Altabancorp (ALTA) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Altabancorp Q1 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Olson, Executive Vice President and Chief Financial Officer. Thank you and please go ahead, sir.
Mark Olson: Thank you and good morning. Thank you for joining us today to review our first quarter 2021 financial results. Joining me this morning on the call is Len Williams, President Chief Executive Officer of Altabancorp.
Len Williams: Thank you, Mark. Good morning and welcome to our call. We appreciate your interest, investment and feedback. After an incredibly interesting and challenging year in 2020 we're pleased to start off the year with solid results. All of our branch lobbies and drive-up windows have been s have been safely reopened, and we have started to bring our employees back from remote work to our operational facilities. In 2020, we provided substantial financial relief to our clients through participation in government programs as well as our own payment relief programs. We continue to offer additional funding from the second round of the SBA PPP program. While our payment relief programs are substantially complete, we will continue to work with our clients to provide financial solutions to assist them on their path to recovery as we all work together to overcome the negative effects of the pandemic. We continue to receive significant funds from our clients related to financial relief programs from us and government agencies, as well as normal organic growth. As a result, our deposits have grown by over $1 billion year-over-year, which represents a 49% increase from last year. This unusually high growth rate is reflected in our deposit ratio decline in the 26% at the end of the first quarter. While core deposits are natural resources that allow us to grow, it has been challenging to quickly and safely deploy this additional liquidity. Our loan yielding Investment Securities portfolio has grown over $920 million or 160% from the prior year, which has negatively impacted our overall net interest margins.
Mark Olson: Thank you, Len. Pre-tax, pre-provision income declined $2.4 million to $12.4 million for the first quarter of 2021 compared with $14.8 million for the same period a year earlier. The decline in pre-tax pre-provision income was primarily the result of a $3.6 million decline in net interest income due to the Federal Reserve reducing benchmark rates to almost zero, and an increase in the average amount of lower yielding cash and investment securities held by us. This decline was offset by $1.6 million increase in non-interest income resulting primarily from mortgage banking income.
Len Williams: Thank you, Mark. 2020 was a uniquely challenging year for all of us and I'm proud of our team and how we've started 2021 with strong earnings performance and significant growth, both in our deposit and loan portfolios. We put the right people in place, improved our processes and enhanced our systems, all of which will allow us to safely grow our balance sheet and expand our market share in one of the strongest economies in the nation. I believe we made good progress and that we are well positioned to succeed. I appreciate everyone joining us and at this point, I'd like to like to turn it back to the moderator, Chris, for questions.
Operator: Thank you. The first question comes from David Feaster of Raymond James. Your line is open.
David Feaster: Hey, good morning, everybody.
Len Williams: Good morning, David. How are you?
Mark Olson: Hi, David.
David Feaster: Very well, very well. It was great to see the growth that you guys put up in the quarter. Quite frankly, it's a huge number. And you all are doing exactly what you said you guys were going to do. I just wanted to get a pulse of where some of this growth came from. I mean, it is broad based, but how much of it do you think is from an improved economic outlook, giving clients more competence to invest versus new client acquisition and just a more effective sales effort?
Len Williams: It's a combination of everything. But one of the interesting parts were, where this growth is coming from. As we've talked on prior calls, we've had a lot of success in hiring talent. A lot of that talent has brought pipelines with them and immediately began to be productive. So the mortgage in continues to grow and do well, but we also grew in our commercial banking and our branches and in our real estate verticals. A significant portion of it was real estate, but you don't even see that in the totals yet. As I mentioned in the dialogue that we have to increase our unutilized or at least our loans available, that have not been drawn up by -- drawn up yet by $175 million. First quarter is usually low on that. So we anticipate continued growth just from those portfolios as well. So a good portion of it is the real estate stuff we've done historically, but we tiered up the game a little bit and we're working a little bit higher quality stuff.
