Glacier Bancorp's (GBCI) CEO Mick Blodnick on Q3 2016 Results - Earnings Call Transcript

| About: Glacier Bancorp, (GBCI)

Glacier Bancorp, Inc. (NASDAQ:GBCI)

Q3 2016 Results Earnings Conference Call

October 21, 2016, 11:00 AM ET


Mick Blodnick - President and CEO

Randy Chesler - President, Glacier Bank

Ron Copher - CFO

Barry Johnston - Chief Credit Administrator

Don Chery - Chief Administrative Officer

Angela Dose - Principal Accounting Officer


Michael Young - SunTrust

Jackie Boland - KBW

Matthew Clark - Piper Jaffray

Matthew Forgotson - Sandler O’Neill

Tim Coffey - FIG Partners

Daniel Cardenas - Raymond James

Jeff Rulis - D.A. Davidson


Good day, ladies and gentlemen, and welcome to the Glacier Bancorp's Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Mick Blodnick, President and CEO. Sir, you may begin.

Mick Blodnick

Thank you. Welcome and thank you for joining us today. With me this morning is Randy Chesler; President of Glacier Bank; Ron Copher, our Chief Financial Officer; Barry Johnston, our Chief Credit Administrator; Don Chery, our Chief Administrative Officer; and Angela Dose, our Principal Accounting Officer.

Yesterday, we reported earnings for the third quarter of 2016. For the quarter, our earnings were a record $31 million that's an increase of 5% compared to $29.6 million earned in last year’s quarter. We produced diluted earnings per share for the quarter of $0.40 compared to $0.39 in the prior year's quarter, that's an increase of 3%. For the nine-month period, we earned $90.1 million, which was 4% above the $86.6 million earned in the same period last year.

Year-to-date, we generated diluted earnings per share of $1.18, that's increase of 3% compared to the $1.15 in the same period a year ago. The quarter's results include $228,000 of acquisition expense along with $1.4 million of expense associated with our core consolidation project and the reassurance of debit cards to our customer base with the new chip technology.

Through the third quarter, we converted 10 of our 13 bank divisions and earlier this month completed the final 3 banks divisions and earlier this month completed the final three banks. We're now working to complete the data system conversion for Treasure State Bank after closing that transaction at the end of August.

Our return on average assets for the quarter was again a strong 1.34%. Return on average equity was 10.80% and we delivered return on tangible equity of 12.69%. All relatively consistent with what we produced over the past couple of years.

During the quarter we closed the acquisition of Treasure State Bank located in Missoula, Montana with assets of 76 million it's great to add Treasure State to our Company and have it become a part of our first security bank of Missoula Division. As we previously stated, we believe this addition brings tremendous strategic value to our company and look forward to having them on our new Gold Bank data system by late October.

We had another very good quarter and year-to-date our results are been consistent and improving each quarter. We certainly hope that trend will continue through the end of the year. Once again, we had good loan growth that exceeded our expectations.

Our organic noninterest deposit growth was especially strong which helped us maintain our net interest margin. Top line revenue growth was higher again this quarter primarily due to increased fee income and we did a good job of controlling noninterest expense especially when you exclude the expenses tied to the major data platform initiative in the hundreds of thousands of card we reissued.

Credit quality was stable although we are no longer seeing further improvement in the metrics as we have in the past several years. As we enter the fourth quarter, it's nice to know the largest internal project this company has ever taken on is now mostly behind us and we can refocus our attention in other areas and initiatives that have had to be sidelined in the past two years.

We hope this quarter will be another good one and we believe that certainly could be the case. However we're now in the quarter were things traditionally slowdown towards the end of the year especially in certain revenue bucket. Nevertheless we're going to everything in our power to make sure this momentum we've built continues.

The CEO transition has gone very well and Randy will be taking over for me effective January 1. The Company is in good hands going forward and I believe Randy, and the talented management team and bank presidents we've assembled over the years will continue to bruise the level of results you come to expect from us.

I'm not going to turn the call over to Randy for a more detailed analysis of the current quarter and year-to-date results. Randy?

Randy Chesler

Thank you, Mick and good morning to those on the phone and thank you for joining us.

So our 13 divisions - let me start where I’m going to review the developments in the third quarter and then I’ll open the line for your questions. So the 13 divisions led by our bank presidents in our 13 markets across our six states once again did a great job across the number of fronts. As Mick mentioned the loan growth continue to be strong.

We got off to a good start in the first quarter. We had a great second quarter and that trend continued into the third quarter. Organic loan growth was $165 million or 3.1% during the quarter. This compares to $181 million or 3.5% growth last quarter and 1.4% growth in the prior year's third quarter.

Third quarter loan production increased by $75 million over the second quarter with $680 million generated in the third quarter versus $605 million in the prior quarter. While gross loan production was up versus last quarter, the seasonally impacted payoffs in the third quarter resulted in a little less total loan growth.

The current 12% annualized growth rate through the first nine months of the year is way above our original plan of 5% that we said at beginning of the year. However, we remain comfortable with the credit and the pricing dynamics in general and still expect to end the year with either a high single-digit or quite possibly a low double-digit growth rate.

We are very pleased to see solid loan growth across almost all our loan categories. Commercial real estate loans saw the largest dollar growth and residential construction also showed nice growth for the quarter. Our commercial and industrial loans declined slightly versus last quarter but we're still up 13% compared to a year ago.

Credit quality was relatively stable as delinquent loans ended the quarter at 0.49% or $27 million of total loans compared to the prior quarter and when they stood at 0.44% and from the third quarter a year ago at 0.37%.

