Glacier Bancorp Inc (GBCI) 2007 Q3 法說會逐字稿

Welcome to today's Teleconference. (OPERATOR INSTRUCTIONS)

I would now like to turn the program over to Mr. Mick Blodnick. Please begin, sir.

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.

Last night, we reported record earnings of $17,639,000 for the third quarter of 2007. Our diluted earnings per share for the quarter were $0.33. That was an increase of 6% over the prior year's quarter. There was a $0.01-per-share stock-based compensation expense that we had during the quarter.

For the nine-month period of 2007, we had diluted earnings per share of $0.94. That's also a 6% increase over the prior-year period. Our ROA for the quarter came in at 1.50%, and our return on equity for the quarter was 13.76%.

For the most part, it's been a difficult quarter for financial institutions. Think everybody on the phone would agree with that. Considering the current environment, though, we were pleased with both our quarterly and our year-to-date results so far.

Although we've not produced the earnings-per-share growth this year that we have historically expected of ourselves, the overall performance in certain key areas continued to trend in a positive direction. Just a few of those I'll highlight before we open it up for questions.

Loan growth, although down from the record-setting second quarter, was still a very respectable $103 million, or 12% annualized, during the most recent quarter. So we felt good about the organic loan growth generated in the quarter. And although we expect that loan volume will begin to slow as we enter the winter months -- and especially considering just the overall environment that we're dealing with today -- we still feel that our goal of 10% loan growth for 2007 is still well within reach. And we sure do hope that we can at least attain that 10% organic loan growth this year.

Another area, our net interest margin, remained stable, at 4.5%. It was one basis point below last quarter. However, the net interest margin did increase by 12 basis points over the 4.38% in the third quarter last year. And another positive was our net interest income was up 4% on a linked-quarter basis.

Now for some of you, you'll notice that the margin was higher, both in previous quarters and this quarter, than what we have reported prior. And the reason was that we're always continuing to try to make sure that the net interest margin is as accurate as possible.

And one of the things we've discovered -- in prior years, it really never made much of a difference, but we were not excluding from our margin the inter-company earning assets. And obviously, we made that change this quarter. And like I said, in prior years, it really didn't make a lot of difference. But it makes more of a difference today, as we have more inter-company activity taking place, as we become a larger institution.

So this is the right way to do it. And it did elevate the margin, but of course it elevated prior quarters, too. So it's all on a relative basis we've made those changes. And again, we feel that the net interest margin calculation is a truer reflection of what the margin really is.

I guess the next point I wanted to try to bring up and discuss a little bit about was asset quality. Our credit quality remained very strong, with nonperforming assets at 0.24%, a slight improvement over the second quarter, where I think we were at 0.25. However, we did charge off two credits we inherited from recent acquisitions totaling $1 million. We recognized when we did these acquisitions, and we reserved for them at that time. We nursed them along for the last year, or year and a half, but finally chose to write those off.

So far this year, we have had net charge-offs -- including with the $1 million now -- our net charge-offs for the year have been three basis points. Our allowance for loan and lease loss ended the quarter at 1.51% of loans. That's the exact number as to where it was in last year's quarter.

I really do feel the banks continue -- all 11 of them -- continue to work very hard at keeping delinquencies and nonperforming assets in check.

Our non-interest deposits were flat from the previous quarter. So we didn't see any growth in nonperforming -- or not nonperforming -- but in non-interest-bearing deposits during the last three months. However, the growth in the number of accounts so far this year has been just over 8%.

So even though recently, in the last three months, we did not grow our DDA balances, so far, since the first of the year, the number of accounts are up 8%. So that's a good trend. Obviously we don't like to see a flattening of our DDA balances, but that's just the way it is.

However, over the same point in time last year, our DDA balances are up 9%. So that's definitely helped, and it's been one of the reasons the margin has stabilized as it has over the last -- especially -- and improved, in fact, over the last 12 months.

So the growth in the number of accounts -- and especially going back a year in the dollar level of DDA's -- has allowed us to reduce our higher-cost funding sources over the last year, and it's also led to higher fee income, which also has helped the bottom line.

