Q3 2020 Altabancorp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Office Bank Corp. Q3 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
You ask a question during this time, we will need to press Star then one on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today, Mark Olson Chief Financial Officer. Please go ahead.
Thank you Jamie and good morning, Thank you for joining us today to review, our third quarter financial results George.
Joining me this morning on the call as Glenn Williams, President and Chief Executive Officer of bulk of Bancorp and drug Kirkham, Chief Credit officer at all thanks.
Our comments today will refer to the financial results included in our earnings announcement and Investor presentation released last night.
To obtain a copy of our earnings release or presentation. Please visit our website at Www Dot also bancorp dotcom.
Our earnings release contains forward looking statements all statements other than statements of historical fact are forward looking statements.
Such statements involve in her inherent risks and uncertainties, many of which are difficult to predict and beyond the control of the company.
We caution readers and listeners that a number of important factors could cause actual results to differ materially from those expressed in or implied projected by such forward looking statements. These 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.
Hi.
Forward looking statements speak only as of the date. They are made and we assume no duty to update such statements except as required by law.
Ill now turn the call over to Len Glenn.
Thank you Mark good.
Good morning, and welcome to our call.
I'm grateful for this opportunity to meet with you and I Hope you and your loved ones are healthy and safe.
We reported solid earnings in the third quarter, demonstrating the strength of our organization to respond to difficult economic conditions, our associates and clients have adjusted to this unusual environment as we continue to focus on addressing our clients financial needs.
We've provided substantial financial relief to our clients through the participation in government programs as well as our own payment related programs.
And we expect to participate with additional funding for SP, a PPP loans if passed by the federal government.
We will continue to work with our clients to provide financial solutions to assist them on their path to recovery as we all work to overcome the current hardships.
I'm incredibly proud of how.
Our associates have responded to the pandemic.
And how quickly and dramatically altered how and where we work.
We've seen strength and leadership emerge through this unprecedented unprecedented business twist. Our technology team has continued to focus on addressing the needs of our associates. Many of whom are still working from home. While we continue to ensure that we protect our clients electronic assets. Our sales force continues.
To connect with our clients to ensure that we offer financial its financial solutions and assistance wherever and whenever possible.
While we rapidly deployed or back office support areas, we did so in a safe and secure environment.
We continue to ensure appropriate data security as our operations shifted to a new two new delivery methods.
Continue to focus on the safety and stability of our associates and their families to the allocation of technology and resources to ensure that a majority of our associates are.
You have to continue to work from home.
We've also enhance cleaning protocols for our office spaces and branch locations to ensure that our associates and clients feel safe.
When they visit us.
The city, Utah has developed a COVID-19 transmission index, which categorizes level of transmission as high moderate or low.
Each county receives a rating every week.
The company's COVID-19 pandemic response plan directly correlates to the state's transition and index.
Counties, where our branches are located presently have a transmission index of moderate or high.
As a result, all of our branch lobbies are available by appointment only while our drive through Windows remain open.
To ensure the safety of our associates and clients, we require mass to be worn in all branch locations and in our back office locations. When associates are unable to socially distance from other associates.
Approximately 60% of our workforce remains working from home and we'll continue to do so until the transmission index and the corresponding county moves to low.
At the outset of the public health crisis, we respond to swiftly to our clients' needs, including by actively participating in the small business administration pay tax paycheck protection Pro program or PPP.
Since the inception of the program, we have funded over $85 million in PDP loans, helping over 330 regional small and medium sized businesses.
We have some subsequently filed 62 applications or 19% of the borrowers for forgiveness with the FDA.
Totaling $19 million.
And have to date received loan forgiveness on 15 loans totaling just under a million dollars. Thus.
Thus far we have not received the denial.
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On any forgiveness applications submitted to the SPD.
We are participating in the PPL facility offered by the Federal Reserve Fund.
Fund, our SP, a PPP loans and receive regulatory capital relief for such loans.
We expect to have most of our SP, a PPP loans process for forgiveness by the end of the second quarter 2021.
We also offer and a temporary loan payment relief program to borrowers impacted by that.
Well did 19 pandemic.
We extended payment relief to 415 businesses and 108 individuals totaling approximately 320 million or 18.5% of total loans, excluding ESB loans.
To address.
Borrowers cash flow challenges to date. The deferral period has ended for 237 borrowers or 45% of loans differ totaling $128 million.
This leaves 284 borrowers are 55% for loans totaling $191 million still on deferral.
There are only for borrowers with small balance loans totaling $70000, who have not made a loan payment for 30 days or greater after their payment deferral.