NPAs compared to total assets ended the quarter at 0.84% or $78 million versus 0.82% at the end of the last quarter and 0.97% or $85 million year ago. We still have a long-term goal to reduce those NPAs to $65 million but we take the approach of trying to find good solutions for these assets where we get the most economic benefit and that takes a lot of time and patience.

We're seeing some slightly elevated delinquencies and NPAs but we believe we're still in a stable part of the credit cycle and we'll see credit performance continue to move in a narrow range like it has been for some time. The provision for loan and lease losses was 626,000 for the quarter compared to zero for the prior quarter and 826,000 a year ago. The allowance for losses as a percentage of total loans ended the quarter at 2.37% versus 2.46% at prior quarter end and 2.68% a year ago.

We still believe we are probably positioned in the event we begin to see a softening in credit. Net charge-offs of the quarter were $478,000 compared to net recoveries of $2 million in the prior quarter and net charge-offs of $577,000 from the same quarter a year ago.

Total organic deposits increased - core deposits increased $161 million or 2.4% from the prior quarter and increased $191 million from a year ago. Core non-interest-bearing deposits increased $179 million or 9.4% from the prior quarter and $103 million from a year ago.

Our good portion of this increase is not a non-interest-bearing deposits for the quarter is driven by seasonality but we still see - we are still very pleased to see some permanent growth here. Core interest-bearing deposits organically decreased $17 million from the prior quarter end and increased $88 million or 1.9% from a year ago.

Consistently attracting good quality stable and low cost deposits remains a key focus for the company and the team across our network does an excellent job in this area. Total borrowings decreased by $129 million or 17.3% compared to last quarter and borrowings are down $205 million or 24.9% from the beginning of the year and down $158 million compared to a year ago.

Our investment portfolio made up 32% of overall assets for the quarter down from 34% at the prior quarter end as we adjust our investment portfolio based on loan demand, deposit growth and for acquisitions as they materialize. The portfolio decreased $197 million from last quarter with most of the decrease coming from the CMO and MBS securities. The CMO and MBS securities are lower yielding and the strong loan demand this quarter has enabled us to replace these securities with higher yielding loans.

Total stockholder equity at the end of September was $1.1 billion which represents an increase versus the prior quarter end of $23 million or 2.1% and an increase of $73 million versus a year ago. Shares outstanding at the end of June were $77 million with a booked value of $15 per share versus $14.76 at the end of last quarter and $14.23 a year ago.

For the quarter approximately half the equity increase was due to earnings retention and the other half due to stock issued for the Treasure State acquisition. All our regulatory capital levels remained far above the required levels.

Mick covered our net income performance, so moving to interest income, this decreased very slightly down $125,000 from the prior quarter but was up $5.6 million from the end of the third quarter a year ago driven by increased loan balances and relatively stable loan yields.

The decrease in this third quarter compared to the second quarter was driven by onetime event in the second quarter, a large interest recovery and purchase accounting adjustments. Interest expense was down $106,000 or 1.4% versus the prior quarter and was flat of just $9,000 from a year ago. Overall the team has done a really good job of maintaining deposit, pricing discipline in each of their markets.

Our net interest margin for the quarter is 4%. Last quarter the margin was 4.06% and was lifted by the one-time interest recovery and purchase accounting accretion. For the nine months of the year, the net interest margin is 4.02% versus 3.99% for the same period in 2015. Average yield on the earning asset portfolio was 4.33%. Now this is down from 4.41% in the second quarter and down from 4.42% in the year ago quarter.

Total funding liabilities had an average rate of 0.37% for the third quarter compared to 0.38% in the prior quarter and 0.39% a year ago. So the remix of investments into loan has helped us maintain a solid and relatively stable margin over this period.

Noninterest income was up $1.5 million, 5.7% from the prior quarter and $2.5 million from the third quarter 2015. This quarterly increase in noninterest income was once again primarily driven by the gain on sale of residential loans.

Including the $1.4 million in CCP expense for this quarter, noninterest expense was up $719,000 or 1.12% versus the prior quarter and up $6.1 million compared to third quarter 2015. The increase over the prior year's quarter was primarily driven by the core consolidation project expense, an increase in headcount and including the acquisition of Canyon, and regular salary increases.

The efficiency ratio for the quarter 55.8% versus 56.1% at the end of the prior quarter and 54.32% at the end of the quarter a year ago. We don't expect to hit our target - our efficiency target of 55% this year primarily due to the CCP expenses but we are closely looking at the efficiency drivers as we develop a path in 2017 to reach the efficiency target.

On September 28 we declared a quarterly dividend of $0.20 per share payable on October 20 to owners of record on October 11. This is the third dividend declared this year and represents a 5% increase over the dividend level paid in 2015.

Two other items I wanted to mention before we go to questions. First is, as Mick mentioned we've now completed the Gold Bank conversion also known as CCP for all 13 bank divisions and really the employees across the company have done an excellent job of planning and managing the conversions and have spent a lot of time on this starting in 2015 and certainly for most of 2016.

Now that it's done it will take some time to get used to the new system begin to develop and test new workflows before we can really start to quantify the gains we expect to achieve.

And lastly we still expect to cross over the 10 billion threshold sometime in 2017. So we're moving forward with our plans and taking advantage of a long time horizon until we have to submit official DFAST stress test results in 2019. As discussed we certainly don't expect the annual cost of this project to be anywhere near the same levels of CCP.

So that concludes my remarks. I would thank you for your patience and I like to ask the Operator to please open up the lines so we can answer any of your questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from Michael Young from SunTrust. Your line is now open.

