Peoples Bancorp Inc (PEBO) 2007 Q4 法說會逐字稿

Good morning and welcome to the Peoples Bancorp conference call. My name is Maureen and I will be your conference facilitator today. Today's call will cover Peoples Bancorp discussion of results of operations for the quarter ended December 31, 2007.

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 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 or Peoples' 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' Securities and Exchange Commission filings. Although management believes that the expectations in these forward-looking statements are based on reasonable assumptions within the balance of management's knowledge of Peoples' business and operations, it is possible that actual results may defer materially from these projections. Peoples claims any responsibility to update these forward-looking statements.

Peoples' fourth-quarter 2007 earnings statement was released 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.

The Peoples Bancorp participants in today's call will be Mark Bradley, President and Chief Executive Officer, and Carol Schneeberger, Chief Financial Officer and Treasurer. Both will be available for questions following opening statements. Mr. Bradley, you may begin your conference.

Thank you. Good morning and welcome to Peoples Bancorp's conference call.

Today, Peoples Bancorp recorded reported fourth-quarter 2007 earnings of $0.21 per share on $2.2 million in net income compared with $4.8 million or $0.44 per share in last year's fourth quarter. For the year ending December 31, 2007, Peoples earned $1.74 per share, down from $2.01 in 2006.

As previously disclosed, fourth-quarter results were negatively impacted by an other-than-temporary impairment charge in our investment portfolio, which lowered after-tax earnings by $3.6 million. This charge was partially offset by a $782,000, or $508,000 after-tax, reduction in franchise tax expense resulting from the adjustment to Peoples' tax reserves to reflect the settlement agreement with the tax commissioner of the State of Ohio. The December 2007 settlement resolved certain issues concerning Peoples' Ohio corporation franchise tax liabilities and associated calculations for the 2002 through 2008 tax years representing fiscal years 2001 through 2007. The net impact of the impairment charges and the franchise tax settlement was a reduction in fourth-quarter 2007 earnings of approximately $0.29 per share after-tax.

The non-cash other-than-temporary impairment is comprised of a $1.3 million charge related to Fannie Mae preferred stock previously carried at $6.8 million and a $1.9 million charge related to Freddie Mac preferred stock previously carried at $8.5 million, a $100,000 charge related to a single bank holding company stock held by Peoples previously carried at $200,000, and a $2.2 million charge related to three collateralized debt obligations, or CDOs, previously carried at $7.9 million. After recording these charges, the carrying value of our Fannie and Freddie preferred stock is now $12.1 million and the carrying value of all CDOs held by Peoples is $6.1 million. Later in this call, we will go into more detail regarding impairment charges and our CDO investments.

Notwithstanding the one-time events during the year and a tough operating environment for financial institutions, I believe our 2007 results from normal ongoing operations were good. Full-year 2007 revenue grew $1.7 million as both net interest income and non-interest income expanded, while operating expenses were only up $150,000.

We also returned value to our shareholders in '07 with a 6% increase in dividends and through the repurchase of approximately 464,000 shares of our stock throughout the year. We're proud to say that our record of increasing dividends now stands at 42 consecutive years.

The fourth quarter of '07 was highlighted by stronger than expected loan growth as (inaudible) loan balances increased $14 million over the linked-quarter end. Commercial mortgage production was the main driver of loan growth for the quarter while we experienced some expected pay-offs in our real estate construction portfolio. Despite good growth in the fourth quarter, total loan balances at year end '07 were down $12 million from year end 2006 due primarily to significant commercial loan payoffs throughout the year.

Our outlook for 2008 will continue to focus on loan quality versus quantity. With some known loan payoffs already in motion, we look for another year of flat loan growth with possible slight declines in total balances. However, we did see earning asset growth in the last three months of the year. As a result of fourth-quarter loan growth and some investment purchases made toward the end of the third quarter, average earning assets were up $29 million compared to the third quarter. Fourth-quarter '07 earning asset yields were up slightly, helped by interest income pickups from two separate pools of loans acquired in 2002 and 2003. The additional interest income on the acquired loans was caused by the loan pools performing better than anticipated and helped increase net interest margins in the fourth quarter by about 8 basis points.

On the funding side, total deposits at December 31, 2007 were up $2 million from the end of the third quarter as reductions in CD balances were offset by gains in non-interest-bearing deposits, interest-bearing checking and money market accounts. Personal money market accounts experienced a $10 million increase during the quarter and interest-bearing checking account balances grew $12 million.

