Peoples Bancorp Inc (PEBO) 2008 Q4 法說會逐字稿

Good morning and welcome to Peoples Bancorp conference call. My name is Camille and I will be your conference facilitator today. Today's call will cover Peoples Bancorp's discussion of results of operations for the quarter ending December 31, 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 of 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 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 changes; the impact of competitive products and pricing; and other risks detailed in Peoples Bancorp's Securities and Exchange Commission filing.

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 fourth-quarter 2008 earnings release was issued this morning and is available at PeoplesBancorp.com. This call will include about 15 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.

Peoples Bancorp participants in today's call will be Mark Bradley, President and Chief Executive Officer, and Ed Sloane, Chief Financial Officer and Treasurer, and 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's Peoples Bancorp reported full-year 2008 net income totaling $7.5 million or $0.72 per diluted share versus $18.3 million and $1.74 per diluted share in 2007. Core revenues increased, net interest margin expanded and expense growth was controlled but deteriorating economic conditions played an overwhelming role in our lower earnings in the second half of the year, particularly in the fourth quarter when a net loss of $3.1 million or $0.30 per diluted share was recorded.

We are disappointed by the results, which were driven lower by higher credit costs and other than temporary impairment charges on certain investments. As described in our 8-K filing earlier this month, fourth-quarter provision for loan losses was $13.4 million and other than temporary impairment charges on investments were $4 million.

Like most financial institutions we were hit with further declines in commercial real estate values and mounting stress on the financial condition of some of our commercial borrowers due to general economic conditions, which led to additional downgrades of loans, an increase in nonperforming loans and further write-downs on existing impaired loans.

In response to ever-changing conditions, management, through our systematic loan loss analysis, determined that it was necessary to build allowance for loan losses to $22.9 million or 2.08% of total loans, up from $19.2 million or 1.72% at September 30, 2008.

While there were many inner-related factors that impacted our allowance for loan losses, there were two main factors that drove the increase. First, there were downgrades of additional commercial loans within our current portfolio requiring a higher specific reserve for loan losses. And second, there were declines in the estimated value of the underlying collateral on certain commercial real estate loans causing them to be under collateralized, which resulted in higher reserve requirements.

We also experienced an elevated level of net charge-offs compared to recent periods. Fourth-quarter '08 net charge-offs totaled $9.7 million versus $2.1 million in the third quarter of 2008. Much of this increase was due to $8.2 million of write-downs on impaired loans from declining collateral values in the fourth quarter. These write-downs were made in conjunction with our normal quarterly analysis of the loan portfolio and our evaluation of the adequacy of our allowance for loan losses at December 31, 2008.

Now I would like to provide some details of commercial loan relationships that deteriorated in the fourth quarter causing the higher charge-offs and change in nonperforming loans. The first relationship is a $4.7 million group of loans secured by various office complexes and raw land properties in Central Ohio which had been placed on non-accrual status during the third quarter of 2008. Based on our updated analysis these loans were charged down by a total of $2.8 million to reflect the new estimated liquidation value of the properties.

The second unrelated relationship is a loan secured by a health and lifestyle facility, also in central Ohio, which had been placed on non-accrual status during the first quarter of 2008. This loan was written down by an additional $1.3 million in the fourth quarter based on an updated appraisal.

The worsening economy certainly impacted businesses in our market areas including some manufacturers resulting in loans being downgraded and several relationships being placed on non-accrual status during the fourth quarter.

In addition to loans in our primary market area in the fourth quarter Peoples placed $5.2 million in loans on non-accrual status which are secured by land in a retail shopping center in the Phoenix, Arizona area. The loans were generated through a longtime relationship with an Ohio-based client developing properties in the Phoenix area. Our total loan exposure to Arizona real estate is about $10 million.

In regards to consumer loans, our credit quality metrics for personal and residential real estate portfolios remain fairly comparable to prior quarters. We continue to proactively identify possible problem loans and remain diligent in our collection efforts. Asset quality will remain one of our top priorities in 2009 as we work through extremely difficult market conditions with one of our goals being a reduction in nonperforming loans by the end of the year.

