Peoples Bancorp Inc (PEBO) 2016 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 a conference facilitator today.

Today's call will cover a discussion of results of operations for the quarter ended March 31 of 2016.

(Operator Instructions) This call is also being recorded.

If you object to the recording, please disconnect your line at this time.

Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples's future financial performance or future events.

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 detailed in Peoples's Securities and Exchange Commission filings.

These include but are not limited to the success, impact, and planning of implementation of business strategies, including the successful integration of recently completed acquisitions and the expansion of consumer lending activity; the competitive nature of financial services industry; the industry rate environment; the effect of federal and/or state banking, insurance, and tax regulations; and changes in economic conditions.

Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples's business operations.

However, it is possible actual results may differ materially from these projections.

Peoples disclaims any responsibility to update these forward-looking statements after this call except as may be required by applicable law requirements.

Peoples's first-quarter 2016 earnings release was issued this morning and is available at peoplesbancorp.com under the investor relations tab.

A reconciliation of non-GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release.

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 in the investor relations section for one year.

Participants on today's call will be Chuck Sulerzyski, President and Chief Executive Officer; and John Rogers, Chief Financial Officer and Treasurer, and each will be available for questions following the opening statements.

Mr. Sulerzyski, you may begin your conference.

Thank you, Denise.

Good morning and thanks for joining us for a review of our first-quarter results.

Earlier this morning we recorded first-quarter earnings.

We reported net income of $8 million or $0.44 per diluted share for the first quarter of 2016.

This compares to net income of $2.6 million or $0.14 per diluted share in the fourth quarter of 2015 and a net loss of $689,000 or $0.04 per diluted share a year ago.

During the first quarter we were able to effectively control expenses, reduce our efficiency ratio, and generate period-end loan growth of 6% annualized compared to year-end 2015.

Our efficiency ratio continued to decline and was 64.3% for the quarter.

Total revenue increased 2% compared to the prior quarter.

Fee-based revenues were 34% of total revenues compared to 32% in the fourth quarter.

This increase was driven by insurance contingency income that is primarily received in the first quarter each year, and we view it as a core component of insurance income.

Insurance contingency income fluctuates each year and is based on a combination of factors, such as loss experience of policies sold, production volumes, and overall financial performance of the individual insurance carriers.

During the first quarter of 2016, reported noninterest expenses declined 4% compared to the fourth quarter and 20% compared to the first quarter of 2015.

Noninterest expenses were $26.3 million of 2016, which was slightly higher than last quarter's noninterest expenses, excluding non-core charges of $26 million.

This increase was primarily driven by higher sales-based and incentive compensation.

We generated positive operating leverage compared to the fourth quarter, with 2% revenue growth outpacing 1% in core expense growth.

We had positive operating leverage compared to the first quarter of 2015, with revenue growth of 18% and core expense growth of 11%.

The year-over-year percentages are insulated by a full quarter of NB&T in 2016.

Loan growth for the quarter was $32.7 million or 6% annualized.

For comparison, in the first quarter of 2015 organic loan balances declined an annualized rate of 3%.

The increase in the first quarter of 2016 was due to our strong indirect lending production, which contributed $16.7 million of the growth at an annualized rate of 40%.

Total consumer loans were up 8% annualized, and consumer mortgages were essentially flat.

Commercial loans increased an annualized 5% compared to year-end.

We are pleased with the growth during the quarter and look to maintain or improve upon this rate for the remainder of 2016.

We do not expect indirect growth to continue at the 40% annualized rate.

On the credit side of the house, we saw stabilization during the quarter.

As occurs every quarter, there was some movement as far as upgrades and downgrades in our criticized loans, but in total it was relatively flat for the quarter.

Classified loans decreased approximately $3 million during the quarter, and our annualized net charge-off rate was 9 basis points.

We booked a moderate provision for loan losses of $1 million.

Allowance for loan losses as a percent of originated loans was 1.17% at March 31 compared to 1.19% at year-end.

Nonperforming loans as a percent of total loans increased slightly to 0.97% compared to 0.94% at December 31, 2015.

Loans 90 days past due and accruing increased during the quarter as a result of one small commercial loan relationship going over 90 days past due.

I will now turn the call over to John to provide additional details around net interest income and margin and noninterest income, balance sheet, and capital activities.

Thanks, Chuck.

For the quarter, net interest income was flat compared to the fourth quarter and increased 20% compared to year-ago, due mainly to a full quarter of NB&T in 2016.

