Glacier Bancorp, Inc.

Good 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. If anyone should require assistance during the conference, please press star then zero on your touchtone phone. 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 Dosey, our Chief Accounting Officer, Byron Pollin, our Treasurer, and Tom Dolan, our Chief Credit Administrator. We finished the second quarter 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 77.6 million, an increase of 14.2 million, or 22% over the prior year second quarter net income of 63.4 million. Diluted earnings per share were 81 cents, an increase of 23% from the prior year second quarter diluted earnings per share of 66 cents. The loan portfolio, excluding payroll protection program loans, increased $249 million or 10% annualized in the current quarter and increased $517 million or 5% from the prior year second quarter. Core deposits increased $669 million or 17% annualized during the current quarter and and increased 3.4 billion, or 26%, from the prior year second quarter. Non-performing 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 second quarter. Early stage delinquencies totaled 12.1 million or 11 basis points of loans and decreased 32.5 million from the prior quarter of 40 basis points of loans and decreased 13.1 million from the prior year's second quarter of 22 basis points of loans. A credit loss benefit of 5.7 million reflected the improvement in our loan portfolio and economic forecast. Non-interest expense was $100 million, which increased only $3.5 million, or 4%, compared to the prior quarter and increased $5.3 million, or 6%, from the prior year second quarter. Excluding deferred compensation from originating PPP loans, total non-interest expense was $102 million for the current and prior quarter compared to $103 million in the prior year second quarter. We declared a quarterly dividend of $0.32 per share, an increase of a penny per share, or 3%, over the prior quarter regular dividend. And 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 eight-state footprint continued in the second quarter. 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 crowds. 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 eight-state footprint, with all markets growing $249 million, or 10% annualized, excluding PPP loans. We were pleased to see that almost all of the loan growth came from commercial real estate and CNI loans. We continue to build on the 3,000 new customer relationships we picked up as part of round one of PPP, with about $65 million 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 originated over 5,500 regular loans and over 1,900 PPP loans, along with processing PPP loan forgiveness. We hit a new loan production record in the second quarter, with over $1.6 billion 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 third quarter of the year with very good momentum and over $140 million 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 across 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 million and at the end of the quarter totaled $16.7 billion, and most importantly, at a cost of seven basis points. down one basis point from the prior quarter, and down seven basis points from the end of the quarter a year ago. Non-interest-bearing deposits increased $267 million, or 4% over the last quarter, and increased $1.3 billion, or 25% from the prior year second quarter. 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 $7.2 billion increased $730 million, or 11% from the prior quarter, and are up $3.4 billion today. or 92% from the prior year second 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 30% at the end of 2020. 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 was 3.44%. compared to 3.74% in the prior quarter and 4.12% in the prior year second quarter. Our core net interest margin was 3.33% compared to 3.56% in the prior quarter and 4.21% in the prior year second quarter. 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 in the amount of lower-yielding debt securities and the decrease in the yields on debt securities and loans. Debt securities increased 11% or $730 million 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 billion 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 1.6 billion 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 triple P, increased $1.9 million in the quarter while the net interest margin fell. Our focus continues to be on growing net interest income, 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 million, which was an increase of only $3.5 million from the prior quarter. Non-interest expense, less the deferred compensation from originating new PPP loans, was $102 million, which was flat to the last quarter and down $1 million from the prior year's second quarter. 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 million from $40 million, or 11% in the prior quarter, due primarily to the reduced gain on sale of residential mortgages, which decreased $5.5 million, or 26%, 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 $1.1 million to $17 million, or 7% from the prior quarter. The efficiency ratio was 49.92% in the current quarter. 46.75% in the prior quarter, and 47.54% in the prior year of second quarter. Excluding Triple P, the ratio would have been 53.53% in the current quarter compared to 52.89% in the prior quarter and 53.92% from the second quarter a year ago. Our combination with Ulta 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 first part of 2022. I've been very impressed with Ulta's focus on continuing to serve customers and growing the business. Ulta Bank was honored with the Utah Best of State Bank Award for the second 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 five and 50 billion. This is the second 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 from other bankers in their communities and in the industry. So that ends my formal remarks, and I'd now like Shalom to open the line for any questions that our analysts may have.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one on your touchtone phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. One moment for your first question. Your first question comes from the line of Jeff Rulis from D.A. Davidson.

