Good day, ladies and gentlemen, and welcome to Glacier Bancorp Third Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we’ll 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 turn the conference over to your host, Randy Chesler, President and CEO of Glacier Bancorp. Mr. Chesler, the floor is yours.

All right. Thank you, Rusty. Good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Barry Johnston, our Chief Credit Officer, Tom Dolan, our Deputy Chief Credit Administrator; and Byron Pollan, our Treasurer. Let me first thank you all for joining us today, and hope you’re all enjoying the fall. Yesterday, we released our third quarter 2019 results. This was a very strong quarter for us with strong net interest margin, excellent deposit growth, steady and improving credit performance and good quality loan growth. As we noted in the last quarter’s call, we feel we are very well-positioned to navigate through the current interest rate environment. And despite the headwinds in the market for banks, challenging interest rate curve, later innings of a long-term recovery, the Glacier team is strong, and we are continuing to build the balance sheet and the company for the long haul. Some highlights from the quarter. Earnings were $51.6 million, an increase of $2 million or 5% over the prior year third quarter, including current period acquisition-related expenses of $2.1 million and $5.4 million of stock compensation expense related to the accelerated vesting of options from the Heritage Bancorp acquisition. Without the acquisition expenses, net income would have been $56.2 million, an increase from the prior year third quarter of $6.9 million or 14%. Diluted earnings per share for the quarter were $0.57, a decrease of 2% over the prior year third quarter, but this included the acquisition-related expenses. Organic loan balances increased $84 million or 4% annualized. On a full year basis, loan balances grew $393 million or 6%. We also had organic core deposit growth of $302 million…

Sure, sir. [Operator Instructions] We have our first question on the line. Jeff Rulis from D.A. Davidson, your line is open.

Thanks. Good morning.

Good morning, Jeff.

Randy, your comments on, I guess, elevated paydowns and perhaps some more aggressive competition kind of moderating that growth outlook a little bit. We’ve got your kind of guide for ‘20 -- or excuse me, through the end of the year. But, how does that bleed into ‘20, and do you see the paydowns as somewhat temporary? And, I guess, the balance of ‘20, how would you look at growth?

At this point, it looks like a pretty kind of equal segue into ‘20, at these growth rates. We don’t see -- don’t expect a huge change in kind of those factors. But, 5% to 6% kind of feels like what ‘20 is going to look like, at this point.

Do you get the sense that just when you’re talking to business customers, any softening or any behavioral changes, given macro events that they’re sort of pulling in the horns at all, anything on that front?

No. we talk to our customers a lot across our western states. I think, a lot of them remain very confident. I did make a note in my comments just as we see some of our longtime customers experienced in a lot of our markets sell properties, I think, they’re a little more cautious on making reinvestments. And that’s part of what’s taken our growth rate moderating and slightly. I don’t think they have any concerns other than they just want to continue to make good investments. And it’s little harder to find, as the economy has continued to do well over a long period of time.

And I don’t know if Barry John or someone else could tackle it. Do you guys have a CECL update to provide, and just thoughts on that and provisioning levels potentially, going forward?

You want Barry, you got him.

Okay. Good morning, Jeff.

Good morning.

We have been running parallel runs since March. We went through about six different runs that we’ve compared the numbers with, where we’re at now, where we’re going. Based on what we’re seeing, given the fact that there is -- it’s still a moving target, the model isn’t totally structured yet to the way we want it. Also, we have an acquisition coming up with the State Bank of Arizona that will impact the numbers. And of course, there is always the accounting adjustments that impact the numbers. But, overall, we feel that with CECL implementation, there will be an increase in the reserve from where we project our reserve to be at year end. How big that is? It’s still a soft number. So, we’re just kind of keeping that in our hip pocket until we get closer to year-end when we run the last incurred loss model.

I see, okay. Thanks. And maybe one last one. Just the mortgage banking kind of gain on sale, pretty robust, obviously, we’ll expect some seasonality. But, any thoughts on how that’s going quarter-to-date and maybe your thoughts on the out year as well?

Yes. No. We’re very happy, pretty -- very, very strong record quarter for us in terms of volume, continues to look strong coming into the fourth quarter. So, probably not quite as strong as our third quarter, but pretty good strength across the board. So, we see -- we should see some good strength continue there.

