Glacier Bancorp Inc (GBCI) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to today's call. Please note that all lines are in a listen only mode and later you will have the opportunity to ask questions. Now I'd like to turn the call over to Mr. Mick Blodnick. You may go ahead sir.

Thank you good morning and thanks for joining us this morning. I'm Mick Blodnick President and Chief Executive Officer of Glacier Bancorp, along with me this morning is Jim Strosahl our Executive Vice President and Chief Financial Officer. Last night we reported earnings for the third quarter of 2006. It was another good quarter for us with continued positive friends in most of the key areas and profitability ratios that we tend to focus on. Some of the prior quarters where we tend to really enjoy a plain vanilla noise free quarter, this one had a little bit of noise attached to the quarter, stemming primarily from the Citizens Development Company and First National Bank of Morgan Acquisitions.

Some of you may remember last quarter we stated that we had hoped to close both the First National Bank Morgan and the Citizens Development Company transactions by no later than mid August. as a result of that we had made arrangements to do a secondary offering in the first week of August and then also do a trust preferred issuance in mid August. Both of those took place in early August and mid August. Unfortunately because of a divestiture that we attempted to argue to hold onto and were unsuccessful with the Citizens Development Company acquisition did not get closed until October 1, and we were not able to close Morgan until the first of September.

So especially on the CDC acquisition we were about 45 to 60 days late in getting that transaction closed, but unfortunately we already had all the financing mechanisms already put in place and scheduled, so it was somewhat unfortunate. We probably would have backed off on some of those for a couple more months if we knew we were going to have the delay because of the one small branch divestiture in Lewistown, Montana.

Again outside of that it was a good quarter outside of that earnings for the quarter even including all of those events that took place regarding CDC. Earnings for the quarter were $15,806,000 which was an increase in diluted earnings per share of 12% over the same quarter last year. And again for the third quarter of this year if we want to try to compare apples to apples on quarterly basis we have to exclude the impact of FAS 123R and excluding 123R earnings per share would have went from $0.47 which was stated for the quarter up to $0.49 for the third quarter or an increase of 17% over last year's third quarter.

Some of the key areas I like to focus on for just a few minutes this morning was that most of the trends, like I said earlier, continued to meet or exceed our expectation, for example, loan growth even if we include the First National Bank of Morgan transaction which closed on the first of September, loans in the quarter grew by $156 million or 22% annualized. If we back out the acquisition of First National Bank of Morgan, the quarterly growth was 16%. So still levels that are beyond what we had expected earlier in the year and with the 22% annualized growth so far this year and actually on a year to date basis the loan growth is even greater than that.

We continue to see strong loan growth throughout just about all of our markets and just about everyone of our banks continues to have that strong loan growth. One of the real focuses for this company and for all of our banks is the growth in non-interest bearing deposits. And during the quarter they increased by $31 million or 17% on an annualized basis. Here again if I back out Morgan we grew at about [inaudible] 8% annualized. That's a little bit lower than our double digit forecast but we're kind of anxious to see what the fourth quarter brings because we do historically see a little bit of an uptick in balances in the last quarter of the year. So we'll hope that that holds true for 2006.

Credit quality continued to be pretty solid. We saw a slight uptick in non-performing assets and the one credit that caused that uptick has already been paid off, so we should - - and we really don't see too much more in the area of credit quality at this time. So we should see hopefully in the fourth quarter that number be at or about the same range possibly even a little bit better than where we ended the third quarter.

As many of you know over the last couple of years, we have worked hard to take an investment portfolio that two years ago was right about 40% of assets. At the end of the third quarter that investment portfolio is now down to 20%, so we've cut the investment portfolio as a percentage of overall assets in half and that even includes one of the acquisitions in 2005 that had a huge investment portfolio that obviously we acquired and inherited. And even with that we continue to rule that down and obviously that's a plus going forward if loan growth stays relatively robust then we have some opportunities there to continue to reduce the investment portfolio.

One of the negatives in the first - - or in the third quarter and this is the second quarter that we saw some compression in our margin. We lost six basis points in margin during the third quarter. Yet even though we saw that 6 basis point reduction in our net interest margin, we still experienced 16% growth in our net interest income on an annualized basis for the quarter. And this is the - - like I say this was second quarter we had that kind of compression.

