Glacier Bancorp, Inc. (GBCI) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Randall Chesler, the President and CEO. Sir, you may begin.

All right. Thank you, Kaylee. Well, good morning and thank you all for joining us today. We – with me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Barry Johnston, our Chief Credit Administrator; Angela Dose, our Principal Accounting Officer; and Don McCarthy, our Controller. So yesterday, we released our first quarter 2017 results. Overall, we’re very pleased to report very solid performance and good momentum, driven by our continued growth in our loan portfolio, stable margins, good credit performance, and moderating non-interest expenses. So for the quarter, our earnings were $31.3 million, that’s an increase of $2.6 million, or 9% over the first quarter a year ago, and – our $214,000, or 69 basis points over the fourth quarter of 2016. Diluted earnings per share were $0.41, an increase of $0.03, or 8% from the prior first year quarter, and equal to the earnings per share last quarter. Return on assets were 1.35% versus 1.28% in the first quarter of 2016, so a nice improvement there. Return on equity was up coming in at a 11.19% versus 10.53% a year ago. We also declared our 128th consecutive regular dividend of $0.21 per share, an increase of a $0.01 per share, or 5% over the prior quarter and prior year first quarter as well. Moving on to the performance for the quarter, loan growth you’ve seen from our release was very strong, with an increase of $193 million for the quarter, or 14% annualized. Other commercial loans grew the most $120 million, or 9%, included in other commercial loans as an increase of $42 million in municipal loans. Excluding the Treasure State acquisition that closed in 2016, the loan portfolio increased $628 million, or 12% versus the first quarter with $351 million and $281 million of the increase coming from commercial real estate and other commercial loans, respectively. Loan production for the quarter was very good. We made $620 million in loans, had $427 million in liquidation for the quarter, which was pretty much consistent with prior trends. Pricing on the new loans is reflective of the higher interest rates we’re seeing, and we’re coming in now with new loan pricing exceeding the yield on the existing portfolio, so we’re happy to see that. Credit quality remain relatively stable, early stage delinquency was up compared to last quarter and the quarter a year ago, but about half of that increase was due to one loan we’re currently – that we’re currently evaluating. Credit loss is still near historic lows and we maintain a reserve level that provide strong support if the cycle begins to turn. Non-performing assets ended the quarter at $71.5 million, that’s about the same level of the prior quarter and down $8.8 million from a year ago. NPAs as a percentage of assets were 0.75% at the end of the quarter, down 13 basis points from the quarter a year ago. Net charge-offs were $1.9 million in the first quarter compared to $4.1 million in the prior quarter and $194,000 in the first quarter of 2016. The allowance for loan and lease losses as a percentage of total outstanding – outstandings was 2.2% at the end of the first quarter, down from 2.28% at the end of the prior quarter. Investments as a percent of total assets stood at 31% versus 33% at year-end, which is a continued – which shows a continuation of previous trends to move investment cash flows into funding new loans. Core deposits increased very nicely, with both interest bearing and non-interest bearing deposits increasing. Core deposits now stand at $7.1 billion, increasing $99.6 million, or 6% annualized compared to the prior quarter. Excluding Treasure State, core deposits increased $390 million, or 6% from the prior year first quarter. Non-interest bearing deposits totaled $2 billion, up 29% of core deposits and increased $7.6 million, or 37 basis points from the prior quarter and excluding Treasure State increased $149 million, or 8% from a quarter – from the quarter a year ago. Interest income of $87.6 million was down slightly when compared to the prior quarter, driven mainly by two less days in the quarter, but up compared to last year’s first quarter by $3.2 million, or 4%. Total cost of funding remains stable, with interest expense increasing $152,000 for the quarter, or 2%, compared to a decrease of $309,000, or 4% from the prior year first quarter. The total cost of funding was 37 basis points versus 39 basis points a year ago. Our net interest margin was stable at 4.03% on a tax equivalent basis and 4.02% in the prior quarter. You’ve seen the ongoing remix of investments into loan. This continues to be a very positive influence on our margin. Non-interest income for the quarter totaled $25.7 million, down $2.3 million, or 8% from the prior quarter. Really the gain on sale of loans for the quarter decreased $3.4 million, or 35% from the prior quarter due primarily to seasonality. Compared to the quarter a year ago, non-interest income increased $1.4 million, or 6%. And this was really primarily driven by an increase in our core consumer checking accounts. Non-interest expense decreased $3.4 million, or 5% from the prior quarter, and was up $988,000, or 2% from the first quarter last year. Now, if you take out CCP-related costs, expenses decreased $2.6 million, or 4% compared to last quarter, and $1.8 million – or increased $1.8 million, or 4% from the quarter a year ago. The efficiency ratio for the quarter was 55.57%, up 49 basis points from the prior quarter of 55.08%, which is our low for last year. The current quarter efficiency ratio decreased almost a 100 basis points from the prior year first quarter. So we expected the first quarter’s efficiency ratio to be somewhat elevated, but feel very positive about our target of 55 on a full-year basis, our 13 Bank divisions are focused on evaluating the post CCP environment and identifying efficiencies. We expect to close kind of moving off the balance sheet and income statement. We expect to close Foothills at the end of the month. This will mark our first entry into Arizona. We’re really excited about the Foothills team joining our company and are very optimistic about the growth potential in Yuma, Prescott, and Casa Grande markets. With Foothills closed, we’ll be very close to hitting the $10 million asset milestone. And, of course, with passing that milestone comes other things the Durbin Amendment and DFAST requirements being the most primary. In order to avoid triggering the Durbin payment to retailers, we will proactively manage our balance sheet in 2017, and do not expect to exceed $10 billion – of the $10 billion threshold until the first quarter of 2018. So before I turn the call back over to the operator for any questions, I’d like to just thank our 13 Bank divisions, our senior staff, all our employees for another very strong performance. So, operator, I will – happy to turn the call back over to you, Kaylee, and take any questions at this time.