One thing this quarter, that's a trend that we have reversed, is our efficiency ratio saw about a 2% reduction from the prior quarter through the third quarter. The banks have worked very hard to become more productive and efficient, which seems to be producing results.

Many of our new de novo offices are now gaining traction, and they're not the drag they have been over the last 18 months. Hopefully, this will continue to improve over time; we sure hope it does, and we believe it will.

We are benefitting from the completion of the data conversions during the first six months of the year. And the fact that we had no other conversions this quarter really helped. It took a little bit of stress and strain after six data conversions in the first six months of the year.

In August, we also implemented another piece of Check 21 when we began electronically presenting all of our cash letters each evening. We believe that this is -- although it was a monumental task, and we're still in the process of refining it, we also strongly believe that it'll provide further cost saves and enhance availability going forward.

So those are some of the key areas. We like -- we're no different than all the other banks around the country. We're facing some definite challenges out there. However, we continue to really like the states, and the economies of these states, that we're doing business in.

We like what our banks and their staffs have accomplished. We think, in these circumstances and in this current situation -- we think they've really done an outstanding job. And we just don't plan on changing what we are doing. Hopefully, this consistency will continue to serve us well over the long term.

So those are some of the highlights from the most recent quarter. And with that, I'll open up the phone lines for those individuals for questions.

(OPERATOR INSTRUCTIONS) Ben Crabtree.

Good morning.

Hi, Ben.

How are things in Kalispell? Beautiful as ever?

They are today, boy. It's a gorgeous fall day.

Ah, great.

Couple of questions -- would you happen to have -- maybe it's in here, but I didn't see it -- but would you happen to have the restated margins, going back for the last several quarters? Or, will that be in the Q, or --

It'll be in the Q, Ben.

Okay.

If I interpreted you correctly, Mick, you had a charge-off of $1.1 million, and $1 million of it was related to those inherited loans?

That is correct.

Okay.

So, looking back up the pipeline, how does it look in terms of early warning, and ratings changes, and things like that?

Well, I think that were monitoring this very closely. And we would be naive to think that in the current situation, that we don't have the possibility of something coming up. But as I've talked to all the bank presidents and all the chief credit officers -- and I know Barry Johnston, our credit administrator, is in constant contact with them -- and we don't see too much right now. Knock on wood.

I mean, I guess that could change rapidly. We've all probably seen credits that, overnight, just came out of nowhere, and I guess that could happen. But we're -- right now, we're just playing it real close to the vest, and we're watching things very carefully.

A number of our banks have really, really backed off on the construction side of it. And some of them started doing that about a year ago, so we really hope that that produces some positives going forward.

So it's tough to -- it's always been tough to say just exactly what could come out of the woodwork. But right now, we're not seeing too much change. And right now, that's -- for us, we feel that's a good thing.

Certainly, good comparison with the rest of the industry.

The developer loans, I guess, are the ones that have been really surprising the industry. Maybe you could refresh us as to the size of your loans to builders.

Well, as far as residential building construction, there was approximately -- if you take both residential building construction and commercial and industrial, or commercial construction, it's about 16.5%, all total. So there's definitely -- we have some exposure; obviously not to the degree that a lot of other banks do. But it's something that probably is continuing to get our attention, and something that we're continuing to monitor very, very closely.

Again, I like the fact that it's 11 independent banks, with 11 chief credit officers and staff that are monitoring this. I mean, we do feel that if there's one really good thing about this model, it's that when it comes to asset quality, you're right there on top of it. And each of the banks are right there in those markets.

Now, again, I'm not trying to say that we can't have a hiccup, or we can't hit a speed bump ourselves. Because by no means are we close to perfect. But we're just going to continue to stay consistent with what we've been doing, and hope that the oversight that we bring to these, and getting on them quickly, will help us out over the long term.

Okay, great. Thanks, Mick.

You bet, Ben.

(OPERATOR INSTRUCTIONS) Brad Milsaps.

Hey, good morning.

Hi, Brad.

Hey, just -- I may have missed it earlier in your comments, but can you just kind of give us a little bit more of an outlook for the margin, in light of the recent Fed cut -- kind of what you guys are seeing in terms of that? It looks like you've kind of stopped the slide in the securities portfolio this quarter. Just kind of curious as to what your thoughts are there going forward.

