Glacier Bancorp, Inc. (GBCI) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Second 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 be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to President and CEO, Randy Chesler. You may begin.

Okay. Thank you, Leanne. So, good morning and thank you everybody on the call for taking time out of your summer to join us today. Here with me in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Cherry, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; and Angela Dose, our Principal Accounting Officer. Yesterday, we released our second quarter 2017 results and we're very pleased to report continued solid performance and momentum driven by growth in our loan portfolio, healthy margins, strong credit performance, and moderating non-interest expenses. For the quarter, our earnings were $33.7 million, which includes $867,000 of acquisition-related expenses. That's an increase of $3.2 million or 11% over the second quarter a year ago and an increase of $2.4 million or 8% versus the first quarter of 2017. Diluted earnings per share were $0.43, an increase of $0.03 or 8% from the prior year second quarter and an increase of $0.02 or 5% from the prior quarter. Return on assets was 1.39%, up from 1.34% in the second quarter of 2016 and 1.35% in the last quarter. Return on equity was up as well, coming in at 11.37% for the quarter versus 10.99% a year ago and 11.19% last quarter. For the first half of the year, earnings were $64.9 million, an increase of $5.8 million or 10% over the prior first half. Return on equity for the first six months of the current year was 11.28% compared to 10.76% for the same period last year. We also declared our 129th consecutive regular dividend of $0.21 per share, an increase of $0.01 per share or 5% over the second quarter a year ago and the prior quarter. The company completed the acquisition of TFB Bancorp, the holding company for The Foothills Bank, a community bank based in Yuma, Arizona, with total assets of $386 million. We're very pleased to have the Foothills' team join the Glacier family. The company also announced the signing of a definitive agreement to acquire Columbine Capital Corp., the holding company for Collegiate Peaks Bank, a terrific, high-performing community bank headquartered in Buena Vista, Colorado. As of June 30th, 2017, Columbine Capital had total assets of $466 million, gross loans of $337 million and total deposits of $399 million. This transaction is expected to close in the first quarter of 2018. Loan growth, without including the Foothills acquisition, was once again very strong with an increase of $176 million for the quarter or 12% annualized. Commercial loans grew the most, increasing $107 million or 4%. Excluding Foothills and the Treasure State acquisition that closed in 2016, the loan portfolio increased $623 million or 12% versus the second quarter a year ago, with $365 million and $255 million of the increase coming from commercial real estate and other commercial loans respectively. Now, a number of you have asked previously if we intended to up our growth goal of 7%, which we established at the beginning of the year. And now with the second quarter results in, we're comfortable to tell you that we expect to end the year closer to 11% annualized growth. Our unique business model continues to produce strong, high quality growth and we feel good that we'll end the year closer to 11%. Loan production for the quarter was very good. We made $709 million in new loans, had liquidation pretty much consistent with past trends, and the pricing on the new loans is reflective of our higher interest rates exceeding the yield on our legacy portfolio. Now, with all this growth, we're actively working towards staying below the $10 billion threshold at year end in order to delay the impact on our earnings from the Durbin Amendment to 2019. We've developed several strategies to achieve this goal and are very happy with the progress we've made and are confident that we'll end the year below $10 billion. Our other initiative in this area is preparation for the required DFAST stress testing. We expect our first stress test results will not be due until 2020. However, we've taken advantage of our experience that we have here and long timeframe to when the result tests are due to develop a very effective and cost efficient program. On the last call last quarter, we said we've discussed the cost associated with DFAST at the end of the second quarter. So, during this time, we've spent some time refining our cost estimates and we expect now to spend a total of $1.5 million to $2 million over the next three years as we ramp up the program. After this initial three-year period and the program is up and running, we expect to spend approximately $750,000 annually. We'll keep you posted on this initiative as it evolves. Credit quality remains stable during the quarter. Early-stage delinquency was $31.1 million, down $8 million compared to last quarter and