For the fourth quarter of '07, the cost of interest-bearing deposits was 3.55%, down 9 basis points from the linked quarter, while the cost of borrowed funds decreased 31 basis points to 4.61%. Lower borrowing costs were caused by the Federal Reserve short-term reduction and also replacing long-term debt at lower rates.

Net interest income and margin for the fourth quarter of '07 were $14 million and 3.40% respectively. These figures represented a 6% increase in net interest income and 14 basis points in margin increased from the linked quarter. In the latter parts of '07, we benefited from our liability sensitivity in the short-term time horizon as market rates came down on the short end. Our modeling indicates we remain slightly liability-sensitive in the short-term. With the recent 75 basis point cut by the Federal Reserve, our modeling indicates net interest income should grow, considering the aggressive cut in our asset liability position. However, with cuts like that and possibly more planned, the waters get a little muddy from intense deposit pricing loan refinancings and unplanned loan repricings, which make projections for future net interest margins a challenge. In the end, we look for '08 net interest margin to be in the mid to upper 330s with no growth in earning assets and possibly a slight decrease in earning assets if loan payoffs are larger than expected.

Now, a look at loan quality, which is at the forefront of everyone's mind -- during the fourth quarter of '07, total net charge-offs were just 16 basis points or 0.16% of average loans, down from the length in prior-year quarters. Net charge-offs for all of '07 were $2.7 million or 0.24% of average loans, as compared with $3.8 million or 0.35% in 2006.

Despite lower net charge-offs in the first quarter, we have begun to see some deterioration in some credit metrics, such as the amount of loans 30 days past due. While such delinquencies do not always lead to charge-offs, it show the pressure mounting on consumers and businesses. Nonperforming loans comprise 0.83% of total loans at December 31, '07, up from 0.56% at September 30, with all of the increase being in non-accrual loans.

Our provision for loan losses was $1.5 million for the fourth quarter of '07, up from $1 million in the third quarter of '07. For the full year, provision expense totaled $4 million in '07, as compared with $3.6 million in '06. We believe that loan quality remained reasonable in 2007, especially considering that much of the recent losses have been associated with a limited number of relationships.

We believe challenges to loan quality remain at manageable levels. Our loan loss reserve grew $1.2 million in 2007 and now stands at 1.40% of total loans. The foundation of our loan quality is still strong although those are cracks may be forming, seen by recent increases in 30-day delinquency, a handful of commercial loans that have either been downgraded or labeled and paired, and of course the economy in general. Recent rate cuts should help our commercial clients with lower loan rates and inflation in price pressures are still very real issues for our customers.

In 2008, we look for net charge-offs to again be in the 0.20% to 0.30% range, which is similar to what we have experienced the last five years. We also look for provision expense to be similar to the $3 million booked in '07, although that number could rise if loan quality deteriorates. Alternatively, provision could drop below 2007 levels if loan quality is better than expected.

Overall, in '08, our plan is to focus on the basics that make us a good company, serving customers through a relationship-based approach, providing diversified financial solutions from wealth management to insurance to banking, making the loans and weathering the storm against unpredictable market conditions.

Now, I will turn the call over to Carol Schneeberger, our CFO, for her comments on fourth-quarter and year-end results.

Thank you. I would first like to share more details about the securities-related impairment charge Mark mentioned earlier. First, the Fannie and Freddie investments -- after the $3.2 million impairment charge, our total deferred stock exposure will be carried on our books at $12.1 million. The Fannie Mae and Freddie Mac preferred stocks are investment-grade high-yielding fixed rate securities that are rated AA- and AA3 by S&P and Moody's respectively.

Next, the CDOs -- after the $2.2 million impairment charge, our CDO portfolio will be carried on our books at $6.1 million, of which $5 million are rated BBB consisting of an underlying collateral pool of 88% bank, 8% insurance and 4% REIT. These collateral pools are currently experiencing no deferrals or defaults. These investments were deemed to have a $2 million impairment based on upon our assessment of the credit and liquidity risk inherent in these types of investments. The remaining $1.1 million of CDOs are invested in two 100% bank income notes originated in 2001 and 2002. One of these income notes, the first, is valued at approximately $400,000. We booked a $675,000 other-than-temporary impairment charge on this investment in the third quarter of 2007. As our analysis anticipated at the time, it is currently experiencing a deferral. No additional impairment is indicated at this time. The institution in question that caused the deferral was able to complete the sale of one of its business units and we are cautiously optimistic this institution might be able to begin making payments again sometime in late 2008.

