Q2 2019 Earnings Call
Good morning, and welcome to the people you were taught Bancorp 2019 second quarter earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Mr., Mark Olson <unk> Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you and good morning.
Thank you for joining us today to review our second quarter 2019 financial result.
Joining me this morning on the call as Glenn Williams, President and Chief Executive Officer for People's You're taught Bancorp.
Our comments today will refer to the financial results included in our earnings announcement released last night.
To obtain a copy of our earnings release.
Please visit our website at Www Dot People's Utah Dot com.
Our earnings release contains forward looking statements all statements other than statements of historical fact are forward looking statement.
Such statements involve inherent risks and uncertainties, many of which are difficult to predict and beyond the control of 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 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.
Forward looking statements speak only as of the date. They are made and we assume no duty to update such statements.
I will now turn the call over to lend Williams.
Thank you Mark good morning, and thank you for joining us on the call today People's Utah Bancorp achieved strong financial performance in the second quarter 2019.
Even as we continue to position strengthen and fortify our balance sheet.
We realized a return on equity of 14.3% for the second quarter. After building, our average equity to assets from 12.4% a year ago to 13.7% for the second quarter 2019.
Well, we also increased our allowance for loan losses from 1.3% a year ago to 1.7% at quarter end.
Well the economy in Utah continues to be strong. We believe there are beginning to be signs of a general economic slowdown, including the flattening of the treasury yield curve and comments from the Federal reserve chairman, suggesting that they may lower interest rates at their next meeting.
Fed funds futures indicate an extremely high probability that the federal reserve will lower interest rate by 25 basis points at their next meeting.
We believe it's prudent for us to prepare for an economic slowdown. So we're able to take advantage of market conditions to expand our market share either organically or through acquisitions.
Loans held for investment was a was essentially flat at the June thirtyth compared with.
The end of the year and down 1.1% compared with a year ago.
This decline is primarily the result of declines in the acquisition development and construction loan portfolio of 17.1 million or 5.26% from June Thirtyth 2000.
19 to December 31, 2018, and 66.4 million or 17.6% from a year ago as we managed loan concentration levels and have become more selective with the type and size of construction projects that were willing to finance given our perspective on the economy.
We have reduced our acquisition development and construction portfolio to a total capital concentration ratio from a high of 149% of capital at the end of the first quarter of 2018% to 100% of capital at the end of <unk>.
The second quarter 2019.
We achieved strong deposit growth of $200 million or 11.2% to 1.98 billion at June Thirtyth 2019, compared with 1.78 billion a year ago.
Our retail branches and commercial Treasury management team have been successful in focusing on raising commercial deposits both 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 believe will help us continue to grow our commercial deposit base and improve on fee income.
We anticipate rolling this out this new platform out by the end of 2019.
Our cost of interest bearing deposits increased 34 basis points to 0.74% for the second quarter of 2019, compared with 0.4% for the same period a year ago.
Our total cost of deposits increased 11 basis points to 0.49% for the second quarter of 2019, compared with <unk>, 0.38% for the same period, a year earlier with the flat yield curve and the fed suggesting that they will lower interest rates at the end of the month, we expect our deposit cost to remain flat near term.
As mentioned earlier, we continue to focus on diversifying our loan portfolio in particular.
Growing our CNS portfolio currently we have operating to commercial banking centers that are located in Salt Lake County, and we're in the process of building out a team to open a commercial banking center in Utah County.
We expect to have the team and we expected to have the team in place by the end of the second quarter, but we're still evaluating talent and potential team members we anticipate.
Having the center opened this quarter.
We're continuing our efforts to automate and digitize, our commercial loan origination processes through the implementation of an online commercial lending application and we have begun the building phase of Encino, which isn't in industry leading.
Leader in the commercial banking loan operating system space. The goal of this project is to ensure that we continue to provide the high touch and unparalleled responsiveness to our clients that we currently offer and be able to offer the same client service that we do today as we continue to grow in size and complexity.
We expect to have the first phase of this project completed in the fourth quarter 2019.