up $7.6 million versus the quarter a year ago. Non-performing assets ended the quarter at $68.9 million, a decrease of $2.6 million or 4% from the prior quarter and this includes adding $1.8 million from -- into the non-performing assets from the Foothills acquisition. NPAs as a percentage of assets were 0.7 -- 70 basis points at the end of the quarter, down 12 basis points from a quarter a year ago. Net charge-offs continued to be somewhat lumpy with $2.4 million in the second quarter compared to $1.9 million in the prior quarter and net recoveries of $2.3 million in the second quarter of 2016. We don't see a big change in the outlook here but expect some of this volatility to continue. The allowance for loan and lease losses as a percentage of total outstandings was 2.05% at the end of the quarter, down from 2.2% at the end of the prior quarter and 2.28% at the end of 2016. Loan growth, credit quality, and no allowance carried over from the Foothills acquisition due to their loans being recorded at fair value drove the allowance to lower levels as a percentage of assets. Total investment securities of $2.8 billion decreased $180 million or 6% during the quarter and $360 million or 12% from the second quarter a year ago. Investments as a percentage of total assets stood at 28% versus 33% at year end and this is a reflection of our continuation of our strategy to reinvest investment cash flows into funding new loans. Core deposits increased nicely in the quarter. Excluding the two recent acquisitions, core deposits increased $70.7 million or 1% from the prior quarter and increased $401 million or 6% from the second quarter a year ago. We're especially pleased to see this increase over prior year, led by an increase of noninterest-bearing deposits of $217 million or 11%. Interest income of $94 million was up $6.4 million or 7% when compared to the prior quarter. This was mainly driven by an increase from commercial loan interest, which increased $6.2 million or 12%. Compared to the quarter a year ago, interest income increased $8 million or 9%. Total cost of funding remained stable, with a cost of 37 basis points for the quarter versus 38 basis points a year ago. Interest expense of $7.8 million increased $408,000 for the quarter or 6% and increased $350,000 or 5% from the second quarter a year ago, driven by higher deposit balances and borrowings. Our net interest margin expanded nicely in the second quarter to 4.12% on a tax equivalent basis compared to 4.03% in the prior quarter and 4.06% a year ago. The nine basis point quarter increase in the net interest margin includes a five basis point increase from the loan purchase discount accretion. The balance can be attributed -- of the increase can be contributed to the ongoing remix of investments into loans and higher yields on new loan production, both obviously continuing to be a positive influence on our margin. Non-interest income for the quarter totaled $27.7 million, up $2 million or 8% from the prior quarter. Gain on sale of loans for the quarter increased $1.2 million or 18% from the prior quarter due to seasonality. Service charges and other fees increased $1.9 million or 12% from the prior quarter, primarily from seasonal activity and increased $1.7 million or 11% from the prior year second quarter, driven by the increased number of accounts. Compared to the quarter a year ago, gain on sale of loans decreased $725,000 or 8% and this was primarily driven by slower refinance activity. Non-interest expense increased $2 million or 3% from the prior quarter and was up $848,000 or 1% from the second quarter last year. If you take out costs related to CCP, our large back-office technology project that most of you are familiar with that we completed at the end of 2016, expenses increased $2.2 million or 3% compared to the prior year second quarter. In addition, the efficiency ratio for the quarter was 52.89%, a 268 basis point decrease from the prior quarter of 55.57%. For the first six months of the year, the efficiency ratio was 54.17%, down 214 basis points from the prior year's first six months. Our 14 bank divisions continue to stay focused on evaluating the operating environment and identifying efficiencies. And at the beginning of the year, we targeted a 55% efficiency ratio on a full year basis. And based on these results, we now believe we not only achieved this goal but likely end the year closer to a 54% efficiency ratio. So, we're very excited about the Foothills' team joining our company and very optimistic on the growth potential in the Yuma, Prescott, and Casa Grande, Arizona markets. And we're also very excited to be working with the leadership team of Collegiate Peaks Bank toward a closing in early 2018. And before I turn the call back over to the operator for any questions, I would like to again thank our 14 bank divisions and our senior staff for another strong performance. So, Leanne, I'll turn the call over to you and would be happy to take any questions at this time.