The market for selling properties is much slower than years past, so it will take time to work our way through some of these problems, but we have the capital strength for these workouts. I'll now turn the call over to our CFO, Ed Sloane, for his comments on fourth-quarter 2008 results.

Thanks, Mark. In addition to a larger than normal provision for loan losses expensed Peoples also recorded a $4 million other than temporary impairment charge related to our securities portfolio during the fourth quarter. About $2 million of this charge was related to a single bank issue trust preferred security that had no previous defaults or deferrals, while the other $2 million was related to four collateralized debt obligation investments previously carried at $6.1 million.

The CDO's charges were based on management's evaluation of the credit quality of the underlying issuers. The fair value of these securities has been affected by the continued liquidity and credit concerns within the financial markets as well as the downgrading of these securities by rating agencies.

After the fourth-quarter impairment charges the carrying value of Peoples individual trust preferred and CDO portfolios were $20.8 million and $4.1 million respectively at December 31, 2008. These securities are currently performing and will continue to be closely monitored.

As we have shared before, one of our top strategic priorities is to proactively manage our investment portfolio in order to minimize interest rate and credit risk. During the year Peoples systematically sold our remaining Fannie Mae and Freddie Mac preferred stocks which resulted in one-time losses, but presented exposure to even steeper possible losses.

Throughout the year we also selectively repositioned the investment securities portfolio to move from lower yielding, longer-term securities with other securities with better interest rate risk characteristics. We continued this proactive portfolio management effort during the fourth quarter and recorded a $1.5 million pretax gain as a result.

Also during the fourth quarter we completed the sale of our Grayson, Kentucky retail office and our merchant credit card processing services which generated aggregate one-time pretax gains of $775,000. These transactions were part of our ongoing strategy to concentrate our resources in the areas of our business with the most growth potential and to improve our operating efficiency.

A positive for Peoples during 2008 was increased net interest income and net interest margin over the prior year. Full-year 2008 net interest income was up 8% over 2007 totaling $58.5 million, while net interest margin was up 19 basis points to 3.51%. Fourth-quarter 2008 net interest income was $14.7 million and net interest margin was 3.44%. Net interest income was flat while net interest margin compressed 6 basis points from the linked quarter.

A major factor in our decline in margin from the linked quarter was a drop in asset yields as our prime based loans repriced downward in conjunction with reductions in short-term interest rates by the Fed.

On the liability side of the balance sheet we saw limited opportunities to reduce funding costs as competition for deposits in our markets remained tight and constrained our ability to lower deposit interest rates. Fourth-quarter net interest income and margin were also reduced slightly by adjustments for loans placed on non-accrual status net of interest collected on non-accrual loans. Without these items fourth-quarter margin would have been higher by about 2 basis points.

While the substantial reduction in short-term interest rates during 2008 produced year-over-year improvements in net interest income and margin, we anticipate that the current interest rate conditions will challenge net interest income and margin in 2009. Our balance sheet has slowly shifted to an asset sensitive interest rate risk position in preparation for a rising interest rate environment. However, we anticipate net interest margin pressure if the Federal reserves allow rates to remain at current historic low levels for a prolonged amount of time.

We anticipate slight contraction of net interest margin in the first quarter of 2009 due to a full year's impact of the December Fed rate cut and look for margin to be in the mid 330s. This guidance excludes the effect of any possible prepayment fees or interest adjustments for non-accrual loans. We will continue to closely monitor and proactively manage our balance sheet in order to minimize interest rate risk exposure and maintain or improve net interest income levels.

Another positive result for Peoples in 2008 has been growth in deposits. Total retail deposit balances, which exclude brokered deposits, totaled $1.3 billion at December 31, 2008, up $81.3 million or 26% annualized for the fourth quarter and up $195.5 million or 17% for the year. These year-over-year increases were due mostly to growth in interest-bearing balances primarily in retail CDs and money markets.

Included in the annual deposit growth is $108 million in growth of retail CDs from customers outside our primary market area as a lower-cost alternative to brokered CDs and $46 million in money market growth from Peoples' trust customers. The $46 million increase was due to a national investment broker's money market funds which Peoples' trust department had utilized for its clients being closed to new investors.

