Peoples Bancorp Inc (PEBO) 2017 Q2 法說會逐字稿

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  • Operator

  • Good morning, and welcome to the Peoples Bancorp Inc.

  • conference call.

  • My name is Denise, and I will be your conference facilitator today.

  • Today's call will cover a discussion of the results of operations for the quarter and 6 months ended June 30, 2017.

  • (Operator Instructions) This call is also being recorded.

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

  • Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' 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' Securities and Exchange Commission filings.

  • These include but are not limited to the success, impact and timing of the implementation of Peoples' business strategies, including the successful integration of acquisitions and the expansion of consumer lending activity; the competitive nature of the financial services industry; changes in the interest rate environment; uncertainty regarding the nature, timing, cause-and-effects in federal and/or state banking, insurance and tax regulations; changes in policy and other regulatory and legal developments, including uncertainty or speculation about the enactment of changes by the current presidential administration; Peoples' ability to leverage the core banking system upgrade that occurred in the fourth quarter of 2016 without complications or difficulties; and changes in economic conditions and/or activities.

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

  • However, it is possible actual results may differ materially from these forward-looking statements.

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

  • Peoples' second quarter 2017 earnings release was issued this morning; and is available at peoplesbancorp.com, under the Investor Relations tab.

  • A reconciliation of the 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 1 year.

  • Participants in 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 opening statements.

  • Mr. Sulerzyski, you may begin your conference, sir.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Thank you, Denise.

  • Good morning, and thank you for joining us for a review of our second quarter 2017 results.

  • This morning, we reported record quarterly net income of $9.8 million or $0.53 per diluted share.

  • This is nearly $1 million or 11% higher than the net income in the first quarter and $1.8 million or 23% higher than a year ago.

  • For the first 6 months of 2017, net income was $18.6 million for $1.02 per diluted share compared to $16 million or $0.88 in 2016.

  • This is an increase of $0.14 per diluted share or 16%.

  • During the quarter, we had many accomplishments.

  • This included a 4% increase in net interest income and a 7 basis point expansion in net interest margin compared to the prior quarter.

  • We also grew fee-based income and were able to shrink noninterest expense compared to the prior quarter.

  • The efficiency ratio decreased to 61.2% compared to 64.9% in the first quarter.

  • Loan growth during the second quarter was 8% annualized, with an increase in both commercial and consumer balances.

  • Our strong loan growth continued this quarter as commercial loans provided $32 million or 10% annualized growth.

  • Consumer loans provided $13 million or 5% annualized growth largely due to indirect lending increases which we have been experiencing over the last couple of years.

  • During the second quarter, our annualized growth rate for indirect consumer lending slowed to 32% compared to 49% in the first quarter.

  • Nonperforming assets decreased $1.8 million or 8% during the second quarter and were 0.88% of total loans in OREO at June 30, 2017.

  • The decline was mostly due to payoffs and improvements leading to loans resuming accrual status or becoming current.

  • Criticized loans increased during the quarter primarily because 2 commercial relationships were downgraded to special mention.

  • In total, nonperforming assets and classified loans have declined 12% from December 31, 2016.

  • Our net charge-off rate has been stable at 11 basis points during 2017.

  • Gross charge-offs for the first 6 months of 2017 were $800,000 or 28% lower than 2016.

  • Delinquency trends continued to improve during the second quarter, as approximately 98.9% of our portfolio was considered current at June 30, 2017, compared to 98.6% at March 31, 2017, and 98% at December 31, 2016.

  • Provision for loan losses increased over $300,000 during the quarter and was mostly due to loan growth.

  • At June 30, 2017, the allowance for loan losses increased to $18.8 million compared to $18.5 million at March 31, 2017, and $18.4 million at December 31, 2016.

  • Fee-based income grew 2% compared to the first quarter and 10% compared to the second quarter of 2016.

  • We had success in several areas this quarter and were able to overcome the $1.3 million reduction of annual performance-based insurance commissions that we recognized in the first quarter.

  • For the first 6 months of 2017, fee-based income increased 6% compared to 2016.

  • Fee-based revenues were 33% of total revenues for the first 6 months of 2017 and 2016.

