Peoples Bancorp Inc (PEBO) 2011 Q1 法說會逐字稿

Good morning and welcome to Peoples Bancorp's conference call. My name is Denise and I will be your conference facilitator today. Today's call will cover Peoples Bancorp's decisions of results of operations for the quarter ended March 31, 2011.

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 for 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 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 Bank's 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 first-quarter 2011 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 David Mead, Director and Former Interim President and Chief Executive Officer; Chuck Sulerzyski, President and Chief Executive Officer; Ed Sloane, Chief Financial Officer and treasurer. And all will be available for questions following opening statements.

Mr. Mead, you may begin your conference.

Thank you, Denise. Good morning, everyone, and welcome to our call. I would like to begin this morning's conference call by introducing Peoples' new President and Chief Executive Officer, Chuck Sulerzyski.

Chuck has been in the financial services industry for over 30 years, most recently serving as the Regional President of the Great Lakes Region for Key Bank. His skills, experience, and proven leadership make him the ideal choice to lead our company and execute on our strategic plan.

Chuck officially started with the Company on April 4 and he will have some comments near the end of our call this morning. We, the members of the Board, are delighted to have Chuck as our new CEO.

This morning Peoples reported earnings available to common shareholders of $1.3 million or $0.13 per common share for the first quarter of 2011. This compares to $0.08 earned in the last year's first quarter.

Results for the quarter were in line with our expectations with improvements over the prior year driven primarily by lower credit costs and, to a lesser extent, slightly stronger non-interest income and control of operating expenses. Some strides were made in improving asset quality metrics as non-performing assets decreased substantially during the first quarter.

We previously reported Peoples repaid approximately $21 million, or slightly over half, of its TARP capital in February. This partial repayment was accomplished without issuing additional common shares that would have had a dilutive effect on existing common shareholders. In future quarters this partial repayment of TARP will reduce preferred dividends and increase earnings available to common shareholders by approximately $273,000.

The TARP shares were originally issued at a discount so consequently the preferred dividends recorded in the first quarter included recognition of $186,000 for an unamortized portion of the original issue discount associated with the TARP shares that were repurchased.

Asset quality continued to be a primary focus for us in the first quarter. As I mentioned, our non-performing assets decreased, going from 2.45% of total assets at December 31 to 2.04% at March 31. This represents a real dollar reduction of about $8.3 million and was due primarily to charge-offs of non-performing loans.

The provision for loan losses totaled $5.3 million for the quarter and the allowance for loan losses was reduced from 2.79% of gross loans at the linked quarter end to 2.58% at March 31. The lower provision expense relative to the level of charge-offs and the corresponding decrease in the allowance was due to write downs on loans that had specific reserves provided in prior periods.

Credit costs remained high compared to our historic experience due to continued weak economic conditions in our markets. However, we did move toward resolution on some problem loans which added to net charge-off totals but also reduce non-performing assets.

In addition, we saw some positive signs in our migration trends as substandard and doubtful loan balances declined by $20 million from the end of the fourth quarter. About $8 million of this decline was due to charge downs that I previously mentioned, while the rest of the change was attributable to upgrades and principal repayments.

First-quarter loan delinquency in the 30- to 90-day categories was good and less consistent with the fourth quarter of 2010 in the low 1% range. We expect asset quality to remain challenged during the rest of 2011, but we will continue to very actively seek resolution on credit issues with the goal of returning our company to a more normal credit state.

As we had anticipated, net interest income for the first quarter was down from the fourth quarter due to reductions in total earning assets, although the net interest margin in itself remained stable. Non-interest income was higher than the linked quarter and remained a key part of Peoples diversified revenue stream. Operating expenses were in line with the prior-year quarter and up modestly from the fourth quarter of 2010.

At quarter end our company continued to maintain a strong capital position as evidenced by our regulatory capital ratios. Our capital ratios have remained substantially higher than the regulatory minimums needed to be considered well capitalized.