Michael Young

Good morning, guys. Mick, first of all, I'd be remiss if I didn't say congratulations on a great career and a well-earned retirement.

Mick Blodnick

Thank you very much.

Michael Young

You're sounding a little under the weather; I hope you're doing all right.

Mick Blodnick

Yes, I did pick up a head cold here, you’re absolutely right Michael.

Michael Young

Well, Mick, I wanted to ask just a big-picture question first on the M&A pipeline. I heard Randy's comments about planning on crossing $10 billion in 2017. Organically, you might not get there, but it sounds like there may be some M&A opportunities that you're seeing that would push you over that threshold.

Mick Blodnick

I think that we would - you can never guarantee anything Michael but I think we would be probably disappointed between now and the end of '17 if our organic loan growth and the possibilities for additional M&A activity would not push us over that threshold.

I mean we’re still seeing good deal flow, lots of interesting things. Some we're interested in, some we quickly let the other side know that it probably isn’t something that we would be interested in pursuing. But I would certainly be surprised if over the course of the next 14 months that we wouldn't find a way and we would be crossing over that number.

Certainly we still have a large investment portfolio although it is coming down. I mean you heard Randy's and we had it in the press release. We've gone from 36% of assets down to 32% of assets just in, well since the 1st of this year but certainly from the same quarter last year.

There is still some leverage there to be played if we need to on the investment portfolio but I don't necessarily think that we’re going to continue to manage this company to stay under 10 billion. Timing obviously as we've talked about in the prior calls, timing is critical, so we got be sensitive to the timing of how close we are to any given year end or anything before we cross over.

But I think that Randy and myself the Board of Directors, the management team we all feel that '17 is probably the year where that happens. And that's what we're planning for, preparing for and expected to be ready for.

Michael Young

Okay, great. And then just wanted to ask one - Randy, I heard your comments on the efficiency ratio and trying to get back to sub-55% next year. Just curious, kind of timing on that. Maybe you may not want to give more guidance to 2017, but with CCP largely done, should we expect some of the expenses to start coming out as early as fourth quarter, or is it more going to be a first half of 2017 phenomena?

Randy Chesler

Well, there is two aspects to CCP. One is we’ve disclosed the elevated expenses associated with making that all happen and so the bulk of that is not going to be in '17. The other piece is, now that we have the one system how do we get to the efficiencies and that's where I was trying to kind of telegraph some patience on that because if you think about it we just spent a year and a half, we've had hundreds of people working on this project. It is a major change and it’s just stunning that we’re able to get this all done and continue to do the amounts of business that we’re doing and quite frankly I think the folks are taking a deep breath here for a little bit now that it’s done.

They have to learn the new system so everyone is on one system but it’s a new system in some ways for many of the - for all the banks. But we've got to get comfortable with that and then we’re going to start experimenting and launching and implementing work flow.

So we’re looking at how people work on the new system and then one of the big advantages of having one platform is we can then use one work flow to gain efficiencies as we start to understand how people are using the system and where we think we can generate some efficiencies.

So that's just going to take longer over 2017 to really work out and really get the true benefit of that. So probably towards the - you are going to see obviously the savings from not having all the costs associated with CCP are not hit in 2017 and then the follow on benefit of the program itself was probably a later '17, '18 like event.

Michael Young

Okay, great. And then just last one for me, on the mortgage fees, obviously they were really strong this quarter and have been really strong all year this year. Are there any sort of things we should be thinking about as we go into next year in terms of maybe market-share gains or just a focus on purchase originations that are going to sort of offset the industry trend of declining volumes?

Randy Chesler

Well, if there’s a lot of good things about our mortgage business, one is we are still running a very high percentage of purchase versus refi. So I think, I like that because those are long-term relationships that, that don't disappear.

You know, I think you'll see – probably expect just pretty steady performance in 2017. We feel like – we are share leader in a lot of the markets that we are in and we don't see that changing. But we don't see material growth as well, but we believe we're going to be able to hold the current levels we've been doing and hopefully see that in 2017.

Mick Blodnick

I think that, if we can like Randy just said, that we can increase market share that will certainly help us maintain where we are at. I think the one thing that's going to be concerning for all mortgage players, make sure we simply do see an increase in interest rates.

It's certainly going to have some impact on refis. And for us like Randy just said, 65% of our volume this year has been in purchase -- purchase transactions, that's great. But still those 35% that's been in refi, so if that would dwindle, we're going to have to make sure we step up the purchase activity and get and reach out in the more of our markets and capture more market share to make sure that we don't fall too far the other way.

One of the things I really like is the fact that we applied a lot of initiative this year to putting in place the resources to grow the mortgage business. There has been a number of banks – a number of banks in the past they are part of our company, now that we are not heavily mortgage lenders.

We've built those banks and those resources up in those markets and they are now starting to really gain some traction. In addition, we are picking up some very good originators in the Treasure State Bank deal.

So that is certainly going to help and that's going to be volume that we will have in 2017 and we haven't had in 2016. So, hopefully all those things together will allow us to maintain what we've got, if indeed we do see higher interest rates. If interest rates don’t move up then it would be my expectation that next year could be another really good year for mortgage origination.

Michael Young

Okay, great. Thanks, again and congratulation once again, Mick.


Thank you. Our next question comes from Jackie Boland from KBW. Your line is open.

Jackie Boland

Hi, good morning, guys. I, too, echo the sentiments; congratulations, Mick. I hope you are really looking forward to a lot of extra time with your family and getting to enjoy yourself a little more.

