Glacier Bancorp, Inc. (GBCI) Q4 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the People's Utah Bancorp Fourth Quarter Earnings Release Conference call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Olson, Chief Financial Officer. Please go ahead.

Good morning. Thank you for joining us today to review our fourth quarter and year-end 2017 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 the earnings release, please visit our website at www.peoplesutah.com. Our earnings release contains forward-looking statements. All such 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 for 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.

Thank you, Mark. Good morning and thank you for joining us on the call today. Mark and I are pleased to speak with you in our new roles within the organization. Before I begin my prepared remarks, on behalf of the entire team at People's Utah Bancorp and the Bank, I want to sincerely thank both Rick Beard and Wolfgang Muelleck for their years of service and for the successes the Company has achieved as a result of their exceptional leadership. We wish them both the very best in their retirement, and we look forward to their continued involvement with the Bank as Board of Directors. We've had an eventful fourth quarter as we successfully completed the acquisition, conversion, and integration of the 7 Utah Banner branch locations. The 7 branches acquired are strategically located in strong growth markets in Utah, including Salt Lake City, Provo, South Jordan, Woods Cross, Orem, Salem, and Springville. The Woods Cross and Orem branches have been successfully consolidated into our existing Bank of American Fork, Bountiful and Orem branches, respectively, which significantly increased the size of these two branches. We are operating these acquired branches under the name of Bank of American Fork, a division of People's Intermountain Bank. To date, both acquired loans and deposits have met or exceeded our retention expectations. In addition, we successfully completed the acquisition, conversion, and integration of Town & Country Bank located in St. George, Utah. We are operating this location under the name of People's Town & Country Bank, the division of People’s Intermountain Bank. We believe these in-market transactions strengthen our standing as the largest community bank in Utah and bolster our market presence along the I-15 corridor in the Intermountain West region with our nearest community competitor being approximately half our size. We are the second largest Utah-based bank. We are now the second largest community bank in Salt Lake County and we now have a physical presence in Downtown Salt Lake City, where we are operating one of two Salt Lake County commercial banking centers acquired in the Banner transaction. We increased our market share in Utah County where we continue to be the third largest bank in the market, and the largest community bank in the County. We remain the third largest bank in Cache County. We also increased our market share in Washington County to the fourth largest Utah Bank and third largest community bank in the market. These transactions provide our existing customer with the added convenience and service in our five new branch locations and give our customers the opportunity to enjoy outstanding personalized service, and the commitment of an over 100-year old Utah-based community bank with 25 branches from the Southern border of Utah up to Southeastern Idaho. These transactions allow us to further deploy our solid capital base and to strategically grow our Company with the workforce consolidation that occurred. At the end of the quarter, we’ve achieved the cost saving expected from both transactions. We expect the transactions will be immediately accretive to earnings going forward. The Bank achieved strong growth in both loans and deposits from these two transactions as well as from continued strong organic growth. We achieved 45% or $508 million year-over-year loan growth with total loans ending the year at $1.6 billion. $282 million of that loan growth came through acquisitions $126 million was organic growth for the year. We also achieved 27% or $390 million year-over-year deposit growth with total deposits ending the year at $1.8 billion. $283 million of that growth came from the acquired organizations and $107 million was organic. Total assets ended this year at $2.1 billion at 27% or $458 million increase from a year ago. Our overall credit performance remains strong. The credit metrics include non-performing assets to total assets declining to 0.18% at the end of the year and net charge-offs to average loans of 0.09% for all of 2017. We believe that we have identified and adequately discounted assets acquired as part of our fair valuation which Mark will speak to in greater detail later. As we look forward to 2018, we believe we can continue to organically grow our business and diversify our loan portfolio, particularly with our larger footprint. I am encouraged about our prospects in the Salt Lake City market with the advent of our two commercial banking centers located in Downtown Salt Lake City and in South Jordan, which are focused on expanding our further diversifying loan base with a focus on commercial and industrial-lending activities. We're fortunate to be operating in one of the strongest economic markets in the country. Utah's unemployment rate is 3.2% versus the national average of 4.1%. Utah has the third fastest population growth in the nation in 2017. Job growth was 2.9% year-over-year versus 1.4% nationally and Utah had the nation's second highest personal income growth. We will 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 $0.09 per common share. The dividend will be payable on February 12, 2018 to shareholders of record on February 5, 2018. I will now turn the call back over to Mark to discuss our financial performance for the fourth quarter and the year. Mark?