Thank you. Our first question comes from the line of Jeff Rulis with D.A. Davidson. Your line of open.

Thanks. Good morning.

Good morning, Jeff.

Just a question on the really strong loan growth. I think you guys have mentioned it in the past few quarters that really you’ve kind of driven out some of the regular seasonality in terms of loan growth has sort of been steadied, used to typically Q1 be pretty light. But I guess on that front, is there any, given the strength in Q1, is there potential for sort of cannibalizing any, what had been sort of a seasonal pop in Q2, given that just the strength of growth in Q1?

That’s a good question, because that is, we have seen that trend over the last couple of years, where the first quarter really historically has been soft, but has strengthened, just as you point out. Looking at the numbers and what we funded and what we see in the pipeline don’t really see the first quarter as popping, because we hold a bunch of second quarter fundings into the first quarter. So to answer your question, though, I think, we feel, it was very strong quarter. But strong on its own and don’t – can’t really attribute it to pulling in a bunch of business either pushing it in from a fourth quarter or pulling it in from the second.

Great. That’s, great. Thanks. And then, Randy, just a follow-up on the $10 billion discussion if we do sort of push that out into 2018, I guess, maybe well further out than the actual impact would be back-half of 2019. But have you put any numbers or estimate out there on costs and lost fees for cost in that mark eventually?

Yes, we did, Jeff. We recently updated the analysis for the expense of crossing over the $10 billion, and that’s primarily interchanged. So the way Durbin works is that effectively takes about half year debit card interchange. And so, for us it’s about $13 million gross and about $7 million in net. So by carefully keeping an eye on the balance sheet in 2017 and pushing that into 2018, we can pretty much save ourselves a year’s worth of that expense because of the way the Durbin trigger is set. So by pushing it into 2018, we won’t have to pay that until July of 2019.

Sure. And then have you quantified the DFAST maybe expense to ramp up for that preparation?

I think we’ll have – yes, I mean, we’re obviously, we’re looking at that. We’re right in that. We have been working on DFAST for the last really two years. And I think in the next quarter, Ron and team are really working on fine tuning a number for you.

Okay.

So I think we’ll have that. I would tell you, we’re very, very pleased with kind of the progress we’re making there and the efficient way that we’re approaching it. We feel pretty good about it.

Okay, appreciate it. Thanks.