On the retail banking front, we mentioned on our last call our plan to have a new business oriented branch in the fast growing Pleasant Grove area, where a number of technology firms have recently built new corporate offices.
The brands will focus predominantly on small to medium size commercial clients. The branch has been dope men opened and we look forward to building additional business relationships in the area.
We've also begun the demolition of our Alpine branch with an expected completion date of the new branches replacement sometime in the fourth quarter of 2019.
The alpine branches, one of our oldest branches with over $120 million in deposits.
Also as I mentioned on our last call, we hired an outside marketing research firm to evaluate our overall brand strategy.
The research firm for provided us with enlightening information about our organization. The research indicated that our existing clients are extremely satisfied with their relationship with us and our loyal to our people and style of business.
Our clients believe we provide excellent service deliver customized financial solutions are responsive to their needs and are quick to complete financial transactions.
This confirmed our belief and direction.
We also discovered that non clients are not highly aware of us.
Or if they are aware they believe that we are too small to meet their banking needs.
Given our brand names the use of multiple brands is causing confusion, both internally and externally and diluting our brand awareness as a result, we decided to simplify our branding strategy and come together in all respects as one unified community Bank.
We hired a new community marketing director and retained a new outside marketing agency.
We've made significant progress in formerly defining our brand promise have made good progress in identifying a single name for our bank Weve also begun.
The work of designing a new logo a more contemporary look for our marketing materials.
We expect to roll out our single brand around the end of the year.
We've had some ongoing expenses associated with this brand realignment for the past year and expect those costs to increase over the next couple of quarters for marketing design costs and rollout of the brand.
We're fortunate to be operating in one of the strongest economy.
Economic markets in the country, thus far we havent seen any significant slowdown in the economy and.
In the markets. We serve we continue to actively evaluate potential acquisition opportunities both in Utah and in states contiguous to Utah, particularly along the I 15 corridor.
I'm also pleased to announce that the board of directors declared an increase in the quarterly dividend of 13 cents per common share the dividend will be payable on August 12, 2019 to shareholders of record on August five 2019.
I'll now turn the call back over to Mark to discuss our financial performance Mark. Thank you Len net income was $11 million or 58 cents per diluted common share for the second quarter of 2019, compared with $10.5 million or 55 cents per diluted common share for the first quarter of 2019 and $10.5 million or 55 cents per diluted common share for the second quarter a year ago.
As a result of strong financial performance our return on average assets improved to 1.96% for the second quarter 2019, compared with 1.93% a year ago.
For the second quarter of 2019, net interest income grew 2.8% or zero point $7 million to $27.7 million compared with $25 million for the same period a year earlier.
The increase is primarily the result of average interest, earning assets growing 3.1% or $64.8 million and yields on interest, earning assets, increasing eight basis points to 5.68% for the same comparable period.
Higher yields on interest, earning assets was primarily the result of yield on loans, increasing 23 basis points to 6.57%.
For the same comparable periods offset by a 1.5% or 25.8 million decline in average loan balances.
And by the percent of the percentage of total loans to interest, earning assets decreasing to 79.5% for the second quarter 2019, compared with 83.2% for the second quarter of 2018, as we have more cash due to strong loan deposit growth during the same respective periods.
For the second quarter of 2019 total cost of interest bearing liabilities increased 17 basis points to 0.74% compared to the same period a year ago and is the result of cost of interest bearing deposits, increasing 34 basis points, 0.74% for the same comparable periods.
While the company had no short term borrowings for the second quarter of 2019, compared with $128 million of short term borrowings in the second quarter a year earlier.
As a result, our net interest margin narrowed two basis points to 5.24% for the second quarter 2019, compared to 5.26% for the same period a year earlier.
For the linked quarters net interest margin declined five basis points the yield on interest, earning assets declined five basis points, which is primarily the result of that.
The percentage of loans to total interest, earning assets declined 9.5% for the second quarter 2019, compared with 81.2% for the linked first quarter.
Acquisition accounting adjustments, including the accretion of loan discounts and amortization of certificate of deposit premium added seven basis points to our net interest margin for the second quarter of 2019, compared with 11 basis points in the first quarter 2019, and 16 basis points in the second quarter your earlier.
