Ladies and gentlemen, thank you for standing by. And welcome to the Glacier Bancorp Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s call is being recorded. [Operator Instructions] I would now like to hand the call over to Randy Chesler, President and CEO of Glacier Bancorp. Please go ahead.

All right. Thank you, Michelle. Good morning and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator. Don Chery, our Chief Administrative Officer is on the road this week visiting our divisions and will not be joining us today. Yesterday we released our third quarter 2020 earnings and today we are ready to review the state of the company and the financial results. The third quarter results show another very solid performance from the Glacier team and once again highlights the strong core of the company and the strength of our team and our business model, despite the stiff headwinds generated by the global COVID-19 pandemic and the related economic and social impacts. COVID rates now appear to be spiking in some of our western states and while most of our business operations remain uninterrupted, this is a circumstance that we are watching closely. We continue to navigate to the ongoing pandemic extremely well and I am exceptionally proud of the Glacier team, our senior staff at the holding company, as well as our 16 Bank Presidents and their teams for their commitment and leadership and their service to their communities that they have demonstrated this year. Despite the pandemic, we are amazed that how well our customers have adjusted to the circumstances and are carrying on with business. Our residential mortgage volume is at record levels with refinancing and new home purchases. Our commercial lending business is beginning to pick up and many of our business customers report they had a very good summer and early fall season. The performance of our loan portfolio continues to show that our conservative approach…

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

Good morning.

Good morning, Jeff.

Randy, maybe I’d just follow up on the last bit there. Clearly, a unique year, and certainly, M&A is quiet for the time being or many not. But looking at the dividend, last couple of years, you have put out a special in the fourth quarter, so again a different year. But any thoughts of entertaining that and noting that the $0.01 increased to the regular dividend, thoughts on the special and any sort of M&A that could be percolating?

Sure. So the special gets early. That’s all that’s evaluated at the end of the year by our Board and that’s a decision they make. And I’d say in this environment, we are going to have to just see what the landscape looks like at that point in terms of our current capital levels, the feeling of how we are feeling about going forward. So, I think, that’s a Board reviewed decision that will certainly take place at the end of the year, but difficult to tell, especially this year, Jeff, with so much uncertainty. We will just have to see at that time. We were pleased they increased the dividend $0.01 a share to 3.4% and you can see our dividend payout ratio is quite low. So we are very comfortable where we are, and as I noted, dividends will continue to be a very important part of our excess capital management approach. As it relates to M&A, you are correct that the pause button was hit earlier this year across the Board. I think that we are beginning to reopen dialogue with a number of interested folks and we are hopeful that in the beginning kind of middle of next year, we will be in a better position to hopefully move forward or make an announcement. We just don’t know, it’s still a little bit early, but I think there’s a lot of encouraging signs. We feel a lot more comfortable with our understanding of our own portfolio and our ability to evaluate a potential seller’s portfolio. So, those conversations are beginning to reopen and we will see where they lead us. We are -- what hasn’t changed is our very disciplined approach to M&A end targets and so we will pick up where we left off almost a year ago now.

Okay. And a question on the mortgage side, MBA forecast has got volumes down maybe 20%-ish next year, any reason to think that your experience will be any different in ‘21? It seems like pretty good demand. It’s a different dynamic in the footprint just stats on the mortgage outlook next year?

Yeah. I think that the overall trend in the industry is going to be down a bit after an incredible year, this year and especially for us. I think we will see that but probably maybe less so than the national, because our footprint and our location and the fact that we are seeing a fair amount of in-migration. And to the extent that rates stay low and then in-migration continues, we will probably not be immune to a little drop off, but I would expect us not to be as much as the national average.

Okay. Thanks. I will step back.

You are welcome.

Our next question comes from David Feaster of Raymond James. Your line is open.

Hey. Good morning, everybody.

Good morning, David.

I just wanted to start on credit. You guys have done a tremendous job on the deferral front. I guess, as we look forward, how do you think about those borrowers that might need additional relief? You plan to grant additional modifications under the CARES Act or probably address those issues head on and put those on non-accrual and TR? And then maybe how does that translate into thoughts on the reserve going forward?