Mark Olson: David, I think the other thing that I think has helped is, we're about a year now into Encino and the process itself, I think has just become much more efficient and effective. Whether it's the sales process or just from application to close, it's just much more efficient to get the loans completed and that certainly has helped us well.
David Feaster: Okay, that's helpful. And then, it sounds like, really the key here is getting the margin back and profitability is just excess liquidity weigh in on it in the short run, and just need to put on earning assets, and appreciate the guidance on the loan growth. I'd argue it seems pretty conservative, just given the strength in the first quarter and the pipelines that you guys have, which are pretty strong. I guess, how do you think about the opportunity to put on earning assets? I think it makes all the sense in the world to attain some more of these mortgages. Do you think you're willing to compete more on price and rate in order to drive more growth or do you think you can hold the line there? Just any puts and takes on the margin, too, it sounds like this is a trough, but just any thoughts on those?
Len Williams: Yes, the margin, I mean, the loan yield was around 530.
Mark Olson: Yes, right.
Len Williams: Around 5.3 is the loan yield for the quarter. It is down a little bit from where it was a year ago, but it's holding there. So we don't necessarily compete on price. We are certainly fair and we take it into consideration, but that's not our driver. We've got a pretty talented group of bankers that provide value, speed and constant followup and a lot of those relationships have been enhanced and strengthened over the last year. The other item that we brought in is a CRM process a new Salesforce. So it's a lot easier I believe for the bankers to identify, follow up that we just got better technology in place to stay on top of these things as well. So I appreciate your comments on the loan growth conservativism, but you've noticed long enough by now that no, we're not going to stretch.
David Feaster: Yes. And then I just wanted to kind of follow up on the technology and the hiring market. I guess, you've done a great job of attracting new talent, and you highlighted the opportunity to continue to grow the bench in your market. Just curious how conversations are going, whether you've seen an increase in conversations with the bonuses now paid out, some of the cool technology that you guys are putting in place, and just thoughts on hiring, and ultimately the impact of the technology that you've rolled out in building out that pipeline?
Len Williams: Yes, the technology piece is an important piece, because you know, first you've got to have the strong people that understand the business. And then you've got to be able to support that with your products, which are here and have been here. But from there, you've got to offer processes that allow them to be effective and efficient and that's where the technology comes in. And in today's world where so much pay is based on production or incentives, the ability to work through a process to get paid matters as well. And the great news is, is through bonus season, we didn't lose a person and the incentive plan stays in place to drive exactly what we're seeing now. So it's been good. We still have a pipeline. We've identified the top bankers in every market and we have a pipeline we continue to feed as we have needs. Recently as yesterday, we put an offer out to one that will be an add to staff just because the pipeline opportunities are so great, and this is another larger banker who has seeked us out. And we've seen a lot of that where we're feeling pretty good about where that sits today.
David Feaster: That's great. Thanks for the color.
Len Williams: You bet. Thank you.
Operator: Your next question comes from Jeff Rulis of D.A. Davidson & Co. Your line is open.
Jeffrey Rulis: Thanks. Good morning. I wanted to maybe dive into the loan growth guide a little more specific. I think year-to-date, you're already at five, kind of mid single digits. So could we talk about the expectations for the balance of the year? You mentioned conservative, but that would signal a pretty big deceleration in that growth for the balance of the year. What do you guys see in there that keeps the loan growth in a single digit number?
Len Williams: Yes, The unknown. We're not all the way through the pandemic, but yes, to be honest with you, we don't see anything backing that growth rate down at this point. We just don't know what happens in Q3 and Q4.
Jeffrey Rulis: Okay, pretty blunt. And then the -- on the margin, so a lot of puts and takes there, but 291, I guess, your take on direction of core margin then, I mean, that sounds like a bright outlook on growth, but where do you anticipate the 291 headed?
