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Edited Transcript of PUB earnings conference call or presentation 25-Oct-18 4:00pm GMT

Q3 2018 People's Utah Bancorp Earnings Call

AMERICAN FORK Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of People's Utah Bancorp earnings conference call or presentation Thursday, October 25, 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

* Jeffrey Allen Rulis

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

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Presentation

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Operator [1]

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Good day, and welcome to the People's Utah Bancorp Third Quarter 2018 Earnings Release Conference Call. (Operator Instructions) Please note, this event is being recorded. And with that, I'd like to turn the conference over to Mark Olson. 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 third quarter 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 can -- 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'll now turn the call over to Len.

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

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Thanks, Mark. Good morning, and thank you for joining us. We appreciate you being here today. People's Utah Bancorp achieved strong financial performance in the third quarter. We experienced widening net interest margins and solid loan and deposit growth from a year ago, both organically and through our acquisition transactions. The bank achieved 41% or $503 million year-over-year loan growth, with loan totals ending the third quarter at $1.72 billion. Total loans have grown $91 million year-to-date, a 7.5% annualized growth rate.

Our associates did a fantastic job adapting to our deposit focus and managing through some of the portfolio of diversification processes we have undertaken. We'll continue to focus on diversifying our loan portfolio and particularly growing our C&I book. To that end, we've promoted Ryan Jones to Senior Vice President and Chief Lending Officer. Ryan will oversee our commercial banking centers, commercial treasury management activities, equipment financing, SBA lending and other specialty finance businesses. Ryan is a seasoned banker who's been with the company for over 13 years and has over 18 years of commercial banking experience. Ryan and Philip Gunther are currently leading our efforts to automate and digitize our commercial loan origination process through the implementation of an online commercial lending application. The goal of this project is to ensure that we continue to provide high-touch and unparalleled responsiveness as we continue to grow in size, complexity of the products and services and expand our geographic footprint.

Currently, we operate 2 commercial banking centers that are located in Salt Lake County. Ryan has also been tasked with opening a third commercial banking center in Utah County in the first or second quarter of 2019.

On the retail banking front, we plan to open a new business-oriented branch in the fast-growing Pleasant Grove during the first quarter, where a number of technology firms have recently built new corporate offices. The branch will focus predominantly on small business to medium size commercial clients. We're also rebuilding our Alpine branch with an expected completion date of the third quarter 2019. The Alpine branch is one of our oldest branches with over $120 million in deposits.

Looking at deposits, we achieved 23% or $344 million year-over-year deposit growth, with total deposits ending the third quarter of 2018 at $1.87 billion. More importantly, deposits grew $90 million or 5.1% in the third quarter from the linked second quarter. We achieved this growth despite experiencing greater competition for deposits and competitive deposit pricing pressures from our peers. Our cost of deposits increased 16 basis points as we matched our competitor deposit rates and enhanced our deposit pricing programs to reward and retain high-value customer relationships. We expect that our cost of funds will increase as deposit betas continue to rise, consistent with our competitors in the near term.

We're focused on expanding our core deposit base, particularly from commercial relationships. To assist in this effort, we have recently hired Michael Baum as manager of Treasury Services. Mike has over 12 years of experience in Treasury Management. Most recently, he was the area manager, team lead of a larger regional bank. Michael has been tasked with evaluating our suite of treasury management products and services to improve our treasury management sales and service processes, and I might add, he's off to a great start.

Looking at our asset quality metrics. Nonperforming assets were $8.8 million at September 30, 2018, compared to $4.5 million a year earlier. Nonconforming assets to total assets increased to 0.4% at September 30, 2018, compared to 0.25% for the same period a year ago. Total other real estate owned was $3 million at the end of the third quarter, which represents 2 foreclosed assisted living centers from the Town & Country acquisition. Both properties are under contract and are expected to be sold by the end of the year.

The allowance for loan losses to loans held for investment was 1.36% at September 30, 2018, compared to 1.45% a year ago. In addition to our allowance for loan losses, we have $9.5 million in discounts remaining on our acquired loan portfolio. We're actively monitoring the performance of the acquired portfolios as well as our existing loan portfolio, and I believe we are well -- believe we are adequately reserved. The allowance for loan losses to loans held for investment, excluding purchased loans, was 1.66% at September 30, 2018. This is an area we continue to focus on. Not sure where the economy is going. Nothing particularly bothering us at this point, but like most of us having been in the business for a period of time we've been on this upswing for a long time, our spider senses are starting to tingle a little bit, so we're continuing to increase reserves.

Much of the successes we had achieved as an organization from a lending and credit quality perspective is the direct result of leadership and guidance offered by our Chief Credit Officer. After providing over 45 years of service with the bank,

David Anderson has decided to retire at the end of year. I sincerely want to thank David for his tireless efforts made on behalf of the bank. I wish David the very best in his upcoming retirement. David, who's a member of the Board of Directors for both PUB and PIB, will remain as a member of both Boards of Directors.

