Earnings Call: Q1 2021

Apr 23, 2021

Good morning, and welcome to the Glacier Bancorp First Quarter Earnings Conference Call. 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 Cofer, our Chief Financial Officer Angela Dossi, our Chief Accounting Officer Byron Pollan, our Treasurer Tom Dolan, our Chief Credit Administrator and Don Cherry, our Chief Administrative Officer. Yesterday, we released our Q1 2021 earnings, and today, we are ready to review them. We finished the Q1 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 8 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 $80,800,000 an increase of $37,500,000 or 86% over the prior year Q1 net income of 43,300,000 dollars diluted earnings per share of $0.85 an increase of 85% from the prior year Q1 diluted earnings per share of $0.46 gain on sale of loans of $21,600,000 an increase of $9,800,000 or 82% compared to the prior year Q1 Non interest expense of $96,600,000 a decrease of $14,600,000 or 13% compared to the prior quarter and an increase of $1,100,000 or 1% from the prior year Q1. Bank loan modifications related to COVID-nineteen decreased $13,500,000 from the prior quarter and decreased $1,400,000,000 from the Q2 of 2020 to $81,300,000 or 79 basis points of loans excluding the payroll protection or PPP loans. Nonperforming 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 Q1. Core deposits increased $1,300,000,000 or 35 percent annualized during the current quarter and increased $4,500,000,000 or 40% from the prior year Q1. The loan portfolio increased $147,000,000 or 5% annualized in the current quarter and increased $1,100,000,000 or 12% from the prior year Q1. The company funded 6,500 PPP loans in the amount of $487,000,000 during the current quarter. The company received $426,000,000 in PPP loan forgiveness on 6,800 loans from the U. S. 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 percent over the prior quarter regular dividend. The company has declared 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 $100,000,000 which was up from the prior quarter of 99,000,000 dollars and up $28,000,000 or 39 percent from the Q1 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 4% to 6% growth forecast that we've talked about previously. Our pipeline of customer relationships larger than $5,000,000 grew significantly in the Q1 and now stands at almost twice the level it did at the end of the Q1 a year ago. As I noted, the loan portfolio of $11,200,000,000 grew $147,000,000 or 5% annualized in the current quarter. If you exclude the liquidation of our residential mortgage portfolio, the loan portfolio grew $252,000,000 or 9%. We continue to build on the 3,000 new customer relationships we picked up as part of round 1PPP with about $135,000,000 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 $1,300,000,000 and at the end of the quarter totaled 16 $1,000,000,000 most importantly at a cost of 8 basis points, down 1 basis points from the prior quarter. Non interest bearing deposits increased $586,000,000 or 11% over the last quarter. We know that this substantial growth in 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 $6,400,000,000 increased $900,000,000 or 17% from the prior quarter and are up $2,800,000,000 or 77% from the prior year Q1. 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 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 percent, down from 2.12% at the end of the prior quarter due to purchasing new securities at lower market rates. Debt security income was $27,300,000 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, are 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 hot housing market and refinancings continued at 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 $5,200,000 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 have opened positions due and not able to find a ready supply of new hires, and our travel and branch expenses reflect less activity. But we expect these saves 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 percent compared to 4.03% in the prior year in the prior quarter and 4.36% in the prior year Q1. The core net interest margin of 3.56% compared to 3.76% in the prior quarter and 4.30% in the prior year Q1. The core net interest margin decreased due to a decrease in earning asset yields. And 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 Q1. Going forward, our margin will continue to be dependent on the incoming flow of new deposits, loan growth and the yield curve. The efficiency ratio was 46.75 percent in the current quarter and 50.34 percent in the prior quarter. Excluding PPP, the ratio would have been 50 2.89% 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. Thank you, Randy. Your first question comes from the line of Mike Young with Truist. Hey Randy, how's it going? Good morning. Good. 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 the other way? Or is it still a pretty strong enduring trend even as the reopening starts to take place? From everything we can see at this point, that trend seems to be sticky. We just have not seen the housing market, as I noted, continues the home sale market. Homes continue to be in very short supply. When they do come on, they're 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 retrade where people decide they want to go back to the markets in which they came here from. But still watching it, but I'd have to say in the Q1, 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 liquidity flowing into the bank. Just curious from what the conversations you've had with other market presidents, etcetera, 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 there, 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 fuel the fair amount of that are look to be at their end. We're seeing the PPP forgiveness come in, which is building it. Yet, as the economy gets stronger 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 will call core deposits. So we feel like they're in a 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 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 as you've seen, the dollars have increased because that's where that's 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 Q4. We're up to 110 basis points to 115 basis points And we're also sticking in the residential mortgage backed security agency backed. 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 as 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 by 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. The timing of the market, you get lucky or you can even lose stakes. 