  • We have remained focused on growing fee income, which is evident in the growth in fee-based income and relatively stable percentage of fee-based income to total revenue.

  • Total revenue grew 3% compared to the first quarter, 8% compared to the second quarter of 2016; and 6% compared to the first 6 months of 2016.

  • Net interest income has experienced notable growth compared to prior periods due to sustained loan growth.

  • Compared to the first quarter of 2017, noninterest expenses declined 2%; and were up 1% compared to the second quarter of 2016.

  • The largest decline during the quarter was salaries and employee benefits, which decreased 3%.

  • Much of this decline was related to lower health insurance costs as well as lower base salaries and wages and the associated payroll taxes.

  • However, this decrease was partially offset during the quarter as we recognized higher incentive compensation related to the improvement in the performance of our businesses.

  • During the first 6 months of 2017, noninterest expenses increased 2% compared to 2016.

  • This increase was largely due to higher salaries and employee benefits and was primarily from higher incentive compensation.

  • Professional fees declined mostly due to lower legal expenses, while communications expense decreased from consolidation of traditional phone lines to voice-over-Internet protocol.

  • For the second quarter of 2017, we generated positive operating leverage compared to both the previous quarter and the second quarter of 2016.

  • We also generated positive operating leverage for the first 6 months of 2017 compared to 2016.

  • The efficiency ratio declined to 61.2% for the second quarter of 2017.

  • This is substantially lower than the 64.9% in the first quarter, and 65.1% in the second quarter of 2016.

  • For the first 6 months of 2017, the efficiency ratio was 63% compared to 64.7% in 2016.

  • Throughout the organization, we are focused on growing revenues faster than expenses.

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

  • John C. Rogers - CFO, EVP, Treasurer, CFO of Peoples Bank, EVP of Peoples Bank and Treasurer of Peoples Bank

  • Thanks, Chuck.

  • Consistent loan growth over the past several quarters, coupled with recent interest rate increases, has provided considerable increases to net interest income.

  • During the quarter, net interest income increased 4% compared to the prior quarter and 7% compared to the second quarter of 2016.

  • Net interest margin grew 7 basis points compared to the first quarter and 5 basis points compared to the prior year.

  • For this first 6 months of 2017, net interest income grew 6% and net interest margin expanded 3 basis points compared to 2016.

  • Loan yields have benefited from recent increases in interest rates, while deposit growth has provided relatively low-cost funding.

  • The combination of loan growth, increased non-interest-bearing deposits and reductions in higher-cost deposits is outpacing increases in our wholesale borrowing costs.

  • This quarter included some prepayments on investment securities that we do not expect to receive in the third and fourth quarters.

  • We also made some slight increases to certain deposit rates late in the second quarter.

  • As a result, we are expecting a net interest margin of 3.55% to 3.60% for the remainder of 2017.

  • Accretion income, which is net of amortization expense from the acquisitions, continues to decline.

  • During the quarter, accretion income was $735,000 compared to $829,000 in the first quarter, and $886,000 in the second quarter of 2016.

  • Accretion income added 10 basis points to net interest margin during the quarter compared to 11 basis points in the prior quarter and 12 basis points last year.

  • Year-to-date accretion income totaled $1.6 million and added 10 basis points to net interest margin compared to $1.8 million and 12 basis points, respectively, in 2016.

  • As Chuck said, fee-based income was positive for this quarter, leading the increase for the quarter was commercial loan swap fee income which grew over $380,000 compared to the first quarter and prior quarter.

  • Trust and investment income increased 11% over the first quarter and 7% over the prior year quarter, with the increases occurring in both fiduciary and brokerage income.

  • During the second quarter of 2017, we also recognized a fee of $437,000 associated with the sale of a government-guaranteed portion of a loan.

  • Insurance income declined $688,000 compared to the first quarter.

  • However, excluding the $1.3 million performance-based insurance commissions recognized in the first quarter, insurance income was up over $600,000, mostly due to higher commercial property and casual (sic) [casualty] insurance commissions.

  • For the first 6 months of 2017, fee-based income increased $1.5 million compared to 2016.

  • Bank-owned life insurance income grew $569,000 from additional insurance purchased in the second quarter of 2016.

