Glacier Bancorp, Inc. (GBCI) Q2 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. [Operator Instructions] 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.

All right. Thank you, Shalon, and good morning and -- 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 compare 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. In-migration of new residents into our 8-state footprint continued in the second quarter. In addition, the summer season -- 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 crowd. 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 8-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 1 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 at some point of deposit outflows, 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. And 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 is an -- 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. And 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. And 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 Instructions] Your first question comes from the line of Jeff Rulis from D.A. Davidson.

Randy, maybe I'll just start with some kind of some line item detail. I think you walked through the strategy on liquidity deployment pretty well. But the -- I guess I'm kind of looking at expenses and the dip in gain on sale. I guess it's kind of a 2-part question, focused on where you think that expense run rate heads. And then the second part is, is there a kind of a tie with the mortgage unit in terms of the variability of gain on sale down $5.5 million, expenses being flat? Granted, there's some other components there. But just trying to see if I could -- if that mortgage wanes how that adjusts on the expense side.

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?

Yes. This is Ron. So Jeff, we think the run rate really will be closer to $103 million. You heard Randy talk about the hiring, and we're looking to ramp that up. So we'll have some additional head count, a bit of higher salaries. But equally, we'll have more business development expenses as the team continues -- all the divisions are continuing to get back out on the road. So we think that, that will increase as well. But we think the $103 million is an appropriate run rate.

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?

Yes. Jeff, we're still -- we still think that's a good estimate. So I think we said down about 25%, consistent 20% to 25%, consistent with the MBA. Again, our -- we have such a short small supply of homes, that's our biggest concern. So the market continues to do well. We continue to do well. But with this in-migration, they're -- the houses just don't stay in the market very long. And we've, I think, also kept the builders. They are building, but in a, I'd say, much more responsible rate than we saw in the last boom. So that's also contributing to a bit of a housing shortage.

Okay. And maybe one last one. The -- just the nonperforming asset relationship, the one big win you brought on. Any color you could provide as to what that is, how it came on and the position there?

Yes. I'm going to -- Tom can cover that. We've obviously spent a lot of time on that. But Tom can give you a little more detail.

Yes. Jeff, it's predominantly one relationship, it's an ag relationship. The issue is kind of one-off. It's not market-driven. And 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.

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

Maybe first, just on the core loan growth. Nice step-up here this quarter. I think in prior calls, you talked about 4% to 6% ex PPP, ex -- well, ex Alta, obviously, too. How do you feel about that range for the year?

Yes. We're -- so on a full year basis, we had a very strong quarter. Like I said, we're very, very happy with that. We're pretty much right on that 6% on a 2021 basis first and second quarter. We're sticking to that. The headwind is excess liquidity. We just keep getting a lot of companies have a lot of cash on the balance sheet. We keep seeing a lot of payoffs because they're just looking at their liquidity and saying, "Hey, I can keep it in the bank at very low interest rates or I can pay off this loan." And they're -- we're seeing a fair amount of that. So we're probably at the higher end of that range, Matthew, just given the strength we see this quarter and given very positive trends going into the next quarter. But still a little bit of caution just with tail on the pandemic and also this excess liquidity. And if the government provides more liquidity to businesses, it's probably going to accelerate that payoff trend.

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?

I'm going to ask Tom to answer that. But we are -- it's a good -- the question, I think it's to the whole balance sheet strategy. And Tom can give you the details on the loans. But both on the debt securities, we are not going way out and taking more risk to get yield nor on loans are we stretching to get a higher yield. We're taking the yields. We're keeping the quality on both duration -- quality and duration on debt securities and quality on loans. But Tom, maybe you can give us some color on the type of business.

Sure. Yes, Matthew. We're not seeing any growth in the high-risk COVID-sensitive industry 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. And the absorption rates of existing projects is favorable and 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. And then looking forward, I think that will continue. In addition, we'll see some multifamily growth as well.

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?

Yes. It's -- 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.

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?

Yes. So depending on how you measure it -- so I'll give you a number based on loans sold. People look at it differently, whether it's lock loans to gain. But just on loans sold, we were just about at 4% for the quarter?

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

About $400 million.

Your next question comes from Jackie Bohlen from KBW.

Randy, I wanted to dig into some of the open positions that you have and just see -- a couple of questions. I'll try not to give them all to you at once. But the first one being where you sit today versus what you would expect to be full employment ahead of the Alta transaction?

