Glacier Bancorp Inc (GBCI) 2006 Q2 法說會逐字稿

Good day. All lines are now in a listen-only mode. Today's call will be recorded.

This news release includes forward-looking statements which describes management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of the Company's style of banking and the strength of the local economies in which it operates.

Future events are difficult to predict, and the expectations described above are necessarily subject to risk and uncertainty. Uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in the Company's public filings, factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include among others the following possibilities -- local, national and international economic conditions are risks less favorable than expected or have a more direct and pronounced effect on the Company than expected adversely effect the Company's ability to continue its internal growth and it's historical rates and maintain the quality of its earning assets; changes in interest rates reduce interest margins more than expected and negatively effect funding sources; projected business increases following strategic expansion or opening or acquiring new banks and/or branches are lower than expected; costs of difficulties relating to the integration of acquisitions are greater than expected; competitive pressure among financial institutions increases significantly; legislation or regulatory requirements or changes adversely affect the business in which the Company is engaged.

And now I would like to turn the program over to Mick Blodnick, President and CEO of Glacier Bancorp.

Good morning and thanks for joining us this morning. Last night we reported results for the second quarter of 2006 and I'm happy to report that earnings for the quarter were a record $14,666,000 or $0.45 per share on a diluted earnings per share basis. That was an increase of 10% over the same quarter last year. However, excluding the impact of SFAS123-R or stock options, our earnings per share were $0.47 or an increase of 15% over the prior year quarter.

It was a solid quarter for us and we continue to see positive trends throughout the Company and each of our nine subsidiary banks. Last quarter we grew our loans by $135 million that was an annualized increase of 21%. We had a good quarter for non-interest bearing deposit growth. Those non-interest bearing deposits were up $37 million during the quarter for an annualized increase of 22%.

Credit quality continues to remain good and probably one of the other trends that continues to be a real plus for us was the continued reduction in our investment portfolio. At the end of the quarter, investments made up 22% of our asset base. That's a significant reduction over the last two years. However, there was one area where we -- after five consecutive quarters of seeing improvement, we did see some slight slippage during the quarter. Our net interest margin. The net interest margin ended the second quarter at 4.34%, that's down from 4.38% at the end of the first quarter.

Now one thing that we did and we tried to highlight this in the news release or the press release on earnings was that we did do a recalculation during the quarter as more and more of our balance sheet is tied to a 365 day calibration we made that change away from a 360 day year to a 365 day year. Some of you, if you went back to the first quarter you would note that our stated net interest margin was 4.32% at the end of the first quarter. When we did the recalculation, that increased the net interest margin to 4.38%, but again I wanted to note that at the end of the second quarter we did see a 4 basis point slippage in our margin from 4.38% to 4.34%.

Net interest income for the quarter compared to the same quarter last year was up 17%. So we had good strong growth in net interest income. And I believe that if you actually look at our net interest margin in the second quarter versus the same quarter last year, part of that increase in net interest income over last year was the result of the 22 basis point increase in margin from last year to this year.

A couple of things on a late quarter basis that I thought were worth noting in this call today is on -- from first quarter to second quarter, we saw a 4% increase in our net interest income and an even greater 16% increase in non-interest income. And with the 16% increase in non-interest income, that was followed by a 4% increase in non-interest expense. So we were pleased with that trend of being able to grow our non-interest income at a much healthier pace than the increase in non-interest income for the quarter. As a result our efficiency ratio remained in the low 50s range for the quarter and that's been a level that we've seen now for the last couple of years.

Moving away from the actual quarterly results to the six month results. For the six month period it continues to be a mirror of the second quarter earnings. For the six month period our earnings were up 10%. But again if you take out the impact of FAS123-R, the pro forma operating earnings for the first six months increased by 15% to $28.295 million. On a diluted earnings per share basis that equates to $0.86 and again, that's up 10% on an earnings per share basis over the same six month period last year. And once again, if we exclude 123-R, those earnings increase by 15% on a diluted earnings per share basis.

So the recent developments that we've highlighted some of these in the press release and others that will speak to you this morning and elaborate if there's any more questions.

