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Edited Transcript of GBCI earnings conference call or presentation 19-Oct-18 3:00pm GMT

Q3 2018 Glacier Bancorp Inc Earnings Call

KALISPELL Oct 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Glacier Bancorp Inc earnings conference call or presentation Friday, October 19, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry L. Johnston

Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer

* Randall M. Chesler

Glacier Bancorp, Inc. - President, CEO & Director

* Ronald J. Copher

Glacier Bancorp, Inc. - Executive VP, CFO & Secretary

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Conference Call Participants

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* Andrew Brian Liesch

Sandler O'Neill + Partners, L.P., Research Division - MD

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Timothy Norton Coffey

FIG Partners, LLC, Research Division - VP & Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would like to introduce your host for today's conference, Mr. Andy Chesler, CEO. Sir, please go ahead.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [2]

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All right. Thank you, Michelle. Well, 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; and Angela Dose, our Principal Accounting Officer.

Yesterday, we released our third quarter 2018 results. This was a very strong and well-balanced quarter and continues an excellent year-to-date performance for the company. Earnings were $49.3 million, an increase of $12.8 million or 35% over the third quarter a year ago. Pretax income was $60.1 million for the quarter, an increase of $12 million or 25% over the prior year third quarter. Pretax income of $161 million for the first 9 months of the year increased $26.2 million or 19% over the first 9 months of 2017.

We had loan growth of $175 million or 9% annualized in the third quarter versus growth of $164 million or 10% in the third quarter a year ago. We grew our core deposits $199 million or 9% annualized in the third quarter. Diluted earnings per share for the quarter were $0.58, an increase of 12% from the prior quarter and an increase of $0.11 or 23% over the prior year third quarter. Our annualized return on average assets at the end of the quarter was a very strong 1.66, up from 1.53 in the prior quarter. Annualized return on average equity was 13.1%, and our return on tangible equity was 17.4%.

We declared a regular dividend of $0.26 per share, which is a 24% increase over the third quarter regular dividend a year ago. This was our 134th consecutive quarterly dividend paid by the company. And in September, we also successfully completed the conversion of Collegiate Peaks Bank in Buena Vista and Denver, Colorado onto our core processing platform. Loan production for the third quarter was $887 million, which was once again generally well distributed among all our divisions. Loan paydowns were $712 million, which is consistent with past seasonality. The loan portfolio ended the quarter at $8.1 billion.

Organically, the loan portfolio increased $632 million or 10% since September 2017 and was primarily driven by growth in commercial real estate loans, which increased $406 million or 12% over the same period. Investment securities of $2.695 billion decreased $103 million or 4% during the current quarter and increased $153 million or 6% from the prior quarter -- from the prior third year -- prior quarter -- prior year third quarter. Investment securities represented 23% of total assets at the end of the quarter compared to 26% at the end of the third quarter a year ago.

Onto credit. Our key credit quality ratios improved in all categories across the board. Early-stage delinquencies as a percentage of loans at the end of the quarter were 30 basis points. That's a 19 basis -- that's a decrease of 19 basis points from the second quarter and a decrease of 14 basis points from the prior year's third quarter. Net charge-offs for the quarter were $2.2 million and were $5.7 million for the first 9 months of 2018. Charge-offs for the first 9 months of 2018 were 7 basis points of total loans, down 5 basis points from the same period a year ago.

Nonperforming assets as a percentage of subsidiary assets at the end of the third quarter were 61 basis points, which is 10 basis points lower than the prior quarter and 6 basis points lower than the prior year third quarter. At the end of the quarter, NPAs totaled $72.1 million, a decrease of $12.4 million or 15% from the prior quarter. We're very pleased to see the reduction in the level of NPAs as we've been working toward this for some time and hope to see this trend continue. The allowance for loan and lease losses as a percentage of total loans outstanding at the end of this quarter was 1.63%, which is down 3 basis points from the prior quarter and down 36 basis points for the end of the third quarter year ago. This reflects our positive outlook on our portfolio end markets.