Yeah. David, this is Tom. I think every Bank is kind of treated their modification approach a little bit differently. I would say, we were -- we take a little bit more of a lenient approach in an effort to make sure we are helping our borrowers through uncertainty. So while we take a very prudent approach from our credit risk management standpoint by adequately assessing the risk grade and the appropriate accrual determination. If a customer comes to us and says, hey, there’s still a lot of uncertainty, and it’s troublesome to me even though I maybe do okay now. We would likely still grant a concession in that case. So I think it’s a little early to say. As Randy said, there’s a lot of uncertainty especially in the fourth quarter with some key events happening and I think we will continue to look at each one of them on a case-by-case basis and apply our ongoing consistent credit management process. Once we get past the end of the year barring any type of extension of the CARES Act, we may look at this a little bit differently from a TDR designation as we would be required to by our regulators and our accountants. So it may look a little bit different next year than it was in the fourth quarter, but again, I think, we will take each one on a case-by-case basis just like we have been.

Okay.

The only thing I’d add, David, is that, Tom and team and the chief -- and the credit officers in each division haven’t stopped their sustained portfolio grading and analysis, and so they are still proactively managing these as if there were no modifications in place.

Okay. And then just I want to get your thoughts on the margin. You guys have done a great job on deposit costs despite the fact that they are already so low. There’s only so much room left there. We got declining new loan yields even though you guys have done a great job on that and lower reinvestment rates. Just contemplating the earning asset remix, the deployment of excess liquidity? I guess how do you think about the NIM near-term and maybe when and at what level do you think we could draw?

Yeah. I am going to let Ron who studies our margin carefully every day kind of talk to that. But I just say, overall, we are -- the margins are going to drop across the industry lower for longer is something that is you can’t defy gravity. However, on the net interest income side, we feel our growth -- our ability to grow both deposits and loans is very favorable for us, because the way to offset a declining NIM is through, in our view, growing your balance sheet and has a strong balance sheet, it’s difficult to cut your way to success. We have got the engine and the markets that I think we will position us very well to offset that lower for longer. But, Ron, did you have any comments on the NIM?

Yeah. David, Ron here. So, the -- think about the fourth quarter, we are estimating PPP loan forgiveness could be as high as 30%. And so when you look back over the second quarter, the third quarter, the PPP loans being a drag as everybody recognizes that. That yield was about 2.60%, 2.65%, and so the 30% loan forgiveness, our yield just on that could pick up to just under 6%. So that will influence the margin. But if we exclude PPP, just looking the same trend that’s happening with the core margins, we back out discount accretion in the PPP, that trend could certainly continue to occur. And especially if we do, as Randy just alluding to, increase the balance sheet, hopefully, it’s going to be loans. But to the extent the investments and the security lower yield and I think we picked up 90 basis points yield on the securities purchases that we picked up in the third quarter. I’d love for that to change. I’d love for the curve to steepen, but probably going to just continue. So, to Randy’s point, we can’t defy gravity, we are just pleased that we are starting higher than our peers, much higher.

Okay. That makes sense. And then just -- I want to go back to the production -- new loan production yields. I know it’s not as high as you would like, but honestly when we look at some of your peers, it’s 50 basis points to 75 basis points better than some of the other banks I have spoken to. I guess, how do you think about the competitive landscape for new credits and your ability to hold yields around these levels? Is it just truly relationship pricing? And then maybe where are you seeing the most growth across your footprint and just -- and within CRE, what segments are strongest, just your thoughts on that?

Yeah. This is Tom. I will take that one. Yeah. The way we are able to maintain our pricing advantages, when you look across our footprint, a lot of the smaller markets that we serve where we have a much larger market share, we are able to hold it better there. Where we face the greater competition is in the larger metropolitan areas like Denver and kind of the Tucson area and Arizona. But outside of that, given the longstanding relationship we had that’s a benefit as well and then just the overall market share allows us to hold that pricing a little bit. And in terms of growth, the growth really has kind of, it’s been across the Board this quarter. I would say, some of our newer markets have grown a little bit at a faster pace, but certainly not significantly outpacing some of our other markets. So we have seen some strength in Arizona, Nevada, Utah and so that’s been a benefit as well. And then, of course, as Randy alluded to in his opening remarks, the new customers we are paying through PPP, which really was diversified across the footprint was beneficial to us in the third quarter. So just as some more color on that. Just with those 3,000 customers thus far we have granted an additional $47 million in loans. So that was a pretty good portion of our third quarter growth as well.