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, put $750,000,000 to work, only had 15 days of that. So we think that will bode well for the Q4 next quarter. Okay. So it sounds like just assume sort of a ratable deployment of that excess liquidity as it flows in and there's a willingness basically or there's 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, ultimately fund dividends. So that's where we are. Are. I can't defy gravity. I think I've said that the last 4 quarters, so I'll just keep repeating that. Fair enough. Thanks. Your next Randy, maybe I'd 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 your other states are economic laggards, however, you think nationally. So maybe it's just a timing thing, but Nevada, you'd saw 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, Arizona, Washington, they're 1, 2, 3, 4 and 6 in terms of home price appreciation. And so, we yes, what we think is that we're in some of the best states in the country to be doing business. The leadership of those states, that surprised us. When we talked about it internally, we think it's probably not going to hold. I think it was a Q1 event, but a fair amount of that is because those states probably came out of COVID much quicker than the rest of our footprint and that they were open sooner, they had less restrictions going through it, and I think that's why we're seeing the loan growth leading in the Q1 coming from those states. Got it. Yes, particularly, I guess, Eastern Washington versus the Western side. So on a related front, I guess, you mentioned real estate and typically bank M and A can follow that activity as well. And I guess as we've seen deals in the Southeast and California have been pretty active. I guess, are you surprised that the Rocky Mountain has been that the region has been less active? And I know there's less charters, but your thoughts on M and 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 time frame. I don't think you'll see much difference over time that the West will you'll 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 maybe moved a little quicker. But I just think that's timing. I think maybe the folks some of the folks in the West were 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 2 sides to this. There's the buyers being comfortable that they can assess a good quality bank and understand the risk and the sellers' interest in making sure that they sell at a time when they can get closest 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 and the rest of the country. Got it. Okay. And maybe last one, just a housekeeping and maybe for Ron. The deferred comp, the release says it's an increase of $5,200,000 Was that the what was the total? And maybe what is your generally historical level there just to try to peg? I got your comments on total expenses. Maybe you returned 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, as we originate these PPP loans, because of their a bit unique, how we have to comply with all the SBA rules, We've assigned a cost to the origination of those. And so if you take the $5,200,000 divide by the units, you'll see what we basically put out there on average. So PPP is its own unique set of loans. But when you then look at any other loans that we have, commercial real estate, name your category, we have a compensation charge that we defer over long lived assets and that happens every month. All banks do that except for the very, very small bank. So that's on the 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, the $5,000,000 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 does that level revert to, ballpark? So, yes, so just on the just looking at the PPP, if I'm understanding your question, in the Q4, since we didn't really originate any PPP loans, there was 0 deferred comp associated with that. But are you looking beyond the PPP? No, I guess that helps. If you're basically saying deferred comp related to PPP was effectively 0 last quarter and you saw a $5,000,000 increase, which was largely PPP, then the other deferred comp that's in the number, we don't really have mentioned that. But so that's basically the piece that would effectively normalize going forward? Exactly. Yes, yes, exactly. All right. And then on the expense, everybody saw our non interest expense went down, just to get to the bottom line. So we're estimating a normal run rate of 105,000,000 give or take a little bit either side, but $105,000,000 would be a good run rate. And so the way I get there, just for everybody's benefit, if you take the I'm looking at our non interest expense summary, The comp in employee benefits, it went down to $62,500,000 We'll add $5,000,000 $5,200,000 So let's call that $67,000,000 $67,500,000 I think that that will hold because in that number, we had an increase in headcount during the Q1 of 2014. So those salaries were front loaded. We were able to put people on to work at the start of the year. You also noticed that we had the FTE count went up by 24 that reflects the overtime pay. You heard Randy talk about the work we've been doing on the PPP1 forgiveness, round 2, getting the new loans in from the customers we picked up from round number 1. So everybody's been really busy. Plus, we've had the higher FICA, higher employment taxes. So with all that said, I'm comfortable with $67,000,000 $68,000,000 run rate for comp. I'm going to move to the other expense line. It's a $6,000,000 reduction there. $3,000,000 about half of that is not sustainable. Part of that is we have been so busy taking care of our customers on PPP round 1, round 2 that and then just think about just the COVID impact. So we haven't spent as much money on what I would call the business development side of the house, the travel, 3rd party consulting. We have been just very, very busy doing that. Keep in mind also in the Q4 last year, we talked about this in January, we did a lot of year end cleanup so we could start the year clean for 2021. So but of that $6,000,000 in other, only about $3,000,000 of that will occur again. I just want to go back for a second on comp and employee benefits because we were down $8,100,000 I've explained $5,200,000 That remaining $2,900,000 or 3,000,000 dollars that is not sustainable because that really relates to the fact in the Q4, 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 just leaves all those other expenses, advertising, occupancy. We think those are the right levels, they'll 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 $105,000,000 is the real run rate we think everybody should go with. Great. Thanks, Ron and Randy. Appreciate it. Welcome. Your next question comes from the line of Matthew Clark with Piper Sandler. Hey, good morning. Good morning, Matthew. I just wanted to circle back to the balance sheet growth related question. I think 4% to 6% loan growth ex XPT is still the guide for the year and you're kind of 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 Ron here. So, basically net interest income was pretty much flat compared to the 4th quarter. So we see that we're still going to be able to hold the loan yields, let's say, around $420,000,000 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 put a lot of money to work in the Q3, but excuse me, in the 3rd month, March. So we will pick up that benefit as well. But 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 