Glacier Bancorp, Inc. (GBCI) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Third Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn this conference over to President and CEO, Randy Chesler. You may begin.

All right. Thank you, LeAnn, and good morning and thank you for taking your time out of your day today to join us. Here with me in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; Angela Dose, our Principal Accounting Officer; Don McCarthy, our Controller; and Byron Pollan, our Treasurer. So yesterday, we released our results and we're very pleased to report another solid performance, continued momentum, which was once again driven by quality growth of new loans, healthy margin and stable portfolio trends. For the quarter, our earnings were $36.5 million. That's an increase of $5.5 million or 18% over the third quarter a year ago and an increase of $2.8 million or 8% versus the second quarter of 2017. Diluted earnings per share were $0.47, an increase of $0.07 or 18% from the prior third year quarter and an increase of $0.04 or 9% from the prior quarter. Return on assets was 1.46%, up from 1.34% in the third quarter of 2016 and 1.39% last quarter. Return on equity was up as well coming in at 11.87% for the quarter versus 10.8% a year ago and 11.37% last quarter. For the first 9 months of the year, earnings were $101.4 million, an increase of $11.3 million or 13% over the prior year same period. Return on equity for the first 9 months of the current year was 11.49% compared to 10.77% for the same period last year. We also declared our 130th consecutive regular dividend of $0.21 per share, an increase of $0.01 per share or 5% over the third quarter a year ago and the prior quarter. Also in late September, the board approved the appointment of George R. Sutton as the Director of the company. George is an experienced Financial Service Attorney, a past board member of Synchrony Bank and a Former Commissioner of the Utah Department of Financial Institutions. I've known George and worked with him under his projects for a number of years, and he will make a terrific contribution to the company. Loan growth for the quarter, without including the Foothills acquisition, was once again very strong with an increase of $164 million or 10% annualized. Commercial real estate loans grew the most, increasing $110 million or 3%. The loan portfolio organically increased $621 million or 11% since the third quarter a year ago, with $354 million and $244 million of the increase coming from commercial real estate and other commercial loans, respectively. Loan production for the quarter was very good. We made $650 million in new loans and had $485 million in liquidation during the quarter. Pricing on new loans is reflecting higher interest rates, exceeding the yield on the legacy portfolio. Credit quality remained stable during the quarter. Early-stage delinquency was $29.1 million or 0.45% of loans, down $2 million compared to last quarter when we ended at 0.49% of loans and down versus the quarter a year ago when we ended at 0.49% of loans as well. Nonperforming assets ended the quarter at $65.1 million, a decrease of $3.8 million or 6% from the prior quarter and a decrease of $13.2 million or 17% from a year ago. NPAs as a percentage of assets were 0.67% at the end of the quarter, down 17 basis points from the quarter a year ago. Now we're getting close to that long time goal we've talked about of driving NPAs below $65 million, but these assets take quite a while to resolve. However, we remain focused on trying to achieve this goal. Net charge-offs continue to be somewhat lumpy with $3.6 million in the third quarter compared to $2.4 million in the prior quarter. Most of this increase for the quarter was driven by a repositioning of one troubled loan. We still 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 loans outstanding was 1.99% at the end of the quarter, down from 2.05% at the end of the prior quarter and 2.28% at the end of 2016. As I mentioned, Barry Johnston is here with us this morning, and he can provide some additional color in the Q&A portion of the call on credit quality and credit trends. Total investment securities of $2.542 billion decreased $260 million or 9% during the current quarter and $430 million or 14% from the third quarter a year ago. Investments as a percentage of total assets stood at 26% versus 33% at year-end. And this is just a continuation of our strategy unfolding over many of the past quarters to reinvest investment cash flows into funding new loans. Core deposits increased $74.5 million or 1% from the prior quarter and organically increased $315 million or 5% from the third quarter a year ago. We're pleased to see this increase over prior year, led by an increase in noninterest-bearing deposits of $159.9 million or 8%. Wholesale deposits went down $105 million or 36% over the prior quarter, and the reduction here was part of our actions to stay below $10 billion in assets. Now we would have grown total deposits $165 million or 2% from the prior quarter if we didn't execute on these Durbin actions. We continue to actively work towards staying below the $10 billion threshold at year-end in order to delay until 2019 the impact on our earnings from the Durbin Amendment. Now these strategies we've developed to achieve this goal are working well, and we're very happy with the progress we've made. We ended the third quarter with total assets of $9.8 billion versus $9.9 billion in the previous quarter and are still confident we'll end the year below $10 billion. Ron and Byron are also here with me, and they can provide more color on our balance sheet strategy to stay below $10 billion when we move into the Q&A section at the end of the call. Interest income of $96.5 million was up $2.4 million or 3% when compared to the prior quarter, and this was mainly driven by an increase from commercial loan interest, which increased $3.7 million or 7%. Compared to the third quarter a year ago, interest income increased $10.5 million or 12%. Cost of funding the business declined slightly with the cost of 35 basis points for the quarter versus 37 basis points a year ago. The increased balance of noninterest deposits and a reduction in borrowings helped to reduce our funding cost. Interest expense of $7.7 million decreased $122,000 from the prior quarter or 2%. Compared to a year ago, funding cost increased $344,000 or 5%, but this is driven by higher deposit balances commensurate with our growth. Our net interest margin was stable in the third quarter coming in at 4.11% on a tax-equivalent basis compared to 4.12% in the prior quarter and 4.02% a year ago. The 1-basis-point margin decrease in the current quarter was driven by a reduction in the earning asset yield, which was partially offset by a reduction in the cost of funds. Noninterest income for the quarter totaled $31.2 million, up $3.5 million or 13% from the prior quarter. Gain on sale of loans for the quarter increased $1.6 million or 21% from the prior quarter due to mortgage business seasonality. Service charges and other fees decreased by $188,000 or 1% from the prior quarter, primarily due to the somewhat early wind down of the tourist season in many of our markets and a bit of issuer incentive that appeared in the prior quarter less so in this quarter. Compared to the quarter a year ago, gain on sale of loans decreased $451,000 or 5%, primarily driven by slowing residential mortgage refinance activity. Other income of $3.4 million increased $1.4 million or 68% over the prior quarter and increased $1.7 million or 92% over the prior year third quarter, primarily due to the increase in gain on sale of other real estate owned. Gains on the sale of OREO during the third quarter was $1.5 million versus $369,000 in the prior quarter and $134,000 in the prior year third quarter. Noninterest expense for the quarter totaled $68.55 million, increasing $3.2 million or 5% from the prior quarter and was up $3.4 million or 5% from the third quarter last year. If you take out costs related to CCP, our large back-office technology project in 2016, cost of $1.4 million in the third quarter of '16, expenses increased $4.8 million or 7% compared to the prior year third quarter. These increases were driven by new employees from our Foothills acquisition, increased performance-based accruals due to our very strong performance this year and core increases in comp and benefits. The efficiency ratio for the quarter was 53.44%, a 55-basis-point increase from the prior quarter of 52.89%. But for the first 9 months of the year, the efficiency ratio was 53.92%, down 223 basis points from the prior year first 9 months. We're still confident of achieving our goal of 54% efficiency on a full year basis. And as you remember, our original goal at the beginning of the year was 55%, but favorable trends and expenses allowed us to adjust our target to a more favorable 54%. Now before I turn the call back over to the operator to take any of your questions, I would once again like to thank our 14 bank divisions, our senior staff and all the employees for just another very strong performance. So with that, operator, LeAnn, I'll hand the call back over to you, and we'd be happy to take any questions at this time.