As a result Peoples' trust department shift to customer funds that were previously invested in a national money market fund to money market accounts held at Peoples Bank. We view these funds as short-term inexpensive funding for the Bank which could change quickly in future period.

We also saw a $36 million increase in CDARS CD balances for the year with $18 million of that growth related to a single customer relationship. We successfully grew core consumer and business deposits throughout the year as highlighted by $10.6 million or 6% growth in quarterly average non-interest bearing checking balances over the prior year quarter.

Fourth-quarter 2008 average savings balances increased $7.3 million or 7% over the prior year quarter while personal money market accounts grew $10.9 million or 11% over the same time period. This strong core deposit growth reflects our ability to attract and retain full customer relationships centered on deposits.

Due to the increases in retail deposit balances throughout 2008 Peoples was able to reduce its level of higher costing wholesale funding compared to year end 2007. In 2008 non-interest revenues were up 2% over 2007. Fourth-quarter non-interest income was $7.8 million, up 3% over the prior year quarter. Deposit service charges and insurance revenues were both up 8% while trust and investment income decreased 9% due mostly to declining market values of managed assets.

Compared to the linked quarter non-interest income was down 4% largely reflecting the normal fluctuation in insurance revenues based on the timing of policy renewals. In 2008 Peoples' non-interest income comprised 35% of its total revenues and we remained focused on growing our sources of income that are not dependent on interest rates.

Non-interest expense was $13.5 million for the fourth quarter of 2008, up 2% compared with the linked-quarter and 9% over last year's fourth quarter. The increase in year-over-year quarter expenses was influenced by higher FDIC insurance expenses coupled with the impact of utilizing the 1 million one-time credit received in 2007. Fourth-quarter 2008 franchise tax expense was also up over the prior year quarter due to a $782,000 reduction in fourth-quarter 2007 expense from the resolution of matters related to people's Ohio corporation franchise tax liabilities.

Fourth-quarter salary and benefit costs were unchanged from the linked-quarter, but increased slightly over last year due to the combination of normal base salary adjustments and higher employee medical benefit costs. We are satisfied that our expense control initiatives are working. For the full year of 2008 total non-interest expense was $53.5 million versus $51.5 million at 2007.

Much of the year-over-year increase was due to higher deposit insurance premiums, additional franchise tax expense, base salary adjustments and higher employee medical benefit costs. As revenue growth outpaced expense growth Peoples' efficiency ratio improved from 57.07% in 2007 to 56.3% in 2008, this ratio continues to compare favorably with our peers and we will remain focused on revenue diversification and expense control in 2009. Now I'll turn the call back over to Mark for his final comments.

Thanks, Ed. As the economy worsens we continue to focus on serving our clients as well as concentrating on maintaining and protecting our capital. We've done that successfully in 2008 despite a decline in asset quality. At December 31, 2008 Peoples Tier 1 and total risk-based capital ratios were 11.87% and 13.18% respectively, basically unchanged from year end 2007. These ratios remain well above the levels needed to be considered well-capitalized by banking regulations and provide some shelter to weather the storm from current economic conditions.

In addition, on January 22, 2009 Peoples' shareholders authorized the issuance of preferred shares which enables Peoples to obtain final approval for a $39 million capital investment to the US Treasury's TARP capital purchase program. We expect to issue the entire $39 million of cumulative perpetual preferred shares in the next week or so.

The new capital is expected to increase our total risk-based capital ratio upward of 16%. This additional capital will provide us with the strength to continue lending to qualified customers and the ability to take advantage of the right expansion opportunities if presented. We look forward to putting the TARP funds to work through good loans in our communities and serving even more clients.

The fourth quarter was an extremely difficult quarter for Peoples Bancorp as we battled commercial real estate loan quality challenges and recognized impairment charges in our investment securities portfolio. But we continue to see many positives in our business fundamentals including net interest margin expansion over the prior year, continued revenue diversification and cost control.