Len Williams: And Jeff, as I mentioned, if we had not seen higher prepayments in the quarter, and that's not just a function that we're seeing, all banks have experienced higher pre payments in -- and then based securities, what's with the rate? As I mentioned, if we were just back to 115 in the fourth quarter, like we were in the fourth quarter, our margins would have been over 3% this quarter. As we look forward, I would expect that that margin to be for the rest of the year, probably around over 3% and going to around 310, 315. It's difficult to take that, $1.5 in investment securities, and immediately change that out into loans. But, the whole reason why we got into mortgage backed securities in the first place is because we wanted to buy amortizing securities. So, the cash was coming back every month, and we could redeploy that into loans, as we knew that the loan growth would be there now that we've finished our strategic initiatives. So, it's what we expected. We didn't expect to see as much liquidity come in. But, I don't think anyone expected multiple stimulus programs from the Fed, but we will take and the securities portfolio right now, that's the highest we believe it will get. But having said that, right now we're getting back about $50 million in cash every single month from the portfolio and hopefully, we'll be able to take at least a portion of that and turn that into loans and grow that aggressively, but safely over the next several quarters.
Jeffrey Rulis: Sounds good, 310, 315 or 25 basis points expansion by the end of the year, that's great. The last one I've had, just the expenses. Just wanted to make sure, you talked about some of the investments you're making and in addition to kind of mindful of that expense rates here. So wanted to get the message here at 16.5, for the quarter, is that our, -- can you make investments and hold the line or what is the outlook for the expense growth or maybe keeping that flat?
Mark Olson: Yes, we think we can continue to grow in the technology. We think we've got it funding available for without increasing because we will continue to see more efficiencies for the technology we've put in place in the last couple years. We haven't maximized very efficiently yet on the commercial lending platform. So there are some opportunities there. So we would expect moderate growth or modest growth on expenses around probably your model. And we don't expect anything extraordinary that we can't fund out of the efficiencies that are already coming online.
Jeffrey Rulis: All right. Well, thank you for the answers. I'll step back. Thanks.
Len Williams: Thank you, Jeff.
Mark Olson: Thank you, Jeff.
Operator: Your next question comes from Andrew Liesch of PSC. Your line is open.
Andrew Liesch: Good morning, guys. Thanks for all the details surrounding margin growth outlook. It sounds like you guys have had some pretty good traction, hiring bankers and attracting inbound interest. So the organic growth should continue to be strong. But what's the chatter on the M&A front? I know in the past you guys have wanted to do deals and are hopeful to do deals, but you have such good organic growth capabilities. I guess, like what's kind of the cadence for prospective M&A if you have such good loan growth?
Len Williams: Yes, it is certainly on the radar, but we're also in a pretty good economy and in the smaller community banks in the market tend to be doing well in their own right. So we continue to carry dialogue, but there's nothing imminent as at this point. We'll continue to push the organic and we do think there will be other opportunities down the road.
Andrew Liesch: Got it. Nothing is good organic trends, you don't have to integrate someone, integrate a bank and go through any disruption that might happen there, the organic trends could be pretty strong without the integration risk. And then just on the securities, look it sounds like that's going to pop out at this level, is that, did I hear you correctly not expecting any more build on that?
Len Williams: Yes, that's, that's correct. We would expect it to remain flat to down as the loan book grows. I mean, that -- we'd like to get that down as quick as we can and we will continue to purchase securities. As, as I mentioned, the cash flow coming back is significant and we want to make sure that we're getting some yield. But as the loan book grows we will allow that security book to decline. One caveat, though Andrew, and that is, we've anticipated deposits going down for three quarters now. And programs keep coming into place and deposits continue to keep growing. We're in a conservative market. It's not just us, but we don't know what happens on the stimulus front going forward. And so far, we've been wrong three quarters in a row on one that goes down. So if things normalize, we think that, that securities portfolio will start to drop, but there is an unknown out there.
Andrew Liesch: Got it. Yes, spoke around deposit growth has been stronger than I've been expecting. You guys have covered my other questions. I will step back. Thank you.
Len Williams: Thank you.
Mark Olson: Thanks, Andrew.
Operator: Your next question comes from John Rodis of Janney. Your line is open.
