Glacier Bancorp, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Bank First Quarter Earnings Release Investor Call. At this time, all participants land on a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today, Randy Chesler, President and CEO. Please go ahead.

All right. Thank you, Victor. Good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Don Sherry, our Chief Administrative Officer, Angela Dosey, our Chief Accounting Officer, Byron Pollin, our Treasurer, and our Senior Credit Team, Tom Dolan and Barry Johnston. We released our first quarter 2020 earnings yesterday, along with supplemental information, and we're ready to review and answer any questions you may have. Before we move to your questions, there are a few points I'd like to cover. First, the global COVID-19 pandemic. I believe we're navigating through the pandemic extremely well, and I'm exceptionally proud of the Glacier team, their commitment and leadership, and their service to their communities during this time. I also want to thank the people on the front line in all our markets, the healthcare workers, first responders, and other essential service providers for all they're doing to help our communities get through this health crisis. The Glacier franchise covers 1,500 miles from Montana to Arizona, and the impact of the pandemic is different across that franchise. Our unique business model with 16 different divisions serving over 140 communities is provides us with a unique capability to respond to our employees, customers, and communities in a way that best suits that local market. Our divisions have taken many actions to help our employees, and most importantly, to ensure their safety. We have removed the caps on benefit time so that our people can take care of themselves or family members without having to worry about using up benefit time. And I'm proud to say that at the beginning of the pandemic, we decided not to lay off any employees during this difficult time. That was the right decision. And as we'll discuss later, it turned out that we needed everyone on our team to help accommodate and take care of our customers. The Glacier team has been actively reaching out to our customers since early March. At the very beginnings of this worsening pandemic in the U.S., we decided to proactively call our loan customers and let them know that we were here to help them get through any difficulties. We wanted to talk to customers about any concerns that they had about their circumstances and also offer to work with them on business plans to help them get through the pandemic. We provided a number of tools for our commercial lenders to deploy if needed, forbearance, modifications, and later on, SBA paycheck protection or PPP loans. We found that many of our customers really appreciated the dialogue, and it helped to alleviate some of their stress and anxiety. Most of our customers told us they had a balance sheet that could absorb a slowdown, but they were worried about how long they would have to be idled. The actions we took with many customers, whether a deferral or a PPP loan, helped strengthen their balance sheet to provide the runway to return to more normal conditions. Most of our customers entered this downturn with good businesses, good staff, and good opportunity to grow. And we think those conditions will still be there for our customers with some help as we work through reopening and re-energizing our markets. And in our communities, we've been doing all we can to be a stable and steady source of calm and confidence. We're supporting food bank networks and other basic needs nonprofits to help make sure everybody in our communities is cared for and also volunteering to work on various state and local committees on how to safely reopen and how to utilize COVID-specific federal funding. We realize we have a long way to go before we get back to the new normal, but most of the states in the glacier footprint are well positioned to safely reopen soon. A number of our states are poised to reopen in the near future because they have the lowest rates of negative effects and are already on a downward trajectory of documented COVID cases. In addition, we think our western states will become even more attractive once the country opens back up because our tourism is easily accessible by car, and the natural attraction of the West with wide open spaces may become even more sought after post-pandemic. I think our first quarter results really highlighted the consistent strength of our core business. Many banks have adopted the current expected credit loss or CECL accounting standard at the beginning of 2020. And while the CARES Act would allow us to delay the adoption of this standard, we are moving forward under CECL as we are operationally prepared and already internally reporting under this method. We really don't see much of an advantage of putting off the adoption of a standard that will ultimately be required. However, CECL is being adopted by the banks at the exact time when forecasting future losses to estimate reserves rather than relying on the past practice of incurred losses is extremely difficult. We are all trying to understand the implications of a global pandemic and the almost complete shutdown of the US economy. That being said, we believe the $19 million increase in our allowance for credit loss in the first quarter