  • Trust and investment income grew $501,000, while commercial and swap fee income and mortgage banking income grew $491,000 and $429,000, respectively.

  • These increases were partially offset by a decline in service charges in deposit accounts of $443,000, which was largely driven by lower overdraft fees and a decrease of $281,000 in insurance income.

  • Insurance income is up slightly in the first 6 months of 2017 compared to 2016, if you exclude the performance-based commissions from both 2016 and 2017.

  • The investment securities portfolio increased $11 million compared to March 31, 2017, but remained at 25% of total assets, similar to previous periods.

  • The investment securities yield increased 4 basis points compared to the linked quarter and was up 8 basis points compared to last year.

  • As I stated earlier, we had some prepayments on investment securities that contributed to the higher investment securities yield in the second quarter.

  • For the first 6 months of 2017, the investment security yield increased 7 basis points compared to 2016.

  • Period-end deposits, which exclude $464 million of CDs, declined $27 million or 1% compared to March 31, 2017.

  • During the quarter, governmental accounts decreased $33 million, which is -- typically have seasonally higher balances in the first quarter.

  • The reduction was partially offset by higher money market and other interest-bearing demand deposit accounts, which increased $22 million.

  • Non-interest-bearing deposits have decreased $13 million mostly due to a commercial customer having a higher-than-normal balance at March 31, 2017.

  • Core deposits increased $120 million or 6% compared to June 30, 2016.

  • Non-interest-bearing deposits provided $72 million of growth, while other interest-bearing transaction accounts accounted for the remaining increase.

  • Non-interest-bearing deposits were 29% of total deposits at June 30, 2017, consistent with March 31, 2017, and December 31, 2016.

  • During the quarter of 2017, stockholders' equity grew $8 million compared to March 31, 2017.

  • This increase was largely due to net income and a slight recovery in the market value of investment securities.

  • Our tangible equity-to-tangible asset ratio increased to 9.07% at June 30, 2017.

  • This is an increase of 9 basis points over March 31, 2017, and 27 basis points over December 31, 2017 (sic) [December 31, 2016].

  • Our tangible book value per common share increased to $16.78 at June 30, 2017, from $16.28 at March 31, 2017, and $15.89 at December 31, 2016.

  • We are maintaining healthy capital ratios which exceed well-capitalized status.

  • At June 30, 2017, our common equity Tier 1 capital ratio was 13.18%.

  • Our Tier 1 capital ratio was 13.47%, and our total risk-based capital ratio was 14.40%.

  • The increase in our capital ratios, compared to March 31, 2017, was largely due to net income increasing our stockholders' equity, which outplays a slight increase in net risk-weighted assets.

  • We continually review our performance in conjunction with setting the quarterly dividend.

  • As we have stated previously, we are targeting a dividend payout ratio of 40 to 45 -- 40% to 50% of earnings.

  • This morning, we announced our quarterly dividend, which has increased to $0.22 per share and represents a dividend payout ratio of approximately 41.2% of our second quarter earnings.

  • In the past, we have increased -- past year, we have increased the dividend rate almost 40%.

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

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Thanks, John.

  • We believe we are building momentum and are realizing the benefits of our disciplined approach to sales and service and expense management.

  • How are we building this momentum?

  • Our go-to-market proposition is to provide consultative advice to consumers and businesses in the areas of banking, insurance and investments.

  • Internally, we are organized by market teams with professionals from all lines of business.

  • At its best, this complex proposition provides a higher-level experience for clients.

  • We have been at this for several years and see with each passing day that it provides us a unique competitive advantage.

  • Furthermore, we continue to see improvement in earnings while we continue to invest in the future.

  • Over the past few years, we have installed a new mortgage system, a new core banking system.

  • And we are currently installing a new dealer floor plan system.

  • These investments will help ensure our future competitiveness.

  • We are extremely pleased with the progress we have made on key financial measures during the first half of 2017, including return on assets, return on stockholders' equity and tangible equity and the efficiency ratio.

  • In addition, our pre-provision net revenue grew 15% compared to the first quarter, and 23% compared to the second quarter of 2016.