that you have left and how much in round 2, just not sure what the kind of gross coupon there or maybe net coupon. Okay. So the net deferred fees remaining PPP round 1 at the end of March is roughly, call it, 6 $250,000, 6,250,000 that's round 1. And then on round 2, we've got just under $22,000,000 remaining. Great. And that's over a longer life though, 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 in there. I can't remember if you guys do any servicing. So Ron, do you want to talk about the MSR and then I'll cover the sale. Yes. On the MSR, we're using lower cost in our markets. So we're not writing those off, but fee 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 at all. And in terms of loans sold for the quarter, residential loans sold, that was about $490,000,000 for the quarter. And how did that compare to last quarter? I just want to look trying to get a sense for the tail margin was up slightly. Just slightly, yes. We sold last quarter just about 680,000,000 Your next question comes from the line of Jackie Bohlen with KBW. Good morning, Jackie. Good morning. I noticed that you repaid just a real small amount of sub debt in the quarter. So I 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 $7,500,000 and really with Tier 2 debt. It was something we picked up when we acquired Intermountain Bancorp First Security Bank in Bozeman and had a very high coupon, 6.5.8. 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 promptly paid it. All of the other sub debt is really trust preferred securities, very dirt cheap capital by any stretch. So we're going to keep that, of course, and that really is it's a liability for GAAP purposes in our financial statements, but it's Tier 2 capital. Remember, it used to be Tier 1, but because we crossed 15 $1,000,000,000 and we did an acquisition, it got reclassed to Tier 2, but it's still in our total risk based capital. Okay, great. Thank you for the color and that's it for me. Your next question comes from the line of David Feaster with Raymond James. Good morning. I just wanted to start 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 and starting to invest versus new customer acquisition from new hires? And maybe just an update on the migration of new clients from the PPP program? Sure. Tom, do you want to cover that? Sure. On the existing pipeline, a little difficult to nail down exact, but I would say about 2 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 market. So now that with everything, for the most part, reopened, customers comfortable spending capital, that's what we see. So that's twothree, onethree split. On the PPP, we've made some nice volume there. Of the 3,000 customers, we've been able to bring over a pretty large share of that. And total loans to date on those customers that we've been able to bring over with Round 1 Triple P is about $207,000,000 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 $5,000,000 being up pretty significantly. Just curious how much of that is strategic, looking to go maybe upstream a bit versus just market demand and some fallout from some of the larger banks not servicing the lower end of that middle market well or in customer migration from PPP? Yes. There it's not a change in strategy. I think it's just a reflection of the activity levels 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 when you look at that pipeline where it was a year ago. And I think it's more a reflection of the strength, the growing strength of the markets than 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 deploying more ITMs. 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% range on the efficiency. So we feather those investments in and we like to keep our efficiency stable and not experience any kind of cliff effect of big investments at one time. And also because we believe these projects are better executed in a bite sized fashion than just making big bets on technology and what we call a 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're 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 as we really penetrate existing customers with that product rather than a brand new business line, we're just going to customers we already have and displacing people who are offering that product to them. So that investment is going well. Probably the 3rd big one is our account opening process. We launched a virtual account opening process in the middle of last year, very well received. We're now going to roll that out to our branch system and deploy that. So I think that's another area. But again, David, we do all these against the question comes from the line of Tim Coffey with Janney. Your next question comes from the line of Tim Coffey with Janney. Great. Thanks. Good morning, everybody. Good morning, Tim. Hey, Randy, can you maybe add a little bit color on the forward direction of your on balance sheet residential mortgages? Yes. 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 just we kind of answered this question has been asked a couple of different times 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 you think that period lasts? Well, I would the first part, the growth aspect, we don't view that as an air pocket. We view that as a very longer lasting trend. So if you 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 8 states that's very positive, all the way from Arizona up to Montana. Arizona is number 5th in the nation in tech job growth. That's what they're projecting. Utah economy ranks number 1 among all 50 states, the U. S. News and World Report. Reno is ranked number 4, 25 best performing large cities. So, 5 of the 8 states we're in, the unemployment rate is lower than U. S. Average. So, all those things, I think, bode extremely well for growth. We've had in migration a population, and we think the business investment follows that to serve a bigger population. And so that's a longer lasting multiyear dynamic that we feel very good about. On the deposits, I think that's probably going to be the 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 that deposit growth. We got a tape of $250,000,000 of stimulus payments 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, like, 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. I'd say from what we can see at this point, we have not seen a big change, but I think it's a bit early. And I think for the factors I cited, we're likely to see a bit of a downshift. Right. Okay. Okay. Those are all my questions. Thank you very much. You're welcome. We have a follow-up question from the line of Matthew Clark with Piper Sandler. Hey, just a quick one. On the round 2 of the PPP fees, are you guys assuming a 5 year life or are you assuming something shorter, something maybe more realistic? No, round 2, we put those on a 5 year schedule. Okay. Thank you. Yes. You bet. Okay. And I'm not seeing any questions in the queue at this time. So I'll 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.