includes most of what we know related to the impact of COVID-19 on our portfolio at this time and don't expect further material ACL adjustments related to COVID-19 unless there are major new developments. The model we used as part of the CECL process is the most current available and includes a 2Q unemployment rate north of 15% and a GDP decline of close to 10%. We are expecting to see a longer recovery where unemployment stabilizes at about 10% for the full year of 2020 and then slowly declines in 2021 and starts to normalize in the following years. We expect the same pattern for GDP. The shape of our forecasted recovery is more Nike swoosh, a slow and steady upturn. This is a conservative approach to our allowance, but consistent with our history. We run towards problems, not away from them. Early last year, when we started to prepare for CECL, we committed to building our CECL process with best-in-breed partners. Our CECL model was built in conjunction with Primatics. Thirteen of the top 30 banks rely on their evolved platform for financing credit functions. We use economic forecasts from Oxford Economics, a global leader in forecasting and quantitative economics. And our model was reviewed and validated by Crow Global, the eighth largest accounting and advisory network in the world, in addition to BKD, our accounting firm, and also our own enterprise risk management department. Perhaps more important than the model is the historical credit performance of our loans that are used in that model. We have always believed that our loan portfolio is the backbone of the company. And the company is a very geographically diverse loan portfolio spread out over 1,500 miles in eight states and in rural as well as urban markets. In addition, our branch footprint encompasses some of the strongest growth markets in the country. Our portfolio is further strengthened by its relatively small commercial real estate average loan size of $500,000, with over 90% of these loans also secured with a personal guarantee. And our credit decisioning is made at the local market level, where our teams have a detailed local understanding of borrowers and properties. Our adherence to rigorous portfolio concentration limits and annual reviews by an independent third party is an important part of our portfolio management process. With this diversification and operational discipline comes tremendous strength. And our portfolio is extremely strong as we enter this pandemic, the strongest it's been in decades. And as you know, we've spent the last three years preparing for the next recession. And we did this while times were good, exiting weaker credits while the supply of buyers was high. This performance is reflected in our MPAs and total loans, slowly declining over the last two years to now stand at 26 basis points, which is among the lowest levels in the company's history. Net charge-offs for the quarter to average loans was very strong, ending this quarter at only one basis point. As a result of our customer conversations and the tremendous publicity about the SBA's Triple P program, we've received and approved almost 9,000 Triple P loans for about $1.1 billion in Phase I of the program and have already closed over $800 million in loans and and deposited those funds in our customers' accounts. We also picked up close to 700 new customers who received PPP loans in excess of $100 million due to a number of competitors that were struggling with the PPP program. The Glacier team did an incredible job getting these loans to the businesses that needed them, and received numerous compliments from customers on how we were able to take care of them. Many on the Glacier team worked 16-hour days and weekends to get through the tremendous amount of applications that we received. With over 9,000 PPP application and an average loan size of around 150,000, I believe the Glacier team handled more applications per person than most banks our size. We serve Main Street, and we're pleased and honored to be helped so many in our communities. We also made over 1,400 modifications on loans totaling $716 million. We've received regulatory flexibility to make these modifications, and they could be a good way to help customers get through a severe but short-term business disruption like we are now seeing. Both the PPP loans and the modifications help customers maintain and build their balance sheets while businesses wait to reopen. In addition to relying upon the substantial inherent strength of the loan portfolio, we have implemented enhanced monitoring of the industries that we think pose higher risk due to the pandemic. The total amount of loans under enhanced monitoring is $703 million, or 6.98% of our portfolio. This includes loans in the following industries, hotel, motel, restaurants, oil, gas, travel, tourism, and gaming. The largest industry with risk in our portfolio is our hotel, motel loans, totaling $466 million, or 4.6% of the portfolio. Most of these hotel loans are smaller loans with less than $1.5 million and have an LTV under 60%. Most of you know we haven't materially increased our position in hotels for over three years, so many of these loans have a good amount of equity. The hotel industry has been hit hard by the virus and will need some time to recover it. We believe our seasoned portfolio is led by a group of very good operators, and they'll work