But during the quarter we did announce the acquisition of First National Bank of Morgan located in Morgan, Utah. It was the first bank acquisition in the state of Utah in the last six years. We're very -- we've felt very fortunate to be able to bring First National Bank of Morgan into the Company and of course, as stated in the prior quarter, the month prior to that on April 20, we also announced the acquisition of Citizens Development Company. Now both of those acquisitions are on target to close hopefully by the end of August. And that's the expectation right now that we will get both of those closed hopefully by the end of next month.

We're excited. Boy, adding both of these it gives us approximately $500 million in additional assets and as always, our key to doing an acquisition is the type of talent that we acquire and we think that we are really acquiring some very talented bankers in both the Utah transaction and the Citizens Development Company transaction here in Montana.

We also continue to add facilities and upgrade facilities throughout our market just as previously noted in the prior press release; we did open up four new offices in the first quarter of the year. Actually, the second quarter of the year we did not have any new offices opened; however, there are two new DeNoble offices schedule to begin operations in the third quarter. As previously announced though, even last year we announced that we were probably going to be opening eight DeNoble offices in 2006. That number looks like now it will be six new offices during this year. Two of the offices have now followed into the early part of 2007 for their openings. So we expect two more DeNoble offices open this quarter and then the other two that were planned over the last year looks like they're going to fall into early 2007.

Like probably most other banks throughout the country, there still are a fair number of challenges that we're facing each and every day. Probably the biggest challenge right now is that the competition for deposits. Something that we're -- we have to and we're just going to have to continue to adapt to because I don't necessarily see in the foreseeable future much change in that level of competition for deposits. Hopefully, even though it is very competitive out there for deposit gathering, hopefully, we can still continue to maintain our net interest margin in that 4.25% to 4.5% range. That's our goal and that's what we're working hard to hopefully maintain that same level of net interest margin.

Loan growth still looks good and hopefully will again continue through the remainder of this year. Historically we have always seen the second and third quarters to be the best quarters for loan growth in our markets. There was some exception to that in 2005 but our expectations are we would move back to a more normal historical pattern in '06, which means that we're again hoping that loan growth through the third quarter remains strong but we could see some tail-off in loan production, loan originations as we move towards winter.

At this point in time we don't see any troubling issues regarding credit quality. It's an area that we continue to work very very hard. All nine of the banks, the bank Presidents, the Chief Credit Officers of those banks along with our own credit administrator are focused more -- as much now as ever before on maintaining that level of credit quality. And as I said, so far, we don't see any storm clouds on the horizon right now.

So, from a core operating and earnings environment again, it was the type of quarter that we strive to have. There was not a lot of extraordinary or non-recurring earnings in our results. It was a solid, basic, good quarter for us.

And so, I'm going to turn -- right now I'm going to turn it over to Jim Strosahl, our Chief Operating Officer and Chief Financial Officer. And Jim will go through and add a little bit more detail and clarity to some of the numbers and then we'll be -- after Jim's comments we will be opening up for any and all questions. Jim.

Thanks Mick. I don't have a lot to add to what you've done -- presented, although one comment on the change in our capitalization of the margin. On an annual basis that has no impact, it only changes the calculation based on the number of days in an individual quarter. So we think it's more accurate the way it is now presented. And it's a function of the change in our asset mix from, as Mick said, the 360 day base interest calculation to the 365.

One other comment on the funding mix that we have. Our non-interest-bearing deposits are where we are spending our efforts to try to increase that. And as of June 30, 19% of our funding is from non-interest bearing deposits. That's up 1% from a year ago of total funding. And when you add in the other lower cost deposit accounts we have; interest bearing checking and savings accounts; 36% of our funding is from those low rate liabilities. And also that number is up 1% from a year ago. So I think those are positive trends and follow the business plan that all of our banks are working on. So from [our] standpoint, although we did see a slight decline in the quarter, we feel that our asset liability mix is pretty well balanced -- in stride -- going forward to maintain that margin in the range where we are now. There are obviously challenges every day from competitive factors but we feel pretty positive about how we're positioned.

I guess that's primarily what I wanted to comment on.