Mick Blodnick

I am indeed. Thank you very much.

Jackie Boland

I wondered if you could provide a little color on this. In the past, as we've spoken, you've talked about not wanting your lenders to reach for growth and that you would be okay if you didn't quite hit growth targets this year. As it comes to pass, you've surpassed growth targets, so just kind of your thoughts on what you're seeing in the markets, what may have changed over the last couple of months and quarters, and just your outlook kind of in the future on how you feel about loan growth and having people not reach for it.

Mick Blodnick

Well, I don't believe we are reaching and I will let Barry quantify and he will speak to that very subject, because you are seeing in every week especially on the larger deals, Jackie. But certainly we came into the year as we’ve mentioned countless times before not putting high expectations on our loan growth for 2016, and in fact, focused squarely on quality over quantity. However, a lot of the growth that we’ve seen above what our expectations were has come from as we said in past calls that municipal loan market.

I think our banks have done an absolutely fantastic job of capturing a lot of that that opportunity and a lot of those projects that exist or become available to us in our six to eight markets. And we pulled a lot of that kind of volume from basically all six of the states and just about every market that we do business in.

And I am not so sure Jackie, did early in the year we were necessarily thinking we're going to be as successful. And we’re going to see that number of opportunities and the size some of these opportunities to that meeting space, its excellent business. We really like the business and like we said, we think we’re pretty darn good at that business.

Outside of that, I still believe that when you have our 13 bank presidents, who over the last couple years have had the opportunity in the time to spend more time in the area of growing their franchises. I think a lot of these bank presidents are far more active now than they were prior to the charter collapses to be able to spent time with those customers.

And there's no doubt in my mind that these individuals can move the needle and they do move the needle. When they get involved in deals, I think we see a lot more deals getting done. And for whatever reason they just bring, they just bring a lot of credibility and we get I think we're getting looks at just about everything.

As far as the quality of the deals that we’re booking, considers so right, we never expected to be sitting here through nine months of the year and up about 12% annualized. And I do believe that as Randy said, that’s probably going to pay her back a little bit in the fourth quarter. I would be really, really surprised it doesn't.

But still it’s going to be a far better year than what we expected. From a quality perspective, Barry, you want to speak to Jackie’s questions partly.

Barry Johnston

Yes, Jackie, you know we just haven't seen too much pressure on lowering credit quality standards over this past year. And probably where we have seen some pressure is an extended amortizations about where we normally like to go but in lot of cases the loan to values there mitigates that to a certain extent. Definitely seeing some pricing pressure.

But overall, lovely been looking at it least it the larger credits that I get involved in. There’ve been pretty solid credits, general run-of-the-mill nothing outside the box too much for the most part on our municipal financing.

A lot of those credits we’ve seen are almost investment grade if not investment grade credits. And then on we have some healthcare financing that we've been pretty aggressive in but we’re taking a look at that to see how much we want to continue into that marketplace.

And a lot of those credits have been high quality, long rated facilities. And then we’ve just seen a lot of growth throughout our footprint from all different product lines. It really hasn’t been something that in one area that we’ve seen commercial real estate is been good.

We've always been a heavy commercial real estate vendor. We have a lot of projects under construction now that for the most part some of those will turn out, some of those will find alternatives to take out commitments.

But, it's been pretty broad-based. We have got some leverage up our new acquisitions, especially in Colorado market, due to the changes in the legal lending limits of the Canyon acquisition. We've got some benefit there. So it's been broad-based. It’s been good, if not above average credit quality credit.

And we’re feeling pretty comfortable about where we’re going to end up the year. And I think Randy is right. It’s going to be high single-digits or maybe well double-digits.

Mick Blodnick

One other thing Jackie, I’d like to add what Barry said was we also have not had to add to our concentrations or really in fact in a few areas we have hit concentrations and its been a concentration levels that are internally established a year or two ago and haven’t booked any additional credits in those areas.

Barry talked about healthcare and how that's one that we will be certainly talking about and discussing as to how and what our appetite is going forward there. But I think one of the really nice things that I see is that we haven't had to go out there and book a bunch of loans in areas where we already have a high level of concentration.

We have just absolutely avoided doing that. And with it all said, you hear a lot of present and all of you on the call are very well aware of this. Chose a number of banks, a large number of banks around the country that are already exceeding their CRE limits. We’re still a ways away from our CRE limit. So we got the runway there to if we choose to continue to and see the opportunities to book more of those kinds of credit.

So it was, somewhat if surprise I'd be lying, if I didn't say that coming into 2016 I expected we'd be at double-digit loan growth. We did not expect that. But as I look back on how we’ve got and where we are today, obviously communities have been a big part of it and I believe that the level of relationships our Bank Presidents, our Chief Credit Officers and all lenders have throughout our markets is absolutely allow this to happen.

Jackie Boland

Okay, that's really tremendous color, guys. Thank you. And just one last quick one, the past two years you've done a special dividend that's been declared in the fourth quarter. Is that something that you might contemplate again?

Mick Blodnick

That will certainly be contemplated. You bet.

Jackie Boland

Okay. Thank you. And congratulations again, Mick.


Thank you. Our next question comes from Matthew Clark from Piper Jaffray. Your line is open.

Matthew Clark

Hi, good morning. First one, just I'm curious how much accretion contributed to the margin this quarter.

Ron Copher

So the margin this quarter, purchase accounting was the 4 Bps. Last quarter it was eight, so it was about 0.5 of what we experienced in the second quarter/

Matthew Clark

Okay, that's what I thought, okay. And then, crossing $10 billion sometime next year suggests that you're going to have the interchange hit mid-2018. I'm just curious what your best guess of that annualized revenue hit is.