Our reported net interest margin decreased slightly during the quarter to 3.53%.

The net interest margin, excluding net accretion income, was 3.41% compared to 3.40% last quarter and 3.28% a year ago.

Accretion income was $1 million this quarter compared to $1.2 million for the fourth quarter and first quarter of 2015.

As such, net interest income, excluding accretion income, was $25.3 million for the first quarter compared to $25.2 million in the fourth quarter and $20.7 million in the first quarter of 2015.

This accretion income added 12 basis points to the margin in the first quarter compared to 16 basis points in the fourth quarter and 18 basis points in the first quarter of 2015.

We expect the accretion income to reduce over time as the acquired portfolios get smaller in size, leading to a lower impact on margin as we move forward.

One of the highlights in the quarter was 8% growth in noninterest income compared to the prior quarter, which was mainly driven by the insurance contingency income that Chuck previously mentioned.

In contrast, the revenue from our investment business for the quarter was impacted by market conditions and was down approximately $100,000 from the prior quarter.

Compared to the first quarter of 2015, we had double-digit growth in many categories as we experienced a lift from the full-quarter impact of NB&T acquisition.

Noninterest income comprised 34% of our total revenue for the quarter, an increase from 32% in the fourth quarter.

We also had minimal gains on investment securities during the quarter.

Moving to the balance sheet, the investment portfolio was approximately 27% of total assets, which was consistent with year-end and still with our anticipated range of 25% to 27%.

The yield on investment securities increased to 2.71% in the first quarter compared to 2.68% in the fourth.

Significant majority of the $17 million investment securities increase from year-end was related to fair value appreciation.

For the quarter, period-end core deposits, which exclude $473 million of CDs, grew $61 million or 3% compared to year-end.

Savings and governmental deposit accounts led this increase with $20 million and $37 million, respectively.

The higher savings and governmental deposits are a seasonal occurrence in the first quarter of the year.

Period-end non-interest-bearing deposits were flat for the quarter and remained at 28% of total deposits.

Compared to the first quarter of 2015, period-end noninterest bearing deposits increased 3% or $21 million, with the growth primarily in business demand deposits.

In 2015 we grew our net core DDA accounts 2.4%.

We are on pace to exceed that amount in 2016 based on first-quarter analyzed growth of 2.7%.

During the first quarter, we began executing share buybacks, purchasing approximately 280,000 common shares for approximately $5 million.

We continue to consider purchase opportunities as they arise through the remainder of the year.

Although we repurchased $5 million of common shares during the quarter, we continue to maintain risk-based capital ratios above those needed to be considered well capitalized.

At March 31, 2016, our Tier 1 risk-based capital ratio was 3.41% compared to 13.67% at December 31, 2015, while our total risk-based capital ratio was 14.29% compared to 14.54% at December 31, 2015.

Our tangible equity to tangible asset ratio grew to 8.8% during the first quarter compared to 8.69% at year-end.

Lastly, the tangible book value per common share increased 5% from the fourth quarter and was $15.39 at March 31.

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

Thanks, John.

The quarter included several positives.

We were below our targeting efficiency ratio of 65%.

Annualized loan growth was in the 6% to 8% range, which we had indicated previously.

Loan growth has been steady over the last couple quarters.

We have already funded several commercial loans since quarter-end.

Our current commercial loan pipeline is sitting at $248 million, with $39 million in scheduled fundings expected during the second quarter.

And fee-based revenues increased to 34% of total revenue.

Overall, we are happy with the results and pleased to present improved earnings to our shareholders.

In the fourth quarter we will be converting our core banking systems to one of the best-in-class third-party systems available.

We anticipate one-time costs associated with conversion of approximately $1.2 million as we convert our banking platform.

The costs will be recorded in each of the remaining quarters of 2016, with a significant majority in the third and fourth quarters.

The conversion will support our future growth and will provide efficiencies for our back-office area.

We are really excited about the enhancements and capabilities offered with this new system.

The conversion will have a positive impact on our customer experience as well as our internal processes.

Looking ahead, we continue to expect to achieve point-to-point loan growth of 6% to 8%, with the growth more balanced between commercial and consumer than reflected in the first quarter.

Our net interest margin was in line with our prior guidance in the low 3.50%s, and we believe we can maintain that throughout the remainder of the year.

