Glacier Bancorp Inc (GBCI) 2008 Q2 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Please note that this call is being recorded. I will now turn the call over to Mr. Mick Blodnick. Go ahead, sir.

Thank you very much. Welcome and thank you for joining us this morning. With us this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administration Officer; [Barry Johnston], our Chief Credit Officer and [Angela Dosie], our Senior Accountant.

Last night, at the close of business, we reported earnings for the second quarter of 2008. Earnings for the quarter were $18.459 million, which was an increase of 10% over last year's second quarter. From a diluted earnings per share perspective, we produced $0.34 a share. That also was a 10% increase over the prior year's quarter.

Our return on average assets for the quarter was 1.51%. That is up from last year's 1.47%. Our return on average equity for the quarter was 13.51%. That is down from last year's 13.79%.

We continue to increase equity within the Company. Tangible stockholder equity ended the quarter at 8.14%. That compares to 7.62% in last year's quarter. Our tangible equity increased by $53 million or 16% since the second quarter of last year.

Also, we continue to strive to build our equity position in this current operating environment. It seems to us to be the right thing to do and so our plan is to hopefully continue to be able to build equity within the Company.

Next, asset quality. Our asset quality stabilized at approximately the same level we saw in the first quarter. Our nonperforming assets were 0.58% of total assets and they were up slightly from 0.57% at the end of the first quarter. But they were up considerably from the 0.25% the same quarter of last year. So we have had more than a doubling in nonperforming assets during the last 12 months.

Our net charge-offs for the quarter were higher than what we experienced in the first quarter; however, through the first half of 2008, our net charge-offs are running at about the same level as last year when, for the entire year, we charged off about six basis points of total loans and so far, through the first six months of this year, we have charged off right at about three basis points of total loans. So we feel pretty good about our net charge-offs so far, but, in this environment, again, it is our expectations that we could still see more issues and both from an NPA and an NCO perspective.

Our goal for 2008 is to keep our net charge-offs at or below 15 basis points and as many of you on the call know, that has been a long-term goal of ours for many years. Whether or not we are going to be able to do that this year, obviously that still remains to be seen. But through the first half of the year, we have done a pretty good job of keeping our net charge-offs at a very manageable level and that is really where we really do focus a lot of our attention is controlling and maintaining a low level of net charge-offs.

Hopefully, we can continue to achieve the goal that we set up and that is to, again, control net charge-offs, control our NPAs. We would fully expect that, through the second half, we are going to have more NPAs. We are going to have more NPAs come on. Hopefully, we will have some of the existing ones come off. We are going to have more charge-offs. We, again, just hope and are working very, very, very hard to control those charge-offs at the levels that I have prescribed to your earlier and that is, by the end of the year, we are doing everything we can to try to maintain our net charge-offs at or below our historical plan of 15 basis points.

Our loan-loss reserve ended the quarter at 1.59%. That is up from 1.54% the prior quarter as we provisioned $5.042 million in the quarter. This compares to $1.210 million in the same quarter last year, which was about four times, a little over four times the amount we provisioned last year and in the second quarter, we provisioned just slightly double what we provisioned in the first quarter. In the first quarter of this year, our provision was about -- exactly $2.5 million. Again, this quarter, it was $5.042 million. And we feel that all the 10 banks are analyzing their portfolios and appropriately putting aside the provision that they feel is adequate for what they are seeing in their individual loan portfolios.

We expect asset quality to continue to be a challenge. Again, I said this earlier with nonperforming assets and net charge-offs, both probably seeing some further increases as we move through the year. Hopefully, they remain manageable as they have through the first half of 2008 and we don't have an extended period of further deterioration in real estate values or activity.

The next point I guess I would like to make is, sequentially, our net interest margin increased 21 basis points in the second quarter to 4.75%. This is up from, again, 21 basis points over the first quarter, but it is also up from 4.51% in last year's second quarter. Loans added to non-accrual status this quarter lowered our net interest margin by three basis points for the quarter. If you remember last quarter, that impact from non-accrued loans was about five basis points. So it was similar in nature, down just a little bit from what we experienced in the first quarter.