[Operator Instructions]. Your first question is from Jeff Rulis with D. A. Davidson.

This is Matt on for Jeff. I just had a couple of questions. Could you give us an update on the time of the combined close? I believe in the past, you stated it would be sometime in the first quarter. But could you give more color on what time that would hit in the quarter?

Yes. And we're very happy with the progress there. We've received all the approvals, but for the Durbin delay, we'd be ready to close. At this point, we are going to close Columbine and our Collegiate Peaks Bank at the end of January in 2018. So we feel like we've got it all lined up and ready to go.

Also, when would the conversion of Columbine take place?

Well that, probably later in 2018. And so that's a little far out, so we have to coordinate that with our back-end provider to get the right date. But we're probably looking at mid to late 2018 to schedule a date and convert that.

And just moving on to the Foothills acquisition, when is the conversion for that going to take place?

Well, the conversion, good question because it just happened last weekend. So we converted the bank over to our core platform, and I think that we've completed that. And so we're pleased to have that one checked off the list.

Your next question is from Matthew Clark with Piper Jaffray.

Curious how much purchase accounting accretion contributed to the margin in terms of dollars this quarter.

So this quarter was seven basis points. Prior quarter was nine.

Okay, got it. And then thinking about the remix of earning assets, that ongoing trend of shifting the mix more toward loans, you got securities down to 26% of assets. Curious where you think that might settle out for the next several quarters and stabilize?

Yes, Matt, this is Ron. Just based upon projections and taking into account that it would come in just say 23%, as we said in the second quarter, somewhere between 20% and 25%. I don't think it will get close to 20%, but 23% would be a good number.