We're hoping and we're not sure right now what impact CDC is going to have although our early indications are that CDC did have a higher net interest margin. So we view that as a potential positive heading into the fourth quarter as far as net interest margin is concerned. Now, that's on a link quarter basis is where we had the compression but we're still benefiting somewhat from the fact that our net interest margin is still 16 basis points on a year to date basis our net interest margin is still 16 basis points higher than what it was for the first nine months of 2005 and on a year to date basis our net interest income is up 20%. So again, somewhat of a negative trend on the margin but it doesn't seem to be having a noticeable impact on our net interest income.

Our efficiency ratio continued to trend in the right direction and we ended the quarter at about 53%. That's down a little bit from the first two quarters of this year but slightly above where we were last year. Part of that of course is the impact of a lot of the new branches that we've added. We added one more branch in the third quarter in Belgrade, Montana just outside of Bozeman Montana, one of the faster growing towns in the state of Montana.

We brought that branch online this quarter and definitely - - then of course this coming Monday, the 30th, we'll be adding another branch opening in Rexburg but we still have a few - - a couple others that we originally planned for this year that I mentioned i think at the last conference call, will be pushed out into '07 but we still have six of the eight that were planned open and operating before the end of this year. Year to date our diluted earnings per share increased by 10% and here again if you exclude the impact of 123R earnings per share on a year to date basis we're up 12%. We continue to still see pretty strong loan demand.

Whether or not we're going to have a fourth consecutive year of plus 20% loan growth in 2007 I'm not sure that's probably going to happen, but at this point in time we really haven't seen a significant slowdown at all. So we'll continue to monitor that trend very closely and hopefully like I said from the indications we're seeing now that some of that volume and the growth that we're seeing even into the fourth quarter will continue at least into the early part of '07.

The credit quality, as I said, continues to look pretty darn good. The overall charge offs for the first nine months of this year were basically negligible. We're not seeing too much out there in asset quality problems So I know all the banks and the presidents of those banks and the chief credit officers and lending staffs are working hard to make sure that any problems that are identified or dealt with immediately and we don't let anything really get out of hand. So right now we're not seeing a lot of issues there.

As for many banks we're not immune to the challenges on gathering deposits. We've had good success up to this point but in this yield curve environment it doesn't get any easier. So that's going to be one of our real focuses in '07 and we've got some interesting things some of the banks are doing out there in the area of deposit gathering. Time will tell how successful those are. Some of the things we continue to do in our HPC program have worked very, very well for us.

So overall pretty good quarter. We continue to see some pressure building again on the margin side, challenges on the deposit side, but overall, a good quarter. I think that we like the fact that now finally the Citizens Development Company transaction is closed. We're excited about finally getting that closed.

It was a lot longer in coming than what we he had planned. But we hope now in the fourth quarter that some additional good things are going to come out of that acquisition. We sure like what we're seeing right now with that acquisition and we felt that we brought on a great staff of bankers and we just hope the leverage that talent - - that continue to see that add to the strength to this overall company. With that I think that we'll turn it over to q-and-a and try to answer your questions.

(Operator Instructions) We'll take our first question from Jim Bradshaw, you may go ahead.

Good morning Mick.

Hey, JIm

Hey a couple of questions. Maybe for Jim if he's there. But the tax rate last quarter was about 34% about 33 this quarter. Anything unusual going on there and what do you think the effective rate is going to be for '04 excuse me Q4?

I don't anticipate it's going to change anywhere significantly. I think this quarter with the tax free income we got from the life insurance proceeds that tended to push that down just slightly for the quarter so it's going to be in that 34 range.

Yeah and Jim what was that the [inaudible] adjust was that an adjustment in carry value or was there actually a payoff on a policy.

There was a payoff on a policy.

I'm sorry to hear that. Let's see Mick. Does the CDC close change your integration schedule at all or are you still planning to do that next April or May as I recall?

Actually it sped it up believe it or not Jim. It sounds kind of strange but so much of our integration schedule is based upon Jack Henry's ability to convert and provide resources and help to us in addition to all the resources that we bring to the table. And as you can only imagine as we broke out in the past, three of the five CDC banks are being integrated into three of our existing banks.

