Q3 2019 Earnings Call
Good afternoon.
Welcome to People's you've talked Bancorps third quarter earnings conference call.
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Well I'd like now turn the conference over to Mark Olson.
Vice President and Chief Financial Officer. Please.
Please go ahead.
Good morning, Thank you for joining us today to review our third quarter 2019 financial result.
Joining me this morning on the call, it's Glenn Williams, President and Chief Executive Officer for people, who taught bancorp.
Our comments today, we'll refer the financial sort of financial result included in our earnings announcement released last night. So.
Okay, and a copy of our earnings release, please visit our website at Www Dot People's Utah Dot com.
Our earnings release contains forward looking statement.
All statements other than statements of historical facts are forward looking statement.
Statements involve inherent risks and uncertainties, many of which are difficult to predict and beyond the control. The company. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in or implied or projected by such forward looking statement.
Forward looking statements are intended to be covered by the safe Harbor for forward looking statements provided by the private Securities Litigation Reform Act of 1995.
Forward looking statements speak only as of the date. They are made and we assume no duty to update such statements I went out to the color Glenn Williams, Glenn Thank you Marc.
Good morning, and thank you for joining us on the call today.
People's Utah Bancorp achieved another quarter of strong financial performance, even as we continue to position strengthened and fortify our balance sheet.
We realized a return on assets of 1.9% and a return on equity of 13.8% for third quarter. After building our average equity to average assets from 12.8% a year ago to 13.7% for the third quarter 2019.
While increasing our allowance for loan losses from 1.4% a year ago to 1.8% at the end of the quarter.
Our total assets grew 10.5% from a year ago. This was primarily the result of strong low cost core deposit growth.
Total deposits grew 230 million or 12.3% year over year as our retail branches and commercial Treasury management team focused on raising commercial deposits from existing clients as well as the acquisition of new client relationships.
We recently signed a contract for a new Treasury management platform that we will believe will help us continue to grow our commercial deposit base and improve our fee income we anticipate rolling this new platform out at the beginning of 2020.
Our cost of interest bearing deposits increased 14 basis points to 0.70 for the third quarter 2019, compared 2.56% for the same period a year ago.
Our total cost of deposits increased only nine basis points or 0.4 or 5% for the third quarter 2019, compared with 0.36% for the same period a year earlier.
We continue to experience significant competition for deposits as a result [noise].
We anticipate.
The downward deposit betas will be lower than in previous interest rate reductions cycles.
Loans held for investment relatively flat flat for the first nine months of this year decreasing 3.8 million or 0.2% to 1.68 billion at September Thirtyth 2019.
Paired with September or December 30, Onest, 2018, and decreased 43.2 million or 2.5% compared with September Thirtyth 2018.
The decline is primarily the result of reduction and the acquisition development and construction loan portfolio of 38.7 million or 11.9% from December 31, 2018 to September Thirtyth, 2019, 96.4 million or 25.2% from a year ago as we have managed.
Loan concentration levels and have become more selective with the type and size of construction projects that were willing to finance, giving our perspective on the potential slowing economy.
We've reduced our acquisition development construction portfolio portfolio to total capital constant creation from a high of 149% at the ended the first quarter, 2018% to 90% at the end of third quarter 2019.
We continue to focus on diversifying our loan portfolio.
In particular.
We are focused on growing our seeing right.
We're currently we operate two commercial banking centers that are located in Salt Lake County, and we're in the process of building out a commercial banking team to open in Utah County this quarter.
We are continuing our efforts to automate and digitize our commercial loan origination process through the implementation of an online commercial lending application and have begun begun the building testing and uploading phases of Encino, which is an industry leader in the commercial banking loan operating system.
Space.
The goal of this project is to ensure that we continue to provide our historical high touch an unparalleled responsiveness to our clients and to be able to offer the same client service as we continue to grow in size and complexity and expand our geographical footprint.
We expect to have the first phase of this project completed this quarter.
On the retail banking front, we mentioned our last call or plan to open a new business oriented branch of the fast growing Pleasant Grove area, where a number of technology firms have recently built new corporate offices.
The branch has been open and we have experienced positive results as we.