[Operator Instructions] And your first question comes from Jeff Rulis with D.A. Davidson. Your line is open.

Good morning.

Good morning Jeff.

Sorry, this is Matt on for Jeff. I just had a couple questions. First one in regards to loan growth, the organic loan growth is pretty strong for the quarter. Was there any geographic areas that outperformed your expectations or -- and you expect to outperform in the future?

This is Barry. There was one credit team out of the Citizens Community Bank down in Pocatello. It was a $32 million transaction. That was the exception; the rest of it was pretty broad based.

Yes, we look across all the 14 divisions and see very consistent, strong performance across the Board. Wyoming is -- the State of Wyoming tends to be a little bit softer, but other than that, very, very broad based.

Thanks for the color. And my last question is about margin, we saw the cost of funds are flat sequentially, but I was curious if you're seeing any pressure in regards to deposit costs?

We obviously are constantly talking to the -- our bank presidents. And at this point, we're -- from our customers; we're just not hearing a real loud cry for increases there. So, we watch it closely. We -- obviously, it's -- one of the advantages of the model is we can respond to that based on each individual geography. But we just have not seen a real strong kind of pressure to do anything there. So, we'll continue with our strategy of looking to hold them, but obviously keeping a dialogue -- communication open with each of the local markets.

Thanks for the color. I'll step back.

Your next question comes from Michael Young with SunTrust. Your line is open.

Hey, good morning.

Morning Michael.

This is actually Nick on for Michael. I have a quick question related to the securities book. As a percentage of assets, it's obviously down 28%. As you continue on this balance sheet remix strategy, is there a certain target percentage of total assets you're aiming towards?

I think we've previously said somewhere around 20% to 25%. So, I wouldn't call it a target. I think we'll see -- that's the range, I think, that ultimately we see it falling into. So, that hasn't changed. I think as this remix continues, we'd probably look forward to be in that range.

Got it. And two quick questions. One, as it relates to discount accretion. It's roughly four to five bps, is that a good for -- on a run rate basis going forward for the quarter?

It's a little tough to tell on that because some of this came through our Foothills acquisition and that's fresh accounting. But probably in that ballpark, that's probably going to be about the amount we see here for at least for this year.

Okay, got it. And then one last question if I can. As it relates to tax and the new market tax credits, what's your outlook on more tax investments and the tax rate as we look to the back half of 2017?

Yes, great question. This is Ron. The tax rate is up this quarter and probably going to stay up around the 26%, more owing to the fact that we're just simply growing taxable income as opposed to the tax-exempt income. And then on the tax credit front, which we certainly do those projects, we are having a slow elevated use of the tax credit. Last year, we made a number of equity investments in low-income housing projects that are starting to come online. And so yes, it will go up. But our income that's taxable is growing much faster than the tax credits that are coming on. So, 26% would be a good rate to consider for your models.

Got it. Thank you.

Your next question comes from Matthew Forgotson with Sandler O'Neill. Your line is open.

I'm going to be careful saying good morning because I got the first two wrong. Is that you Matt?

Yes it is. Good morning.

All right. Good morning.

Okay. On the margin, I just want to make sure I'm thinking clearly here. Can you just quantify how much purchase accounting accretion contributed to the second quarter margin?

Okay. So, in total, it's nine. And the way we described it was a five basis point increase over the prior quarter.

Got it, okay. Perfect. Thank you. I guess, then just shifting over to expenses. You've always said that we should expect some of the synergies from CCP to begin to surface in 2018. Can you give us a midyear update here on the opportunities you've identified and better yet, just a preliminary sense of where we might see the efficiency ratio trend that those efficiencies are mined?