Thanks, Jeff. Good morning. Morning, Jeff. Randy, maybe I'll just start with some line item detail. I think you walked through the strategy on liquidity deployment pretty well. I guess I'm kind of looking at expenses and the dip in gain on sale. I guess it's kind of a two-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 of, you know, gain on sale down 5.5 million, expenses being flat. Granted, there's some other components there, but just try to see if that mortgage wanes, how that adjusts on the expense side.

Yeah, no, we had a lot of discussion about expenses. I'm going to ask Ron to cover that. You know, 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?

Yeah, this is Ron. So, Jeff, we think the run rate really will be closer to $103 million. You heard Randy talk about, you know, the hiring, and, you know, we're looking to ramp that up. So we'll have some additional headcounts, a bit of higher salaries. But equally, we'll have more business development expenses as, you know, the team continues, all the divisions are, you know, continuing to get back out on the road. So we think that that will increase as well. But we think the $103 million 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 the MBA forecast is showing?

Yeah, Jeff, we're still, you know, we still think that's a good estimate. So I think we sat down about 25% consistent, 20% to 25% consistent with the MBA. You know, again, we have such – a short, small supply of homes, that's our biggest concern. So the market, you know, continues to do well. We continue to do well, but with this in-migration, you know, the houses just don't stay in the market very long, and we've, I think, also kept the builders, you know, they're 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. Just the non-performing asset relationship, the one big one you brought on, any color you could provide as to what that is, how it came on, and the position there?

Yeah. Tom can cover that. We've obviously... spend a lot of time on that, but Tom can give you a little more detail.

Yeah, Jeff, good morning. It's predominantly one relationship. It's an ag relationship. The issue's kind of one-off. It's not market-driven. And, you know, what we're showing right now is it's adequately secured. We're in the process of liquidation, so I think over the next, you know, two to three quarters, we'll be continuing to monitor it closely, but I'm not seeing, you know, a significant or material loss in the relationship at least as of today. Okay. Thanks. I'll step back.

Your next question comes to the line of Matthew Clark from Piper Sandler.

Hey, good morning. 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-PPP, ex-ALTA, obviously, too. How do you feel about that range for the year?

Yeah, so on a full-year basis, we had a very strong quarter. Like I said, we're very, very happy with that. You know, we're pretty much right on that 6% on a 2021 basis, first and second quarter. We're sticking to that. You know, the headwind is excess liquidity. We just keep getting a lot of companies have a lot of cash on the balance sheet. You keep seeing a lot of payoffs because they're just looking at their liquidity and saying, gee, I can keep it in the bank at very low interest rates or I can pay off this loan. And we're seeing a fair amount of that. So, we're probably at the higher end of that range, Matthew, just given the strength we see this quarter and given very positive trends going into the next quarter. But, you know, still a little bit of caution just with the tail end of the pandemic and also this excess liquidity. And, you know, if the government provides more liquidity to businesses, you know, it's 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 CNI might have been right behind that, ex-PPP. 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 and restaurants, or is it, you know, more warehouse type of stuff, industrial type of project?

I'm going to ask Tom to answer that, but we are, you know, it's a good question. You know, 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 yields. nor on loans are we stretching to get a higher yield. 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 that type of business.

Sure, yeah, Matthew. You know, we're not seeing any growth in the high-risk COVID-sensitive industries like hotels and restaurants, not really at all. The production and where the growth's predominantly been has been more on the industrial warehouse. And, you know, it kind of mirrors what the in-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, you know, average home prices are quite high. You know, multifamily has become quite popular. And, you know, the absorption rates of existing projects is – you know, favorable and allowing us to participate in that as well. So I would say this last quarter, you know, mostly industrial, certainly some CNI. We've had some businesses with some expansion, buying some equipment that's helped us there. And then, you know, looking forward, I think that will continue. In addition, we'll see some multifamily growth as well.

Okay, great. And then just on the reserve, I think in prior calls you talked about stabilizing 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 1st of 2020?

We don't anticipate really any change from where we are today. We set the reserve level this quarter given what we know on 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?

Yeah, so depending on how you measure it, so I'll give you a number based on loans sold. You know, people look at it differently, whether it's locked loans to gain. But just on loans sold, you know, we were just about at 4% for the quarter.

Okay. And do you have to have the volume that you sold? I'm just curious.

About $400 million.

Okay.

Thank you.

Yep. Our next question is from Jackie Bowler 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 see 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.

Yeah, we have a lot of open positions. And, you know, hiring has been difficult across most of our markets to fill new positions. So, you know, we're somewhere around 15% or so, maybe a little bit more, just lagging, bringing those folks on. And it's We have, you know, one market, six positions open, and, you know, we've received six resumes. So it's just slow. I'm sure you've heard it. Just getting people to come back into the workforce is difficult.

