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Ladies and gentlemen, thank you for standing by, and welcome to Glacier Bancorp Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now hand the conference over to your speaker today, Randy Chesler, Glacier Bancorp, President and CEO.
All right. Thank you, Carmen. So good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Barry Johnston, our Chief Credit Officer; Tom Dolan, our Deputy Chief Credit Administrator; and Byron Pollan, our Treasurer.
Let me first thank you all for joining us today and we hope you're all enjoying these winter months. Yesterday, we released our fourth quarter and full year 2019 results. Our divisions I think did a great job holding our margin with prudent pricing and fair, but full loan pricing. They also did a great job building deposits in a competitive environment.
We grew core deposits $401 million, or 4% in 2019, and we also continue to grow our non-interest deposits, which were up $305 million or 10% over the year, not including any of the current year acquisitions.
Non-interest deposits now represent 34% of core deposits, up from 32% at the end of 2018. And most notably, these -- the divisions continue to do an excellent job with credit. Non-performing assets were down almost $20 million for the year, or 34%. We ended the year with non-performing assets as a percentage of assets at 27 basis points, that’s the lowest level for us in over a decade.
We are a little light on loan growth for the quarter and the year up 4% in 2019 organically versus our expectations at the beginning of 2019 for 7% loan growth. This shortfall can be primarily attributed to consumer excess liquidity that is used to be -- used to pay off debt, sub-market cooling and occasional money center bank competition on larger loans often with pricing that doesn't compensate for adequate return and risk in our view.
We are optimistic for growth in 2020, as we believe the Glacier markets are strong and that excess liquidity will find its way into more business investment. And as a result we expect to see a loan growth rate in 2020 of about 5% to 6%.
The Glacier team once again delivered impressive results in 2019. Our 16 divisions now serving eight states across the west and our senior staff did a terrific job. And Forbes agrees with us, having just published their ranking of top banks in the U.S. and putting Glacier in the top 10.
Net income for the quarter was $57.4 million, an increase of $7.8 million or 16% over the prior year fourth quarter, including current period acquisition-related expenses of $4.4 million. Without the acquisition-related expenses and a benefit of $1.3 million reduction in regulatory assessments applied by the FDIC, the net income would have been $59.7 million, an increase from the prior year fourth quarter of $9.8 million, or 20%.
On a full year basis, net income was $211 million, a 16% increase over the prior year. Crossing that $200 million income mark on a full year basis was a great milestone [indiscernible] achieved at year-end. Diluted earnings per share for the quarter were $0.62. That's an increase of 5% over the prior year fourth quarter, including acquisition-related expenses.
On a full year basis, earnings per share were $2.38, an increase of 10% from the prior year. For the quarter, core organic loan balances were essentially flat decreasing 30 basis points, or $28 million to $9.5 billion. On a full year basis, the loan portfolio grew organically 4% or $364 million.
Core deposit balances for the quarter were essentially flat as well, declining 10 basis points or $10.8 million to $10.7 billion. On a full year basis, core deposits grew 4% or $401 million.
Return on assets was 1.67 for the quarter and 1.64 for the full year. That's up five basis points from 2018. Tangible book value per share of 15.61 at quarter end increased $0.08 per share from the prior quarter and increased $1.68 per share from a year ago.
For the full year, tangible equity increased $264 million or 22%. And we declared a regular dividend of $0.29 per share, our 139th consecutive quarterly dividend and declared $1.11 in regular dividends per share for the full year, which was a 10% increase over prior year's regular dividends. We also declared a special dividend of $0.20 per share, which was the 16th special dividend declared.
2019 was a record year for acquisitions too. We announced three transactions with combined assets in excess of $2 billion. We've already closed Heritage Bank of Nevada and First National Bank of Layton, with combined assets totaling $1.4 billion and have received all regulatory approvals to close State Bank of Arizona with assets of $678 million at the end of February.
