Earnings Call: Q2 2021

Jul 23, 2021

Morning, ladies and gentlemen, and welcome to the Glacier Bancorp Second 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. 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 to the group and thank you for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer Don Cherry, our Chief Administrative Officer Angela Dossi, our Chief Accounting Officer Byron Pollan, our Treasurer and Tom Dolan, our Chief Credit Administrator. We finished the Q2 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 $77,600,000 an increase of $14,200,000 or 22% over the prior year 2nd quarter net income of 63,400,000 Diluted earnings per share were $0.81 an increase of 23% from the prior year 2nd quarter diluted earnings Per share of $0.66 The loan portfolio excluding payroll protection program loans increased $249,000,000 or 10 percent annualized in the current quarter and increased $517,000,000 or 5% from the prior year Q2. Core deposits increased $669,000,000 or 17 percent annualized during the current quarter and increased $3,400,000,000 or 26% from the prior year Q2. Nonperforming assets as a percentage of subsidiary assets was 26 basis points, which compared to 19 basis points in the prior quarter and 27 basis points in the prior year 2nd quarter. Early stage delinquencies totaled $12,100,000 or 11 basis points of loans and decreased $32,500,000 from the prior quarter of 40 basis points of loans and decreased $13,100,000 from the prior year's Q2 of 22 basis points of loans. A credit loss benefit of $5,700,000 reflected the improvement in our loan portfolio and economic forecast. Non interest expense was $100,000,000 which increased only $3,500,000 or 4% compared to the prior quarter and increased $5,300,000 or 6 percent from the prior year Q2. Excluding deferred compensation from originating Triple P Loans total non interest expense was $102,000,000 for the current and prior quarter compared to $103,000,000 in the prior year Q2. We declared a quarterly dividend of 0.32 dollars 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 Q2. In addition, the summer season Tourist season kicked off as well. Signs of increased activity were visible everywhere. Many hotels had the 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 $249,000,000 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 and I loans. We continue to build on the 3,000 new customer relationships we picked up as part of round 1 of PPPP, With about $65,000,000 of this quarter's commercial loan volume coming from this group. All of this growth is even more impressive when you that the Glacier team originated over 5,500 regular loans and over 1900 PPP loans along with processing PPP loan forgiveness. We had a new loan production record in the 2nd quarter With over $1,600,000,000 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 Q3 of the year with Very good momentum and over $140,000,000 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 Crossed 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 $669,000,000 and at the end of the quarter totaled $16,700,000,000 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. Non interest bearing deposits increased 260 $7,000,000 or 4 percent over the last quarter and increased $1,300,000,000 or 25 percent from the prior year Q2. 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 $7,200,000,000 increased $730,000,000 or 11% from the prior quarter and are up $3,400,000,000 or 92% from the prior year 2nd 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 thirty 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, it was 3.44 percent compared to 3.74% in the prior quarter And 4.12% in the prior year Q2. Our core net interest margin Was 3.33% compared to 3.56% in the prior quarter and 4.21 percent in the prior year Q2. 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 The amount of lower yielding debt securities and the decrease in the yields on debt securities and loans. Debt securities increased 11% or $730,000,000 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 $1,000,000,000 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 $1,600,000,000 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 $1,900,000 in the quarter, while the net interest margin fell. Our focus continues to be on growing net interest 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. Non interest expense for the quarter was 100,000,000 which was an increase of only $3,500,000 from the prior quarter. Non interest expense, Less the deferred compensation from originating new PPP loans was $102,000,000 which was flat to the last quarter and down $1,000,000 from the prior year Q2. 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. Non interest income declined to $36,000,000 from $40,000,000 or 11% Percent 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 $1,100,000 to $17,000,000 or 7% from the prior quarter. The efficiency ratio was 49.92% in the current quarter, 46.75 percent in the prior quarter 47.54% in the prior year 2nd quarter. Excluding PPP, the ratio would have been 53.53 in the current quarter compared to $52,89,000 in the prior quarter $53,92,000 from the Q2 a year ago. Our combination with Alta Bancorp 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 1st part of 2022. I've been very impressed with Alta's focus on continuing to serve customers and growing the business. Alta Bank was honored with the Utah Best of State Bank Award for the 2nd consecutive year. And Glacier Bank was also honored by Bank Director Magazine with a top five finish in their 2021 ranking Of the top performing banks between $5,000,000,000 $50,000,000,000 This is the 2nd consecutive year that Glacier had a top five 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 So that ends my formal remarks, And I'd now like Shalon to open the line for any questions that our analysts may have. Thank Your Your first question comes from the line of Jeff Rulis from D. A. Davidson. Thanks. Good morning. Good morning, Jeff. Randy, maybe I'll just start with some just kind of some line item detail. I think you walked through the strategy on liquidity deployment I guess, I'm kind of looking at expenses and the dip in gain on sale. I guess, it's Kind of 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, gain on sale down $5,500,000 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 103,000,000 You heard Randy talk about the hiring and we're looking to ramp that up. So we'll have some Additional headcount, 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 $103,000,000 is the 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 that 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, 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, 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 non performing asset relationship, the one big one you brought on, any 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, good morning. 