TARP capital is included in the calculation of total capital and Tier 1 capital. Consequently, the partial repayment of TARP lowered Peoples' total capital and Tier 1 capital ratios slightly during the quarter. However, our Tier 1 common capital ratio and tangible common equity ratio showed slight increases to 11.72% and 7.36%, respectively, at March 31.

I will now turn the call over to Ed Sloane, Peoples' CFO, for his more detailed comments on first-quarter results.

Thanks, Dave. As Dave mentioned, net interest income was down approximately 4% from the fourth quarter at $13.5 million on a non-FTE basis while margin was stable at 3.43%. The decrease in net interest income was mainly attributable to the smaller loan portfolio, and we did not experience the margin compression we had anticipated.

As part of our cash management strategy, we utilized excess cash in our long-term investment portfolio after the partial repayment of TARP. This, combined with the slightly steeper yield curve for much of the quarter, helped keep margin in line with the linked quarter. Going forward, we anticipate net interest income to remain challenged in the second quarter of 2011 with slight compression in margin in the absence of loan growth.

The persistence of the historically low interest rate environment and the recent flattening of the yield curve does not benefit our balance sheet which is positioned for rising interest rates. Average loan balances for the quarter were down 4% from the linked quarter due to a few large payoffs we experienced in December 2010. We also had a $10 million loan payoff near the end of the first quarter which substantially impacted the $12 million decrease in period-end loan balances as compared with the prior quarter end.

We have seen some traction early in the second quarter in consumer loan growth due to targeted promotions. However, most of our residential real estate production continues to be sold to the secondary market. Although we currently have a solid loan pipeline, there are a few possible larger payoffs that could occur throughout the rest of 2011 which will make loan growth difficult.

On the other side of the balance sheet, total deposits were basically flat from the linked quarter in as increases in checking and savings account combined with seasonal increases in governmental checking accounts to offset decreases in money market accounts and higher-cost CDs. As loan balances have declined we have remained disciplined in our pricing of higher cost accounts in order to shift towards a lower cost funding mix. We have also continued to focus on lessening our reliance on wholesale funding, but not -- by not reissuing maturing borrowings and brokered CDs.

Looking ahead, our second-quarter cost of funds should be positively impacted by the maturity and repricing of a large governmental deposit account contract in late April. Our balance sheet has adequate liquidity and is well positioned for future earning asset growth and a rising interest rate environment. However, until loan demand increases or more attractive investment opportunities are presented, we anticipate that net interest income and margin will be pressured.

Our balance sheet strategy is to profitably grow loans, maintain good liquidity, continue to change our funding mix, and to use excess cash to pay down borrowings. In other operating results for the quarter, Peoples' non-interest income was $8.4 million and was up 3% from the linked quarter due mainly to insurance profit sharing revenue recognized annually in the early part of the year.

We saw good results in regular property and casualty revenues, trust and investment income, and fees from electronic banking. Secondary market income from mortgage production was down substantially from fourth quarter of 2010 as mortgage rates moved up, while deposit account service charges were down due to less overdraft and non-sufficient funds revenue.

Non-interest income was up 4% as compared with the first quarter of 2010 with improvements driven mainly by insurance income, electronic banking fees, and some letter of credit fees. Looking ahead, we are still uncertain of the effects that changes in regulations and consumer behavior will have on our deposit account service charges. We anticipate lower overall deposit service charges than in 2010 for the rest of the year, which could be mitigated to an extent by increased fees from our revitalized consumer checking account product pricing structure that went into effect in March.

We had good operating expense control for the first quarter as total non-interest expense was equal with the prior-year quarter and up only 3% from the fourth quarter. The increase over the linked quarter was due mainly to higher salaries and benefits costs associated with associate merit increases. Year-over-year increases in base salaries and sales compensation costs were offset by lower expenses associated with problem loans.

Looking ahead towards the second quarter, we anticipate expense levels similar to those experienced in the first quarter. We project that we will benefit from the change in the FDIC insurance premium calculation moving into the second half of the year. However, we will also have some additional expenses associated with our strategic initiatives as we move through 2011.