Our net interest income increased 8% on a linked-quarter basis and 16% over the second quarter of last year. And when we look, and many of you might remember that, at the end of the first quarter, I stated that I really felt that the margin at best would probably remain flat if we could remain or keep the margin at that 4.55% level. We thought that that would be -- that would be a good thing.

Obviously, the margin has moved higher. Most of the gain in the margin -- basically all the gain in the margin has really come from the funding side. Our banks continue to do a great job of controlling their funding. I think our Treasury department and Ron, Angela and his crew continue to do a very good job of finding low-cost funding sources at the wholesale level. And then, of course, we are also benefiting from high-cost CDs continuing to roll over and roll down the yield curve. So I mean there has been a couple of things that have taken place in the second quarter that really helped the margin from a funding perspective.

I am going to once again say that I doubt that we are going to see much improvement in the margin in the third quarter. I think I am going to probably be right this time and I think that all of us would be thrilled if we could even hold on to this higher level of margin during the next three to six months. Time will tell, but, again, this was a very, very nice surprise for all of us this quarter to be able to see the margin expand at that rate.

Interest expense, getting back to the margin, interest expense decreased 19% during the quarter where we only gave up 2% in interest income. So once again, the benefit that we saw in the margin was driven by the funding side and our ability to reduce our interest expense. Hopefully, going forward, we won't experience a significant amount of contraction in our margin the rest of the year, but, again, as I just said, the chances of seeing any further increases I think is going to be negligible.

Our loans grew by $139 million during the quarter or 15% annualized. This is above our projections and through the first six months, loans have grown at a 12% annualized rate, which also exceeds our expectations for the year. Because of the seasonality built in to our loan production, the second and third quarters are always our two best quarters for loan volume. So we will have a better idea of what to expect by the end of the third quarter. If the third quarter, however, is anything like the second quarter, we could achieve better loan growth this year than we originally forecasted.

Our efficiency ratio decreased to 52% from 55% the prior quarter and decreased from 57% for the same quarter last year. This may have been one of the best things we achieved in the quarter; although increased revenues play a big part in improving efficiency. I thought our 10 banks did a stellar job of controlling their expenses.

During the quarter, net interest income was up 8%. This is on a linked-quarter basis. Noninterest income went up 7%, but noninterest expense was only up 2%. So we are very fortunate and pleased that we were able to produce that level of efficiency and that change in our efficiency ratio from a number that was running over the last, especially during 2007, a much higher rate than we have historically -- we have historically seen.

And then, finally, the states and the economies we operate in continue to do reasonably well. Unemployment levels are well below the national average. There is still high demand for many of the natural resources produced in our region and we continue to experience good population growth in many of our markets. We really like the model of independent community banks and especially during these tumultuous times, we believe it is one of the key reasons for the success that we have been able to have to date.

It continues to be a very difficult operating environment for banks and as we have said many times before, we are not immune to the problems and the issues facing banks today, but we fully expect to have more issues and challenges to deal with as we move forward. However, so far, we have done a pretty good job of negotiating and managing through this environment and hopefully, we can maintain this performance level as we move through the rest of the year.

And with that, those are some of my initial comments and we would be more than happy now to open it up for questions of the management team and we will see if we can get everybody's questions answered. So with that, are there any questions out there?

(OPERATOR INSTRUCTIONS).

Operator, is there a technical difficulty?

All of these lines are open. It just looks like nobody is speaking right now.

Hello?

Hello?

Mick?

Yes.

Is there a queue?

I have an open mic here. Mick, this is Chris Stulpin, DA Davidson. May I ask a question?

You bet, Chris.

Okay, thank you. Can you just -- what are you seeing happening in your home equity line of credit portfolio? Anything developing there? Can you also get a little more specific with some of the markets that you are -- that Glacier operates in, please?

I think from a home equity perspective and I will let Barry chime in here too, but we, as we do all the time, we are constantly polling all the banks and obviously, we are checking the numbers ourselves, but, just recently, we wanted to just see specifically from those lenders what was taking place in our HELOC portfolio. I think there are two trends that we see. So far, fortunately, they haven't seen a huge -- haven't seen a lot of increase in delinquencies in the portfolio. But I believe that, as you look across the 10 banks, they are seeing that where the HELOCs that have already been out there for some time, there are being more and more dollars advanced on those HELOCs. So I think the entire HELOC portfolio has seen some increase. And Barry, I will let you give Chris some specifics.