through the current challenges. However, we need to stay close to these customers to work with them along the way. The next largest exposure in the higher risk group is restaurants, totaling $132 million, or 1.3% of the loan portfolio. Similar to our hotel portfolio, these are smaller loans with an average loan size of less than $175,000 and a group of solid operators. Many of these owners have already started to adapt to a new operating model by shifting to takeout while they wait for the ability to reopen fully. Even with the required social distancing requirements, it looks like most of the restaurant businesses will be able to get minimum economics reestablished as a foundation. There's also been a lot of discussion about oil and gas, and this industry is also in the higher risk portfolio, but only about 24 million or two basis points of the portfolio. We never made too many loans directly in the energy industry because we don't have the deep subject matter expertise needed to stay out of trouble. Most of our exposure here is to businesses providing the secondary support for the primary producers. Further supporting the enhanced monitoring portfolio that I just went through, Approximately 25% of the loans in this portfolio have modifications, and approximately 15% have PPP loans. So we'll continue with our enhanced monitoring process for these industries for the foreseeable future. So for the quarter, the loan portfolio grew $575 million from the last quarter, or 6%. and this included our acquisition of State Bank of Arizona. Without the acquisition, we grew $124 million, or 5% annualized in the first quarter. Core deposits increased $772 million, or 7% from the prior quarter, including the acquisition, and increased organically $168 million, or 6% annualized. Our investment portfolio increased $834 million in the quarter or 30% due to $142 million of investments from our State Bank of Arizona acquisition and our purchase of $723 million of municipal and corporate bonds. Debt securities represent 24% of the total assets at the end of the first quarter compared to 20% at the end of the prior quarter and 23% at the end of the prior year quarter. Margin was also strong. Our core net interest margin ended the quarter at 4.3%, down from 4.33, or just three basis points from the end of the prior quarter, and was up seven basis points from 4.26 from the prior year's first quarter. The yield on the loan portfolio was 5.1%, which was down 13 basis points from the prior quarter and was driven by lower yields on new loans, which dropped about 20 basis points from the last quarter to about 4.8%. Core deposit pricing was down one basis point from the prior quarter, and the total cost of funding was down one basis point as well. So overall, we're very pleased with the resiliency and the stability of our core margin. And our mortgage business experienced record volume in the quarter with over $600 million in loans locked versus $250 million locked in the first quarter of 2019. Gain on sale of mortgages was almost $12 million for the quarter compared to about $5.8 million in the first quarter a year ago. Our mortgage business is still active, but it's a bit too early to see clearly what COVID-19 will do to the business. And the company's capital levels remain very strong, with CET1 ending the quarter at 12.89%. up compared to 12.58 at the end of the prior quarter and up from 12.2 from the quarter end a year ago. Tangible book value per share was 16.35 at the end of the first quarter and increased from 15.61 at the end of the prior quarter and increased from 14.35 from the prior year's first quarter. Our access to liquidity remains robust with growth due to an increase in core deposits and borrowing capacity. At the end of the first quarter, the company had access to over 5.5 billion in liquidity. This includes 3.4 billion of unused borrowing capacity with 1.8 billion at the Federal Home Loan Bank, 1.3 billion in borrowing capacity at the Federal Reserve, and $400 million of capacity at correspondent banks, in addition to $1.8 billion in unpledged marketable securities and cash of $273 million. In March, we declared our 140th consecutive dividend with our robust capital and liquidity position We don't see any change in our dividend strategy at this time. Dividends have been and remain our preferred excess capital management strategy. And finally, before we move on to questions, our PPNR, pre-tax, pre-provision net revenue for the quarter, was $75.7 million, an increase of $6.1 million, or 8.8%, compared to the prior quarter's PPNR of 69.6. Compared to the year-ago quarter, the company's PPNR increased 14.9 million, or almost 25%. We believe this clearly demonstrates our exceptionally strong core business. And we also welcomed employees and the board from State Bank of Arizona to the Glacier team and are very excited to expand our Foothills division to now cover all the major markets in the state of Arizona. On top of everything else going on, we completed this acquisition and converted it over to our core system in the first quarter. So, Victor, that ends my formal remarks, and I'd now like to turn the call back over to you to open the line for any questions that our analysts may have.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question will come from the line of Michael Young from SunTrust Robinson. You may begin.