First National Bank of Layton now named First Community Bank of Utah was converted over to our core processing system in the fourth quarter and the four Glacier branches -- already in Utah were added to the division as well. We expect to convert State Bank of Arizona and Heritage Bank in the first half of 2020.
Our key credit quality ratios improved in almost all categories across the board, reflecting the strength of our loan portfolio. Early stage delinquencies as a percentage of loans at the end of the fourth quarter were 24 basis points, a decrease of seven basis points from the prior quarter and down 17 basis points from the prior year fourth quarter.
Net charge-offs for the quarter were $1 million, compared to $2.5 million in the fourth quarter a year ago. And most notably, non-performing assets as a percentage of subsidiary assets at the end of the fourth quarter were 27 basis points, which is 13 basis points lower than the prior quarter and 20 basis points lower than the prior year fourth quarter.
At the end of the fourth quarter, the dollar amount of NPAs were $37.4 million, a decrease of $17.7 million, or 32% from the prior quarter. A number of our divisions and their Chief Credit Officers continue to do an excellent job, working through these difficult credits. Many take years of work to bring to a resolution.
The allowance for loan and lease losses, as a percentage of total loans outstanding at the end of this quarter, was 1.31%, which is down 1 basis point from the prior quarter and down 27 basis points from the fourth quarter a year ago. Provision for loan losses was zero in the quarter -- in the current quarter and this reflects our continued very positive outlook on our portfolio end markets.
We're nearly complete with our CECL preparation and we'll disclose a range of loan loss reserves we anticipate as part of our 10-K in February. We don't expect the CECL impact on our loan loss reserves to have a material impact on the company.
The cost of funding for the current quarter was 30 basis points, down from 39 basis points in the prior quarter, due to our balance sheet strategy we announced in the third quarter, which resulted in lower borrowing costs due to the unwind of swaps and also due to the increase in lower-cost deposits. Compared to a year ago, the cost of funding declined 6 basis points from 36 basis points to 30.
The cost of our core deposits was stable at 21 basis points in the current quarter and prior quarter and was up 4 basis points from the end of the prior year. And we ended the year with a loan-to-deposit ratio of 80.92%, up slightly from the 87.64% at the end of the prior year. The current quarter interest expense was $8.8 million, which was down $2.1 million, or 19% from the prior quarter, due primarily to the third quarter balance sheet strategy.
Net interest income for the quarter was $136 million, which was up $5 million or 4% from the prior quarter and increased $20.6 million or 18% over the prior year fourth quarter. Both increases were primarily attributable to an increase in interest income from commercial loans, which increased significantly due to acquisitions and organic growth.
Net interest margin for the quarter was 4.45% of earning assets, which increased 3 basis points over the prior quarter and was up 15 basis points from the prior year-end. The core net interest margin for the quarter, excluding 6 basis points or $2 million from discount accretion and 6 basis points or $2 million from non-accrual interest, was 4.33% compared to 4.35% in the prior quarter and is up eight basis points from 4.25% in the prior fourth -- prior year fourth quarter. We continue to be very pleased to see margin strength and resilience in our margin.
And for 2020, our view is the same as it was last quarter. We see the margin operating in a relatively tight band around current core margin levels with a slight downward bias based on interest -- on the current interest rate environment. Noninterest income for the quarter, totaled $28.4 million, which was a decrease of $14.6 million or 34% over the prior quarter and a decrease of $77,000 compared to the same quarter last year.
In the third quarter, we had a one-time gain of $13.8 million due to the balance sheet strategy implemented in the third quarter. Gain on the sale of residential loans of $10.1 million, increased $4.5 million or 80% over the prior year fourth quarter, due to increased purchase and refinance activity. The strength and durability of our residential mortgage business in our markets remains strong. In 2019, we funded $1.4 billion in mortgage business compared to $1.2 billion in 2018. We expect another good year for the mortgage business in 2020.