Thank you. Our next question comes from the line of Matthew Clark with Piper Jaffray. Your line is open.

Good morning, guys.

Good morning.

Maybe just sticking with the loan growth in the quarter, can you quantify what the production was in the quarter? And as a follow on, what was the weighted average rate on the new production that sounds like, it’s above the portfolio yield, just curious what it was?

Yes. So we – total you’re talking about gross loan production for the quarter, that’s…

$475 million.

$475 million. And I think a little bit higher than that, maybe if you put the whole thing closer to six. But the – yes, on the yield, we’re – so the yields was just a tad bit higher. I don’t know we’ve kind of quoted that in the past. But our – if you look at our portfolio yield, I’d say, a couple of basis points higher. We saw that. We didn’t see that for all of 2016, and the fourth quarter of 2016 was the first time we start – we kind of popped above the portfolio. So we saw it, again, in the first quarter. So we’re very happy with that.

Okay. And then the amount of accretion in the quarter?

Pretty minimal. I think, I want to say 3 or 4 basis points.

Okay.

Yes, 4 basis points, Matthew.

Got it, okay. And then on your OREO, your other real estate owned and those related write-downs and costs came down pretty dramatically in the quarter. You still have some OREO though on the books that you’re trying to work through. I guess, how should we think about, and I’m assuming, it’s going to be somewhat volatile and obviously, depend on what you’re working out. But would you suggest that it’s an unusually low amount this quarter on the expense side?

Barry, how would you?

I don’t think I can say anything out of the norm, so it’s pretty much…

Okay.

What we have left in the portfolio some legacy loans from the 2006, 2007, and 2008. It’s the bulk of it with one property down in Idaho. So we’re still turning that. But so that’s about the only thing that other concern and the rest of it is just one of the new general single family residential in the occasional commercial property in there. So I don’t – I didn’t see anything that is unusual, per se.

Okay. Any merger charges in the quarter?

Very minimal. You’re talking about acquisition-related expense?

Yes.

Yes, pretty minimal this quarter.

Okay. And the last one, just on loan growth. I think you guided coming out of year-end to do 7%. You guys are obviously off to a great start even excluding the acquisition. But on an organic basis, I mean, are you still comfortable with that 7%? Do you think you have any desire to up that?

Yes, Barry and I were just talking about that before the call. We obviously, look, we’re very happy with the start. And we think it’s broad-based and good quality. We had a couple of larger deals for the first quarter, which are not highly unlikely we’ll see that happen again. So we – what we decided is, we’re going to wait and see how things go in the second quarter. And then if we see another very strong quarter, we’ll go ahead and we’ll readjust that seven.

Okay. And maybe just one quick one. How would you compare the pipeline at the end of the first quarter versus year-end?

End of the first quarter versus year-end.

I looked at it last year, we were – the pipeline versus last year was up, of course, dollar – absolute dollars, of course, we’ve grown since then. But probably since year-end, I would say, the pipeline is a little better than what we saw at year-end. So…

Yes, we looked at it two ways. One was we went back here and looked at the end of the first quarter of 2016.

Right.

And compared it to 2017, and it’s pretty consistent, if you look at it that way. That’s the commercial lending pipeline. The mortgage pipeline is down a little bit. But we’re seeing a pretty strong start to April. So that one looks a little softer. But we’ve – in the last couple of weeks that we’ve seen a pretty good mortgage activity.

Okay. Thank you.

Yes. You’re welcome.

Our next question comes from the line of Jacque Bohlen of KBW. Your line is open.

Good morning, Jacque.

Hi, I was muted. Good morning, Randy. And picking up again on the mortgage pipeline, given that it’s down a little bit understanding that 1Q had seasonality, and you’re starting to see some pick up in April. What are your expectation for that platform this year?

Well, we still feel very good about it. We have our forecast in for a repeat of last year, so $1.3 billion. I think, we’ve seen the shifts. We’re doing almost 80% purchase now and 20% reifi, so we’re seeing that. But in some of our markets, purchases really picked up pretty well. I’d say, I’m still a little cautious about the $1.3 billion only because of the interest rates going up, reifi kind of moving off, purchase picking up, which is good. And I think, we’ll know a lot more after the second quarter. But Jacque, I think the one – so I’d say, overall, we – that’s a very aspirational goal of $1.3 billion. But looking at how we’re starting off in April, we’re seeing some pretty good strength. So we’ll just have to watch that.

