Peoples Bancorp Inc (PEBO) 2011 Q3 法說會逐字稿

Good morning and welcome to Peoples Bancorp's national conference call. My name is Keith, 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, 2011.

(Operator Instructions).

This conference is also being recorded. If you object to this 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. Statements in this call are not historical fact, are forward-looking statements and involve risks and -- I am sorry -- 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's filings.

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

Peoples Bancorp's third-quarter 2011 earnings release was issued this morning and is available at peoplesbancorp.com. This call will include about 15 minutes prepared commentary followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available and on peoplesbancorp.com.

Peoples Bancorp's participants in today's call will be Chuck Sulerzyski, President and Chief Financial Officer, and Ed Sloane, Chief Financial Officer and Treasurer, and each will be available for questions following the opening statements.

Mr. Sulerzyski, you may begin the conference.

Thank you. Good morning and welcome to our call. Early today Peoples Bancorp reported net income of $3.7 million or $0.35 per common share for the third quarter of 2011 compared to $0.26 last quarter. Through nine months, our bottom-line earnings have more than doubled from $0.33 to $0.73 per common share. The stronger bottom-line results during the third quarter were driven by a significant reduction in credit costs from recent quarters. Improving asset quality remained a primary focus for us in the third quarter, and our efforts continued to produce positive results. Net charge-offs were 0.34% of average loans, which was the lowest since 2008 and more in line with our long-term historical average. Migration trends also remained favorable with criticized loans decreasing 11% during the third quarter and 15% since year-end due to upgrades. In addition, our 30- to 89-day loan delinquencies continued to be in the 1% to 2% range.

At September 30, our allowance for loan losses was 2.65% of total loans, comparable to the prior quarter. While we experienced generally improving asset quality trends in the third quarter, economic stress continues to impact certain segments of our portfolio, including the hospitality sector, which is our largest industry concentration. We anticipate continued improvements in asset quality as we are being active and disciplined with our problem loan workouts.

We also are continuing to build a more disciplined and balance credit culture within our organization. These efforts to restore our asset quality will benefit from the hiring of Tim Kirtley as our Chief Credit Officer late in the third quarter. We are pleased to have Tim leading our credit function. His experience in credit administration and portfolio management makes him a great addition to our senior management team.

Other key accomplishments for the quarter include modest linked-quarter growth in loans and total revenue. Net interest income and margin pressures intensified in the third quarter as the Fed took steps to drive down longer-term interest rates to spur economic activity. Operating expenses were up moderately as higher employee benefits costs overshadowed expense control in other areas.

Capital levels continued to strengthen in the third quarter with our tangible common equity to tangible asset ratio improving 33 basis points to 8.16% and Tier 1 common ratio increasing to 12.45% from 12.05% last quarter. We believe these strong capital positions, along with our improving asset quality and earnings stream, will allow for the return of our remaining top capital by the end of the year or early 2012. We will do this without a capital raise.

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

Thanks, Chuck. As Chuck mentioned, we saw a modest flattening of the yield curve in the third quarter as the Fed worked to keep long-term interest rates at very low levels. The resulting lower reinvestment rates put downward pressure on our net interest margin. We were able to offset much of this impact through greater pricing discipline for loans and deposits. The end result was third-quarter net interest income being generally comparable with the linked-quarter.

Loans grew modestly late in the third quarter, producing $11 million in growth in period-end balances, although average balances still fell slightly. New production has picked up in the second half of 2011, and our commercial loan pipeline remains strong. At September 30, we had over $28 million in loan commitments not funded, and less than $5 million was commercial real estate loans.

We continued to emphasize increasing our C&I lending, given the current concentrations in commercial real estate. We also consider consumer lending to be a good growth opportunity within our footprint. Thus, in the coming quarters, we intend to devote additional resources to this area with the goal of making consumer loans a larger part of our portfolio.

On the other side of the balance sheet, we experienced continued growth in lower-cost core funding during the third quarter with non-interest-bearing deposits increasing $14 million or 24% annualized. This growth allowed us to remain less aggressive for higher cost deposits and continue our strategy of shifting to lower-cost funding. This strategy caused the overall decline in deposit balances as we reduced CD and money market balances by $20 million.

This change in deposit mix has helped lower our overall deposit costs by 32 basis points in 2011. We also have a group of high cost CDs from a special product offering in 2008 coming due, which provides us an opportunity to further reduce our funding costs. In the third quarter, $37 million of these high cost retail CDs matured with an average rate of 3.57%. An additional $30 million of these high cost CDs at a rate of 4.05% will mature in the fourth quarter, and another $26 million matures in the first quarter of 2012 at a rate of 4.16%.

Our balance sheet remains positioned to benefit from rising interest rates. However, expectations are the Fed will work to maintain low interest rates. Thus, our outlook for the fourth quarter is for flat to slightly contracting net interest margin, absent significant steepening of the yield curve or continued loan growth. We are continuing to explore opportunities in the coming quarters to enhance our margin, while at the same time move towards a more neutral interest rate position.