Noninterest expense for the quarter was $95.3 million, which decreased $15.4 million or 14% from the prior quarter and increased $13.4 million or 16% over the prior year's fourth quarter. Compensation and employee benefits decreased by $7 million or 11% from the prior quarter, primarily due to the one-time $5.4 million accelerated stock compensation expense related to the Heritage Bank acquisition. The prior quarter loss on termination of hedging activities totaling $13.5 million was specific to the third quarter.
Regulatory assessments and insurance decreased $1.2 million from the prior year fourth quarter as a result of a $1.3 million small bank assessment credit applied by the FDIC during the quarter. We're just about out of the credits here and don't expect to see meaningful credits in this area going forward.
Other expenses of $19.6 million increased $4 million or 26% from the prior quarter and was primarily driven by an increase in acquisition-related expenses. Tax expense for the quarter was $12.2 million, stable compared to the prior quarter and an increase of $556,000 or 5% from the prior year fourth quarter. The effective tax rate for 2019 was 19% compared to 18% in the prior year.
The current quarter efficiency ratio was 54.9%, a 97 basis point increase over the prior year fourth quarter efficiency ratio of 53.93%, driven by increased operating expenses from acquisitions and the impact of being subject to the Durbin Amendment, which outpaced the increase in net interest income.
The efficiency ratio for the year was 57.78%. However, when removing the one-time impact of third quarter events including the $10 million loss on the termination of interest rate swaps, the $3.5 million write-off of the remaining unamortized penalties, Federal Home Loan Bank advance, the $5.4 million of accelerated stock compensation expense related to the acquisition of Heritage Bank, the full year efficiency ratio would have been 54.79%, which represents a slight increase of six basis points from the efficiency ratio of 54.73% in 2018. We are on track in 2020 to once again meet the full year efficiency ratio target of between 54% and 55%.
So, the fourth quarter and full year 2019 represents another excellent performance by the company. Our 16 division Presidents and their teams across our eight 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 drive to be the best.
That ends my formal remarks. And I'd now like Carmen to open the line for any questions that you may have.
Thank you, sir. [Operator Instructions] And our first question is from Levi Posen with D.A. Davidson. Please go ahead, Levi.
Hi. Good morning.
Good morning.
This is Levi on for Jeff Rulis.
Yes. Good morning.
I wanted to ask about credit. You made promising improvements this quarter. I was just wondering if there was anything larger in there or any segments that kind of moved together just to kind of create that lower NPA balance?
Yeah. No, we're very, very -- as I noted, very happy with the credit performance. As it relates to NPA going forward, we don't see that level increasing. So, it's staying about that same level. And of course, we're always looking for opportunities to improve it, but I think we’ll -- we don't expect that to change much in the foreseeable future.
Okay. Thanks. Also, just to talk a little bit high level heading into 2020 pretty soon here, you'll be at a point where there's three deals that have closed in the last 12 months. Just kind of being on the other side of that change or have any strategic shift in focus on strategy as it relates to capital deployment or kind of where you're able to allocate focus and direction?
No, as it relates to M&A, our strategy and focus hasn't changed at all. So, we had a record year in 2019 with the three transactions that we announced over $2 billion in assets, so that was a record year for us.
A lot -- all those transactions, those three were very strategic for us. So, if you think about our acquisition in Utah that really gave us a division platform in that state. That's one of the fastest-growing states in the country for years, so we're very pleased with that.
Our acquisition of Heritage Bank in Reno, gave us a platform and with a terrific bank, one of the top-performing community banks in the country in a very, very strong market, where we like the growth prospects very much. And our announced deal in Arizona really positions us well, I think, in a very, very solid state, with a franchise now that will cover pretty much all the core markets in the state. So, very happy with those, and we're going to look to do more of that going forward.
Okay. Thank you. That's all I had. Thanks.
Yeah. All right. You’re welcome.
Thank you. And our next question comes from Michael Young with SunTrust. Please go ahead.
Hey, good morning, everyone.
Good morning, Michael.