Ron Copher

So I think we have consistently called the street Matthew that we expect a pre-tax hit of somewhere in that $10 million range, so call it $6 million after-tax. I don't see anything right now that would change our analysis.

Certainly, Barry always says that hope is not a strategy but we could certainly hope that something would get down there and that atrocity would get removed but you can’t plan on that. You can’t design strategy around that.

So right now we’re assuming that yes, you're right, if we crossover by December of 2017 then we’re going to July 1 of 2018 that would be impactful for us.

Matthew Clark

Got it. And then, the increase in non-accruals, part of that was driven by Ag. I'm just curious as to what you're seeing, what exactly is going on there, and maybe also give us some color on what the mix looks like in terms of grains, including wheat, within that portfolio.

Barry Johnston

Well, this is Barry. Actually I think this quarter our non-performing agricultural credits went from $3.9 million down from $2.3 million. We had one credit last quarter that was on the past new status awaiting financial information from the borrower and depending on whether or not we’re going to renew that line.

But in regards to the overall impact some of the credit, yes, we are seeing some challenges there. We are seeing some increases in carryover. We are seeing some few operators that are just struggling.

As Ron mentioned, with the change in commodity prices but we are monitoring also we are actually looking at different strategies to work through those depending on secondary resources, real estate equities, government enhancements through with their various programs and/or look at alternative financings for the borrowers that they are available those have the ability to do that.

Ron Copher

But you Matt so you bring out non-accruals and I wanted to make sure that Barry and myself talked about this about this scoring. We want to make to make sure that as you look at our non-accruals for the quarter and our NPAs, our NPAs were up a total of a little bit over 2.6, call it $2.7 million for the quarter but during the quarter we brought on one large credit and moved it to non-accrual. That one credit was approximately 9.6, $9.7 million.

So on the one had without moving that one credit to NPA and non-accrual status we would have had a heck of a quarter for reducing our NPAs of almost $7 million and getting back to what Randy said earlier we would have really started to make an assault at that goal of ours of 65 but that’s neither here or there. That wasn’t the case. This large credit was moved to non-accrual. Now that large credit was an OREO property that we had during the credit crisis.

We sold out OREO to a group and this is maybe one of the first times where the Canadian dollar and what’s gone on in the slowdown in Canada has obviously caused some impact to our credit quality. That was a group that took that OREO property over and with what’s going on up in Canada over the last 18 months or so we felt it prudent to move that credit to non-accrual status because they’re experiencing some slowdown in some issues up there and as a result this credit we felt needed to be moved to non-accrual.

But the good news is again, that’s not what we like to see and we certainly hope that over time that we can work through this one too. But the good news on even that credit is the condition of this collateral and the amenities that have been added to that project in the last five or six years since we originally sold OREO and it was taken over by this group are far, far superior to what we sold back five or six years ago.

So we’re and we feel we’re in much, much better shape collateral wise. The property is in much, much better shape, there are far more amenities that exist today that did not exist back then. And so as a result it’s one of those good news bad news things. The good news is the property is in really good shape. The loan to value we believe is far below what it was five or six years ago. The bad news is there is a slowdown and there is some stress on this particular project and we did decide to move it into a non-accrual status.

With that said, as I mentioned earlier without that one credit coming on we would have this quarter seen approximately about $7 million reduction in NPAs. So there is again a full disclosure, I wanted to make sure that small increase in NPAs this quarter was not camouflaging what was a large credit that got moved to non-accrual status and just wanted to make sure that everybody understood that.

Matthew Clark

Got it, got it. Okay. Sorry about that, yes. And then on the CCP expenses, you know, $1.4 million this quarter, obviously not going to have that level of expense next year, particularly the expense that you've incurred year to date. But just curious, how much of those CCP expenses might we still see here in the fourth quarter and as we get into next year for modeling purposes?

Ron Copher

Well, it’s just a clarification, it wasn’t 4 million in the quarter, it’s been 4 million so far this year for the nine months.

Matthew Clark

I was saying 1.44.

Ron Copher

For this quarter yes. Again we have - we’re complete right now while we have one more role this quarter so with that role obviously came a lot of the CCP expenses that we’ve seen every quarter during the first three quarters of the year and this was a role that once again had another relatively large bank of ours that rolled. Now it was only three but in addition we’re converting Treasure State here this weekend.

So call it four conversions anyway you want to slice or dice it, there are still lot of work and effort and expense that’s going to have to go into that. So I don’t know. I would suspect it it’s not going to be too different. I just think that what we’ve seen in the first, second and third quarter and what we know has taken place and will take place this weekend, we should still be right in that ballpark.

Matthew Clark


Ron Copher

Randy you want to comment on what you see for next year, I mean these should be done pretty much.

Randy Chesler

Sure, I think you are right. You think for, it’s kind of the pace we’ve been on for the year so the expense should be consistent with what you’ve seen in the past and then we’re going to do everything we can to make sure there is no trailing expenses and we don’t see it in ’17 but knowing how these things work there is probably going to be a little bleed over in the first quarter and then I hope we’re, we’ve seen the end of it.

Matthew Clark

Okay. And then just curious what the wage average rate was on new production this quarter.

Ron Copher

The new production well sitting here we know probably have that number here Matt and we’re all kind of scrambling to see but it look like for the third quarter it was new production was right around 456.

Matthew Clark

Okay. Thank you.


Thank you. Our next question comes from Matthew Forgotson from Sandler O’Neill. Your line is open.