  • Our pre-provision net revenue to total average assets increased to 1.72% at June 30, 2017, compared to 1.52% at March 31, 2017, and 1.48% at June 30, 2016.

  • We continue to remain diligent and show improvement in our fee-based income.

  • However, we do not expect our fee income in future periods to contain the loan sale again that we had in the second quarter.

  • We mentioned in the Fourth Quarter Call in January that we were focusing -- that we were going to focus on decreasing the $26 million in nonperforming assets.

  • We are pleased that we have already been able to reduce this to $20 million at June 30 and expect continued improvement on a quarterly basis.

  • Continuing through the rest of 2017, we expect to achieve point-to-point loan growth of 5% to 7% for the full year.

  • We anticipate higher credit costs and do not expect continued long term with net charge-off rates of 11 basis points.

  • As John mentioned, we believe net interest margin will be between 3.55% and 3.6% for the first half of 2017.

  • Our fee-based revenue growth is expected to be in the mid-single digits for the full year of 2017 compared to 2016.

  • Commercial loan swap fees in the third and fourth quarter will be more consistent with what we reported in the first quarter.

  • We plan to generate positive operating leverage for the full year of 2017.

  • We expect quarterly noninterest expenses during the third and fourth quarter to be near $27 million.

  • We believe our effective tax rate for 2017 will be approximately 31%.

  • And we are targeting an efficiency ratio of 62% to 64% for the full year of 2017.

  • We have previously stated that we are still exploring acquisition opportunities and we are looking for quality deals that will complement our business, but we'll remain disciplined in our approach.

  • In the meantime, we are still focusing on our core business.

  • 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 John Rogers, Chief Financial Officer.

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

  • Operator

  • (Operator Instructions) And your first question will be from Scott Siefers of Sandler O'Neill + Partners.

  • Brendan Jeffrey Nosal - VP of Equity Research

  • Chuck, John, this is Brendan on the line for Scott.

  • I'm hoping to start off on the margin.

  • I appreciate the specific guidance that you guys offered on the second half for the year.

  • I was wondering if you could offer the size of the securities prepayment benefit net EBITDA margin in the 2Q.

  • John C. Rogers - CFO, EVP, Treasurer, CFO of Peoples Bank, EVP of Peoples Bank and Treasurer of Peoples Bank

  • Yes, we looked into that.

  • It's approximately 4 basis points impact on the margin for the quarter.

  • Brendan Jeffrey Nosal - VP of Equity Research

  • Okay, great.

  • So that'll come out, and then...

  • John C. Rogers - CFO, EVP, Treasurer, CFO of Peoples Bank, EVP of Peoples Bank and Treasurer of Peoples Bank

  • (inaudible).

  • Right.

  • We don't -- we have gotten those previously, but you cannot expect them.

  • So we expect to have benefit to the quarter of around 4 basis points.

  • Brendan Jeffrey Nosal - VP of Equity Research

  • All right, fantastic.

  • And then if we could switch over to the indirect consumer book for a minute.

  • Growth here has been incredibly robust.

  • And granted the book has, one, been growing off of relatively low base; and then, two, the diversification into RV and motorcycle has helped that with growth here.

  • Just trying to get a sense of what the growth outlook is in this portfolio and kind of how far along into this diversification into those other asset classes are you.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Well, we continue that strategy of diversifying the portfolio.

  • We've been pretty much consistent, with above 20% of the origination being in non-auto, and we believe we can continue to grow this portfolio meaningfully.

  • We have historically been growing close to our headquarters in Marietta.

  • And as we've spread our geography out of a larger distance, we are now penetrating much more successfully across the footprint.

  • Our penetration in Ashland, in Huntington is as good as it is in Marietta at this point, and we have opportunities to spread that into more markets.

  • So for the time being, we're comfortable.

  • We like the fact that we continue to improve the average weighted credit score in the portfolio, and so we think we're in a good place.

  • Operator

  • Your next question will come from Kevin Reevey of D.A. Davidson.

  • Kevin Kennedy Reevey - Senior VP & Senior Research Analyst

  • So just following up to the last question.

  • Can you give us some guidance as to kind of what exactly the FICO scores have been on average for the -- those new loans that you're putting on and then what yields have they been at and then the LTVs?

