Glacier Bancorp, Inc.

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

All right. Thank you, Twanda. And 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 Tom Dolan, our Chief Credit Administrator. Yesterday, we released our second quarter 2020 earnings, and today we're ready to review the state of the company and the financial results. The second quarter was very solid and highlights the strong core of the company and the strength of our team and our business model, despite the stiff headwinds caused by the global COVID-19 pandemic. We continue to navigate through the pandemic extremely well, and I'm exceptionally proud of the Glacier team, their commitment and leadership, and their service to their communities. As I noted in our last earnings call, the Glacier franchise covers almost 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. We continue to take advantage of our model today to respond to the quickly changing conditions. At this time, most of our locations have moved back to drive-through service within lobby meetings by appointment. This is in response to a resurgence of the virus in many of our markets. Most of our eight states have active cases and mortality rates well below the national average, but are still seeing increasing cases with more testing. Despite the pandemic, we're amazed at how well customers have adjusted to the circumstances and are carrying on with business. Our mortgage volume is at record levels with refinancing and new home purchases. Our commercial lending business is beginning to pick up, And many of our business customers report solid increased activity. As expected, tourism in our western markets has generally rebounded very well due to a lot of pent-up desire to get out of the house and travel. Our markets were strong before the pandemic, driven by high quality of life, business-friendly environments, and low cost of living. And we are seeing some signs that the natural social distancing that comes with our more rural markets will add to the attractiveness of our markets. And now on to our results for the second quarter. Once again, the second quarter results really highlighted the consistent strength of our core business. We reported earnings per share of 66 cents, an 8% or 5 cent increase from the prior year second quarter. Net income was $63.4 million, which is an increase of $11.1 million, or 21% from the prior year second quarter. And highlighting the company's core earning strength, pre-tax, pre-provision net revenue for the quarter was $91.3 million, which was up 41% from the prior year second quarter. Core deposits increased $1.8 billion, or 16% over the prior quarter, with non-interest-bearing deposit growth of $1.2 billion, or 30%. Non-interest-bearing deposits were 38% of total core deposits at the end of this quarter, compared to 34% at the end of the quarter a year ago. Deposits continue to flow into the balance sheet, so we significantly reduced our federal home loan bank borrowings by $475 million during the quarter to about $40 million and put an additional focus on reducing the cost of deposits given the drop in interest rates. We were pleased to see our cost of core deposits decline to 14 basis points from 20 in the prior quarter and and the total cost of funding dropped 21 to 21 basis points from 29 in the prior quarter. The loan portfolio organically increased $1.4 billion, or 14% in the quarter, and increased $1.5 billion, or 17% from the prior year quarter. All the loan growth in the current quarter and most of the deposit growth was due to our Paycheck Protection Program or PPP loans. We have approved and closed over 15,000 PPP loans for about 1.4 billion with most of these funds deposited in accounts with us. We expect to earn about $55 million in fee income from these loans. So as part of this effort, we also acquired over 3,000 new customers who received Triple P loans from us, totaling close to $298 million in loans. This was due to a number of our competitors that were struggling with offering the Triple P program. Total debt securities of $3.7 billion increased $104 million, or 3% during the quarter, and increased $1 billion, or 37%, from the prior year second quarter. Net interest margin was tough to hold, as we saw it drop from $4.36 last quarter to $4.12 today, dragged down by the 150 basis point reduction of short-term rates by the Federal Reserve in late March. Pricing on new production during the quarter was around $4.40 versus our portfolio rate of about $4.85. Last quarter's new production yields averaged 480. The core margin looked better, ending the quarter at 421 versus 430 in the prior quarter and 427 a year ago. The pace of PPP loan forgiveness could help the margin in the next few quarters, as fee income will be accelerated upon forgiveness. And last night, the SBA issued some direction on how and when to submit the forgiveness applications, and we look forward to getting started with the process, which, according to the SBA, will most likely start in mid-August. Longer term, though, we still expect lower rates will continue to put downward pressure on our margin. The return on our debt securities held up well, ending the quarter at 3.16%, up six basis points from the prior quarter. Debt security income was $26 million, which was an increase of $5 million or 23% over the prior quarter and 18% over the prior year quarter. This shows the effectiveness of the actions we have taken to maintain our investment portfolio returns. Non-interest income was driven by record mortgage production. We booked gain on sale of loans of $26 million, which was $14 million over the prior quarter, or an increase of 118%, and $18 million, or 233%, over the quarter a year ago. Mortgage purchase and refinance business continues to be very strong. And we've seen an uptick in the number of our out-of-state buyers in addition to strong local demand. Credit performance was better than expected, with net charge-offs at 1.2 million, or