Peoples Bancorp Inc. Announces Linked Quarter Improvement in Earnings

MARIETTA, Ohio, July 26, 2011 /PRNewswire/ -- Peoples Bancorp Inc. ("Peoples") (NASDAQ: PEBO) today announced results for the second quarter of 2011.  Net income available to common shareholders totaled $2.7 million for the quarter ended June 30, 2011, representing earnings per diluted common share of $0.26.  In comparison, diluted earnings per common share were $0.13 for the first quarter of 2011 and $0.27 for the second quarter of 2010.  The linked quarter earnings improvement was driven by lower loan-related credit losses.  Second quarter 2010 earnings included net security gains of $2.2 million or $0.14 per common share after-tax.  On a year-to-date basis, earnings per diluted common share improved 12% to $0.38 compared to the $0.34 earned in the first half of 2010.

Summary points regarding second quarter 2011 results:

• Loan-related credit losses, consisting of the provision for loan losses plus gains and losses on loans held-for-sale and other real estate owned ("OREO'"), were $2.8 million for the second quarter of 2011 compared to $6.8 million for the second quarter of 2010. This reduction was driven mostly by lower second quarter net loan charge-offs, which were 0.67% and 1.86% of average loans on an annualized basis in 2011 and 2010, respectively. Another significant factor was $0.5 million in gains realized on the sale of two commercial real estate loans during the second quarter of 2011, which partially offset a $1.0 million net loss on OREO resulting mostly from write-downs attributable to decreased real estate values.
• The level of substandard-rated loans decreased 8% during the quarter due to $4 million in paydowns and $3 million in charge-offs. Nonperforming loans were down modestly on a linked quarter basis as paydowns and charge-offs were mostly offset by $4.3 million in substandard-rated loans to six unrelated borrowers being placed on nonaccrual status, of which the majority are secured by commercial real estate. As a result, total nonperforming assets as a percentage of gross loans and OREO was 3.71% at June 30, 2011, versus 3.85% last quarter and 4.64% at year-end 2010.
• At June 30, 2011, the allowance for loan losses was 2.68% of total loans and 79.8% of nonperforming loans versus 2.58% and 75.6%, respectively, at March 31, 2011, and 2.79% and 66.1%, respectively, at year-end 2010. The linked quarter increases reflect the impact of specific reserves for two commercial loan relationships placed on nonaccrual status during the second quarter.
• Net interest income and margin were consistent with the first quarter but down moderately year-over-year, due mostly to decreased loan balances and the impact of the sustained low interest rate environment.
• Non-interest income grew 2% over the prior year driven by a higher volume of revenue generated by fiduciary, brokerage and electronic banking activities. Linked quarter growth in several non-interest categories was more than offset by the impact of annual performance-based insurance revenues in the first quarter, which totaled $943,000. Consequently, total non-interest income was down $483,000 or 6% from the linked quarter.
• Total non-interest expense, while comparable to the first quarter, was 3% higher than the prior year second quarter and up 2% on a year-to-date basis. Increased employee benefit costs and professional fees were mostly offset by reduced FDIC insurance costs and lower foreclosed real estate and other loan costs.
• Total loan balances decreased modestly, as new production was more than offset by commercial loan payoffs. During the quarter, promotional efforts produced consumer loan growth of $4 million, or 20% annualized, comprised mostly of direct auto lending. Through six months, total loan balances were down $21 million at June 30, 2011.
• Retail deposit balances were essentially unchanged during the quarter and remained $17 million higher than year-end 2010. Efforts to adjust Peoples' deposit mix to increase low-cost, core deposits remained ongoing in the second quarter, which produced an increase in non-interest-bearing balances and declines in money market balances. The year-to-date increase was driven mostly by higher governmental and savings account balances.

"Second quarter results exceeded our expectations given the persistence of challenging economic conditions," said Chuck Sulerzyski, President and Chief Executive Officer.  "Economic activity and employment levels in many of our market areas continue to remain weaker than national averages.  Despite these conditions, we are encouraged by the second consecutive quarterly reduction in credit losses and problem assets, which we consider to be another step towards restoring our asset quality to more historical levels.  Additionally, our second quarter fee-based revenue generation also was stronger than prior quarters, although linked quarter growth was obscured by the annual insurance revenues in the first quarter."