The second income note, valued at approximately $700,000, was deemed to have $200,000 of other-than-temporary impairment in the fourth quarter of 2007. This income note experienced a default within its pools and will begin making an income note payment distribution in April of 2008. The size of the default fell within the original purchase analysis of the security. Therefore, the impairment charge of $200,000 was not related to the default in the pool but rather to our reassessment of the credit and liquidity risk inherent within the investment.

In summary, we will continue to monitor the Fannie, Freddie and CDO investments on our books, as well as all other investments, through our normal credit review process and the other-than-temporary impairment guidelines set forth in current accounting pronouncements. Current accounting rules require us to analyze all of our assets on an ongoing basis for indicators of impairment. When those indicators exist, we have controls and procedures in place to determine if the carrying value of those assets should be reduced.

We will continue to monitor developments in the credit markets and respond accordingly to make good economic and risk management decisions based on the long-term focus, not just accounting rules.

Now let's switch gears and look at normal operations. In the fourth quarter and for the full year of 2007, we continue to progress on our strategy of diversifying our revenue streams to become less dependent on the interest rate environment by growing our fee-based revenues.

Total non-interest income was $7.6 million in the fourth quarter, up from $7.4 million a year ago. Full-year 2007 non-interest revenue was also up by $1 million over last year, totaling $31.3 million. Non-interest income comprised 37% of our total revenue in 2007.

Most of our growth in year-over-year fees was from higher trust and investment income, plus debit card income. Trust and investment income was up $725,000 or 17% over 2006, as total assets under management grew 10% due to the addition of seasoned sales personnel and increased cross-sale opportunities from our retail banking operation.

E-Banking revenues, primarily debit card revenues, where up $444,000 or 14% over 2006, reflecting steady increases in debit credit activity. In addition, our insurance commissions grew modestly despite lower one-time profit-sharing revenues and a softer insurance market that has seen decreasing premiums from last year.

Going forward, we continue to focus on growing our fee-based revenues through the addition of skilled sales personnel in our Wealth Management group and increased cross-sale activity among our banking, insurance and investment businesses.

Total non-interest expense was $12.4 million for the fourth quarter of 2007, down from $12.6 million and $12.9 million in the linked and prior-year quarters, respectively. Fourth-quarter expense was positively impacted by the reduction of franchise tax expense, which is an above-the-line tax for Peoples Bancorp that Mark mentioned earlier. Offsetting this non-interest expense decrease were year-over-year increases in sales based compensation, marketing expense and bank card costs in correlation with increased debit card activity.

For 2007, total non-interest expense was $51.4 million, up less than 1% of over the previous year, as higher salaries and benefit costs were offset by reductions in other expenses.

We look for our operating expenses to increase 3% to 5% in 2008 as continued investment in new sales associates, technology, a full year's expense of our newest financial services office in Huntington, West Virginia, and a return to normal for franchise tax expense will combine to grow operating expenses.

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

Thank you, Carol. Although we believe that operating results were good in '07, the year was marked by one-time charges that have plagued many companies in the financial services industry this year. However, I think that it is important to note that our already strong capital position improved in '07. Our tangible equity of tangible assets ratio of 7.30% a year in '07 is up from 7.15% at year end 2006.

During the end, 2000 results were disappointing despite a good year in our core operations. Net interest income and non-interest revenues increased while operating expenses were flat over the prior year, which improved our efficiency ratio. Although loan growth was challenged by payoffs, loan activity was good and we saw some growth late in the year. Net charge-offs were reasonable and challenges to loan quality remain manageable.

Net interest margin increased slightly over last year and we are positioned to take advantage of possible future decreases in short-term rates with our liability sensitivity in the one-year time horizon.

With the financial markets as unpredictable as ever and the housing industry sending shockwaves through the industry, we believe it makes sense to be sensible with our capital levels in 2008. As some have said, capital and consistency is a good thing. We tend to agree with those folks. We will be selective with acquisitions. We will also probably be less active with stock buybacks than we were in '07 when we repurchased 468,000 shares.

