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Glacier Bancorp, Inc. (GBCI)

Q4 2018 Earnings Call· Tue, Jan 29, 2019

$49.41

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Transcript

Operator

Operator

Good day and welcome to the People’s Utah Bancorp Fourth Quarter and Year End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Olson, EVP and CFO. Please go ahead.

Mark Olson

Analyst

Thank you, Olson. Good morning. Thank you for joining us today to review our fourth quarter and year end 2018 financial performance. Joining me this morning on the call is Len Williams, President and Chief Executive Officer of 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. Len?

Len Williams

Analyst

Good morning and thank you for joining us on the call today. People’s Utah Bancorp achieved strong financial performance both in the fourth quarter and for all of 2018. The company achieved a return on equity of 14.9% for 2018 even as we build our tangible common equity to tangible assets to 12.1% compared with 10.9% a year ago. With the strong financial performance we have achieved after the two acquisition transactions completed at the end of 2017, we have fully earned back the tangible book value dilution. To add a little color to our past year, we ended the third quarter of 2017 with 19 branches. Since then, we added 9 locations, consolidated 2 to bring us to our current total of 26. The organization added over 100 people to our staff, integrated two large credit portfolios and hired a new management team, all in the past year. We are now back to our third quarter 2017 asset quality, increased our reserve, earned back the book dilution and accomplished the desired efficiency gains. We achieved a 33% or $426 million year-over-year average loan growth rate with total loans ending the fourth quarter at $1.7 billion. Total loans grew $51 million for the year, a 3.2% annualized growth rate. The lower loan growth rate for the year is primarily the result of a 2.3% or $40 million decline in total loans in the fourth quarter as we experienced seasonal trends in our construction loan portfolio due to more severe fall and winter as compared to a year ago. In addition, we sold $7 million hotel construction loan as we actively reduced our hotel loan concentration by 12% to $56 million overall, which is well within our guidelines. Lastly, we had a couple of large construction projects that were completed in…

Mark Olson

Analyst

Thank you, Len. Net income was $10.7 million or $0.56 per diluted common share for the fourth quarter of 2018 compared with $10.5 million or $0.55 per diluted common share for the third quarter of 2018 and $0.6 million or $0.03 per diluted common share for the fourth quarter a year ago. For the 12 months ended December 31, 2018, net income was $40.6 million or $2.14 per diluted common share compared with $19.8 million or $1.08 per diluted common share for the same period a year earlier. We have excluded non-recurring items including gains or losses on sale of investment securities, costs related to the acquisition of the 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 one-time 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 $10.7 million or $0.56 per diluted common share for the fourth quarter of 2018 compared with $10.4 million or $0.55 per diluted common share for the third quarter of 2018 and $8.1 million or $0.43 per diluted common share for the fourth quarter of 2017. For the 12 months ended December 31, 2018, net income from core operations was $40.6 million or $2.14 per diluted common share compared with $28.1 million or $1.53 per diluted common share for the same period a year earlier. As a result of our strong financial performance and lower income taxes, our return on average assets for the fourth quarter of 2018 was 1.94% compared with 1.91% for the third quarter of 2018 and 0.12% for the fourth…

Len Williams

Analyst

Thank you, Mark. We’re excited to begin the 2019 New Year and believe that we’re well positioned to take advantage of the outstanding economic prospects in the markets 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 business – businesses with 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 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 will now turn it back to Alison to open it up for questions.

Operator

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Jeff Rulis of D.A. Davidson. Please go ahead.

Jeff Rulis

Analyst

Thanks.

Len Williams

Analyst

Good morning, Jeff.

Mark Olson

Analyst

Good morning, Jeff.

Jeff Rulis

Analyst

First – hey, first, couple of questions on the margin. Mark, what – so you mentioned 14 basis points of benefit to the margin in accretion and other. What was that linked quarter, I guess, if you have a 4 – 5.27% core this quarter, what was that in the prior quarter?

Mark Olson

Analyst

What was the net interest margin in the third quarter?

Jeff Rulis

Analyst

No, the fourth [ph].

Mark Olson

Analyst

What was the – what was the benefit from the accretion?

Jeff Rulis

Analyst

Right.

Mark Olson

Analyst

Yes, hold on one second, I can give you that information, it’s in the earnings release.

Jeff Rulis

Analyst

Sure. Maybe if I’ve got Len there, on the – just the margin outlook then, you talk about the deposit pressure and kind of from there we can kind of get into the core, but what do you see on the margin front?

Len Williams

Analyst

We – it actually surprises a little bit, that is held up as well as it has. We’ve been relatively conservative on our deposit beta movement with the rate changes and actually some pretty good growth in the third quarter and then moderate growth in the fourth quarter, which is the first time we went back in history, it’s the first time we’ve actually seen growth in the organization in the fourth quarter in deposit. We attribute a lot of that to the commercial business focus and to the efforts of all the lenders in the organizations focusing kind of laser-focused on the deposit gain and then the increase in addition to the treasury management team. So, that outlook still looks quite positive for us. We think there is a good opportunity to continue that focus and obtain low cost deposits. Last year as I mentioned as we were talking through this, there was a lot going on. We had to integrate quite a bit, this year the focus will be more on both loan and deposit quality sustainable profitable growth.