Okay. Thanks Jim. And like I said, we wanted to make sure that we kept our comments somewhat to a minimum. I'm sure that many of you have already read the press release and so at this point in time let's open up the lines and start to take questions from various individuals.

[OPERATOR INSTRUCTIONS]

Hi Mick, how are you doing?

Good.

This is Brad. I just wanted to ask really two quick questions. First off, on at least the period end balances it looks like you had a slight decline in the interest-bearing deposits and utilized some shorter-term funding to fund some of the growth this quarter. And given that you're expecting the margin where it is, I'm just curious how you see that side of the balance sheet from here if the conditions in the second quarter were somewhat of a temporary dip. I know you obviously have strong non-interest bearing growth. But I'm just curious to hear any color on what you see primarily on the interest bearing deposit side.

Part of that, Brad, is we have been using broker deposits and also some internet based deposit gathering sources that we have available to us as an alternative to FHLB borrowing that have some distortion from period to period in what those interest bearing deposit numbers are. So it's really a function of we're looking for the least cost source of funding and the brokerage houses happen to be less costly than FHLB advances during the last six months. So you see some distortion from that.

The other thing is we do participate in a treasury auction program and that is not available to us at all times. But it is another source that we're using to keep our costs down. It's a lower cost -- borrowing cost at the FHLB level. So that helps on our margin control also.

And then secondly I was hoping for some additional color on the service charges that were up nicely quarter-to-quarter, if you had any additional color on why those are up as much and if that's a sustainable run-rate going forward?

Well, I'll answer that Brad. It was a very good quarter for service charges. A couple of the banks did refine their service charges in the quarter. But it really is more a function of the time of year. Historically we've added about 50% of all new checking accounts during the four months from June, July, August and September. And this year it's no different from those historical trends. We continue to do very, very well in generating, and like Jim mentioned earlier, that really is the focus on the liability side. For each of those nine banks that is truly what they focus on is gathering non-interest bearing deposits in DDA and now accounts of course, too. But are you going to see that same trend line? No, because we would normally see that the second and third quarter from the service charge routine are always better than when we get into the first and fourth quarters. We're not opening up as many accounts and we just don't see the level of activity and interchange fees and other things that we get during the busy time of the year. So that was a really nice increase for the quarter. I'm not saying that we couldn't see the same level, I'm not seeing the same type of increase, but we may see those same kind of levels in the third quarter. But then that very well could tail off some in the fourth and first quarter of next year.

Of course, one of the things that it's going to be difficult to reconcile is obviously if we are closing these two transactions in August, that's going to make it more difficult and it's going to make a little bit more noise in the third quarter than what we saw here in the second quarter as far as some of these individual line items.

Okay. Great. Last quick question, I wanted to make sure there wasn't any non-recurring items in the other expense line bucket.

There wasn't anything real material in there. We did have some data conversion costs and so on with changing our accounts at [inaudible] Bank over to our system. But it's nothing that would be really significant number. I think as Mick said, it's a pretty straight-forward quarter.

We did not mention that, but we closed on First State Bank of [Thomson] Falls last November 1. And as Jim just mentioned we did complete that conversion on April 20. So they are now, of course that bank was one that had become a part of First Security Bank in Missoula, but we did get that entire data conversion done this past quarter too. Like Jim said, that's probably about the only thing that we could see on the Other Operating Expense line.

Great. Congratulations on the loan growth in the quarter.

Hey Mick, its Jim Bradshaw.

Hi Jim.

Good morning. Hi Jim.

Hi.

Can you talk about on the loan side, maybe the geographical distribution of loan growth in the quarter? It looked like a much bigger number than I thought. And we're hearing Boise's particularly strong. But just wondered what your thoughts are there.

All of the banks -- all nine of the banks had very nice loan growth for the quarter. Mountain West Bank, especially in the Boise area, probably had the strongest growth of all of the banks. But of course they're a large bank now. On a percentage base some of the smaller banks, of course, also had pretty decent growth. But there is just no question that the Boise area especially continues to be a very, very good area for us. And that staff and the people down there in that market are doing a great job for us. I think that loan growth probably surprised us a little bit too. I mean, obviously we didn't plan for plus 20% loan growth through -- for the quarter on an annualized basis and especially now through six month in the year. It's running at that same level. But really Western Montana, Northern Idaho is still continue to be very good. Southwest Montana. Most of the markets, Wyoming, Pocatello has been very good. So some of these banks on a percentage basis really had really strong loan growth. Other ones in absolute dollars, the bigger banks in absolute dollars had much more loan growth on a percentage basis it may not have been quite as high.