Turning back to other operating results, third-quarter noninterest income grew 6% over the linked-quarter and 9% over the prior year. Stronger deposit service charges and increased production from our insurance business drove most of this growth. We continued to see decent growth in wealth management services; however, the downturn in the financial markets in the third quarter more than offset the growth in trust and brokerage assets under management.

Operating expenses were impacted by higher costs in the third quarter relating to our pension, medical and incentive plans. These additional costs overshadowed our ongoing cost control efforts. We also made the decision to contribute $100,000 to our private foundation during the quarter. In prior quarters, contributions were limited as part of our expense savings initiatives. The third-quarter contribution strengthens the foundation's ability to meet the increasing charitable needs within our markets.

Over the next several months, we will continue to make strategic investments in our people and brand to drive revenue growth. As we do, we also will explore opportunities to offset these incremental costs with savings in other areas. These savings could come from further rationalization of our branch network, process improvements or other efficiency gains. We believe these efforts will have a positive impact on our efficiency ratio.

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

Thanks, Ed. We are pleased to report another solid quarter in terms of earnings. Additionally our credit costs were more in line with our long-term historical levels. We also experienced linked-quarter growth in loans and revenue, and operating costs were generally contained.

Asset quality continues to head in the right direction. However, we are maintaining our diligent focus as additional progress is needed before we can say our issues are resolved. The level of nonperforming assets remain higher than we like, and economic conditions continue to stress certain loan segments. Still we believe credit costs over the next several quarters will be meaningfully lower than the amounts experienced over the prior two years.

While restoring asset quality is our top priority, we also have a number of strategic initiatives underway. These include the hiring of new producers, expanding our lending activities and developing our branding. These initiatives will continue over the next several quarters. We will also keep our eyes open for expansion opportunities through the acquisition of insurance agencies, branches or whole banks.

Execution is critical to the success of all strategic initiatives. This requires you have the right people in the right places within the organization. As such, we are making changes within our senior management group to position Peoples for the long-term growth.

The first of these changes occurred in the third quarter with the promotion of Carol Schneeberger to the newly created position of EVP and Chief Administrative Officer. This role expands Carol's responsibilities to include legal, HR and enterprise risk management in addition to operations.

We also hired a senior sales trainer and filled our open Chief Credit Officer position during the quarter. We are continuing to round out the management team, including searching for an experienced consumer lender and hope to announce other changes in the near future. Our earnings momentum continues to strengthen in the third quarter. We are committed to building on the success and growing shareholder returns. We will succeed through disciplined execution of our strategies and partnerships with our clients and communities.

This concludes our commentary, and we will open the call for questions. Once again, this is Chuck Sulerzyski, and joining me for the Q&A session is Ed Sloane, Chief Financial Officer. I will now turn the call back to Keith. Thank you.

(Operator Instructions). Daniel Cardenas, Raymond James.

Good quarter, guys. Congratulations. A couple of questions. Probably, Ed, you can answer this one. On the margin side, you had mentioned that there is about $30 million of deposits that are repricing in this quarter. You said they are at a 4.05% rate right now?

Yes, that is correct.

And then you expect them to reprice down to about what?

Boy, those will -- yes, right around 1%, I would have to say. And something else that is important to note here -- and it was not in the script -- but we have about $55 million that is coming off between the fourth and the first quarter at an average rate of about 4.10%. So those, again, will be going on around 1%.

All right. Is that in addition to the $26 million you mentioned in the first quarter of 2012?

No, that is combined and combining the fourth and first quarter.

Okay. Got you. Got you. All right. And then on the asset side, I mean it looks like that number was under pressure like everybody's number has been recently. I mean continued focus on trying to grow the loan portfolio, it looks like you said the pipelines are looking okay right now at $28 million. Any guess as to what percentage of that $28 million you can actually close on?

We think the vast majority of that we can close on, and we think that we will also fund it during the quarter. So we mentioned in the script that we had $10 million, $11 million of loan growth in the quarter, and we are very hopeful that we are going to turn back and start climbing up the mountain and really are pretty optimistic about loan growth, not only for the fourth quarter but into next year.

Okay. And you said $5 million of that is commercial. The other, is that consumer, or is that residential real estate?

Yes, it is more in the C&I.

The C&I?

Yes, the C&I space. You touched on it. The pressure has been more on the asset side, and some of the repricing pressures that we will see in the investment portfolio from the flattening curve, that will have some impact.

Yes, so we look to loan growth as a stabilizer to some of the pressure that we see out of the investment portfolio repricing. And then what we are doing on the other side of the balance sheet, some continued shift in mix from the high cost CDs to the lower cost. And then, in addition to that, we adjusted our rates rather significantly on some of our deposit products.

Okay. It sounds like you are feeling more confident about the ability to capture loan growth in obviously the fourth quarter and in 2012. I mean what is spurring that confidence? Is it lack of competition or --?

