1 million in income notes. That is the same that we've talked about in the past.

Right, okay. Given what is happening across the country with construction and development, I was a little surprised to see the construction growth in your portfolio. Can you give us some color as to what types of projects those are? Is it commercial or residential and where they are?

Yes, that is actually something I can answer. This is Mark. For the most part, Jason, those are going to be commercial real estate. We do have a concentration in assisted living facilities. A good relationship with an Ohio-based and Ohio builder of those private pay facilities. So we are seeing -- we've approved construction loans there and those are being drawn on as we speak. And I believe there is a hotel loan in there as well that is being built in Ohio. So those would be the primary forces driving that number up.

And this is stuff that maybe like you said you were just seeing draws, now you might have had the loan approved already but you are seeing draws now?

That is correct. These would have been approved months ago and are being drawn on right now. We consider them to be good projects. So yes, this is not -- this is just a timing issue of when the loans are being drawn.

Can you repeat you said the assisted living and the hotel are both in Ohio?

Yes, the one I am thinking of would comprise the most of it there, yes, they are in Ohio.

All right. I guess also on the same kind of line of thought, the growth in home equity, obviously that's an area that has given some banks problems and yet you guys are seeing that number go up. I guess what can you tell us about that type of growth given what's happening to home values?

It is a good question. Most of our home equity lines of credit are 80% loan to value, the vast majority. We have seen a little bit of growth over the last couple of quarters. We are monitoring that to see if it is additional stress on the consumer or if people are just accessing new lines that were booked over the last 12 months. We did change our pricing probably nine to 12 months ago, so there have been some new equity lines come on board. This is an area that we monitor. I would not say we are overly concerned about it.

Home values in our markets did not shoot way up, so we don't expect them to shoot way down; but obviously the stress on the consumer has increased over the last several months. So it is not a huge part of our portfolio, but we have had good success with consumer delinquency lately. So we are very much monitoring that part of our portfolio to see if there has been any degradation I will call it in that area.

You had said that you are seeing some opportunities on the loan front for loan growth kind of with maybe some of your competitors kind of pulling back a little bit. But you still say you expect loan growth to be challenged. I just kind of how you reconcile those two statements.

Well, it is because we have sharpened things on our end, as well. We are looking at -- we are seeing deals that we haven't had the opportunity to look at before, but we are trying to be conservative in our parameters with cash in the deal, loan to values, etc., loan exceptions are basically a thing of the past for as much as we can do for our credit, for the credits we look at it especially with bank examiners. So we may be seeing a lot of opportunities but that doesn't mean we are going to book those loans necessarily. So our goal right now is to have pretty steady to no growth in the loan portfolio over the next several quarters and just focus entirely on quality. We are still seeing opportunities. We haven't closed shop, it is just we are trying to be more selective.

Do you still see pay downs, or has that kind of slowed down quite a bit, too?

That has slowed down, and that is one of the reasons loans were up in the third quarter is we didn't see the pay downs we thought we might. We did have one early here in the fourth, just a couple million, maybe $3 million that we expected that to pay off at some point. So once in a while if we had five to eight loans we thought would pay off, now only one or two might pay off, so those have slowed down which keep our balances a little higher.

And I think my last question. What can you tell us about trends in the delinquency rates for the 30 to 89 day category?

Besides the commercial category, which is being hammered right now, the other categories compared to June 30 and probably year end are either unchanged or even better than year end last year, year end 2007. I think it's a credit to the underwriting standards we've had in place on the consumer side of the business. We have not seen major changes in our one to four family portfolio. Maybe a testament to everything you have been reading about; we are probably seeing more pressure on the loans we originated and sold to Fannie Mae and Freddie than the loans we originated and held. Our collections folks are busy, but a lot of it is on paper we've already sold. So those areas, Jason, are holding in for us. We watch those like a hawk.

You said the commercial, you mean commercial business is getting hammered?

Well, I'm just saying over the last nine to 12 months, the numbers are very different. It is a different story on the consumer side. We are not seeing a lot of increases, say, in the last 90 days on our 30, 60, 90 on the commercial side. I will make that clear.

Okay. I think that's all I have. Thank you.

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

Just to say thank you for everyone for participating, Jason and Dan, thank you for your questions. Please remember that our earnings release and webcast of the call will be archived on PeoplesBancorp.com under the investor relations section. Thanks, and have a good day.

This will conclude today's conference call. Thank you.