Our low-cost, high-quality stable funding platform across our Western multistate footprint continued to perform really well for the company. Core deposits at the end of the quarter were $9.45 billion. Total core deposits were up versus the prior quarter by $199 million or 2% as we continue with our focus on growing relationship-based accounts. The bulk of the deposit growth this quarter was all in noninterest-bearing deposits, which increased $188 million or 6% from the prior quarter and organically increased $276 million or 12% from the prior year third quarter. We ended the third quarter with a loan-to-deposit ratio of 85%, essentially unchanged from the prior quarter. And we were very pleased to see the total cost of funding for the current quarter unchanged from the prior quarter at 36 basis points and up only 1 basis points versus the prior year third quarter. Once again, our 14 divisions continued to do an outstanding job tightly managing deposit costs specific to each of their markets.

Interest income increased $5.2 million to $123 million or 4% from the prior quarter and increased $26.4 million or 27% over the prior year third quarter. Both increases were primarily attributable to the increase in interest income from commercial loans and rising interest rates. Interest income on commercial loans increased $4.8 million or 6% from the prior quarter and increased $20.7 million or 34% from the prior year third quarter. Our net interest margin as a percentage of earning assets for the current quarter was 4.26% compared to 4.17% in the prior quarter. The 9 basis points increase in the net interest margin was primarily the result of increased yields on the loan portfolio and it also included a 2 basis point increase in loan discount accretion, for a total of 8 basis points attributed to the discount accretion.

The current quarter net interest margin increased 15 basis points over the prior year third quarter net interest margin of 4.11 and would have been an increase of almost 30 basis points if the same federal tax rates in effect in 2017 were in effect today. The increase in the core margin from the prior year third quarter was a result of the remix of earning assets to higher-yielding loans, improved interest rates on the loan portfolio and very stable funding cost. Noninterest income from the quarter totaled $32.4 million, an increase of $588,000 or 2% from the prior quarter, and an increase of $1.2 million or 4% over the same quarter last year, driven by increased accounts from our recent acquisitions.

Service charges and other fees of $19.5 million increased $700,000 or 4% from the prior quarter and increased $2.2 million or 13% from the prior year third quarter. The increases were primarily due to the increased number of accounts from organic growth and acquisitions. Gain on sale of loans decreased $886,000 or 11% from the prior quarter as a result of some housing seasonality and decreased $1.9 million or 21% from the prior year third quarter as a result of some seasonality and timing of loan origination. Other income increased $1.5 million or 56% from the prior quarter and was primarily due to a $2.3 million gain on the sale of a branch building and increased $767,000 or 22% from the prior third -- prior year third quarter due to the branch sale.

Noninterest expense for the quarter was $82.8 million, and that increased $1 million or 1% over the prior quarter and increased $14.3 million or 21% over the prior year third quarter. Comp and employee benefits of $49.9 million increased by $904,000 or 2% from the prior quarter and $8.6 million or 21% from the prior year third quarter, primarily due to the increased number of employees from acquisitions. Occupancy and equipment expense increased $1.4 million or 22% over the prior year third quarter and was also attributable primarily to our acquisitions.

OREO expenses increased $2.5 million from the prior quarter and $1.9 million from the prior year third quarter, with the increase driven by a single property, which we wrote down $2.2 million in the quarter. Other expenses decreased $1.9 million or 13% from the prior quarter and was primarily driven by a decrease in acquisition-related expenses. Acquisition-related expenses were $1.3 million during the current quarter compared to $2.9 million in the prior quarter and $245,000 in the prior year third quarter.

Tax expense for the third quarter was $10.8 million, which is a decrease of $837,000 or 7% from the prior year third quarter and was attributable to the Tax Act. The effective tax rate in the second quarter of 2018 was 18% compared to 24% in the prior year third quarter. Our efficiency ratio for the quarter was 52.3% and was a 318 basis point decrease from the prior quarter efficiency ratio of 55.4%. The decrease was the result of an increase in interest income and the sale of the branch building, combined with the company controlling operating cost and a decrease on our acquisition-related expenses.

