Glacier Bancorp, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Blancorp third 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 call is being recorded. If you require additional assistance, press star then 0 to reach an operator. I would now like to hand the call over to Randy Chesler, President and CEO of Glacier Bancorp. Please go ahead.

All right. Thank you, Michelle, and good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Angela Dosey, our Chief Accounting Officer, Byron Pollin, our Treasurer, and Tom Dolan, our Chief Credit Administrator. Don Cherry, our Chief Administrative Officer, is on the road this week visiting our divisions and will not be joining us today. Yesterday we released our third quarter 2020 earnings, and today we're ready to review the state of the company and the financial results. The third quarter results show another very solid performance from the Glacier team, and once again highlights the strong core of the company and the strength of our team and our business model, despite the stiff headwinds generated by the global COVID-19 pandemic and the related economic and social impacts. COVID rates now appear to be spiking in some of our western states, and while most of our business operations remain uninterrupted, this is a circumstance that we're watching closely. We continue to navigate through the ongoing pandemic extremely well, and I'm exceptionally proud of the Glacier team, our senior staff at the holding company, as well as our 16 bank presidents and their teams for their commitment and leadership and their service to their communities that they have demonstrated this year. Despite the pandemic, we are amazed at how well our customers have adjusted to the circumstances and are carrying on with business. Our residential 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 they had a very good summer and early fall season. The performance of our loan portfolio continues to show that our conservative approach to credit really pays off during times like these. And we've seen some increase in digital transactions, but our branch transactions have remained steady. We continue to watch the numbers, but have not seen a major shift in the mix. 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 signs that the natural social distancing that comes with our more rural markets will only add to the attractiveness of our footprint markets. Once again, the third quarter results highlighted the consistent strength of our core business. We reported earnings per share of 81 cents a 42% or 24% increase from the prior year third quarter. Net income was $77.8 million, which is an increase of $26.2 million or 51% from the prior year third quarter. Highlighting the company's core earnings strength, the pre-tax, pre-provision net revenue for the quarter was $99.4 million, which was up 56 percent from the prior year third quarter. Core deposits increased $868 million or 6.5 percent over the prior quarter with non-interest bearing deposit growth of $436 million or 8.6 percent. Non-interest bearing deposits were 39 percent of total core deposits at the end of this quarter compared to 35% at the quarter a year ago. Deposits continue to flow onto the balance sheet as a result of customers' reduced spending and unprecedented government fiscal stimulus and monetary policy. We're pleased to see our cost of core deposits decline 11 basis points from 14 in the prior quarter to 21 in the third quarter a year ago. Total debt securities increased $582 million or 16% during the quarter and increased $1.6 billion or 60% from the prior year third quarter. The return on our debt securities reflected the impact of lower for longer interest rates, ending the quarter at 2.72%. down 45 basis points from the prior quarter due to purchasing new securities at current lower market rates. That security income was $25 million, which was materially unchanged from the prior quarter and an increase of 19% over the prior year third quarter. We're taking a cautious approach to new investments given current low rates, and risk at some point of deposit outflows and we're targeting a short average life while maintaining higher levels of liquidity. The loan portfolio organically increased 165 million or 1% in the quarter as we saw an increase of activity to our markets that was driven by pent-up demand from the first half of the year. The growth was well distributed across our footprint, and the quality was reflective of our conservative approach to credit. At the end of this quarter, we had made over 16,000 Triple P loans for $1.472 billion. As part of this effort, we acquired over 3,000 new customers who received Triple P loans from us, totaling close to $298 million in loans, due to several competitors that were struggling with offering this program. Expanding these new high-quality relationships helped drive some of our growth in loans this quarter. At the end of the quarter, we had $36.1 million in net deferred fees remaining on these PPP loans. Net income was $151 million, which was an increase of 3.2%, or 2% over the prior quarter and increased 20 million or 15% from the prior year third quarter. While the industry is dealing with the impact of lower for longer interest rates, we are encouraged by our ability to grow our balance sheet, even if at a slower pace, to offset declining them with more net interest income. We feel our strong geographic footprint and the economic and growth advantage to our market areas will enable us to weather the lower for a longer period of time. Net interest margin was tough to hold onto due primarily to the interest rate environment as we saw margin drop again this quarter to 3.92% from 4.12% last quarter. Pricing on new production during the quarter was around 4.30% versus our portfolio rate of 4.54%. The second quarter's new loan production yield averaged around 4.4. The core net interest margin ended the quarter at 4.02 versus 4.21 in the prior quarter and 4.35 a year ago. The pace of Triple P loan forgiveness could help the