  • This is with respect to the indirect loan portfolio.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Our FICOs over the last few quarters have been in the high 720s to high 730s.

  • The average FICO in the portfolio is 723.

  • So over the last few years, 4 years, we've been pulling up that average score; and expect to continue to be able to do that over time.

  • In terms of gross yield, are you interested in gross?

  • Or are you kind of interested in net yield?

  • To -- you asked a question about what kind of yield we're getting on the portfolio.

  • Kevin Kennedy Reevey - Senior VP & Senior Research Analyst

  • Yes, both would be helpful.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Gross is about -- it's 4 -- the high 4s, 4.7, 4.8.

  • And the net is about 2.25, 2.3, 2.4, in that area, each quarter.

  • Kevin Kennedy Reevey - Senior VP & Senior Research Analyst

  • And then the 2 commercial relationships that were downgraded to special mention, was there any common thread, as far as industry or geography?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • No.

  • Those are 2 really good long-term customers.

  • I have no concerns about either one of them.

  • It's -- one of them is in kind of heavy equipment that's kind of seeing a bit of a downturn.

  • One of them is in a business that is going through a restructuring.

  • I expect to see improvements in both of them within a 12-month period of time.

  • Then there's a lot of -- one has a strong guarantee, and one has very strong people involved in it.

  • So I'm not really focused on that.

  • I'm a lot more excited about whacking down the NPAs that we've been talking about over last few quarters.

  • Kevin Kennedy Reevey - Senior VP & Senior Research Analyst

  • And then my last question is related to deposit concentrations.

  • I know you -- there was a movement in your noninterest DDA related to a large depositor.

  • Can you give us some color as to any other large deposit concentrations specifically in your noninterest and interest DDA?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Our non-interest-bearing DDA remains about 29% of total deposits.

  • There are a handful of customers that have more than $10 million with us, but it's a very small handful.

  • I don't think that there's any concentration by industry that's meaningful.

  • I think there's a great deal of granularity to the deposit base.

  • Operator

  • And the next question will come from Michael Perito of KBW.

  • Michael Anthony Perito - Analyst

  • Maybe to start here, Chuck, it sounds like, with the exception, the margin range seems a little bit higher, but largely speaking, most of the outlook commentary for the rest of the year here seems to be reiterated.

  • But I mean, I guess, it sounds like also that, you guys, you had a good quarter, feel good about where you're at.

  • I mean, is it fair to say that you guys are feeling more comfortable that you should be at the better end of somebody's ranges as we kind of look out to the back half of the year in terms of, like, the efficiency ratio and et cetera?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Boy, Michael, that's a tough question.

  • You want to put a gun to my head.

  • I will say that we have beaten consensus for 6 consecutive quarters.

  • I think that there's an opportunity for the investment world to view us more positively than we have been viewed.

  • So I think we've -- do a good job of giving out a great deal of information every quarter.

  • And we've been focused pretty manically on positive operating leverage and good credit.

  • And if you get positive operation -- positive operating leverage and good credit and you happen to grow some loans and fees along the way, good things happen.

  • So I certainly hope to perform on the better end of the ranges, but we try to give the ranges where we think they'll be.

  • Michael Anthony Perito - Analyst

  • Great.

  • And on the expense side, if I heard you guys correctly, I think you kind of said around $27 million for the rest of the year, but I guess more of a high-level question.

  • As you guys look out, I mean, you're seeing some good growth on the loan portfolio.

  • I mean it sounds like acquisitions are still something on your radar if the right opportunity comes about.

  • How do you kind of view the infrastructure, whether it be kind of the mobile aspect, cybersecurity, all those things, as you guys continue to grow and we look out towards next year in terms of any investments or expenses you guys might have to make or you're thinking about that are on the horizon?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Well, first of, I think we've been very aggressive at making investments.

  • We put in the new -- some of the systems I referenced in the script, the mortgage system, the core system, the dealer floor plan system.

  • We -- the core upgrade that we deal will allow us to add a lot of mobile capabilities.

  • We already have much more mobile capability than most banks less than $10 billion in assets.