So they were planning - - they were going to go away. And that was planned for next May. Well Our banks were just - - and I believe their banks too - - were just really chopping at the bit to get this done sooner. So rather than those three conversions taking place in May they are going take place in January. Slated for the week of - - or January 25th, 26th. Those three CDC banks will be integrated into our three existing banks. The other two remaining banks, again I think as we mentioned in the prior quarter, are going to be combined into one new bank and that conversion will take place in June now.

Because we were going to move out the Morgan conversion a little bit later and that's going to take place in April. So we've got a pretty busy conversion schedule planned for the first six months of next year, but I'll tell you we've just this last weekend, finished the conversion of Pocatello Citizens Community Bank, in Pocatello and I've been through so many of these over thirty years and just amazed at the job that that bank did and our conversion team did.

It was basically a non-event sunday morning and there's so much work that goes into these but we've done so many of them over the last ten, twelve years that we really do have a template of making sure that no thing gets missed. Boy, it was truly a non-event both for the Pocatello bank and for us here. So I'm only keeping my fingers crosses and hoping that next year's experience will be much the same. With the talented group that we've developed in that area I just don't see much in the way of issues to get those conversions and transitions done.

Great. Last question I had Mick, was the gain on sales loan number was down obviously year over year but still is a pretty healthy number is that number of loans stronger than expected? Or was gain on sale pricing better than you assumed?

I'd say it was the former. I'd say that the volume was a little bit stronger. And It's kind of funny Jim because the volume in '05 a lot of the volume came from some of the really hot areas like the Coeur D Alene market. Like the Bozeman market like the [inaudible] market, the [inaudible] market. This year - - those markets that stayed good but they haven't increased dramatically and in some of those the volumes are still good but they're almost flat on the year.

But where we're seeing some real improvement is in the areas like in Helena, in Missoula, in Billings. Some of these markets that were not all that strong last year are - - I don't know if it's just that leg that some of these markets that were not as expensive that they are starting to see people migrate into some of these markets. We've got a lot of the amenities but they don't have the high costs. I'm not sure but we're getting a better distribution of volume from some of the banks that really didn't participate all that much last year.

Great. Thanks very much. Appreciate it.

You bet Jim.

Thank you. And our next question comes from [Brett Rebaden]. Go ahead please.

Good morning Mick, good morning Jim.

Good Morning. Hi Brett

I just wanted to ask as far as expenses go for the third quarter, they weren't up that much but was just curious if there was anything in there related to integration or cost to all the stuff going on that might not reoccur going forward and in a sort of a if you guys have any goals for efficiency going forward in '07.

No, we've got another branch opening up on Monday. We just finished as I mentioned we just finished the pocatello integration. But come Monday we will be working - - that team will be working feverishly to start on the three bank conversion in January. We also have the divestiture that will take place on the 19th of January of that branch in Lewistown, Montana.

That really doesn't present a lot of issues for us being the seller but definitely this three bank integration is going to take some time. So Brett with that you always have overtime and you always have expenses that probably are outside of the norm. But as we look forward into '07, I mean we're still kind of thinking that from an efficiency perspective we're going try to hold it right where it is. We got some more branches coming on next year some more DeNoble branches coming on.

We know we have a lot of these integrations to get out of the way. The sooner we get some of those. That should, in essence, help our efficiency ratio but we've not necessarily targeted - - well we got to get back to 50 or 51% by June of next year. We really haven't done that. We just try to keep our eye on our costs. Like you say costs did not go up a whole bunch and yet I think that we still do have a lot of new branches that were just added and we're definitely not making any money in those branches yet that we've opened up this year.

So there's some things that are dragging, there's no doubt about it. Again we've had some good things happen too in the form of VDA growth, and loan growth and lower investment portfolio. So we're hoping that some of those will continue next year and offset the integration costs and the new branch locations.

Jim any other thoughts? No, that pretty well sums it up. I don't see any real movement either direction. I think it's going to track on pretty close.