Work to build additional bill business relationships in the area.
We've completed the demolition of our Alpine branch and have made significant progress on rebuilding the branch we expect to complete the rebuild sometime in the fourth quarter 2019, the alpine branches, one of our oldest branches with over $120 million and deposits.
As I mentioned on our last couple of conference calls, we have decided to simplify our branding strategy to a single unified name for our bank, a new logo and a more contemporary look we have identified the new named logo and overall style. We're currently communicating the new brand with our existing clients through one on one discussions and other.
Her forms of communication.
We plan to make a public announcement on November 12, 2019 regarding our new branding strategy. We expect this new branding strategy will provide us with the opportunity increased market penetration as potential clients better understand our size scale and product offering as a unified bank.
Ultimately we anticipate these efforts will result in greater growth in our loan and deposit portfolios and higher overall revenues.
While the economy in Utah continues to be strong we believed that there are beginning.
To be signs of a general economic slowdown, including flattening of the treasury flattening of the treasury yield curve and the federal reserve lowering interest rates by 20.
Five basis points twice, so far this year.
We believe is prudent for us to be prepared for an economic slowdown.
So that we can take advantage of market conditions to expand our market share either organically or through acquisitions.
We continue to actively evaluate potential acquisition opportunities both in Utah and in states contiguous to Utah, particularly along the I have 15 corridor.
I'm also pleased to announce that the board of directors declared a quarterly dividend payment of 13 cents per common share dividend will be payable on November 12, 2019 to shareholders of record on November 4th to Sep 2019, I'll now turn the call back over to Mark to discuss our financial performance Mark. Thank you Glenn.
Net income was $11.1 million or 59 cents per diluted common share for third quarter of 2019, compared with $11 million or 58 cents per diluted common share for the second quarter, 2019, and $10.5 million or 55 cents per diluted common share for the third quarter a year ago.
Third quarter 2019, net interest income grew 3.7% or a million dollars to $28.2 million compared with $27.2 million for the same period a year earlier.
The increase is primarily the result event average interest, earning assets growing 8.3% or $170 million, while yields on our interest earning assets declined 18 basis points to 5.44% for the same comparable period.
Lower yields on interest, earning assets was primarily the result of a 207 million or 62.5% increase and the average amount of lower yielding cash and investment securities held by us stemming from average core deposits, increasing 172 million or 9.4% for the same respective period.
Yield on total loans increased 16 basis points to 6.49% for the third quarter 2019 compared to the same period of your goal while average loans declined 35.5 million or 2.1% for the same comparable period.
The percentage of loans to total interest, earning assets decreased to 75.7% for third quarter 2019, compared with 83.7% for the third quarter 2018.
Acquisition accounting adjustments, including the accretion of loan discounts and amortization of core deposit intangible at a 10 basis points to the net interest margin for third quarter 2019.
For the third quarter 2019 provision for loan losses were $2.1 million compared with $1.9 million for the same period a year earlier.
The increase in provision for loan losses in the third quarter is due primarily to a $1 million increased in specific reserves satisfied with the remainder the result of increased general reserves.
We recorded annualized net recoveries that point o., 8% for the third quarter 2019, compared with net charge off a point to 1% for the same period a year earlier.
For the nine months ended September Thirtyth 2019 annualized net charge offs were 0.5% compared with 3% for the same period a year ago.
Non performing assets were $4.3 million or <unk>, 0.17% of to laugh at September Thirtyth, 2019, compared with $8.8 million acquaint, 4% a year earlier.
The percentage of allowance to loans held for investment increased to 1.82% at the end of September compared with 1.36% of your earlier.
In addition to our allowance for loan losses, we have $6.4 million in both Nonaccretable and Accretable credit discounts remain out our acquired loan portfolio.
The allowance for loan losses, plus credit discounts to loans held for investment was 2.2% at September Thirtyth 2019.
We believe that it is prudent for us the continued to build our overall allowance for credit losses, given that we believe we're nearing the end of an overall economic cycle.
Our third quarter 2019, noninterest income increased point $7 million or 17.7% to $4.5 million compared to $3.8 million for the same period a year ago.
