Randy Chesler - President, CEO.

Jeff Rulis - D.A. Davidson & Co. Andrew Disdier - Sandler O'Neill & Partners Matthew Clark - Piper Jaffray & Co. Michael Young - SunTrust Robinson Humphrey Jacque Bohlen - KBW.

Welcome to the Glacier Bancorp Fourth Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to President and CEO Randy Chesler. You may begin..

All right, thank you, Leigh Anne and 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; Barry Johnston, our Chief Credit Administrator; Angela Dose, our Principal Accounting Officer; and Don McCarthy, our Controller.

Yesterday, we released fourth quarter and full-year 2016 results and overall the Company had a strong fourth quarter and closed out a really good year. For the quarter, our earnings were $31 million; that's an increase of $1.5 million or 5% over the fourth quarter a year ago.

Compared to the third quarter of 2016, earnings remain consistent, increasing by $84,000. For the full year, earnings were a record $121 million which is an increase of $5 million or 4%, over 2015.

As you know, we're a company of community banks and our 13 banks, led by our bank presidents and supported by our senior staff, had a lot going on throughout the year. Most significantly, we converted each of our 13 banks from their own unique core operating platform to one version.

This took a lot of planning and preparation and I'm really pleased to report we have finished this project and all 13 banks are now converted. In addition, we converted our most recent acquisition, Treasure State Bank, in the fourth quarter.

Now we have previously talked about our operational strength in doing conversions, but doing 14 in one year is really remarkable. It is quite a testimony to the strength of our entire team that we're able to accomplish this in 2016 while still delivering record results.

The fourth quarter results include $368,000 of acquisition-related expenses and $749,000 of expenses related to the conversions. We also delivered earnings per share for the quarter of $0.41 which is $0.01 more than the prior quarter and up 5% from the prior year's fourth quarter.

Full-year 2016 earnings per share were $1.59 which represents a 3% increase over 2015. Our return on average assets for the year was a solid 1.32%, while return on average equity was 10.79%. And our return on tangible equity was 12.71%. We're very pleased that we've been able to deliver strong results like this on a consistent basis year over year.

We paid a dividend of $0.20 per share in December and this was our 127th consecutive quarterly dividend paid by the Company. In addition, we declared a special dividend of $0.30 per share, payable in January. This will be the 13th special dividend paid by the Company.

Consistently returning excess capital to our shareholders will remain a key strategy for the Company. We started the fourth quarter a bit unsure of what level of loan growth to expect, given our strong year up to that point, but also recognizing the slower growth that typically occurs in the fourth quarter.

While we were pleasantly surprised by a solid quarter with organic loan growth of $88.5 million or 6% annualized, this compares to $165 million of organic growth or 12% annualized last quarter and $43 million or 3% annualized in the prior year's fourth quarter.

The historical trend of a weak fourth quarter seems to have become a little less pronounced, as we have become more active in the municipal lending markets and activity in general seems to be less impacted by winter weather.

For full-year 2016, we organically grew loans by $554 million or 10.91% which was much better than we expected at the beginning of the year. The growth was broad based across all of our 13 divisions and surpassed 2015, where we grew $346 million or 7.71%.

Now, we're really optimistic about 2017, but a lot of questions remain about future economic policy. And as we have seen in the past, the economic outlook can change really quickly. So, we remain cautiously optimistic.

Loan production for the quarter was $601 million which was $78 million less than the prior quarter, but $31 million better than a year ago. Production gains were generally well distributed among the 13 divisions. Paydowns were generally consistent with past historical trends.

For the quarter, commercial real estate saw the most significant growth, increasing $71 million or 2%. Other commercial loans, consisting of C&I, municipal and ag loans, were the second largest growing segment, up $39 million or 3%, from the prior quarter. The municipal loans were for a wide variety of uses across our six-state footprint.

Credit quality showed general improvement for the quarter and we continue to feel pretty good about the credit outlook. Nonperforming loans dropped $6.9 million to $71.4 million from the prior quarter and decreased $8.37 million or 11%, from a year ago.

We would still like to see our nonperforming loans below $65 million and hope the economic environment in 2017 will provide some further downward NPA momentum. Nonperforming assets as a percentage of assets were 0.76% at the end of the fourth quarter which was a 12 basis-point decrease from the prior year-end.

Net charge-offs for the current quarter were $4.1 million, compared to $478,000 in the prior quarter and $1.5 million in the quarter a year ago.

While this quarter's charge-offs appears larger than normal, it was primarily driven by a $2.1 million value adjustment, our single largest chargeoff this year by far, reflecting an updated appraisal of a property currently in NPA, as well as the usual fourth quarter push to resolve troubled credits before the start of a new year.