Agreement has expired.
To date, we have not entered.
Into any ready for early agreements since.
Since these loans were performing loans that were current on their payments prior to the COVID-19 pandemic. These modifications are not considered to be trouble troubled debt restructurings pursuant to applicable applicable accounting and regulatory guidance. However, we do expect a small percentage of KLH.
Scientists, who have or had deferral agreements to be renewed and converted to tdrs.
It is important to note that average deposit balances for clients, who either apply prepayment relief with us or who have.
At loan payments made by the FDA.
Increased deposit balances increased $98 million or 363%.
Two $125 million from the first quarter to the third quarter of 2020.
In particular, we have seen that many of our borrowers who requested payment deferments have held onto their cash that would have otherwise been use to make their monthly payments.
We anticipate these additional funds held by these clients.
We will provide cash flow so they will be able to resume making payments on loans. After their deferral periods, approximately 15% of borrowers who requested a loan deferral continued to make their monthly payments through their deferral period.
Our overall asset quality trends have improved throughout 2020 and charge offs across our portfolios have remained relatively low.
We expect to see asset quality trends began to deteriorate and charge offs to increase beginning in 2021 as the positive effects of the government stimulus and loan payment relief programs come to an end.
We believe our allowance for credit losses is adequate to cover our current expected losses. However, we will continue to monitor closely macroeconomic conditions and the overall performance of our loan portfolio to determine if we should adjust our expectations for credit losses.
Over the past 24 months, we've communicated each quarter, our efforts to fortify our balance sheet based on our perspective that we were at the end of an economic cycle and wanting to be prepared for an economic turndown.
While we certainly did not anticipate that the economic downturn would be the result of a pandemic our strong balance sheet provides safety and security to our stakeholders.
We believe our balance sheet strength is reflected in the level of allowance for credit losses held by us and our strong regulatory capital position.
In addition, our focus to reduce loan concentration in our APC in commercial real estate portfolios and the tightening of our overall underwriting standards over the past couple of years will help to mitigate the negative effects. The pandemic may have on our loan portfolio lastly, our strong liquid liquidity position provide.
Hi, guys us the flexibility to grow aggressively as the economy recovers.
Evaluating our loan portfolio approximately 20% of our portfolio is in business sectors that could potentially be impacted by the coal did 19 pandemic.
His business sectors, including retail assisted living or nursing home facilities hotels, and motels restaurants, and Arts entertainment tourism and recreation.
The vast majority of these loans are secured by real estate and our commercial and industrial loan exposure is small.
We're fortunate to operate in one of the strongest states in the nation from an economic perspective.
Utah's economy has consistently performed better than most states and the nation as a whole.
The unemployment rate for the nation was 7.9% at September Thirtyth, while the unemployment rate for the state of Utah was 5%, which is a six lowest unemployment rate in the nation.
Nationally total jobs decreased by 6.4% year over year at September Thirtyth.
While Utah jobs degree decreased 0.9%. This is the second lowest year over year.
Job change of any state in.
In the us.
Despite the negative effects of the pandemic. The pandemic has had on the overall year over year change in jobs in Utah at the end of the third quarter construction jobs actually increased 6.6% year over year, which we believe is a leading indicator of the beginning of an economic recovery here.
Youtube continues to experience net in migration, particularly.
During the pandemic as individuals and families are able to work from home for an extended period.
We believe that Utah will continue to outperform other states.
And the nation as a whole as we recover from the negative economic effects of the pandemic.
Lastly.
COVID-19 fatality rate in Utah was the lowest of any state in the nation.
Which we believe will also mitigate the negative effects of the pandemic.
Despite the onset of the pandemic, we reported a net income of $11.3 million for the third quarter of 2020 compared to $10.3 million for the second quarter 2020, and $11.1 million for the third quarter of 2019.
Diluted earnings per share per common share were 60 cents for the third quarter of 2020, compared with 55 cents for the second quarter and 59 cents for the third quarter of 2019.
Annualized return on average assets was 1.47% for the third quarter of 2020 compared to 1.52% for the second quarter and 1.8 for the third quarter a year ago.
Annualized return on average equity was 12.6% for the third quarter compared with 12.1% for the second quarter and 13.8% for the third quarter a year ago.
The board of directors declared a quarterly dividend payment of 15 cents per common share the dividend will be payable on November 16, 2020 to shareholders of record as of November nine 2020, the dividend payout ratio for earnings for the third quarter 2020 was 24.9%. This continues the over 50 year trend of paying down.
It ends by the company.