The increase was primarily the result of mortgage banking income increasing due to higher loan sales in the third quarter 2019 compared to the same period a year earlier.
We experienced an increase in refinance volumes as overall interest rates decline.
For the third quarter 2019, noninterest expense was $16.1 million compared with $15.3 million for the same period a year earlier and is primarily the result of point $5 million in higher salary and employee benefit point $5 million in higher marketing and advertising expense related to the rebranding of the company.
We expect higher marketing and advertising expenses as we roll out our new brand strategy, both in the fourth quarter 2019 and into 2020.
Higher costs were offset by lower FDIC premiums as we applied the small bank efficacy assessment credits to our overall premium assessment, we expect to benefit from these assessment credits for an additional two quarters.
Our efficiency ratio was 49.2% for the third quarter of 2019 compared to 49.3% the same period a year ago.
Non interest expense to average assets was 2.7% for third quarter 2019, compared to 2.8% for the same pretty earlier.
For third quarter 2019 income tax expense was 3.4 $9 compared with $3.3 million for the same period a year ago.
The effective tax rate was 23.2% compared with 23.9% for the same respective period.
In June 2016, the financial accounting standard or Fas be issued a an accounting standards update or ask you related to the measurement of credit losses on financial instruments. He asked you significantly changes the accounting for credit loss measurement on loans and debt securities.
Loans and held to maturity debt securities. The assay requires a current expected credit loss or Cecil measurement to stylish the allowance for credit loss or Hcl for the remaining estimated life, the financial asset, including off balance sheet credit exposures using historical experience current conditions and reasons.
That's a portable forecast the asks you eliminate the existing guidance for purchase credit impaired or PCI loans requires an allowance for purchase financial assets with more than an insignificant deterioration since origination otherwise known as purchase credit deteriorated or PCB assets.
This assay was effective beginning after December 15 2019.
On October 16th 2019, the fast devoted to delay the adoption of the fast you by two years to January 2023 for private companies not for profit companies and certain small public companies that meet the definition of a smaller reporting company or Src as defined by the Securities and Exchange Commission.
To meet the requirements of an Src it ended and entity must be an issue, where I have public float of less than $250 million or public float of less than $700 million, an annual revenues of less than $100 million.
As of June Thirtyth 2019.
Our public float was $466 million and our annual revenues for 2018 were $130 million.
Therefore, we do not meet the requirements of an Src and will be required to adopt this you effective January onest 2020.
The implementation process includes evaluation of technical accounting topics developing validate in implementing models and methodologies used to calculate Cecil updating hcl documentation validating internal controls and overall operational readiness for the adoption of this asked you.
We are currently reviewing new models and processes in parallel with existing model and processes under current accounting guidance in advance of the January Onest 2020 effective date.
These parallel run this will focus on technical functionality of the C for calculation operational execution at the end of the end to end processes as well as disclosure requirements.
We've established a project team and the strength married to provide cross functional governance over and make key decisions related to the project plan and the parallel run.
We expect to use the weighted average remaining maturity or warm approach adjusted for prepayments to calculate Cecil.
As described in the Fas be Steph questions and answers, we intend to use a qualitative approach to justice Triple last information for current conditions and for reasonable and supportable forecast and then immediately revert to historical credit losses as noted in the asks you an entity can or Sao consider the need to adjust historical information to reply.
The extent to which management expects current conditions.
And forecast to differ from the conditions that existed for the period over which historically information with evaluated.
The adjustments to historical loss information may be qualitative nature and should reflect changes related to relevant data.
We are currently in the process they have evaluating the impact of the issue on our earnings financial position and regulatory capital amount and ratios.
We expect IRA sale to increase upon adoption because the sale will be required to cover the full remaining expected life the portfolio rather than the incurred loss model undercurrent us gap.
In addition, a portion of the increase will be due to PC AD on that will be reclassified as PCB loans with a credit related non accretable discount increasing both the HDL and loan balances, but not retained earnings.
However, accretable discount held on non PCB loans are not allowed to be moved to Hcl as part of the adoption.