We remain focused on controlling costs, but we are also investing in our company where it makes sense to do so to promote growth in the future. Now I will turn the call back to David for his final comments.

Thanks, Ed. Well, all-in-all we are pleased with the improvement and results of the first quarter compared to the linked and prior-year quarters. There is still uncertainty how current economic conditions and recent volatility and disruptions will continue to impact borrowers in the near term.

Nonetheless, despite declines in earning assets and net interest income, overall earnings for the quarter grew within the range of our expectations and we made some reductions in non-performing loans. We had good results with fee income which was favorably impacted by annual insurance [revenue] recognized in the first quarter. In addition, our costs remained in check and our capital levels remained quite strong.

We also had a couple of big wins during the quarter with the partial repayment of TARP and the hiring of our new CEO. We are beginning to execute on our strategic initiatives for 2011 and all of our leadership team is focused on the long-term success of the Company.

Stepping down as the Interim CEO I am pleased to turn those duties over to Chuck Sulerzyski, who I know will be a great asset to our company's future. I will ask Chuck to say a few words to wrap up our call this morning.

Thanks, David. I am pleased to join the team here at Peoples and to lead a community bank was such a rich, long-term history of growth and success. Community banks are a vital part of our country's economy and Peoples committed to supporting the communities and customers with which we do business.

The Company has a strong desire to win, an experienced management team, and much hard work has been done to develop a sound strategic plan with Board and management support. My immediate focus will be on making progress in the area of asset quality as we search for a new Chief Credit Officer. I am confident that we can work through our problem loans and get back to a more normal credit state.

Our long-term goals will be to produce stable, growing earnings and increase shareholder return. We currently face our share of challenges. I believe that we will emerge as a leading financial service provider to the clients and markets we serve. Thanks, Dave, for your support.

Thank you, Chuck. We all look forward to working with you in the future.

Well, this concludes our commentary and we will open the call now for questions. Once again, this is Dave Mead and joining me for the Q&A session will be Chuck Sulerzyski, Chief Executive Officer, and Ed Sloane, Chief Financial Officer.

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

(Operator Instructions) Bernard Horn, Polaris Capital.

Good morning and welcome to the team, Chuck. I am just -- got a few questions here really just to flush out some of the details. And then maybe, Chuck, after that ask you for your strategic direction for the Bank. But first --.

Bernie, if I could interrupt; this is Ed. Would you speak a little bit louder into the mic? We are having a hard time hearing you.

How is this? Any better?

Much better. Yes, thank you.

Okay, sorry. So thanks and welcome, Chuck. So first a couple of questions.

The first is on the strategic issue costs that you were talking about. Could you just maybe give us a little bit more flavor for what is going on in your thinking there? How much you are likely to spend, what direction that is going to take?

Then I was wondering if you might give us a sense for the roll-forwards. It looks like the net interest margin is obviously challenged, like it is for all banks, but I am kind of curious what the balances are that are maturing and at what costs this year and how you are pricing the news CDs that might coming due. And then the loan production and payoffs.

So just maybe your sense for what the competitive environment is, whether you are gaining share or not in the local area in terms of loan productions.

On strategic costs, Bernie, what I can tell you is that we do have various strategic initiatives that have a cost associated with them during the course of 2011 that will represent a ramp up in revenue in a future period, maybe to start in 2011. But this year we consider to be a positioning year for the Company. We know that we are going to have a higher level of costs and those might come in the form of marketing type of initiatives as we have increased our marketing budgets so that we can target various areas.

And then also costs -- staffing costs associated with putting various loan and commercial and retail initiatives into place. So, again, the strategic plan; that is the way we established our strategic plan is to generate potentially some increased costs in the current year as we position for revenue growth as we move forward over the 5-year strategic plan. Does that answer your first question?

Yes, I think it does.

Okay. And then you had another question on loan production?

It seems like you have had a net reduction in loans so earning assets are down even though margins were stable. I am just curious what the competitive environment looks like so you have got more payoffs than production. I am not asking for big increases in production, I am just curious what the market share and what your position is like.

