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Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Fourth Quarter and Full-Year 2018 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 call is being recorded.
I would now like to introduce your host for today’s conference, Mr. Randy Chesler, President and CEO. Sir, you may begin.
All right. Thank you, Joelle. Good morning and thank you for joining us today. With me here in snowy Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; and joining us by phone is Barry Johnston, our Chief Credit Administrator.
Yesterday, we released our fourth quarter and full-year 2018 results. This was a very strong and well-balanced quarter and wraps up an excellent year for the company. Earnings for the quarter were $49.6 million, an increase of $14.9 million, or 43% over the fourth quarter a year ago, excluding the revaluation of the net deferred tax asset.
Pre-tax income was $61.2 million for the quarter, an increase of $14.9 million, or 32% over the prior year fourth quarter. Diluted earnings per share for the quarter were $0.59, an increase of 2% from the prior quarter and an increase of $0.15, or 34% over the prior year fourth quarter, excluding the revaluation of the net deferred tax asset.
We had strong organic loan growth of $164 million, or 8% annualized in the fourth quarter. This represents really good activity for this time of the year. Net margin of 4.30% of earning assets was up 4 basis points over the prior quarter. Our yield on earning assets increased 5 basis points to 4.64%. Return on assets was a very strong 1.66% for the quarter.
We declared a special dividend of $0.30 per share, or 15th special dividend and also declared a regular dividend of $0.26 per share, or 135th consecutive quarterly dividend. And right after the quarter closed, we announced the signing of a definitive agreement to acquire First National Bank of Layton, a community bank in Layton, Utah. This great 100-year-old community bank with stable low-cost deposit base and high-quality, high-margin loans, we believe will serve us very well.
We like the growth drivers in Utah, highly educated population, business-friendly environment, few community banks, fantastic quality of life, and we think these are all in place for the long-term.
This addition, First National Bank of Layton, will position us nicely for future growth, and we are very excited to expand our presence in this dynamic state. So 2018 was a great year for the company. Thanks to our proven business model, strong performance by all our divisions and the talented members of the Glacier team.
Net income was $182 million, an increase of $46 million, or 34% over the prior year, excluding the revaluation of the net deferred tax asset. Pre-tax income was $222 million, an increase of $42 million, or 23% over the prior year.
Earnings per share were $2.17, an increase of 24% from the prior year, excluding the revaluation of the net deferred tax asset. Total loan growth for the year was $1.7 billion, or 26%, and we had organic loan growth of $728 million, or 11%. Core deposits grew $1.9 billion, or 26% and we had organic core deposit growth of $195 million, or 3% for the year.
Net interest margin was 4.21%, a 9 basis points increase over the 4.12% net interest margin in the prior year fourth quarter. This is especially notable as the increase would be 23 basis points over the prior year, if the tax rates in effect in 2017 were in effect in 2018.
Return on assets for the year was 1.59%, up from 1.41% in the prior year and return on equity for the year was 12.56%, up from 11.46% a year ago, both of those comparisons exclude the revaluation of the net deferred tax asset. And while we were posting these actual results, the team was able to complete the acquisitions and system conversions of Collegiate Peaks Bank and First Security Bank, which added combined assets of over $1.6 billion.
Loan production for the fourth quarter was $944 million, which once again was very generally well distributed among all our divisions. Loan pay downs were $780 million, which is pretty consistent with past seasonality. The loan portfolio ended the quarter at $8.3 billion. It was a strong quarter and full-year, and we view it as reflective of our very healthy Western markets.
The loan portfolio had organic growth of $728 million, or 11% since the beginning of the year, and was primarily driven by growth in good quality commercial real estate loans, which increased $463 million, or 13% over the same period.
Our investment securities grew to $2.9 billion, increasing $175 million, or 7% during the current quarter and increased $443 million, or 18% from the prior year fourth quarter. Investment securities represented 24% of total assets at the end of the fourth quarter, compared to 25% at the end of the fourth quarter a year ago.
Once again, our key credit quality ratios improved in almost all categories across the Board. I’m especially proud of our team’s performance in this area. Early-stage delinquencies as a percentage of loans at the end of the quarter were 41 basis points, a decrease of 16 basis points from the prior year’s fourth quarter.
Net charge-offs for the quarter were $2.5 million, or 3 basis points of total loans, compared to $2.9 million, or 4 basis points of loans in the fourth quarter. On a full-year basis, charge-offs were 10 basis points of total loans, down 7 basis points from the end of last year.