Total revenue growth is expected to be 4% to 6% in 2016, with low single-digit growth in expenses.

We expect to generate positive operating leverage for the full year of 2016 compared to 2015.

We expect our adjusted efficiency ratio, excluding the $1.2 million costs noted above to remain in the 65% range, as stated in our previous guidance.

Our net charge-off rate was lower than expected during the first quarter.

However, we still anticipate net charge-offs to be near the low end of our 20 to 30 basis points historical rate.

As I stated earlier, this quarter we had record earnings and are proud of this achievement.

However, given last year's performance, we know that we have to continue to be focused on executing and delivering reliable and predictable results to our shareholders.

We remain committed to our customers and communities as we continue to drive shareholder value by our sound practices and disciplined execution.

Earlier this month we announced the hiring of two new executives who will help us proceed on our path to becoming the best community Bank in America.

Cindy Crotty, formerly Executive Vice President, Commercial segment head at KeyBanc, joined us on April 11 and will be the Regional President for Northeast Ohio region and surrounding markets.

Doug Wyatt, formerly Executive Vice President, Senior Commercial Bank of Fifth Third Bank, will be joining us on May 2 and will be developing and leading a significant portion of our commercial line of business, including Central and Southeast Ohio, West Virginia, and Kentucky.

Each individual has over 30 years of experience and represents best-in-class talent.

We are pleased to have them join our team.

This concludes our commentary, and we will open the call for questions.

Once again, this is Chuck Sulerzyski; and joining me on the Q&A session is John Rogers, Chief Financial Officer.

I will now turn the call back to the hands of our call facilitator.

Thank you.

(Operator Instructions) Scott Siefers, Sandler O'Neill & Partners.

Chuck, I was wondering if you could maybe provide any update, to the extent that there is any, on the couple -- you know, criticized or NPA assets -- or criticized assets or NPAs that got kind of brought up last quarter.

I wondered if there have been any new developments with them?

And then what would be sort of the outlook for their migration, positive or negative, as the year progresses?

No, I think that we had kind of a pretty stable quarter.

I anticipate our credit metrics improving as we move out throughout the remainder of the year.

I would say there's really nothing of any significance in any of the credits that have been previously mentioned in prior calls.

Again, I expect that you'll see the credit metrics improve over the remainder of the year.

Okay, perfect.

Thank you.

And then just switching gears to capital management: you were kind of active, as you guys had disclosed previously, in the share repurchase this quarter.

Just given -- I'm just curious, given sort of the recovery in the stock price over the last couple of months, what the appetite is for continued repurchase, and how you guys are thinking about that dynamic.

Scott, it's John.

I'll take that.

I think we still have an appetite to consider repurchases at the right price.

But I think you were very accurate in saying that the market has recovered some lately.

And probably somewhat a little -- at this point in time a little bit rich for our appetite to buy back at those prices.

But we still are definitely to open to buying back at the appropriate price, should it arise.

All right, perfect, thank you very much.

You're welcome.

Kevin Fitzsimmons, Hovde Group.

I was wondering if you could give an update on where we stand in your direct and indirect energy exposure.

I know one of those loans that was -- I believe it was one of the classified ones from last quarter was a fracking-related one.

But just given the discussion on the topic industrywide, it was probably worth getting an update if you had it.

Thanks.

Yes, we continue to make progress.

I think the total exposure of the energy portfolio is down to 1.6% of total assets.

So 1.56% commitment of total loans from 1.68% at the end of the year.

So we're down to $38.2 million.

That $38 million is not as good as the rest of the portfolio, but it's not doing horrifically.

Most of that -- we feel pretty good about it.

There's a couple that we're watching pretty closely.

But we don't anticipate that to have a significant impact in the future.

You okay, Kevin?

Yes, sorry, Chuck.

Just maybe if you could give us also a little bit of outlook on how you're looking at the pace of provision.

You described it as moderate this quarter, and it has bounced around over the past year or so.

So looking out and seeing what you see now, would you expect to stay roughly at that range, or it to be simply more of a byproduct of loan growth that you have put up?

I think it's going to be mainly a byproduct of loan growth that we put up.

Great, great.

And Chuck, one last one.

Just when you've talked about M&A in the past, you've said bank acquisitions are probably off the table, unless they were cash deals in the near term.

But you always expressed an interest in more insurance agency deals.

Anything on that front that you are seeing or conversations happening?

Yes, we -- just a couple of thoughts.