Okay. And then when I think about those open positions, kind of a two-part question here, number one – What types of positions are they? And I'm trying to get, you know, whether they're more entry-level or middle management type positions. And also, you know, 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?

Yeah, the openings are spread out across the organization, you know, And Alta, you know, 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 Alta, it's 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 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 million 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, you know, we have hired some people in the second quarter that, you know, will start to show up. So that's where I'm coming from when I say there's additional hiring. So it's not a, you know, 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 second quarter, and that will ramp up more in the third quarter then.

Okay, great. Thank you very much.

Yeah, Jackie, just on that, the, you know, back to the open positions, it's actually closer to 5%, not 10%. So we're, you know, if you take the total across all 16 divisions, it's right now closer to about 5% opening.

Okay. Thank you for clarifying.

Yep, you bet.

Our next question comes from Brandon King from SureList Securities.

Hey, good morning. Morning, Brandon. Hey, so Randy, I know in your prepared remarks you mentioned the immigration trends and the footprints, and I wanted to know, 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 the dynamic will play out or if it's sustainable over this next year or years to come.

Yeah, we've Talking to all the divisions, we have not seen a let up in the in-migration. It continues both in buying current homes and also a fair amount of our construction lending is to people outside the market. They're planting a foot in the market and building. That's You know, that really hasn't changed at all. In terms of sustainability, you know, we expected to wane it a bit as more of the markets normalized, but we just don't know for sure. I actually thought we'd see a little bit of a, you know, a tailing off of that trend in the second quarter, but it just continued really unabated and unchanged. So... We would just expect as, you know, people, the in-migration, you know, 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 trend, core deposit growth is strong again. And I was wondering, is that coming from existing customers, or is it also coming from some of this emigration and new customer acquisitions?

Yeah, really coming from both. And I should just point out, you know, before the pandemic, we were experiencing good emigration. 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, yeah, that's both existing customers with excess liquidity, new customers. So I talked about the, you know, the 3,000 new customers that we picked up as part of the Triple P. 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, you know, 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. Is the plan still to hold more residential loans in the balance sheet going forward?

Well, you know, that's a dynamic on the demand.

The first quarter, you know, we had quite a bit of runoff there. Second quarter, a lot less. Probably going to see this portfolio remain stable for the most part for this year. Possibly grow a bit, but, you know, most of our activity will be on creating saleable loans and selling those.

Okay. And are you seeing any less compression on general sale 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. You know, we ended the quarter around 4%. You know, there's probably going to be a little more price competition starting to occur in some markets, and so we could see a little pressure there.

Okay. Thanks for the answers. You're welcome.

Ladies and gentlemen, once again, if you have a question, please press star 1 on your telephone keypad. Once again, that is star 1. Your next question comes from the line of Tim Coffey from Janie.

Great. Thanks. Morning, Randy.

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, you know, I think we locked in about $350 million this quarter. You know, 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, you know, we're still above pre-pandemic levels. But, you know, we're seeing a little reduction there, but still – 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 MBA survey. But with all the immigration, you're seeing your footprint.

Yeah. No, because, like I said, it's really supply. You know, a fair... We see more and more of our locks TBD, so they're locking and getting a prequal because they want to move quickly if a house does, you know, present itself. So, yeah, the in-migration continues, but properties, you know, they're reasonably priced, you know, to the market are lasting a couple weeks and they're being purchased. So there's... You know, the inventory of homes is down very low. So that's, you know, that's our biggest pressure point right now.

Sure. Okay. And then just on the unbalanced sheet liquidity, say it stays on there longer than you expect and it should continue to grow given how good you guys are at growing deposits and you don't stretch for credit, what other levers do you have to pull to absorb some of that liquidity? Okay.

Yeah, Tim, it would go into the loan portfolio. I'll just reiterate, you know, obviously we strongly prefer loans. But in the meantime, you know, those are very stable sticky deposits, as Randy had mentioned. So we'll continue to focus on growing the net interest income. You know, said differently, we're very poised for higher rates, especially with the non-interest bearing. That's... great way to mitigate interest rate risk as the yield curve would start to steepen again. So we're, you know, don't fight the Fed, 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, again, we appreciate everybody dialing in in the middle of the summer. We know you have a lot of activities on a Friday, so we really appreciate you dialing in. We hope everybody has a terrific weekend. Thank you again.