Non-performing assets as a percentage of subsidiary assets at the end of the fourth quarter were 47 basis points, which is a 14 basis – which is 14 basis points lower than the prior quarter and 21 basis points lower than the prior year fourth quarter. At the end of the quarter, NPAs were $56.8 million, that’s a decrease of $15.4 million, or 21% from the prior quarter.
We’re very pleased to see this continued reduction in the level of NPAs, as we’ve been working towards this for a number of years and it’s reflective of our belief that now is the right time to focus on reductions here. A number of our divisions did an excellent job working through these difficult credits.
The allowance for loan and lease losses as a percentage of total loans outstanding at the end of the quarter was 1.58%, which is down 5 basis points from the prior quarter and down 39 from the end of the fourth quarter a year ago. This reflects our positive outlook on our portfolio and our markets.
Core deposits ended the quarter at $9.3 billion. Total core deposits were down 1%, or $125 million from the prior quarter, which is relatively consistent with past historical trends for this time of year. On a full-year basis, organic deposits increased 3%, or $195 million, and we ended the year with a loan to deposit ratio of 88%, essentially unchanged from the prior year.
The cost of funding for the current quarter was unchanged from the prior quarter at 36 basis points and was up 3 basis points versus the prior year fourth quarter. The cost of funding on a full-year basis for 2018 was 36 basis points and was unchanged when compared to the prior year. Once again, our 14 divisions continue to do an outstanding job, managing deposit cost specific to each of their markets and we expect to continue to outperform our peers in this area.
Interest income increased $2.4 million to $125 million, or 2% from the prior quarter and increased $28.4 million, or 29% over the prior year fourth quarter. Both increases were primarily attributable to the increase in interest income from commercial loans due to our loan growth and rising interest rates.
Interest income on commercial loans increased $1.7 million, or 2% from the prior quarter and increased $20.9 million, or 34% from the prior year fourth quarter. The company’s net interest margin as a percentage of earning assets for the current quarter was 4.30%, compared to 4.26% in the prior quarter. The 4 basis points increase in the net interest margin was primarily the result of increased yields on the loan portfolio.
The current quarter net interest margin increased 7 basis points over the prior year fourth quarter net interest margin of 4.23% and would have been an increase of approximately 21 basis points if the same federal tax rates in effect in 2017 were in effect today. The increase in core margin from the prior year fourth quarter was a result of the remix of earning assets to higher-yielding loans, improved interest rates on the loan portfolio and stable funding cost.
Non-interest income for the current quarter totaled $28.5 million. This is a decrease of $3.9 million, or let’s see, 2% from the prior – 12% from the prior quarter and – an increase of $785,000, or 3% over the same quarter last year – 2% decrease. Service charges and other fees of $19.7 million increased $2.4 million, or 33% from the prior year fourth quarter. The increase was primarily due to the increased number of accounts and organic growth from – and acquisitions.
Gain on sale of loans decreased $1.6 million, or 22% from the prior quarter as a result of real estate seasonality, as well as market volatility and some political uncertainty. Gains decreased $1.8 million, or 24% from the prior year fourth quarter. Other income decreased $2 million, or 47% from the prior quarter and was due to a $2.3 million gain on sale of a branch building.
Non-interest expense for the quarter of $81.9 million decreased $1 million, or 1% from the prior quarter and increased $13.5 million, or 20% over the prior year fourth quarter. Comp and benefits increased by $458,000, or 1% from the prior quarter and increased $9.9 million, or 25% from the prior year’s fourth quarter, primarily due to increased number of employees from our acquisitions.
Occupancy and equipment expense increased $959,000, or 14% over the prior year fourth quarter and was also due primarily to our acquisitions. OREO expenses decreased $2.4 million from the prior quarter, driven by a single property, which we wrote down $2.2 million in the third quarter.
Other expenses increased $846,000, or 6% from the prior quarter. Acquisition-related expenses were $520,000 in the current quarter, compared to $1.3 million in the prior quarter and $936,000 in the prior year fourth quarter.
Our tax expense for the fourth quarter was $11.6 million. This is a decrease of $19.7 million from the prior year fourth quarter and was attributable to the Tax Act. The effective tax rate in the fourth quarter was 19%, compared to 25% in the prior year fourth quarter, excluding the revaluation of the next tax deferred asset. The current quarter efficiency ratio was 53.93%, 167 basis point increase from the prior quarter efficiency ratio of 52.26%.
Now the prior quarter efficiency ratio would have been 53.06% if the sale of the branch was not included in the third quarter ratio. The current quarter efficiency ratio was also impacted by the $1.6 million seasonal decrease in the gain on sale of loans during the current quarter. On a full-year basis, the efficiency ratio is 54.73%, up from 53.94% in 2017 due to the Tax Act.