As a result, we will be required to set addition set aside additional hcl for non PCD loans through retained earnings upon it adoption as a result, we will continue to hold accretable discounts that will be recorded intend to interest income over the remaining life for Don Peafiel loans as well as a similar amount in our FPL.
We expect greater volatility in our earnings and those other banks after adoption do the nature and time horizon used to evaluate diesel. In addition, we expect the potential negative impact of credit availability and reduced loan terms. The borrower as this hcl a few is adopted by financial institutions.
Lastly, we expect a lack of comparability with financial performance to many of our peers as we adopt this asked you due to the delayed adoption for public companies similar in size to us.
But that meet the requirements of an Src.
The ultimate effect, Oh, I see so our Hcl will depend on the size and composition of the loan portfolio loan portfolios credit quality and economic conditions at the time of adoption as well as any refinements to the model methodologies and other key assumptions used.
Adoption, we will have a cumulative effect adjustments retained earnings for the change in the Hcl, which we expect to negatively impact our regulatory capital amounts and ratios.
Bank credit for agencies have provided regulatory accounting relief for an initial capital decreased from the adoption of this issue by allowing a phased adoption over three years on a straight line basis, which we expect to utilize.
Ill now turn the call back over Glenn.
Thank you Mark.
We're pleased with the strong financial performance and positioning we achieved in the third quarter of 2019 and year to date.
In particularly we're pleased with the momentum we've experienced in our Treasury cash management commercial program, and the resulting growth and deposits.
We continue to focus on taking advantage of the strong economic prospects in the markets, we serve where passion and enthusiastic about our prospects to expand our commercial and industrial lending to small and medium sized businesses through our branches in commercial banking center.
Also we continue to actively pursue potential acquisition opportunities throughout the inner mountain West, which we believe is crucial as a crucial component to our business strategy and shareholder value creation model going forward.
Thank you for joining us today at this point I would now like to open the lines for questions.
Thank you we'll now begin the question answer session to ask a question. Please press star one on your telephone keypad.
As soon as if you could use a speakerphone please pick up your handset before pressing the keys.
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This time, we will pause momentarily to assemble our roster.
First question comes from Jeff Rulis D.A. Davidson go ahead.
Thanks, Good morning, Jeff.
Hi, Jeff.
Glenn I was hoping to kind of range bound to the economic slowdown that youve sort of references for several quarters and I want to.
Well I think certainly prudent.
At this point in the cycle just wanted to.
Check in and see that level of.
Caution I suppose.
I think you're you're speaking more of a downshifted and then a reverse and knowing that Utah economy is in great relative shape, just wanted to kind of.
Sharp and what would I think is your view of of how the economic landscape is progressing.
Yeah, Jeff probably the easiest way for me to explain it is going from.
Almost unbelievably well two very good.
You know I mean, that's it that's an odd slowdown.
But we have seen.
Inventories in residential.
New construction.
Lengthen, we're seeing a little bit more.
Availability to where there has been such excess demand and no supply, we're starting to see a little bit of supply.
And we have as we've stated had a pretty high concentration in the real estate arena that we've we've backed down and we're starting to see some extensions and things carried out a hair longer. So it's it's typical stuff you're seeing a normal economy.
That we havent seen for awhile and that's what we're talking about.
Yeah Okay.
Then I guess given sort of that backdrop and you spoke on.
The M&A.
You know approach I guess, given that cautious stance is that slow that effort saumen in lieu of sort of buying someone else's problems do you get the says that the banks health.
Markets that you're looking at.
Have you.
Engaged or.
Change your interest given your view of the landscape.
You know I think a lot of this last year year and a half has been positioning for us to be opportunistic in any climate.
And we feel we fortified the balance sheet, we've identified our credits well enough to where even in a downturn. We don't feel we're going to be a 100% internally focused like sometimes happens so we want to be able to play.
Offense, and acquire and grow market share even if things.
Reverse let alone slowdown.
So that's the intent we feel we're pretty well there at this point.
You get a sense, there's more inbound I mean, when do you see it turn in the economy. Some of the smaller players may look out to reach to a partner and say Wow. This is a this is a tough road ahead.
