Glacier Bancorp, Inc. (GBCI) Q1 2021 Earnings Report, Transcript and Summary

Good morning and welcome to the Glacier Bancorp First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Randy Chesler; President and CEO. Please go ahead.

All right, thank you, Carol, and good morning and thank you all for joining us today. With me here in snowy Kalispell is Ron Copher our Chief Financial Officer; Angela Dose our Chief Accounting Officer; Byron Pollan our Treasurer; Tom Dolan our Chief Credit Administrator and Don Chery our Chief Administrative Officer. Yesterday, we released our first quarter 2021 earnings. And today, we are ready to review them. We finished the first quarter of 2021, well positioned for the rest of the year. We do business in some of the strongest markets in the country have record liquidity and our business model and people continue to attract new customers. I'm also happy to report that most of our 193 locations are now fully open for business across our eight state footprint as COVID cases decline and vaccination rates increase. I'll touch on some of the business highlights and then provide additional observations on the quarter. Net income of $80.8 million, an increase of $37.5 million or 86% over the prior year first quarter net income of $43.3 million. Diluted earnings per share of $0.85, an increase of 85% from the prior year first quarter diluted earnings per share of $0.46. Gain on sale of loans of $21.6 million, an increase of $9.8 million or 82% compared to the prior year first quarter. Non-interest expense of $96.6 million, a decrease of $14.6 million or 13% compared to the prior quarter and an increase of $1.1 million or 1% from the prior year first quarter. Bank loan modifications related to COVID-19 decreased $13.5 million from the prior quarter and decreased $1.4 billion from the second quarter of 2020 to $81.3 million or 79 basis points of loans excluding the payroll protection or PPP loans. Non-performing assets, as a percentage of subsidiary assets was 19 basis points, which compared to 19 basis points in the prior quarter and 26 basis points in the prior year first quarter. Core deposits increased $1.3 billion or 35% annualized during the current quarter and increased $4.5 billion or 40% from the prior year first quarter. The loan portfolio increased $147 million or 5% annualized in the current quarter and increased $1.1 billion or 12% from the prior year first quarter. The company funded 6,500 PPP loans in the amount of $487 million during the current quarter. The Company received $426 million in PPP loan forgiveness on 6,800 loans from the US Small Business Administration during the current quarter. We declared a quarterly dividend of $0.31 per share, an increase of $0.01 per share or 3% over the prior quarter regular dividends. The company has declared a 144 consecutive quarterly dividends and has increased the dividend 47 times. Further highlighting the company's core strength pre-tax pre-provision net revenue for the quarter was $100 million, which was up from the prior quarter of $99 million and up $28 million or 39% from the first quarter a year ago. We think this is a very good measure of the health of our core franchise. We saw loan growth in most of our markets with Montana, Wyoming and Washington leading the way and we are trending to our 46 growth forecast, that we've talked about previously. Our pipeline of customer relationships, larger than $5 million grew significantly in the first quarter and now stands at almost twice the level it did at the end of the first quarter a year ago. As I noted, the loan portfolio of $11.2 billion grew $147 million or 5% annualized in the current quarter. If you exclude the liquidation of our residential mortgage portfolio, the loan portfolio grew $252 million or 9%. We continue to build on the 3,000 new customer relationships, we picked up as part of Round 1 PPP with about $135 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 processed over 4,300 regular loans and over 13,000 PPP loans including new and those forgiven. Core deposit growth was incredibly strong, driven by excess liquidity due to the unprecedented government stimulus and lack of spending due to the pandemic. Core deposits increased $1.3 billion and at the end of the quarter totaled $16 billion most importantly, at a cost of 8 basis points, down 1 basis points from the prior quarter. Non-interest bearing deposits increased $586 million or 11% over the last quarter. We know that the substantial growth in the low-cost core deposits will continue to add to our net interest income and position us extremely well to reinvest in new loans as the economy recovers. Total debt securities of $6.4 billion increased $900 million or 17% from the prior quarter and are up $2.8 billion or 77% from the prior year first quarter. We continue to purchase debt securities with the excess liquidity from the increase in core deposits and the forgiveness of PPP loans. Debt securities represented 30% of total assets compared to 30% at the end of 2020 and 24% a year ago. The return on our debt securities reflected the impact of lower for longer, interest rates, ending the quarter at 1.81% down from 2.12% at the end of the prior quarter due to purchasing new securities at lower market rates. Debt security income was $27.3 million, which is about flat to the prior quarter. We continue to fully invest excess deposits taking a cautious approach to new investments given current low rates and risk at some point of deposit outflows. And as a result, our targeting a short average life with high quality and highly liquid investments. Non-interest income was strong, due to our better-than-expected mortgage business performance, the high housing market and refinancing's continue to add a stronger than expected pace across our footprint. It was a record first quarter for new locked volume and our gain on sale margin was up slightly over the prior quarter. We expect those margins to decline in the next quarter, slightly based on interest rate trends, our biggest concern in our mortgage business is the availability of an ample supply of homes for sale. Non-interest expense was lower than expected due to the $5.2 million of deferred compensation expense from new PPP loans and good expense management by our divisions. Some of our expense saves were due to COVID, we've been - we have open positions do and not able to find a ready supply of new hires and our travel and branch expenses reflect less activity, but we expect these sales to subside and expenses to return to a more normal run rate as the economy gets back to normal. The company's net margin - interest margin as a percent of earning assets on a tax equivalent basis for the current year was 3.74% compared to 4.03% in the prior year - in the prior quarter and 4.36% in the prior year first quarter. The core net interest margin of 3.56% compared to 3.76% in the prior quarter and 4.30% in the prior year first quarter. The core net interest margin decreased due to a decrease in earning asset yields, an earning asset yields have decreased from the combined impact of the significant increase in lower yielding debt securities and the decrease in yields on both loans and debt securities. Debt securities comprised almost 36% of earning assets during the current quarter compared to 32% in the prior quarter and 24% in the prior year first quarter. Going forward, our margin will continue to be dependent on the incoming flow of new deposits, loan growth in the yield curve. The efficiency ratio was 46.75% in the current quarter and 50.34% in the prior quarter, excluding PPP the ratio would have been 52.89% in the current quarter, which was a 300 basis point decrease from the prior quarter efficiency ratio of 55.96%. So the Glacier team, all 3,000 from Montana to Arizona once again demonstrated the commitment, strength, leadership and performance that sets them far apart from other bankers in their communities and in the industry. So that ends my formal remarks today. And I'd now like Carol to please open the line for any questions that you may have.

