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Edited Transcript of PUB earnings conference call or presentation 27-Jul-18 4:00pm GMT

Q2 2018 People's Utah Bancorp Earnings Call

AMERICAN FORK Aug 4, 2018 (Thomson StreetEvents) -- Edited Transcript of People's Utah Bancorp earnings conference call or presentation Friday, July 27, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Len E. Williams

People's Utah Bancorp - President, CEO & Director

* Mark K. Olson

People's Utah Bancorp - Executive VP & CFO

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Donald Allen Worthington

Raymond James & Associates, Inc., Research Division - Research Analyst

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* John Lawrence Rodis

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the People's Utah Bancorp Second Quarter 2018 Earnings Release Conference Call. (Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Mark Olson, Chief Financial Officer. Please go ahead.

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [2]

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Thank you. Good morning. Thank you for joining us today to review our second quarter 2018 financial performance. Joining me this morning on the call is Len Williams, President and Chief Executive Officer for People's Utah 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.peoplesutah.com. Our earnings release contains forward-looking statements. All statements other than statements of historical fact are forward-looking statements. 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 Len Williams.

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [3]

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Thank you, Mark. Good morning. Thank you for joining us on the call today. We're pleased with our second quarter financial performance and believe our results are reflective of our strong growth from a year ago, both organically and through our 2 acquisition transactions. We achieved 41% or $491 million year-over-year loan growth, with total loans ending the second quarter at $1.7 billion. Quarter-to-date average loans grew 46% or $536 million from a year ago.

Quarter-to-date average loans grew 3.05% or $50 million compared to the first quarter 2018. Loans outstanding at the end of the second quarter were flat from the first quarter as we experienced higher-than-normal construction drives in the first quarter due to unseasonably warm weather and experienced a -- $24 million in loan payoffs in the last 2 weeks of June primarily out of our construction portfolio.

We continued to focus on diversifying our loan portfolio, in particularly -- in particular, growing our C&I book. Currently, we operate 2 commercial banking centers that came from the acquisition of the Utah branches of Banner Bank and are located in Salt Lake County. We are reviewing ways to further capitalize on this structure.

We also achieved 22% or $321 million year-over-year deposit growth, with total deposits ending the second quarter of 2018 at $1.8 billion. The quarter-to-date average deposits grew 23% or $334 million from a year ago. Quarter-to-date average deposits declined slightly compared with the first quarter 2018. Deposits outstanding at the end of the second quarter of 2018 declined 1.4% or $24.4 million from the first quarter of 2018 as we experienced approximately $13.3 million in deposit outflows from the branches acquired by Banner Bank and $9.5 million in deposit outflows from Town & Country Bank in the second quarter.

Subsequent to the second quarter, deposits have grown in the branches acquired from Banner Bank and now exceed the acquired deposit balance by approximately $8 million. Total deposit outflows from the Town & Country Bank acquisition have not recovered at this point. They are approximately $27 million or 15% under the acquired deposit balance.

We're experiencing greater competition for deposits and competitive deposit pricing pressure and expect our cost of funds to increase consistent with our competitors in the near term. We're focused on expanding our core deposit base, particularly from commercial relationships. To assist us in this effort, we have embarked in an effort to strengthen our treasury services function from a personnel, product and delivery perspective.

Looking at our asset quality metrics. Nonperforming assets were $8.6 million at June 30, 2018, compared to $8.1 million at June 30, 2017. Nonperforming assets to total assets declined to 0.4% at June of 2018 compared with 0.47% at June 30, 2017.

During the quarter, we increased specific reserves by approximately $300,000 on classified loans. The allowance for loan losses to loans held for investment was 1.32% at June 30 compared with 1.44% at June 30, 2017. In addition to our allowance for loan losses, we have $9.7 million in discounts remaining on our acquired loan portfolio. We are actively monitoring the performance of the acquired loan portfolios as well as our existing loan portfolio, and we believe we are adequately reserved.

We continue to look for opportunities to improve our overall efficiencies [through] the implementation of new technologies. While still maintaining our high-touch great customer service culture, we've begun evaluating our entire commercial loan origination and servicing processes with an outside consulting firm and expect to implement an automated loan origination system early next year. This will allow us to improve our overall efficiencies in this area and to ensure we maintain the quick turnaround time we currently offer to our commercial clients.

We're fortunate to be operating in one of the strongest economic markets in the country. Utah's unemployment rate at 2.7% for May remains well below the national rate of 3.8%. Utah has the third fastest population growth in the nation in 2018. Job growth was 3.3% year-over-year versus 1.6% nationally. In addition, Utah had the nation's second-highest personal income growth. We continued to activate -- or to actively evaluate other potential acquisition opportunities, both in Utah and in states contiguous to Utah, particularly along the I-15 corridor. I'm pleased to announce that the Board of Directors declared an -- increased quarterly dividend to $0.11 per common share. The dividend will be payable on August 13, 2018, to shareholders of record on August 6, 2018.