Okay. And how is the gain on sale margins been this year compared to last year?

Very good. We’ve been pretty stable there. We are doing some things. So in the end, our production is off a little bit. Our strategy coming into the year was to try to create some efficiencies on the gain side to make up for that. And so we are looking at ways of shifting the mix and the delivery mechanism to get a little bit improve the gains. So the gain so far have been very stable. I haven’t really seen a lot of movement there. And we’re hoping to improve that as a way to offset any shortfall on that production side.

Okay. That’s helpful. Thank you.

You’re welcome.

All right. And then looking at deposit cost, obviously, no real movement in the quarter. Was there any impact from March’s rate increase? And how are you thinking about those portfolios just in light of the rising rate environment?

Well. Yes, no, we didn’t see a lot of flow into the deposit rates. We’re happy to see that the loan rates moving up a little bit. We are not feeling a lot of pressure at this point across the Board there. And so, I think, we’re very mindful of our margins, and to the extent that we can keep that posture we will. And where we stay close to our customers and read that often. But at this point, Jacque, we’re just not seeing a lot of pressure on that side.

Okay. And that’s inclusive of the March increase?

Yes.

Okay. Thank you. That’s very helpful. I’ll step back.

All right. You’re welcome.

Thank you. And our next question comes from the line of Matthew Forgotson with Sandler O’Neill. Your line is open.

Hi, good morning, everybody.

Good morning.

Just on expenses, I guess, $63.3 million or so of operating this quarter. I know CCP is out of the run rate. But how much of the expense related to crossing $10 billion did you accrue in the 1Q? And how should we be thinking about those accruals as we move throughout the year?

Yes. We – so as I said before you, I think we’re tuning that up. There really is in terms of new expense that hit in the first quarter from the fourth quarter, there really is very little in there in new. You will – so I think in the second quarter, you’ll see a little bit more expense. We’re going to be licensing some software to get ready for the DFAST that will increase our expenses slightly. But that’s that is about it. So, I think there will be – so we’ve talked about it and I’m hesitant to put a number out there, because I think we want to refine it a little bit more. But I would tell you, to answer the first part of your question going from the fourth quarter to the first quarter, we’re actively working on it. But a lot of the expense for DFAST is already in the expense number. So, if you think about enterprise risk function, that’s built on operating. That’s already baked into the numbers. We hired a Treasurer last year, that’s already baked into the numbers. So I think, we’ve got some cost to license some software and do some other things to prepare for DFAST. So we’ll have that number for you a little bit more refined in the next probably into the next at the end of this quarter.

Perfect. I guess just to frame that up a little bit. If you did $4.3 million last year related to CCP Gold Bank, is it still fair just to put rough numbers around it that any incremental accruals associated with planning across $10 billion would be lower than that?

Yes. I think, what we’ve talked about is, it’s – we don’t see it being half of that number. So that’s a good broad kind of a guideline.

Great, okay. And then just on crossing $10 billion, in terms of managing the size of the balance sheet, as we move through 2017. Is it possible that you could top above $10 billion in – at any one quarter-end and then kind of limbo below it at the end of the year, or are you managing below $10 billion throughout the whole year?

Yes, our plan is to manage below $10 billion for the entire year.

Okay.

And we – I think we feel pretty good about being able to do that.

Okay. And then one last question for me then I’ll hop out. In terms on credit, can you just comment a little bit about the steep decline linked-quarter in accruing TDRs, it looks like they were down about $13 million this quarter. Could you give us a little color there?

Sure.

And then also on the uptick in 30-day and 90-day delinquencies, specifically that one problem credit?

Sure. Well, let me just touch on the TDR, and Barry is here. I think he can – we – he will give you a little bit more color on the early stage. But the TDR, fair amount of that is just some accounting, where loans start to perform, they come out of there. So it’s a little volatile as they slip back, they’re going to go back into TDR. So that we just have a lot of loans that where that started to perform that from an accounting standpoint get moved out. But we’re still – we’re not out of the woods yet. Barry, you want to talk about the early stage.