[Operator Instructions] Your first question comes from the line of Michael Young with Truist Securities.

Wanted to start maybe just with the high level trends you kind of touched on it a little bit with the mortgage commentary, but just big picture, you guys saw a lot of influx of activity in migration. As a result of the pandemic and the kind of closing down of the West Coast. Have you seen any of that sort of flow back in the other way or is it still pretty strong enduring trend even as the reopening starts to take place?

You know from everything, we can see at this point that trend seems to be sticky, we just have not seen other housing market, as I noted, continues the home sale market, homes continue to be in very short supply, when they do come on their snapped up pretty quickly and so a fair amount of that is still outside buyers, as we would say not from the end market coming in and buying homes. So we've yet to see really any kind of a re-trade where people decide they want to go back to the markets in which they came here from but, so watching it but I have to say in the first quarter. No, we did not see any signs of that happening.

Okay. And then I guess secondly just on the large amount of deposit growth and in liquidity flowing into the bank. I'm just curious from what the conversations you've had with other market precedents, et cetera, does it seem like permanent liquidity or temporary liquidity and then how are you guys thinking about deploying that and leveraging that going forward?

Yes, well, let me just kind of talk about our outlook and I'll have Ron talk about our investment strategy, tied to that, because obviously we see this liquidity. I think the team has done a very good job taking advantage of it and getting some nice interest, net interest income growth on it, but I think, we so we had an incredible quarter of growth on deposits, we think that's probably going to tail-off a bit, because the stimulus payments that fueled a fair amount of that, our look to be at there end. We're seeing the PPP forgiveness come in, which is building it, yet as the economy gets stronger, excuse me and people have more places to spend money and feel more comfortable taking trips and doing other things. We expect to see some of that flow out a bit. In terms of, - but overall, I'd say, it's, we feel it's very sticky. Most of that, that's why I stress the core relationships or the core deposits are in our core, what we would call core deposits, so we feel like they're in the relationship account. So any if there is a slower growth rate there. I think we'll see that over time. And Ron, do you want to comment on the our investment strategy with those excess deposits?