margin in the next few quarters as fee income will be accelerated upon forgiveness. At the end of the quarter, the SBA had not begun to act on loans submitted for forgiveness, but recently started approving those requests. So far this quarter, we have received forgiveness from the SBA on 242 loans for $8 million. It's unclear at this point how quickly the SBA will process existing forgiveness requests and how quickly customers will push for forgiveness. Longer term, we still expect lower for longer rates will continue to put downward pressure on our margin. Non-interest income was once again driven by record mortgage production. We booked gain on sale of loans of $35.5 million, which was almost $10 million over the prior quarter, and an increase of $25 million over the quarter a year ago. Mortgage purchase and refinance business continues to be very strong. In addition to local demand, we continue to see an uptake in the number of out-of-state buyers, accounting for 26% of purchases, and 31% of construction loans in the third quarter. Credit performance was better than expected, with net charge-offs at $826,000 compared to $1.2 million last quarter. The Lincoln loans were 15 basis point of loans versus 22 last quarter and 31 a year ago. Non-performing assets decreased slightly by about $1 million and were 25 basis points of assets, which was down two basis points from the prior quarter and was 15 basis points less than the level a year ago. For the quarter, excluding PPP loans, our MPAs would be 27 basis points of assets, which was a three basis point decrease from the prior quarter. During the second quarter, we made over 3,000 loan modifications in response to COVID concerns on loans totaling over $1.5 billion, representing about 15% of the loan portfolio, excluding Triple P loans. It's important to note that all these loans that received the modification were performing as agreed before we gave them a modification. In the third quarter, Those modifications decreased by $1.049 billion to $466 million, or 4.6% of the total portfolio. $105 million of these modifications were loans that re-deferred and extended their original deferral period for a re-deferral rate of about 9%. with no one industry accounting for more than 20%. We continue our enhanced monitoring of industries that we think pose higher risk due to the pandemic. The total amount of loans under enhanced monitoring is $617 million, or 6% of our total loan portfolio. This includes loans to hotel, motels, restaurants, travel tourism businesses, gaming businesses, and oil and gas industry-related businesses. We ended the second quarter with $400 million of these loans in modification status and ended the third quarter with only $77 million in modification, a reduction of $323 million, or 81%. Despite the steep reduction we saw in modifications in the third quarter, we will continue with our enhanced monitoring process of the entire portfolio and these higher risk industries for the foreseeable future. And we continue with our rigorous approach to managing and proactively addressing any credit issues. In addition to our bank loan modification program, The state of Montana created a grant program for businesses, which was only available in the third quarter, where customers could get a grant, not requiring any repayment, paying for six to 12 months of interest payments with little qualification requirements. Customers with loans totaling $237 million took advantage of this program in the quarter. Funding for this program was part of the federal government's CARES Act. Credit loss expense of $2.9 million for the quarter brings us to $39.2 million for the year. Our allowance for credit loss stands at $164 million, or 1.42% of loans. 1.62% of loans, not including PPP loans, which are 100% guaranteed. We believe this is a very adequate and prudent level given the uncertain circumstances caused by the impact of COVID and the uncertain political circumstances. Total non-interest expense was $106 million, which increased 7.5 million or 8% over the prior quarter and decreased 5 million or 5% over the quarter a year ago. For the quarter, the efficiency ratio was 49.16%, an improvement compared to the prior quarter efficiency ratio of 49.29%. On a year-to-date basis, the company's efficiency ratio was 50.21%. Excluding the impact from the PPP loans, the efficiency ratio would have been 53.3%. The company's capital levels remain very strong, with CET1 estimated to end the quarter at 12.44% up compared to 12.35% at the end of the prior quarter and down slightly from 12.56% from the quarter a year ago. Tangible book value per share was 17.64% at the end of the third quarter and increased, from 17.08 at the end of the prior quarter and increased from 15.53 from the prior year's third quarter. Our access to liquidity remains robust with the growth due to an increase in quarter deposits and borrowing capacity. At the end of the third quarter, the company had access to over $12 billion in liquidity. This includes $5.9 billion of unused capacity with $2.6 billion at the Federal Home Loan Bank, $2.7 billion of borrowing capacity at the Federal Reserve Discount Window and Triple P Liquidity Facility, and $600 million of capacity at correspondent banks. In addition to $2.1 billion in unpledged marketable securities and cash of $769 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. And in December, we declared our 142nd consecutive dividend of $0.30 a share, an increase of $0.01 per share, or 3.4%. dividends have been and remain one of our preferred excess capital management strategies. So overall, the third quarter was another outstanding performance from the Glacier team. And Michelle, that ends my formal remarks, and I'd now like you to please open the line for any questions that our analysts may have.

Ladies and gentlemen, to ask a question, please press star, then 1. If you'd like to remove yourself from the queue, please press the pound key. Our first question comes from Jeff Rulis of DA Davidson. Your line is open.