Thank you, Len. Net income was $0.6 million or $0.03 per diluted common share for the fourth quarter of 2017, compared with $6.2 million or $0.34 per diluted common share for the third quarter of 2017 and $6.5 million or $0.36 per diluted common share for the fourth quarter a year-ago. For all of 2017, net income was $19.8 million or $1.08 per diluted common share compared with $23.6 million or $1.30 per diluted common share in 2016. Our fourth quarter results were impacted by two large non-recurring items. First, cost associated with the acquisition of the Utah branches of Banner Bank and the merger of Town & Country Bank, and second the one-time write-down of our deferred income tax assets, resulting from the reduction of corporate income tax rate under the Tax Cuts and Jobs Act signed into law in December. During the fourth quarter, we recorded $4.1 million in costs related to these two transactions. For the year, we recorded $4.8 million of acquisition costs. Of the total acquisition related costs recorded year-to-date, $2.8 million were related to costs incurred by us, while $2 million was related to merger cost incurred by Town & Country that we agreed to pay as part of the total purchase price of the merger. Total acquisition related costs incurred year-to-date include to the following. $1.8 million in IT termination and conversion costs, $1.2 million in payroll related costs associated with terminated employees, including severance costs, $0.7 million in legal fees, $0.5 million in investment banking fees and $0.5 million in other costs including lease termination costs and costs related to premises and equipment, we eliminated as well as new equipment purchases. On December 22, 2017, the President of the United States signed into law, the Tax Cuts and Jobs Act, which amends the Internal Revenue code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction is effective January 1, 2018 and we anticipate an effective tax rate, including state income taxes of 25% for 2018. That compares with an effective tax rate of 32% for 2017 and 36% for 2016. Consequently, the lower corporate income tax rate reduces the future net tax benefits of temporary differences between the carried amounts of existing assets and liabilities on our GAAP financial statements and the respective tax basis. Deferred income tax assets and liabilities are measured using the enacted rates, tax rates are expected to apply the taxable income in the years in which those temporary differences are expected to be recovered or settled. As a result we re-measured our net deferred income tax assets at the end of December and recorded a one-time additional income tax expense of $4.7 million related to the write-down of our deferred income tax assets. For net of tax benefits that we’re not expected to realize. In our earnings release, we have excluded the loss on investment securities sold to raise liquidity to fund the purchase of net assets from the acquisition of the Utah branches of Banner Bank, costs related to this acquisition and the merger of Town & Country Bank and higher income tax expense related to the one-time write-down of our deferred income tax assets to derive non-GAAP financial information related to our core operations, which we believe is useful in understanding our financial performance. For the fourth quarter of 2017, net income from core operations was $8.1 million or $0.43 per diluted common share, compared with $6.9 million or $0.37 per diluted common share for the linked quarter and $6.5 million or $0.36 per diluted common share for the same period a year-ago. For all of 2017, net income from core operations was $28.1 million, or $1.53 per diluted common share, compared with $23.6 million, or $1.30 per diluted common share for all of 2016. Our return on average equity from core operations was 12.6% for the fourth quarter compared with 11.2% for the linked third quarter and 11.4% for the same quarter a year-ago. For the year, our return on average equity from core operations was 11.6% compared with 10.7% for the prior year. I will now discuss the financial results in detail. Net interest income for the fourth quarter of 2017 increased $5.6 million or 31% to $23.9 million compared with $18.3 million for the same period a year earlier. The increase was primarily due to average interest earning assets growing by 21% or $329 million, and yields on interest earning assets increasing 41 basis points for the same comparable periods to 5.17% in the fourth quarter of 2017 compared with 4.76% for the same period a year-ago. Net interest margin is also improved as a result of our loan-to-deposit ratio increasing to 90% at the end of the year, compared with 80% at the end of the third quarter. For the fourth quarter, our net interest margin was favorably impacted by less than 2 basis points from accretion accounting adjustments, including loan discount accretion. This was primarily due to the fact that we recorded some shorter duration loans from our acquisitions at a premium, while longer duration loans were recorded at a discount. We expect that our accretion accounting will positively