Mark Olson

Analyst

So, Jeff, if you look at our non-GAAP financial table in the back, you’ll see that for the third quarter, we had 5 basis points of accretable yield in that number. So, our – excluding that, our net interest margin would have been 5.2% and for the fourth quarter that was 5.27%. So, kind of that 5.25% is a number I think that makes sense.

Jeff Rulis

Analyst

You say 5.25%, that makes sense for the outlook and –

Mark Olson

Analyst

Yes, excluding the accretion. Now we had a large – some large pay-offs in the fourth quarter and that’s why you saw an increase in the accretable yield in the fourth quarter.

Jeff Rulis

Analyst

Right, okay. And then on the credit side, some – a big drop in the NPAs and you walked through a couple sales of the Town & Country loans, but could you just itemize maybe what kind of went out of both non-performers and OREO and then the make-up of what was in net charge-offs?

Len Williams

Analyst

The charge-offs were related predominantly to the leasing portfolio. We’ve talked about that on last couple of quarterly calls, those were anticipated charges. We don’t have anymore OREO. We only had two properties in there, both of them were related Assisted Living centers. The amount of reserves held this quarter were a mix between some specific allocation and just general increases. We’ve always been conservative in that arena and knowing that we’re pretty heavy in the real estate construction businesses – business, we wanted to sure we had adequate comfortable reserves in there, but there is nothing highlighted in there as far as big problems looming.

Jeff Rulis

Analyst

Now, Len, the net charge-offs from the leasing portfolio, are there still to come or is that going to be an area of continued higher losses with the expectation?

Len Williams

Analyst

That’s kind of the $64,000 question, Jeff. The issue with the leasing program and that’s why we’ve exited the business except for – in our market with our clients, the very nature of that doing business out of state, out of market. When you find out there is an issue, there is an issue versus managing traditional credits through the credit grading system, they go from performing to non-performing when you hear about it. That portfolio is down at about $40 million dropping relatively quickly. Yields on the back-end are pretty high, but no surprises, and we take remarks as soon as the – as soon as we hear there is a problem. Right now, we’re in a low, unless I just jinxed it.

Jeff Rulis

Analyst

What was the peak of that portfolio?

Mark Olson

Analyst

It’s about $53 million.

Jeff Rulis

Analyst

Got it. And then maybe last one, I guess, Len, you touched on this a bit, but the in-market transaction very recently of the FNB Bancorp. Just kind of, if you could also additional comments about your interest in that institution and kind of what else dialog on M&A front that you’re having?

Len Williams

Analyst

Yes. The FNB, we really don’t have a comment on. They were acquired as you know like Glacier, great organization, phenomenal institution that will provide some good competition. Obviously, you’ve seen what they can do with their currency value in their stock price, which certainly would have given them an advantage on that particular transaction. But we continue to have active conversations in and near the market, and we hope we can continue forward and have some positive news in that front. The – as you know we absorbed two a year ago and we’ve really focused a lot on that absorption and frankly building relationships with some of the banks and the markets. So, there are active conversations obviously nothing concrete at this point.

Mark Olson

Analyst

And our currency valuation is strong. We think that, that gives us an opportunity to continue to aggressively try to acquire banks and we are seriously focused on that. We spent a great deal of time looking at acquisition opportunities. So, any one of them that come up, we’re looking at it.

Jeff Rulis

Analyst

Okay. Thanks, guys.

Len Williams

Analyst

Thank you.

Mark Olson

Analyst

Thanks, Jeff.

Operator

Operator

Our next question will come from Andrew Liesch of Sandler O’Neill. Please go ahead. Thomas O’Connor: Good morning. This is Thomas on for Andrew today.

Len Williams

Analyst

Hi, Thomas.

Mark Olson

Analyst

Hi, Thomas. Thomas O’Connor: So, it sounds like most of the lower loan portfolio balances up end of the quarter were mostly construction, but was there anything else driving the portfolio lower?

Mark Olson

Analyst

No, it’s predominantly the construction portfolio. And as we mentioned on the call, we see seasonality in the fourth quarter and weather-related activities slow it down, as well as people anticipated the weather and so they complete projects. And so we expect some pay-downs in the fourth quarter usually. Last year was very warm and projects continued on into the fourth quarter and that’s a big part of the difference between the two periods. Thomas O’Connor: Okay, got it. And how is the pipeline looking heading into this quarter?

Mark Olson

Analyst

Pipeline looks pretty good. It – actually the last month has been relatively heavy. The issue being in the construction business is that starts out low and builds over time, we’ll probably start to see some of those peak in the second quarter, but build – start building in this quarter. Thomas O’Connor: Okay. And then just turning to expenses, is this a good run rate going forward or will there be a step-up in operating costs just to bonus accruals and payroll taxes this quarter?