Gross recoveries for the quarter were $2.1 million which is a level consistent with prior quarters. 2016 chargeoffs are 0.043% of loans versus 2015 of 0.046%. Both years are well below the 20 basis points threshold we generally like to maintain. Early-stage delinquencies decreased $1.8 million or $25.6 million from the prior quarter.

Our 30 to 89 past-due loans stood at 0.45% of loans at the end of the quarter, compared to 0.49% last quarter and 0.38% a year ago. Our divisions continue to do really an excellent job because they are very familiar with the credits and they are able to work with them -- with their customers to mitigate risks.

Our allowance for loan and lease losses ended the quarter at $129.6 million or 2.28% of loans which is down from the prior quarter of 2.37% and 2.55% -- or $129.7 million at the end of last year.

This gradual reduction in the allowance as a percentage of loans is reflective of the improvement in our credit outlook, driven by a number of specific credit and environmental factors. The coverage of the allowance to nonperforming loans ratio at the end of the quarter was 257%, compared to 238% at the end of the last quarter and 244% a year ago.

Investment securities grew $129 million in the quarter for a total of $3.101 billion or 4%, from the prior quarter. We had some surplus cash and deposits available, due to less loan demand and we put these assets primarily into short-weighted average life U.S. agency and mortgage-backed securities.

This level of investment represents 33% of total assets versus 36% at the end of the prior year. Total core deposits ended the year at $7.04 billion which was up $69.8 million from the prior quarter and organically increased to $265.9 million or 4%, from the prior year-end.

Importantly, noninterest-bearing deposits ended the quarter at $2 billion -- $2.04 billion which was down $56.9 million from the prior quarter, primarily due to seasonal factors, but up $110.5 million or 5.8%, versus a year ago. Interest income increased $1.8 million to $87.8 million or 2%, versus the prior quarter.

Current quarter interest income increased $4.5 million or 5%, over the prior year's fourth quarter, due to the increase in commercial loan net income which more than offset the $2.1 million decline in investment income over the same period. For 2016, interest income was $344 million which was up $24 million or 8%, versus 2015.

The total cost of funding remained relatively consistent, with the cost of the current quarter at 36 basis points versus 37 basis points for both the prior quarter and prior year's fourth quarter. Net interest margin for the quarter was 4.02%, compared to 4% in the prior quarter and 4.02% a year ago.

We're very pleased with the ability of our bank divisions to help us maintain a margin north of 4% in an interest rate environment where a historical very low flat yield curve was in place for most of the year.

Noninterest income for the quarter was $28 million, a decrease of $279,000 from the prior quarter and an increase of $3.5 million or 15%, over fourth quarter 2015. The primary decrease for this quarter was due to a shorter business day quarter which resulted in less service charge income.

While quarter to quarter the noninterest income remained relatively stable, the primary driver of the increase over the quarter a year ago was the gain on sale of loans which increased $3.7 million or 62%. For the year, noninterest income was $107.3 million which represents an increase of $8.6 million or 9%, over 2015.

Our increased number of deposit accounts drove more service charges and other fees totaling $62.4 million or an increase of 5% over the prior year. Gain on sale of loans was $33.6 million, an increase of $7.2 million or 27%, from 2015 due to stronger mortgage originations and improved secondary market pricing.

Noninterest expense for the quarter increased $1.5 million or 2%, over the prior quarter and increased $4.5 million or 7%, over the prior year's fourth quarter. The biggest driver of the increase over the prior quarter was the increase in OREO expense.

And this was primarily caused by a large write-down of $1.45 million that was the result of another appraisal that came in lower than our expectations. On a full-year basis, noninterest expense of $259 million increased $22 million or 9%, compared to 2015.

CCP-related expenses and those are core consolidation projects, of $4.3 million and compensation and employee benefits of $17.3 million were the primary components of the 2016 increase.

The efficiency ratio at the end of the quarter now stands at 55.08% which is a 76 basis-point drop from the prior quarter and a 144 basis-point decrease from the prior year's fourth quarter. For the full year 2016, the efficiency ratio is 55.88%. As previously discussed, our full-year goal for 2017 is an efficiency ratio of 55%.

So in closing, the fourth quarter and full-year 2016 represents a very good quarter and year for the Company. We have an exciting year on tap for 2017.

We look forward to closing our acquisition of Foothills Bank in the second quarter and believe our entry into Arizona will be a great addition to the Glacier multistate footprint which will become seven states and will stretch from the borders of Canada all the way down to Mexico.