Matthew Forgotson

Hi good morning all. Congratulations to you, Mick, and to Randy as well, on a flawlessly executed transition. So, thanks to both of you.

Randy Chesler

Thank you.

Matthew Forgotson

I wondered if you could just talk a little bit about the net interest margin. You know, your outlook. You're right at 4%. As you move forward, the puts and takes to hold that level.

Ron Copher

We’ll I’ll let Randy chime in here too but going forward we’ve done a, I think we’ve done a remarkable job clearly of maintaining this margin through this entire time period. I mean if you go back we had a 4% margin for the quarter but so far for the first nine months our margins has been at 402 and that compares to like 399 for the first nine months of 2015.

So rather than our margin actually decreasing we’ve actually been able to step it by 3 bps over the last, over the course of 2016 versus the same period in ’15. I think in my mind that’s been pretty remarkable. I think there is some are some things that we continue to do that certainly support the margin.

Our banks aggressively go out and try to generate checking accounts, zero cost dollars into this company and they’ve done a really, really good job of doing that. The numbers through nine months are as good as any we’ve seen in the last three or four years, as far as number of new accounts. That’s helping because on average all these new accounts truly maintain about the same average balances so you get some growth and Randy alluded to that just by increasing your customer base you’re going to get some level of additional non-interest bearing deposits and we’re certainly seeing that. That has helped.

The remix has probably been one of the biggest things. Because when you’re taking lower yielding securities as I mentioned earlier we’ve gone from 36 to 32% of total assets and when you take and remix that balance sheet and put on yield that are arguably about double what is paying off and what’s paying down or what’s moving up off the books that certainly lends a great deal of support to that margin also. There's no doubt in my mind that those two issues are the main reason why we've been able to maintain this margin.

Will that continue going forward into 2017? Who knows. I mean, I'm not that smart to figure that out. But if we stay somewhere in this tight range I can probably assure you that we are going to be out there wrestling for every new checking account.

And I think we'll continue to be successful in that arena like we have been in the past. We still do have another -- I believe we've got easily another $500 million, $600 million that could move out of the investment portfolio and move into the loan portfolio or we could use that cash flow out of the investment portfolio to fund our loans, that next year will go a long ways. Those are going to be in my mind, Matthew those are going to be the drivers. And if those drivers stay intact and in place, our goal is to try to keep that margin in or around that 4% level.

And we've been able to do that pretty consistently for a number of years. Now, the wild card is do we get a rate increase? We don’t know. I mean speculation is that if you're betting right now, you're betting that probably in 2017 you are going to see higher interest rates to some level. But we thought that same thing this time last year and look at what we've got. So we don't – that’s the bank. We don't try to change the balance sheet or we don’t try to formulate strategy based on speculation where interest rates are going.

We try to deal with the reality in hand. Right now, I think we're all preparing for a tight band of interest rates and us doing much the same as what we've been able to do these last two or three years to maintain that margin where it is.

Matthew Forgotson

And just staying on rate, I believe the most recent disclosure we have on your interest-rate sensitivity is actually in your 10-K, and you showed you basically had an interest-rate neutral position at that time. Given the modest changes to the balance sheet, are you still interest-rate neutral or do you believe you are more asset sensitive? And if so, if we were to see a 25 basis-point lift, what kind of benefits would you expect to see to margin?

Mick Blodnick

For the most part we are neutral. I mean we've always managed these balance sheet to more of a neutral position. With that said, the latest numbers that we have at our disposal show us slightly asset sensitive, but it's not -- we're not one of those banks Matthew that an increase in rate is going to move the needle dramatically, you know like day one, we are going to have hundreds of millions of dollars of assets that are going to move higher like other banks are positioned. That's not us, it's never been us.

But we should over a 12 month, 18 month period of higher rates we will benefit simply because and I've said this for many, many, many years. We built this very, very valuable DDA base of customers. And that's where we'll get the benefit. Ron?

Ron Copher

Yes, I'd add if we look back in the fourth quarter last year December rate increase, our bank, our Division President did a great job of not passing on those rates to our depositors, and so we'll benefit on the asset side to next point, but equally as important is to control the rates on those interest-bearing deposits in combination with growing the non-interest-bearing. So it'll help, but it's mixed that it won't move the needle real dramatically. But it all taking together it's very helpful.

Matthew Forgotson

Okay. Thanks very much.


Thank you. Our next question comes from Tim Coffey from FIG Partners. Your line is open.

Tim Coffey

Good. Thank you. Good morning, gentlemen. Mick, again congratulations on your retirement. You're always accommodating with your time with me and I really enjoy covering Glacier because of you. I wish you nothing but the best in your next endeavors.

Mick Blodnick

That's very kind and thank you very much Tim. It's been a pleasure working with you over the years too.

Tim Coffey

So, Randy, now that you're going to be in the hot seat, do you have an update on how the team is performing in Colorado Springs? Barry talked a little bit about it earlier with the higher legal lending limit for that team, but do you have any kind of update on how they're doing and where they are versus kind of the Company's expectations when the merger was originally announced?

Barry Johnston

I would say that given what we’ve seen come out of that market as far as the size of some of the transactions and respect of underwriting and credit quality characteristics, it's been a positive.

I want to say I'm totally surprised because that same scenario happens with most of our acquisitions, where you have a small community bank limited by legal lending limit, and there's really two benefits; they can go out and solicit larger transactions, more complicated transactions.

And the second thing is we can repurchase some of the participation they sold over the years, we can bring those back into the portfolio. So, if we get that, that will benefit, but in the case of the Colorado acquisition it truly has been on the growth side.

