Glacier Bancorp Inc (GBCI) 2007 Q2 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. Please note this call is being recorded.

I will now turn the program over to Mick Blodnick. Please go ahead.

Thank you. And welcome, and thank all of you for joining us this morning. With me this morning is our Chief Financial Officer, Ron Copher.

At the close of business last night we reported record earnings for the second quarter of 2007 of $16,725,000. Our diluted EPS for the quarter were $0.31 per share, an increase of 3% over the prior year's quarter. There was a $0.01 per share stock based compensation expense during the quarter. And for the six months of 2007 we had diluted EPS of $0.61 or an increase of 7% over the prior year period. Our ROA for the quarter stood at 1.47% and our ROE was 13.79%.

Considering the current environment we were not disappointed in the quarter and the first half results. Although we have not achieved the EPS growth that we expect here, there were still some, in my mind, three key takeaways that took place in the second quarter.

First, our loan growth came back strong after a flat first quarter and increased by $169 million during the quarter. Payoffs which were unprecedented in the first quarter, we really got back to a much more normal level of payoffs in the second quarter. And then of the $169 million of net loan growth only $40 million of that was the result of the increase in loans that came along with the acquisition of North Side State Bank in Rock Springs. So we really felt good about the organic growth that we generated in the second quarter, it was a very, very nice quarter for us in that respect.

The second takeaway was that our net interest margin, again, remained very stable. In fact, it was at the exact level of 4.36% that we had in the first quarter, and just a slight increase over the 4.34% from the same quarter in 2006. Our net interest income on a linked quarter basis was up 5%, so we felt good about that and, again, definitely felt good that net interest margin for the company continues to show some real stability.

And then, I guess the third takeaway from the quarter was that credit quality remained very strong. Our nonperforming assets stayed the same as a percentage of assets at 0.25%, and that's exactly where they were at the end of the first quarter. In addition, the first six months of the year we've actually had $119,000 in net recoveries, so as far as chargeoffs they did not exist for the first six months. There's no saying if we're going to be able to keep that trend going, but right now we've been working very hard and we've -- and the banks have done a great job in the area of asset quality.

Our allowance for loan and leased lots into the quarter of 155, that was down slightly from the prior quarter of 158, but we were actually up 3 basis points from where we were in the second quarter of last year, where we were at 1.52%. Again, I can't say enough about the job that the banks are doing out there, as far as working just diligently to keep their delinquencies and their nonperforming assets in check.

So, in addition to those three takeaways, it was a very, very busy second quarter. We completed two more bank data conversions in the quarter, one with First National Bank of Morgan in Morgan, Utah, and the second one with First Bank of Montana in Lewistown, Montana, both are now fully integrated onto our system. This was the fourth and the fifth complete data conversion in the first six months of this year, so you can see that our operational people and our bank people have been very, very busy the first half of this year on full data conversions.

In addition to the data conversions, we also completed the internal merger of Western Bank of Chinook into First Bank of Montana, which was formerly First National Bank of Montana. During the quarter they also went through a complete name change and are now a state bank with the new name of First Bank of Montana. By bringing those two banks together, it also brought the total number of bank subsidiaries back to 11.

Also in the quarter we completed the acquisition of North Side State Bank in Rock Springs, Wyoming. North Side had assets of almost $120 million. North Side at the date of the acquisition, on April 30th, became part of First Bank in Wyoming, our other First Bank in Wyoming, and we're excited -- North Side brought a very low cost funding base and a very liquid balance sheet, and they -- they really should be a great addition to the company.

Another point I'd like to mention this morning is noninterest deposit growth. On a sequential or a linked quarter basis we grew by 4% from the first quarter, as all of our banks continue to focus on this funding source, and that focus definitely paid off in the first quarter -- I mean in the second quarter. The growth in checking accounts at both the personal and business level -- now, this is numbers of accounts -- have both grown by over 8% through the first half of the year. And this growth has allowed us to reduce our use of higher cost funding sources and ultimately played a big part in the stabilization of our net interest margin.

Our efficiency ratio did increase to 57% in the second quarter, mostly a reflection of the additional offices, as we break-down these numbers it's really a reflection of the additional offices we've added over the past year, which now totals eight, and that come with the addition more recently of offices in Spokane, Washington, and Rexburg, Idaho.