Chris, (inaudible) revolving, and that is primarily our home equity line of credit product, increased $36 million quarter-over-quarter from $322 million to $358 million. It was a combination, just informally soliciting the information from the banks, a combination of increased usage of some of our larger banks, increased from the 58% to 62%, 63% range and then it was also a combination of increased production.

Generally, with the reduction in -- a lot of our home equity lines of credit are tied to prime plus a small margin and given the low rates, we would anticipate that we may see some usage there as that is more advantageous than some of the other consumer products out there.

Also, as Mick mentioned, we generally do see some kind of seasonality in our lines. Our borrowers or consumers, they are buying boats, cars, whatever and a lot of them avail themselves to use a home equity line of credit at that time. So it is up $36 million quarter-to-date and it is up $42 million year-to-date.

Do you have any other questions, Chris?

Well, I had a follow-up and that was the -- can you get a little more specific what you're seeing in maybe your more urban markets as far as the economies? I know you generally said that things are doing pretty well. But are you seeing any sour spots or markets that aren't doing well under your umbrella?

Well, I mean the real urban markets probably for us would -- I mean depending upon what you consider urban -- but I mean our largest markets are Spokane and Boise and those are markets of 500,000 to over 500,000 people and I believe everybody knows that the Boise market was an overbuilt market. It was a market that -- there was a lot of construction, as well as development lending that went on there. We don't have a huge presence in the Boise market, but, to date, a lot of the issues that we have had from a credit quality perspective have come from that market down there in and around the Treasure Valley.

Haven't seen a lot of issues coming out of northern Idaho or maybe in that Spokane area. Of course, we have a very, very small presence in Spokane. In fact, it is a presence that we are just now really starting to develop. Some of the other states, Montana, we don't have any huge metropolitan areas here, but Montana, Wyoming, Utah, I think you're still seeing some pressure on real estate. Real estate prices are not increasing like they were before. The good thing is they haven't seen the huge reductions in real estate values in these states.

I was just talking with people in Wyoming yesterday and it has softened up in some respects, but the real estate market and the real estate values have still held up very well. Utah -- I think the Utah market is definitely softer, especially on the west slope of the Wasatch, but we don't have a presence in that general area.

I guess real estate values overall on our footprint have held up probably better than just about everywhere else, but they are definitely not going up anymore. I still think that there are pockets of overdevelopment and inventory levels that are going to have to be worked through and that is not just in the metropolitan areas, but I think that holds true also, Chris, with some of our smaller markets throughout Montana and Idaho.

Thanks a lot, Mick. Thanks, guys.

This is Joe Gladue. Just wanted to ask you if you could give us a little color, update us on the philosophy in regards to the provision and the loan loss reserve. Obviously, you have more than doubled the provision. It was I guess more than five times net charge-offs and you already had some pretty strong reserve coverage and got even stronger. Not that I am complaining, but I guess just trying to get a better feel for how to forecast going forward.

Well, that's a good question. I mean we are somewhat unique and we have said this in the past. We are unique in the fact that what you see on a consolidated basis is the compilation of 10 banks doing their own separate analysis, deciding what the mix of their assets are, what the issues in the nonperformings and the delinquencies that they see within their individual bank and then making sure that they are adequately providing for not only what is in the portfolio right now or what the problems are in the portfolio right now, but also what they are seeing in their markets and some of their projections.

So I mean it is somewhat unique, this model more so than almost all the other banks around. We do give each of our banks a great deal of autonomy to determine what is the scope of their loan portfolio, what needs to be done from an ALLL perspective and yes, I mean we felt -- when you rolled it all up, there was over $5 billion in provision and going forward, all I can tell you is that we are going to make sure that all the banks continue to adequately provide.