Yes, early stage definitely went up $13 million this quarter, as mentioned in the press release and Randy mentioned in his opening remarks, $7.1 million of it is one credit. It’s in land, lot, and other construction, it’s a regulatory category. It is a commercial real estate property. It came out of – the property is fully completed. Construction is complete. And the stabilized occupancy just isn’t a number, where it needed to be coming out of there. So the borrowers been facing some financial difficulties and resultingly is sitting in the early stage delinquency buckets. At this time, borrowers are doing some positive things, liquidating assets and move up with operating performance of the property – keeping the loan at that delinquency period. So we are fully anticipating that with the other actions that we’re taking and what the borrowers are doing, we hope to have that by current by this quarter-end.

You want to comment, I mean, it was a little lumpy in that bucket. So I mean that, we don’t feel it’s really reflective of any kind of a trend, because you have the one big loan that Barry just talked about. And then you had two others in there as well that were very large.

Yes, for other ones $1 million to $1.8 million, two of which were up $2 million currently this month to-date, so.

Okay. Well, thank you very much for the color.

You bet.

Thank you. Our next question comes from the line of Michael Young with SunTrust. Your line is open.

Hey, good morning.

Good morning, Mike.

Randy, wanted to start off dovetelling on your comments about the $10 billion asset threshold. I would assume then that pertains that M&A sort of off the table in near-term. But you may sort of reengage later in the year. Could you maybe just talk about your plans there, and maybe what you’re seeing in the market?

Sure. So, yes, no – M&A, so I would – starting with the top – the first part of your question. No, we are actively engaged in discussions, but making it clear that any transaction will be a 2018 transaction. And we’re at a point now where that’s going to – if you’re starting a discussion now that’s pretty much, where you’re going to end up anyway. So we’re really not too far off it, but we call it the Durbin delay. And so – but from a pipeline standpoint, the market has been very active. I was just looking at it yesterday talking with one of our investment bankers and I think in the first quarter we’ve seen pretty much about as much as we generally see in a full year, so there is a lot of activity. I would tell you from a quality standpoint, it’s kind of a mixed bag and from a strategic standpoint, so even though there is a lot of activity we’re being very picky and sticking to our disciplined strategy of, you know that served us very well over the year. So, there is a lot to look at, I mean it’s been an incredibly busy quarter, we’ve turned away a lot. There are some good things out there as well that we’re looking at, but anything we do we are communicating and planning on funding, closing that in 2018.

Okay great. And just one more on credit. Could you just give us an update maybe on the Ag book and kind of are things moving positively there versus maybe where they were at year end or just big pictured thoughts?

Yes, let me comment on that and then we’ll see if Barry has anything to add. I mean remember our Ag book is really well diversified from tree fruit on the kind of Eastern Washington down to wheat and cattle further south overall and then to some extent of your Ag and commodities, you know those are probably the two areas here. We’re talking about some oil and gas as well. The tree fruit business is doing very well. Prices are stable, apples and cherries. The main tree fruit crops are doing very well, very stable. We’re really happy with how that’s performing. Wheat, you know it’s still down around $4 dollars a bushel. That’s pretty close to breakeven. Yields have made up for that at last year. We still just have our concerns about wheat, so we’re keeping a close eye on it. Cattle I think is kind of in the same boat, a little bit better, it’s moving up. We are hoping that’s going to continue. So we feel pretty good about that piece and we’re underexposed to oil, so we don’t have a lot of exposure there. Natural gas with our one franchise down in Evanston is probably the bigger component for us. That’s actually starting to look a little bit better, we’re getting a lot of demand on natural gas. So, we feel pretty good about that. Barry, do you have anything you want to add there?

No, from a material standpoint, not much has changed since the first quarter. So, we’re feeling that we’re going to get through this cycle if – where we are at or if commodity prices were to increase only slightly, so.

Okay, great. And one last kind of small and just on the new market tax credits. Can you give me an idea of what the expense was this quarter and is that the run rate we should expect going forward?

Well, I’m going to hand it over to Ron, who is our new market tax credit expert and we’ll see what’s mixed in the numbers.