Although we've been very pleased with the early performance of these offices, they're still creating more costs than they are revenue, so they're -- they are definitely a drag and they are affecting the efficiency ratio. Hopefully, over the next 12 months the burden of these facilities will not, you know, will no longer be causing an elevation to our efficiency, like they have done in the first half of 2007.

Also, most of our acquisitions come with a higher efficiency ratio, and it does take us some time to get their costs and their efficiency ratio pushed down. And with three acquisitions in the past nine months it's definitely moved our efficiency ratio higher, also. So that's an area that we -- where we've got to focus on and make sure we're doing all the right things from a cost perspective, but at the same time there's a lot of growth opportunities in our market, so we're trying to make sure we're taking advantage of the opportunities being presented to us and not being shortsighted when it comes to where that efficiency ratio has been moving to.

So, in essence, you know, the current operating environment for banks certainly has its challenges today. However, we really like the states and the economies of the states that we do business in. We especially like what our banks and their staffs have accomplished, and at the end of the day they're the ones who are ultimately make the difference and they're the ones who've definitely are the ones who have produced these results.

So, with that, I'll allow the Operator to open it up for questions, and we'll take any and all questions anyone has this morning.

(OPERATOR INSTRUCTIONS.)

We'll take our first question from Matthew Clark. Please go ahead.

Hi, good morning, guys.

Hi, Matthew.

Can you give us a sense for the $129 million of organic loan growth in terms of where it came from? I know you have some, you know, three broad categories here, but can you break it down a little bit better and talk about maybe, you know, obviously how much of it came from resi and the commercial construction, as well as the markets it came out of?

As far as an exact breakdown, Matthew, no. I mean I'm just -- I could just tell you, though, that construction lending continues to be a big piece of what we're doing. We have added a couple of larger C&I loans during the quarter, but still most of the growth would come from the commercial and residential construction.

Some of the markets, especially we're still seeing Utah, southern Idaho, western Montana, are still strong markets. I don't know if any of you saw the figures, but the national numbers that came out I think from the National Realtors Association just showed those states that had the highest house price appreciation from April to March of this year, and Utah was number one, Idaho was number two, Montana was number three, and Wyoming was number four.

So price appreciation in -- I mean those markets are still awful good. I don't think we were as early to the game as a lot of other states around the country, and so pricing is still good. As a result, if pricing is still good, the volumes are still being good, but that's really where I would still say 75% of the growth came from, was commercial and residential construction.

Okay. And do you -- are you making any deliberate decisions to tighten up a little bit in areas like Boise or markets like that, where there is obviously a lot of buildable land and opportunities for expansion that might -- that could get out of hand?

Well, I -- I'd like to say that we never lose a [duck]. And I really -- I'm not really saying that in jest. I really think that the banks have really stayed pretty close to their knitting on this, but, yes, there's definitely been a couple of markets where because they're analyzing these markets every month and they're analyzing multiple trends within their own markets, I know of a couple of the banks, for certain, that have just started backing away from some projects, not necessarily because they, they thought the projects were bad, it's just that they didn't have the overall strength in numbers or resources that we'd seen in the past, and at this stage we're just probably getting a little bit more leery of some of these projects. So, yes, I wouldn't say there's been a wholesale pushback, but I can definitely say that there is in some of our markets, especially those that got a little bit more frothy, we have, we definitely scaled back.

And then I think the other -- the second piece to that is we still see real strong demand in almost every one of our markets on the low end and at the very, very high end. It appears to be that middle market, that $300,000 to $500,000, $300,000 to $600,000 priced home that seems to be softer in a lot of these markets and, as such, we've really began to probably scrutinize anyone playing or operating within that market more carefully and closely.

Okay. And then on the -- a little bit more on the credit side. You obviously had net recoveries again this quarter. NPAs were stable. Are you seeing anything, you know, your reserve did come down a few basis points I guess sequentially. I know they're up YOY, but you did put on some good growth, and I'm just curious as to, you know, because of the way you build the reserve, is there anything going on in there that gives you any sense of concern?

No, not yet. You know, knock on wood. It's been, you know, it's been pretty steady as she goes. We're constantly -- our chief credit administrator at the Holding Company is constantly talking with each of the bank presidents, each of the chief credit officers out there in the banks. And so far we really haven't seen any noticeable trends one way or another. It's something we're very cognizant of, it's something we're watching very, very closely. The banks continue to reserve as they know they have to. They do, each of those banks do their own independent, individual detailed analysis every quarter, and some of our banks are reserving and some of our banks are reserving at a relatively significant level. Some of our banks are not reserving, at all.