I'll now turn the call back to Mark to discuss our financial performance for the first quarter. Mark?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [4]

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Thanks, Len. Net income was $10.5 million or $0.55 per diluted common share for the second quarter of 2018 compared with $9 million or $0.48 per diluted common share for the first quarter of 2018 and $6.5 million or $0.35 per diluted common share for the second quarter a year ago.

For the 6 months ended June 30, 2018, net income was $19.5 million or $1.03 per diluted common share compared with $13 million or $0.71 per diluted common share for the same period a year earlier.

We have excluded nonrecurring items, including gains or losses on sale of investment securities; costs related to the acquisition of Utah branches of Banner Bank and the merger of Town & Country Bank incurred in both 2017 and 2018; and higher income tax expense related to the onetime write-down of our deferred income tax assets recorded in 2017 to derive non-GAAP financial information related to our core operations. We believe this non-GAAP financial information is useful in understanding our core financial performance.

Net income from core operations was $10.2 million or $0.54 per diluted common share for the second quarter 2018 compared with $9.3 million or $0.49 per diluted common share for the first quarter 2018 and $6.6 million or $0.36 per diluted common share for the second quarter 2017.

For the 6 months ended June 30, 2018, net income from core operations was $19.5 million or $1.03 per diluted common share compared with $13.1 million or $0.72 per diluted common share for the same period a year earlier. As a result of strong financial performance and lower income taxes, our return on average assets for the second quarter of 2018 improved to 1.93% compared with 1.7% for the first quarter of 2018 and 1.53% for the second quarter of 2017. Return on average assets from core operations for the second quarter of 2018 was 1.88% compared with 1.75% for the first quarter of 2018 and 1.56% for the second quarter a year earlier.

Return on average equity for the second quarter 2018 was 15.6% compared with 13.96% for the first quarter of 2018 and 10.91% for the second quarter of 2017.

Return on average equity from core operations was -- for the second quarter was 15.2% compared with 14.38% for the first quarter 2018 and 11.1% for the second quarter a year ago. I will now discuss the financial results in detail. Net interest income for the second quarter of 2018 increased $8 million or 42% to $27 million compared with $19 million for the same period a year earlier. The increase is primarily the result of average interest-earning assets growing 27% or $443 million and yields on interest-earning assets increasing 70 basis points for the same comparable periods to 5.6% for the second quarter 2018.

Higher yields on interest-earning assets were primarily the result of yields on loans increasing 23 basis points to 6.34% for the same comparable periods, and the percentage of loans to total interest-earning assets increasing to 83% for the second quarter 2018 compared with 73% for the second quarter a year earlier.

Total cost of interest-bearing liabilities increased 27 basis points to 0.57% for the second quarter of 2018 and is primarily the result of $116 million increase in average short-term FHLB borrowings at an average borrowing rate of 2.01% for the second quarter of 2018 compared with the same period a year earlier. The increase in average short-term borrowings in the second quarter of 2018 compared with the same period a year earlier is primarily the result of strong average loan growth of $536 million, while average deposits only grew $334 million for the same comparable periods. Approximately $100 million of the difference in loan growth versus deposit growth was the result of us acquiring $100 million more in loans than deposits with the Banner Bank branch acquisition.

The cost of interest-bearing deposits increased 11 basis points to 40 -- 0.4% for the second quarter of 2018 compared to the same period a year earlier. We expect the increase in cost of interest-bearing deposits to accelerate over the next several quarters as financial institutions increase their competitive deposit pricing.

Net interest margins increased 55 basis points to 5.26% for the second quarter of 2018 compared with the same period a year ago. Acquisition accounting adjustments, including the accretion of loan discounts and amortization of certificate of deposit premiums, added 16 basis points to the net interest margin in the second quarter of 2018. We expect that the impact of acquisition accounting adjustments will diminish in future quarters as these static loan pools pay down and we record acquisition accounting adjustments on an effective interest method.

We recorded provision for loan losses of $1.5 million for the second quarter of 2018 compared with $0.9 million for the second quarter of 2017. The increase in provision for loan losses is due primarily to the increase in the allowance for loan loss to loans held for investments, excluding specific reserves and a $0.3 million increase in specific reserves on classified loans. We incurred net recoveries of $0.1 million in the second quarter compared with net charge-offs of $0.3 million in the second quarter of 2017.

Noninterest income was $4.1 million for the second quarter of 2018 compared with $3.8 million for the same period a year ago. The increase was primarily due to gain on sale of securities and increase in card processing fees and service charges on deposit accounts offset by lower mortgage banking income. Lower mortgage banking income declined primarily because we lost a couple of high-producing mortgage loan officers to our competitors.