I will now turn the call back to Mark to discuss more specifically our financial performance for the three and nine months ended September Thirtyth 2020.
Thank you Len.
Total assets grew $731 million or 30% year over year to $3.2 billion at the end of the quarter, which is primarily the result of the significant increase in total deposits.
Total deposits increased $615 million or 29% to $2.72 billion at September Thirtyth.
Noninterest bearing deposits increased $261 million or 34% to $1 billion at September thirtyth compared with the same period, a year earlier and interest bearing deposits increased $354 million or 27% to $1.68 billion at September thirtyth compared with the same period a year earlier.
Noninterest bearing deposits to total deposits increased to 38% at September thirtyth, compared with 37% a year earlier.
The increase in total deposits is primarily the result of both governmental and bank relief programs and businesses and consumers actively conserving cash to try to counter the negative.
Economic effects of the COVID-19 pandemic.
We anticipate that total deposits will decline throughout the remainder of the year and throughout 2021 as borrowers begin to make payments again on loans, where payments were deferred and as cash reserves are used by both businesses and consumers to address shortfalls in income resulting from the pandemic.
Loans held for investment grew $22 million or 1.3% to $1.7 billion at September thirtyth, compared with $1.68 billion a year earlier.
Orders to date average loans increased $11.6 million or 0.7% to $1.69 billion for the third comparable third quarter compared with $1.68 billion for the same period a year ago.
Loans held for sale increased $12.3 million or 63% to $31.9 million at September thirtyth because of increased mortgage loan volume from our mortgage banking division.
The allowance for credit losses increased $11 million or 36% to $41.5 million at September thirtyth compared to $30.5 million for the same period a year ago.
The allowance for credit losses to total loans held for investment was 2.45% at September Thirtyth compared with 1.82% at September Thirtyth 2019, right.
Removing the $84.6 million in NSP, APTP loans and $77.5 billion in government guaranteed balances from the denominator, our hcl to adjusted loans increases to 2.7%.
Lastly, if we add the remaining $2.6 million in Accretable discounts to our allowance for credit losses, our total loss coverage ratio for outstanding non guaranteed loan amounts is 2.9%.
Nonperforming assets decreased $6.9 million at September thirtyth, compared with $8.8 million at December Thirtyth 2019, nonperforming assets to total assets were 0.22% at September thirtyth compared to 0.37% at December 32019.
Cash and liquid investments securities grew $688 million or 104% year over year to $1.35 billion or 42% of total assets at September Thirtyth.
Shareholders equity increased $37.6 million or 11.6% to $360 million at September thirtyth compared to $323 million a year earlier.
The increase is primarily from net income earned during the intervening periods.
Change in accumulated other comprehensive income, resulting from the change in the fair value of our investment securities portfolio and due to a decline in overall interest rates and then cash dividends paid to shareholders.
The company's leverage capital ratio was 10.87% at September Thirtyth compared with 12.64% at September Thirtyth 2019, total risk based capital ratio was 19.13% at September Thirtyth compared with 17.8% at September Thirtyth 2019, the coming.
These regulatory capital ratios were negatively impacted by the adoption of asked you to 2016 dash 13, or see Seoul, and the companys election to take the full impact of such adoption against its regulatory capital ratios during the first quarter of 2020.
Turning to the income statement pre tax pre provision.
Provision income was $15 million for the third quarter compared with $16.6 million for the same period a year earlier.
For the year pretax pre provision income declined from $3.1 million or 6.3% to $45.5 million compared with $48.5 billion for the same period a year ago.
The decline in pretax pre provision income was primarily the result of lower net interest income and higher non interest expense offset by higher noninterest income primarily from mortgage banking activities.
Net interest income decreased $2.4 million or 8.5% to $26 million for the third quarter compared with $28 million for the same period a year ago.
The decrease in <unk> is primarily the result of net interest margins narrowing a 152 basis points to 3.52% for the same comparable periods.
The narrowing of net interest margin is primarily the result of the federal reserve, reducing benchmark rates to almost zero and an increase in the average amount of lower yielding cash and investment securities held by us stemming from average core deposits, increasing $592 million or 30% for the same respective periods.
Offset by average interest, earning assets, increasing $696 million or 31% to $2.9 billion for the same comparable periods.
The percentage of average loans to total average interest earning assets decreased.
58% for the third quarter compared with 76% for the same period a year earlier.
Please keep in mind that if our balance sheet only had 15% of its interest earning assets.
Held in cash and investment Securities and our current liquidity was allocated to loans based on the third quarter yields our net interest margin would have been 4.6%.
