Glacier Bancorp Inc

F:GLC

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by and welcome to the Glacier Bancorp Third Quarter Earnings Conference. [Operator Instructions] I would now like to hand the conference over to your host, CEO of Glacier Bancorp, Randy Chesler. Please go ahead.

[Randy Chesler, Chief Executive Officer]

Alright. Thank you, Latif and good morning and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator.

We closed out the third quarter encouraged by our loan growth, which came on strong in the later part of the year. We think our company footprint covers some of the best growth markets in the country, and it’s great to see those markets showing continued signs of increasing activity. Our people and our unique business model once again produced very strong results in all of our divisions across the West.

So I’ll touch on some business highlights first and then provide some additional thoughts on the quarter. The loan portfolio, excluding Payroll Protection Program loans, had strong growth of $382 million or 14% annualized. The loan portfolio grew $711 million or 9% annualized from the beginning of the year. Core deposits continue to flow into our divisions, growing $742 million or 18% during the quarter and growing $2.7 billion or 25% annualized from the beginning of the year.

Net income for the first 9 months of the year was $234 million, an increase of $50 million or 27% from the $185 million in the first 9 months of the prior year. Pre-tax pre-provision income was $285 million for the first 9 months of the current year, an increase of $18 million or 7% compared to the $266 million in the prior year first 9 months. Net interest income, excluding PPP loans in the current quarter, was $154 million, an increase of $4.6 million or 3% from the prior quarter. Net interest income, excluding PPP loans for the first 9 months of the current year, was $452 million and increased $22.5 million or 5% over the same period in the prior year. Our efficiency ratio for the current quarter was 50.17%. Excluding PPP loans, the efficiency ratio was 53.9% compared to 53.53% in the prior quarter.

Non-performing assets of $51.2 million as of current quarter end decreased $1.9 million or 4% from prior quarter. NPA to assets ended the quarter at 24 basis points. Net charge-offs to average loans was 2 basis points for the current year-to-date period compared to 3 basis points in the prior year same period. And we declared a quarterly dividend of $0.32 a share. The company has declared 146 consecutive quarterly dividends and has increased the dividend 48x. We saw excellent loan growth in our markets with Wyoming, Arizona and Idaho leading the growth across our 8-state footprint with all markets growing a total of $382 million or 14% annualized, excluding PPP loans. We are pleased to see that almost all of the growth came from commercial real estate. New loan production for the quarter was strong with over $1.6 billion in new loans originated.

We continue to deepen the relationship with the 3,000 new customers we picked up as part of Round 1 PPP, with over $400 million in loans made to this group so far. We now have about $370 million of round 1 and 2 PPP loans still on the books out of a total of over $2 billion that we originated starting in 2020. As I noted last quarter, we still have some growth headwinds with borrowers using excess liquidity to pay down loans and the increasing level of competition for new business. We continue to stick to our disciplined lending and risk management strategies and generally seeing most of the players in our markets still avoiding a race to the bottom on credit, but we see price competition continuing to heat up for the best loans. That being said, we are very happy to enter the fourth quarter of the year with very good momentum and a very strong pipeline of new loans. Considering all of this, our original target of 4% to 6% full year growth for 2021, excluding PPP, is more likely to be closer to 8% to 10% when we close out the year.

Core deposit growth continues to be surprisingly 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 $742 million at the end of the quarter and totaled over $17 billion. Most importantly, the core deposits have a cost of 6 basis points, down 1 basis point from the prior quarter and down 7 basis points from the quarter a year ago.

Non-interest bearing deposits increased $325 million or 5% over the last quarter and increased $1.2 billion or 21% from the prior year third quarter. Non-interest bearing deposits are now 38% of core deposits. Total debt securities of $8.5 billion increased $1.3 billion or 19% from the prior quarter, and are up $4.2 billion or 97% from the prior year third 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 40% of total assets at the end of the quarter compared to 35% last quarter and 30% at the end of ‘20 and 24% a year ago. We will continue to fully invest excess deposits, buying highly liquid and high-quality investments with shorter duration, given current low but increasing rates, with the plan of putting these deposits to work as we continue to grow.