Yes. We have a lot of open positions, and hiring has been difficult across a lot -- 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. And it's -- we have 1 market, 6 positions open, and we've received 6 resumes. So there -- it's just slow. I'm sure you've heard it. Just getting people to come back into the workforce is difficult.

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 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?

Yes. The openings are spread out across the organization. And Alta, we believe has really got some very, very strong people. We've been really impressed with the quality of the team. And yes, we expect -- and we're still in the process of having discussions with them, but we expect them -- many of the folks -- certainly, most of the folks there -- as you know, with our model, there won't be any change. We buy good banks in good markets with good people. And we just want to have them continue to keep doing what they're doing. At the staff level at Alta is probably maybe more with your question is the operating folks in the branches, there's really no change. The staff people, most of those continue to keep doing what they're doing. But there are some of the leadership positions there that would be -- we think will be a great fit for our organization. So we're very excited about that aspect of the transaction.

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?

It will -- Jackie, it will take time. But we have hired some people in the second quarter that will start to show up in the third. So that's where I'm coming from when I say that the additional hiring. It'll -- it's not -- we're always looking for talent. And we have been able to hire -- Randy reported to you the open positions. So we have been able to fill some of them, certainly during the second quarter, and that will ramp up more in the third quarter then.

Yes. Jackie, just on that, the back to the open positions, it's actually closer to 5%, not 10%. So we're -- if you take the total across all 16 divisions, it's right now closer to about 5% opening.

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

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 even an acceleration? And also, I just wanted to get your sense of how long you think the dynamic can play out with the sustainable over this next year or years to come?

Talking all the divisions, we have not seen a letup in the in-migration, it continues, both in buying current homes. And also a fair amount of our construction lending is to people outside the market. So they're getting -- planting a foot in the market and building. So that really hasn't changed at all. In terms of sustainability, we expect it to wane a bit as more of the markets normalize, but we just don't know for sure. I actually -- we actually thought we'd see a little bit of a tailing off of that trend in the second quarter, but it just continued really unabated and unchanged. So we would just expect as people the in-migration, if things normalize across all the markets in the country, maybe it will tail off a little bit, but it's still unknown at this point.

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

Yes. Really coming from both. And I should just point out, before the pandemic, we were experiencing good in-migration. Pandemic just accelerated it significantly. So even if it tails off a little, it's still going to be above the U.S. average. It's just a matter of degree. In terms of the new deposits, yes, that's both existing customers with the excess liquidity. New customers, so I talked about the 3,000 new customers that we picked up as part of the PPP, we're getting new loan business with them and with that is coming more deposits. And then also this in-migration. So in a lot of our markets we're the bigger bank in the market with a great reputation rated as the best bank in the market -- in many of our markets. And so we're naturally then attracting as the new people come into the market and asked, "Well, who should I bank with?" Many times, our name comes up. And so we're picking up a good amount of that business.

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?

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.

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

Starting to see a little bit of pressure there. So we'll just see how that pans out in the quarter. We ended the quarter around 4%. There's probably going to be -- there's a little more price competition starting to occur in some markets, and so that could -- we could see a little pressure there.

[Operator Instructions] Your next question comes from the line of Tim Coffey from Janney.

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?

Yes. So locks are still pretty strong. So for the quarter, let's see. I think we locked in about $350 million this quarter. That was down from the -- from 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 book the gain when we lock the loan.

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

They're down. So 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.

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

Yes. No, because like I said, it's really supply. A fair -- we see more and more of our locks TBD. So they're locking and getting a pre-qual because they want to move quickly if a house does present itself. So yes, the in-migration continues. But properties, they're reasonably priced to the market, are lasting a couple of weeks and are being purchased. So there's -- the inventory of homes is down very low. So that's our biggest pressure point right now.

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?

Yes. Tim, it would go into the loan portfolio. I'll just reiterate. Obviously, we strongly prefer loans. But in the meantime, those are very stable sticky deposits, as Randy had mentioned. So we'll continue to focus on growing the net interest income. Said differently, we're very poised for higher rates. Especially with the noninterest-bearing, that's a great way to mitigate interest rate risk as the yield curve would start to steepen again. So we're -- don't fight the Fed, don't fight the market. We're going to take the relationships and continue to build on that.

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

All right. Well, we -- again, we 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.

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