First, with the bank deals, obviously we mentioned the core conversion in November.

So if we were to do a bank deal, it would be something that would be closing mid-2017.

We would love to do insurance deals.

We would love to do investment deals.

We are having conversations in both categories.

But again, these are generally pretty small deals, many of them less than $1 million.

But we would love -- I will be disappointed if we don't get several of these done in 2016.

Okay, great.

Thank you.

Michael Perito, KBW.

I wanted to ask a quick question on the indirect auto.

Can you remind us some of the parameters of that portfolio, kind of like the average FICO scores, percentage new versus used?

Anything like that you guys can offer us?

Yes.

First off, in terms of new or used, we're usually about 50%/50% over time.

And we see that change a little bit, but not too much.

In terms of the scores for the first quarter, they were at 716.

That -- we have had four quarters of rising scores.

In general, we are between 700 and 720, and the portfolio continues to perform respectably.

Great, thanks.

But just I guess the follow-up going forward, it sounds like the growth at least as you see it today is not going to be as strong in Q1.

It's going to be a bit more balanced over the back half of the year -- more tilted, hopefully, towards commercial.

Is that fair?

Yes, I think that that is fair.

I think you'll see good indirect performance over the remainder of the year, but I don't see us accelerating the growth on a growing portfolio.

That will taper a little bit.

Part of that growth is from the West, where we bought the bank last year.

If you go back five years, NB&T had a $75 million indirect portfolio.

And we have been trying to reintroduce ourselves to dealers there.

We've also been at it for several years in our core footprint and have expanded both the number of dealers -- but more importantly, getting more business from many of the dealers that we've been doing business with.

Okay, great.

Thanks.

Quick question on the expenses.

The salaries and benefits line, a little over $14 million this quarter.

Does that incorporate, I guess, some of the newer, higher-level hires you guys brought on?

And is that -- is there anything else you guys would note in that number that would make that, I guess, even more sticky?

Or maybe there could be an adjustment in Q2 going forward?

Doug and Cindy are not in those numbers in Q1 and will be in there partially in Q2, so you might see a modest uptick.

We'll continue to look at other expense ideas, et cetera.

So I wouldn't expect that to be a major impact to our results in the future quarters, et cetera.

Just remember, on the incentive side last year, late last year there was a significant cut in the executive compensation incentive pools, given the results.

And given our results, we will bump up those accruals this year.

You'll probably see an impact to that as well if you look at that number from the linked-quarter basis.

Okay.

And then just one last question for me.

Maybe asking a capital question a different way.

You guys are hitting it pretty good standing right now.

I mean, the TCE should approach 9% over the course of the year.

And it sounds like bank M&A is on hold for at least another quarter or two, just given the conversion.

And then anything on the fee income side would be relatively small.

So why the -- even with the recent outperformance, why the hesitation to maybe continue using the buyback here?

It's still, relative to where you guys have been over the past two years, significantly cheaper on book value.

Yes, I mean, as I said earlier, we continue to evaluate that and look at what we believe to be a fair price.

I don't think -- as Chuck mentioned, I don't think we plan on any [back] acquisition deals this year; and we wouldn't close anything at the earliest until mid-next year.

But I do think in the longer-term that's still a part of our strategy, and we need to keep those thoughts as we look at our capital plan and what we envision the Company to be.

And we will continue to evaluate the share buybacks in light of where we think we're headed.

And we will give consideration with that as we move forward.

And then, sorry, just one more on that front.

Just any updates, Chuck, on the dividend and how the Board is thinking about it today?

I think there's more -- I think that there's upside opportunity in the dividend is what I would say.

Okay, perfect.

Thanks.

We will consider to evaluate that as well as we move forward.

Thank you.

Daniel Cardenas, Raymond James.

Just focusing on the loan side for a minute, what impact, if any, did paydowns and payoffs have this quarter on your loan balances?

Nothing out of the usual.

We had some meaningful -- we probably will experience more paydowns in the first quarter then we will in the next two quarters.

So we had a little bit more than expected, but again, nothing unreasonable.

We are optimistic on the second quarter on the commercial side.

Okay.

And then maybe a quick update on the Dayton/Cincinnati marketplace.

What does loan growth look like going forward?

Do you expect to see that be kind of the driver on the commercial side, or is the commercial growth going to come from other areas of your footprint?

Well, I think we have added talent across our footprint.

And we'd love to see all aspects of the geography perform extremely well.