Yes, I think that is a part of it, although I really would not want them to cut that quote up and put it in the locker room for the rest of the year. But I would say in most of our markets our competition, if I look at the wins that we have had recently, we have been able to win meaningful pieces of business from the large regionals. And I think that it is tough for them to cover our footprint in terms of just the distances and where we are more local in these smaller cities than some of the large competitors are.

Okay. Then I missed part of your comments, Chuck, when you were talking about TARP. My phone was breaking up here. It sounded like you wanted to try and repay that by middle of 2012. Is that --?

I'm hoping that we can pay it much more quickly than that. I'm hoping that we pay it no later than the first quarter, and we are going to try to pay it off early in the first quarter or late in this year if we can.

Okay. And that is without the help of capital raise?

That is correct.

Okay. And that is about $17 million?

$18 million.

$18 million?

Correct.

All right. Well, I will step back right now and see if anybody else has any other questions. If not, I will jump back on.

(Operator Instructions). Daniel Cardenas, Raymond James.

All right. It looks like it is just you and me, guys.

On the credit quality side, can you give me the dollar amount of the criticized loans? I know they were down sequentially, but if you can just remind us.

I think we indicated that they were down sequentially $17 million. The dollar amount on criticized loans, and this would include our Grade 5 watch, 6, 7 and down from there, is $153 million.

And then in terms of classifications, are those primarily CRE? Is it real estate? Is it a mixed bag?

It is primarily CRE. There is a small portion of C&I in there, but mainly all CRE.

Okay. And then the amount of TDRs for the quarter, was that zero?

Approximately $5 million. We had a couple that worked their way into that bucket, but relatively small.

Okay. Is that included in your non-accrual number?

Yes, that is correct. Yes, they were all impaired.

All right and then maybe just kind of a quick update. Your OREO number is pretty small, pretty manageable. I mean how are trends looking? I mean are we expecting to see some migration out of non-accrual into OREO, and if so, what do you think the timing is going to look like?

In general, maybe if I could just talk about credit trends. I think you will see dramatic improvement in our criticized classified ratios over the next four quarters. We have had really good improvement over the last few quarters, and I think you will see that be even stronger. So we are feeling pretty good about it. The OREO numbers are pretty small, and we don't see meaningful change there anytime soon.

Okay. And then where did Tim Kirtley come from? What is his background?

Most recently he was the acting Chief Operating Officer at Delaware County Bank. He was --

In Columbus?

Yes, previously he was hired in there as the Chief Credit Officer to try to get them on the mend. His earlier years, he kind of cut his teeth in Star Bank in Cincinnati when [Glenn Hoffer] was running that and went through the credit training there, has played sizable credit roles in Fifth Third's organization between the two spots.

So he is familiar with your footprint?

Yes.

Now, he is at the bank now, right?

Yes.

Okay. And then just I know I am jumping around here, but just jumping over to the deposit side here, the sequential quarter contraction, I mean can we expect to see a little bit more of that just given the challenges with implementing some of that excess liquidity?

Yes, I think so. Maybe some slight contraction in that area. Like I said, we have made some pretty significant rate adjustments in the middle of the third quarter. And, again, where we are seeing some of the contraction on the deposit side is more in the higher cost CDs.

Right. So the focus is still on improving the deposit mix?

It is, very much so.

And I would say from my perspective I think the story for the quarter on the deposit side was the increase of the deposit service charges and the fee income. I think that was a real handsome pickup.

Okay. And then other line items on the fee income side, I guess other issues on the fee income side, you said you are focused on growing that. I think it was in the press release, as well as your prepared comments. Any areas in particular that you can speak to, or is that still kind of a work in process?

We can speak to the insurance and the trust area on the non-interest income front. We saw improvements beyond our expectations with insurance income in the third quarter. And we have been experiencing some double-digit increases in some of the other areas. Trusts and deposit service charges have been up nicely for us.

As we move into the fourth quarter, we expect to see continued contribution from both trust and insurance, and actually as we move into next year as well, our expectation is double-digit increases in those areas as part of the benefit of having a diversified revenue stream. Thus, when there is some pressure on net interest income, these are certainly areas that we can focus our attention on and continue along the lines of revenue growth. We experienced 2% revenue growth in the third quarter, and we expect to see that to continue with the help of some of these other areas of the Company.

Okay. And then what was the driver on the insurance side? What was the driver from second quarter to third quarter? Is it more brokers, or was it --?

Well, first of all, it was in the property and casualty area. Very much so. It is the generation of new business from our producers in that area.

Okay. And then as I look at expenses, specifically the salary and benefit costs, that seems like that is overinflated by about $500,000. Is that --?

You are pretty close on that. I would use -- to normalize it, I would use about $600,000. So some increase in medical expenses, and the bulk of it was in the pension expense area.

All right. Well, that will do me for right now. Thanks, guys.

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

No thank you and appreciate everybody's time today.

Thank you. This will conclude today's conference call. You may now disconnect your lines. Thank you for participating, and have a nice day.