Some very large transactions that they have been able to generate some volume out of through either some quasi-public entities, some municipal financing, we had some success there that they just haven’t been able to source at those borrowers before.

So, I anticipate that's going to continue as that franchise down there continues to grow. The lenders we have brought across top-notch, good quality lenders and we really can please with their performance. They've done a good job down there.

Mick Blodnick

I think Tim, there is one additional what Barry said is you know we do have great lenders down there, very talented. We maybe be probably over the course of the next year may look to add to our resources down there, that's a very, very, very big market.

There's a lot of things going on. And you know, I suspect that with us we would like to maybe capture even a little bit bigger share of that market and that's probably only getting done if we probably can find a couple of additional lenders, because I think the talent and the people we've got down there doing a great job.

But they can only handle so much volume too. So I think we are going to really continue to take advantage of what Barry just said and the things that we bring to the table, we may need one or two more lenders in that market.

Barry Johnston

And I think one of the things that acquisition did I think Canyon is really got us into the Spring's market. I mean they were in the market, but much less so than they are right now and that's 600,000 population markets. So I think lot of opportunities there. And that's fair aspect of the incremental growth we are seeing is the products and the approaches; opened up some new opportunities down there.

Tim Coffey

Yes, that's what I remember from the transaction being announced, that it was one of the bigger markets that Glacier was going to be operating in. And given the success that you're having in that market, does it provide additional encouragement to maybe enter some bigger markets than you have historically, via acquisition?

Barry Johnston

That's a great question. That's kind of the double edge sword too though. On the one hand Tim as you know, we've always wanted to play around the edges of the bigger markets. And you are absolutely right. It is the biggest market.

I believe the Colorado Springs market is even bigger than Boise and Spokane, the other two larger markets that we operate within. We had great success there. So it probably does bake the question you just asked, well, why not if we have this kind of success why not go after more of those.

There are a couple of other markets that we think are similar to Colorado Springs of Boise and that certainly we would be interested in. And if those opportunities arise I think you're going to see us and we've already attempted in a couple of cases to move into a few of those markets, just haven't been successful.

So it's not for a lack of trying, but just more the fact that we do what we do and we are willing to pay what we’re willing to pay. In some cases in doesn’t always work out totally in our favor. But I think there are some other markets like that that if we do get those opportunities down the road they could have a similar outcome as to what we’re seeing currently in the Colorado Springs market.

I don’t think our philosophy or our strategy about going into metropolitan markets has changed much. over my 40 plus or close to 40 years I have learned never say never because you’ll always be proven to be liar but it still those metropolitan markets we realize that maybe the model that we have the things that we rely on to make this company a very good company you need different, you need different attributes and maybe this model doesn’t play as well in metropolitan areas where scale, presence, things like that are more important than wide breadth of product offerings and different type of financial services. That’s not us.

I mean we know that, we know who we are and we accept who we are and we’ve been very good at what we are. But going into the metropolitan areas I don’t know if that’s necessarily in our best interest but certainly playing around the edges markets in the size of Colorado Springs I don’t think we’re a bit afraid of moving into those markets because I think down the road they could be good for us.

Tim Coffey

Good. Well thanks those are my questions.


Thank you. Our next question comes from Daniel Cardenas from Raymond James. Your line is open.

Daniel Cardenas

Hi, good morning gentleman. Congrats, Mick. A quick question, can you remind us what percentage of your loan portfolio is influenced by the Canadian dollar, or had some dependency on the Canadian dollar?

Ron Copher

Well 51% of our portfolio is centered in Montana with the bulk of that at Glacier Back is about 1.8 billion so that would be probably that portfolio is probably influenced more than any other in our organization. Now there is always some drifts out, there is some snow birds that come out of Canada and would impact some of our other market. That would be the bulk but it is about little over $1 billion would be my best guess.

Randy Chesler

That's just at Glacier that’s not the Canadian influence. I mean the Canadian influence I would be I don’t know, we’re just guessing here Dan. We could probably run a report and get that but I would really be surprised if the Canadian, straight Canadian exposure were we’ve made loans to Canadian individuals would be much more than 50, $75 million.

Ron Copher

The other thing I was going to say is Mitch talked about the one exposure that hit the NPAs so we really don’t see anything else at this point with the same dynamics that’s concerning us. That was the one big one. The one area where we thought we’d see it so a thing about some of our resort markets here like Whitefish Montana where is a heavy influence of Canadians. We’re looking at the resort tax and there we still see them coming down and spending money.

So we just haven’t – at the beginning of the year I think we expected a little bit more impact from the lower oil prices up there but haven’t seen much of it other than the ability to purchase real estate which is really driven this one big NPA that we had to deal with.

Daniel Cardenas

Okay, good, good. So the tourist industry is looking healthy as well, it sounds like.

Mick Blodnick

Tourism was an absolute blow out this year. It was fantastic. I think we’re going to see where Glacier Yellowstone just about every national park in the western United States Dan is going to crank out all time attended figures. I know that Glacier and Yellowstone are, I mean that almost backed in at the end of September. And in fact in one case was already baked in.

So it was a wonderful, wonderful tourist season and I think that some of the numbers that we went through earlier with the growth in DEA and some of that that we’ve seen through the third quarter that's all part of what we saw from the tourist coming in. There was just so many individuals and I’ve heard countless stories from those people in that industry that it was just a really, really solid great year and I think you could see that from here, you can see that into Yellowstone Grand Teton.