We're also looking forward -- look forward to achieving our efficiency goal of 55% on a full-year basis in 2017 by taking advantage of all the work that we did in 2016 to consolidate our back-office processing onto one system. We hope to find a number of better ways of doing things that will translate into improved customer service at a lower cost.

As I noted at the outset, these strong results are a testament to the strength of our very talented team which I think is one of the best in the industry. That ends my formal remarks. And I will now ask Leigh Anne to please open the line for any questions you may have..

[Operator Instructions]. Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open..

Randy, just a question on the -- I guess the core conversion cost, the $749,000, is that itemized as nonrecurring? Or maybe just in the big picture, then, if we're looking at noninterest expense going forward, is there -- now that that is complete, does the one-time fall off and then are there efficiencies? Or if you could kind of walk us through the run rate on expenses..

Sure, yes. So the total for 2016 was about $4.5 million related to CCP. Now all of that will drop off in this year, so we don't expect to carry forward any of that expense into 2017. There could be a little tail in the first quarter.

We have done our best to make sure we've got all those expenses in, but on a project this large, there is always a little risk of that. So that is behind us. And now that we have this system in place, we have an initiative to start to look for the cost savings that we believe are there as part of the ability now to operate with one platform.

So our first goal and as we talked about and I mentioned, 14 conversions in a year is unheard of and we not only did that, but also delivered the results that we're talking about today.

So, we really took a breath at the end of the year and now we're going through our processes and procedures with the new system and starting to identify areas where we think we can get some efficiencies.

Now we're doing this carefully because we want to make sure that we continue to deliver great service to our customers and we don't rush to implement some of these things without understanding the full impact.

And so, I would tell you, Jeff, I think those -- the fruits of that project are probably going to be later in 2017 and you'll probably see much more clearly the impact of that in 2018..

Just for purposes of what we saw this quarter, though, the $749,000 would be expected to be out of the run rate and then, as you say, cost savings later in the year.

But is that correct, that the $749,000 would be out of the run rate?.

Yes, it is..

Okay, I guess including merger costs, too. I guess you could incur some going forward.

Okay, switching gears on the -- I guess a little surprised on the lack of seasonality in the mortgage arena and maybe that is a testament to what you had talked about, you're maybe bucking some historical trends with good relationships, but maybe your expectations for the mortgage gain on sale for 2017..

I think we're very happy that we held some production and gains in the fourth quarter. And yes, I do think that's because more than 60% of the business is purchase business driven through relationships, rather than through transactional refis. And so, that's something the team has worked hard at and I think has served us well.

And I think going forward we feel pretty good about that continuing. We don't really see a disruption in that and at the same time we do believe refis are going to feel some -- probably as rates increase, tail off. But we feel pretty good about moving forward at the same levels we did in 2016..

Got it.

And maybe one last one, just on -- I guess if you would hazard a guess on loan growth guidance, if you guys threw one out early last year and what are you thinking for 2017?.

Well, we're always very cautious on that. We're -- as I said, there's a lot of variables out there. We're -- as a planning standpoint, we're pretty much thinking of pretty close to where we were last year, around 7% growth. We feel that is pretty realistic and we will just have to see how the year unfolds..

Our next question comes from Matthew Forgotson with Sandler O'Neill. Your line is open..

So first question, have you seen loan pricing improve with the backup in rates? And then, conversely, are you feeling any upward pressure on deposit costs?.

So on loan rates moving up just a tad, we really haven't seen a full transfer of that into the pricing at this point. They went up and then they kind of backed down again, so it's been a slight increase.

And what was your second question Andrew?.

And then, just on the other end, are you feeling any upward pressure on deposit costs?.

At this point, it is pretty calm, so I would have to say no. So it's -- I think that the folks are -- we haven't really seen that across our 13 divisions at this point..

Great.

And then maybe one more, just how much did purchase accounting accretion contribute to the NIM during the fourth quarter?.

I think that was some -- right about six bps for the quarter and that is pretty consistent quarter to quarter..

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

Maybe just on the core loan yield as well, stripping out the accretion, still up a tad. Just curious if there was anything unusual in there, an increase in prepayment penalty income or whether or not that was just new loans going on the books above the portfolio..

No, well, a couple things. One is we picked up because we roll -- we're still seeing a profitable remix where it rolls off the investment portfolio and we're putting that into loans, so we're picking up that increase which has been running about 200 basis points.

But maybe more to your point, there was a bit of a mix shift in the fourth quarter which I think helped us, so we saw commercial loans increase in the mix and those have a higher yield. And so, that helped us with our margin..