Yes, Brad, I don't think that you're going to see too much more of a slide in securities, simply because we do have some requirements that -- we need to keep certain amount of securities as collateral for public funds, and for some of the repurchase agreements, and things like that, that we have on the funding side of the balance sheet.

So I don't see where we're going to see a huge reduction from here on out. We've taken that investment portfolio from over 40% of assets down to about 16% of assets. So -- and that's probably -- we recognized awhile back that was probably about the low end, simply because of some of the collateral requirements we need.

As far as the net interest margin, and with what's happening with interest rates right now -- as I've said before, we really try to manage our interest-rate risk to a neutral position. And based on all of our modeling that we do, that's about where we're at. We don't try to make bets, being asset-sensitive or liability-sensitive. We really try to manage the Company to the middle.

Now, with that said, some of our banks are definitely asset-sensitive. And some of our other banks are definitely liability-sensitive. So if you go through the 11 banks, and you look at the individual modeling we do for each and every one of those banks, you can see a wide disparity in their level of interest-rate risk in certain interest-rate environments. But when you grow all 11 banks together, it's somewhat amazing just how neutral we really are.

So, I think the key for us is we're not going to -- like you said, we're not going to necessarily get a lot of upside from rolling investment securities to loans. We are, of course, hoping that the loan production stays halfway decent. It's been a good year so far this year. It's just -- like I said in my comments, if we can continue, and if we can make it to that 10% growth in loans, that's as good as we could have ever hoped for coming into the year.

I think the net interest margin still has the ability to stabilize in and around these. I don't see what's going to cause that to fall off a cliff. But I don't also see where we're going to -- especially in a downward-rate environment, where all of our significant amount of DDAs -- obviously they become a little less valuable all the time as rates moved downward -- I don't see where we're really going to pick up a lot of margin, at least over the near term.

Okay.

And Ron, you and I have talked quite a bit about the calculation of the margin.. I was just noticing -- I guess towards the front of the release, you've got it listed at 4.5%, and then the average balance sheet is showing margin of more like 4.36. Am I missing an adjustment there, or something that you haven't maybe disclosed previously? Or is that -- is there just maybe a typo in the release?

Let me answer that question off-line. I don't believe there's a typo in here, but you and I have talked off-line before about adjustments to the tax-exempt portfolio. And so let's pick up where that conversation left off, and not take everybody through that on this call.

Okay. Fair enough.

And then, Mick, the gain on loan sale line item -- obviously, no one has a crystal ball there where mortgage is headed. But in terms of your markets, I assume that will kind of continue to be weaker as you go forward. But can you kind of comment on just kind of residential real estate activity, et cetera, and how it pertains to that line item going forward?

Yes. I think that you're going to see some slowing down -- number one, you're going to start to see some slowing down over the next two quarters, just because of where we're located, and just because of the seasonality that's built in. So that's one thing for sure, Brad.

The other thing is, I think that you will start to see -- even though we like the economies -- we think that some of these states have some of the better economies in the entire country -- we're starting to see slowdown, though. I don't know whether it's the fact that most people are just standing on the sidelines, just not willing to commit, thinking that things are going to be -- they're going to get a better deal, they're going to be able to do something at a lower price six months or 12 months from now.

But the people in these markets -- they're reading all the same things that everybody else is. And I do believe that we will see some slowing in our fee income, especially from the volume on residential and one-to-four family lending.

The flip side of that is there are some variable costs associated with that. So as the fee income goes away, it's not on a dollar-for-dollar basis. But there is -- a significant amount of that is offset by some of the variable costs, primarily compensation. So if one slows, there is an offset on the other side.

Okay. And yes, that's a good segue -- my final question on cost.

You essentially have all, really, your branches in the run rate. Any other big expenditures for '08, or do you think this is -- kind of what you did in '06 is going to be enough at this point?

We do have -- we have a couple of additional offices on the drawing board right now -- two actual new ones in '08; another one that is just going to be a new building replacing an existing building. So it's not a true de novo office. But no, nothing like what we saw back in '06, when we had the eight to 10 new offices that we had planned on putting in.