Sure. Well, to begin with, I'd say we're pretty happy with where the efficiency hit this quarter. And we think -- like I said, we were targeting 55% that was a couple hundred basis points improvement over the prior year and now we're thinking it's going to be closer to 54% based on how things are going. And CCP is going on very well and that gets back to the 14 divisions really focusing on that. And we have an initiative. We've got a very sharp individual working with each of the 14 divisions on the CCP saves. And there's really a couple of phases to it. There's what I'd call kind of the first phase, which is the obvious efficiencies and then there's more detailed kind of process mapping as we look to reengineer some of our processes. So, I'll talk about the first phase because that's one that's furthest along. I'd say in 2018, based on what we're seeing now on a full year basis, there's probably somewhere $752 million worth of expense that we'll pick up. And we're still working on the second phase, which is the reengineering of processes now that we can do that with one platform and that's underway right now. So, I can't really put a number on those at this point.

Okay. Thank you. And then just lastly, and then I'll hop out. Just on the loan loss provision, $3 million this quarter. Can you help us decompose that a little bit? How much of that $3 million was to establish specific reserves? And then how much was for, I guess, we'll call it loan growth? Just trying to get a sense of how we ought to expect provisioning to trend relative to the 2Q level.

Well, its -- there's a lot of science that goes into that provision. And the factors that are reviewed every quarter that we have to review with our outside accounting firm move and it's difficult to predict exactly where it will be. But remember, I think -- so we're going to look at growth. We're going to look at -- in this case, we had Foothills, so that changed things around a little bit, environmental factors, so it's difficult -- charge-offs. So, it's difficult to really give you a clear direction on where to see that go. But I think -- I don't think it's going to move much more around kind of the levels you're seeing, but just depending on our analysis and the factors and there's a number of factors that get adjusted and reviewed every quarter. That's the kind of science we have to go through because, obviously, we have to justify that with our outside accounting firm and the methodology behind it is pretty complex.

Okay. Very good. Thank you very much.

All right. You're welcome.

Your next question is from Matthew Clark with Piper Jaffray. Your line is open.

Good morning.

Good morning Matthew.

Curious on -- in trying to stay below $10 billion in assets at year end, just curious how much cash flow's coming off the securities portfolio knowing there's a decent slug in munis in there. But also just curious what your other plans are to help stay under $10 billion given that you're only about $100 million away in terms of assets.

Right. So, I'll let Ron jump in since this is what he spends most of his time this day watching. But the investment, we're using the cash flow as the investments to fund new loans. And I think Ron that ran at about 180, the cash flows per quarter coming off there.

Right.

So, that continues and that's been a very nice remix for us and also helping with keeping us below. And its couple of things on the -- there's two things to think about on the $10 billion. One is we're -- most front and center is mindful of Durbin. And the way that, that works is that if your call reported the end of the year, if you report in excess of $10 billion, then you trigger Durbin. So, we could theoretically go above $10 million before the end of the year, bring it down and still avoid Durbin. We're not planning to do that. We're going to plan -- we're planning to stay below $10 billion this entire year. The other consideration is the DFAST requirements and that is triggered -- you become a designated institution after four quarters of averaging that takes you over $10 billion. So, there's two things, the kind of reasons why to keep it low as long as possible. But for us, the primary consideration is Durbin. And as we've talked about, once we get into 2018 with our acquisition of Columbine, when we finalize that, we'll be well on our way over the $10 billion. But Ron, did you want to talk about some of the actions that keep us below?

Yes, so we're working with a third-party vendor where we can, with customers' full knowledge, blessing, sell-off deposits temporarily. They always have the convenience in knowing that they're always going to have FDIC insurance. So that is a solution that enables us to move those off and then bring them back in the first quarter. But back to the comment Randy made about the target range for the investment portfolio, 20% to 25%, and you mentioned a lot of munis. And so we have the ability to -- as munis are called, we could even sell some munis and pay down borrowings, pay back wholesale deposits. So, we have quite a few levers both on the asset side and the liability. We have some lower yield incorporates that I really can't pledge them other than to the Federal Reserve discount window, concerned about the discount window. So, we have a number of, again, levers that we can pull and feel confident that we're going to stay below $10 billion, $9.30 billion and certainly at year end.