Sales on interest, earning assets declined 171 basis points to 3.74% for the third quarter compared with 5.45% for the same period a year earlier the declining yields on interest earning assets is primarily the result of the average amount of cash and investment securities held by us increasing $684 million.
Our 128% to $1.22 billion for the same comparable periods was the yield on cash and securities declining 70 basis points to 1.49% for the third quarter compared with 2.19% for the same comparable periods.
In addition, the yield on loans declined 112 basis points to 5.37% compared with 6.49% for the same comparable periods.
Average loans outstanding increased $11.6 million or 0.7% to $1.69 billion for the same comparable periods.
Cost of interest bearing liabilities decreased 32 basis points to 0.38% for the third quarter compared with 0.7% for the same period a year earlier and is primarily the result of the cost of interest bearing deposits decreasing 32 basis points to 0.38% compared with 0.7% for the same period a year ago.
Total cost of funds decreased 20 basis points to 0.25% for the third quarter compared to 0.45% for the same period a year ago.
Acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits added seven basis points to our net interest margin for the third quarter.
Year to date, net interest income decreased $4 million or 4.8% to $78.8 million compared with $82.8 million for the same period a year earlier.
The decrease is primarily the result of measures this margins narrowing hundred 15 basis points to 4.04% for the same comparable periods.
For the year as a percentage of average loans to average interest, earning assets decreased to 65% compared with 79% for the same period a year earlier.
For the year yield on interest, earning assets declined 130 basis points to 4.32% compared to 5.62% for the same period a year earlier.
Declining yields on interest, earning assets is primarily the result of the average amount of cash investment securities held by us increasing $464 million or 103% to $915 million from the same comparable periods with a yield on cash and securities decreasing 38 basis points.
To 1.28% for the same comparable periods.
In addition, the yield on loans declined 80 basis points for the same comparable period and average loans outstanding increased $7.4 million or 0.44% to $1.69 billion for the same comparable periods.
Total cost of interest bearing liabilities decreased 25 basis points to 0.47% for the year compared with 0.72% for the same period a year earlier.
The decline is the result of the cost of short term borrowings decreasing 220 basis points, 0.35% as well as the cost of interest bearing deposits decreasing 24 basis points, 0.48% compared with 0.72% for the same period a year ago.
Total cost of funds decreased 16 basis points, 0.31% for the year over the 0.47% for the same period a year ago.
Acquisition accounting adjustments, including the accretion of loan discounts and fair value amortization on time deposits added nine basis points to net interest margins for all of 2020.
Moving to provision for credit losses, we did not record any provision for credit losses in the third quarter compared with $2.1 million for the same period, a year earlier, which was calculated under the prior incurred loss methodology, but.
The provisions for the current and preceding two quarters Reis flecked expected lifetime expected credit losses based on the current conditions and the potential effects from forecasted deterioration of economic metrics due to the COVID-19 pandemic based on the outlook as of September Thirtyth 2020.
The decrease in provision for credit losses in the third quarter compared with the same period a year earlier is due primarily to an $11 million or 60% decline in loans individually evaluated for expected credit losses to $7.4 million and the related allowance for credit losses of $4.4 million. This was offset by.
A $49 million or 3% increase in loans collectively evaluated for expected credit losses to $1.6 billion and the related allowance for credit losses of $37.1 million we.
We incurred net charge offs of $1.2 million for the third quarter compared with net recoveries of zero point $3 million for the same period a year ago.
Provision for credit losses was $2.8 billion for all of 2020 compared with $5.8 million for the same period, a year earlier, which was calculated under the prior incurred loss methodology we.
We incurred net charge offs of $2.1 million for all of 2020 compared with net charge offs of zero point $6 billion for the same period a year ago.
Noninterest income increased $1.7 million or 37% to $6.1 million compared for the third quarter compared with $4.5 million for the same period a year earlier.
The increase was primarily due to a $1.7 million or 82% increase in mortgage banking income to $3.9 million compared with $2.1 million for the same period, a year ago, which are the result of higher volume and wider margins on loans sold which was favorably impacted by an increased mortgage banking loan refund.
Answers as overall interest rates decline.
For the year noninterest interest income increased $4.6 million or 40% to $16 million compared with $11 million for the same period a year earlier the increase in noninterest income was primarily due to a $3.4 million or 67% increase in mortgage banking income and a 1.4.
Million dollar gain on the sale of investment Securities.
We expect to continue to continue to see improving noninterest income as we expand our mortgage banking operations, both in Utah, and the and the surrounding states and reap the benefit of a significant investment in the technology used by our mortgage operations from an operational efficiency and enhanced client experience perspective.