But I -- we think that we'll see growth in the West, but we'll see growth across the footprint.

You know, I mentioned hiring of Cindy and Doug.

We continue to add high-caliber folks, and there's business to be had everywhere.

The other thing I would mention in the West that I'm really excited about is the first quarter we have had meaningful DDA growth in the West, growing at a 2.5% to 3% rate, which mirrors what we've done in our core footprint.

This was a franchise that was attriting checking accounts at a pretty high level when we acquired it.

So, you know, a year into it we've got growth.

And here we sit at that 28% non-interest-bearing checking account, and we see that as a key in terms of cost of funds, but also a source of future mortgages, insurance sales, investment sales.

So I'm excited what they're doing out there in loan growth, but I'm really excited to see the core checking account.

Because I think -- in the long run I do believe that a lot of franchise value is derived from the deposit base.

And I think we can make our deposit base even more attractive over time.

Okay, good, good.

Then just in terms of the deposits, are you seeing any changes on the competitive factors within your footprint?

Is anybody getting aggressive on pricing right now?

Not extremely aggressive, I guess is what I would say.

For the most part over the past, there's always been banks out there that have been higher than us.

And I don't really see anything really meaningful happening there.

Yes, Daniel, I think the uncertainty around what the feds are going to do and everything else -- most banks are kind of just hanging relatively steady.

We might see an occasional outlier here and there, but nothing of any magnitude.

Okay, good.

And then if you could just remind me -- your balance sheet position.

Are you guys fairly neutral right now?

And how about a rising rate environment?

We are a hair asset-sensitive.

Okay.

And last question for me: I noticed your goodwill amortization was down about $100,000 on a sequential-quarter basis.

That $1 million number -- is that kind of a good run rate to work off for the rest of this year?

Yes, it is.

That's just kind of the turn of the calendar and the amortization -- quit ticking down a little bit as we move through some of the past acquisitions and declining core deposit amortization.

Great.

All right, guys.

Thank you.

(Operator Instructions) Scott Beury, Boenning & Scattergood.

I was just looking at -- the loan growth, obviously, was pretty strong.

But we did see some more runoff in the acquired portfolio.

And I was just wondering if you could give a little color on maybe what was driving that, specifically if it was concentrated in any specific loans; and what you're kind of forecasting internally, generally speaking, for future runoff?

When you say -- hold on one second, give us a second.

Can you put us on mute for one second?

Scott, I mean, the acquired loan book is a segregated book.

So once it gets acquired, it's only ever going to go down.

It's not going to go up.

So basically the new originations from those loans move up into the originated loan category.

And so there is no real new loans.

Or anything that goes down with those moves up into the originated loan bucket.

So that's a declining balance from day one with each acquisition.

Understood.

So it was really just standard payouts.

Right -- and just relates to the amount of PCI loans, or et cetera, that you book it at the day of acquisition.

Your question scared me, Scott.

Sorry about that.

It's one of those accounting anomalies you got to just -- for us bookkeepers.

Understood, understood.

I guess one other kind of housekeeping question.

In terms of the accretion income, can you just remind me what's kind of left there based on the -- you know, in the accretion income to run off?

I mean, I'm expecting, I think, based on your prior comments, to run off completely some time mid-2017.

But just any specifics there?

No.

So they are looking up a detail about the number.

I didn't have that handy.

But I'll tell you, during the quarter when we did the work, we're actually seeing little bit more of accretable income that got recorded over future periods.

So we would actually expect that our accretable income, even though it declines, will be with us for a little bit longer as we move forward, as some of the cash flow projections that we ran showed that there was somewhat of an improvement of those.

And we will get a greater number.

So our accretable number is $7 million we have left to accrete in the income.

And that will accrue over the next number of years.

I mean, that could go for a while; but at some point you're just going to get relatively de minimis.

And we'll start talking about it in a couple of years, probably.

Understood.

All right.

Well, most of my other questions have been answered already, so thank you.

At this time there are no further questions.

Sir, do you have any closing remarks?

Yes, thank you all for listening to our call.

We appreciate it.

And please remember that our earnings release and a webcast of this call will be archived on peoplesbancorp.com under the investor relations section.

As a reminder, our annual shareholder meeting will be held on Thursday, April 28 in Marietta, Ohio.

Thank you for your time and have a good day.

This concludes today's call.

Thank you for your attendance.

You may now disconnect your lines.