Okay. And then just secondly I was curious the construction portfolio. How much of that is related to the total portfolio now and if you guys have any thoughts on limitations there and how you see it obviously going in the 4Q, 1Q. typically slow assuming weather is not warm which is has been in the past two years. but just any thoughts on the construction piece of the portfolio and where you see that going in the next year or so.

So as Mick mentioned, a couple of markets have seen a little bit of a slowdown in activity. Coeur d' Alene market is one that has slowed up somewhat although there's still quite a bit of activity over there. It's down from 2005 but more in line with 2004 which was a very good year. So there's still activity in that area. Our banks are being quite cautious.

They read the paper every day about the real estate market and what's going on around the country. Everyone is watching the markets very closely. So far, the activities are still pretty good. So I don't see much change there. I wouldn't say that it's going to be real active going forward as far as increases but I would anticipate it's probably going to stay kind of in the range where we are.

Okay. In terms of where that piece - - where that construction is relative to the total portfolio now?

You know, I don't have that number. I can tell you that it has increased from where we were a year ago. I think the total construction activity is - - I think we're up about $130 million from where we were at the end of September of last year. That brings on some new branches and stuff also but - - so we are up somewhat from there but I would guess that we're probably going to stay about at that same level. But out of $560 $590 million in growth year over year, that's not a huge percentage.

Okay.

I think the 130 in increased construction lending based on overall $590 million in overall loan growth and - - run the number but probably it's less than 30%.

And that number includes, you know, we do have some loans out there for you know developments, lot projects and so on which is included in there. And some of those are you know as they are being developed and sold out that number probably will be coming down. I don't think we'll see the activity going forward. If the market does slow up where everybody is thinking it may be a little lighter going forward that we probably won't see the level of increases there.

Okay and last question. With Citizens closing here in the fourth quarter you certainly have some opportunities on the margin with that one coming in. They have a great core funding base and I know they have some liquidity that you would be able to deploy on the loan side and so it certainly appears that its sort of in a static environment your margin could actually go up with that deal closing.

But the offset is obviously the top core deposits market growing deposits and then just the general incremental cons of funding new items in this [inaudible] curve environment. Is a assumption that the margin could be flat in the fourth quarter with the acquisition, does that seem aggressive to your guys given what you see balance sheet and can you just give us thoughts on how much of that liquidity you might drain from them in the fourth quarter?

I think you're probably about on my target at least I'm thinking the margin will be fairly flat. I think you're right. They do bring little higher margins, but we do have these other factors that continue to increase our funding costs. So I think they're probably for the most part might adjust set.

And as far as liquidity Jim I think they brought $50, $60 million was about the number.

I think that's about right.

So it was about $50 or $60 million in liquidity that they had that like you say down the road if loan growth stays strong then we could redeploy that and hopefully also help us in maybe maintaining that margin at the current levels.

But you guys don't have a lot of cash flow from the securities portfolio overall that you might be utilizing for that?

Well, from theirs or ours?

Just take the whole proformer securities portfolio.

We still see a pretty good cash flow coming off of what we have in our portfolio now, and that's going to continue to help. But as the portfolio shrinks, that obviously also slows up a little bit. So we see a little bit reduction there every month. But with that said we do most of our securities RCMO's and some of those are now moving into the window where they are getting paid down faster that what we've seen in the past. so I think we're going to stay in that $12 to $15 million a month in cash flow off the investment portfolio.

Okay great. Thanks guys.

Our next question comes from [Chris Sulton] go ahead.

Good morning.

Hi Chris.

Hi. I was in at the very beginning of the call and then we had a fire alarm so I had to leave and pop in again so forgive me if I doubling up on addressed questions or statements that you've mentioned before. But your [inaudible] of $534,000 now if you back that out to $0.02 a share correct?

That sounds about right.

About 1 1/2.

Great. And let's see here on a macro sense. speaking with a few management teams from banks in the Seattle area, some of them mentioned the competition for the deposits has leveled off or at least eased up a bit from the last five to six weeks or so. Have your seen the same in the any of your markets?