A lot of the other parks and tourist destinations that make up the six states that we operate within I think they all experienced the same thing. I mean, we were a little bit concerned last year that maybe Glacier with the reduction in the Canadian dollar maybe fewer Canadians coming down in the Glacier Park and into the Flathead Valley was going to really hurt tourism.

And I do believe that there was some of that and I do believe that they did come done in probably smaller numbers although we saw a lot of Canadians still down here all summer long but they were more than and that slowdown if it really was much of a slowdown was so far made up by people coming from other countries and other parts of the United States to these destinations. And it really, really was a nice, nice benefit for us and not just Glacier but a number of our banks throughout the Rockies.

Daniel Cardenas

Okay, good, good information. Then just a quick question on the M&A front. Now as you guys are approaching the $10 billion mark, has there been any change in terms of the size of the institution you would be willing to look at, either on the low end or on the high end?

Mick Blodnick

No, I think we’ve been pretty consistent about saying that we know Dan who we are, we know the type of deals that we’re good at doing and the type of deals that we’ve historically done. I think in the prior calls we have mentioned that could we do a bigger deal, well, of course we could and yet not so sure that a lot of those deals necessarily exists in our part of the world. But we certainly believe that there is still a lot of opportunities to do deals but they probably are going to continue to be of the smaller variety and as we've said countless times if those are the types of deals that present themselves and in our mind strategically those are the deals that we’ve historically done and have built this company on we’re willing to continue to keep doing things the way we’ve always done it.

I don’t believe that any of us on the management team, any of the bank presidents or the Board feels that there is an urgent need as we've approach $10 billion to change strategies and to move in entirety different direction to. But the fact is we’ve got to go out there and do something transformational. That’s not us, that’s not probably the way we see this paying out and we’re certainly not expecting that’s way it’s going to be.

Randy Chesler

Dan, I think Mick and I’ve talked a lot about that thing. We’re very much on the same page there and we’ve a very disciplined approach to acquisitions and we don’t think it’s in our best interest of the company that change that just to jump and leap over in arbitrational number. So we’ll continue to do what we do and certainly if something big comes along we’ll look at it but it’s got to fit what our typical approach has been and our metrics to make sense for us.

Daniel Cardenas

Okay. Perfect. Thanks guys.


And our next question comes from Jeff Rulis from D.A. Davidson. Your line is open.

Jeff Rulis

Thanks good morning. Just try to narrow it down to one for the sake of time, but really just interested, Mick, in your role with the Bank into 2017. I know that certainly you've developed some long-standing relationships and friendships, and I don't know -- hopefully, they are not calling in too often, but if there are sort of M&A, I guess, is kind of where I'm leading this to, but maybe outline kind of your role into 2017 if there is M&A-led conversations and how that may impact next year.

Mick Blodnick

Well Randy and myself talked a lot about this. I am going to stay on the Board and you don’t work in all these states and in this market for 40 years and not build up a lot of relationships with a lot of banks, a lot of ownerships, a lot of Board members and I’ve mentioned, Randy and I’ve mentioned to the Board that I am more than willing to do whatever I can on the M&A front.

Again I know a lot of people, been doing deals for 25 years now and there is a lot of deals that we haven’t done but those deals haven’t gotten done yet either. So those things are still out there potentially down the road and these are many times deals that I've had lengthy and detailed conversations with these people before.

And so I would hope that whatever value I can bring on the M&A front I am more than willing to do that and I would just work at the pleasure of the Board and Randy and the rest of the management team to do whatever I can do to help add some of these great franchises down the road to the GBCI family.

Jeff Rulis

Okay, great. Thanks Mick.


Thank you. And I am showing no further questions from our phone line. I would now like to turn the conference back over to Mick Blodnick for any closing remarks.

Mick Blodnick

Well very good, and again thank you all very much for the time that you spent today. I just have a few final thoughts that I wanted to go through with everyone on the phone. Like we've said after 20 years this is my final earnings call but before we close today, I wanted to thank a few groups.

First of all I’d like to thank the investors and I know we have a number of investors on the line today. I would just like to thank you for the faith and support that you’ve given us in the past. Some of you've been invested in this company for many, many years and we can’t thank you enough and hope that we have provided you in some small way with the growth and the returns that you expected. So to all of your investors out there thank you very, very much.

Next to the analyst and you heard on the call today a number of them. These are analysts that some of them have covered us for many years, some of them are newer to the company but I also want to extend this remark to all those analysts who covered us in the past because over the last two decades or longer we’ve had a number of other analysts that have taken the time and resources to cover Glacier Bancorp.

I would like to thank all of you for the time and the energy that you’ve put in getting to know our bank, our markets and our community bank approach to doing business. I’ve enjoyed the many road shows and conferences that we’ve had together and through good times and those that were more challenging I always thought that we were treated very fair by all of you. When we messed up, you called us out on it and when things went well, you were also there to congratulate us and that’s all we could ever ask for.

And then finally to the 2300 individuals who make up Glacier Bancorp, I've said it hundreds of times and I’ll say it again, you are simply the best. You can't produce the type of results this company has produced in the past 32 years without talented and committed people and we certainly have that.

This point was never more evident and we certainly saw this in the past two years during this massive core consolidation project. To achieve this level of performance we're planning and completing what turned out to be 15 if you add Treasure State in Canyon, 15 data conversions is absolutely remarkable. And although we have some challenges along the way, we learned from them and we move forward. But what we really learned was the character and commitment we have from this terrific group of people.

So with that I'd like to say goodbye. Thank you for your support. Have a wonderful weekend and go Griz! Thank you all very much. And again have a terrific weekend. Bye now.


Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.

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