Great. And on the core margin outlook from here given that remix, I think putting new loans on, I think, around the portfolio, I wonder what your thoughts are on the core margin outlook from here whether we could still gravitate a little higher as deposit betas remain relatively muted.

Yes, I would be comfortable saying it will be just around 4.05. And I'm not trying to give you the order of precision, but that would be a good number to put into the models.

Okay, got it. Great. And then on the expense run rate this quarter, a little bit higher than what you've seen over the last year or so. Anything unusual in that run rate? Or you think that's a good one to build from?

Well, like I mentioned, there's a couple of things in there. Depending on what kind of time frame you're comparing it to, you get Foothills in there so that was an increase. And our accruals are up on a performance base kind of compensation, and that's a good thing because we're having a really good year. So I think if we continue to do some acquisitions and continue to perform a little bit better than our expectations, that's probably a decent -- it's a pretty good proxy for the future.

Okay. And the weighted average rate on new production this quarter?

We're coming in somewhere, new production, around 4.80 and feel like that's holding pretty well.

Okay. And what was the production this quarter?

In terms of?

Loan production dollars.

The amount?

Yes.

Dollars?

Yes, I think it was $709 million last quarter.

$650 million. So Barry can talk to that in a bit if you'd like. But I mean, just seeing really solid, continued growth, good quality coming in. So we're very pleased to that.

Okay. And then on the tax rate, a little bit lower this quarter. I wonder what your thoughts are there going forward. Is 25% a better number? Or is it still 26%?

All things taxes, I hand over to Ron Copher. So I'm going to let him answer that one.

So the rate I said last call would be 26%, and we had a New Market Tax Credit project closed earlier than expected, all good news. So I would say for the fourth quarter, not to split the number, but 25.5%, that's where we'd come in. It should be below 26%. I'm pretty confident, Matt.

Okay. And you feel good about that rate in next year as well?

Let me get to the budget. That would be a good question on the January call.

Yes, there's a lot of moving parts on tax as you know.

Your next question is from Jackie Bohlen with KBW.

Randy, you had mentioned that there was an early end to the tourist season. What was the driver of that?

Well, we had a lot of fire up here that created quite a bit of smoke across the West. And so the people come out for the scenic beauty, and we had a lot of fire, smoke certainly in Montana, most of the markets and that drifted all the way down into Colorado. And so we did see in August some falloff in bookings and reservations in a lot of the tourist destinations because people change their plans when they realized to come out to do some flyfishing or float down a river. There was a fair amount of smoke that really clouded a lot of the sceneries. So we had a lot of momentum. I think what really helped us is we had a really strong lead up into that through July. And in August, I think we ended the season a little early because of the fires.

Okay. And is there any understanding that obviously it's not summer anymore, but is there any carryover into the fourth quarter from that impact?

I don't think so. Things are back to normal now, and we didn't really see much long-term impact. I think it was much shorter term kind of specific to that one event.

Okay, that's helpful. And you mentioned the quarter's production and you had good growth once again. How are you thinking about growth as you head into 2018 in terms of loans and both deposits as well when you're not concerned about managing below the $10 billion mark?

Yes. So one of the things we've been really careful about doing, I think Don very happy with it, is that we didn't want to slow the business down and have people bring in less business and bring in less deposits. So we're managing the $10 billion, if you will, kind of behind the curtain on the balance sheet side more to the deposits growth. I think we haven't tried to throttle that back specifically because of Durbin. So I think we're very happy with the trend that we see now. We're optimistic. We feel good about next year. We're not getting any signals that that's going to change materially. And I think what we're seeing in our pipeline looks pretty solid. I'll ask Barry to give you some of his thoughts, but I think in general, Jackie, we like where we are. We like the pace of growth. We could certainly do more. We really wanted to step on the accelerator, but in managing the credit as well as keeping some good growth in place, we're happy with what we see. Barry, did you have anything you wanted to add?

Yes, I think two things. With the expansion of our footprint, we're seeing some of the seasonality of our quarter start to diminish. And we're seeing some increased production from those acquisitions that did not have the legal lending limits to pursue some larger transactions that put a little lumpiness into the growth rate. The second thing is, given our existing growth rate, we've been very cautious in looking at new relationships, especially in regard to location and pricing. So we've just taken the stance that where we're given where we're at, we just don't have to reach either in pricing or credit quality. So that gives us a really good comfort level of where we're at and where we're going.

And Jackie, in your deposit question, I think that, we don't see much change there. What I tried to get in my comments was the deposit growth is masked a bit because of our Durbin actions where we're moving some of those deposits off balance sheet. And so the growth there actually looks very good, so we're pleased with that as well.