And what you're -- like I think I've mentioned in past conference calls, what you see is the consolidated number, but that number is a rollup of 11 different banks making 11 separate decisions based on their own market, based on their own portfolios, and based on the quality of those loan portfolios. So that number kind of moves, you know, up and down a little bit from time to time, and it moved down a little bit simply because of the growth we put on, not necessarily because the banks made any material changes in the amount they were providing.

Okay. And then, finally, on the M&A front, have you seen any change in sellers' appetite to sell, any more reasonable price expectations with how depressing this market is?

Not really. I mean I think it's going to start coming, though. I mean especially if this continues to prolong itself, flat yield curves, the competition, some asset quality issues are starting to show-up at some banks. I think all these regulatory burden, these are all areas that probably are moving banks, especially maybe some of the smaller community banks, to take a look at that option.

I think the key we've got to remember is that most of the acquirers, you know, our stock hasn't been obviously unaffected either. I mean those that have been acquiring or have been active acquirers, we've also got a currency that is lower than what it was a year ago, or not even a year -- not so much a year ago, but definitely six months ago.

So, yes, I -- I'm hoping that the expectations of sellers start to become more realistic, but I wouldn't say that I've necessarily seen that yet.

And your appetite, specifically, for deals at these levels?

Well, our appetite for deals is always there if we can do deals like we've always been able to do deals. I mean that's really where we feel comfortable. We've obviously walked away from a lot more than we've put together because those expectations, as you mentioned earlier, were just too high in our minds.

So the one thing I can tell you is we sure have not changed our disciplined approach to how we model and look at these transactions, and if we feel we can't get them at the price that we feel very comfortable with then we'll just wait for another time. It's not like we absolutely have to do these, I mean we -- we didn't see a lot of growth in the first quarter, but the second quarter had decent growth, and I think our pipeline at least in the near term, you know, the pipeline I would hope would stay pretty strong, at least till, you know, late fall.

Thanks, guys.

You bet.

We'll take our next question from Jim Bradshaw. Please go ahead.

Good morning.

Hi, Jim.

Hi, Mick. What -- what's left on the integration and conversion calendar for the rest of the year for you guys?

We've got North Side slated for mid December.

And then, as I recall, you have another one coming up in like April or May or so of next year; right?

No. That's --

That's it; huh?

Yes, we've -- we've done five so far in the first six months of this year, and all we really have left right now is, you know, in essence we really did -- I said five, we've really done six because we merged the Bank in Chinook into Lewistown but we really had to convert them both, they were two separate banks, so we've really done six so far in the first six months. But, Jim, all we have left is North Side in Rock Springs, Wyoming, and that's scheduled for December.

Okay, good. And is the high performance checking product rolled out just about everywhere now, too? Obviously, North Side maybe not, but some of the others?

It's actually because even though we haven't done the conversion yet, we did just recently, not in the second quarter but more -- just more recently, we did roll it out in -- at North Side. The one that is still just about ready to roll-out is First National Bank in Morgan.

Okay.

Neither one of those were in the first -- in the second quarter or in the first half of the year, but both of those will be out there in the second half, and then that will be -- every one of them will be on the program.

Has that product lost any of its zest at some of the later rollouts, or is it still trending very strongly initially?

Initially, it's still a very -- I mean we're very, very happy with it. If, Jim, it doesn't have, as you would well expect, it doesn't have the same level of appeal and that that it did 15 years ago when the first bank started with it, but again we -- we've focused on that product, increasing openings by somewhere between two to three times, and we have not been disappointed at all even in the more recent banks that have brought the program on.

And then last for me, can you talk about how your home equity line of credit product is performing?

The home equities seem to be doing well. We've always taken a very conservative approach, you know, loan to values no greater than 75 to 80%, and if they were over 80% we required insurance. We had a product that would insure anything over 80%. So I was just talking with [Barry Johnston] earlier this week, and we just haven't seen much pressure or much problems. We haven't necessarily grown home equities at the pace we did back in '04 and '05, but I actually think that that started slowing down last year some. And so far this year, we're still doing them, some of the pricing on them is not as appealing as it once was so that's another hurdle you've got to overcome. But the banks are still doing some, but from a credit quality perspective so far we haven't seen much change.