We were also able to grow deposit balances significantly reducing our reliance on wholesale funding sources and improve overall liquidity. We continue to believe that we are well positioned to handle the challenging economic environment. In 2009 we will continue to focus on the basic fundamentals of our business and our unique advantages in this time of unrest making good loans, serving our customers' needs and working together across business lines to leverage our universal financial services offering.

We believe that capital is still king in the financial services industry and our participation in the TARP program will bolster our already strong capital ratios. We expect 2009 to be another challenging year in terms of asset quality as the economy looks for direction. We have the people and processes in place to deal with challenges as they arise. We remain optimistic about the future and we believe that our focus on the long-term will serve our shareholders, clients, employees and communities well in these challenging times.

This concludes our commentary, and 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). Jason Werner, Howe Barnes.

Good morning. My first question, Mark, when you were going through the individual nonperforming stuff you were going pretty quick and I didn't get everything written down. You had talked in your preannouncement and in the quarterly press release that during the quarter there were three loans I think for about $10 million that were moved to non-accrual. Can you give us a little more color on those three loans, what they were and how much each one was for and where they were located?

One is that Arizona property that I described earlier. Those are the retail strip centers or center and raw land. Those were moved to non-accrual in the third -- or excuse me, the fourth quarter. Trying to think of the other properties off the top of my head.

There were two other properties, Jason. One was for $3.1 million and that's located in central Ohio and another one in southeast Ohio for $2 million.

So both the last two Ed just mentioned were manufacturing type firms, not directly related to commercial real estate. Those were the three, a lot of the other write-downs in the fourth quarter were loans that were already on non-accrual as updated appraisals came in.

Okay. I guess looking at the whole commercial portfolio, I was curious if you're seeing any trends in industry in terms of where things are getting weak. And obviously retail is a weak spot. But looking at your portfolio where are you guys seeing weakness?

The biggest weakness, if we lined up our top 10 problem credits, would be commercial real estate. And it's not just geographically driven, I think it's universal throughout the entire United States, followed a little bit -- we have a couple of manufacturers, as we just mentioned, that had some issues in the latter part of the year. But most of it for us is commercial real estate. On the personal and residential real estate side we haven't seen a huge deterioration in that segment of our portfolio, but it's really commercial real estate for us.

Within that commercial real estate are there any particular industries that are weaker than others?

You know, it's across the board, Jason. We have a hotel in there, we have a retail strip center, we have an apartment complex. It really -- there isn't one industry that's driving it; it's more global. Obviously we have the health and fitness center in central Ohio that's been on our list for several quarters. So really it's across the board, there's not one industry.

What did your delinquencies look like, your 30-day, 90-day delinquencies, what did they do compared to the previous quarter?

They were about the same, 30-day picked up a hair, but not a lot. Really no change from year end 2007. Okay, and I'm excluding business loans, for example, looking more at the residential and the personal side. So we have not seen major changes there. So they've been pretty comparable to previous quarters.

Okay.

Which I think is a testament to the underwriting that we have done in those areas.

Okay. So I guess if that hasn't changed much, what are your thoughts? Obviously with the pretty dramatic slowdown in the economy you've seen rising NPAs the last several quarters. What are your thoughts going forward on NPA levels. I mean, I hardly think that we're anywhere near the bottom here. What are your guy's thoughts?

Well, one of our focuses in '09 is to lower our NPA numbers. Obviously that's very dependent on economic conditions and how fast properties can be moved. Unless the economy really takes a turn for the worse we don't see a significant increase coming in NPAs. We have our eyes on a few loans. But we plan to work with clients on the residential and the personal loan side. I think we're focused mostly on reducing nonperforming loans in '09. So are we at the bottom? I don't know. But our focus this year is to reduce that number.

Okay. I'll step back and see if anybody else has any questions at this time.

Okay, thanks.

Thank you.

(Operator Instructions). Jason Werner, Howe Barnes.

If nobody else is going to ask anything I'll keep going. I didn't catch if you said it or not, but in previous years you've given some guidance on what you thought for fee income growth and expense growth and that sort of thing. I know it's kind of next to impossible to give a full number because of the provision. But did you mention anything? And if you didn't, can you mention something on those two categories?