Right. Yes. Hi, Michael. Just to be clear, we strongly prefer loan growth. But in the meantime as deposits are flowing in, we will park them into the investment securities portfolio and so the as you've seen, the dollar has increase because that's where - the best yield we can get other than through the loan portfolio. So the yields that we're getting were slightly higher than what we were getting in the fourth quarter were up to 110 basis point to 115 basis point. And we're also sticking in the residential mortgage-backed security agency back. We've moved off the 10 year into the 15 year, again a short weighted average life and that's really key to the strategy going forward. So we're getting cash flow off of that and rates rise, and as they rise more, we can all predict what that will look like over the course of the year. We think we will bode well, but what we've put to work. One thing I want to point out is we're not trying to time the market we're not holding back large amounts of cash time in the markets you get lucky or we can even lose big. So we're pretty pleased with that. One thing I'll point out with the cash flow, the federal stimulus that came in, we were in the month of March with $750 million to work only had 15 days of that. So we think that will bode well for the fourth quarter, next quarter.

Perfect, so it sounds like just assume sort of a ratable deployment of that excess liquidity as it was and you know there is a willingness basically or there is no hesitancy about kind of the margin compression that will be associated with that.

No, we are, I mean I'm not thrilled with that, but that's the result of what we're doing, we're much more focused on net interest income to grow earnings to grow EPS - fund dividends. So that's where we are - I can't defy gravity. I think I've said that the last four quarters, so I'll just keep repeating that.

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

Randy. Maybe I'll just kind of dip into the markets a little bit, you mentioned that Montana, Wyoming, Washington kind of leading the charge. It's not as if you're other states or economic laggards however you think nationally so maybe it's just a timing thing. But in Nevada, Utah, Colorado do you feel like it's just again a few of those states leading, but I guess the balance of the footprint. What else are you seeing on a growth perspective?

The footprint is extremely healthy. If you look at Idaho, Montana, Utah and Arizona, Washington there are one, two, three, four and six in terms of home price appreciation. And so, yes, what we think is it, we are in some of the best states in the country to be doing business. The leadership of those days that surprised us. You know, when we talked about internally, we think it's probably not going to hold. I think it was a first quarter event, but a fair amount of that is because those states probably came out of COVID much quicker than the rest of our footprint in that, they were open sooner, they had less restrictions going through it. And I think that's why we're seeing the loan growth, the leading in the first quarter coming from those states.

Got it. Yes, particularly I guess Eastern Washington versus the Western side.

Exactly.

On a related front, I guess you mentioned real estate and typically of bank M&A can follow that activity, as well and I guess as we've seen deals in the Southeastern California you've been pretty active. I guess are you surprised that the Rocky Mountain has been the region has been less active and I know there's less charters, but your thoughts on M&A, you guys have been quiet for a bit. But any thoughts on the acquisition outlook.

Yes. And so I'd start the timeframe, because of the pandemic in 2020, we lost a year. So as we previously commented really started to pick things back up in kind of the December timeframe. I think you know, I don't think you'll see much difference over time that the West will you will see a fair amount of activity, just measured by the amount of phone calls that we've received and people who want to talk about transactions, it's very busy. So I think some of the other parts of the country, may be moved a little quicker, but I just think that's timing, I think maybe the, maybe the folks, some of the folks in the West we're just a little less in a hurry and wanted to see the full result of get fully comfortable with the outlook due to COVID and making sure that you could not only. There's two sides to this, there is the buyers being comfortable that they can assess, you know a good quality bank and understand the risk and - and the sellers interest in making sure that they sell at a time when they can get closer to their full value. So I think those two things are coming together have come together here recently and I think over time, over this year, I would expect, you won't see a big difference between the West in the rest of the country.