How much penetration do you think you have gotten in that PPP -- from those PPP borrowers and how much do you think is left there?

I think there’s more there. I would say, we are probably not even half of the way there, to be honest with you. So we have definitely got some upside there and the division banks are doing a great job with their life, making sure that we are fostering those relationships to not only bring the rest of their credit relationships over, but also the rest of deposit relationship as well. So we want to make sure that we are their primary Bank and I think we saw the ways to go on it.

Okay. All right. That’s helpful. Thanks.

You are welcome.

Our next question comes from Matthew Clark of Piper Sandler. Your line is open.

Hey. Good morning, everyone.

Good morning.

Maybe just starting on mortgage, how much in the way of mortgage production did you sell this quarter versus last, so we can back into a gain on sale margin?

Well, I believe it was pretty consistent, but I want to double check to make sure, Matthew.

Okay.

It’s -- yeah. It’s very -- pretty safe to say it’s pretty consistent to the prior quarter. We sold most of our production.

Okay. And then on expenses, up a little bit here, even adjusting for the FAS 91, how much of that expense run rate is mortgage related and of that mortgage expense, how much is fixed versus variable, so that can -- it would help us kind of model going forward?

Yeah. Matthew, Ron here. It’s on the fixed versus variable on the mortgage. I would say that, no more than 25% of it is variable tied to the production levels and then the other expenses that you backed up is the $1.9 million. But just to get to the point, the run rate for the fourth quarter to say would be $102 million to $103 million for the run rate.

Okay. Okay. And then, I guess, along those lines of those third-party expenses, consulting expenses. Is that something that we are going to see more of as you kind of continue along the kind of technology front and kind of upping your game there or is it -- or is that truly one-time?

Yeah. It largely is one-time. The bulk of that $1.9 million was we engaged with third-party to help us manage the renegotiation of various technology contracts that were coming due. And so the real point of that story is the good news is that, just over the next five years, we could save $6 million to $8 million over that time period, that’s 20 quarters. So it will ramp up. So just thinking even for the fourth quarter, it could be a $400,000 reduction and the reason it’s not flat line, straight line is that we have to hit certain benchmarks, certain usage, and as we do, then we will save more. So that’s the bulk of it. In any given quarter, we have you small time to use third-party, but the magnitude of that $1.9 million, it will be much lower. We normally don’t call it out in the press release and so I don’t expect to have that happen again on the fourth quarter certainly.

Okay. And then do you happen to have the average PPP loan balance in the quarter?

Yes. So the average balance, just a second here, Matt, we got this chart there. Tom is in that report you are looking at. Hang on Matt.

No worries.

Why don’t we get back…

Yeah.

… just to make sure we give you the right number.

Okay. That’s all for me. Thank you.

Yeah. We are -- I mean our average loan it’s going to come in pretty low because 60% of our loans are below the $150.

Yeah.

Right.

So we will get to the actual number. But we -- most of our lending was what I’d call main street lending and so our average loan size is couldn’t be on the smaller side, but we will get that to you.

Our next question comes from Jackie Bohlen of KBW. Your line is open.

Hi. Good morning, everyone.

Good morning.

I wanted to just dig in to new customers a little bit more from both a mortgage perspective up and fees and then also in loan growth. And just to clarify, you said that 26% of purchases and 31% of construction were from out of, like I said, these are really new customers, but we are from out-of-state…

Yeah.

… followers. Okay. So my assumption with that is that none of that is PPP related, is that true?

Well, these are all residential mortgage, so those were the figures on the residential mortgage. But to my understanding, there was no relationship to PPP on those.

Okay. Okay. And I figured it would do little if any, but…

Yeah.

… I just wanted to…

Yeah.

…clarify that. Okay. So you have got two factors at work here where you have got out-of-state people coming in that are either purchasing second homes or looking to move and then you have also got this new customer base from new PPP borrowers, correct?

That’s right.