In closing, the third quarter of 2018 represents another excellent quarter for the company. We finalized the integration process as planned for Collegiate Peaks at the end of the third quarter, and now we have successfully integrated both our First Security and Collegiate Bank -- Collegiate Peaks Bank acquisitions that'll be closed at the beginning of the year. Our 14 division presidents and their teams across our 7 states really rose to the occasion in the third quarter and delivered some very strong results across all aspects of the business.

That ends my formal remarks. And I'd like to now ask Michelle to please open the line for any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Andrew Liesch with Sandler O'Neill.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [2]

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Just if you can provide some color around the margin outlook. It just seems like with the impressiveness of the funding base and the cost of funds there staying pretty flat, and the inflows to your noninterest-bearing accounts, but then stronger loan yields at the margin would have to continue marching higher. I'm just wondering if you could provide some color around your outlook on the margin.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [3]

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Yes. No, we're very, very pleased with the margin results this quarter. I think the very positive underlying trends that we see this quarter should continue. I'm going to ask Ron to make a couple comments, if he would. I know he spends a lot of time looking at the margin.

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Ronald J. Copher, Glacier Bancorp, Inc. - Executive VP, CFO & Secretary [4]

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Yes, it really is a continuation of what we have said in the second quarter release, and that is it's really the focus the division have, and my hats off to them. They're really focused on getting the noninterest-bearing accounts. And you'll notice that we've had some slight increases in the interest-bearing, but when you can't continue, and I expect that we'll continue to have great growth in our noninterest-bearing, that goes a long way towards increasing the margin. So I'm optimistic on that standpoint. And then the loan production yields, the growth in that's likely to continue, so we're pretty optimistic the core is running pretty well.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [5]

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That's great. And then just looking at the loan pipeline, where it stands now, I mean normally you have a little bit of slowdown here in the fourth quarter. Is that normal seasonality, what you expect to end the year?

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Barry L. Johnston, Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer [6]

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Yes, it's -- we see it every time this year. Generally, the third and fourth quarter's a little slower than the first and second, so nothing out of the norm there.

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Andrew Brian Liesch, Sandler O'Neill + Partners, L.P., Research Division - MD [7]

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Got you. And then just one last question. The cost saves from the acquisitions this year, are those all in the run rate right now?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [8]

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For the most part, yes. Both acquisitions are -- have now been converted, and there's always a little bit of time after the conversion where some of the expenses are still there, but then they begin to drop off. And we finished our last one at Collegiate Peaks in September, so there may be a little bit of trailing expense. But certainly First Security Bank, having done that one earlier this year, we've -- most of that is out of -- most of the saves are reflected. There's a little bit of -- there will be a little carryover, but not much.

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Operator [9]

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And our next question comes from the line of Jacquie Bohlen with KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [10]

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Zeroing in a little bit more on loan yields, I wonder if you could provide us a refresher with how much of your portfolio, number one, is variable? And number two, how much of it reprices on a quarterly or shorter basis?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [11]

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Ron, do you want to take that?

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Ronald J. Copher, Glacier Bancorp, Inc. - Executive VP, CFO & Secretary [12]

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Yes, Jackie here -- Ron here. So the loan portfolio and the variable parts is about 64% -- just call it 2/3, if you will, and then the other part is the fixed portion. And then I don't have the quarterly that was repriced, but we would tell you, it's 40%, 45% of it would reprice within a year, and that's been pretty much the historic pattern. Remember, from an asset liability perspective, we price a lot of our loans off to 5-year and we always have a rolling book. And so we get more lift in the second year after the first year of rates. And that's what you're starting to see, as these loans are starting to reprice both from a maturity standpoint and certainly from the variable part, that's what's given us that lift.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [13]

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Okay. And that 45%, is that 45% of the total portfolio or 45% of 2/3 of the portfolio?

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Ronald J. Copher, Glacier Bancorp, Inc. - Executive VP, CFO & Secretary [14]

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It's the 2/3 of the portfolio.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [15]

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Okay. And just generally speaking, when those are repricing, what rates are they repricing off of, prime, LIBOR, a different metric?