I'm pleased to announce that Judd Kirkham will succeed David as Senior Vice President and Chief Credit Officer. Judd brings to this role more than 23 years of financial services experience and 5 years working at the bank here. Most recently, Judd was Senior Vice President and Commercial Banking Manager for the bank. Prior to joining us, Judd worked for 17 years at Zions Bank in various roles in commercial lending, commercial real estate lending, regional retail credit management and other positions. David plans to work closely with Judd through the end of 2018 to ensure a smooth leadership transition.

We are fortunate to be operating in one of the strongest economic markets in the country. Utah's unemployment rate is at 3.1% for September; remains below the national rate of 3.9%.

Utah has the fourth fastest population growth in the nation in 2018. Job growth was 3.7% year-over-year versus 1.7% nationally. In addition, Utah ranks in the top tier of states in personal income growth. We continue to actively evaluate other 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 a quarterly dividend of $0.11 per common share. The dividend will be payable on November 13, 2018, to shareholders of record on November 6, 2018.

Now I'll turn the call back to Mark to discuss the financial performance for the third quarter. Mark?

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

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Thank you, Len. Net income was $10.5 million or $0.55 per diluted common share for the third quarter of 2018 compared with $10.5 million or $0.55 per diluted common share for the second quarter of 2018 and $6.2 million or $0.34 per diluted common share for the third quarter a year ago.

For the 9 months ended September 30, 2018, net income was $30 million or $1.58 per diluted common share compared with $19.3 million or $1.05 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 '18; and higher income tax expense related to the onetime revaluation 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 $10.4 million or $0.55 per diluted common share for the third quarter of 2018 compared with $10.2 million or $0.54 per diluted common share for the second quarter of 2018 and $6.9 million or $0.38 per diluted common share for the third quarter of 2017.

For the 9 months ended September 30, 2018, net income from core operations was $29.9 million or $1.57 per diluted common share compared with $20 million or $1.09 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 third quarter of 2018 was 1.91% compared with 1.93% for the second quarter of 2018 and 1.42% for the third quarter of 2017.

Return on average assets from core operations for the third quarter of 2018 was 1.89% compared with 1.88% for the second quarter of 2018 and 1.57% for the third quarter a year earlier.

Return on average equity for the third quarter of 2018 was 14.97% compared with 15.6% for the second quarter of 2018 and 10.14% for the third quarter of 2017.

Return on average equity from core operations for the third quarter of 2018 was 14.84% compared with 15.22% for the second quarter of 2018 and 11.24% for the third quarter a year ago.

Net interest income for the third quarter of 2018 increased $7.3 million or 36.5% to $27.2 million compared with $19.9 million for the same period a year earlier. The increase is primarily the result of average interest-earning assets increasing 24% or $397 million and yields on interest-earning assets increasing 67 basis points for the same comparable periods to 5.62% for the third quarter 2018.

High yields on interest-earning assets was primarily the result of yields on loans increasing 19 basis points to 6.33% for the same comparable periods, and the percentage of loans to total interest-earning assets increasing to 83.7% for the third quarter of 2018 compared with 73.5% for the third quarter a year earlier.

Total cost of interest-bearing liabilities increased 33 basis points to 0.63% for the third quarter of 2018 and is the result of cost of interest-bearing deposits increasing 26 basis points to 0.56% for the third quarter of 2018 compared with the same period a year earlier. And an increase in average short-term borrowings of $45.8 million at a borrowing rate of 2.25% for the third quarter 2018. We expect the increase in cost of interest-bearing deposits to continue to accelerate over the next several quarters as financial institutions increase their competitive deposit pricing.

Net interest margins increased 48 basis points to 5.25% for the third quarter 2018 compared with the same period a year ago.

Acquisition accounting adjustments, including the accretion of loan discounts and the amortization of certificate of deposit premiums, added 5 basis points to the net interest margin in the third quarter of 2018. We expect that the impact of acquisition accounting adjustments will diminish in future quarters as these static loan pools pay down. We recorded provision for loan losses of $1.9 million for the third quarter of 2018 compared with $0.9 million for the third quarter of 2017. The increase in provision for loan losses is due primarily to the increase in allowance for loan losses to loans held for investments, excluding specific reserves, offset by $1.3 million decrease in specific reserve on classified loans. We incurred net charge-offs of $0.9 million in the third quarter of 2018 compared with net charge-offs of $0.6 million in the third quarter of 2017.

Noninterest income was $3.8 million for the third quarter of 2018 compared with $3 million for the same period a year ago. The increase was primarily due to a loss on sale of securities a year ago and increase in card processing fees and service charges on deposit accounts compared with a year ago offset by lower mortgage banking income year-over-year.

Noninterest expense was $15.3 million for the third quarter of 2018 compared with $13.1 million for the third quarter of 2017. Noninterest expense for the third quarter of 2018 increased as a result of $1.1 million of higher salary and employee benefits, primarily from the addition of employees retained from the acquisition of the Utah branches of Banner Bank and the merger of Town & Country Bank. $0.3 million of higher occupancy, equipment and depreciation costs associated with the net increase of 5 branches from these transactions and $0.2 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 49.3% for the third quarter of 2018 compared with 57.1% for the third quarter of 2017. The company's efficiency ratio from core operations was 49.7% for the third quarter of 2018 compared with 53.9% for the third quarter of 2017.