What do we think about '08 earnings? Accounting rules in the financial markets make such projections difficult, but our internal models assume a net interest margin in the mid to upper 330s with flat to slight declines in earning assets. Our effective tax rate will increase to about 26% in '08 from fewer tax credits being available for use and higher projected pretax income. Therefore, we project 2008 earnings-per-share to be in the $2.02 to $2.08 range. Please note our projections exclude any special loan loss provisions or one-time impairments or gains. As always, we will continue to manage Peoples Bancorp for the long-term while making the best of a challenging operating environment.

This concludes our commentary. We will open the call for questions. Once again, this Mark Bradley. Joining me for the Q&A session will be Carol Schneeberger, Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.

(OPERATOR INSTRUCTIONS). Daniel Arnold, Sandler O'Neill.

Hey, guys. Good morning. The first question -- just on the franchise taxes, (inaudible) I just want to make sure that is nonrecurring, right? That is going to only be in the fourth quarter?

You're correct in that assumption.

Those expenses will just come back up to third-quarter levels back in the first quarter.

That is a fair assessment, yes.

Okay. Then just on the nonperforming assets, I just wanted to see what kind of the loans exactly where showing up in the ones that are coming into nonperforming status?

There's probably two to three or four loans, Dan, that pop that number up about $3 million. The biggest loan would be close to $2 million; that is raw land. (multiple speakers)

I'm sorry, that is what kind of land?

Raw land, mostly unimproved land. It is not a typical loan for us but we do feel pretty good that the loan is salable. It is in Ohio; it is an economically growing area. So that is currently on nonperforming and nonaccrual, but we are cautiously optimistic that the loan -- the value is good and that we will come out of it with no loss; it's just a matter of when. That is the biggest one; it is roughly $2 million.

The other handful of loans would be commercial real estate for the most part. They're not big in dollar amount. Again, we do not expect major losses out of those.

With respect to the margin, I was just kind of curious. It looks like it mostly is a result of these loan pools that you guys bought. What kind of loans are those? Is it just you put them on your books at kind of low valuation assumptions or what exactly is going on there?

They are loans that we bought in the normal course of acquisition several years ago. They would be commercial loans mostly, some personal loans, some equi-lines but they are mostly commercial loans. Obviously, when you buy such loans, you mark those to market, expecting losses. The pool is actually -- when I say pools, they were just part of basic acquisitions over the last several years.

These are part of bank acquisitions?

Correct, or branches but mostly bank. In the end, the loans performed better-than-expected, so we are accreting that back into income, which helps net interest margin. So that is really the answer there. We call them loan pools but we did not go out and buy a bunch of loans. They were just part of acquisitions.

You guys mentioned that you're liability sensitive over the short-term, so you probably should see a further benefit to the margin at least in the first quarter. Does that mean you guys are asset sensitive over the long-term and then margin will kind of trend down as 2008 goes on with the 320 to 330 guidance?

The 75 basis point cut, that -- when I saw that, I was obviously very happy. The question is, if there's going to be further cuts, how does that cut into the pricing dynamics that then occur, which occurred, what, four or five years ago. A lot of loan customers come in wanting to talk about refinancing. So, yes, I think if the cuts are really strong, meaning another 75, another 25 on top of that, it does not benefit us. Then at that point, we will try to turn the ship to be asset sensitive and I think we are in those bigger ranges.

Okay. Then just lastly on the buybacks, I was wondering how many shares you guys bought back in the fourth quarter? May I have the full-year numbers?

I think that is actually in the earnings release. We bought about 85,000 shares in the fourth, compared to about 140,000 in the third. As I said in the call of the transcript part, I do not expect us to buy back another 0468,000 shares this year. We are authorized to do it but I think we will be a little more selective. We bought $85,000 in the fourth quarter. We will probably be at that level or below in the first quarter of '08 is my projection. But, you know, obviously, if the prices are in a certain range, we may get a little more aggressive. So I will hedge my comments in that manner.

Fair enough. Well, I appreciate it, guys. Thanks a lot.

Thanks, Dan.

David Darst, FTN Midwest.

With the loans from '02 and '03, what is the final maturity date of those? Are some of those paying off and that's why you were able to recapture the interest in the fourth quarter? Or are you --?

Those loans will pay off over the next several years, but the credit quality is just better than we anticipated. Some have paid off and some of them obviously paid off a little quicker than we anticipated.

I guess, to add to that, David, there was not like a massive repayment of those loans in the last few months. It is just more of the credit quality than repayment but there have been some prepayment, I will call it, on some of the loans we acquired.