If that means that the ALLL continues to go up, so be it. It will be what the individual 10 banks ultimately decide is best for each of them and then what happens when all those banks get rolled up again is the number that you see. And I would hope that -- and I truly do feel that they do a great job and Barry works with each and every one of them. I think they do a very good job of understanding their portfolio, dealing with the problems that they foresee, addressing them and provisioning accordingly for those issues.

And I don't see that changing any. I am hoping that -- like I said earlier, I am hoping that the delinquencies and the NPAs can stay within a manageable range, but I fully expect that the rest of this year we could see higher levels of NPAs. We are hoping that even though, and I have said this before. We have had much higher levels of NPAs in the past and we were able to really keep our net charge-offs down to very manageable levels. And we could see NPAs continue to move higher, but if they do, hopefully the values and the way they were underwritten is going to minimize the amount of charge-offs that we ultimately take. Barry, do you want to add any more?

I just might add that the increased provision is truly a reflection of the increase in the NPAs. It's primarily a reflection of maybe a little catch-up from the first quarter where the NPAs nearly doubled. And so I think it was -- in order to maintain what you will hear as a catch-all phrase called directional consistency, we felt it was prudent, at least at the bank levels, to also increase the reserve to reflect the deterioration of credit quality.

Fair enough, thank you.

Hey, Mick. Matthew Clark. Can you give us the -- or Barry, can you just give us the 30 to 89 day bucket at the end of June that we will see in the call report on a dollar basis?

Yes, I can give you those totals. Why don't I just go through the list and it might free up additional questions. 30 to 59 and still accruing interest is going to be $13.137 million. I just want to maybe preface that these were preliminary call report numbers. They are not final, but they will be close. 60 to 89 is $17.439 million and 90 and still accruing interest is $3.727 million. Total past due is $34.305 million. Non-accrual loans are $20.725 million. Total past due and non-accrual are $55.030 million.

Okay. Great. And the incremental increase in delinquencies there by type and maybe by affiliate, can you give us a sense for that?

I do not -- that would take some time to go through. What I could do, if you want to e-mail me and I can email back you just a spreadsheet where that went through. I can give you the March quarter changes. Over 30 to 59 was a decrease of $15.498 million for March. In the 60 to 89 was $13.189 million and 90 and still accruing was down $989,000. Total past due dropped $3.298 million and non-accrual loans were down from $22.842 million to $20.725 million.

Okay. Great. And can you discuss the appraisal process right now in a lot of your markets and what you are seeing and when you are getting those back? Is there any dumping of resi land and developmental type assets going on in any of your markets and where it might be damaging underlying real estate values or the growing OREO buckets that we are seeing among the banks and the related foreclosures causing some additional pressure on related values? Can you just discuss that phenomenon and whether or not you are seeing that in any of your markets?

Okay, I think we had three questions there, but I will be happy to address them. The appraisal process traditionally and as we have always done, with the exception of one bank that has an appraisal department, we engage independent third-party appraisers. Generally, we would require an appraisal on any of our properties that we would start a foreclosure action on or if we did take it back into OREO, we would update the appraisal at that time with the current appraisal based on usually comps within the last 90 days and we have made the adjustment to balance sheet assets at that time.

For renewals, loans that we do in the normal course of business, depending on the amount of equity that was originally programmed underneath the original appraisal, we may waiver appraisal. However, generally across the system anymore, we are -- due to the market conditions, it is only prudent that we order new appraisals at almost every renewal that we are doing anymore, even if the appraisal is a year old. So it is pretty commonplace now. We just incur the costs early, pass that cost along to the borrower just to support the values out there.

And how much -- are you doing any discounting to those at all or not?

Generally, if we find that there is an appraisal that is high, we have an appraisal review process and if we feel that the appraisal is high compared to what we see in the comps, we would ask the appraiser to go back to the Board and redo the appraisal.

In regards to discounts, about the only time that we would consider a discount, if we were in a liquidation mode on a property and we felt it was prudent given the market conditions to discount the balance of the loan in order to liquidate the preferred loan or OREO in order to liquidate it.