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 Your next question comes from the line of Matthew Clark from Piper Sandler. Hey, good morning. Good morning, Matthew. 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 PPT, 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 Percent 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, yes, I can Keep it in the bank at very low interest rates or I can pay off this loan. And there we're seeing a fair amount of that. So We're probably at the higher end of that range, Matthew, just given the strength that we see this quarter and given very positive trends going into the next quarter. But still a little bit of caution just With the tail end of the pandemic and also this excess liquidity and if the government provides more liquidity The business is 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 and I might have been right behind that 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 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. Here we go, 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 has predominantly been, it's been more on the industrial Warehouse, and kind of mirrors what the end 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. Well, multifamily has become quite popular And the absorption rates of existing projects is favorable and is allowing us to Participate in that as well. So I would say this last quarter, mostly industrial, certainly some C and 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 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 set the reserve level This quarter given what we know in 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 happen to have the volume that you sold? I'm just curious. About 400,000,000 Okay. Thank you. Yes. Your next question comes from Jackie Bohlen from KBW. Hey, everyone. Good morning. Good morning, Jackie. Randy, I wanted to dig into some of the open positions that you have, and just 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 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 one market, 6 positions open, and we've received Six resumes. So there, it's just slow. I'm sure you've heard it, just getting people to come back into the workforce It's difficult. Okay. And then when I think about those open positions, kind of a 2 part question here. Number 1, what types of physicians are they? And I'm trying to get whether they're more entry level or middle management type positions. And also realizing that Alta is obviously a great deal of expansion for you, but will bringing on those new folks To the organization, potentially be able to fill some positions for others who might be displaced. 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 that 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 and 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 Ulta is probably maybe more where 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's 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 $103,000,000 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 2nd quarter that will start to show up in the 3rd. So that's where I'm coming from when I say that the additional hiring. So It's not a we're always looking for talent and we have been able to hire Randy reported to you The open position, so we have been able to fill some of those certainly during the Q2 and that'll ramp up more in the Q3 then. Okay, great. Thank you very much. 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. Okay. Thank you for clarifying. Yes, you bet. Your next question comes from the line of Brandon King from Churless Securities. Hey, good morning. Good morning, Brandon. Hey, so Randy, I know in your prepared remarks, you mentioned the in migration trends in your footprint. And I wanted to know if you are you seeing any slowing of the immigration or even an acceleration? And also, I just wanted to Get your sense of how long you think this dynamic could play out or if it's sustainable over this next year or years to come? Yes. We've talking to all the divisions, we have not seen a let up in the 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 planning a foot in the market and building. That's 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. 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 be 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 and 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 ask, 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. And is the plan still to hold more residential loans on the balance sheet going forward? Well, that's a dynamic On the demand, the Q1, we had quite a bit of runoff there, 2nd 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 General sales 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. Okay. Thanks for the answers. You're welcome. Your next question comes from the line of Tim Coffey from Janney. Great. Thanks. Good morning, Randy. Good morning, Tim. Hey, 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 $350,000,000 this quarter. That was down From last quarter, and that's part of what you saw in the reduced gains because as you know, the accounting, we locked the gain in when we Book the game when we lock the loan. Right. 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 NBA But with all the 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 they're being purchased. So there's and the inventory of homes It is down very low. So that's our biggest pressure point right now. Sure. Okay. And then just on balance sheet liquidity, say it stays on there longer than you expect and 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 the Growing the net interest income. Said differently, we're very poised for higher rates, Especially with the non interest 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 bad, don't fight the market. We're going to take the relationships and continue to build on that. Okay, great. Thanks, Ron. Those are all my questions. I appreciate your time. You're welcome. 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 got 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.