Okay, great. Thanks very much. Appreciate it.

You bet, Jim.

We'll take our next question from Brad Milsaps. Please go ahead.

Hey, good morning, Mick and Ron.

Good morning.

Hi, Brad.

Mick, could you talk a little bit more about the fee income performance in the quarter, maybe specifically the gain on loan sale revenue, kind of how many or the amount of mortgage loans you sold in the quarter and kind of where you finished in terms of the loans held for sale bucket?

I don't have the exact dollars here, Brad, of what we -- of what we've sold, but I can tell you that real estate originations for the first six months of this year were greater, in fact, we probably should have that production report. We definitely have produced more real estate loans.

Now, part of that is obviously we're a bigger company than we were a year ago -- but let me just see here -- we've got so far this year to date in real estate loans we've produced approximately $579 million versus $487 million the same time last year. Prices, like I said earlier, prices in these markets were up the strongest of any four states in the entire country, and so the size of the loan has probably increased somewhat. Last year we, through the first six months, we closed 2,508 loans, this year 2,837 loans, so we've got a couple, a little over 300, 300 more loans closed but quite a few, almost, what about $80 million -- let's see, that would be almost $90 million, almost $90 million more in production through the first six months of this year versus the first six months of last year.

So obviously that production is a direct reflection of the gain on sale of loans. As most of you know, we sell most of our production into the secondary market, so we just take the fee income, take the funds, and reuse the funds to lend again.

So, yes, I mean fee income, especially in the second quarter, when the loans kicked in -- although loans, real estate loan volume even in the first quarter, I think I -- I mentioned that last, last quarter in the conference call, we were down in commercial lending and we were down in consumer lending, but even in the first quarter we were, production wise, we were stronger in the first quarter of '07 than we were in the first quarter of '06 from a real state origination perspective. But, clearly, the second and third quarters are always stronger for us, and that really kicked in.

And did anything change on the deposit service charge front? I mean that was a nice linked quarter increase, as well.

No, not in the quarter, there really was no changes on the deposit, but here again, as always, and this historically has always been the case. You truly are putting a lot more checking accounts on in the May to October time period. For ever and ever we've put 50% of all of our checking account volume each year on between May and October, so that also has something to do with just the increased volume of accounts, some of the service charge revenue is a direct result of that increased volume.

And, Mick, you talked a little bit about the [offici] ratio, you got a little bit of an improvement linked quarter. I guess I'm a little bit surprised that it wasn't an even bigger improvement. You know, I was thinking with North Side in there for just two months, they were running somewhere around $800,000 or $900,000 a quarter in noninterest expense, but yours were much I guess up much more than that. Are there some things in there that are offset sort of on the revenue side that makes that number look optically bigger than it might be, or any other color on the expense front, kind of --?

Yes, well, I think you just -- in your first question you just named it. I mean when we have that kind of revenue increase we definitely with all the commissioned lenders we have on the real estate side, that goes hand in hand, as those people produce so much more volume, of course, they're making that much more money, and we're paying that out.

We also had, as we -- as many of you know, we went finally to a self-funded health plan at the beginning of this year, and in the second quarter we and, you know, Ron, Ron can give you more color on this, but we definitely had an expense, an IBNER expense because we had incurred but not reported claims that we had to account for, and because we're so early on in this self funded plan we're just now getting the actuaries to determine what our claims history and experience is.

And so there was about a $260,000 hit to or additional expense in the quarter, just to make the IBNER adjustment. That and, of course, we're paying more this year than we did last year for stock option expense, so it really -- I mean from, when we look at our compensation outside of healthcare and some of the benefit expenses for stock options, we -- a lot of it is variable in the fact that as these lenders are producing more they're getting paid more. And that'll go and track production relatively closely, so. But outside of that we really haven't -- I mean just for pure merit raises and that, I think we've done a really good job of holding them within a reasonable level.

Okay, great. Yes, fair enough. And a final question, you talked a little bit about potential M&A activity and sort of reconciling where the stock price is versus doing deals. Any thoughts of using some of your capital for a share buyback at this point?

We're always talking and always considering those options, Brad. And we talked about it consistently at the Board. I guess probably right now, the plan is to kind of keep our powder dry on the capital front. Just like one of the earlier questions from Matthew, although I haven't necessarily seen sellers' expectations change, I guess maybe our expectation is that they're going to, and that may create some opportunities for us. We want to be in a position where we can take advantage of those opportunities. It's not like, you know, obviously capital has gone up, it's gone up nicely, but if an opportunity for a really good acquisition would make itself available we'd definitely want to have the powder to act on that right away.

