Earnings Call Transcript - GBCI Q2 2021

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Randy Chesler, President and CEO of Glacier Bancorp. Please go ahead, sir.

Randy Chesler, President and CEO

All right. Thank you, Shalon, and good morning to the group, 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; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator. We finished the second quarter of 2021 pleased to see our divisions showing strong loan and deposit growth. Our markets are all beginning to show more strength as the national economy continues to recover and the summer season kicks into high gear. I'll touch on the business highlights and then provide some additional observations on the quarter. We generated net income of $77.6 million, an increase of $14.2 million or 22% over the prior year second quarter net income of $63.4 million. Diluted earnings per share were $0.81, an increase of 23% from the prior year second quarter diluted earnings per share of $0.66. The loan portfolio, excluding Payroll Protection Program loans, increased $249 million or 10% annualized in the current quarter and increased $517 million or 5% from the prior year second quarter. Core deposits increased $669 million or 17% annualized during the current quarter and increased $3.4 billion or 26% from the prior year second quarter. Nonperforming assets as a percentage of subsidiary assets was 26 basis points, which compares to 19 basis points in the prior quarter and 27 basis points in the prior year second quarter. Early-stage delinquencies totaled $12.1 million or 11 basis points of loans and decreased $32.5 million from the prior quarter of 40 basis points of loans and decreased $13.1 million from the prior year's second quarter of 22 basis points of loans. Our credit loss benefit of $5.7 million reflected the improvement in our loan portfolio and economic forecast. Noninterest expense was $100 million, which increased only $3.5 million or 4% compared to the prior quarter and increased $5.3 million or 6% from the prior year second quarter. Excluding deferred compensation from originating PPP loans, total noninterest expense was $102 million for the current and prior quarter compared to $103 million in the prior year second quarter. We declared a quarterly dividend of $0.32 per share, an increase of $0.01 per share or 3% over the prior quarter regular dividend. The company has declared 145 consecutive quarterly dividends and has increased the dividend 48 times. Overall, the Glacier team delivered a strong quarter and wasted no time getting back to business. The in-migration of new residents into our eight-state footprint continued in the second quarter. In addition, the summer tourist season kicked off as well. Signs of increased activity were visible everywhere. Many hotels had a 'no vacancy' sign lit for weeks and are raising prices to control demand. Rental cars are tough to find. Restaurants are packed, and many national parks are again experiencing record crowds. Residential real estate prices continue to increase, and the inventory of available homes for sale is very low. We saw solid loan growth in our markets, with Montana, Wyoming, and Nevada leading the growth across our eight-state footprint with all markets growing $249 million or 10% annualized excluding PPP loans. We were pleased to see that almost all of the loan growth came from commercial real estate and C&I loans. We continue to build on the 3,000 new customer relationships we picked up as part of round one of PPP, with about $65 million of this quarter's commercial loan volume coming from this group. All of this growth is even more impressive when you consider that the Glacier team originated over 5,500 regular loans and over 1,900 PPP loans along with processing PPP loan forgiveness. We had a new loan production record in the second quarter with over $1.6 billion in new loans. We still have some growth headwinds with borrowers using excess liquidity to pay down loans and the increasing level of competition for new business. That being said, we entered the third quarter of the year with very good momentum and over $140 million of unfunded new construction loans. Considering all this, we still believe our target of 4% to 6% growth for the full year is reasonable. Core deposit growth was incredibly strong across our footprint driven by excess customer liquidity due to the unprecedented government stimulus, lack of spending due to the pandemic, and our success in establishing new deposit relationships. Core deposits increased $669 million and at the end of the quarter totaled $16.7 billion, and most importantly, at a cost of 7 basis points, down 1 basis point from the prior quarter and down 7 basis points from the end of the quarter a year ago. Noninterest-bearing deposits increased $267 million or 4% over the last quarter and increased $1.3 billion or 25% from the prior year second quarter. We know that this