Net interest income and margin were $13.4 million and 3.43% for the second quarter of 2011, consistent with the linked quarter.  Interest income decreased on a linked quarter basis, due mostly to declining loan balances, which was offset by reduced interest expense largely attributable to the repricing of a large government deposit relationship early in the quarter.  Year-over-year, net interest income decreased 11% for the second quarter and 12% on a year-to-date basis, while net interest margin compressed six and eight basis points, respectively.  These reductions primarily reflect the impact of the sustained low interest rate environment and lower average loan balances.  

"We are pleased to have maintained a stable net interest income and margin during the second quarter," said Edward G. Sloane, Chief Financial Officer and Treasurer.  "Earning asset levels continued to be pressured by the lack of loan growth.  During the first half of 2011, we redeployed short-term assets and maintained a slightly larger investment portfolio and have been more disciplined in our loan and deposit pricing.  These actions have helped mitigate the impact of declining loan balances on earnings.  However, net interest income and margin will be pressured in the second half of 2011 unless loan demand strengthens or market interest rates increase."

In the second quarter of 2011, non-interest income totaled $7.9 million, comparable with the prior year second quarter, as stronger fiduciary, brokerage and electronic banking revenues were tempered by lower insurance income.  Compared to the linked quarter, non-interest income was lower in the second quarter due to the recognition of annual performance-based insurance revenues during the first quarter.  This impact was partially offset by stronger deposit account service charges.  Through six months of 2011, total non-interest income was up 3% over the same period last year, due mostly to higher debit card revenue and mortgage banking income.

Trust and investment income grew 17% year-over-year and 6% on a linked quarter basis, driven mostly by the timing of annual tax compliance revenues.  Contributing to the increase from the prior year was increased market value of managed assets.  Electronic banking income continues to benefit from increased debit card usage by Peoples' customers.   Deposit account service charges, while consistent with the second quarter of 2010, increased 13% from the linked quarter.  Second quarter deposit account service charges reflect a full quarter's impact of Peoples' new consumer checking account product offering and pricing structure, which took effect in March 2011.  Additionally, overdraft and non-sufficient funds fees increased 20% on a linked quarter basis, due mostly to normal seasonal fluctuations but were down 6% year-over-year as a result of changes in banking regulations and consumer behavior.

"Our overall revenue growth is being challenged by conditions within our markets and the banking industry," said Sulerzyski.  "During the remainder of 2011, generating profitable revenue growth across all lines of business will be a key priority.  As part of this focus, we will be placing greater emphasis on execution of a sales discipline, making greater investments in our marketing and brand positioning and adding talent in growth or underserved markets.  While some of these efforts will take several quarters to reach their full potential, we believe many initiatives will begin producing positive results almost immediately."  

Second quarter 2011 non-interest expense totaled $14.7 million, comparable to the linked quarter and 3% higher than the second quarter of 2010.  Salary and employee benefit costs were up 4% on a linked quarter basis and 6% year-over-year.  Higher employee medical benefit plan costs was the key driver of the linked quarter increase, while additional incentive plan expense corresponding with stronger second quarter operating results accounted for most of the increase over the prior year.  Professional fees, primarily legal and consulting costs, were substantially higher than those for both the linked quarter and second quarter of 2010, due to the timing of external legal services for problem loan workouts and external consulting services associated with various strategic initiatives.  Peoples' FDIC insurance costs benefited from the change in assessment calculation that became effective for the second quarter of 2011.  Foreclosed real estate and other loan expenses continued to be lower than recent quarters, reflecting the stabilization in asset quality.  On a year-to-date basis, total non-interest expense was up 2% to $29.3 million, driven mostly by higher personnel costs and professional fees.

During the second quarter of 2011, portfolio loan balances decreased $7.9 million, to $940.1 million at June 30, 2011.  This decline was the result of commercial loan payoffs exceeding new production, coupled with continued sluggish demand for new loans and lower utilization of credit lines by commercial borrowers than historical levels.  In contrast, Peoples experienced 20% annualized growth in consumer loans during the second quarter of 2011 driven by targeted promotions, primarily direct auto lending opportunities.  Since year-end 2010, total portfolio loan balances have decreased $20.6 million.