Randy, I wanted to maybe start with the loan growth outlook. You mentioned market cooling, and I was curious if you could maybe give some geographic specificity to that? And also, if you could help us understand, if any of that's coming from either just the larger overall size of the balance sheet now, or any specific pay downs from any of the acquisitions that have been made recently?
So the -- I'm going to ask Barry to fill in a little on growth, because he has been -- that we've been talking about that quite a bit. Market cooling, I think, we're seeing that across the board and, I think, that's just no sign of a slowdown. But, I think, that we've been operating on a pretty good pace.
I think, that there's been sales of properties, and that the -- our core customers are looking for the next transaction, but a little more cautious. And there's just less immediate opportunity than there has been in the past, as some of the pricing has increased. So, Barry, did you have anything you want to add?
Yes. I think, for the coming year, we projected 7% this year. We're just underneath 4%. So we really had a soft fourth quarter. Understandably, our fourth quarter is always probably one of those quarters that, due to some seasonality weather, is soft in relationship to the other quarters.
But for next year, we're looking at, I think, fairly on a point-to-point basis around 5%, maybe just a little north of that, based on what we're seeing in the production schedule as we sit today. But we're looking across the system; I don't see any one area that's going to generate a lot of growth, or any area that's going to produce that in a concentration level.
We always do have the advantage of bringing, for those new acquisitions, a bigger balance sheet, but they can look at larger transactions than they have historically. As a small community bank, we try to take advantage of that, try to repurchase some participations that they've sold, take advantage of that. And we bring some products and some expertise, and other type of product that they haven't used before, that they can take advantage of that. But overall, I think, it's going to -- we're looking at between 5% and 6% growth for next year.
Okay. And any shift in areas that you're kind of pressing pause on, or watching more closely? I know, I think, hotels and multifamily had been an area in the past that you were not growing very robustly. Just any update there.
Yeah. We several years ago took those two product lines and determined given all of the respective concentrations we had in certain markets that we were going to look at any additional product in that. In hotel properties, basically hospitality and multifamily, we would look at as on an exception basis look at maybe strengthening, underwriting or participating absolute dollars out or enhancing with some type of government guarantee. And we're still continuing that trend and we anticipate that we will still generate that product. But for the most part, we are either looking to enhance it with the government guarantee or participate those dollars out on a percentage basis and take a servicing fee.
And last one for me. Just Randy, you also mentioned, kind of, the build and consumer liquidity that was maybe hurting loan growth, but I wanted to look at the opposite side of that. Should we expect maybe deposit growth to outpace loan growth potentially this year?
I think that we'll see where things go. When I was talking about excess liquidity both business and consumer, but more on the business side. That's what's driving some of the liquidation. Just balance sheets are pretty flush. People making balance sheet decisions, deciding to pay off debt. We're just seeing an uptick in that based on the health of the customers, which is a good thing from a health standpoint, not such a great thing from a standpoint of so much excess that they're able to pay down some of the loans. But -- so I think that that will continue. I think as deposits, I would expect pretty much a similar performance that we saw in 2019 in 2020.
Okay. Thanks. That's all for me.
Yeah. You bet.
Thank you. And our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Good morning.
Good morning, Matthew.
Maybe we could just start on production and payoffs in the pipeline. Just wondered how much in the way of production and payoffs you had this quarter, how that compared to last quarter? And then maybe the size of the pipeline relative to a year ago?
The fourth quarter in regards to projection is always softer than the other quarters. When we looked at the numbers, it was relatively close to where we have been. But definitely there was some seasonality there. As we entered in the winter months, you look at our balance sheet, single-family residential construction was down, which makes sense. You got commercial and industrial all of those lines are driven but off of operating lines where heavy equipment, street paving construction. We have some decrease there. Agriculture as always we're going to get pay downs in the third and fourth quarters. So probably that continues a little bit into the first quarter.