Okay, great. And then, curious if you -- now that you are -- congratulations on the new role. Just curious if you think you may change the way you manage the affiliate bank structure at all and whether or not kind of leave it the way it is..

Yes, I can definitively say there are no -- we're not going to make any changes to that structure. We have talked about that from the beginning, but it is working extremely well, our division structure. We're going to add number 14 with our Foothills acquisition and I think that model and that strategy is only going to get better for us.

So I am very, very high on it. I don't expect to make any changes at all..

Our next question comes from Michael Young with SunTrust. Your line is open..

I jumped on a little late, so if I ask something that was already asked, I apologize. But wanted to start off maybe just on the M&A side. I don't know if you talked about the pipeline there.

Just maybe kind of what you are seeing in terms of level of conversations now following the stock market increase and then also, dovetailing with that, as you approach the $10 billion asset threshold, I know there's no desire to do a -- necessarily a larger deal, but would you potentially piece together a couple more deals in rapid succession as you get close to that line?.

Sure. Okay, so M&A pipeline, there are -- we're seeing some discussions. I would say that we're somewhat cautious because of the pricing has gone up, some of these current deals with a three in front of them. So while our stock has done very well, we still are very conscious of the goodwill that we put on the books for doing a deal at those levels.

So, I think we're cautiously having our conversations and we will continue to do that. In terms of the $10 billion, Michael, we have talked about. Really our thinking on that is we -- as you know, we're a very disciplined acquirer and we look at every transaction and it needs to meet our requirements. We're not going to change that.

And so, we're not going to stretch to do a deal just to leapfrog over the $10 billion. If one comes along and it meets our requirements and it's a large deal, then we would certainly look at it.

But we're going to continue to do -- follow the same process with the same discipline and, of course, we're going to carefully watch that $10 billion because there's implications once we go over. So I think we're just driven by looking for good deals.

That would be a good addition to the business and the $10 billion, it's not if, it's just a matter of when. And we don't completely control that because of the nature of M&A..

And then, maybe switching gears, with the CCP largely behind you, I know you had talked about efficiency improvement potentially this year, but coming more on the revenue side.

Is that still the thought process? And when do you think we might see that start to come into the fray here?.

I think CCP would -- I think those -- the benefits from that are probably later in the year and into 2018 because this is -- there is a lot of folks in the organization.

We have to work through how these things can actually work and like I said, I'm committed to doing this in a way that we can -- we're able to deliver really good service as we do today, so we don't want to get our hands into some of these processes and procedures and inadvertently cause problems. So, it's just -- I think it's the right way to do it.

We're going to take our time. On the -- so that's the -- that's primarily expense and there may be some revenue pick-up there as well. On the revenue side, I think that is just normal business of us looking at ways to do things better which is always an opportunity for us..

[Operator Instructions]. Our next question comes from Jacque Bohlen with KBW. Your line is open..

Circling back again to the $10 billion mark, is it fair to say that if another deal outside of the Foothills transaction doesn't close in 2017 that you might look to manage a little bit below that level to end the year just shy of $10 billion?.

Yes, I think that's a very good possibility..

Okay. And on the M&A front, just a little bit more color on that. Have you noticed a change in conversations over the last couple of months just as -- I think you mentioned some of the high valuations that we have seen in recent deals in the marketplace.

But how has that maybe changed conversations you are having with sellers?.

It's a little early because some of that is pretty current and some of that depends on where we might be in a discussion. I think it has crept into people's thinking and that is just part of the discussion that needs to be had.

Some of those deals, as you know, were done on a more strategic basis and a particular need, so some of that premium may not be completely transferable. But, yes, those people see those numbers and that is part of the discussion..

Okay.

And on that same sentiment, just given the changes that we've seen in the business environment, are you noticing any changes in customer behavior, any changes in optimism as we head into the year, maybe from some small business owners?.

I would say from the looks of some of the projects that our customers are talking to us about that I would say they are pretty optimistic. I think that we have seen a couple things that were on the shelf that are now being contemplated. So, generally, I think at this point there is optimism and people are moving forward.

We have very little evidence of people holding back right now. It's actually quite the opposite, that people are planning to do some projects going forward that seem to be a good level of activity..

And I'm showing no further questions at this time. I would now like to turn the call back to Randy Chesler for any further remarks..

All right. We thank you for your questions. We're very proud of the quarter and the full year. We appreciate you calling in to hear about our results and we thank you and we hope to see you back at the end of the next quarter. So Leigh Anne, that's it. We will end the call..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day..