two basis points of total loans, about the same as the prior quarter. Delinquent loans were 22 basis points of loans versus 41 last quarter and 43 a year ago. Non-performing assets increased 7 million, but were 27 basis points of assets, which was up one basis points from the prior quarter, and was 14 basis points less than the level a year ago. For the quarter, excluding PPP loans, our MPAs would have been 30 basis points of assets. We've also made over 3,000 loan modifications on loans totaling over $1.5 billion, representing about 15% of the portfolio, excluding PPP loans. We have received regulatory flexibility to make these modifications, and they are a good way to help customers get through a severe but hopefully short-term business disruption like we're now seeing. Both the PPP loans and the modifications help customers maintain and build their balance sheets while they get back to business. We've also made in excess of $200 million in PPP loans to the modification customers that will provide additional support. We finalized closing many of these modified loans a bit later in the second quarter as we were very busy with handling the record number of loan requests for PPP loans. While most of the modifications are for three months, we'll begin to see the majority of them come up for renewal in a few more weeks. We expect to see a good number of these customers go back to paying as agreed. It's important to note that all of these loans that received the modification were performing as agreed before we gave them the modification. In addition to relying on the substantial inherent strength of the loan portfolio, we've implemented enhanced monitoring of industries that we think posed higher risk due to the pandemic. The total amount of loans under enhanced monitoring is 630 million, or 6.29% of our portfolio. This includes loans in the following industries, hotel, motel, restaurants, travel, tourism, gaming, and oil and gas. The largest industry with increased risk risk in our portfolio is our hotel motel loans totaling 422 million or 4.2 percent of the portfolio most of these hotel loans are small are smaller loans less than 1.5 million and have an LTV under 60 percent most of you know that we have not materially increased our position in hotels for over three years so many of these loans have a good amount of equity and which generally translates into a lower debt burden. The next largest exposure in the higher risk group is restaurants, totaling 151 million, or 1.5% of the loan portfolio. Similar to our hotel portfolio, these are smaller loans with an average loan size of $175,000 and comprised of a solid group of 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. We plan to continue with our enhanced monitoring process of these industries for the foreseeable future. Credit loss expense of $13.6 million for the quarter brings us up to $36.3 million for the year and 1.42% of loans. 1.62% of loans not including the Triple P loans, which are 100% guaranteed. This is a 13 basis point increase over the last quarter. This increase is primarily driven by the impact of COVID-19 on the economic forecast and not deterioration in the underlying credit portfolio. Our allowance for credit loss stands at 162.5 million which we believe is a very adequate and prudent amount given the uncertain circumstances. Total non-interest expense was 98.1 million, which increased 6.2 million or 7% over the prior quarter and increased 12 million or 13% over the quarter a year ago. For the quarter, the efficiency ratio was 49.29%. an improvement compared to the prior quarter efficiency ratio of 52.55. On a year-to-date basis, the company's efficiency ratio was 50.81, improving from the 54.93 efficiency ratio for the first half of last year. The company's capital levels remain very strong. with CET1 ending the quarter at 12.35% up compared to 12.14 at the end of the prior quarter and up from 12.19 from the quarter a year ago. Tangible book value per share was 17.08 at the end of the second quarter and increased from 16.35 at the end of the prior quarter and increased from 15.03 from the prior year's second quarter. Our access to liquidity remains robust with growth due to an increase in core deposits and borrowing capacity. At the end of the second quarter, the company had access to over $11 billion in liquidity. This includes $5.6 billion of unused borrowing capacity with $2.6 billion at the Federal Home Loan Bank $2.6 billion in borrowing capacity at the Federal Reserve discount window and Triple P liquidity facility, and $400 million of capacity at correspondent banks. In addition to $1.6 billion in unpledged and marketable securities and cash of $547 million. An additional $3.5 billion in liquidity is available from other sources, including broker deposits, over-pledged securities, and loans eligible for pledging at the Federal Home Loan Bank. So in March, we declared our 141st 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 one of our preferred excess capital management strategies. And a few important items before I end my comments. We completed the operational conversion of Heritage Bank in Reno, and I'm pleased to report that the conversion went very smoothly, and it will be good to have the Heritage Bank on the company's core platform. My thanks to the Glacier and Heritage teams for an excellent conversion. S&P selected Glacier to become part of the mid-cap 400, moving up from the small-cap 600. And finally, Bank Director just this week published the 2020 Bank Director Scorecard, and we moved up in the rankings quite a bit. For banks with assets between $5 and $50 billion nationally, we are in the top five, number four. That's up from number 16 last year. So overall, an outstanding performance from the team. And that ends my formal remarks, and I'd now ask Tawanda to open the line for any questions that you may have.

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Young with SunTrust. Your line is open.