Noninterest expense was $16.9 million for the third quarter compared with $16.1 million for the same period a year earlier, our efficiency ratio was was 52.9% for the third quarter compared with 49.2% for the same period a year ago.
For the year noninterest expense was $49.3 million compared with $45.7 million for the same period a year earlier.
Our efficiency ratio was 52% for the year compared to 48.5% for the same period a year ago.
The increase in noninterest expense both for the three nine months ended September Thirtyth was primarily the result of higher salaries and associated benefits, resulting primarily from higher incentive payments, particularly in the mortgage banking division.
In addition, we incurred higher data processing expenses due to the investments made in new technologies for the mortgage banking division the term commercial banking division, including costs for our cloud based commercial loan origination application, including automated processes for smaller ticket commercial loans cost for the implementation of a salesforce CRM.
Alan.
And costs for a new cloud based commercial client Treasury management solution and cost for new cloud based construction budget draw and inspection management solution for both commercial and consumer clients.
We expect to continue to make significant investments in new technologies to enhance the overall client experience and to a power empower our clients to transact for business on our mobile platforms lower the overall cost of our operating platform and to become more scalable as we aggressively evaluate acquisition opportunities now.
Noninterest expense also increased from higher marketing and advertising expenses as we continue our efforts to improve overall brand recognition in the regional markets in which we operate.
We anticipate overall interest rates to remain near zero for the foreseeable future as a result, we continue to review our overall operating costs turn.
Term and how we can better leverage our platform, while retaining our high touch client experience.
We anticipate making changes over the next several quarters to improve our overall operating leverage income.
Income tax expense was $3.7 million for the third quarter compared with $3.4 million for the same period a year earlier, the effective tax rate was 24.6% for the third quarter compared with 23.2% for the same period a year ago for the year income tax expense was $10.3 million compared with $10.1 million for the same period a year around.
Earlier.
For the year, the effective tax rate was 24.1% compared with 23.7% for the same period a year ago.
I will now turn the call back to lend Glenn.
Thank you Mark.
Im very proud of our team and how they've handled the pandemic our top priorities through this has been the safety and soundness of our associates and of the bank.
We believe we've build a fortified balance sheet that will withstand the negative effects of the pandemic.
Lastly, we have focused on providing financial relief to our impacted clients. It's our goal to provide as much assistance as we can to our clients to support them through this crisis. Thank.
Thank you for joining us today and at this point I will turn the call back to the moderator to open up the lines for questions.
At this time, ladies and gentlemen, thank you have a question you can go ahead and press Star then one on your telephone keypad.
Again star one to ask a question.
And we'll pause for just a moment to compile the keenly roster.
Your first question comes from the line of Andrew Thanks, Steve.
Proceed with your question.
Hey, good morning, everyone.
Hi.
Got a question on the margin here, just curious where new loans were being added but added like what was the average rate on the new production this quarter.
For the quarter.
It was let me just look at that here.
Okay.
It was around.
Just around 5% overall.
Okay, new loans being added around five.
I would imagine securities being added around one.
And cost of funds are on 25 basis points.
Let me just spending all that together I mean should we I mean clinical margin will still be under some pressure, but should begin to flatten out a few basis points lower from here.
Yes, I think we're pretty much at the bottom Andrew as we look and forecast into the future.
We expect.
As we as we grow the our loan portfolio into next year.
Our margins will start to widen with the level of cash and investment securities. We have obviously we have been.
Negatively impacted our margins have certainly narrowed but so yes, we think we have kind of a floor at this point.
Okay. That's very helpful. And then obviously some pretty solid loan growth here this quarter what.
Anything specific driving that and I guess I'm not sure. If this pace is repeatable in the coming quarters like How's the pipeline look.
Heading into the fourth quarter, maybe even the next year as well.
Heading into the fourth quarter a.
A lot depends on the weather here and so far so good.
It's usually a slower quarter, but that said.
Over the last.
Couple of years, we have.
None of it enhanced our credit process, we've tightened up with a couple areas. We actually have moved out a very large number of close to $80 million in relationships and frankly, our production. This year is over last year. So we think we've cleaned up the balance sheet.
Cleanup the credit portfolio to the point, where we don't think we'll have those reductions going forward. So that in its own right gives us a boost and we're seeing the effects of that now.
Okay. That's.
Thats great color. Thanks for taking the question, let's go back.
Thank you good talking with you thanks Andrew.