So in closing, the fourth quarter and full-year 2018 represents another excellent performance for the company. We successfully closed and converted both our First Security and Collegiate Peaks Bank acquisitions, which increased our asset size by almost 15% and launched us over the $10 billion threshold. We are well on our way towards successfully integrating the new employees and customers into our company, which I believe the results demonstrate.
Our 14 division presidents and their teams across our seven states, as well as our senior staff, continue to produce market-leading results. And I would like to thank them all for their commitment and their drive to be the best.
That ends my formal remarks. And Joelle, I’d like to call – hand the call back over to you to open up the line for any questions.
Thank you. [Operator Instructions] Our first question comes from Jackie Bohlen with KBW. Your line is now open.
Hi, Randy, good morning.
Good morning, Jackie.
I wanted to touch first on expenses. I’m – if I take aside the acquisition costs and then the write-down on the property last quarter, it looks like those moved up on a linked-quarter basis. Was that an uptick in the run rate or were there just seven year-end true-ups that caused us to be a little higher?
So, Jackie, probably the biggest driver quarter-to-quarter in terms of expenses is really the expenses in the third quarter were a bit understated. So, between $507,000 and $100,000, we received a credit on a contract that we renegotiated, that came through as a credit.
So it actually decreased our expenses in the third quarter a little more than we normally would have had. So the comparison there really is, if you look at linked-quarters, primarily driven by the fact that the third was a bit understated due to that credit.
Okay. So the fourth quarter is a pretty good run rate going forward outside of any unusual items and then just ahead of the acquisition next year?
Yes. We think the full-year 2019 efficiency ratio will be between the 54% and 55%. So that’s consistent with kind of the rate in the fourth quarter.
Okay. And then just one more and I’ll step back. In terms of gain on sale of loans, I know that you had seasonality that’s typical there at play. How is your outlook looking for 2019? Outside of seasonality, were there any noteworthy trends in the quarter in either volume or gain on sale margins?
So margin and gain on sale pricing held pretty well. So as you saw, as you noted, we were down due to seasonality. And I think that was pretty much felt across the industry, given both seasonality and a bit of uncertainty. We still feel real confident in 2019 is – on a full-year basis is going to look a lot like 2017 and 2018.
Okay, thank you. That’s helpful. I’ll step back.
You’re welcome.
Thank you. And our next question comes from Matthew Clark with Piper Jaffray. Your line is now open.
Hey, good morning.
Good morning, Matthew.
How much do purchase accounting accretion contribute to the margin this quarter?
So for this quarter, there were 5 basis points. We’re down actually from the prior quarter, where we had 8.
Okay, great. And then the weighted average rate on new loans this quarter?
So new production, we’re coming in north of 5.50%. So we’re seeing pretty good pricing on new new loans coming in.
Okay, great. And then I wanted to take a stab at the outlook for loan growth for the year. You guys have obviously exceeded expectations in 2018, but just want to get your thoughts on kind of what you’re seeing in the pipeline and what you might be tapping the brakes on this year as well?
I think that we feel good about 2019. Despite a lot of noise coming from Washington, our customers still seem to be plowing forward. So we still feel our 8% forecast for 2019 is very solid and we’re very, very comfortable with that at this time. So we don’t see a lot of headwinds on – against that at this point in time.
Okay, great. And then just on deposit pricing, done a great job in mitigating the betas there. But the loan to deposit ratio is up to 87%, and I just wondered what your comfort range is with that ratio and whether that, that might put some increased pressure on you to start moving deposit costs up a little more going forward?
So, we’re expecting deposit growth in 2019. And on a pricing front, we expect to continue to outperform our peers in that area. And we’ll – so that’s our outlook at this point. We feel – like I said, we feel pretty good about growing the deposits. And our strategy is, we’re growing operating accounts with both consumers and businesses. We continue to to add those to the company and we think that’s going to continue. And so, we’ll have to see how the year pans out, but that’s how we’re viewing the year at this point.
If your loan to deposit ratio got to, say, 90% and would that change your behavior on deposit pricing or not necessarily you feel comfortable operating the low 90s as well?
I think we’d be fine. We ended the year…
Thank you.
…we ended this year just where we ended last year. So I think with our acquisitions and our deposit growth, we feel comfortable.
Great. Thanks.
Thank you.
You’re welcome.
And our next question comes from Michael Young with SunTrust. Your line is now open.