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Ronald J. Copher, Glacier Bancorp, Inc. - Executive VP, CFO & Secretary [16]

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It's largely off the -- we index to the -- predominantly indexed to the 5-year Federal Home Loan Bank of Des Moines rate and then we add a spread to that. And some of those are contractual, but then they're -- if they're variable, we get a chance to lift those occasionally, so.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [17]

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Okay. That's helpful. And I apologize if I somehow missed this in your prepared remarks, but I have in my notes from last quarter that new generation was around 5.20%, and I know that you've said that it increased this quarter, and I wondered if you had that number.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [18]

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You're talking about new loan production yields?

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [19]

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Yes.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [20]

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So it's moved up quite nicely. Right now, we're right around the 5.30s for new production. So it's moved up commensurate with the increase in rates.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [21]

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Okay. And then just one last one for me. Obviously, your bank divisions are doing a fantastic job of developing noninterest-bearing balances. I guess number one, do you expect that -- how much longer can it continue to keep funding costs flat basically as rates rise?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [22]

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Well, when we look -- we spend a lot of time looking at it this quarter. I mean, when you think of our position as a commercial lender, we feel like there's still quite a bit of room to grow there of our penetration of noninterest. If you look at our noninterest balances of only about 31% of the total, we think there's good room to grow. We're also seeing -- now that we have, over the last year, really focused on looking for that relationship with the loans we're making that, that's paying dividends. We think our product is very strong in the market that we offer. We are picking up some business as the bigger banks kind of move away from the -- our target market of smaller companies. And so all that, we feel is -- are very good trends for us going forward.

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Operator [23]

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And our next question comes from the line of Matthew Clark with Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [24]

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Wanted to talk a little bit about the construction development portfolio. I think it's up to about a little over 13% of total loans. Just want to get a sense for whether or not you're seeing any slowdown in production activity given what rates have done and just kind of general having a slowdown nationwide and how you might manage that portfolio going forward.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [25]

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Sure. The construction piece. Yes, so Barry and I, we have -- we talk a lot about that, so I'm going to let Barry give you a little insight there.

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Barry L. Johnston, Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer [26]

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Yes. Basically this past quarter, we saw a reduction in custom and owner-occupied single-family residential. I think that's a little seasonal. Saw 14% growth in presold and spec, and that's a reflection of just -- we get a lot -- some builders out there trying to fill the demand for affordable housing. Their inventory is pretty tight across our markets, not a lot of supply, so we're -- if we've seen some increase there, anticipate that'll probably continue. Then on -- in regards to the total land lot and other, that grew about 6%. Some of it is in land development. We're seeing a few more loans there. We're financing borrowers who are going to build homes and sell lots. Nothing really large increase in absolute dollars, nothing big, but percentage-wise is pretty good. Other construction, which is the -- comprises the bulk of that portfolio is $487 million. That stayed relatively flat this quarter, again, I think seasonality. That portfolio is comprised of various commercial, primarily commercial vertical construction. About $100-and-some million is multifamily, of which the biggest part of that is low income housing tax credits projects that we financed across our footprints. We have them all the way from Montana down to Colorado. So it's really a good product. We have about $80 million in there of educational dormitory properties that we're financing at various colleges and universities across our footprint. And then we have some medical offices buildings in there, about another $70 million, $71 million is in there. So outside of those 3 classes there, it's spread out across all other office buildings, warehouses and that sort of products. So usually for the bulk of it, it's owner-occupied or owner-managed, very little outside investment properties for the most parts. Does that help?

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [27]

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Okay. Yes, so there's -- it sounds like there's still capacity to grow. It doesn't sound like you're pulling back necessarily.