Generally, we write our OREO down to fair value, and knock on wood, generally across the board, we have been able to -- we have not had significant loss on sale of OREO to this date. But given the following increase in OREO that we've seen this quarter, we would anticipate we may start to see some of that based on the fact that, of time versus resources analogy, if we want to start blowing out some of this OREO, we are going to start discounting it.

And there has been more short sales, more requests for these for short sale. We haven't necessarily honored all of them, but if it makes sense for us, we will entertain a short sale. But sometimes that is -- if we feel there is other assets or there's other collateral there, we won't necessarily jump on that either. But as far as the other question, Barry, we haven't really seen much in the way of dumping.

No.

We really haven't throughout our markets.

We have seen a lot of solicitations for prices on some of our properties that are, of course, being discounted. But in this type of environment, you are going to see that across the board. So I guess it really comes down to the question how long do we want to hold these properties. From a statutory standpoint, we could hold them for five years. Of course, from a management perspective, we would like to liquidate them in 30 days. So it really comes down to that. Will we hold properties more than 90 or 120 days? Maybe. Over 180? I really doubt it. So we are going to be fairly aggressive in liquidating those properties that we have in our present OREO portfolio.

I think that currently a lot of the OREO properties are coming out of that Treasure Valley area and Mountain West has done a very good job of really staying on those and moving a lot of those properties. So there is going to be a lot of activity I believe the second half of the year. You just hope that we are moving as much out as what is coming in.

Right. Okay. And then if you were to consider the subcategories of your resi construction and your land development, could you discuss what you are seeing in that spec bucket that is around, that was around at least at the end of the first quarter around 207 million in terms of spec resi and also on the raw land of 110 or so and then also in the land development? Just trying to think -- I guess hone in on the areas of where you might be seeing at least the most stress within that portfolio?

I will just give you some quick numbers and these are call report numbers and then anything beyond that, Matthew, I think we would spend a lot of time going through. But one to four family residential and the bulk of that is, or a good share of that is spec. Generally, it runs about 50%. It is down $11.4 million quarter-to-date, $23 million year-to-date. Other construction, land development loans is up $45 million year-to-date, but only quarter-to-date is up $2.1 million.

And so we are really transitioning away from the high-risk portfolios -- the spec, the presale and the A&D loans. And we are truly -- where our loan growth is coming is partially in owner-occupied commercial and non-owner-occupied commercial. We are seeing -- we have $20.8 million in owner-occupied quarter-to-date and we have a $42.4 million basically in non-owner-occupied commercial. And I know $12 million of that is in one hotel loan down in our Billings market.

The other big increase that we saw is in the revolving and the home equity lines of credit, $36 million and we have portfolioed some single-family residential, so we increased $30 million there. So where we are moving in the trend is away from the spec, presold, A&D into our more traditional loan products.

And Barry, even the A&D loans through the first six months, so many of those were loans made in '07 or before that finally were advancing.

Right. So our portfolio is in transition. It is probably changing quicker now than it has even during the boom years of 2005, 2006. Is it going down? Are some of those A&D loans paying off as quickly as they went on? No. And that is probably some reason for some of our continued loan growth. But it is definitely -- the risk profile is starting to change.

Okay. And what kind of absorption rates are you seeing on maybe the developed lots?

I'll tell you what, the developed lots are a concern. In all of our markets, the minimum is about four to five years and depending on the first-quarter and second-quarter sales, we could see up to 10 years. Now that is -- if we have fairly small markets here, fairly small numbers, but developed lots are a concern.

The absorption on spec and presold generally is 9 to 12 months across our markets, but generally across all the markets, the inventory of new construction is down and we would anticipate here in the next six months to a year that we would get back to an equalization what we call six-month absorption on spec and presold. So why it is high now, it is moving in the right direction.

Okay, great. Thanks.

Are there some additional questions? Okay, well, I guess hearing no other questions, I would like to thank everyone for joining us this morning and again, we feel like it was a pretty good second quarter and we are going to continue to just slug it out out there. Again, it is a very, very difficult environment for so many banks and we have been very fortunate to be able to produce the results we have been able to produce so far. And we are going to keep working diligently to see if we can keep this momentum going. So with that, I would like to thank everyone for being with us this morning and have a good weekend. Thank you.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.