And maybe last one, just a housekeeping and maybe for Ron - the deferred comp, the release says it's an increase of $5.2 million was that, what was the total and maybe what is your generally historical level, there just to try to pay, I got your comments on total expenses, maybe a return to more of a normal rate with COVID impacted. I guess benefit to the cost side, but first the deferred comp and then maybe just kind of overall expense levels?

Yes so on the deferred comp if we originate these PPP loans, because of their a bit unique, how we have to comply with all the FDA rules, we've assigned a cost to the origination of those. And so if you take the $5.2 million divide by the units, you'll see what we basically put out there on average. So PPP has its own unique set of loans, but when you then look at any other loan that we have commercial real estate named their category, we have a compensation charge that we defer over a long live asset and that is that happens every month. All banks do that except the very, very small bank.

Ron, I'm trying to get. Okay, go ahead.

No, you go ahead.

Just I'm trying to understood the mechanics there, but the increase, $5 million. I'm assuming is heavy PPP impact, but I guess what was that last quarter. I'm trying to get a level of generally historical deferred comp as the PPP runs away what is that level refer to you Ballpark?

So we're yes - so just on the, just looking at the PPP if I'm understanding your question in the fourth quarter since we didn't really originate any PPP loans, there was zero deferred comp associated with that, but are you looking beyond the PPP.

No, I guess that helps, that if you're basically saying deferred comp related to PPP was effectively zero last quarter, and you saw a $5 million increase, which was largely PPP, then the other deferred comp, that's in the number been to really to mention that but. So that's basically the piece, that we look actively normalized going forward.

Exactly, yes. And then on the extent you everybody far non-interest expense went down, just to get to the bottom line. So, we are estimating a normal run rate of $105 million give or take a little bit, either side that $105 would be a good run rate. And so the way I get there is for everybody's benefit, if you take the - I'm looking at our non-interest expense summary the comp and employee benefits, it went down to $62.5 million will add $5, $5.2. So let's call that $67 million or $67.5. I think that that will whole because in that number. We had an increase in head count during the first quarter of '14 so those salaries were front loaded. We were able to put people on the work at the start of the year, we also noticed that we had the FTE count went up by 24 that reflect the overtime pay, you heard Randy talk about that work we've been doing on the PPP 1 forgiveness Round 2 getting the new long-term from the customers, we picked up from Round number one. So everybody's been really busy, plus we've had the higher - higher employment taxes. So with all that said, I'm comfortable with $67 million, $68 million run rate for the comp. I'm going to move to the other expense line. It's a $6 million reduction there, $3 million about half of that is not sustainable, part of that is we've been so busy taking care of our customers on PPP Round 1, Round 2. And then just think about that, just the COVID impact, so we haven't spent as much money on what I would call the business development side of the --, the travel, third -party consulting we have been just very, very busy doing that. Keep in mind also in the fourth quarter last year, we talked about this in January we did a lot of year-end clean up. So we could start the year clean for '21. So, but the $6 million in other - about $3 million of that will occur again. I just want to go back for a second on comp and employee benefits, because we were down $8.1 million of decline $5.2 that remaining $2.9 million or $3 million that is not sustainable, because that really relates to the fact in the fourth quarter, we had higher accrued expenses for the really good performance that we were seeing. So that won't happen again. So when you boil that all down, that's just leave all those other expenses, advertising and occupancy. We think those are the right level so stay there. Everybody can see that other real estate owned is only $12,000, we don't have a lot of OREO. That's a real blessing. And then I'll leave it there. But $105 is the real run rate we think everybody should go with.

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

I just wanted to circle back to the - kind of balance sheet growth related question, I think 4% to 6% loan growth ex-PPP is still the guide for the year and you're kind on pace for that, but what I'm trying to get at is just your overall thoughts on NII growth, whether it's on a reported basis overall with PPP or without?

Yes Matthew. It's, it's Ron here. Net interest income was pretty much flat compared to the fourth quarter. So we see that, we are going to be able to hold the loan yields to stay around for 2020 for new production, but as well when we put more dollars to work in the investment securities portfolio, we think that's the way we're going to be able to maintain the net interest income. As I mentioned, we've put a lot of money to work in the third quarter, but assuming in the third month March. So we will pick up that benefit as well. But, so no, we feel comfortable that we'll be able to maintain grow, I should say our net interest income.