The positive impact of acquisition accounting adjustments will continue to decline going forward.
For the second quarter 2019 provision for loan losses was $2.2 million compared with $1.5 million for the same period a year earlier the increase in provision for loan losses in the second quarter 2019 is due primarily to a setting aside $3.3 million in specific reserves of which $2.2 million were reserved.
For the Unguaranteed portion of for government guaranteed loans acquired in the town and country purchase.
For the second quarter of 2019, the company incurred net charge offs of $34000 compared with net recoveries of zero point $1 million for the same period a year ago.
Looking at our asset quality metrics nonperforming assets were $5.1 million or 0.22% of total assets at June Thirtyth, 2019, compared with $8.6 million or 0.4% a year ago.
Our annualized net charge offs for the second quarter of 2019 was 0.01% compared with zero point to 1% for the first quarter 2019, and net recoveries of 0.02% for the second quarter of 2018.
For the six months ended June Thirtyth 2019 annualized net charge offs were 0.11% compared with net recoveries of zero.
0.06% for the same period a year earlier.
The allowance for loan losses increased $5.7 million or 26 percentage in 32019 compared to the same period a year ago.
The percentage of allowance to loans held for investment increased to 1.68% at the end of June 32019, compared with 1.55% at March 32019, and 1.32% a year earlier.
In addition to our allowance for loan losses, we have $6.7 million in both non Accretable and Accretable credit discounts remaining on our acquired loan portfolios.
The allowance for loan losses, plus total credit discounts to loans held for investment was 2.08% at June Thirtyth 2019.
We believe that it is prudent for us to continue to build our overall allowance for credit losses, given that we believe we are nearing the end of overall economic cycle.
For the second quarter of 2019, noninterest income was $3.6 million compared with $4.1 million for the same period a year ago.
The decrease was primarily due to a onetime gain on sale of securities a zero point $3 million for the second quarter, 2018, and zero point $2 million loss on the disposal of assets in the second quarter of 2019.
For the second quarter 2019, non interest expense was $14.7 million compared with $15.8 million for the same period, a year earlier and the decline is primarily the result of zero point $7 million and lower salary and employee benefit zero point $3 million and lower other noninterest expense primarily related to lower lower legal fees.
And to your point $2 million in lower FDIC premiums and zero point $1 million and lower marketing costs.
As I mentioned, we are in the middle of our rebranding initiative, we have discontinued many of our current marketing advertising campaigns as we prepare to roll out the new brand later in the year, we anticipate higher marketing and advertising costs over the next couple of quarters, resulting from the rollout of our new brand.
For the second quarter 2019, the Companys efficiency ratio was for 46.9% compared with 51% for the same period a year ago.
Non interest expense to average assets was 2.6% for the second quarter of 2019, compared with 2.9% for the same period year earlier.
For the second quarter 2019 income tax expense was $3.5 billion compared with $3.3 million for the same period, a year a year ago.
The effective tax rate was 24.1% compared with 23.9% for the same respective periods.
I will now turn the call back over to Len.
Thank you Mark.
We are pleased with our financial performance for the second quarter 2019, particularly regarding our deposit momentum and expense management.
We continue to focus on taking advantage of the outstanding economic prospects in the market we serve.
We believe we can continue to grow our business organically diversify our loan portfolio and expand our low cost core deposit base.
We are passionate and enthusiastic about our prospects to expand our commercial and industrial lending to small and medium sized businesses with our commercial banking centers and increase our emphasis on growing our commercial deposits with the expansion of our Treasury management service team and through improving the products and services we offer.
As I mentioned earlier, we continue to actively pursue potential acquisition opportunities throughout the inner mountain West, which we believe is a crucial component to our business strategy.
And shareholder value creation model going forward.
In closing, we had a strong earnings quarter, and new technology initiatives and cost controls are on target current priorities include loan growth fee income initiatives.
Along with a smooth well orchestrated brand transition.
Thank you all for joining us today and at this point I'd like to open the lines for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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Our first question today will come from Andrew Liesch with Sandler O'neill and partners. Please go ahead.