Okay. You gave your outlook for your average earning assets for next year to be flat to slightly down. Is that incorporating both -- they are flat -- (inaudible) securities balances?

Yes. It actually incorporates also the write-downs we had from the impairment charges because obviously the book value on those will go down a little bit. We're not going to scurry out there and buy another $5 million or $10 million of investments just to plug that. But yes, I anticipate loans to drop slightly or be flat. I think flat would be a victory for the year but I do not expect earning assets -- probably the best way to say it is I do not expect much if any earning asset growth in '08.

Okay. Then any thoughts or comments on your economy, unemployment rates or economic trends?

It's kind of all across the board, David. Remember our economy stretches from the Columbus, Ohio area to the west of Ashland, Kentucky, to parts of West Virginia. So it is a fairly stable economy because it is so diverse. Typically, this area would lag the nation. As I've talked to you before, there are booms and busts. We do not typically trend along that way, but things are actually okay in our economy. We have not have the issues that -- what I've seen in northern Ohio or Michigan. It is a little more stable because we are a little further south.

So actually, you know, there's not much negative news that I can see right now but we are certainly watching all of those indicators, like unemployment, home values, etc. There are pressures mounting but, at this point, we are still okay.

Then your assumptions for provision expense and charge-offs for next year, is that kind of in line with the historical trend of 35 basis points or so?

Yes, the 35 BIPs was probably a little on the higher end. That was our '06 number. That is a crystal-ball approach but our best crystal ball says we will be between that 20 and 30 BIPS, you know, 8. I look for our provision to be roughly -- and because of that, I look for our provision to be roughly the same as we saw in 2007, again not expecting much loan growth. If we are pleasantly surprised and loans grow, that provision could go up just because of loan growth.

Okay, thanks.

Jason Werner, Howe Barnes.

Good morning. A follow-up question regarding the loan pools that you're putting more income into now. I guess what triggered that now, as opposed to some other quarter? Why are you recognizing the income now versus prior to this?

we did start accreting that income in third quarter. It's just, over time, the quality of the pools has improved and we needed to start going that into income.

Okay, so prior to then, they were performing kind of the way you had expected and then lately, it is better?

That is a fair assessment. It is kind of one of those -- not a waiting game but when you create that mark-to-market mark, you expect some loans to not perform well, so you wait. Then as they perform better, I think we are at that point where we say this is real. It is a good performance, so we need to take this accretion. So as Carol said, the last six months of the year, we started that. IT will continue into '08 and then start following off into 2009 and 2010.

Okay. How much of the improvement in margin did this contribute?

Dollar-wise for the -- well, it was 8 basis points in the fourth quarter. For the year -- for the quarter, it was about $150,000 in interest income. For the year, it was about $350,000; for '08, it will probably be in the $450,000 to $500,000 range. So we will actually see a little more pickup in '08 than we booked in '07.

Okay. Overall, for the margin guidance that you gave, mid to high 330s, since you are liability sensitive in a one-year timeframe and you are at 340 in the quarter, I guess why is that number down a little bit? Wouldn't that number be higher?

Remember we had 8 basis points, so our -- what I will call core -- was closer to 332 in the fourth quarter. Sometimes, there is a delay in how quickly you see those rate cuts translate into net interest income. My thought is what I'm seeing already on the loan pricing side and especially on the deposit pricing side is our models are predicting some net interest income pickup but I think the dynamics of the markets, pricing for loans and deposits, will mitigate that. That is why I think I am somewhat optimistic we get to the 340 range and maybe even higher, but I think it will be short-lived in '08 because of this pricing dynamic on the loan and deposit side. We're already seeing it on the loan side.

Okay. then on the asset quality side, you had mentioned that you saw a pickup in the delinquency. What is the dollar amount of the 30 to 89 days delinquent bucket?

It is roughly $10 million to $11 million; it's closer to $10 million, compared to about $6 million at the end of September. It is not a number that creates shockwaves but our -- the people that work here that hoc our loan quality, that is certainly something that we watch closely. The trend has been kind of ticking up throughout all of '07. We hope that stops in '08 but obviously you have to follow the trends.

Okay, thank you.

Bernard Horn, Polaris Capital.

Good morning. Just a couple of quick questions -- one was on the market. First, a couple of housekeeping ones and then a question on the market in the local area. The preferred yields, could you just indicate what the yields are now on the Freddie and Fannie investments?