substantial growth in low-cost core deposits will continue to help our net interest income and position us extremely well to reinvest these stable sticky deposits into new loans as we grow. Total debt securities of $7.2 billion increased $730 million or 11% from the prior quarter and are up $3.4 billion or 92% from the prior year second quarter. We continue to purchase debt securities with the excess liquidity from the increase in core deposits and the SBA forgiveness of PPP loans. Debt securities represented 35% of total assets at the end of the quarter compared to 33% last quarter and 30% at the end of 2020. We fully invested excess deposits, taking a cautious approach to new investments given current low rates and risk of deposit outflows at some point, and as a result, are targeting a short average life with high-quality and highly liquid investments. The company's net interest margin as a percentage of earning assets on a tax-equivalent basis for the current quarter was 3.44% compared to 3.74% in the prior quarter and 4.12% in the prior year second quarter. Our core net interest margin was 3.33% compared to 3.56% in the prior quarter and 4.21% in the prior year second quarter. The core net interest margin decreased due to a decrease in earning asset yields. Earning asset yields have decreased from the combined impact of the significant increase in the amount of lower-yielding debt securities and a decrease in the yields on debt securities and loans. Debt securities increased 11% or $730 million from the prior quarter to 39% of earning assets from 36% in the prior quarter and 32% at the start of the year. The yield on debt securities ended the quarter at 1.74%, down 21 basis points from the prior quarter. Fueling the decline in the investment portfolio yield was the addition of over $1 billion of new debt securities in the quarter at a rate of 1%. The yield on the loan portfolio ended the quarter at 4.7%, down 19 basis points from the prior quarter. We added $1.6 billion in new core loan production with yields around 4.15%, which drove down the portfolio yield. Although our net interest margin continued to experience downward pressure because of adding a substantial amount of new debt securities and loans, our net interest income for the quarter less PPP increased $1.9 million in the quarter, while the net interest margin fell. Our focus continues to be on growing net interest income. For most of this year, our margin will continue to be impacted by the incoming flow of new deposits, loan growth, PPP forgiveness, and the yield curve. Noninterest expense for the quarter was $100 million, which was an increase of only $3.5 million from the prior quarter. Noninterest expense less the deferred compensation from originating new PPP loans was $102 million, which was flat to the last quarter and down $1 million from the prior year second quarter. The minimal expense growth was driven by good expense management by our divisions as they are making do with less as increased hiring takes longer than we expected as the markets get back to normal. Noninterest income declined to $36 million from $40 million or 11% in the prior quarter due primarily to the reduced gain on sale of residential mortgages, which decreased $5.5 million or 26% from the prior quarter. The hot housing market and refinancing slowed down a bit across our footprint. Gain-on-sale margins were relatively steady in the quarter. Our biggest concern in the real estate business remains the supply of homes available for sale. Core fees, including service charges and miscellaneous loan fees and charges, increased $1.1 million to $17 million or 7% from the prior quarter. The efficiency ratio was 49.92% in the current quarter, 46.75% in the prior quarter, and 47.54% in the prior year second quarter. Excluding PPP, the ratio would have been 53.53% in the current quarter compared to 52.89% in the prior quarter and 53.92% from the second quarter a year ago. Our combination with Altabancorp is proceeding very well. We are working closely together on planning for a closing at the end of October and a conversion sometime in the first part of 2022. I've been very impressed with Alta's focus on continuing to serve customers and growing the business. Altabank was honored with the Utah Best of State Bank Award for the second consecutive year. And Glacier Bank was also honored by Bank Director Magazine with a top 5 finish in their 2021 ranking of the top-performing banks between $5 billion and $50 billion. This is the second consecutive year that Glacier had a top 5 finish. The Glacier team once again did an outstanding job taking care of our customers while working hard to get back to normal and grow the business. Their performance continues to set them far apart from other bankers in their communities and in the industry. So that ends my formal remarks, and I'd now like Shalon to open the line for any questions that our analysts may have.