Can you update us on how Morgan and Citizens did just generally in the quarter also? I've got 330 numbers and 331 numbers and just wonder how things are progressing with those folks too.

They're tracking just like we would have expected.

Good. Are you reviewing--?

No surprises there.

And are you review -- are you sort of already doing some ongoing due diligence with their new loan production and such?

We're assisting as much as we can. That's kind of a fine line.

Yeah.

Until we close this thing. We never want to get our fingers too much in that pot until the transactions are closed. But where they have asked for our assistance we have been more than happy to help them out. And they've done that. They've both done that in a number of areas. And so I think that already the working relationship as we usually find with our acquisitions is moving along really, really well. And those people are very, very excited to get these closed and to start the integration process. But we're helping them out whenever they ask. But to answer your first question, there's no doubt that the excitement level is there and we're just can't wait to get these both buttoned up come the end of this coming month.

Jim, it looks like you added about $100 million in borrowings, a little over that. Could you talk a little bit about what the duration looks like on the new stuff?

Most everything we're borrowing at this point in time is on the short end, overnight to 90 days basically. Our strategy has been to stay short and we think we're nearing the end of the increases in rates and really don't believe it's the time to extend out on our funding. So we're maintaining our strategy that we've used all along on that and staying fairly short.

And then the last thing I had is -- it looks like the gain on sale of loans has picked up nicely in Q2. Is that just seasonal, Mick? Or is there anything, any extra production flow or anything-- better pricing maybe-- that came through.

I think you're actually right, Jim. I think that's just, as I mentioned earlier, I think that's more a seasonal factor than anything else. We continue to do pretty well out there. We've got good markets. But the second and third quarter are usually the best quarters for us especially on gain on sale and that line item. It was up nicely, especially on a link quarter basis, but I would say that's more just because of the time frame and the second quarter and the seasonality versus anything that we necessarily tweaked or did differently in that line of business.

Thanks a lot. Appreciate it.

Mick and Jim, this is Brad.

Hi Brad.

Hi Brad

Hey, how are you guys?

Good.

Just quickly on the margin, you guys have historically and continued to stay pretty short on the liability side. What are your models showing, if you get into the situation sooner rather than later that the sets cutting the short end, do you show a scenario where your margin could actually perform even better since the expansion you've really had to this point has been a lot driven by the change in mix?

We really -- our model is showing that in the short term, there's -- depending on which way rates go, it does move a little bit, but over a one-year or two-year horizon we don't see that the margin's going to change more than 2% I think is what the model shows. Either way, whether rates go up or rates go down.

That's not the margin. That's net interest income.

Net interest income, I'm sorry. Net interest income. And that assumes a flat, no growth balance sheet. So obviously the changes and the growth continue to help support our margin as we have experienced here in the past quarters.

Okay. And then secondly, can you refresh my memory on the Citizens deal? I think you're going to be issuing in the neighborhood of 2 million shares. Will half those shares going to become issued into the market and the other half to Citizens? Can you update me on the time frame there? One half's going to come earlier in August and the other half later? Is that still the scenario you foresee?

Yes. As we've previously disclosed we get a 2 million share shelf registration of which the first part of August we will be selling a million shares, or issuing a million shares to create cash in the Company. And the other million shares will come at closing. And right now we're just working hard to hopefully close the CD seal at or before month-end -- August month-end. It could come a little bit sooner than that and it could be a month-end August 31 closing. Same holds true with Morgan. Of course on the Morgan it's going to be shares issued to their shareholders. So both of those are just around the corner and it will be approximately 2 million shares all total, Brad, for Citizens Development Company.

Okay. One final question. You guys continue to have great asset quality but sort of against the trend of other banks I'm looking at you continue to keep the reserve at a pretty high level. I know you mentioned in past calls that you thought the level of provisioning might come down a little bit. What's your sense there? What are you seeing in that regard to kind of get a sense of that going forward?