impact net interest margin in future quarters. For the year, net interest income grew 15% or $10.8 million to $80.6 million compared with $69.9 million for all of 2016. The increase is primarily the result of average interest earning assets growing 11.8% or $179 million, and yields on interest earning assets increasing 9 basis points for the same comparable period to 4.95% for all of 2017. This contributed to a higher net interest margin of 4.76% for the year ended 2017 compared with 4.6% for all of 2016. Provision for loan losses was $0.8 million for the fourth quarter 2017 compared with $0.2 million a year-ago. We incurred net charge-offs of $0.1 million in the fourth quarter of 2017 compared with net recoveries of $0.4 million for the same period a year-ago. For all of 2017, provision for loan losses was $2.8 million, compared with $0.9 million in 2016. We incurred net charge-off of $1.2 million for all of 2017 compared with net recoveries of $0.3 million for 2016. Non-interest income was $4.5 million for the fourth quarter 2017, compared with $4.2 million for the same period a year-ago. The increase was primarily due to an increase in card processing fees and service charges on deposit accounts, offset by lower mortgage banking income. For the year, non-interest income was $16.6 million, compared with $16.8 million for all of 2016. The decrease was the result of lower mortgage banking income and $0.5 million loss on sale of investment securities offset by higher card processing fees and service charges on deposit accounts. For the fourth quarter 2017, non-interest expense was $19.7 million, compared with $12.4 million for the fourth quarter of 2016. The fourth quarter of 2017 included $4.1 million in non-recurring costs associated with our two acquisitions. In addition, non-interest expense for the fourth quarter 2017 increased as a result of $1.9 million of higher salaries and employee benefits primarily from the addition of employees retained from the two acquisitions, and $0.3 million of higher occupancy costs associated with the net increase of five branches from these transactions. For the year ended 2017, non-interest expense was $58.1 million compared with $48.9 million for all of 2016. The increase was primarily due to $4.8 million in non-recurring costs associated without two acquisitions. In addition, non-interest expense for all of 2017 increased $3 million as a result of higher salaries and employee benefits due to salary increases to existing employees. New employees hired to support the balance sheet growth, and the addition of employees retained from the two acquisitions, and $0.5 million of higher occupancy and equipment costs associated with the net increase of five branches from this transaction. Our efficiency ratio from core operations was 54.6% for the fourth quarter of 2017 compared with 55.2% for the fourth quarter of 2016. For the year ended 2017 our efficiency ratio from core operations was 54.6% compared with 56.4% for all of 2016. Excluding the one-time write-down to our deferred income tax assets, the effective tax rate for the fourth quarter of 2017 was 34% compared with the same rate a year-ago. For all of 2017, our effective tax rate was 32% excluding the one-time adjustment, compared with 36% for 2016. The lower effective tax rate in 2017 compared with 2016 is primarily due to tax benefits related to tax deductible stock compensation expense and adjustments in the expected recoverability of certain tax credits. Let's talk about the balance sheet. Under GAAP we’re required to fair value the assets purchased and the liabilities assumed with our two acquisitions. As we look at the acquisition of the Utah branches of Banner Bank we purchased $257 million in loans, $3.5 million in property, $1.8 million in other assets and assumed $160 million in deposits. We paid $13.8 million purchase premium for the acquisition. We recorded $1.3 million in non-accreditable discount on $6.2 million dollars in purchase credit impaired loans and we recorded $3.9 million of accreditable discounts on the remaining $251 million in loans. We recorded a $2.6 million core deposit intangible and recorded $14.9 million in goodwill. As we look at the Town & Country merger, we purchased $117 million in loans and $28 million in other assets. We assumed $123 million in deposits and $4.8 million in other liabilities. We exchanged Town & Country shares for 466,680 PUB shares and paid cash of $11.6 million for the merger of which $2 million is being held in escrow for potential loss indemnification. We recorded $3.1 million of non-accreditable discounts on $8.6 million of purchase credit impaired loans and $3.9 million in accreditable discounts on the remaining $108 million in loans. We recorded a core deposit intangible of $0.8 million, $0.7 million premium on CD's and recorded $11.1 million in goodwill. These transactions have a lot of us to further deploy a solid capital base in a measured way as shown with our tangible equity to tangible assets ending the year at 10.9% compared with 13.7% at the end of third quarter. I'll turn the call back over to Len. Len?