Noninterest expense was $15.8 million for the second quarter of 2018 compared with $11.8 million for the second period (sic) [quarter] of 2017. Noninterest expense for the second quarter of 2018 increased as a result of $2.4 million of higher salary, employee benefits, primarily from the addition of employees retained from the acquisition of Utah branches of Banner Bank and the merger of Town & Country Bank; $0.3 million of higher occupancy, equipment and depreciation costs associated with a net increase of 5 branches from these transactions; and $0.4 million in higher data processing costs associated with an increase in total accounts from both organic growth and acquisition transactions.

The company's efficiency ratio was 50.97% for the second quarter of 2018 compared with 51.9% for the second quarter of 2017. The company's efficiency ratio from core operations was 51.5% for the second quarter of 2018 compared with 51.1% for the second quarter of 2017.

Income tax expense was $3.3 million for the second quarter of 2018 compared with $3.6 million for the second quarter of 2017.

The effective tax rate for the second quarter of 2018 was 23.85% compared with 35.56% for the same period a year earlier. The lower effective tax rate in 2018 compared with 2017 is the result of the reduction in the federal corporate tax rate to a flat rate of 21%, the reduction of the Utah state corporate tax rate to 4.95% as well as tax benefits related to tax-deductible stock compensation expense.

I'll now turn the call back to Len.

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [5]

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Thank you, Mark. We're excited and encouraged about the prospects our larger banking platform can offer. We believe we can continue to grow our business organically and diversify our loan portfolio and expand our low-cost core deposit base, particularly with our larger footprint. We're excited about our prospects to expand our commercial and industrial lending to small and medium-sized businesses with our commercial banking centers and our emphasis on growing our commercial deposits with the expansion of our treasury management services and increased staffing in this area. We appreciate you joining us today. Thank you.

At this point, I'd like to open it up for questions and touch on anything that's on your mind.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first questioner today will be Jeff Rulis with D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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So on the margin side of things, I guess if you back out some of that accretion-linked quarter, I think it was 16 versus 24 last quarter. It would suggest a core margin of still double-digit growth. And I appreciate the comments on the deposit pressure. But that's a pretty big jump. I guess, thoughts on the core margin. You're still north of 5%. It's a pretty strong number. Just kind of where you think -- you focused on the deposit side, but you're obviously doing well on the earning asset yield front. So kind of outlook on margin, I guess.

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [3]

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Sure. I think we have a disciplined approach when it comes to getting yields on our loans, and I think we'll continue to do that. As Len mentioned, we plan on further diversifying the portfolio and growing our C&I base. And as we do that, that will lower our overall margins on loans. But as you mentioned and I agree with you that we do expect our deposit cost to increase over time, along with our competitors. And we are certainly seeing greater competition right now on the deposit side. So we expect to see that impact as well. I guess, to respond to your question directly, I think we'll be able to maintain margins at around the same level that you saw this quarter, excluding the acquisition-related adjustments.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Helpful. And Len, the $13.3 million and $9.5 million outflows from Banner and Town & Country, respectively, that was in the quarter -- that was in second quarter?

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [5]

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It was in the second quarter. And we mentioned subsequently, we've actually returned all the Banner piece. And Town & Country was a little different model. They actually priced up for deposits. And we chose not to retain a lot of the CDs. But we've also had some core run-down that we're working on in that market as well. So we're watching it closely. We're focused -- our top priority organizationally right now is deposit gathering, particularly low cost or free deposits. And we're building that. There's going to be a little ramp-up as we build some of the product set to support the commercial side of it. We've got a phenomenal platform. And people, when it comes to the lending business, we can apply levers and increase and decrease that relatively easily. But the deposit side is a new growth engine for us that we're putting a lot of resources and time into. So we'll probably see another quarter to ramp up in that. Historically, we have a relatively strong third quarter anyways, but we're working up from all angles.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Got you. And last one just on the -- you mentioned you lost a couple of mortgage bankers. I guess, would you expect seasonally that maybe that line item can begin to grow or should grow sequentially? Or is that -- those losses, each one will hold a line on mortgage banking...

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [7]

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That's a very insightful question, Jeff. The mortgage business -- as you know, the refi business has dried up, but we have seen the blues (inaudible) pretty good-sized mortgage company in the area that focus predominantly on our construction loan conversions to mortgages. So we have the individuals replaced, but we think it might take a period to get their ramp up to get that resolved. It's a focus area for us, and we're a little disappointed with the numbers this quarter as well. But we think it may take a quarter to ramp up.