Hi, Good morning, everyone. This is actually Aaron deer on for Andrew This morning.
Good morning, Aaron.
Hi.
It's more start I was just interested to hear some of your commentary surrounding the economic outlook.
Sound to a more I guess cautious tone than what I'm hearing from a lot of other banks I'm just curious if there's anything specific within your markets that you can point to that.
Indicative of.
Real slowing.
Nothing specific.
The market.
Has had just minor minor downward movement in the couple of construction areas.
The.
Residential inventory has increased slightly just just minor changes they've gone from.
Almost unbelievable to really good.
Okay.
We also know it won't last forever. So we continue to be conservative on how we manage the credit portfolio and what we bring on.
Okay.
And I guess, then maybe related to that you mentioned among your three top priorities is is as loan growth where does the pipeline stand today and what are you thinking about in terms of loan growth for the back half of the year.
Yes, that's.
Thats a great question.
One of our.
Biggest issue has been the his history of a heavy construction lending organization with that comes the duration of the portfolio that is much less than most banks. Our average duration is 1.2 years. So the productivity this state.
The level is incredible.
So that protein production continues to go where we plan to expand that is more.
Measurable consistent commercial banking.
Type activity to supplement the real estate business that we do thus, we're adding some people in some locations to beef up that sector.
We still have a very low market share, particularly in Salt Lake County that even if we're in a depression, we've got people to call on in business to do so our focus is making sure the balance sheet is strong enough.
The capital base is strong enough and that regardless, where the economy goes were.
In position to have the doors open for business.
Okay. So it sounds like just maybe as he left that construction book pay down more there's just kind of a headwind that you're fighting on the growth front.
Yes, the market is still strong which makes competition a little bit more.
How can I put a little more.
Open to be outside of some of the standard underwriting that were not comfortable in going all the way there.
Okay.
Got it.
And then.
On the expense side and maybe just to the extent you can provide some guidance on the costs surrounding the rebranding and particularly as the as the marketing.
Launches related to that both the specific to that line and then maybe to just kind of if you can provide any any numbers around in your view or overall noninterest.
<unk> expense expectations through the back half of the year and maybe even heading into next year as those costs really hit their full run rate.
Sure we have a position that we don't provide forward guidance.
With respect to forward periods, but what I would say it as as we mentioned.
We do anticipate an increase in our overall marketing costs. If you look at.
Well, what we spend in marketing a year ago.
We would anticipate that we would have a similar dollar amount.
By the end of the year.
With cost overall on the mortgage lending front weve seen some some good activity going on there and as a result, we anticipate that.
That salary and employee benefits would go up.
As as we pay an additional commissions for that volume that we're seeing as rates have declined.
So we would expect expenses to go up in short term just given some of the initiatives that we have going on in addition to that.
Glenn mentioned, some some technology projects that we're working on both Encino and the Treasury management system and and those additional costs will be coming in.
In line as well our online as we implement those those applications. So.
We feel like we've done a good job and cost containment, but.
There are things that we have to do to be able to develop the infrastructure necessary to to go to the next level as an organization and so there will be additional costs going forward.
Okay. That's helpful. I appreciate the additional color thanks for taking my questions.
Thank you Aaron.
The next question will come from Jeff Rulis with da Davidson. Please go ahead.
Hey, Good morning, guys. This is actually Jeff usage on for Jeff This morning.
Hi, good morning year coming in pretty faintly.
Can barely hear you.
Hey can you hear me better now.
Gotcha. This is good. Thank you Asaf alright, yeah. This is Jeff usage on for Jeff Rulis. This morning.
First question I wanted to touch on was just in regards to margins. Your margin outlook, you know what the probability of fed easing being more likely I'm, just kind of walking through some different rate cut scenarios. What you guys have kind of laid out for that in regards to margin for the back half of the year.
Yeah, you know as we look at net interest margins.
Yes, all banks are going to be negatively impacted by a decline in interest rate I mean, its just a function of our business.
But.