Well, Jason, this is Ed. Just in operating expenses efficiency will continue to be our primary focus, cost control into 2009. Keep in mind that we will be pressured by an increase in FDIC insurance. Medical -- I think medical -- employee medical expense also should start to -- should continue to build in 2009 as it did in 2008. But again, on the expense side, cost control efficiency is going to continue to be a primary focus for us during 2009.

In the income, the non-interest income piece, we would expect to see service fees or service fees on deposit accounts continue about the same trend as what we saw in 2008, electronic banking fees was also another area of growth for us in 2008, expect that to continue. Trust and investment income, we would expect that to be somewhat flat, maybe slightly down as that's going to continue under pressure with market value of trust assets.

So those are a couple things to highlight for you in there. I wouldn't expect to see much growth out of either of those areas -- non-interest income or non-interest expenses.

What about the insurance? And what do you expect in terms of contingency income in the first quarter?

Well, it's still a soft market out there, Jason, but we're seeing some turns. It's hardening up a little bit. We do not expect to go backwards in insurance income. The first quarter we obviously have our -- as you know from following us, it's when we recognize most of our what's called contingency income. We expect to have -- there's really no way to know what that number will be, but we haven't heard any overly negative or positive news there.

So I expect insurance to hold the line, maybe see a slight increase in 2009. The real -- as you know, the biggest unknown is what loan loss provision or charge-offs would be. We don't expect to see 2008 levels again in 2009. We're not going to make predictions or projections on 2009 earnings because that is such a big unknown.

Okay. And then with the fee income, going back to the selling of the merchant processing -- does that affect the ebanking line? What is the impact on that? I know you guys said it wasn't going to be [immaterial] in terms of the bottom line, but I would imagine there would be some loss revenue and maybe some loss expense offsetting that. But where does that show up on your income statement?

A little bit in the ebanking income area and it's spread out through the expense side. It's not really material from a line item perspective. It was basically a breakeven process for us, I'll call it. So in the end we should see improved bottom-line performance, I'll call it, by not owning that process anymore.

Okay.

Really no line item I can say -- go to tack that line item that's really going to change, it's really across the board through our income statement.

Okay. And then on the TARP capital, when you do get that where do you initially plan on putting that? Is that going to go into short-term securities initially until you get it redeployed?

Yes, it will be just deployed right out of the securities portfolio.

What kind of a rate do you think you can get on that initially?

Maybe 4%, 4.5%.

4% to 5% type percent.

Yes, somewhere in that area.

Our goal with that money is to make loans, good loads that bank examiners like to see. Obviously with the economy the way it is it's going to take a while to deploy those funds totally in loans. But we are continuing to make loans each and every day and we plan to continue to do that.

Do you anticipate adding any leverage to offset the cost of that preferred?

Well, as you saw from our balance sheet at the end of the year, we have leverage already. Our goal is not to add more leverage. Our goal is to probably keep the balance sheet at about where it is at this point and keep this at the high point -- meaning year end would be the high point of the year for leverage.

Okay, going back to the idea of putting that into loans. Obviously just going back the last couple of years, getting positive traction on loan growth hasn't been easy for you guys. It seems like you take a step forward and a couple back in terms of having customers pay off. What are your thoughts on loan growth going forward? Do you anticipate additional payoffs in the portfolio --?

Well, I don't anticipate a lot of payoffs, Jason. I do anticipate continued challenge to gain that traction, as you described it, as we produce residential one to four family loans that are sold to Fannie Mae, for example. So balance sheet growth will be a challenge this year. We continue to make those loans; we're looking for different avenues to make business loans. Some of our reduction in 2008 is obviously from charge-offs.

So we've had a flattish year from a production perspective in '08. The balance sheet number went down because of charge-offs. Obviously if we don't have the same level of charge-offs in '09 we have a better chance to gain some of that traction. So it's a very difficult environment to predict loan growth, but it is our plan to keep -- stay after it and try to get those loans in the door the best we can.

Okay, thank you guys.

Thank you.

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

I just want to thank everyone for participating in the call. Thank you, Jason, for your good questions. Please remember that our earnings release and a webcast of the 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.