  • We are committed to improving that way of handling clients, so to us, we will make long-term investments as long as we can grow the revenue faster than the expenses.

  • We don't have -- a few years ago, I would have been able to rattle off a few things that we want to invest in that we have not yet, but at this point in time, I think that a great deal of the heavy lifting is behind us.

  • And I think we're poised, as we've indicated in the strategic plan, to improve our ROAA.

  • We'd like to get consistently in that 1.15% to 1.20% range.

  • And I think we took a great stride this quarter in that direction, and hopefully, in the quarters ahead, we'll see good things.

  • John C. Rogers - CFO, EVP, Treasurer, CFO of Peoples Bank, EVP of Peoples Bank and Treasurer of Peoples Bank

  • We continue to make cybersecurity investments.

  • We made them in '16.

  • We made some in '17.

  • I'm sure we'll make some in '18, but it's kind of part of our consistent run rate at this point in time, I would say.

  • Michael Anthony Perito - Analyst

  • Okay.

  • Just one more from me.

  • Just, Chuck, can you remind us on capital?

  • What kind -- what ratios do you guys focus on?

  • And I guess, in terms of kind of looking at the ratios today, I mean, how do you guys think about excess?

  • And kind of what -- in a perfect world, what's kind of the right level of capital for your balance sheet going forward in terms of trying -- just tying to isolate maybe what's available to kind of be put towards other deployment opportunities in the future.

  • John C. Rogers - CFO, EVP, Treasurer, CFO of Peoples Bank, EVP of Peoples Bank and Treasurer of Peoples Bank

  • Yes, Michael, it's John.

  • I'll take that.

  • I mean I think we focus on tangible.

  • We focus on Tier 1. In today's world, I'd say we probably got about $30 million, $35 million of excess capital that we're probably comfortable with, but we have a desire to acquire.

  • And I think we'll be comfortable getting into the mid 8s with an acquisition, the right one, depending upon just how strategic it was, et cetera, that would drive how far we'd want to go on that.

  • But I think those are the things that we're focused on.

  • And that's about how much excess we believe we kind of have to work with from an acquisition perspective as we look forward.

  • But we've also increased the dividend some too here lately, right?

  • So we think this will hold for a little few quarters and believe in returning some of that to our shareholders.

  • Operator

  • (Operator Instructions) Your next question will be from Daniel Cardenas of Raymond James.

  • Daniel Edward Cardenas - Research Analyst

  • Just a quick question on your -- could you -- Chuck, could you repeat your comments regarding your charge-offs?

  • I missed what you said regarding that.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • In terms of the script, in terms of what...

  • Daniel Edward Cardenas - Research Analyst

  • Yes, in terms of the script.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Yes.

  • Look, I think we said -- I'm trying to find the page -- 11 basis points, that we didn't expect it -- I'm getting help here.

  • Okay, our net charge-off rate has been stable at 11 basis points during 2017.

  • Gross charge-offs for the first 6 months of 2017 were $800,000 or 28% lower than 2016.

  • And then at the end, I also said we anticipate higher credit costs and do not expect to continue long term with net charge-off rates of 11 basis points.

  • And that comment has been in our scripts.

  • The last comment has been in the script for the past several quarters, maybe over a year now, because this 10 basis points, single-digit charge-offs, 11 basis points charge-offs just isn't the business that we're all in.

  • And I just expect someday that that'll change.

  • It's not that we know anything that's going to change it anytime soon.

  • Daniel Edward Cardenas - Research Analyst

  • All right.

  • So just more precautionary tone, not necessarily that you see something coming down the pipeline that's going to cause charge-offs then to move up...

  • John C. Rogers - CFO, EVP, Treasurer, CFO of Peoples Bank, EVP of Peoples Bank and Treasurer of Peoples Bank

  • Yes, that's right.

  • And I don't think we can say -- we're not going to tell you it's going to be lower than it is today.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Yes.

  • We're going fat, conservative banker.

  • Daniel Edward Cardenas - Research Analyst

  • Nothing wrong with that.

  • And then given that all the heavy lifting that's kind of been done on the expense side, how much larger do you think you can grow organically without having to make further substantial investments in the expense platform?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • I think in terms of organically, I think that we can go for many, many quarters, years, growing revenues faster than expenses if we're disciplined.