Income tax expense was $3.3 million for the third quarter of 2018 compared with $2.7 million for the third quarter of 2017. The effective tax rate for the third quarter of 2018 was 23.9% compared with 30.2% for the same period a year earlier.

The lower effective tax rate in 2018 compared with 2017 is the result of the reduction of the federal corporate tax rate to a flat rate of 21%, the reduction of 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 about the prospects our larger platform -- banking platform can offer. We believe we can continue to grow our business organically, diversify our loan portfolio and expand our low-cost core deposit base, particularly with our larger footprint. We're passionate and enthusiastic about our prospects to expand our commercial and industrial lending to small- and medium-sized businesses within our commercial banking centers and increase our emphasis on growing our commercial deposits with the expansion of our treasury management services team and through improving the products and services we offer.

As I mentioned earlier, we continue to actively pursue potential acquisition opportunities throughout the Intermountain West, which we believe is a crucial component to our business strategy going forward. Thank you so much for joining us today. At this point, I'll turn it back to the moderator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question will be 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 [2]

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Wanted to follow up, Len, on the -- you talked about some of the deposit pressures and pricing that you're seeing. I guess, how does that equate on the margin outlook? You also discussed trying to continue to diversify and grow the C&I portfolio and that relative to legacy book might weigh on loan yields a bit. So just kind of looking at the net of that and where you see the margin kind of outlook for the balance of kind of '19.

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

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Yes. That's a great point. That's something we spend a lot of time on too, Jeff. We expect it to compress a little bit. The deposit betas still -- we're committed to staying up with the market as those move. We had an especially large beta increase last quarter due to adjusted deposit strategy that the organization came up with to bump some rates a bit and change some tiering and do some things. So that affected a little bit. We have some of that accrual from the acquired transactions that are becoming out of that, and we all know that the C&I margins are tighter than construction real estate. So we do anticipate some compression, but I still think we will stay in the top tier arena there.

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

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Got it. I guess, while you have your crystal ball out, the -- I guess, a forecast on provision and operating expense. There's been some movement between both this kind of a normalized kind of outlook on those 2 line items.

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

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Yes. The provision we tend to -- and will tend to still be relatively aggressive. I think that's an area that we don't know when it comes. The Utah economy still has signs of life, a lot of life to it. But when those things turn and they do turn, we are real estate intensive. And so we'll continue to add to reserves probably consistent with the rate you've been seeing. What was the other point?

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

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On the operating expenses.

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

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Yes. Operating expenses are down a little bit. I think you may see those hold relatively even for a while because we're actually spending some money presently to upgrade some technology that over time we think will even get us more efficient, but you might not see that for a couple of quarters.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Okay. So the net of that is kind of a 2%, 3% growth in '19, I mean, if you kind of put the number to it.

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [9]

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Yes. We don't really put the guidance out there, but I would hope it would be in that range.

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Operator [10]

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(Operator Instructions) The next question is from Andrew Liesch with Sandler O'Neill.

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

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Just a question on the loan yields, kind of following up on the margin here. Just curious what -- what's the average rate of new production that's been coming on the balance sheet?

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

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It's been -- overall, in total, it's been over 6%.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [13]

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And is that -- like, what types are driving that right now?

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [14]

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Well, we still continue to see growth in our construction portfolio. Our commercial real estate continues to grow. Obviously, as Len mentioned, we're diversifying the C&I portfolio and we expect some margin pressures there as we do that. Having said that, we do think the overall relationship with our C&I customers will provide us profitability overall, particularly from a noninterest income perspective. But yes, we continue to expect to kind of grow the same levels that we've been growing historically.

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Len E. Williams, People's Utah Bancorp - President, CEO & Director [15]

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Andrew, we would hope that any decrease we see in the C&I margin is made up through the treasury management business on the fees side.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [16]

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Great.

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Mark K. Olson, People's Utah Bancorp - Executive VP & CFO [17]

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And whether that's a noninterest income or account analysis, we'll see that benefit, right?

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [18]

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Okay. And then just on the provision, just if you can dive in just more of the methodology because the credit trends are really good, but like the provision is a little maybe larger than I was thinking. Just kind of curious on why you have this methodology and what's driving this.

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

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I'll tackle that a little bit, Andrew. As I mentioned, the economy is still good. Our belief is that's when you prepare for when it isn't. That's a part of it. We feel real good about our real estate portfolio. We're working through the process. A lot of the C&I stuff is new to the acquisition. So we're still working through grading and understanding those better. And frankly, the leasing portfolio has been a bit of a challenge. So we've had a couple of hits in there. So we continue to reserve up for that. And by the way, on the leasing front, we've actually moved that more from a national line of business to a local product to support existing client term loans versus the prior strategy on that. So that's why it's caution.

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Operator [20]

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With that, that was the last question for today. That will conclude today's question-and-answer session, as well as today's conference. We want to thank everyone for attending today's presentation. And at this time, you may now disconnect.

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

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Thank you.