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Barry L. Johnston, Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer [28]

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No. Given the class of product, it's kind of our bread and butter, so I don't see us limiting production there. The only 2 classes that we have put a limit on is hospitality and then conventional multifamily. Just see that's -- we're at our max limit there, about $200-some million in each one of those classes.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [29]

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Okay, great. And then just shifting back to deposits. Can you give us a sense for where that growth in noninterest-bearing is coming from competitively, whether or not the big banks or not?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [30]

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Sure. A couple things about that. Number one is when we look at all the divisions, it's pretty well spread out among all the divisions, so we're seeing it across the footprint. A lot of it is continued blocking and tackling. We just kind of updated volume on this whole area over a year ago with some enhanced training around our product offering and really, Barry is really kind of asked for total relationships quite a bit more, and I think that's working for us. And if there is one threat, your question on big banks, a number of the divisions report Wells Fargo is continuing to kind of lose some relationships. And so I think we're benefiting from that in the markets where they're with us as well. And I think in general, if the larger banks are in the market, we tend to be benefiting from that.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [31]

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Great. And then did you happen to have the spot rate on your interest-bearing deposits at the end of September? Just wondered if it moved much at all relative to the quarter?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [32]

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Let's take a look. So that is on the release, I believe. If you look at the core deposits, do you have it quarter-over-quarter? Looks to be -- if you look at it over this quarter versus a year ago, we're up 3 basis points on the core deposit. And it moves around between DDA savings, money market and CDs. The bulk of that increase is on the CD side.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [33]

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Right. I guess I was just looking for the end of September, not the current quarter. Sorry.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [34]

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Okay. End of this September from the, you mean beginning of the quarter to the end of the quarter?

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [35]

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Yes.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [36]

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So let's see, pretty much the same. Looks like it's up about 1 basis point.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [37]

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Okay. And do you, I guess -- that's great. It doesn't seem like you anticipate any meaningful pressure here in the near term to have to raise deposit rates.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [38]

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That's right. We talk to all our divisions, and we're just not hearing that.

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Operator [39]

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And our next question comes from the line of Jeff Rulis with D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [40]

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A question on the -- just looking at the commercial loan balances, and I guess it's in the regulatory classification, some fluctuations in those balances. Is that a product of payoffs? Is there some seasonality going on? Just wanted to kind of dig into that C&I category a bit.

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Barry L. Johnston, Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer [41]

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Yes, generally, third quarter, as it starts getting colder, we'll have a lot of revolving lines that pay down. We also have some agricultural production lines that, as our commodity producers sell their crops, they will pay those down. So generally that's -- we see those reductions this time of year.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [42]

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So Barry, as you've grown the ag portfolio, could you see potentially more seasonality than you've had in the past?

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Barry L. Johnston, Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer [43]

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Right now the portfolio's split about 50-50 between term real estate and production. My guess is, is that we will continue to grow that portfolio, but the variances probably won't be that much different than what they've been traditionally because we'll probably be adding more totals that will offset any variability to pay down in operating lines.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [44]

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Got it. Okay. And then on the gain on sale, just interested in your view on, maybe a broader view on '19, if you're looking at that kind of outlook or budget, where do you see that revenue stream, I guess year-over-year in '19 versus what you've seen this year?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [45]

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For the -- so the gain on sale, primarily driven by the residential real estate business. Right now, when we look at our total originations year-over-year, we're running pretty close to even. There's some variability in how the gains get recognized due to when they come onto our platform. So I think the tailwinds that we have are -- in many of our markets, there's still a housing shortage. And we think that, that's going to continue. We see good demand. We're still seeing good in-migration, which is driving the housing demand. The headwind is just really interest rates, as they move up, question is what kind of impact that will have. So at this point, we're really looking for a continuation of pretty much the same level of business that we had this year going into '19.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [46]

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Okay. And margin-wise, any thoughts on sort of the margin in that business year-over-year?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [47]

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Well, it's been doing pretty well. I think we did make some internal shifts to move to a little bit towards -- more towards mandatory delivery. And that's helped our margin as the business got a little more competitive. So we've held it pretty flat year-over-year if you look at the numbers. So the one offset the other, so we're able to increase our gains because we moved to mandatory. That took up some of the competitive issues. So I think -- and that's another thing as we look at '19, that, that should stay pretty stable.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [48]

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Okay, great. And one last quick one on the NPA balance. I can't recall if there was something transitory in 2Q because you sort of reverted the NPA balances back to kind of where it was in 1Q. Was there anything kind of that fluctuated through there in 2Q that's now gone or...