Might you potentially move some of that back on the balance sheet in 2018?

I think it's possible. I mean, I can certainly have Byron, who's our Treasurer, just give you an outline of our strategies if that would help and give you some idea of what we've moved off and what the plan is.

Sure, that'd be great.

Yes, I think we would look at investment opportunities in the securities portfolio and we'd also consider loan growth and see how that is pacing as well as combining that with just the growth in our core deposits. Should we see a need to bring some of that on the balance sheet, it's available for us to do that. It's a very simple transaction to put that back on, and so I think it's something that we definitely we'll be looking at probably first half of next year.

Okay. So we could see -- obviously, the balance sheet would be flattish, down slightly through this year but then can see it maybe a little bit higher the growth rate in one half just to make up for the latter half of this year?

Yes, we've moved off about $150-ish million at this point. That's probably going to increase in the coming quarter. So there'll be a fair amount of powder sitting off-site that can be brought back on if we choose to do so.

Okay. And then just one quick follow up on an earlier comment regarding the seasonality in the loan portfolio and the expansion of the footprint. Is it a pretty meaningful change to seasonal trends? Or is it more gradual?

As what happened in the first quarter this year, it surprised us a little bit with the growth that came out of that because generally, that is a very soft quarter with the winter winding down and still not being able to generate primarily advances on the construction lines of credit, either heavy construction or residential construction. So I came to think that it's going to level out going forward, given our footprint is expanding, especially into some Southern states that does not have the seasonality that our Northern states traditionally have had.

Your next question is from Michael Young with SunTrust.

I wanted to start off with just the loan and deposit growth obviously continuing to remain very strong. Ron or Randy, just curious if you could geographically kind of divide that up a little bit for us and let us know how much of that is coming from maybe some of the newer territories versus some of the legacy footprint?

Barry and I were looking at that. It's very nicely diversified. We're seeing it both in the number of -- on the loan side, the number of properties or the type of loans we make as well as where their coming from. We don't have any one area I would point to, to say it's got an oversized share, and we like it that way. We like to see it diverse throughout the footprint. So we're seeing very well spread out among all those markets. On the deposit side, pretty much the same thing. We don't -- that falls a little harder to track because it's a lot of smaller accounts. But our main marching orders in all the divisions is they're really good at going out in getting new relationships. You see the noninterest income or the noninterest-bearing account growth. Those are business accounts they were able to bring in and bring into the bank, and that's happening every day in all of the divisions and I think at a pretty even pace.

Okay, great. And I don't want you to put too much on the spot for any sort of outlook next year. But just directionally, we should continue to think about the efficiency ratio coming down as you lever the infrastructure and add loans from here. I would assume that trend should continue even with impacts from crossing $10 billion next year and into '19.

Yes. No, I think the magnitude of the drop, I don't think you'll continue to see. I think you'll see us bounce around at these lower levels where we currently are. I don't see us going back up to the levels we were certainly a year ago or anywhere near that. But I think in this range, you're kind of seeing us as where we expect to be. And as we've talked about, we do want to do -- continue to reinvest in the business, so we're not going to drive that below 50. But certainly, kind of in the current range in the last couple of quarters, the last two quarters specifically is where you'll see us operate.

Okay, great. And maybe just the last one for me if I could. If you could just give us kind of your updated thoughts on what you're seeing in the M&A market out there and pipelines, if people are still pretty active headed into year-end. And I know you guys would be looking for something to continue to lever the balance sheet past $10 billion next year.

Yes. No, absolutely. The conversations continue. I would say compared to the first quarter, activity is down, not as robust. However, still good and I think still some good conversations. From my perspective, I think the Glacier story continues to be very interesting to many people on our footprint. And whether they're ready to do something now or later, we continue to have some -- I think, some real high-quality discussions. So velocity is down. But I think, as I mentioned in the first quarter, a fair amount we passed on a lot of that. So there was just a lot of opportunity, but they weren't really the quality that we look for. So probably not the best measure. But the longer-term trend of good banks and good markets with good people looking for some liquidity relief or generational change, that continues and I think will continue here for quite a while.

[Operator Instructions]. Your next question is from Tim Coffey with FIG Partners.

Randy, most of my questions have been answered, but I was wondering if you employed any more balance sheet management strategies during the quarter. Last quarter, you've talked about moving some deposits off balance sheet. And I was wondering if there are any new strategies you employed this quarter.

Well, that is something that Ron and Byron have spent a lot of time on. And I think Byron can just walk you through a couple of the key strategies to give you a little bit of an idea of when I say we're doing things behind the curtain to keep -- to stay below the $10 billion to maybe give you a little more color on exactly some of the specific actions that we're taking or happening. So Byron, do you want to just hit the highlights there?