Thank you, Mark. We're pleased with our financial performance for 2017 and we're optimistic for the growth opportunities that our new acquisitions provide and we continue to look for in-market acquisition opportunities to even further improve our market penetration. We are excess to our customers, who we serve and for our outstanding associates within this organization, who provide excellent service and who have worked so diligently to successfully complete these two successive transactions. Our associates are actively engaged in making our vision of being the most distinguished provider of financial services in Utah and adjacent markets are reality. Thank you for joining us today. At this point, I will now open up the lines for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Andrew Liesch with Sandler O'Neill. Please go ahead.

Hey, good morning, everyone. This is actually Thomas Gallagher on for Andrew.

Good morning, Thomas.

Good morning, Thomas.

So I just to get started the strong organic loan growth in the year. We were wondering, what types of loans help support that growth?

Yes, we've had a combination with bringing the Banner group on significantly increased our C&I portfolio. They brought in more C&I than real estate which has typically been the bulk of the business at PUB. It was a mix. At the end of the year, we've had a very calm fall and winter so far. So construction season didn't back off the way it has in the past. So there was a mix to measure the two. Most of it is real estate and it's a mix of residential construction, some owner occupied stuff and C&I.

Okay, great. Thank you. And to follow-up on that, with the two deals integrated, what is reasonable loan growth outlook for 2018 somewhere in the high single-digits?

Yes, we don't really provide guidance there, but that’s – our market continues to grow and expectations here is still high, so that’s probably not far off.

Okay, great. Thank you. And then just looking at the TCE ratio, it's still high, near 11%. It's likely to continue to increase throughout the year. We were just wondering when you would be ready to complete more acquisitions to deploy this capital.

Well, our team did a phenomenal job integrating the last two. The tax scenario going forward provides again additional opportunity for us to look at deals. I would say there's nothing imminent at this point, but our eyes are open now.

Okay, great. And have there been any conversations with potential sellers?

Nothing outside of the norm. We have conversations on a regular basis with a lot of folks, but there's – like I said, there's nothing in the hopper that's imminent.

Okay. And then cash balances from our position, it looks like cash and equivalent – cash equivalent balances declined during the quarter. And we're just wondering is there a percentage of assets you'd prefer to manage cash out or is the $51 million level reasonable?

That $51 million is reasonable.

Okay. Thank you. That's all my questions. I'll step back from here.

Thank you, Thomas.

Thank you, Thomas.

[Operator Instructions] The next question comes from Don Worthington with Raymond James. Please go ahead.

Thank you.

Hey, Don. Welcome to the family.

Yes. Good to be here.

Hi, Don.

Hey, good morning. Just a couple questions, in terms of mortgage banking revenue, what’s your outlook for that going forward, say relative to this quarter?

Yes. It continues to defy us a little bit. We actually expected a decrease in the fourth quarter and it went the other direction. I think weather and construction completion has helped us, so we don't look at a serious tail off yet, but I would guess over time due to the dry up of refinance business, we would expect over time for that to slow a little bit.

Okay, great. And then are there any more one-time merger costs that would trickle over into this quarter from the…?

Yes. We expect that there will be some merger cost trickling into the first quarter. But we not at any magnitude that we saw in the fourth quarter of course, but there will be some.

Yes. The internal requirement was that we got them all into the fourth quarter, obviously there will be a little trickle over, but I don't think it'll be significant.

Okay, great. All right. Thank you.

Thank you.

Thank you, Don.

I do have one question from Jeff Rulis with D.A. Davidson. Please go ahead.

Hi, Jeff.

Hi, Jeff.

This is actually Jeff Pusich on for Jeff Rulis this morning, a little confusing there.

All good.

Yes. So in terms of margin, I was just wondering if you guys could provide some color on how much accretion by basis points impacted your net interest margin, just kind of so we can look at a more core number for the third and fourth quarter?

Sure. Jeff, as mentioned in the call, less than 2 basis points of our margin was in accretion – adjustments or accretion accounting. And the reason for that is we had short duration loans that we recorded at premium versus the longer duration loans that had discounts on them. But we do expect that we will see positive impacts from accretion accounting going forward not significant, but we will see some positive effects going forward.

All right. Awesome. Thanks for that. And then just kind of moving on to the expense side of things, I was just wondering if we can expect the more normalized expense run rate moving into 2018. I know you guys said there's a little bit of expenses in costs less from the merger, but I was just wondering if you add any more color on that.

We continue to work that pretty closely. There is a little bit of carryover for some assistance in the final integration, and then we will more normalize internal operations as we go forward. So we expect throughout the year that will continue to normalize.

All right. Awesome. Well, yes, all my other questions have been answered, so I'll step back in the queue.

Thank you.

Thanks Jeff. End of Q&A

This concludes our question-and-answer session. I would like to turn the conference back over to Len Williams for any closing remarks.

Great. Thank you, Gary, and thank you all for joining us today. We appreciate your interest in our Company, and we appreciate the questions that you offer. If you have questions offline, don't hesitate giving Mark or myself a call at anytime. Thank you so much.

Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.