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [49]

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No. The only thing I would say is there was -- I think we made this comment in the second quarter. There was a bit of a timing. We had some things fall into NPA at the end of that quarter. That -- a couple of them got resolved pretty quickly in the early third quarter. So over the combination of some quick fixes that -- properties that went in and then they were resolved pretty quickly as well as some structural because I think what I would call reduction of some of the more longer-term NPAs that are in there. Because we're really -- I think we've talked about we're trying to focus on that area and identify loans and try to work them out and move them along. So I think what you're probably referencing is in the second quarter, we had a couple properties, one was a short -- was a health care facility that went in and pretty quickly went back out. That was about 1/3 of that $12 million. Yes, a little less actually than that, but around there.

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Operator [50]

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And our next question comes from the line of Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [51]

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Randy, I wanted to just touch on the efficiency ratio. I appreciate the color on kind of the expense trajectory and the cost saves post the deals. But I think for Glacier as a whole, we've kind of been stuck around the mid-50s for some time with the core consolidation project and the various things related to crossing $10 billion in assets. But it seems like now we should really start to make some progress on that going forward with an expanding net interest margin and more stable sort of expense growth. Is that a fair characterization?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [52]

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Well, let me just back up for minute and point out. Remember, the efficiency ratio went up because of the change in the tax law. So when you say -- we don't really view it as we're stuck around 55 because the -- if you factor into where we were back in at the end -- if you take out the tax rate at the end of the year, the change, we were kind of in the 54 range tax. The tax change had a negative impact on the efficiency because it reduced the amount -- the impact of the tax advantaged loans and investments, so our efficiency actually went up with the new tax law. But if you look at it where it is now, it's – especially this quarter, it's down nicely. Now some of that's that gain. So if you take the gain out, it's more in the kind of the 50 -- mid-54 range. And so I think that's the right range for us. I don't see a big -- I think a steady grind. I think the trend is down, but at a more measured pace, and that just comes from operating efficiencies. We're a high-service business, so we're just very cautious about the cost that we take out and just very mindful of that. But what we continue to -- what I would call more as a slow grinding march on efficiency, that's not going to stop. And this quarter is really good, but I would look at it more in kind of in the 54 range because if you take the gain out, that's really where the efficiency is this quarter.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [53]

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Okay. And then on the NPAs, I think you've kind of talked a little bit about trying to work those down. Any sort of time horizon over what you would expect that to kind of transpire? And do you expect any more kind of OREO marks or larger charge-offs provisions to kind of accomplish that over the foreseeable future?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [54]

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No. So on that, I think we had really good 2 pieces. One is just the NPA, then we can talk about OREO, specifically, charge-offs. But we had a really had a good quarter, down $12 million. We're very, very happy with that. We think there's some more downward movement there over the next couple of quarters, don't know exactly when that'll happen because they're -- we're in the process of working those out. But don't expect to see any increase there and should see a little more improvement. Tough to put a time on it because it's all subject to buyers and when they pull the trigger. But I think the trend there is good. On the OREO, don't see another circumstance like we had this quarter. We had 1 very large credit. There's the -- out of the 43 properties in OREO, there's only 2 north of $1 million. One of them, we just wrote down. The other was marked down before it went in. I don't think there's anything left on that one to take down. So the one that we did market had been in OREO for 9 years, so have been in there for quite a while, very unique circumstance. And we just decided this was the -- had some interest in the property and just decided to recognize what the market was telling us, which was what you saw in terms of the write-down. But don't expect that to continue.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [55]

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Okay. And similarly, you don't see any additional charge-offs to kind of move that down, the NPA level down?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [56]

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Not to any kind of material extent, no.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [57]

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Okay. And then one last one just on the deposit growth this quarter. Obviously, very strong in DDA. And you've already talked about it a good bit. But any characterization about how much of that is coming from retail versus small business or larger commercial clients, just to kind of give us a little additional color?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [58]

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In the noninterest-bearing accounts?