Okay, great. Thanks, Mick.

You bet, Brad.

(OPERATOR INSTRUCTIONS.)

Our next question will come from Ben Crabtree.

Good morning.

Hi, Ben.

If -- I guess I would maybe dig a little deeper in some of the expense lines. The release says that there were extraordinary costs of about a half a million dollars in the first half relative to the consolidation of the branches. Was that more or less spread evenly over the quarters?

No, that was not, that was pretty much the first quarter expense, Ben.

Okay.

Even though we were very active and very busy doing conversions in the second quarter, we just did not have the same level of overtime in that they were smaller banks, number one, and two of the banks we'd done all the heavy lifting in the first quarter, even on some of those as far as the conversions, themselves, and the layouts, and some of the front, upfront work, so really very little of that $500,000 came in the second quarter. It was all basically first quarter expense.

Okay, good. And if we get beyond the extraordinary part of it is there going to be a significant savings in operating expense now that you have the consolidations done on an ongoing kind of a base level?

Well, you take, let's see, one -- for example, First National Bank of Morgan, that -- they were basically doing their data processing in-house, they were not paying a data service or anything like that, so the savings there are not always quite as good as when you've got somebody that's using an outside third-party vendor. Now, with the CDC banks, that was definitely the case, and with Rock Springs, that is definitely the case.

So, yes, I mean we -- in some of these we get more savings than others. Of course, we do ramp-up some of our own overhead expenses at our own data center to handle the additional volume. But as far as them qualifying the level of benefit, there's definitely a benefit. I mean I -- I've never gone out but maybe we should, and try to allocate some kind of per share, you know, per share savings. And we've not usually done that, but, yes, our expectation is that going forward now that almost everyone of these with the exception of Rock Springs are done. We should start to see some definite cost reductions from a data processing perspective.

Okay, great. And then in effect you've kind of touched on this one, and it's kind of like the other side of the coin of all the strength in real estate values in the markets you've talked about. Any signs of real estate values flattening out in any of your key markets? And any sign of a significant increase in, say for example, inventories of homes for sale, and time on the market? Are they extending out a lot?

Not a lot, but they're definitely extending out, and in answer to your first question regarding the pricing, yes, I truly believe that some of these markets are seeing softer prices. Not all of them, though. I mean we've, again, I was talking with Barry earlier this week and we were somewhat surprised from the data that we accumulate every month that some of the markets have still through the end of May were still seeing reasonable increases in price appreciation, not -- they're not seeing the 15, 20, 25 like took place maybe a year or two ago, but it's still in that 5 -- in some of these markets it's still in that 5 to 15% range. I know that's kind of a broad range, but that's kind of where some of these markets still are at.

Well, at least the direction is right.

Yes, I mean they're not going down. Now, yet in certain markets we were looking at data on [Couer d'Alene] the other day and average home prices there from some of the statistics that our bank in Couer d'Alene has gotten has showed that the Couer d'Alene market probably at best is flat to maybe even down just a tad in average home prices, but you don't want to zero too much in on the average.

Right.

Because that can really get distorted if a couple of big deals, you know, all of a sudden would stop getting done or whatever, so we don't really pay as much attention to probably average home prices as we do median home prices.

Right. And I guess the last question, and sorry if you've already touched on this, denovo plans over the next three or four quarters?

Well, we've got a new office that broke ground in Whitefish, Montana, so that one should be coming on in March. There's plans for another office in Pinedale, so, and that'll be in next year. I don't necessarily think that we've got any more that are going to be completed this year. A large office is under construction in Spokane, and that won't be completed until next year.

I know of three construction projects on three new offices, but none of them will be done prior to 12-31 of '07, they'll all be first quarter, second quarter of '08 completion dates on those. And then there's a couple of the banks that are looking at some other markets, but nothing firm yet at this point in time, Ben.

Okay. Good enough. Thanks.

It appears that we have no further questions at this time.

Okay. Well, thank you all very much for listening in this morning. If you do have other questions you all know exactly where to get a hold of us, and again we just thank you for taking part in the conference call this morning, and we'll definitely be talking to you next quarter.

This concludes today's teleconference. You may now disconnect.