I can start that by just simply saying that our production levels are pretty much what we had expected in the first quarter. Pipeline is reasonably strong and that is moving forward appropriately.

We had talked in the past quarter about placing new lenders into certain markets or Huntington market in and around the Columbus area. These represent some higher growth markets for us, and so we are very much focused in that. Those lenders have hit the ground running and that, again, is keeping our production numbers where they need to be.

We are getting, though, the cross currents from pay downs. Some of those which were expected, others were not. And then also our charge-off levels are still elevated at this point so it is putting some pressure on the production numbers as we move through this year.

We know that is going to be a challenge for us. We believe that we will see some stability in our loan growth as we move through the year, but it's going to be a continued challenge for us.

I would add, Bernie -- this is Dave Mead -- that clearly in our markets we have seen slack loan demand. And that, combined with what Ed just described, was some fairly large payoffs. We are challenged with growing the loan portfolio.

Now in our strategic plan we have looked at (technical difficulty) designs for different types of lending programs that we will be implementing in 2011 to help offset that, and to be able to give us more products and services that we can provide to prospective clients.

And the larger pay downs, where those things that got refinanced out to other banks or were they just companies retrenching a little bit in terms of their financial leverage? And maybe just were these commercial loans or industrial type things or residential?

Yes, one in particular that we had, which is fairly large payoff, was with a client who needed some different kind of support in terms of the type of lending and floorplanning that that business was doing, which we were not really prepared to continue to expand with that client.

Okay, thanks.

Daniel Cards (sic), [James].

Good morning, guys. It's Dan Cardenas.

Dan, as I mentioned before with Bernie, if you could just speak up a little bit more. We are having a hard time hearing you.

Hold on a second.

Dan, we cannot hear you.

Is that better?

Yes, much better.

All right. Sorry about that. Just another question just going back to kind of the strategic plan that you are talking about. In terms of some of the different lending programs that you just mentioned, can you discuss the types of programs that you are considering?

Dan, I think you asked regarding the strategic plan what types of lending programs are we focused in on. Is that correct?

Correct.

Dan, our portfolio historically has had a large share of commercial real estate exposure in it. Going forward, we see increasing the amount of C&I lending that we do. That will account for the major change in the portfolio's characteristics over time.

Okay.

I would add that another area of focus for us in 2011 is small business lending, even well below the level of C&I or CRE, the normal C&I and CRE that we do. We have done a lot of work in kind of reorganizing and revitalizing our small business lending program for this year, too. So that will be a focus and consumer lending right along with it.

Okay. So then how are staffing needs going to change to prepare for those? Are you out on a hiring binge right now to get C&I lenders and SBL lenders or SBA lenders or are (multiple speakers)?

No, a lot of the restructuring was done in internally.

Okay. Then how competitive is the C&I platform right now? It seems like everybody is focused on C&I growth. What are you seeing out there?

Was the question, Dan, how competitive are we seeing it in the marketplace? I am having trouble hearing you.

Yes, correct. In terms of C&I, how competitive is it right now and where is most of that competition coming from, the larger players or the local players?

I would say in our marketplace, in portions of our marketplace it's coming more from community banks because we have portions of our marketplace where the large players are not as prevalent. In some of the towns it's very much the large players.

I think a big issue is what David mentioned earlier and that is the demand. I see more issue personally from the few calls that I have been on in terms of the appetite of businesses to expand and take on extra debt right now, than I do see necessarily from any hardship that any one competitor is causing us.

Okay. Then, as I look at the SBA lending, would you guys consider the small business lending fund. I mean, I know you just exited out of a substantial amount of TARP, but is that something that is under consideration?

It always is. We would look at that and we have done some deals recently that way.

Okay, and do you have an application in for the SBLF?

Yes, we do have an application. We have not heard back and when we hear back, if we can get a full understanding of all of the issues that are tied and related to that, we will then make a decision.

Okay. And then just kind of regarding the additional cost. Seems to be more like a back half of 2011. What kind of increase should we be thinking about for the cost basis on a forward-looking basis?