Sir, we have our next question on the line from Matthew Clark from Piper Jaffray. Your line is open.

Good morning, Matthew.

Good morning. Maybe first one just on the securities that were sold this quarter. Can you give us a sense for the kind of the weighted average yield on that portion that was sold? Just trying to get a sense for what rolled off relative to what’s still on the books.

Yes. Matt, it’s Ron. So, the weighted average yield was basically 2.94%. We sold just some of the longer dated munis, but very few. The predominant portion of what we sold was the lower yielding agency securities, including some of the agencies that we had from the Heritage acquisition. So, in terms of reinvesting that, we’re just about halfway done with that. And overall, the metrics of the portfolio really haven’t changed much. The yield came down maybe 3 basis points, when you look at it Q3 over Q2. But, in terms of duration, weighted average life, it’s pretty consistent with what we had at the end of the second quarter. I would also take note that we’ve built our cash position. So, we still got that to hopefully reinvest or even pay down some higher cost deposits we have.

Okay. And then, just on deposit costs, have you stabilized pricing at this point, or do you feel like there’s still some upward pressure in terms of exception pricing in deposit rates?

Yes. I would probably say, feel pretty stabilized. We’ve seen a lot less request for interest rate exceptions. So, I think the market has settled down quite a bit. There is still always -- the one-off kind of circumstance. But generally, Matthew, I’d say, it’s stabilized quite a bit.

Okay. And then, just on charge-offs and credit in general, the $1.9 million loss on the short sale. Is there more cleanup work to be done here where we might see some lumpy charge-offs or is that process largely complete at this point?

Yes. We don’t see -- we don’t have a pipeline of credits to work. This one had been in the portfolio for quite a while, had been troubled in the past. The point I was -- I made in my comments were, we just feel now is the time to get a little more proactive with some of these weaker credits and deal with them, and kind of continue to kind of work that through for a number years. We just felt it was a good time to exit it. And, I think on a one-off basis, we may see more of those pop up, but we don’t -- right now, we don’t see a lot of that. But again, our bias now with a still relatively strong economy is to be proactive with weaker credits. We don’t see trends in the portfolio of weakness. But, weaker operators are probably the biggest issue right now across the board. So, if we see folks that we think can’t carry to us in the distance, we’ll be a little bit more proactive.

Okay. And then, just last one, the operating efficiency ratio of 54.4%, as you kind of work through the budgeting process for next year, are you looking to manage within that range still in the 54% to 55% on an operating basis?

Yes.

Okay. Thank you.

You’re welcome .Rusty?

Yes, sir. We have our next question from Gordon McGuire from Stephens. Your line is open.

So I just wanted to follow up the efficiency question with just how to think about the next quarter expense levels. If I back out what I would have assumed for the acquisitions on the compensation line, it looks like the core compensation was up about $3 million, which I know you attributed to some new hires, but it just seems a little bit elevated. I’m wondering whether there were some more unusual items, or whether this is a decent run rate to look at, before cost saves come in?

Yes. No, there were no other unusual items in there. And I think you’re seeing just the acquisition increases that we brought on with Layton and then with Heritage Bank, pretty close together. So, should be a good -- what you have seen now, it should be a pretty good run rate then to -- for the future.

And just to clarify, the FDIC Small Bank Assessments credits, those are more one-time. So, I guess, the regulatory expense should move back closer to $2 million a quarter, once the remaining credits are applied?

Yes. We don’t know when they are going to give us the credits. It’s probably going to be over the next couple of quarters. But really, it’s up to the FDIC and their fund levels. But, once that’s completed, then that’s the end of it.

Then, last one from me, on the loan yields. On a core basis, they’ve been up 4 basis points from the first quarter. But, it’s just hard for me to see what the underlying impact from the rate environment are, just given the acquisitions, which I think it came over at higher yields. Is there any way you tease that out and help us think about repricing trends over the next few quarters on a kind of a legacy basis?

Let’s see. So, if you’re looking at the loan yields, they have done pretty well. And we did -- we are getting some lift out of the acquisitions that we brought on, both with a little bit higher loan yields. So, that’s a positive. On the repricing, I don’t know, Ron, do you want to comment on that? I think, the question about the impact of the repricing.