Okay. And then, can you remind us, just how much in the way of Round 1 PPP fees left, and that you have left and how much in Round 2 just not sure with the kind of gross coupon there maybe net coupon?

Okay, so that the net deferred fees remaining PPP Round 1 at the end of March is roughly call it $6.25 million that's Round 1 and then on Round 2 we've got just under $22 million remaining.

Great, thank you. And that's over a longer life. Right.

Yes.

Okay and then just lastly on the mortgage banking piece, can you give us the amount of loans sold in the quarter? This quarter maybe last I'm trying to get at a gain on sale margin and just wanted to also verify if there were any MSR related marks and I can't remember, you guys doing servicing.

So Ron, do you want to talk about the MSR and then, I'll cover the sale.

Yes, on the MSR - and lower costs on markets. So we're not writing those up but see associated with that is for 25 basis points in the margin calculation, so that's been pretty steady for us. Again some banks mark-to-market quarterly, we have not made that election law. And in terms of loans sold for the quarter, residential loans sold was about $490 million for the quarter.

Ever have you compared to last quarter, I just look trying to get a sense for the gain on sale margin was up slightly so.

Just lately, we sold last quarter, just about $680 million.

Your next question comes from the line of Jackie Bohlen with KBW.

I noticed that you repaid just a real small amount of sub-debt in the quarter? So just wanted to get the thoughts behind that and if you might look to do any other pieces?

So the only sub-debt we paid was $7.5 million and really with Tier 2 debt, it was something we picked up when we acquired Inter-Mountain Bancorp First Security Bank in Bozeman and had a very high coupon [6.625%]. So we paid that off on January 4. I'm happy to report that with $500,000, we will not pay out because we were able to retire - they got to the call date and so we probably paid it, all of the other sub-debt is really trust preferred security very dirty capital by any threats. So, we're going to keep that of course and that really is a liability for GAAP purposes, in our financial statements, but Tier 2 capital remember it used to be Tier 1 but because we crossed $15 billion, then we did an acquisition, it got reclassed to Tier 2, but it's still in our total risk-based capital.

Your next question comes from the line of David Feaster with Raymond James.

I just wanted to start to on the increasing in demand and just the trends in the pipeline. Just curious how much of this is from existing clients that are just more confident in the economic improvement in sort to invest versus new customer acquisition from new hires and maybe just an update on the migration of new clients for the PPP program?

Sure, Tom, do you want to cover that?

Sure, on the existing pipeline, it’s a little difficult to nail down exactly, but I would say about two-thirds of the pipeline is existing customers. Last year there were projects that were put on hold until our customers got more comfortable with what they were seeing in the markets. Now, with everything for the most part reopened customers, comfortable spending capital that's what we see like two-thirds, one-thirds split. On the PPP, we've made some nice volume there, out of the 3,000 customers, we've been able to bring over a pretty large share of that in total loans to date on those customers that we've been able to bring over with Round 1 PPP, its about $207 million of total since the start of the program.

Okay, that's great. And then just Randy following up on your commentary about the pipeline of customer relationships over $5 million being pretty significantly. Just curious how much of that is strategic, looking to go, maybe upstream a bit versus just market demand in some fallout from some of the larger banks, not servicing the lower end of that middle market well in order for in customer migration from PPP.

Yes David, it's not a change in strategy. I think it's just a reflection of the activity levels in the market and we are picking up some good loans from some of the other players in the market, some of the larger banks continue to be distracted so that's been very good for us as well. So really no change there just something we talked about this quarter because of how significantly that particular area has grown so it's almost double. We look at our pipeline where it was a year ago. And I think it's more a reflection of the strength in growing strength of the markets that it is a change in our direction.

Okay. And then, just wanted to touch on any upcoming investments that you might have, whether on the technology front or just any other projects. I mean, we've talked in the past about kind of an ATM upgrade and deploy more ATMs. Just wanted to get an update, maybe where you were at on that and any other strategic investments or opportunities that you might have on the horizon.