Great. Thanks. And then on loan yields, just curious what the weighted average rate was on new production this quarter.

So, the -- as we calculated and that one we were just talking about, I think we came in at 4.85 this quarter. So, we're very happy with that. And I think we are really doing the best we can and putting a lot of focus on pricing all the new production kind of to our targeted return levels. And I think Barry and his -- and the Chief Credit Officers in the 14 divisions have done an excellent job seeing the new production and getting healthy pricing.

Great. And then last one just on cost saves from the Foothills acquisition, just curious how much you realized in the quarter, if any.

Cost saves?

Yes, cost saves from the acquisition.

Very little, if any.

Okay.

I think we're just incorporating that into the company. So, really nothing is really reflective of that.

Got it. Thank you.

You're welcome.

[Operator Instructions] Your next question comes from Jackie Bohlen with KBW. Your line is open.

Hi Randy, good morning.

Good morning.

First question on just service charges. The seasonality in that was a bit more than it's been in past years, was there anything unusual that happened in the second quarter?

No, there was no -- just reflective of the activity in the marketplace, I think just -- but nothing out of the ordinary.

Okay. And would you expect that to do another seasonal uptick in 3Q given the strength in 2Q?

We were just talking about that this morning and we do -- that could be likely. I mean, we're starting to see some good trends. I think the early start was -- probably a fair amount of that weather related with the tourist season and some of that activity that's driven by just all the visitors across our footprint. So, yes, I think, at this point, that's frank, we should continue to see that through 3Q and then as you know, seasonally, that will start to drop-off as we wind up the year.

Okay. And what is the fire outlook this year?

Right now it's pretty muted, which is another reason why I hesitated a little on the outlook on the fees because we haven't had any fires, which really dampens the visitors. And there are some fires burning and they just haven't -- they're not of the size that really kind of darkens the skies and creates some issues for people to stay away. So, as long as -- it's getting -- start to get a little dry, so we're hopeful that the fires can be kept at bay, but at this point, really across the footprint, we're not -- that's not a material problem.

Okay. And then just one last one, as we look at loan growth and you've increased what you think the company can put up this year, how much of that is driven by the economy and how much of that is driven by just internal operations?

The loan growth?

Just moving from that 7% up to 11% and the strength you had in the quarter, is the economy doing better? Is it just more traction within some of the internal initiatives you might have going on?

I think it's both. I do think across our 14 bank divisions, the markets are -- we're seeing some good economic growth and it's above the national average generally, with the exception of Wyoming, very, very strong. We have a lot more time and focus on our customers now, 2016, where Barry spent a lot of time on the CCP project and more than we probably realize the amount of time and really concern about planning really well, but people have to put a lot of time into it. So, I think that's the other piece that we have a lot more time for customers and I think that's showing. And the third prong and probably the most effective out of all those is really our model. And I think our model of good banks and good markets with good people, when those markets pick up, we've got -- we typically, in each of our 14 banks, have very good relationships with the folks who grow when the markets grow. And as the bigger banks get bigger and pull authority out, that just helps us and we're the beneficiaries of that. So, the model is really firing on all eight cylinders across the 14 divisions and I think that, coupled with those other two things, really are why we're growing at the rates we're growing. And we've taken a lot of time, Jackie; to make sure that those are the right factors and that there's no credit creep that's driving that. And I can tell you, Barry's looked at it, we've had third parties double check it for us. We feel very comfortable we're operating in the sandbox and those -- and the factors that I walked through are really what's driving the growth.

Okay. Thank you. That's very helpful. And those are my questions.

All right. You're welcome.

Your next question comes from Tim Coffey with FIG Partners. Your line is open.

Thank you. Good morning everybody.

Morning.

Randy, looking at the borrowings and advances on the balance sheet, do any of those have prepayment penalties?

Yes, there are. Some of the borrowings do have prepayment penalties associated with them.