  • And we've been very disciplined for several years at this.

  • So if we happen to find an acquisition that's strategic and at the right price, that would be a great day.

  • And if not, we'll just continue to improve our returns; and get bigger at the rate that the market gives us, which last few years has been kind of in that 5% to 8% range.

  • Daniel Edward Cardenas - Research Analyst

  • Okay.

  • Fair enough.

  • And then as you focus on the fee revenue side, I mean, is -- organically, obviously you're expecting some top line revenue growth, but what are the opportunities looking like for you guys on your -- on the fee income side in terms of either adding new components or growing the insurance side of the equation?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Well, we like the insurance business, for sure.

  • And we continue to look at acquisition opportunities that broaden our capabilities or deepen our capabilities.

  • The insurance business has been under a little pressure in the last few years in terms of premiums decreasing.

  • Some of our customers have been under pressure in terms of having less assets.

  • For instance, we insured a lot of coal trucks.

  • And coal companies have bought fewer trucks today than they did a few years ago, but recently we see signs that those trends are abating and we're beginning to see stronger revenue growth.

  • We are very much committed to the investment business.

  • Both our trust business did well.

  • Our brokerage business is doing well.

  • Our retirement plan business is doing well.

  • Again, we would look at acquisitions that would expand there if we could, be it combination of fees and margin, but if we could get into the leasing business, small equipment leasing business, we would do that.

  • In terms of the fee income improvements, we've seen a lot in swaps this year.

  • I think that, going forward, we hope to -- the swap fees are not going to be, be forever, but we're certainly trying to do the best in this rising rate environment.

  • I see us working on a SBA program that I think can help, that'll grow fee revenue.

  • And if the swap fees dissipate, hopefully, we can make some of that up with good, strong SBA growth.

  • Daniel Edward Cardenas - Research Analyst

  • Okay, good.

  • And then last, last question for me, just maybe some comments or color regarding deposit pricing competition in your footprint.

  • Are you beginning to see signs of a pickup in competitive pressures, or not yet?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • A little bit on the public funds side but not too much on the core consumer, core business side.

  • So I -- my personal view, and I know that we're all reading the American Banker.

  • And every day or every week, there's a different article on this in there, but I just believe the rates are too low to pique consumer interest.

  • If people are going to get excited if they're getting 0.3 points versus 0.2 points, I don't think it changes behavior.

  • Operator

  • The next question will be from Kevin Swanson of Hovde Group.

  • Kevin William Swanson - VP

  • Just quickly on loan growth.

  • In terms of geography, any concentrations?

  • Or was it spread out?

  • And then maybe looking forward, the pipeline, kind of the same question.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Pretty much spread out, maybe a little bit stronger in Northeastern Ohio than, of course, our footprint, but that changes from time to time.

  • And I would say the pipeline probably is similar to that, slightly stronger in Northeast Ohio than the rest of the footprint.

  • Kevin William Swanson - VP

  • Okay.

  • And then just one more question.

  • If we kind of group home equity with consumer loans, it looks like the percent as a portfolio is now just over 21%, up from 18% last year.

  • Is it a level that you're kind of comfortable moving to?

  • Just kind of any outlook on how the mix you think going forward.

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Yes, I have no -- that causes me no discomfort.

  • I would be happy if we could grow our mortgage portfolio and the home equity portfolio.

  • I think that's a great asset class, but the growth has been pretty tepid in home equity.

  • And our consumer growth has mainly come in the indirect arena.

  • Operator

  • At this time, there are no further questions.

  • Sir, do you have any closing remarks?

  • Charles W. Sulerzyski - CEO, President, Director, CEO of Peoples Bank, President of Peoples Bank & Director of Peoples Bank

  • Yes.

  • I want to thank everybody for participating.

  • Please remember that our earnings release and a webcast of this call will be archived on peoplesbancorp.com, under the Investor Relations section.

  • Thanks for your time, and have a great day.

  • Operator

  • Thank you, sir.

  • Ladies and gentlemen, the conference has now concluded.

  • Thank you for attending today's presentation.

  • You may now disconnect your lines.