Operator, Operator

Your first question comes from the line of Jeff Rulis from D.A. Davidson.

Jeff Rulis, Analyst

Randy, I’ll begin with some detailed insights. I believe you covered the strategy for liquidity deployment effectively. However, I have a couple of questions regarding expenses and the decrease in gain on sale. First, where do you anticipate the expense run rate heading? Secondly, is there a correlation with the mortgage unit concerning the variability of the $5.5 million drop in gain on sale while expenses remain stable? I understand there are other factors involved, but I’m curious how a decline in the mortgage segment might affect expenses.

Randy Chesler, President and CEO

Yes. No, we had a lot of discussion about expenses. I'm going to ask Ron to cover that. We were very pleasantly surprised to see the run rate coming in a little bit less than we expected. And I think a lot of that is, again, people doing more with less, given some of the difficulties in hiring. But Ron, do you want to touch on expenses?

Ron Copher, CFO

Yes, this is Ron. We believe the run rate will be closer to $103 million. You heard Randy mention the hiring, and we are planning to increase that. This means we will have some additional headcount and slightly higher salaries. Additionally, there will be more business development expenses as the team gets back out on the road. Therefore, we expect that to increase as well. We believe that $103 million is a suitable run rate.

Jeff Rulis, Analyst

Okay. And could I ask kind of the mortgage expectations for your group? And is that kind of mirroring what you think the MBA forecast is showing?

Randy Chesler, President and CEO

Yes, Jeff, we still believe that estimate is sound. We mentioned a decline of about 25%, which aligns with the 20% to 25% range consistent with the MBA forecast. Our main concern is the limited supply of homes. The market remains robust, and we are performing well. However, with the ongoing in-migration, homes are selling quickly. Additionally, the builders are active but are constructing at a much more responsible pace compared to the last boom, which is also contributing to the housing shortage.

Jeff Rulis, Analyst

Okay. And maybe one last question. Could you provide details about the nonperforming asset relationship, the significant advantage you gained? What it is, how it developed, and the current status?

Randy Chesler, President and CEO

Yes. Tom will provide additional details on that. We've certainly invested a lot of time into it.

Tom Dolan, Chief Credit Administrator

Yes. Jeff, it's predominantly one relationship, it's an ag relationship. The issue is kind of one-off. It's not market-driven. What we're showing right now is it's adequately secured. We're in the process of liquidation. So I think over the next 2 to 3 quarters, we'll be continuing to monitor it closely. But I'm not seeing a significant or material loss in the relationship, at least as it sits today.

Operator, Operator

Your next question comes from the line of Matthew Clark from Piper Sandler.

Matthew Clark, Analyst

To start, I want to address the core loan growth. There has been a nice increase this quarter. In previous calls, you mentioned a range of 4% to 6% excluding PPP and Alta. What are your thoughts on that range for the year?

Randy Chesler, President and CEO

Yes. We had a very strong quarter for the full year and we are very pleased with that. We are on track for a 6% increase based on 2021 results in the first and second quarter. We are committed to that goal. However, we are facing challenges due to excess liquidity, as many companies have significant cash reserves. We are observing a considerable number of payoffs, as companies assess their liquidity and opt to pay off loans instead of keeping cash in the bank at low interest rates. Given the strength of this quarter and the positive trends heading into the next quarter, we might be on the higher end of our projections. Nevertheless, we remain slightly cautious due to the ongoing effects of the pandemic and this excess liquidity. If the government increases liquidity support to businesses, it could likely further drive the trend of loan payoffs.

Matthew Clark, Analyst

Okay. And then the incremental growth that you put on this quarter looked like commercial real estate kind of led the way, and I think C&I might have been right behind that ex PPP. Can you give us a sense for the types of projects you're financing? Have you gotten back into a couple of the higher-risk segments like hotels and restaurants? Or is it more warehouse-type of stuff, industrial-type of projects?

Randy Chesler, President and CEO

I'm going to ask Tom to answer that. The question relates to our overall balance sheet strategy. Tom can provide details on the loans. Regarding debt securities, we are not taking on additional risk for higher yields, nor are we pushing for higher yields on loans. We are focused on maintaining quality in both duration for debt securities and overall quality for loans. Tom, perhaps you can provide more information on the type of business.

Tom Dolan, Chief Credit Administrator

Sure. Yes, Matthew. We're not seeing any growth in the high-risk COVID-sensitive industries like hotels or restaurants, not really at all. The production and where the growth's predominantly been has been more on the industrial warehouse, it kind of mirrors with the in-migration that we're seeing. We're also seeing some more demand on the multifamily side as well, especially in some of our markets where average home prices are quite high. Multifamily has become quite popular. The absorption rates of existing projects is favorable allowing us to participate in that as well. So I would say, this last quarter, mostly industrial, certainly some C&I. We've had some businesses with some expansion buying some equipment that's helped us there. Looking forward, I think that will continue. In addition, we'll see some multifamily growth as well.