"Our efforts during the first half of 2011 to increase loan production and grow loans have been hindered by intense competition for quality loans," said Sloane.  "However, the rate of decline in loan balances appears to be slowing and the potential for growth in the near-term exists.  During the remainder of 2011, we will be expanding our consumer lending efforts, adding new niche commercial lending, opening new loan production offices and restructuring our commercial lending function as means of increasing our overall lending activity.  Based on our second quarter success, we see consumer lending as an opportunity for future loan growth given our small consumer portfolio and historic reliance on commercial lending.  We intend to balance our focus on loan growth with prudent risk management and sound underwriting standards."

At June 30, 2011, nonperforming assets totaled $35.1 million, or 1.95% of total assets, versus $36.8 million and 2.04% at March 31, 2011.  Much of this reduction was the result of $1.3 million in write-downs on OREO based upon deterioration in commercial real estate values.  During the second quarter of 2011, Peoples also experienced an 8% decline in substandard-rated loans to $75.8 million at quarter-end from a combination of paydowns and charge-offs.  This decline was limited by six commercial relationships with aggregate balances of $4.3 million being downgraded and placed on nonaccrual status during the quarter in response to updated financial information regarding the borrowers.  Of these loans, $3.7 million involving five relationships are secured by commercial real estate, with the remaining loans secured by other business assets.  The level of watch-rated loans, which are credits with indicators of potential weakness, remained virtually unchanged during the second quarter as the impact of downgrading two large commercial real estate loans into this category was matched by payoffs and upgrades.   Since year-end 2010, nonperforming assets have decreased 22% from $45.0 million, or 2.45% of total assets.  During the same period, the amount of substandard-rated loans has declined 25%, driven by paydowns and charge-offs.

During the second quarter, Peoples' allowance for loan losses increased to $25.2 million, or 2.68% of gross loans, versus $24.4 million and 2.58% at March 31, 2011.  The key driver of these increases were specific reserves for the two previously mentioned commercial loan relationships placed on nonaccrual status during the quarter.  Even with the second quarter increase, the allowance for loan losses remained lower than the year-end 2010 level of $26.8 million and 2.79%, reflecting the decrease in substandard-rated loans and the utilization of specific reserves for impaired loans charged-down during the first quarter.  Net charge-offs for the second quarter of 2011 were down substantially from recent quarters and the lowest level for Peoples since the third quarter of 2008.  This improvement reflects a reduction in gross charge-offs in the second quarter, plus higher than normal recoveries for the quarter.  To maintain the adequacy of the allowance for loan losses, Peoples recorded a second quarter 2011 provision for loan losses of $2.3 million versus $5.3 million and $5.5 million for the linked quarter and prior year second quarter, respectively.  

"We intensified our monitoring and workout efforts associated with our under-performing loans during the second quarter, which is producing positive results," commented Sulerzyski.  "As part of these efforts, we performed a detailed review of our significant problem loans and established a comprehensive workout plan for each loan.  While recent trends suggest our asset quality may be stabilizing, we believe additional losses will be required to resolve some of our larger distressed commercial real estate assets.  Still, we anticipate credit costs over the next several quarters to remain substantially lower than the level experienced during the last couple years."

Retail deposit balances were virtually unchanged during the second quarter, as increased low-cost core deposit balances were matched by a planned reduction in money market balances.  Governmental deposit balances remained higher than year-end 2010 at June 30, 2011, reflecting first quarter tax collections.  Peoples' funding strategy over the past several quarters has emphasized growing low-cost deposits and reducing reliance on high-cost funding sources.  As part of this focus, Peoples has priced its certificates of deposit and money market accounts less aggressively, which has led to reductions in these balances.

During the second quarter of 2011, Peoples' Board of Directors adopted a new schedule for considering the declaration of dividends payable to common shareholders.  Beginning with the second quarter dividend, Peoples' Board of Directors will determine whether to declare future dividends on common shares, if financial conditions warrant, during the first month of the following calendar quarter.  In recent quarters, the Board of Directors declared dividends in the final month of each calendar quarter.  As a result of this change, no common dividends were declared during the second quarter of 2011, which had a positive impact on Peoples' common equity and corresponding capital ratios at June 30, 2011.  The Board of Directors will consider the declaration of a dividend on common shares with respect to second quarter 2011 results at a regularly scheduled meeting to be held later this week.  