As as Len mentioned, our construction portfolio one of the positive things with that is that that portfolio turns about three and half to four times, a year and with that any origination fees that we get associated with those projects.
Our fully amortized over that time period, so that helps.
Negate decline in the overall yields so so thats a positive thing for our balance sheet overall, but but we do have a short duration and an asset sensitive balance sheet. So so we anticipate that thats going to have some impact on us going forward, we're going to be aggressive in lowering deposit costs as rates go down.
Which will.
Somewhat mitigate the negative effects of.
Lower interest rates overall, and then one of the other things. We're looking at is again, a one point to your effective duration is pretty short so we feel good that we could.
Go out in and.
Growth in some of the term financing and extend the duration a little bit so that we could.
Lock in some additional rates.
We're looking at are owner occupied.
Real estate portfolio for example, and.
And while it's very competitive we we think that we could grow that a bit to extend the duration overall, but yes.
Declining interest rates are not good for banks.
Awesome, yes, great great color.
Okay moving on from there just kind of wanted to touch on.
Loan loss provision in the quarter.
You guys had mentioned that a majority of that was from the town and country government guaranteed loans I just wanted to kind of you know with some little run off loan run off and you know Npis fly no net charge offs.
Could we have anticipated that being closer to zero outside of the town and country government loans.
As far as the provisions, yes as far as the provision.
Yes, I mean, we we has we mentioned we've we've.
Our our views on the economy is that where we are at the end of a credit cycle and so with that.
Our overall general reserves have built over the last year and we will continue to evaluate that.
Overtime.
So.
Yes, I I.
I would say that our intent is to reassess loan reserves every quarter and look at the economic conditions overall and decide where we should be so.
Jeff This is Lynn.
It's an area the credit management scenario were pretty conservative in we've we've brought in a new chief credit officer, who is going through the complete portfolio.
Doing a phenomenal job identifying the more conservative approach.
We also hired a new loan review manager recently, that's on top of the portfolio.
If you'll notice and I know, it's not mentioned in here, but we'll we'll show up in the quarterly I mean delinquencies are at all time lows in Pcs are still solid charge offs are low, but yet we're seeing the way we classify things are a little more strict than maybe we have been historically.
That's just part of the conservative credit culture.
We've taken reserves and as you'll notice on these deal I think Mark mentioned that in the release that we have charged off a 100% of the non guaranteed portion.
Historically had we lost 100% that has not been the case, but we take a pretty conservative approach. So we'll continue to operate in that fight that.
And just to clarify we didn't charge. It off we did just set aside specific reserves from correct on that portfolio. Thank you.
Awesome. Thanks.
And then just one last one for me.
Kind of just broad based capital plans moving forward I mean, you guys have a tc ratio in the mid 12% range.
Can you kind of just give any color of what you guys have been discussing any chatter you're having on that front.
Yes, you bet. So I guess, the first thing I'd say.
Yes, it is higher than that.
Most banks, but I would also say that getting a 14.3% are are we on that higher capital is is a pretty good return for our shareholders and and I think they should be pleased with that.
We are holding.
Capital one of the things as we'd like to be able to use some of that powder with an acquisition.
And so we continue to look for those opportunities.
So certainly that's something we're looking at.
But yes, if that continues to grow we're going to have to make a determination of what we're going to do we increase the dividend this quarter and we'll we'll evaluate that going forward our stock price is pretty high.
But we've we've had discussions about maybe repurchasing shares and we will continue to evaluate that given where our stock price is right now.
Also is there any particular markets you guys are looking into or have been considering outside of your core markets.
Yeah, we continue to look at the contiguous states to Utah with the particular focus up the I 15 corridor.
Awesome no, yes, not a not a ton of banks throughout that area in the markets been pretty good and that's why we want to make sure we're in strong capital shape.
And earning shape and credit quality shape, when things do turn I think that will put us in a nice position.
Thank you guys so much I'll step back.
Thank you.
Our next question comes from John Rogers with Janney Montgomery. Please go ahead.
Good morning, guys.
Hey, John .
Just.
I guess I wanted to make sure I understand this right. So just back to the provision. So you said in the press release you set aside.