Matthew Clark, Analyst

Okay. Great. And then just on the reserve. I think in prior calls, you talked about stabilizing kind of around 130. What are your updated thoughts on that coverage ratio and whether or not you might be able to dip below it, knowing that the underlying assumptions might be better than they were on January 1, 2020?

Randy Chesler, President and CEO

Yes. We don't anticipate really any change from where we are today. I mean we've set the reserve level this quarter given what we know on the current economic conditions and the portfolio quality. So barring any material change in either going forward, I think we'll probably stay where we're at from a reserve level.

Matthew Clark, Analyst

Okay. And then just last one for me, on the amount of loans sold that generated the mortgage gain on sale. Can you just give us that number so we can back into a gain-on-sale margin?

Randy Chesler, President and CEO

Yes. Depending on how you measure it, I can provide a number based on loans sold. People assess it differently, whether considering lock loans to gain. But just on loans sold, we were close to 4% for the quarter.

Matthew Clark, Analyst

Okay. And do you have the volume that you sold? I'm just curious.

Randy Chesler, President and CEO

About $400 million.

Operator, Operator

Your next question comes from Jackie Bohlen from KBW.

Jackie Bohlen, Analyst

Randy, I wanted to discuss some of the open positions you have and ask a couple of questions. I'll try not to overwhelm you with them all at once. To start, how does your current situation compare to what you anticipate will be full employment before the Alta transaction?

Randy Chesler, President and CEO

Yes. We have a lot of open positions, and hiring has been difficult across most of our markets to fill new positions. So we're somewhere around 15% or so, maybe a little bit more, just lagging, bringing those folks on. We have one market with six positions open, and we've received six resumes. It's just slow. I'm sure you've heard it. Just getting people to come back into the workforce is difficult.

Jackie Bohlen, Analyst

Okay. And then when I think about those open positions, kind of a 2-part question here. Number one, what type of positions are they? And I'm trying to get whether they're more entry-level or middle-management-type positions? And also realizing that Alta is obviously a great deal of expansion for you, but will bringing on those new folks to the organization potentially be able to fill some positions for others who might be displaced?

Randy Chesler, President and CEO

Yes, the openings are distributed throughout the organization. We believe Alta has some very strong individuals, and we have been impressed with the quality of the team. We expect to continue discussions with them, but we anticipate that most of the team members will remain unchanged, as we follow our model of acquiring strong banks in good markets with capable people, and we want them to keep doing their jobs. Regarding the staff at Alta, particularly in the branches, there will be no changes. Most of the staff will continue their current roles. However, we believe some leadership positions will be a great fit for our organization, and we are very excited about this aspect of the transaction.

Jackie Bohlen, Analyst

Okay. And then that $103 million number that you spoke about, Ron, just wondering based on the challenges that it is bringing people over to hire, is it fair to assume that you wouldn't see that immediate bump up between 2Q and 3Q, that it could take some time to layer in as you work to fill positions?

Ron Copher, CFO

It will take time. However, we have hired some people in the second quarter who will start to contribute in the third. When I mention additional hiring, I mean we are always on the lookout for talent. We have been successful in filling some open positions, as Randy mentioned, particularly during the second quarter, and we anticipate further progress in the third quarter.

Randy Chesler, President and CEO

Yes. Jackie, regarding the open positions, it's actually closer to 5%, not 10%. So if you consider the total across all 16 divisions, it's currently closer to about 5% openings.

Operator, Operator

Your next question comes from the line of Brandon King from Securities.

Brandon King, Analyst

So Randy, I know in your prepared remarks, you mentioned the in-migration trends in your footprint, and I wanted to know are you seeing any slowing of in-migration or even an acceleration? And also, I just wanted to get your sense of how long you think the dynamic can play out with the sustainability over this next year or years to come?

Randy Chesler, President and CEO

Talking to all the divisions, we have not seen a letup in the in-migration; it continues both in purchasing current homes and in construction lending, which is benefiting people from outside the market. They are establishing a presence in the market and building. This situation hasn't changed. Regarding sustainability, we anticipate it might decrease somewhat as the markets normalize, but we are uncertain. We thought there would be a slight decline in that trend in the second quarter, yet it has persisted without change. We expect that as in-migration occurs and if markets across the country stabilize, it may taper off somewhat, but that remains uncertain at this time.