The next one is it looks like your yields on the loans went down while your yields on securities went up in the quarter. Is that just a function of the security values going down and that is kind of boosting up the yields a little bit? Is there anything else kind of going on in the loan category that would make the loans -- the yield on the loans decrease? So why don't I get those two first and then I will come back on the other question.

Okay. I believe the first question was the Fannie and Freddie yields. They were yielding roughly 10% on a tax equivalent basis before the write-downs. They will be in the 12% to 13% range after the write-down.

Your second question was related to loan and investment yields. I think Carol may have some information there.

Yes. Our securities yields are up due to securities that we repurchased ahead of some of the calls that we were expecting. Those securities were purchased in the 5.8% to 6% range versus the runoff at about 5.2%.

Okay. So what are the maturities on those that you bought ahead of the calls? They have already been called away. Is that what you mean?

Can you ask that again please?

Can you asked that again please?

Yes. When you send you that bought them ahead of calls, does that mean that you anticipated some bonds being call in for prepayment?

Yes, exactly. Yes.

And therefore the maturity on those is probably quite short and may have already left the portfolio?

Yes.

So as you reinvest the proceeds, what kind of yields would you expect to get on the reinvestment of those call bond proceeds? Is it back down to 5.2%?

Are you talking about current reinvestments?

Yes. In other words, if you bought a bond in anticipation that it might be called away and then you got a slightly higher yield as a result of that, now the bond has been called away. You have cash; you have to reinvest it. So at what yields are you able to reinvest? In other words, would we expect to see the yield on securities kind of go back down to where it was?

Let me try to answer this. I think I understand your question. We anticipate calls of securities that were in our portfolio, so we did kind of a pre-buy, so to speak, in anticipation of those calls. The securities that were called away had -- were yielding about 5.2%. So it's like our earnings assets -- our investment portfolio jumped in anticipation of those calls, so it's kind of back down to the former level.

I guess that answers the question then. The other question I had is just, generally speaking, what is the competitive environment in your area? I know -- you know, I'm calling from Boston in the Northeast here. We have certain banks that are out trying to raise a lot of capital and they're also trying to raise a lot of liquidity. It appears that they are boosting up their bids and yields on what they are willing to pay for consumer deposits. I am kind of curious if that is also happening in your market. And then likewise on the loan portfolio or the loan competition, are you seeing that that's still intense? Is it reduced? If so, is that having any affect on the new loans that you are able to book in terms of their yields?

They first question on deposits -- yes, we are seeing rather intense deposit pricing from the very, very large banks. That is impacting our ability to enhance net interest margin as rates go down. In our local markets, we do have the very large players in our markets and it has had an impact on deposit pricing.

In regards to loans, the capital markets, as you know, froze up a little bit there for a few months or weeks, probably months. Therefore, we did retain some loans that we thought would pay off. However, we are starting to hear about other maybe banks stepping in and taking us out on longer-term fixed-rate commercial real estate type deals. So what had been seized up a little bit is starting to loosen up a little bit.

We do think our competitors, for the most part, have tightened underwriting standards. We have never really changed our underwriting standards but it has made it difficult to compete on commercial deals and even some one-to-four family deals. But in the end, I think we are going to see some loans get taken out and go to the capital markets or to larger national banks because of that.

Thank you. Do you think that the reduction in the Fed fund rates -- will that take some of the competitive pressures off of some of these large banks trying to bid up deposit rates, because now they have potentially a lower cost of funds than what they would?

My only hope is that is true but I think people are so hungry for what everybody is now calling a core deposit, and money markets now call it a core deposit -- that with liquidity issues and bank regulators, their number one thing now is liquidity. [1A] would be Bank Secrecy Act but liquidity is important. If deposits drop, that is not a good thing for bank regulators. I think there is a dynamic going on that, yes, the Fed's cutting rates will help a little, but it may not help as much as you think. We will have to wait and see.

Okay, thanks very much. Thanks again for keeping the margins stable and going up and the efficiency ratio in good control. So I appreciate it.

Thank you.

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

Yes, I just want to thank everyone for participating. Those were very good questions. Please remember our earnings release and webcast of the call will be archived on PeoplesBancorp.com, under the Investor Relations section. Thanks for your time and have a good day.

This will conclude today's conference call. Thank you.