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [59]

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Yes.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [60]

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Yes. Well, it's pretty well spread out. They're -- when you say larger customers, they're -- for us, a larger customer is somebody with over $1 million in one of those noninterest-bearing accounts. So pretty well spread out. There was no mega account that really moved that number. There was quite a few. Once again, we take a hard look at that and just -- there is not 1 account in there that kind of accounted for a material part of that. So it was very diverse and spread out among the 14 different divisions, which we were happy to see.

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Operator [61]

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(Operator Instructions) Our next question comes from the line of Tim Coffey with FIG Partners.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [62]

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Randy, I was wondering if you could provide a little more -- a little color on the growth in the commercial real estate portfolio, perhaps not quarter-over-quarter but over, say, the last 5 to 6 quarters on an organic basis. What kind of opportunities are you seeing there, especially as it relates to kind of non-owner-occupied CRE, which seems to be growing a bit faster than owner-occupied?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [63]

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Sure. I'll give you my comments on it and then ask Barry to fill in. So we see good growth. I think the thing I would point out is our non-owner-occupied commercial real estate loan in our business is different in a lot of ways than maybe what most people think of when you say non-owner-occupied commercial real estate. Most of that is end market customers developing smaller projects in their community. So we feel very good about that. And that we continue to see some good activity there. We -- our customers are growing and making investments. And that, I think is what you see reflected in the numbers and it's very spread out in terms of product type. And just feel if there's any one headwind in that area, it's just interest rates. And do they go -- do they rise to a point that they make some of the development uneconomical? Haven't seen it yet. Don't think we're too close to that. But if there's one concern there, it's that. But generally, that's been a good -- I think a good segment that we're very comfortable with. Barry, do you want to add anything?

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Barry L. Johnston, Glacier Bancorp, Inc. - Senior VP & Chief Credit Officer [64]

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Yes. One of the things we also see is with our recent acquisitions, The Foothills Bank of San Juan, Collegiate Peaks, and now we'll start to see it with First Security Bank of Bozeman, is after the acquisition, with the increase in the legal lending loan, that those small community banks are able to pursue larger commercial real estate term loans. And we see that almost -- we've seen that historically with the last 15 or 20 acquisitions that we've made. So they have an opportunity to pursue customers that -- underneath their previous legal lending limit was a challenge for them. So we see a lot of organic loan growth coming from that sector.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [65]

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Great. That was going to be my follow-up. If I can switch gears a little bit to M&A. Is your focus still on smaller markets, or are you becoming more open to perhaps looking at bigger markets?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [66]

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Really, Tim, our strategy hasn't changed. We operate in -- I guess it depends how you define bigger markets, but we operate in some larger markets as well as some smaller markets; mainly smaller markets. We prefer to be the bigger bank in the smaller market, if we can, from an M&A standpoint. There's -- but there's some times, there's also good community banks like Collegiate Peaks operating in a close to a very large market. So our strategy and what we look for really hasn't changed. I think a good bank in a good market with good people, if we can find that, then we're going to take a hard look at it.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [67]

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Okay. And then I know you have a long-term view on M&A, but has the recent volatility in the market slowed any conversations or having any kind of a comp slowing impact on discussions?

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [68]

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Volatility in the stock market? Or...

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [69]

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Yes, and overall big valuations.

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [70]

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No, I don't -- at least from our perspective, I don't think it's had much of a change. I think that the market's very active. I think our position as the preferred acquirer in our areas that we focus upon really hasn't changed at all. We continue to get a lot of early phone calls from people and early -- I mean, we're generally, I think, the first phone call. So that continues to work really well with that for us. And I think the stock market is going to have its moves up and down, and many of the folks that we're talking to are making the decision based on other factors in terms of age of the management team, the preference of the ownership group in terms of the bank and whether they need more liquidity and how they're going to pursue that. So the market volatility up until now really hasn't had any material impact on any of the discussions that we have.

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Operator [71]

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

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Randall M. Chesler, Glacier Bancorp, Inc. - President, CEO & Director [72]

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Well, thank you, Michelle. Well, we appreciate everybody taking time out of their morning to dial in and get the update on the company. And pretty proud of the results this quarter. Appreciate your interest. And as always, if you have any questions, just give us a ring. Have a great weekend, and thank you.

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Operator [73]

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