Brandon King, Analyst

Okay. And kind of on that trade, core deposit growth was strong again. I was wondering, is that coming from existing customers? Or is it also coming from some of this in-migration in new customer acquisitions?

Randy Chesler, President and CEO

Yes. We were seeing positive in-migration trends before the pandemic, and the situation has only accelerated since then. Even if the growth slows down, it will still remain above the U.S. average, just to varying degrees. As for the new deposits, they are coming from both existing customers who have extra liquidity and new customers. I mentioned the 3,000 new customers we gained from the PPP, and we are generating new loan business with them, which is also leading to increased deposits. Additionally, due to this in-migration, we are often the largest and most reputable bank in many of our markets. When new residents ask for banking recommendations, our bank frequently comes up, allowing us to capture a significant amount of that business.

Brandon King, Analyst

Okay. And just lastly, I know gain-on-sale margins have compressed over the last couple of quarters. Is the plan still to hold more residential loans on the balance sheet going forward?

Randy Chesler, President and CEO

Well, that's a dynamic on the demand. The first quarter, we had quite a bit of runoff there, second quarter a lot less. Probably going to see this portfolio remain stable for the most part for this year. Possibly grow a bit, but most of our activity will be on creating salable loans and selling those.

Brandon King, Analyst

Okay. And are you seeing any less compression on gain-on-sale margins? Or is that still?

Randy Chesler, President and CEO

We are beginning to notice some pressure in this area, and we will see how it develops throughout the quarter. We finished the quarter at around 4%. There appears to be increased price competition emerging in certain markets, which may lead to additional pressure.

Operator, Operator

Your next question comes from the line of Tim Coffey from Janney.

Tim Coffey, Analyst

Just kind of follow-up on the migration and the housing trends. Do you have info on mortgage locks quarter-to-date and how that relates to the previous quarter at this point in time?

Randy Chesler, President and CEO

Yes. So locks are still pretty strong. For the quarter, let's see. I think we locked in about $350 million this quarter. That was down from the last quarter. And that's part of what you saw in the reduced gains because, as you know, the accounting we lock the gain in when we lock the loan.

Tim Coffey, Analyst

Right. And how is the pace of the locks looking this quarter so far?

Randy Chesler, President and CEO

They're down. We're still above pre-pandemic levels, but we're seeing a little reduction there but still stronger than we expected coming into this quarter or coming into the next quarter.

Tim Coffey, Analyst

Were you surprised that mortgage was down as much as it was in the quarter? I know you're tracking it as it was in line with the MBA survey, but considering all the in-migration you're seeing in your footprint?

Randy Chesler, President and CEO

Yes, the main issue we're facing is supply. We are noticing an increase in the number of our locks that are to be determined. Customers are locking in and getting pre-approved because they want to act swiftly when a suitable house becomes available. The influx of new residents is ongoing. However, homes that are priced fairly are only lasting a few weeks on the market before being sold. The availability of homes is very low, which is currently our biggest challenge.

Tim Coffey, Analyst

Sure. Okay. And then just on the on-balance sheet liquidity. Say, it stays on there longer than you expect, and it should continue to grow given how good you guys are growing deposits, and you don't stretch for credit, what other levers do you have to pull to absorb some of that liquidity?

Ron Copher, CFO

Yes, Tim, that would be included in the loan portfolio. I want to emphasize that we prefer loans. Meanwhile, those are very stable, sticky deposits, as Randy mentioned. We will keep our focus on increasing net interest income. In other words, we are well positioned for higher rates. Particularly with noninterest-bearing deposits, it's a great strategy to reduce interest rate risk as the yield curve begins to steepen again. Therefore, we will build on our relationships and keep moving forward.

Operator, Operator

At this time, there are no further questions. I would like to turn it back to the speakers for any further comments.

Randy Chesler, President and CEO

All right. Well, we again appreciate everybody dialing in, in the middle of the summer. We know you get a lot of activities on a Friday. So we really appreciate you dialing in. We hope everybody has a terrific weekend. Thank you again.

Operator, Operator

Thank you. This concludes today's conference. You may now disconnect.