Hey, good morning, everyone.
Good morning, Michael.
Wanted to just ask, Randy, you kind of made a comment about the deposit outflows around year-end, just those balances were down a little bit and looks like it was kind of backfilled with the FHLB borrowings. So I just wanted to get a sense of how much of that you feel like might be seasonal similar to prior years? And then is there any flow-through effect into the margin in the first quarter from those FHLB borrowings, or will those run off pretty quickly?
So the decline in the deposits was primarily in the non-interest bearing portion of our deposit base. We went back and looked and saw seasonally, it was pretty consistent with what’s taken place. Probably it made a little bit more acute by the fact that the title company’s balances were down, that’s a pretty significant part of that bucket.
So, we’re seeing the markets strengthen back up a little bit. So, Michael, that was – when we look at the movement there, pretty much consistent with past seasonality. And at the end, our average balance of non-interest was higher at the end of the fourth quarter than it was on the third quarter.
In terms of the borrowings, the Federal Home Loan Bank borrowings, we’re going to expect those to be pretty much brought down pretty – by the end of this first quarter. So don’t really expect that to be something that’s carried forward.
Okay. And then another one just kind of on the loan yield side, you mentioned the new loan yields at about 5.50% versus the average yield in the quarter of 5.05%. It sounds like, you guys have some pretty strong tailwinds, I guess, on the loan pricing side, both in the new pricing engine that you put in place last year, but also given that you’re more focused on the five-year portion of the curve. So could you maybe just talk about maybe the magnitude of that this year and any additional lift in them that you expect from that?
I’m going to have – I’m going to ask Ron to talk about the NIM. I would just tell you in terms of a nice tailwind, we still feel pretty good about getting good pricing in our markets and there are pockets of some competitive pressure. But generally, because of our strategy and how we’re positioned in the market, we feel we’re getting what we think is adequate and right. So we feel good about that. On the NIM side, Ron, do you want to talk about NIM?
Yes. So we’re – we’ve got momentum, everybody could see that in each of the fourth quarters we continue to have better yields on the loans – better yield on the earning assets and so that will continue. But there were four rate hikes in 2018, there may only be two, there may be none, who knows.
But the beauty of our – the structure of our balance sheet, particularly our loan book tied to the five-year is that a majority of those loans will either reprice or mature and that’s where we get the lift. That’s how our balance sheet is built. We typically do better in the second year. So we’ve got the four rate hikes in 2018 and that I think will help us get a higher margin throughout 2019.
Okay, perfect. So you’re still rolling into that, perfect. Just wanted to double check that. And then maybe kind of switching gears altogether just the other expense line item was up in the fourth quarter, a little higher than I expected. Is that where that kind of $600,000 credit was present in the third quarter that reverted, or were there any other expenses that kind of flow through there? And then any outlook on that line item, maybe in the next year?
Yes. No, you got it exactly right. That – the third quarter was understated, because we took that barge credit in and that hit on the other income line. Not a lot of – little ins and outs there, but nothing else material and expect going forward again, of course, you got M&A expense in there. So kind of pulling those things out, don’t expect to see a lot of extraordinary movement.
Okay. And just tax rate last one, Ron, any outlook for next year?
You know exactly to go to Ron when you talk taxes.
I would use – I would just, for the full-year, use 20% and just give some background on that. Our – the percentage of our assets either loans or investments that are tax exempt, that continues to come down. So the regular ordinary income is increasing and that is what principally will drive our tax rate up another 1%, if you will.
Okay. Thanks.
Thank you. And our next question comes from Jeff Rulis with D.A. Davidson. Your line is now open.
Thanks. Good morning.
Good morning, Jeff.
Randy, you discussed the work you’ve done on the credit side and it’s ongoing,. I guess, the sequential drop is more sizable. Anything that triggered that NPA reduction, or is it just a bit of timing?
Really timing. It’s – like I said, it’s a result of long lead time on these restructuring, finding good solutions. They just take a lot of time. And to some extent, the end of the year is kind of a natural line for us to kind of have discussions with both buyers and sellers.
So that probably helped spike it a little bit. But we continued – we hope we’ll see some continued improvement there. It’s just going to be subject to other discussions we have going. But end of the year, this was a great quarter for resolving some of those NPAs.
Sure, just to your tone, Randy, seems like there’s a little more urgency or let’s get through this. Is that correct that you’ve picked up maybe the heat on your folks to maybe move some stuff out, or is it just back to some things tied together and that’s the result?