Your next question comes from the line of David Feaster with Raymond James. Please proceed with your question.
Good morning.
And everybody you are.
Hey, pardon me.
How are you.
Doing well doing well thank you.
You know you guys I appreciate all the color in the release about being able to drive operating leverage in the comments on the call.
All the while retaining your high touch experience before.
For your for your high touch client experience now you've done a great job of investments to keep ahead of the competition into Encino and some of the other odd automation is sounds like there's some water dock yet I guess.
As we look forward contemplating additional investments and inflationary pressures.
How do you think about the opportunity to reduce costs and drive that operating leverage that you referenced.
And it will both will both attack that one but it's a it's a tough one because we are committed to a high touch run in.
And so technology, and we think Thats the Dan.
The answer to the space. We're looking at what is that is so that small to midsize enterprise business owner.
And as we've we do that we bring in the technology, but we have not taken the full benefit of the efficiencies of those that technology were still trying to fly on the on the back end support piece of that if there were working through.
This quarter next quarter I think we'll be in pretty good shape. There now we may also sees some increase as it should be offset by revenue as we continue to expand particularly our commercial lending platform in Salt Lake County, where we have.
1% or less market share.
We think this is a good opportunity in the market with some of our larger competitors backing off and going less high touch.
We think we are going to be able to what attracts some talent into the track plans with that so we may see a little bit of an expense.
Push as we continue to build our commercial lending capacity in Salt Lake County.
Yes, my comment with respect to that David is obviously that the best way to do that is to grow volume and that and expand the portfolio overall.
And to the extent that we're able to do that and certainly we are seeing.
The pipelines improve.
That's that's the best way to do it but if if that growth has a better than than we are going to have to find a way to be more efficient on the backend and Meg and make that platform more efficient overall so.
We totally get it was.
As we look into the future, we don't see rates rising for a while and as a result, we really need to be efficient there the other thing.
And we have always said that in our releases that were aggressive in looking at acquisitions and to the extent that we can acquire.
Other banks that will help lever the platform as well so.
We're looking at everything that we want to lower those costs as our margins are low.
I do want to go back to the fact that if you if we.
Take that liquidity, we have and and move that into into loans, our yields are going to be kind of in the ninetyth percentile as all banks. So.
We're comfortable where we're at.
And we think Weve got great opportunities to grow.
Okay. That's good color.
We hear a lot of banks talking about afford to slight balance sheet. You guys are really be a could any of that at this point just given your reserve levels in excess capital and I think it is really affirms our strategy over the past couple of years the parent for something like this I guess.
How do you think about your Pos through here, maybe what lessons have you learned that to help position you even better going forward and maybe just how you appreciate the commentary about improving the shrinking run off some loans and improving the credit profile, but just how do you plan to leverage the balance sheet going forward to take advantage of the market in your positioning.
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First and foremost we're in position to grow and again, our conservative nature sales that some of those deposits are probably drop off as businesses begin to reinvest.
So that will change composure actually increase or or.
Capital position from a percentage perspective, if that happens but.
[music].
The.
The capital management part of this is a very important part of ours and on of the boards.
And.
Not knowing we've talked about acquisitions for couple of years as well spend a few select few years since we've done one and we think thats going to open up and hanging onto a little bit of excess capital and managing through that.
Is the mindset today, we continue to look at buybacks, we did increase the dividend a couple of cents will keep that at the high ends I believe of our our stated range.
So right now.
The capital question comes quite comes up quite a bit and we feel we're in a position to act in the best interest of the shareholders are best action is through growth and that's what we've got to focus on.
And David the other the other component the other comment I would make is.
Len mentioned.
We expect that by the end of year, our overall volume will be over $1 billion and.
With that you can see how short the duration is and we talked about that all the time.
Our our duration is very short and so we are turning the portfolio over.
Quite quickly, but now that we feel that.
We've we've kind of cleaned up the balance sheet as best we can and eliminate that $80 million of credits that we felt that we needed to let go there should just be some natural growth. There just just in doing that even if we don't.
Increase anything at all.
From what we are doing today, but having said that when you look at it the money center banks in particular are really.
Their lenders have been told no more new business and so we think that puts us in a great opportunity to go and expand and grow.
And brain and clients that to.
I'm going to have strong credit and that will help us grow overall.
Okay. That's good color and then just kind of following up on some of those comments on the capital deployment opportunities obviously organic growth at the top of the list saw the pivotal increased cloud what like before towards the top end of the range and we've talked about M&A, but at current prices I'd argue that given your current valuation in the province.
Lilly profile the best deal that you could do is your own stock.