With our model it's maybe just a little bit more difficult at the consolidated level or at the holding company to get our arms around exactly where that level's going to go. Because you've got to remember that it's the combination of nine banks and nine individual banks that are -- Like I've said many times, you've got Presidents, you've got Chief Credit Officers who are making independent decisions as to what is the right level of reserves for their particular bank in their particular situation. And what you end up seeing, Brad, is the roll up of those numbers. And yes, we've continued to see that number stay right at or north of 1.5%.

Asset quality has been very, very good. I mean, there's no other way to describe it. Net charge off for the first six months were, they were zero. But at the same time there's been a tremendous amount of loan growth like we've talked about. The loans, I think loans in this day and age, they are becoming larger. They are becoming more complex. And we're just continuing to try to do the right thing to make sure that we're trying to cover and take into consideration those risks. And so it kind of ends up at the end of each quarter where it is. And I can't really say that we're going to cut back or not. Again it's the culmination of all nine of those banks and at the end of next month we're going to have, at least for a short period of time, we're going to have a number of additional banks out there. And those people are making those independent decisions out there based on their market, based on their condition, based on their economies. And so yeah, it continues to probably be higher than what you're seeing at other places but that's just kind of the way it falls together.

I would say only if our loan growth does slow down our provisional expense would go a lot lower.

Okay, great. Jim, just one final thing. On the tax rate, any changes there? I notice that's kind of been moving up. Is the second quarter number a pretty clean number going forward?

Yes, it is. And I think the reason it's moving up a little bit is that we have our ratio of tax free assets to the total asset level is declining so it does have some increasing affect on the tax rate.

It's somewhere around 37%.

Yeah, I think we're about 34% at the end of the quarter.

Okay. All right, great. Thank you.

Other questions out there?

Hi. This is Peter Fraelich.

Hi Peter.

Hi, how you guys doing?

Good.

Good. You mentioned that the securities portfolio was down to 22% of total assets, a little bit from 24% the prior quarter, and I'm coming up with Citizens at about roughly 17-18% so that might push you guys down a little bit from where you are now. I'm just wondering how much further you anticipate running down the securities portfolio.

Well, we've said before that probably somewhere in that 15-20% range is probably about where we see it possibly bottoming out. Again, Peter, a lot of that is going to depend upon how solid loan growth continues and obviously the slope of the yield curve. There's a lot of things that come into play there. But at this particular time in our discussions we haven't seen -- I know there's some banks out there that run it a lot -- a lot more loans but I guess for us probably that 15-16-20%. I don't know. What do you think, Jim? I think that's what we've talked about in the past is not going much below that.

Yes. I think we're always -- the slope of the curve has a lot to do with what we decide to do with that area. If there's an opportunity to generate some revenue in the investment portfolio, I think we would be definitely taking a look at that.

The one thing I would like to mention, Peter, is -- because I know that two or three years ago there was a lot of concern among the analysts about -- we had a -- at that point in time the investment portfolio was 40% of assets and that was a function of some of the leverage that we put on back in 2002 and 2003 with a very steep yield curve. And I think there was a lot of concern about that strategy, number one, and number two, just what type of extension -- because two thirds of our entire investment portfolio of that time was in the form of CMOs.

But for many, many years now we've felt pretty comfortable in the structures and the types of CMOs that we've purchased. We've never gone out there and stretched for yield. We've always found that we spent a tremendous amount of time in due diligence finding tight structures that don't have much in the way of extension risks. The best way of looking at that is after-the-fact. Now, reflecting back on the last two years and did that portfolio do exactly what we had hoped it would do? And I can say without reservation that it absolutely did. And even though rates have gone up -- And you could make a case that obviously long term rates have not gone up dramatically although there has been some little blips here and there -- but the cash flow off of that investment portfolio continues to be very consistent and just what we had expected all along.

So, like Jim says, if the opportunity arises again we may look at that strategy sometime in the future. But right now with the loan growth that we're seeing we still continue to deploy all of that cash flow into loan growth.