Yes. We have quite a lot of floor protection. We look at this in the third quarter and in the fourth quarter. So, we’ve got that holding up a lot of what could have repriced. But the new production yields are definitely coming in lower. We’re not going to defy gravity. But, keep in mind, when you look at the margin, you can see that the overall loans went up to 5.23% from 5.20%. So, in there, you will see the discount accretion plus the 5 basis points on the non-accrual interest recoveries.

So, yes, I think, on the floors, the -- just keep in mind, three quarters of the book has a floor is either fixed or has floor protection. And when we look at the fourth quarter, about 90% of the portfolio is protected in some -- one way or the other.

Got it. All right. Thank you. That’s all I had.

You bet. Rusty, do we have any other questions?

Yes, sir. We have our next question from Michael Young from SunTrust. Your line is open.

I wanted to follow up first on the loan yields question that was just asked, just on new production. Where the new production yields coming on relative to the back book, just given the 150 basis-point drop in five-year rate since last year?

Yes. So, we’ve said in the prior quarter call that we thought the loan production yields would come in just north of 5.15%. Actually, it’s pretty well. They came in at just between 5.05%, 5.10%, right in that range. So, that held up as well. Again, we think that’s a tribute to our floors. And we’ll still see some of that downward pressure. So, in terms of the back book, there’s very little lift and the vintages going back two or three years ago, just given where the five-year Federal Home Loan Bank rates are, which we tend to price off the majority of our portfolio.

Okay. So, essentially, you are just getting wider spreads on new production?

Yes, where we can. Yes.

Okay. And then, also wanted to just follow up on the comments of kind of the slower loan growth with higher payoffs, but it still seems like deposit growth remains very strong. So, how are you kind of thinking about that strategically from a mix perspective on the balance sheet? Is that incremental deposit funding going to go into the securities book, or how should we think about that?

I think, we’d like to see incoming deposits fund loan growth, and I think we’re seeing that now. So, we’re happy to have a pretty good balance. But to the extent now that we have most of the high cost debt terminated and off the balance sheet, yes, any kind of excess will go towards reinvestment in the portfolio.

Okay. So, we could see some margin compression a little bit from mix shift, but it would still be NII dollars positive because the balance sheet may grow a little faster than loan growth, potentially?

Exactly, yes.

Okay. And then, maybe just a last one kind of cleanup question on -- or an update on the State Bank acquisition, just any updates on timing around closing or system conversion?

Yes. Closing, we have to go through regulatory approval, and that’s under way. And I think, late this year or kind of early next year is probably the right timing. If that timing works out, we would look. We have a conversion spot open kind of towards the later end of the first quarter. And we generally like to do those acquisitions where we have two banks in the same markets sooner rather than later, because -- when we announce them, we have a lot of customers from both banks going to the new bank and trying to do transactions. So, the sooner -- we generally like to do those sooner, rather than later.

Okay. And one last cleanup question for Ron just on the tax rate. With the securities restructuring, I don’t think it’d be a meaningful adjustment. But, any change to the tax rate that we should expect?

I think, we’re going to hold at 19%. I’ve been saying that it would be 20%. It started to move up, but 19% is better. Part of that is we’ve been able to do some more tax credits and that’s had a pretty good benefit.

We have our next question on the line from Andrew Liesch from Sandler O’Neill. Your line is open.

You’ve answered nearly all my questions, just one quick follow-up though. Just curious if you have the dollar amounts of the loan production and the dollar amounts of the paydowns?

We can give you kind of a high level number here. So, production was somewhere between $900 million and $1 billion. Payoffs kind of between -- right around $900 million, kind of in that ballpark.

Got you. Thank you. Yes. Like I said, you’ve covered everything else. Thanks so much.

You bet.

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

Just wondering if you could provide us with an update, given some of the fluctuations in the securities portfolio as to where you are thinking about a target range of securities to assets. Ron, I know you mentioned you’re going to be purchasing some and maybe deploying some cash, but just wanted to know where you’re thinking about that ratio going forward?

I don’t want to go below the 20%. I could see it going up 21%, no more, just -- I think that’s the best number I can give you right now, Jackie. I’m truly hoping that excess cash goes into loans, but you’ve heard the comments.