Sure, yes. In the third quarter, we did prepay some FHLB advances. Those were shorter-term advances floating rate, and so there was fairly insignificant prepay penalty there. That's one thing that we did. In Randy's opening remarks, he did mention wholesale deposits went down $105 million. Those were some brokered [indiscernible] balances that we brought down. We continue to gain momentum on our strategy to move deposits off the balance sheet to sell those deposits. And so that's something that we will continue into the fourth quarter. And of course, you did see us declare and pay a special dividend within the third quarter, so that was another thing that we did to help manage cash on the balance sheet.

Your next question is from Daniel Cardenas with Raymond James.

Just most of my questions have been asked and answered. Just a quick question on the credit quality front. Trends have been steadily improving, reserve levels are high and charge-offs have been pretty manageable. Is there anything out there right now that perhaps is giving you pause for concern as you look throughout your portfolio and your geography on the credit front?

About the only thing that we have any concern at the current time is our agricultural portfolio. We have some drought in Northeastern Montana. We have some borrowers that, of course, will struggle through that. In a lot of those cases, they did have production yield insurance, which goes a long way to cover operating cost. But from that perspective, it's nothing we think that we anticipate. We're going to have some asset quality changes, primarily some increases in nonperforming. But in a lot of those cases, we do have government guarantees or we have equities in real estate that will support the operating lines.

And Dan, we spend a lot of time asking that question and looking hard at the portfolio and where we're growing. And because we're all -- just all is asking that question, but we don't really see any asset class that we think is too frothy or bubbling at this point other than the one that I think in the past we've said we have stepped away from, and that's hospitality. So we're not really increasing our position in hospitality, and there's still a fair amount of growth in that space. But from a portfolio standpoint, we've kind of hit our limit and probably should've started with that. We have our risk appetite framework that we put together, and I think it's a very well thought out series of limits around where we want our portfolio to be and what are the trigger points. And we don't see anything near causing us any concern other than we've been very disciplined when we do hit a limit, not to talk ourselves into. It's different this time and increase the limits, we stick to the limits. And so that's the case with hospitality as well as multi-family.

Conventional multi-family.

Conventional multi-family, right.

We still look at low-income housing tax credits.

We do.

Right. As given the equity positioning in those properties after the credits have been distinguished.

Yes, we view those very differently. But kind of standard multi-family, which has been a lot of press have been -- we haven't really increased our position materially there for probably over a year, so maybe even a little bit longer. So that I think we feel good about what we see. Borrowers are still stepping up, and we're still getting the credit, the covenants that we'd like to see on these loans. So we're ever vigilant, but we feel pretty good about what we see.

All right. And then I guess in terms of competition, I mean, are you seeing weakness in either underwriting standards or maybe some questionable terms out there from your competitors on the lending side?

I think we're fortunate in a lot of ways. We have good competitors across most of our markets. We're really thankful for that. And we compete, we don't get all the loans. But we rarely step back and say we can't believe somebody did that. So we may lose on a relationship or some other factors. We generally win, but sometimes we don't get them all. We're not feeling pressured that we have to materially change the way we underwrite credits because of the competitive space. The only spots where we see we kind of scratch our head are with credit unions, quite frankly. We have credit unions in some markets that we do see doing things that don't make a lot of sense, but we're not feeling any pressure from that to change the way we do business.

All right. Good to hear. And then last question and I'll step back is how should we be thinking about your provision expense and your loan loss reserve on a go-forward basis?

Yes, as you can well see, the reserve, as a percentage of allowances, continue to decline from our high of 3.67% in -- during the troubles. We're sub-2% now. We anticipate we would prod as our asset quality continues to improve. As Randy mentioned, we're nearing that $65 million level of NPAs, which includes the several acquisitions since we set that goal. So given probably excluding those acquisitions would be below that, but we're still sticking to our guns as far as that number. Traditionally, I think going forward, we'll look at that more in light of this percentage of total loans and OREO. But we anticipate just we're going to continue to probably lower the reserve, given the improvement in the economy or stabilization of certain industries within the economy and our improvement on our asset quality.

We'd like to be very conservative, but sometimes the market reality runs ahead of our conservatism. So you'll probably see a bit of a trend. And we continue to grow as well, and so you'll see that total percentage on the provision probably continue to drift downward.

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

Okay. Well, thank you, LeAnn. Appreciate everybody spending time. And again, we're very pleased with the quarter. And if you have any questions you want more detail on, we're here. We'll be happy to talk about it. So thank you again, and have a great weekend.

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.