Sure. Well, I mean we continue to make strategic investments and specifically in technology. We do that, trying to keep without the PPP, 54% - 55% on the efficiency. So we favor those investments and we like to keep our efficiency stable and not experience any kind of cliff effect big investments at one time. And also because we believe these projects are better executed and a bite-size, fashion than just making big bets on technology and a what we call our raise the curtain strategy where everything is put together. So, it's worked very well for us, we are evaluating investments in the ATM fleet and that's underway. I think we are going to bring some consistency there and I think position ourselves well for the future, that distribution outlet pretty generic today, but we want to make sure as things change, we're well positioned to use that distribution more strategically, if the need arises. So that's one area we've talked about our commercial card business, the investment we've made there, that's continuing to grow very nicely at a very strong rate is we really penetrate existing customers with that product rather than brand new business line we're just going to customers we already have and displacing people who are offering that product to - so that investment is going well. I mean the third big one is our account opening process, we launched a virtual account opening process in the middle of the last year, very well received we're now going to roll that out to our branch system and deploy that so I think that - that's another area. But again, David, we do all these against the backdrop of managing to that 54% - 55% efficiency and that will continue doing that.

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

Randy, can you make little bit color on the forward direction of your on balance sheet residential mortgages.

Yes, the, so we do service, we both portfolio and then we service for the agencies. We've been very opportunistic in how we've grown that and it's really based on our assessment of when we originate loans, what's the best most economic favorable economics for us and how to deploy that mortgage so whether we hold it, whether we sell it, or whether we sell it servicing retained really just drives that portfolio.

Okay. All right, thanks, that's helpful. And then we kind of answer questions and ask a couple of different times this for this call. But I'm kind of curious about how long you think the current air pocket that we're in, in terms of say stronger loan growth on balance sheet excess liquidity, how long do you think that period last?

Well, I would, the first part, the growth aspect. I, we don't view that as an air pocket, we view that as a very longer lasting trend, so we give back up and look at the strength of the markets that we're in and again this is relative to our geographic footprint, we have a lot of activity in our eight states. That's very positive, all the way from Arizona up to Montana, Arizona number fifth in the nation and tech job growth that's what they're projecting, Utah economy ranked number one among all 50 states, US News and World Report ranked number four, 25 best-performing large cities. So five of the eight states where in the unemployment rates lower than the US average. So all those things I think bode extremely well for growth. We've had in migration of population and we think the business investment follows that, the serve a bigger population and so that's a longer lasting multi-year dynamic that we feel very good about on the deposits. I think that's probably going to be that certainly the quarter we had this quarter was exceptional that kind of deposit growth. We just see that tailing off over the next couple of quarters, a bit, because the stimulus payments aren't coming in, that was part of what fueled deposit growth. We got to table quarter of $1 billion of stimulus payments in as part of that and also the pent-up demand is there and I think as people have more ways both businesses and consumers have more ways to spend their money. I think you're going to see some of that outflow so those, the deposits probably, we do see that trending down a bit, the market growth rate as I said, we feel good about over a long period of time here.

Okay. And then on just kind of on the deposit side. So far this month. Have you seen any change in the velocity within those deposit accounts?

Just in April.

Yes.

Just to say from what we can see at this point, know the, we have not seen a big change, but I think it's a bit a bit early and I think as for the factors, I cited we're likely to see a bit of a downshift.

[Operator Instructions] We have a follow-up question from the line of Matthew Clark with Piper Sandler.

Just a quick one on the Round 2 of the PPP fees are you guys assuming a five year life, are you assuming something shorter more something more realistic?

Round 2, we put those on a five year schedule.

Okay, thank you.

Yes you bet.

Okay. And I'm not seeing any questions in the queue at this time, so I will turn the call back over to Randy for any closing remarks.

All right, well thank you, Carol for managing the call today. And I want to thank everybody who dialed in for spending some time with us today. Have a great day and a wonderful weekend. Thank you

Ladies and gentlemen, thank you for participating. And have a wonderful day. You may all disconnect at this time.