I guess, how do you think about capital return in buybacks in you know I believe you've got to a buyback in place I mean do you plan to be active in the short run or do we need to have more visibility into the credit before you start.
On a more active.
There's a big unknown out there or the credit so far things look good we're glad to be in Utah. We're we're grateful for the for what our Chief Credit Officer is done to enhance the the color that portfolio, but there is a big unknown hanging out there as well, we're well aware of the capital position and the way to maximize.
Is that an and share it with the investment community, but there is an unknown we want to make sure were in place for we also look at you're seeing a lot of buybacks now in the market but.
Banks are trading.
80% to 90% of books that are good they're.
Do and most of that we're back up to that pushes that 120 to 130 range.
And.
While I'm with you I think given how much were earning in building that capital continually we do intend on leveraging it through through growth first organically second acquisition, and then hold a little bit to see what happens on the credit portfolio, we talk about it every quarter and our board meetings.
Continues to intensify this things stabilize we'll probably see more more action on that buyback approval, we have hanging out there.
Okay.
Thats helpful. Thanks, everybody.
Thank you so much thanks David.
Your next question comes from the line of John Moten Mccann. Please proceed with your question.
Good morning, guys.
Well, John Hi, John.
Just a follow up maybe a different way on the Ics on expenses.
You you were 16.8 $16.9 million for the quarter is there anything.
Is that a good run rate or is there anything we should sort of back out given the various.
Just just given the different moving parts that were in the quarter as far as initiatives and stuff like that.
Yes, yes, I think thats, probably a good run rate as it stands right now I mean, we think we've got we've got to be invested in technology and we do have some additional.
Areas that we're looking at investing them.
And so yes, I think thats, probably a good run rate for now.
Thanks Mark.
As far as the you guys have been growing the securities portfolio, obviously, just given the lack of loan growth up until this quarter, how should we think because I think last quarter on the call you said.
Securities portfolio could trend down some but it was up a little bit this quarter, how should we think about that going forward.
Yes.
When we set that we honestly felt that we'd start seeing some outflows and deposits and and so.
As a result, we would stop reinvesting but.
So far that trend has not reversed and that that continues to grow and so long as that as it continues to view that we just can't sit on cash at nine basis points and.
So what we're going to have to kind of manage accordingly.
I hate buying securities, particularly in where we're at from a margin.
Perspective.
We want to make our earn some yield and any investment we make certainly is going to be an amortizing securities. So we get the cash back and and you can use that as a loan book grows so.
I.
Don't want to do it but if the deposits continue to grow it we've got to do something.
Okay, but I guess you said in your prior remarks. Your prepared remarks, you thought deposits would trend down through next year right. So right and to the extent that that happens then yes, we will completely discontinue.
Find security.
Commensurate to whatever whatever the outflows are.
Okay makes sense.
As far as you guys talked about building out the mortgage platform and expanding and actually expanding that how should we sort of think about I mean, certainly mortgage has been strong for all banks this quarter last quarter.
I would still think is it still fair to assume that even with the expansion that mortgage trends down from the third quarter level or just.
Just just talk about those dynamics and how much of the slowdown for expected slowdown you can offset with expansion.
Yes, the the timing for this the mortgage rate drops have been phenomenal.
Phenomenal for us, we reorganized and hired a new leader for that mortgage division about a year ago, who has taken us to a whole new level and improve margins. So.
He is he's been very aggressive in as budgeting.
As a matter fact, even through this year is just just now getting to worries on target, so very very aggressive and knows the business well.
So I would the other point with the mortgage business as these build toward scalable. So the bulk of the increase expenses our incentive base. So it will scale with volume.
That said in a prior life he actually managed locations across the country were staying in the inner mountain west in our footprint, but we do have some expansion opportunities. This is becoming a pretty well known platform at a pretty high performing well known group to where we have not had a big problem attract.
Tablets, so we hope that offsets a good piece of it as the market does slow again on the plus the inner mountain West if you're looking at.
Utah, Idaho.
Arizona, that's where we're seeing all the growth from.
The straps stays on the West coast.
Predominantly.
So so mark or Larry Im just as far as the mortgage is it is it's all digital expansion or do you or will you actually open some physical locations.
Yes, mostly we can do it from home, we will have sort of office or on the street outside of the market, but the whole application delivery processes digital.
Okay. Okay.
Okay and.
Okay, and then I guess as far as.
As far as if mortgage slows down the impact to expenses is it for each dollar of revenue that goes down to do expenses go down by roughly 50 cents or how should we think about that.