I guess are you getting any sense that theres more people coming to the table in saying all right.
I'm willing to be a little more reasonable with with my.
The way should give in there do you think that that's impacting that the targets as well that in their reasoning.
Yes, we're not seeing reasonable valuations yet Jeff were.
With conversations out there.
There are plenty of people talking but this has been a pretty long upswing and most privately held community banks have done quite well through this cycle I think we're going to actually have to.
Wait until either the this interest rate cycle or a business slowed down impacts earnings at that point I think we'll have some opportunities.
Got you, Okay, and then maybe one last one I maybe for Mark as well I just looking at that reserve build you guys are on a pretty steady clip upward.
All while you're a diminishing the construction land development I guess is a reserve build above 2%.
In the future is that is that reasonable to think you'd climb to that or it's it's not really a number that you're actively watching it's it's just the underlying risk in the portfolio. Thanks Yeah.
No I don't think we'd get to 2% under current accounting guidance, but certainly under Cecil.
There will be an increase in reserves of that what that will.
Increase that number overall, so yeah I do believe will go over 2%.
Actually after the adoption of seasonal.
Okay I'll step back thank you.
Thank you.
Our next question comes from Andrew Lee Sandler O'neill go ahead.
Morning, guys.
And our continued to have really good deposit growth without much and delay of.
I've grown loan portfolio and I understand why but what how should we looking at this liquidity here.
Cash is increasing without necessarily a big increase in securities book are you looking at apply this into securities. What's the what's the thought the with the deposits that we have come on over the last few months.
Yes, we've we've purchased some securities I mean, not not a great time to be buying securities quite honestly, a particularly if you're going out longer in duration that you just don't get paid for the risks.
So we continue to watch that and to the extent that we can.
See good pricing on on certain securities. We are we are buying.
We will obviously like to to invest the cash and lending and.
I anticipate that we'll have opportunities to grow the the loan book, a little bit more and put that to use.
The.
Hi, how should we be looking at the size of the of the securities portfolio relative to the.
Overall asset base or non stop the best time to be buying securities interest rate environment, but what side is there certain percentage that you'd like to keep it up.
Yes, we.
We'd like to keep it at a you know around $300 million to $350 million Thats, where would be okay.
Gotcha.
And then just with.
Fewer loan growth opportunities given some of the caution and illiquidity coming on I mean is unreasonable thing that we're still going to see the margin come in maybe still be able to grow net interest income but.
But margin be under pressure.
You're right on Andrew we do feel we're going to be able to grow the net interest income, but we are impacted by these rate reductions in a pretty big way, we've got our short duration of our portfolio that said, we talked about earlier about our concentration and bringing that.
The loans to capital down we're now under a number where we're comfortable actually rebuilding.
Some of that back up with the right clients and the pipelines, we think will allow us to do some of that so we'll probably see some.
Some longer term.
Larger real estate deals go on here in the next.
Quarter to two quarters.
Now that that's good to hear odd you've covered all my other questions I'll step back.
Thank you thanks, Andrew.
Again, if you have a question. Please press star one our next question comes from Don Worthington Raymond James Go ahead.
Hi, Thank you good morning, guys.
No.
Mark you talked about the FDIC credit.
Going another quarter or too.
Is it at the same rate is this quarter or would it be dashing credit.
It would it be about the same effect as we have right now.
For the next couple of quarters, I mean, it's not a huge dollar amount but.
We do get the benefits.
Every little bit helps right yeah.
Hey, good exactly.
And then a mortgage banking revenue that was strong do you expect that to continue particularly if rates.
Declined further.
We do we've actually hired a new gentleman to run our mortgage division and we're increasing the size of it as far as producers as we speak so.
We're looking at.
Noninterest income growth both in the mortgage area if rates continue to decline and then also by some of the strategies, we have regarding treasury management fee income.
Okay, great. Thank you.
Thank you thanks.
This concludes our question answer session I'd like to turn the conference back over to Glenn Williams for any closing remarks.
Great. Thank you all for joining us in your interest in the come in the company. We appreciate your being with US and look forward to these as weak.
In the coming quarter. So thank you all in have a wonderful Thursday.
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