"Overall, we are pleased with second quarter results, which were highlighted by favorable asset quality trends," summarized Sulerzyski.  "During my first quarter at Peoples, I have enjoyed visiting every office and reviewed every troubled asset.  I am impressed with our team and am even more optimistic about our future than when I first joined the company.  Still, more work is needed to position the company for long-term growth.  In the coming quarters, we will be implementing several strategic initiatives designed to grow revenues and enhance operating efficiency.  As we execute these strategies, improving asset quality and preparing to return the remaining TARP funds will remain key priorities."

Peoples Bancorp Inc. is a diversified financial products and services company with $1.8 billion in assets, 48 locations and 42 ATMs in Ohio, West Virginia and Kentucky.  Peoples makes available a complete line of banking, investment, insurance, and trust solutions through its financial service units - Peoples Bank, National Association; Peoples Financial Advisors (a division of Peoples Bank); and Peoples Insurance Agency, LLC.  Peoples' common shares are traded on the NASDAQ Global Select Market® under the symbol "PEBO", and Peoples is a member of the Russell 3000 index of US publicly-traded companies.  Learn more about Peoples at www.peoplesbancorp.com.  

Conference Call to Discuss Earnings:

Peoples will conduct a facilitated conference call to discuss second quarter 2011 results of operations today at 11:00 a.m., Eastern Daylight Saving Time, with members of Peoples' executive management participating.  Analysts, media and individual investors are invited to participate in the conference call by calling (800) 860-2442.  A simultaneous Webcast of the conference call audio will be available online via the "Investor Relations" section of Peoples' website, www.peoplesbancorp.com.  Participants are encouraged to call or sign in at least 15 minutes prior to the scheduled conference call time to ensure participation and, if required, to download and install the necessary software.  A replay of the call will be available on Peoples' website in the "Investor Relations" section for one year.

Safe Harbor Statement:

Certain statements made in this news release regarding Peoples' financial condition, results of operations, plans, objectives, future performance and business, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are identified by the fact they are not historical facts and include words such as "anticipate", "could", "may", "feel", "expect", "believe", "plan", and similar expressions.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of Peoples' business and operations.  Additionally, Peoples' financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially.  These factors include, but are not limited to: (1) deterioration in the credit quality of Peoples' loan portfolio could occur due to a number of factors, such as adverse changes in economic conditions that impair the ability of borrowers to repay their loans, the underlying value of the collateral could prove less valuable than otherwise assumed and assumed cash flows may be worse than expected, which may adversely impact the provision for loan losses; (2) competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures and Peoples' ability to attract, develop and retain qualified professionals; (3) changes in the interest rate environment, which may adversely impact interest margins; (4) changes in prepayment speeds, loan originations, sale volumes and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated; (5) economic conditions, either nationally or in areas where Peoples and its subsidiaries do business, may be less favorable than expected, which could decrease the demand for loans, deposits and other financial services and increase loan delinquencies and defaults; (6) political developments, wars or other hostilities, which may disrupt or increase volatility in securities markets or other economic conditions; (7) legislative or regulatory changes or actions, including in particular the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations to be promulgated thereunder, which may adversely affect the business of Peoples and its subsidiaries; (8) changes in accounting standards, policies, estimates or procedures may adversely affect Peoples' reported financial condition or results of operations; (9) adverse changes in the conditions and trends in the financial markets, which may adversely affect the fair value of securities within Peoples' investment portfolio and interest rate sensitivity of Peoples' consolidated balance sheet; (10) Peoples' ability to receive dividends from its subsidiaries; (11) Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; (12) the impact of larger or similar financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples; (13) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity; (14) the costs and effects of regulatory and legal developments, including the outcome of regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations; and (15) other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples' reports filed with the Securities and Exchange Commission ("SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples' Annual Report on Form 10-K for the fiscal year ended December 31, 2010.  

Peoples encourages readers of this news release to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance.  Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this news release or to reflect the occurrence of unanticipated events, except as required by applicable legal requirements.  Copies of documents filed with the SEC are available free of charge at the SEC's website at http://www.sec.gov and/or from Peoples' website.

As required by U.S. GAAP, Peoples is required to evaluate the impact of subsequent events through the issuance date of its June 30, 2011 consolidated financial statements as part of its Quarterly Report on Form 10-Q to be filed with the SEC.  Accordingly, subsequent events could occur that may cause Peoples to update its critical accounting estimates and to revise its financial information from that which is contained in this news release.

SOURCE Peoples Bancorp Inc.