So, when I think about those two trends in tandem and just really round broad numbers are perfectly fine here. But how much of your growth assumptions in 2021 are based on those two factors both, continued in-migration and maybe even second home purchases? And then also you mentioned that you are not quite 50% on the way through converting over PPP customers?

Yeah. So we are still working on our ‘21 plan. But I would say, those are two very important growth aspects and so that -- this quarter we saw on the commercial side about 20% of the growth was related to the new customers that we brought on through PPP. That’s got some limitation because we can only penetrate so many of those loans as they come due. But I think it’s early to put an actual number on it for you. But I think those trends are very important in our markets. Those people coming and buying homes. We think that that is from outside the market, not something that’s a flash in the pan. We think that’s a part of a longer term trend and like many things with COVID, it’s accelerating things that were there. And so we had in-migration prior to COVID. It’s accelerated under, now that we are in the middle of COVID and we think that with the changes in technology and work-at-home that those things, those are longer lasting and sticky. So those will be -- we have kind of the third leg to growth is just our very successful model and markets that we are very well-positioned in and we think our model attracts good quality growth because of our ability to make local decisions in the market for people. So, I think those three things, Jacque, are going to be very good, I think, against the backdrop of very uncertain economic growth and probably a little less than we have seen over the prior years. But I would say, it’s -- the two factors you pinpointed both the in-migration and the growth from new customers that we brought in will be an important part of our numbers next year, just too early to tell exactly how much though, Jacque.

Okay. And if I am interpreting the comments related to balance sheet side versus net interest margin in the rate environment. It sounds like the goal is to keep your core net interest income and what I mean by that is excluding PPP and excluding accretable yield. The goal would be to keep that flat to up in ‘21 versus ‘20?

Yes.

Okay. Okay. Thank you.

Very good. You are welcome.

[Operator Instructions] Our next question comes from Michael Young of Truist Securities. Your line is open.

Hey, Randy. I hopped on little late.

Good morning.

So if I am repetitive in any sense, just let me know. But I guess, just on a big picture basis, could you just cover kind of what the messaging is to the respective Bank Presidents? Are you really kind of focusing more on cost rationalization and profitability maintenance or is this go acquire all these new customers moving into our markets and get them locked in. Just kind of how is that messaging going out at this point and what are you telling people at this point?

Yeah. No. I think messaging is a couple points to it. Number one is, we are keeping a very close eye on deposit costs, so we have a lot of discussions about lower for longer and how we need to be positioned on those things and that’s really very much a foundational concept that will affect just our total franchise. And so that’s been -- there’s been a fair amount of discussion to make sure, hey, let’s keep up with lower for longer and make sure we are keeping pace with a very, very low interest rate environment in terms of deposit cost. In terms of growth, I think, the messaging is, we are open for business. We are not afraid to make good loans to good borrowers. But we will be cautious given the COVID issues and -- but we are interested in looking at good loans from good borrowers. And I think that we want to be there for our customers and I think that’s why you are seeing some of the growth coming in this quarter. In terms of pricing on those loans, it’s another discussion in terms of how do we maintain our margin as strong as we can in the marketplace. So we have talked quite a bit about that. And probably the last thing is we do -- we have spent a lot of time earlier this year talking and training folks how to successfully go after the 3,000 new customers we brought on through PPP and get their full relationship in the Bank. So those are the areas we are stressing, Michael, and we will probably continue on those themes for the next quarter as well.

Yeah. That’s helpful. And one other kind of big picture question just on the net interest margin, as I look back at the company operating through a zero rate environment coming out of the last financial crisis for several years. You always maintained kind of a net interest margin of around 4% excluding kind of a period of higher premium amortization. So is there anything structurally different in terms of the size of the organization or competition or just maybe the lower five-year rate now that would that would potentially change that on a go-forward basis?

Yeah. Michael, Ron here. So the -- if you think back over those time periods you were referencing the 4% especially. The loan book is the primary driver for our margin and so we typically price off the FHL five-year and certainly that’s pretty low, but we have been able to increase the spreads. But the -- just allow me, 20% of that book turns over. So we are slow steady up. We are slow steady down and I don’t see that happening. Lower for longer will be the real challenge because the curve where we are starting at for this pandemic versus where we were during the Great Recession, it’s different. We have a higher, steeper curve compared to this flat line effectively that we have for now and so that steepness of the curve or the, I think, not even safety, about the flatness of the curve is really what’s going to affect the ability to hold the net interest income certainly, but the margin as a direct result.