But production overall was reasonable where we really saw that something unique. We have a dozen or so fairly large paydowns. Some of those were on properties that were being constructed and we're taken out by term financing either on -- with the life insurance companies pretty back Freddie and Fannie financing or HUD financing on some low income housing tax credit properties and we have some municipal loans that were refinanced into long-term bonds. So, there wasn't so much the production side. It was payoff side, that we have the challenges with those scores. But then again, every loan is made to be repaid and a lot of those were paid as programmed.
Okay. And then just on expenses, can you speak to your tech spending demand this year and how that might impact expense growth for the year?
Yes, I think we're very cautious on tech spending to have that phased in commensurate with our revenue growth. So, I think that we look at that back to the efficiency ratio given that 54%, 55% range, I think, you'll continue to see that in this year. I don't see a change there.
And is that 54% to 55% include merger charges or no?
Yes.
Okay. Okay, that’s it from me. Thanks.
You bet.
Thank you. And our next question is from Luke Wooten with KBW. Please go ahead.
Hi, good morning guys.
Good morning.
I just wanted to start with some housekeeping things. Just on the expense line items. The other expense after backing out the merger expenses of $4.4 million, it still seems a little bit high. I think it's up $3 million from 1Q and a similar level from 4Q last year. I just didn't know if there was -- that was kind of just increased spend due to the excess personnel or I didn't -- just wanted to kind of get a little clarity on that?
This is Ron, Luke. So, the -- looking at what we've got here, I think the run rate that we have in the fourth quarter really will continue on into the first quarter. It may be up no more than 1%. So, that's how we're taking a look at it, but--
You're talking total.
Total, yes.
Total relates to other, it was up. The bulk of that was acquisition-related. And there are some other small charges in there, some consulting fees and some other things. But I think that's going -- you're going to see that normalize back down and then as Ron said, kind of an overall total expense raise of somewhere around 1% in the first quarter.
Yes, because that will include some of the acquisition expenses related to closing of State Bank of Arizona.
Okay, that's helpful. And then just kind of continuing on that type of expense line, just the FDIC credit, we should expect that to return to like 2Q levels next quarter or is that still going to be somewhat muted from the credit?
There's really not many credits left there. So, it's going to go back to a normalized level.
Okay, that's definitely helpful. And correct me if I'm wrong, but 1Q is usually seasonally higher just due to payroll for total expenses?
Yes, exactly.
And then just on the fee income lines, a lot of growth in the gain on sale line this year. Is that partially due to acquisitions acquiring some of those kind of platforms or is that really just kind of organic growth just looking for next year kind of how we should model that?
No, the acquisitions have been a very nice way for us to continue to increase our business, because typically the banks we're buying have not been in the mortgage business. And so, we're able to increase the amount of production by bringing those folks into the mortgage business. So that's been a nice add for us as well.
The activity across our markets has just been very strong. And so, there's still a bit of a shortage of housing, so that's been very positive. In many of our markets, we're well positioned to serve the communities, so we're taking advantage of that. So it's a base of a very strong fundamental business.
And then one of the reasons we're able to maintain the level and grow it is because when -- as a result of these acquisitions we're bringing on, new markets that haven’t -- and new banks that haven't been in the business. So, for example, in Utah, we're gearing up with our mortgage operation there, a great market with a lot of potential.
Reno, they've been -- they were in the business, but we're going to bring them more products and services. So we're excited about that. State Bank of Arizona has got a very healthy mortgage business. We're actually going to flip it around there and take advantage of some of their experience, but we think there's good opportunity to grow there. So, the M&A has been provided a nice underpinning to what's already a good business across our core markets, but that helps continue to grow it.
Okay. That's really helpful. Thanks. So it seems like, I mean, obviously, it's kind of seasonal in that line item, just due to kind of seasonal trends. But it should seem like that should trend up, just due to the larger kind of production capacity.
Well, we're calling for pretty much, like I said in my comments; we funded about $1.4 billion in 2019. We funded about $1.2 billion in 2018. We're expecting 2020 to be somewhere in that range.