Mark Olson

Analyst

Yes. So, we did have some adjustments to bonus accruals in the fourth quarter that improved our overall expenses. We will have a 3% increase in salaries overall just with our annual merit increases in the first quarter. So, this would be a little bit lower than what we would expect going forward. We would expect to be more in the 10.7%, 10.8% range. Thomas O’Connor: Okay. And then looking up the provision, that’s definitely helped to build the allowance. Is there a reserve ratio you guys are kind of targeting or looking to build towards this year?

Len Williams

Analyst

We don’t have a specific. We continue to look at our portfolio, do specific allocations when the opportunity presents itself and stay relatively conservative. We feel pretty good about where we are right now however. Thomas O’Connor: Okay, okay, thanks. And just one last question, what’s your outlook for deposit growth this year and where you guys kind of comfortable allowing the loan to deposit ratio to rise still if at all?

Len Williams

Analyst

That depends on a couple of issues. One is, we don’t provide guidance on actual, our budgeted growth. We do expect moderate deposit growth. I’ll leave at that. And then – what was the other part of the question, loan to deposit, and where we are at right now is a good level, it’s a comfortable zone, however, we do have plenty of borrowing liquidity if we’re not in a position to slow down our lending because of it, but we prefer that 90% range. We got a precise 95% last year, which is higher than we’re comfortable at, that’s the deposit focus, but we’ve got plenty of liquidity to take care of anticipated loan growth. Thomas O’Connor: Got it. Thanks for taking my questions. I’ll step back.

Mark Olson

Analyst

Thank you.

Len Williams

Analyst

Thank you, Thomas.

Operator

Operator

[Operator Instructions] Our next question will come from John Rodis of FIG Partners. Please go ahead.

John Rodis

Analyst

Good morning, guys.

Len Williams

Analyst

Hi, John.

Mark Olson

Analyst

Hi, John.

John Rodis

Analyst

Hi. Maybe circling back first to the question on expenses, you said 10.7% to 10.8%, is that salary expense?

Mark Olson

Analyst

Yes, no, that number was not correct. Let me give you a better number. [indiscernible]

Len Williams

Analyst

That’s – yes, it’s 15.3% for total non-interest expense.

John Rodis

Analyst

15.3%, sort of a starting point.

Mark Olson

Analyst

Yes.

John Rodis

Analyst

Okay. So, you had bonus accrual adjustments of what roughly $600,000, I guess?

Mark Olson

Analyst

Yes.

John Rodis

Analyst

Okay. And then I guess just given the various initiatives, do you still think sort of low to mid single-digit loan growth for next year?

Mark Olson

Analyst

That’s probably a pretty good guess. The market is still in decent shape, but it has slowed a bit. We have seen some slowing.

John Rodis

Analyst

Well, I am sorry on the expense side?

Mark Olson

Analyst

As far as what? I am not sure I understand the question.

John Rodis

Analyst

I am sorry I didn’t know. I meant expense growth I said low to mid single digit expense growth?

Mark Olson

Analyst

Yes. Yes, that’s about right.

John Rodis

Analyst

Okay. And then I think your – maybe your response as far as you said, Mark, you don’t see the market slowing, is that more loan growth, I guess is that sort of what you were pointing there?

Mark Olson

Analyst

Yes.

John Rodis

Analyst

Okay. So, low to mid, because for the year you guys put up loan growth of what, 3%, 3.2% or so?

Mark Olson

Analyst

3.4%, yes.

John Rodis

Analyst

Yes. So, historically, you guys have done better than that.

Mark Olson

Analyst

And we would expect some improvement over that this year?

John Rodis

Analyst

Okay, okay. Maybe just revisiting the provision, you obviously grew the reserve. As far as on an absolute basis, the provision was $8.6 million this year. Do you think it will be that high again this year? And then on a percentage basis, it was around 50 basis points of average loans, do you still anticipate it being that high?

Mark Olson

Analyst

A lot of it is going to be driven by loan growth during the year. That percentage is comfortable with from where we are now. We continue to be conservative there, but I don’t anticipate it growing at the rate it grew this year.

John Rodis

Analyst

Okay. But it could be at a similar – I mean, it could be a net $8 million range?

Mark Olson

Analyst

I doubt it.

John Rodis

Analyst

Okay, probably something less?

Mark Olson

Analyst

Yes, I mean we don’t give forward guidance, but we believe that’s a reasonable level from a reserve perspective. We have to build it this year. Next year, it’s more maintenance.

John Rodis

Analyst

Makes sense. And then just one other question on the tax rate, so for the year, you were roughly 23%, I think you sort of said 23%, 24% going forward?

Mark Olson

Analyst

That’s right.

John Rodis

Analyst

Okay. So, that’s still good.

Mark Olson

Analyst

Yes.

John Rodis

Analyst

Okay. Thank you, guys.

Mark Olson

Analyst

Yes, I would say about just under 24%.

John Rodis

Analyst

Thank you.

Mark Olson

Analyst

Thanks, John.

Len Williams

Analyst

Thank you.

Operator

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Len Williams for any closing remarks.

Len Williams

Analyst

Thank you, Alison and thank you all for joining us and your interest in the organization. Please feel free to give us a call any time we are pretty transparent about where we are. If you have specific questions, give either Mark or myself a call, we will be glad to address it with you. So thank you for joining us and have a great day.

Operator

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.