Okay. That makes sense. And but it does sound like you have been able to get some higher spreads, so maybe there’s some defense opportunity there more so than maybe what the curve would imply, is that fair?

Yeah. And it really gets back to the relationship pricing where we need to beat the drum over and over here, but for the bigger banks and the smaller market. And we are able to price the relationship. We are not the mercenaries. We want the whole relationship. We certainly want the deposits. We want the funding with the customer for whom we are going to make a loan and that really is what helped us. It’s credit to our division. The ability to hold those higher yields on those loans is just fantastic.

Okay. Great. And just last one for me and I apologize if this was asked and I missed it or if you already alluded to this. But just, implications for the tax rate, if there is an increase in the tax rate to 28%, you guys were pretty low tax payer before that. So if you could just talk about any kind of what the gearing ratio would be to that increase in terms of your effective tax rate and then your DTO or DTA applications as well?

Yeah. On the DTL, we are just modeling out a tax rate federal of 28% versus the 21%. So the adjustment that would flow through the different re-pricing, if you may, revaluing the deferred tax asset that could be as big as a $10 million favorable adjustment. Again this is the opposite of what we live at the end of ‘17 when they lowered the rate. We had to write down the deferred tax as a onetime adjustment and now we are going to do the opposite, so write it up. We will get a one-time adjustment and then we will give that back over time, because we will suffer the higher tax rate marginally. And then on the effective tax rate, I could see it going up to 23%, no more than 24%, if the federal rate goes to 28%. I am more comfortable saying 23%, up from the 19% we have right now.

And as you know, Mike, I mean, we feel we are well-positioned for both environments and certainly if tax rates go up, we will feel a little less, because of our significant oversupply or over share of municipal securities in the investment portfolio. So we have a built-in kind of hedge there. It’s providing good returns today. We will get better if there’s a tax rate change. So that the other thing that we, in addition to the one-time adjustment that we think we are pretty well, as well as you could be positioned for increasing taxes.

And I guess maybe as a follow-up to that, just I know you guys had some really strong growth in municipal originations a couple years ago. That was kind of a competency that you built and had a good product offering there. If we -- I don’t know if you have seen more demand for that and kind of new borrowings there generally just with rates being so low and maybe some cash flow shortfalls from municipalities and/or do you think that would increase under a higher tax rate regime?

So we are very careful about the municipal securities that we do buy in terms of the types and location. We tend to pick what I call mission-critical muni loans or investments, infrastructure things that are supported, and Ron can you kind of fill it in. But in the first quarter, we saw a very significant opportunity to pretty much make our whole plan year of municipal purchases at a very, very attractive time.

Yeah. That -- and that was the strong redemption to the panic in the market that did about the third week of March and we were able to come in and buy, I can’t remember the exact number. But just say, out of the $720 million was what we bought, 70% of that were municipal. But they were rated AA+ or better and the yields were just very, very attractive, because people were selling. The redemptions were coming out at ultra low prices. So we were able to step in. All-in, including the corporates, the -- speaking of corporate, the truest type Bank, we were able to pick up a tax equivalent yield of 4.20% on that $723 million that we collectively put in at about a week. And then, just on the muni loans, we still see the -- still do see some demand. But munis -- the municipalities, I think, they are a bit reluctant right now to borrow. We know projects are being put on hold that we have expressed strong interest in and so we still have about $600 million of muni loans in our portfolio. They are not really re-pricing. They are holding up quite well. It’s the new production that’s really, really slowing down.

Okay. Thanks. Appreciate it.

Sure.

You are welcome.

There are no further questions. I like to turn the call back over to Randy Chesler for any closing remarks.

Great. Well, we appreciate everybody spending time with us this morning and questions. And we wish hope everyone stays -- manages through this pandemic and please stay safe. And we wish everyone a great weekend and thank you for joining us. And Michelle, thank you for helping us host this call.

You are welcome. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone have a great day.