Okay. That's definitely helpful. And then, just wanted to switch to the margin quickly. Was the kind of pay-down for the wholesale deposits and then increase in the FHLB balances, was that kind of just a rate play, just given what you're seeing in the market? Or were those unrelated?
Well, really unrelated. I mean, we had the big move in the third quarter, where we did the balance sheet strategy, and we got rid of the swaps and pay-down the Federal Home Loan Bank quite significantly. I think you're probably looking at a point, that's a point-to-point measure.
If you look at the average for the Federal Home Loan Bank, it would be almost half that number. So, you're going to -- I think, going forward, see, if assuming loan growth stays in kind of the range we're talking about, that kind of staying in that current -- kind of in that current range.
Okay. That's helpful. And then, just lastly for me. On the -- I know, you mentioned it a little bit in your opening comments, but just on the -- the large banks moving downstream kind of on the loans, is kind of having an adverse effect on the growth. Do you mind just talking about that a little bit more? And if -- what the significance that is to net loan growth in 2020?
Yes. I would say, overall, it's been more anecdotal. It hasn't really been what I would call significant. We're just observing it. And that's something relatively new, where they come down below $10 million. So these are the large money center banks and try to compete on some of these credits. They have a cost of funds that they put out there. We don't think they really compensate themselves for return and risk. In some cases it really comes down to the borrower.
The customers that have the long-term relationship tend to understand the value of working with the community bank versus a money center bank, but not all customers see that. And we noted it, because we saw -- we've seen an uptick in it. And it seems to be appetite-driven. So I think as they get to the quarter end and decide they need to move their loan growth totals, they come down market to try to top it off. Don't know if they're going to continue to do that. I can't say, I don't believe it's had a material impact on the business, don't expect it to, but we do occasionally expect to see them swoop in and try to take some business, probably more driven by there, less strategic and more tactically driven by their own need to build their balance sheet.
That's really helpful. And that's all the questions for me. Thank you for taking.
You bet.
Thank you. [Operator Instructions] And our next question is from Gordon McGuire with Stephens. Please go ahead.
Good morning.
Good morning, Gordon.
So I hopped on late, so I hope this wasn't asked earlier or addressed earlier. With State Bank closing in the first quarter, will there be any one-time provisioning related to CECL?
So, yeah, obviously that's something we've been spending a lot of time with since this will be our first transaction closed under CECL. So, I'm going to ask Ron, just to comment on that. He's been looking at this closely.
Right. So we're aware the CECL impact double count issue. And so right now, we're continuing to look at the portfolio to judge what are the performing loans non-PCB for those who are into the technical side of it. And so we're still working through that. So yeah, there will be some additional provision. And that will go through P&L, but we'll isolate that in the press release.
Okay. And then just the day two provisioning levels are just on a run rate basis. How should we think about CECL provisioning relative to your provisioning this year where you were releasing reserve?
Right. So, what Randy said in his formal remarks is we are pretty far down the path. We have given the results of what we're doing to our external accounting firm on-site now. And so in the 10-K, which will be probably released somewhere around February 21st that's where we'll provide the range, but don't want to release a number yet given our auditors are looking at it.
Okay. So the 10-K will provide a provisioning range as well as a day one impact?
Yeah. You'll see the implementation that -- to the extent they're adopting it will affect capital given that we expect there will be some increase in our bad debt reserve. But as Randy said, we're not expecting a big impact, a big increase.
Yeah. The day one impact Gordon, State Bank of Arizona, you won't see that until we release the quarterly -- the first quarter results, because we're going to close that at the end of February, right?
Okay. Right, right. But I guess maybe I misunderstood. Will you provide a provisioning range for next year with the 10-K?
Yes.
Yes.
Okay, okay. That's all I had. Thank you.
Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Randy Chesler for any final remarks.
Great. Well thank you, Carmen. Those are -- we appreciate all your questions. We know you guys have a busy earnings season. And we do want to thank you for dialing in today and we hope you have a great day and a fantastic weekend. So, thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.