$3.3 million in specific reserves this quarter is that correct.
That's correct.
Okay. So, but then so the so the actual provision of 2.1 or 2.2 million. So does that imply without that specific reserve you would have had a negative provision.
That's correct yes.
Okay and then.
Okay.
Okay I just wanted to make sure I was looking at that right. Okay.
You are correct.
Okay, and I guess, the reason for the negative provision would be.
NPK trends your comments on delinquencies and.
Basically no net charge offs and so forth correct.
Right the loan growth lack of loan growth, yes for sure and then.
If you look at our overall concentrations they certainly have declined and we've always been.
More conservative on on the.
On the construction side of things. So so we evaluate the reserves overall.
Yep.
So.
Lenny I know you sort of answered the question on loan growth going forward, but so year to date year the loan balances are down slightly.
I mean would you expect to see some net growth in the second half of the year.
Well the fourth quarter is always a little tougher.
Third quarter, we've got four or five internal initiatives underway right now.
That is that is the hope and that's what we're driving for we're also looking at business lines.
I don't want to go into detail at this point, but we're looking at streamlining some of the operations were also looking at operations, we don't have that would fit into our organization and our delivery platform well. So we've got four or five initiatives underway all of them with the singular focus of driving more loan activity more consistent quality profitable lenders device yes.
Okay. Okay.
Mark today did I hear you correctly when when you were going through your commentary did you say there was a was at about a $200000 loss on disposal of assets I guess was that probably yes.
Was that in other non interest income.
That's right yes.
Okay can you just elaborate on what that was.
Oh, you bet, so as we mentioned that we're.
Weve demolish the alpine branch and we're rebuilding that so we wrote off any fixed assets associated with the demolition of the branch.
We also had.
Some property.
That was.
Located next to a branch that we sold and took a loss on on that as well.
So nothing major but.
That's that's where it came from.
Okay and then so maybe just one other question in.
Just back to expenses and I realize you don't give guidance, but so you've been able to keep operating expenses below $15 million for the last two three quarters and it looks like this quarter correct me, if I'm wrong, but.
Looks like a pretty clean quarter at 14.7 million.
And you know all things equal taking into account your new initiatives marketing and so forth do you do you sort of think you can keep expenses below 15 million going forward or is that going to be a challenge on a quarterly basis. We we don't really provide the guidance, but thats going to be a tough number to hit in the third quarter.
Keeping below 15 million.
Yes.
Okay. Okay. Just I just wanted to make sure Directionally I was thinking I understand you're working on the model.
Okay. Good thank you guys.
Sounds good thanks.
As a reminder, if you have a question you May Press Star then one our next question comes from Don Worthington with Raymond James. Please go ahead.
Thank you good morning.
Good morning, Don.
Hi.
On mortgage banking.
Fairly good quarter relative to last quarter any way, where do you think thats going.
The second half.
That that business has been.
It has been pretty robust of late.
I guess, one benefit from the declining long term yields.
So that activity continues to be pretty strong for us. So we're hoping to continue to see momentum at least through the third quarter on that.
Okay. Okay.
And then.
During this quarter you mentioned.
Kind of the turn into construction portfolio, but.
If you have any other elevated pay offs that maybe you weren't expecting.
They were basically all out of that portfolio.
Okay. So nothing on the.
Say commercial real estate or whatever there now.
No the the construction and the some of the non owner occupied occupied real estate that we had many perms on that was coming to maturity of the mini they've taken them to institutional investors. We've lost a couple of that way, but they were planned.
Okay, All right and then I guess lastly, any.
Change in the tax rate going forward or pretty much where it was this quarter.
Got it where it is this quarters, what we would expect.
In future quarters.
Okay, Great alright, thank you.
Thanks, Don Thanks, Don.
This concludes our question and answer session I would now like to turn the conference back over to London Williams for any closing remarks.
Great. Thank you so much and thank you all for joining US today. We appreciate the support in the organization I would also add if you have any direct questions.
Don't hesitate to either mark or myself a call we we'd love to entertain your calls thank you and have a great day and great weekend.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.