Okay. The ones that don't, could they be put in a box of those that you could lower over the course of the year to stay under $10 billion?

Yes, exactly. So, as we look at our balance sheet, some of those are inside in Ron's sites in terms of additional ways to kind of lower the -- give us a little more headroom. So, yes, we're looking at that as well.

You don't happen to have a dollar figure for how much that is, do you?

How much kind of borrowings that we can take off the balance sheet?

Yes.

I think Ron can probably give you a ballpark on that.

Let me start with the -- we have what are called the knockout puttable structured advances by another name and so there's $155 million sitting there that I will be reluctant to want to go that path. Prepayment penalties can be a bit steep. And then I don't have a precise number because it ebbs and flows with where we are with our loan growth and sometimes of having to borrow overnight at the Federal Home Loan Bank window, but those are exactly the types that we can pay down.

Okay. And those are about $200 million-ish at quarter end?

Yes, that would come in at $180 million or $175 million, closer to that.

Okay. And then Randy as you progress through the year and start looking to 2018, could there be a build in the marketing budget or the advertising budget to kind of communicate to your markets that you are again open for business in terms of growing the balance sheet and such?

Well, I don't think our customers ever felt that we weren't open for business. I want to make sure I'm painting the right picture. In 2016, I think no one really felt that we weren't doing any business. I think it was just our ability to get out there and pursue it and get every -- get our share of the market plus. I think -- and so we've talked about what's going on this year. And really the marketing budgets are driven by the banks individually. So, we believe each division has the best feel for how to allocate resources in their market. And I think each of them -- and interestingly, they all take a very different approach on how to lever marketing budget. But we're growing at the -- as we said, thinking about 11% on a full year basis and that's just kind of using our standard marketing that's -- and really driven by people in the marketplace with really solid relationships. So, no, I wouldn't expect you would see any kind of material increase in the marketing budget.

Okay. All right. Well thank you. Those were my questions.

All right Tim. You're welcome.

You do have a follow-up from Matthew Clark. Your line is open.

Yes. Hi. I just want to clarify. You mentioned a larger loan you guys made in the quarter. Just -- can you remind us how large of a loan that was and what type of credit it is?

It was $32 million. It was for a student housing complex.

Okay. And can you just also maybe give us a sense for how many loans or relationships you have of that size, say, over $25 million or $30 million?

I do have that information. Over $25 million.

I guess, just trying to get a sense for if that's a larger loan for you or not, typically.

Yes, it's a larger loan for us. Loans of that size gets signed off in the local markets by the division through Barry's executive loan committee and at the GBCI board level. So, there's a lot of eyes on anything that size I can assure you.

There's 32 relationships greater than $25 million.

Okay, great. And then just the last one for me on retail commercial real estate. I'm assuming you guys have done some digging within your own portfolio. But could you help maybe quantify that exposure and maybe drill down to some of the pieces that might be at risk of the Amazon effect?

Sure. Well, there's -- the obvious are malls. I think that's kind of the ground zero of this effect. And we have very little exposure to malls here, I think $40 million total. And then here in the West and in our markets -- we don't have the same dynamics in the East and the West Coast where there's a lot of mega malls built. Most of our retails and strip shopping centers and -- doesn't have the same profile. Nevertheless, we're still sensitive to some of the bigger retailers having issues. But most of our portfolio is smaller operators in smaller projects. And to this point, we haven't seen extraordinary material pressure on those players. So, we're watching it, but we just -- we're watching the national trends, but just because of the unique kind of Western markets that we operate in, just have less of a -- less exposure to it.

Okay, great. Thank you.

You're welcome.

And I'm showing no further questions. I would now like to turn the call back to Mr. Randy Chesler for any further remarks.

All right. Well, we're very happy with the quarter and very happy with the momentum and the excitement. We have a lot of things going on, so we look forward to telling you all about it at the end of the third quarter. And we thank you again for dialing in today. Thank you.

Ladies and gentlemen thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone have a great day.