Sure. Good. I couple knit picky questions here. The stock option compensation cost crept up a little bit here to $651 in the second quarter from $523 in 1Q. How do you anticipate that behaving for the rest of the year going forward?

I think we may see a slight decline in the next quarter. Part of what drives that number is the vesting period of the stock options. And the options that we issued for all of our directors, including the bank directors, has a six month vesting period. So the expense associated with those options gets booked over a six month period. So second quarter was higher because of the options that we granted in late January of 2006.

Okay.

So it's probably not going to change a whole lot in the third quarter. It'll be down 90,000 - 100,000, I would guess. I don't know right off the top of my head exactly what the number is, but I think that's it.

Okay. And then finally I noticed that the rate paid on the savings accounts, it's not a huge amount of your deposits, about 8 or 9%, but it was down 9 basis points from 0.25 to 0.86%. A little unusual given the rising short-term rate environment. What was behind that decline in the rate on the savings accounts?

On the savings accounts, Peter, basically historically for us that's really been a [inaudible] more I believe of a convenience account for a lot of people. Just a place where they just park money. We historically have not found that that has been an interest sensitive account type for us. And we haven't really made a lot of changes at all in that. My guess would be there may be a few special accounts if you pull some money out it could cause the reduction there. But overall, as Jim mentioned earlier, we truly are viewing more and more of the Now accounts, DDA accounts and savings accounts as very low cost transaction type accounts. And accounts that are not interest rate sensitive as are your, of course, CDs, MMDAs and most types of deposits. Even in an upper rate environment we just haven't been making any changes at all to those interest paying transaction accounts.

Our average balance did go down a little bit in there. And I think that is [inaudible]. And a couple of the banks have I think had a little bit higher rate account out there so that may have -- so those people may have been more rate sensitive and moved out the remaining balances are at the lower rate.

Okay great. Thanks, guys. Good quarter.

Thank you. Any other questions out there at all?

Hey Mick, it's Jim Bradshaw again. I forgot one. What's the plan for technology integration at Morgan and Citizens and can you give me an idea of sort of what the merger charges will be and about what the timing would look like, Q3 or Q4, I guess?

Okay. Yeah. What we're planning right now is on October 19 we plan on converting First National Bank of Morgan and Citizens Community Bank of Pocatello -- now remember Citizens has been with us and been a part of the Company for well over a year already and as usual we never feel compelled or that we have to get these conversions done in 30 or 60 days because we don't price those things into the transactions when we do these deals. And so we take our time, we make sure the time is right. The key with doing these both, and this is somewhat unusual for us that we would do two of them on the same day, but because of their close geographic proximity and because of contracts and that that are expiring, we are going to do both of those at the same time. And we're already working on those. Yes, there will be some expenses in the late third quarter, early fourth quarter and it's more, I don't see anything material there, Jim. It's more overtime. It's more just things that come up in any conversion. But we've done so many of these and you never want to take conversions for granted because something can always jump up and knock you for a loop. But we tend to really have got a nice structure down and we're very confident that these two -- I know that we're already working on both of them and have been for a couple of months now. We are already working on Morgan. That is one area that we are working on closely with them already, even though we've not closed the transaction yet, simply because we want it and they want it. They wanted to have the capability and the things that we bring to the table as soon as possible. So that's another reason why they are coming online on the date of the conversion at the same time that Citizens Community Bank is. And then for CDC, and remember CDC is five banks and we are going to continue to operate those banks separately until next May, May of 2007, at which time we will do the data conversion towards the end of May in '07. And we will at that time then also integrate some of those banks into our existing banks.

All right. Thanks for refreshing me.

You bet. Other questions?

Okay. Well, I guess in closing, we felt it was a pretty good quarter. We kind of liked the fact that there was nothing unusual or non-recurring or extraordinary or anything. It was just kind of a good core solid operating earnings. I guess that's what anybody always hopes for. If anybody has any further questions I guess you could always contact us. But for Jim and myself and for all the over 1,300, soon to be almost 1,500 employees, we'd like to thank all of you today and have a great weekend. And we'll be talking to you later.

Thank you and that closes today's teleconference. You may now disconnect your lines and have a great day.