John Rodis: Good morning, guys.
Mark Olson: Good morning, John.
Len Williams: Hi, John.
John Rodis: Hope you guys are doing well. Just real quick, just to clarify back to your loan guidance, does that include the impact of the runoff of the PPP loans?
Mark Olson: Yes, it does.
Len Williams: It does.
John Rodis: It does. Okay.
Len Williams: The PPP loan program declined from the fourth quarter to the first quarter. We're continuing to fund loans from round two. But our SBA team, they've been fantastic and they've filed significant amount of forgiveness applications and no, we haven't lost one yet. And so that portfolio continues to decline quickly, even as we continue to fund on round two.
John Rodis: Okay, so but I guess back to a prior question on your guidance for high single digit overall growth, and you can grow core loans in excess of 10% and then net of the runoff, you're going be high single digits, still?
Len Williams: Little bit more.
John Rodis: Okay. Just on the mortgage front, I guess given your various investments and so forth, I guess the NBA forecast has mortgage, -- mortgage value and is trending down from the first quarter. But it sounds like you still think given your new investments you can offset that and grow revenues going forward from the first quarter?
Len Williams: Yes, we do expect the mortgage business to slow down a little bit. As a matter of fact, we're seeing it forward. Now dropping off a little bit. That is offset a little bit just by the mortgage teams' aggressiveness and bringing on bankers and growing the opportunity and their self funding is they do that, but we do anticipate some kind of a decrease there. And as you'll note, this quarter a portion of our loans, we rather than going out and buying mortgage backed securities, we kept our own to a degree the increased yields and opportunities. But the volume was so great this time that allowed it to happen. If we get down to normalize, then that growth will probably come predominantly from our commercial real estate portfolio and we'll continue to sell mortgages, because we don't want to, we don't want to lose that, that fee income base either. So yes, we've got, you heard the pipelines where we are, and we do have a little wiggle room in there for mortgage business backing down a bit.
Mark Olson: We also budgeted. When you look at the mortgage program there, we budgeted for an increase in mortgage loan officers for the year and we'll continue to see that, but we're doing it with incremental value every time and so we'll see some growth there as well. The other thing is, construction development here in Utah is really strong. And we've got a business vertical that is doing builder finance lending and we're getting more and more of that long term residential loans through those areas as our mortgage team continues to focus in that area as well.
John Rodis: Okay, so the combination of all that you think mortgage revenues can actually be up a little bit from the first quarter though, just to be clear?
Len Williams: Yes, we do.
John Rodis: Okay. And then you mentioned the treasury management product that you've got coming online, just any sort of idea, the magnitude of what sort of revenues, you could see from that?
Len Williams: I think that's going to be us, relatively stable growth mode. We brought on the function of treasury management a couple years ago, and it continues to gather steam as it goes with mediocre products, I guess I'll say. So they've been working for a good year and a half with the vendor to bring this new automated product into where all clients can manage, at least all business plans can manage cash and investments, and wires, and ACH all through their telephone app or online. And we actually were their first client. We had the bank go on to where all of our ACH and wire approvals were done remotely via the authorized personnel. And until we got it to the point where we were comfortable that it would provide value, it was easy to work, we held back on the release. So we're thinking that should have a nice jump. And we also believe that some of the deposit retention that we're seeing more than we anticipated we would is due to the treasury management team already doing a good job. And we've had a half dozen clients, our best, some of our best clients testing the product for a period of time and we're getting pretty good reviews. So I'm not going to guesstimate the growth rate, but it should, over time, it should really make an impact on our fee income base.
John Rodis: Okay, sounds good. Thank you, guys.
Len Williams: Thank you.
Mark Olson: Thanks, John.
Operator: There are no further questions at this time. I will now return the call to Mr. Williams for closing remarks.
Len Williams: Very good. Thank you, Chris. And again, thank you all for joining us. We appreciate the interest and as we push forward to 2021, wishing you all the safety and health, and we look forward to our conversation next quarter. Thank you.
Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