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Operator [8]

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And our next questioner today will be Andrew Liesch with Sandler O'Neill.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [9]

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Just a question on the loan growth here with balances flat. It looked like average balances were higher. So were there some paydowns late in the quarter? And if so, what was the driver behind that?

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [10]

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I actually read your comments earlier today and thought we wrote it. The story behind the slower loan growth actually has a couple of chapters. One is, average loan growth was up for the quarter, but the month-end totals were down due to several large construction load paydown the last week of June to the tune of $24 million. We tapped the brakes a tad to manage down a portion of our ADC portfolio and reconfigure it. That is done. We're in our comfort zone, and we've now ramped up in certain areas there that we're good at. I'd also add that our pipeline remains adequate going into Q3. And we've got a very strong unfunded commitment number that will be going out as well and that -- the total tune to that's around $300 million. So we think that will ramp back up. But we continue to try to diversify into the C&I, where you may see some net interest margin erosion, but you'll see it offset by growth. It will be profitable for the business.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [11]

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Okay. Great. And then just on the -- more so on the reported margin. I mean, I recognize accretion can bounce around. But have you guys done any analysis on what you expected the discount accretion to be in the coming quarters ahead?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [12]

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We don't give forecasted information, but we would expect that, that would continue to decline each quarter. We're on the effective interest method and the static pool will continue to decline. So I'd expect to see some decline each quarter going forward.

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Operator [13]

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And our next questioner today will be John Rodis with FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [14]

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Not to spec to the yield accretion question, was there any added yield accretion this quarter from the early payoff of loans? Or was this all sort of core?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [15]

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It was all core.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [16]

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Okay, okay. Maybe a question on the provisioning this quarter. I know you talked about -- I think you said the specific reserve added roughly, I think, you said, $300,000. But if you look, you had net recoveries in the quarter and loan growth was basically flat with the payoffs, yet the provision was still $1.5 million without the specific $1.2 million. So is that sort of $1.2 million? How should we think about provisioning going forward? Is that $1.2 million with better loan growth? Does that trend a little bit higher? Or...

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [17]

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As we look at that, Don (sic) [John], we're relatively conservative on the marks there anyways. And given just an internal decision, we do a lot of construction, real estate-related type loans. We just wanted to bump that a little bit going forward. We're still a little low. We'd probably be more comfortable if the whole thing were in the $1.45 million range over time, give us a couple of years. So we -- that was just intentional to just add some cushion. No real reason behind that other than conservative nature.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [18]

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But you're not -- I mean, you're not really seeing any adverse trends or anything in the portfolio right now.

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [19]

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We're seeing a little bit in the industry. I mean, our NPAs were up a little bit, delinquencies are up a little bit, still well within reason. We just wanted to move that up a little bit just to stay consistent with that.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [20]

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Okay. Fair enough. That makes sense. Just back to the mortgage, your mortgage producers, so you said you lost 2 producers, and then you've hired the replacements. How many producers do you have in total?

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [21]

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13, I believe, is the number today. And it's -- boy, that mortgage business is as competitive as the C&I business in this market. We're in an interesting spot here. I don't know, the average completed home inventory is less than 30 days. So they're building them as fast as they can, and then there's just a very limited number on the market. The mortgage competition is as fierce as I've seen it.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [22]

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Okay. And then maybe just, Mark, a question for you on the securities portfolio. [It trended down what was down $15 million, $20 million-linked quarter]. Is it sort of around this $300 million a good level going forward?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [23]

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Yes, I think that's a good level going forward.

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Operator [24]

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(Operator Instructions) And the next questioner today will be Don Worthington with Raymond James.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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Just wanted to follow up a little bit on the payoffs. You mentioned the ones that occurred late in the quarter. What were the total prepayments in second quarter maybe versus first quarter?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [26]

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I don't have that number in front of me. Don, I apologize. As Len mentioned though, we did have $24 million of payoffs on a construction site. That was a big decline.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Would you say, directionally, it was up from the first quarter?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [28]

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Oh, yes, absolutely. No question.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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Okay. And then in terms of the securities gain during the quarter, was this relative to like, say, restructuring or interest rate risk management that you sold the securities for the gain?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [30]

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We had an equity security that we've had for a long time, and we decided it really didn't make sense for us to retain that equity security, so we went ahead and sold it.

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Operator [31]

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And our next question will be a follow-up from Jeff Rulis with D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [32]

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Just a quick one on the tax rate expectations for the back half of the year?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [33]

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Yes, I think the tax rate that we expensed in the second quarter, that's going to be about what we're going to see going forward.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [34]

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Close to 24%?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [35]

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Yes.

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Operator [36]

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And there look to be no further questions at this time. So this will conclude our question-and-answer session and today's conference call. Thank you all for attending today's presentation, and you may now disconnect.