For the what again, Dan? You cut out right at the end there.

For the costs, for the additional costs. As I am looking at expenses on a sequential quarter basis, what kind of pop-up do we think we can -- do you envision seeing?

Just overall our operating expenses?

Correct, as they relate to --.

In comparison to the first quarter to last year?

Correct.

Right. Yes, I would expect to see operating expenses in and around the same level as the first quarter, maybe a slight increase as we move through the year.

Dan, this is Dave Mead. I will just add to that. As we built the strategic plan and the 2011 transition year within our strategic plan, some of these initiatives that we are referring to we recognize will have a slight drag on earnings per share, but not a significant drag. There are revenue components that will also be driven off of these.

But, of course, when you start new initiatives there it is that ramping up period. But we don't expect a significant impact on EPS from these initiatives.

Okay. And do you expect to be fully ramped up by the end of 2011?

When?

By the end of the year?

Correct. Yes, I think in some of these initiatives the plans are that they would be fully implemented. Others may be in some stage of implementation.

Okay, great. Thank you.

The other thing to keep in mind on that, too, Dan, is that the change in the FDIC calculation, as I mentioned in some of my prepared remarks, will benefit us as we move through the rest of this year.

Really starting in the second quarter we are looking at an annual benefit, just based on our estimates today, somewhere in the area of $700,000, $800,000 on an annual basis. So that will provide some offset to some of the initiatives that we have that generate costs.

(Operator Instructions) Bernard Horn, Polaris Capital.

Thanks again. So the just on the net interest margin, as we look forward a new -- if we looked at the roll-forward on your certificates of deposit, can you give us a sense for how much is maturing and at approximately what rates during the rest of 2011?

And then what are you currently paying on CD rates to just try to give us an understanding of how cost of funds might decline during the year?

Bernie, I really can't tell you right off the top here what the amount of maturing deposits are coming off. We do have a couple things that will help to create a reduced cost of deposits or cost of funds.

One we had mentioned in the conference call script that has to do with the government deposit that is a fairly large deposit, that the interest rate on that will decrease from just over 4% down to around the 1% range. The other is we do have some higher-cost CDs and there is a rather large group of those that matured during the course of the year. And we will see some relief on that as well.

So it will help to provide some offset to the earning asset yield. I would expect that margin compression into the second quarter is going to be another 1 to 2 basis points. I am looking at about 3.4% is our FTE net interest margin.

Beyond that into the third and fourth quarter, again we expect that there will be some pressure on margin given a flat interest rate environment. So some additional compression at that point.

And the last question is just for Chuck. Maybe you could give us just a little bit of a background on what your strengths are and what the Board has kind of focused your attention on and what you bring in?

Are you from the local area? Do you have any loan customers or relationships that you are looking to help develop for Peoples? That kind of thing.

Thanks, Bernie. In terms of my background, I have a pretty broad set of experiences. I have run retail businesses, I have run trusts and investment businesses, I have run commercial businesses, so I consider myself a broad-based generalist.

In the short term, my focus is really digging into our credit issues. We have a large number of loans that are criticized and classified. Within the first six weeks of joining I will have sat through a review on every one of those loans to try to build a game plan or kind of help with the existing game plan of working those loans to a successful completion.

Longer term, as we go through the remainder of the year, what I really have a passion about is the quality at which the institution interacts with clients. Making sure that customers have a superior experience and making sure that our front-line people in all of our lines of business are doing what they can to help their customers meet their goals.

So we will see an increasing emphasis on kind of tighter pipeline management, more sales process, and also trying to build our knowledge base that allows us long-term to differentiate ourselves in terms of knowledge, advice, and expertise that we can offer to clients.

Okay, thanks very much. Appreciate it.

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

Yes, I just wanted to thank everyone again for participating. Please recall that our earnings release and a webcast of this call will be archived on PeoplesBancorp.com under the Investor Relations section.

Thanks again for your time and all of you have a good day. Goodbye.

This will conclude today's conference call. Thank you and you may now disconnect.