Yes. I think it’s just prioritization. I think some of these – we’re busy doing so many things. And I think sometimes, we don’t spend a lot of time working through them and they take a lot of work and creativity to figure out good solutions to move them forward. And you can see, we didn’t take a lot of credit write-down at the same time. So they were very well handled by our divisions. They just do a tremendous job.
I think it was just reprioritizing, and as a team, we got together and just looked at it and just said, we felt we were a little higher than we wanted to be. We looked at our peer group and we like to be outperforming peers in every area. This is one, we were a little high. So we all decided to really put some elbow grease on it and I think it’s – that’s what you’re seeing here, it’s paying off.
Okay. And then just a follow-on, maybe for Barry, just with the 8% loan growth, I guess, the provisioning levels, the expectation in 2019 with a good low NPA base?
Yes, it’s – I think that’s reasonable based on what we’re looking at given this year and what we did with NPAs through the year, I think at 8% is something that’s achievable.
Well, on the provisioning versus 8% loan growth than were similar to Q4s kind of provision levels, or more like the third quarter?
What we look at it is, we look at it every quarter, so it’s going to depend on organic loan growth. And then if we have any acquisitions during the year, that would also impact it. So really hard to say, but I wouldn’t expect that would be too far off what we did last year.
Okay, fair enough. And then maybe one last one Randy. Just to define the gain on sale outlook, you talked about maybe 2019 looks a lot like 2017 and 2018. 2018 you were down kind of 11% year-over-year. Similar in that range, I guess, between 2018 and 2017 is the expectation on gain on sale?
Yes. Jeff, that’s a good way to look at it. I think that’s just what we’re seeing.
Okay. All right. Thank you.
You bet.
Thank you. [Operator Instructions] Our next question comes from Andrew Liesch with Sandler O’Neill. Your line is now open.
Good morning, guys.
Good morning, Andrew.
Just – you covered most of my fundamental questions. But just longer-term just what’s on M&A? What – I know you got it on some latest deal here in Utah, but I don’t think it would preclude you from doing anything else. Just what – where does this discussion stand? I mean, your currency certainly held up a lot better than the other banks? Just curious what the M&A market – M&A chatter is for you guys right now?
Well, I think, it’s really good. I think we continue to get phone calls, and some of that’s – our reputation is being a high-quality buyer. People seek us out, that hasn’t stopped, so some real good conversations ongoing. I’d say, we’re – we still very much sticked to our discipline, good banks, good markets, good people. We don’t feel a particular need to move quickly unless we see something we really like, because we have really strong core performance as you can see in the business.
So it’s a real good position to be in. But a lot of activity, a lot of conversations and we’re spending our time taking a fair look at a number of them talking with people. So, the door is open. We just again stick to our guns and looking for good banks, good markets, good people.
Great. You’ve covered all my other questions. Thanks.
You bet.
Thank you. And then next question comes from Gordon McGuire with Stephens Inc. Your line is now open.
Good morning, gentlemen.
Good morning, Gordon.
So all my questions have really been answered, so maybe I’ll just throw on quickly on CECL. Any preliminary outlook you can provide at this point, or maybe just when you might be able to get provide a little bit more detail on that, and just how preparations have been going?
So CECL, we’ve been doing a lot of work on it and we’re getting ready for the change. I think, we’ve got a team on it. I think it’s going very well. I think it’s too early to really give you any kind of specific output. We’ve built the models. We’re in the process of tuning them, and so it’s a little early to tell.
I guess, just at a very high level, I think, for us, it doesn’t appear that it’s going to be dramatically different than where we’ve been in the past. But we have to go through all the work to finish the models and test them and really go through the results.
Sure. That’s all I had. Thanks, guys.
All right. You’re welcome.
Thank you. [Operator Instructions] Our next question comes from Don Worthington with Raymond James. Your line is now open.
Thank you. Good morning, everyone.
Good morning, Don.
Question on your two acquisitions that were completed in 2018. Did – were you able to have good retention rates on the deposits that you assumed?
Yes. We – on both deals, I think, we did very well going into them. We tell the teams, look, we don’t expect it to run out and prove yourself. We just want to keep all your good customers and all your good employees. And I think it – for the most part, we accomplished that in both cases.
Okay, great. Thanks. That’s all I had.
Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Randall Chesler for any closing remarks.
All right. So thank you for joining us today. We appreciate your interest and we want to wish all of you a great weekend. Enjoy the fun and the snow here in the West and other places. So we thank you again. And as always, if you have any questions, you can just give us a ring directly and we’d be happy to talk to you about. Thank you.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone, have a great day.