Yes. Michael, give me a minute, I’m just looking up the number here. To tell you what, let me get back to you offline with that number.

Okay, that’s fine.

Yes, the fact we have to search for it tells you it’s not a big one, but to give the exact number, we’ll – Ron will get back to you on that later.

Okay, great thanks. That’s all for me.

Thank you and our next questions comes from the Tim Coffey with FIG. Your line is open.

Thank you. Good morning everybody.

Good morning Tim.

Randy, as we kind of look at the growth from the quarter and the kind of commercial real-estate construction portfolios and compare it to the declines in the residential mortgage portfolios and multifamily portfolios, what’s going on there? Is that a philosophical shift, market opportunity, or maybe both?

Yes, well, I think what you’re seeing is, you know we hit a concentration limit on multifamily and we’ve been very disciplined to kind of stick to our concentration limits. And so we haven’t really increased our position significantly in quite a while, because we’re – we feel like from a diversification standpoint, we like to keep the portfolio diversified. We set exposure limits, it’s over times. We could have worked a lot more, but we just decided that, we’re at a point where we’re comfortable with and really not growing that that portfolio.

Yes, we had one large loan for $22 million payoff during the quarter, it was a property down in our First Security Bank property in Missoula.

Yes.

So…

Okay.

We anticipate we’ll probably refund a portion of that to some of our existing borrowers who have been knocking at the door.

Okay. And then the $22 million is a multifamily?

Yes, it was.

Okay, great. I just want to make sure.

Yes, it was a sale of the property. So we did not have an opportunity to refinance it.

Okay, that’s very helpful. Thank you. And then the difference in yield between kind of the residential mortgages, multifamily mortgages, is that substantially lower than what you did on the commercial real estate, or assuming it would be on a construction on the – on kind of non-residential mortgage type loans?

That’s a good question. I don’t know how to answer that. Generally, a multifamily would be priced similar to any other commercial real estate income-producing property. So it typically would be higher than a single family residential loan. So in general terms that’s probably pricing historically.

Okay, thanks.

As far, okay.

Yes, I didn’t mean to cut you off there.. Was there something else you want to add?

No.

Okay. Thanks for the color. And then on managing under $10 billion, we’ve seen companies do this before and when it comes down to it kind of all options are on the table. Randy, is that how you’re approaching managing under $10 billion through the next three quarters?

I’m not sure what all options on the table are. But I’ll tell you a couple of things. We looked at this and kind of used as a framework. That number one, we don’t want to slowdown this franchise, because it’s doing extremely well. And you can see from our growth that got a lot of people working hard and doing a great job bringing in good business. So and I think what you’ll see from us is more a balance sheet activity to make some room and allow just organic growth. We’re going to close Foothills, and that’s going to get us pretty close. We don’t plan to close any more deals this year. So we can kind of use that as one lever. And then just on the balance sheet, we’ve got a couple levers to use to kind of carve out some room. And I guess, our other principal, one is, we don’t want to slowdown the – some of this great momentum that we have. And the other is, this is a short-term problem. We don’t want to create long-term consequences by trying to solve a short-term problem. So we’re very mindful of that. It really is just a limbo bar at the end of the year, get under it, and then we – we’ll certainly go over in 2018. But we’ve got a couple of actions identified that we feel we’ll be able to – to be able to manage through that.

Okay. One of the things I was looking at was the balance of CD and wholesale deposits. What are the kind of maturity schedules on those for this year?

Well, the wholesale deposits are primarily there because of our swap. So those are short-term, but they’re going to – those will likely stay there. CD roll off, I think, there is nothing extraordinary just to kind of historical trends for the CDs, as you know that’s been a long-term liquidation, but we don’t see that changing.

Okay, all right. Well, thank you those are my questions.

All right. You’re welcome.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Chesler for closing remarks.

All right. Well, we certainly thank you for taking the time. I thought there was some questions, we’re pretty excited about the first quarter, we feel like it was, a lot of good things happening. We see that continuing throughout 2017, so we look forward to our next call. Sure we’ll have some more things to talk about and appreciate you again for taking the time to dial in. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.