Okay, good. Fair enough. Good quarter.

Thanks, Brad.

(OPERATOR INSTRUCTIONS) Ben Crabtree.

Yes. I figured somebody else would ask this, but how about an update on the M&A environment, Mick? We're all reading about the worsening outlook for bank earnings, and how maybe that's pushing some bankers to think about selling. And wondering if you're seeing a bit more interest on your part, and maybe most importantly, whether that's resulting in them being a little more realistic in their asking prices.

Ben, I hate to sound like a broken record, but so far, I think there is a lot of interest out there. It seems like we're seeing a lot of interest. I think that we're seeing a lot of interest in the model, and that's what's driving some of the interest, is the independent bank model. But at the same time, we're also still seeing not a significant amount of change in pricing expectations.

And so, when you really start to model these things, it's making it more difficult. And obviously, if you're trying to use your currency with the hit that so many banks have taken to their stock price, that just makes it that much more difficult.

Right. Right.

And there's not that many all-cash deals getting done. And a lot of the individuals we've talked to -- they don't necessarily want an all-cash deal, anyway, so --

Right. Right.

So I don't know. I mean, on the one hand, you would think that the M&A activity would really heat up in a time where banks are facing all the challenges. But it seems as though they are interested in doing that, and looking at a sale. But they just -- their price expectations haven't changed dramatically.

Okay, great. Thanks.

Brad Milsaps.

Hey, Mick, thought I'd ask one more question, if no one else is on here.

Just curious kind of the geography of the loan growth this quarter on any certain larger-size loans, anything like that, that sort of stick out in your mind? I know, you tend to keep things pretty granular, but kind of any comments on kind of geographies, and where the growth is coming from?

Brad, I don't think there's anything in this quarter that stuck out from the last two or three years. There's -- I think the Helena market has been a little bit stronger this year than it has the last two or three years, where I believe the Bozeman market has slowed down some.

But I still think that we've seen good growth coming out of northern Idaho. We've definitely seen good growth coming out of Western Montana, both in Missoula and in Kalispell and Whitefish markets.

So, I think it's still pretty diversified. Maybe -- and now that you ask the question, probably one of the areas where we've probably seen -- on a percentage basis -- maybe not necessarily in dollars, but in percentage -- one of the best areas has been Southwest Wyoming. I mean, that economy continues to do extremely well. The Rock Springs acquisition was a great acquisition for us, for a lot of different reasons. And we just talked yesterday about just how good that's been.

So, I think that Southwest Wyoming has probably been the big surprise this year. Because prior to this year, we'd always done well there. But it seems like the loan volume has really stepped up a couple of notches this year.

Any specific comments on Boise? I know some of your competitors have talked a lot about that market. I know it's not a huge presence for you guys, but certainly a growing one. Anything in specific you would talk about there?

Well, I think that in talking with our people, and specifically with Jon Hippler, the president of the bank in Boise and Coeur d'Alene -- I don't think that -- I mean, there's definitely been an inventory buildup. I mean, everybody knows that. I think that you're always watching that market very carefully. I still think that houses on the low end in that market still seem to be moving pretty well. I do believe that the higher-end product is definitely slowed down.

And so, I think that they're right on top of it. I think they're monitoring it very, very carefully and closely. And if this thing continues for another 12 months, there could be some issues there. But at this particular time, I think all I can say is that we're just really watching it carefully and don't -- at this point in time, outside of a significant inventory build, we're not seeing a lot of other changes down there.

Now we're going to be down there next week. The holding company will be down in Boise next week. So we'll get a better flavor for exactly what's going on there, since we're going to be right on the ground for three days down there.

Sounds good. Fair enough, Mick. Thank you.

You bet.

(OPERATOR INSTRUCTIONS) And I'm showing no further questions at this time.

Okay.

Well, thank you all very much. And we appreciate your taking an interest today in the Conference Call. And if there's any other questions that the analysts on the phone have, don't hesitate to give us a call. And again, thanks for joining us this morning.

This does conclude today's Teleconference. Have a great day. You may disconnect at any time.