Yes, we don't have that ratio right now Mark Yes, I think what we've seen is kind of a three to one so for every $3 of revenue decline, we see a dollar.
Expense reduction.
Okay.
Okay, and then Glenn just to follow up on your comment on on M&A and you certainly talked about.
Your interest in doing deals and obviously being patient that makes the most sense. We can you remind us from a from a market standpoint, obviously, Utah, probably makes the most sense, but as you talk about the inner mountain region.
What markets are you potentially interested in from an M&A standpoint.
I'd say contiguous states of the inner mountain West.
I would probably skip Nevada on that discussion, there's just not much there, but as you look across southeastern Idaho Western Wyoming Western.
Colorado.
And the northern Arizona, that's that's really where we are and where we feel we can manage well.
A lot of.
It's been an interesting time with.
Particularly some of the smaller community banks being public we get to look at our valuation every day.
A lot of the smaller non public organizations, maybe havent hit the realization that value banks have gone down so I think theres theres going to be a period of time, while they understand that reality and then the other issue is right now going in and doing diligence on the loan portfolio probably wouldnt.
Treated fairly either because we don't know what's going to happen with with the market. So they probably we discount a little bit. So I don't expect much of the fourth quarter, but I'm, hoping by the first laid for second quarter next year we.
We start having little more meaningful discussions along that line.
Okay Super Thanks for the thoughts guys. Thank you.
Kian.
Sure.
And again, ladies and gentlemen, if you would like to ask a question. Please go ahead. Please press Star then the number one on your telephone keypad.
Your next question comes from the line of Jeffrey Wong with D.A. Davidson.
Please proceed with your question.
Thanks, Good morning.
Well, Jeff Hi, Jeff.
Question on the.
Then you mentioned the charge offs expectation to increase in 21, I think thats broadly in industry expectation and I think an industry question is with Cecil.
We've set up the system, where were effectively you do charge that down if it's been built.
Yeah, you had a little reserve charge down in the quarter.
Trying to get a sense for.
Does that accelerate I guess based on your comments, you've got a pretty stout reserve than and could we I guess, it's implying an acceleration of that.
Charged down into 21, assuming.
Assuming in a loss content is within projection but.
Any thoughts around that dynamic.
Ill provide a little bit more color on this quarters or excuse me last quarter's charge off it really happened to be one deal, which we are expecting some recovery from.
But it was a C and I contractor kind of a mismanagement issue and that charge off amount was virtually that one deal. So we're not we're monitoring the portfolio on grade changes pretty tight right now and we have been moving some of the hotels and some of the highly volatile.
Industries with co bid.
To that.
Watch to sub standard.
Range.
But yet we haven't seen enough.
Bend in the portfolio to really be able to.
Predictive right now we don't see much more hanging out there.
And I will say, while it pulls in line with the comments that we think they're going to go up it was a bit of a little lot anomaly in the third quarter with one deal driving it.
So I don't have a great prediction is just kind of going along with the market thinking we havent seen the impact the negative impact of the market yet from a charge off perspective.
But just to your point.
We set up those reserves for expected losses, and as those losses come to fruition, we will be lowering the reserve overall, because our expectation of losses in the portfolio will that down and and therefore, we're not going to need to re provide.
As as those expectations become reality so.
We don't view it as we're always going to have this very large reserve.
That's kind of out that align with our peers, we did that because we're conservative and and as that losses incurred will reduce reserves accordingly.
Thank you and may be.
Lynn you know we've had a few months now I guess.
Interested in your thoughts on the brand acceptance of the work we've done there I know thats a longer term play and its Scott implications for.
Kind of years down the road, but just wanted to get your sense for.
How thats played in the markets.
So far.
Yes on as I mentioned loan volume actually is deposits are up.
You can attribute to a lot of things the branding has been good internally, we have been able to do particularly the acquisitions. We've had the last few years.
Actually I can even go back to Louis the state Bank acquisition several years ago, It really has United that group.
So we're seeing some some very positive internal supported the brand and the clients are still trying to understand many of not clients, but the market is still trying to understand if the other banks got bought or if this is the way what it is so we're still explaining that pay were the same people, we just rebrand and put us all.
Together and unified the organization. So it's been a positive we've heard positive press, we're spending a little bit more money for market awareness as we anticipated its in our budget.
So far so so good Jeff.
Okay, so committed phases, but.
The first step is is in house sounds like.
Momentum so that's all for me. Thank you guys.
Thank you so much thanks, Jeff.
And there are no further questions in queue at this time I turn the call back to the presenters for any closing remarks.
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