Okay. So, pretty steady from here?

Yes.

And then, I just want to make sure that I understand all the NIM commentary and how those different actions play in with each other. So, essentially, the actions that you took in September will have a positive flow-through next quarter, because you’ll get the full quarter’s effect, and those will in essence offset some of the other pressures from the adverse rate environment to keep the margin fairly flattish. Is that the message?

Exactly right.

Okay. Thank you. And then, just one broader one and probably for you, Randy. So, you’ve had an excellent year with M&A here just in terms of announcing and closing deals in fairly rapid succession. If you get this most recent one closed, you’ll have one closing in 2Q, 3Q and 4Q. How are you feeling about future acquisitions? Is everything -- do you anticipate if that conversion takes place in 1Q to be fully integrated and ready to jump into the next one, just your updated thoughts on everything.

Yes. No, with this -- so, this was a record year in terms of announced transactions for us with the three transactions, First National Bank and Layton Heritage and now State Bank, close to $2 billion in assets. And the team, I think, has done an incredible job of working on those and closing them and then doing the integration. I think, we continue to have the doors open. We continue to talk to folks. We feel, if there is the right opportunity that that’s something we could act on next year. But, we’re going to continue our disciplined approach to the market and just look for the best, really good banks, good markets, good people. So, we -- that may mean another one is on the table, it may mean that we just not are seeing what we like to see. It’s just difficult to tell at this point in terms of the quality of the deal flow. But, we are -- the team is -- muscle memory on acquisitions is sharp. And so, I think we’ll get through the ones we have. And if something very compelling appears, we’re going to take a hard look at it.

Okay. And does the implementation of CECL have any effect on how you think about deal announcement timing and closing?

No. We’ve modeled that out, Jackie. We’ve taken a look at how these would look with CECL and without. And other than the optics of a messy quarter when you make an announcement, it’s not going to -- it doesn’t change our longer term strategy and how we feel about acquisitions.

Our next question comes from the line of Tim Coffey from Janney. Your line is open.

Randy, as we kind of look at your interest-bearing deposits, do you have the opportunity to reprice those in the next quarter? Is it something that the market is providing you an opportunity to do, from a competitive standpoint?

The core deposits, I think, are pretty stable. I think, you saw us -- we didn’t move a lot when rates went up, didn’t move a lot when run rates came back down. And that’s kind of our contract with our customers. We’re a steady stable. And I don’t see really much change there.

Okay. And regards to the loan-to-deposit ratio, is there a level that you want to keep it at? Because that looks like it’s going to be under pressure a little bit here, at least in this next quarter. But you go into 2020 and 2021, is there a kind of a bottom level that you would like to kind of be able to stay at?

Well, loan-to-deposit actually improved this quarter with the addition of Heritage. So, real happy to see that. It’s under 90% and don’t see a big change in that going forward. We like kind of the range it’s in right now. We’d go higher if we needed to. But, probably like to keep it in this, the range it’s in right now.

[Operator Instructions] Our next question comes from the line of Matthew Clark from Piper Jaffray. Your line is open.

Hey. Could you just give us the credit mark on the loan portfolio, so we could just -- so we could gross up the reserve-to-loan ratio? I think, it was $25.9 million last quarter.

This is Angela. The credit mark for this quarter was $2.9 million.

On the -- with all the acquisitions you’ve done, it’s -- recall it being around $26 million last quarter?

Yes. Oh! We want the total -- the total discount was $23.6 million. That’s what we have left to amortize. During the quarter, with the acquisition of Heritage, the credit mark was $2.9 million, but that portfolio had such great rates that the net acquired loan discount was minimal. It was only about 8,000.

Okay. Yes. I was looking for the 23.6. Thank you.

Okay.

[Operator Instructions] We don’t have any more questions. I would like to turn the call over back to Randy Chesler, President and CEO of Glacier Bancorp.

All right. Rusty, thank you. And thank you everybody on the call for dialing in today. I really appreciate you taking the time. And we hope you all have a wonderful weekend. Thank you for joining us.

Ladies and gentlemen, this concludes today’s conference. Thank you for joining. Have a wonderful day. You may all disconnect.