No. it seems as though - - I know what they're saying because- - but I think it's more a function of just they're not seeing these dramatic increases. I mean I think the competition is still out there. I think that at least in our market, there's a lot of banks scrambling for deposits. But unlike earlier this year in the latter part of last year we're not seeing where every week somebody is popping rates higher and higher because well, the Fed hasn't done much here now for the last three meetings.

So that may be in the back of their minds. That may be a perception that it's not - - it's not as competitive and it's not as tough, but I sure see and I think I hear from all of our bank presidents there's still a lot of competition out there. And a lot of the banks are really scrambling to figure out how the can grow their deposit base. And some of them I'm seeing a lot of bank numbers. some of the them haven't been able to grow DDA's at all its strictly gains in the form of MMDA's and CDs as far as the additional funding if they were able to do that. So I don't think it's changed measurably.

Okay. All right. My other questions were answered. Thank you very much.

You bet Chris.

Thank you and our next question comes from Brad Milsap go ahead please.

Good morning guys.

Good morning brad.

Just a couple housekeeping questions. Jim, do you have a sense of what the CDI number will be for 2007 after your layer in citizens?

No. I don't have that number for 2007. It will obviously it's going to be a little higher but we also continue to see rundown on ones we have out there and I'm sorry I haven't calculated that.

Okay. And just another numbers question. Do you happen to have the tax equivalent adjustment for the quarter?

The dollar amount?

That's right.

No, I don't have that either. We do that as part of our tax calculation but I don't know what that number is.

Okay. That's all right. Final question. Just trying to get a sense of loan pricing in your marketings. Can you give me an idea of where in this flat [inaudible] curve environment market at what rate you're putting new loans on at even sort of relative to where the portfolio is now I guess both fixed rate and then what percentage of your customers are going with variable rate financing.

I think that from everything we're seeing at the various banks, and boy I'll tell your when you've got soon to be eleven - - currently we've got fifteen out there, but that will whittle down to eleven by early next year you've got banks in a lot of different markets, the competition levels of growth levels of these banks dictate sometimes what you can get, what you can't. If I had to take all the banks and again there's a wide disparity between what bank A and another sister bank are booking average loans. But currently I would say that probably that 7 1/2, seven 3/4 is probably a pretty good boggy for where we are overall.

Again some of the markets are a little stronger than that. Some may be more on the low end of that range. As far as fixed versus variable. One of the things that we look at a lot is our core utilization funding. It's a number that we pay a lot of attention to. It comes off of our ALKEL model and right now we're at some of the lowest levels that we've been at with that ratio.

In other words, taking those DDAs now, savings accounts, those deposit bases that are not as interest rate sensitive and taking - - making the assumption that you can go out and fund longer assets with that core base and currently that core funding utilization has been like I said very, very low. So we have been talking to the bank presidents and their lending staffs and we really could at this point in time extend out a little bit more if we truly wanted to and I believe that some of them are starting to do that where over the last two or three years there's been more of a focus on trying to do as much as you could on a quoting rate basis.

So to answer your question I think that probably right now if we went out and interviewed all them, they're probably doing a little bit more than they have in the past as far as longer term fixed rates. I don't have the number exactly this month as to what the absolute breakdown was in all the banks, but my guess would be Brad, that the guidance that we've given is probably skewing that a little bit more going forward to the fixed end versus the floating end.

I would agree with that and I think the other thing is from an interest rate perspective if the rates do start back down, we'd like the opportunity to have some of those locked in. Fixed rates with the pre-payment penalties on them so that's kind of the strategy do some of that along with of course the variable rate and continue to come on the books.

Jim, can you remind us just what percentage available rate loans - - what percentage that is of the portfolio as of right now?

We're around 34% I think of pure variable rate ones. Of course there's always maturities- - cash flow and other loans as well on top of that.

Okay. So only about a third?

Yes.

Okay. Great. Thank you.

You bet Brad.

Thank you and we have no further questions from the phones.

Okay. Well, thank you all very much. If there's other questions or we've made a note we'll follow up on a few of the things that we haven't taken the time or had the time to calculate yet. So if some of you need some of those numbers, we can have those to you yet today. So we'd like to thank all of you for attending today and we'll talk again next quarter.

Ladies and gentlemen that concludes today's call. We thank you for joining. You may disconnect at any time.