The company’s net interest margin as a percentage of earning assets on a tax equivalent basis for the current quarter was 3.39% compared to 3.44% in the prior quarter and 3.92% in the prior year third quarter. The core net interest margin was 3.17% compared to 3.33% in the prior quarter and 4.02% in the prior year third quarter. Earning asset yields have decreased from the combined impact of the significant increase in the amount of debt securities and the decrease in yields on both securities and core loans. The yield on debt securities ended the quarter at 1.62%. That’s down 12 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 around 1%. The yield on the loan portfolio ended the quarter at 4.86%, down 16 basis points from the prior quarter. We added $1.6 billion in new core loan production with yields around 4.1%, which drove the total loan portfolio yield down.

Given the interest rate environment, our focus continues to be on growing net interest income, which for the quarter, increased $4.6 million less PPP. Non-interest income of $34.8 million declined about $700,000 or 2% from the prior quarter, due primarily to the reduced gain on sale from residential mortgages, which decreased $2.2 million or 14% from the prior quarter. The hot housing market and refinancings slowed down a bit across our footprint. Our biggest concern in the real estate business remains the supply of homes available for sale.

The efficiency ratio was 50.17% in the current quarter, 49.92% in the prior quarter and 48.05% in the prior year third quarter. Excluding PPP, the ratio would have been 53.59% in the current quarter compared to 53.53% in the prior quarter and 50.51% in the third quarter a year ago. Intangible book value per share increased in the quarter from $18.74 to $19.11 or 2%.

Our combination with Altabancorp is proceeding very well. We closed the transaction October 1, a full month earlier than planned as we received all regulatory approvals sooner than expected. I’ve been very impressed with the Alta’s team’s focus on continuing to serve customers and growing the business. We continue to work closely with Alta on the planning for our core processing conversion in March of 2022. Alta has a very good technology platform, and we are studying many products that may be a good fit for our other divisions.

I received a lot of questions about M&A since a number of the recent MOEs were announced. And while we see the MOE banks embracing a new strategy, we intend to stick to our disciplined approach on M&A that has proven to be successful for us. Our focus today is on Alta, and we want to make sure we fully complete our integration before we look for another transaction given the strong EPS accretion that Alta will produce for Glacier. Remember, this transaction produces almost the same EPS as our last five transactions combined.

The Glacier team accomplished a lot in the third quarter. While we are still dealing with COVID in many markets, the team achieved great results. The loan growth we experienced in the quarter was great to see and we think we are very well positioned to close out 2021 strong and be well positioned to continue to grow in 2022.

So that ends my formal remarks. I’d now like Latif to open the line for any questions our analysts may have.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Rulis of D.A. Davidson. Your question, please.

[Jeff Rulis, D.A. Davidson]

Yes. Good morning.

[Randy Chesler, Chief Executive Officer]

Good morning, Jeff.

[Jeff Rulis, D.A. Davidson]

Just a few questions on Alta focused on that and maybe the first one for Tom. Just trying to get a sense for as you get under the hood a bit more kind of the health of the portfolio, given that the bank had done some sort of pre pandemic pruning and just get a sense for as you get your arms around that portfolio in detail, how the credit profile meshes with Glacier.

[Tom Dolan, Chief Credit Administrator]

Sure, Jeff. The portfolio, we’re very pleased with. The pruning they did pre pandemic proved to be a successful strategy for them, and they have continued to show that through their asset quality metrics, which as of today, at the end of the quarter, were 15 basis points NPAs and continues to show positive trends. So what we’ve seen so far, we’re very pleased with. And I think that was accomplished largely because our two credit cultures were very similar. And so thus far, they have been able to fold in quite easy with Glacier.

[Jeff Rulis, D.A. Davidson]

Great. And kind of off that base, Randy, I think the idea at Alta was – had done that pruning and then they were turning to growth. And so same question, I guess, as you engage with that team a bit more kind of the growth potential of that platform just to kind of give us an update of your latest thoughts?

[Randy Chesler, Chief Executive Officer]

Yes. No, we’ve spent a lot of time in Utah. We all have with the team. They are doing a great job focusing on their customers, taking some of the products and services and bigger balance sheet that we offer in getting out to their customers. And we’ve seen against the backdrop of a market that’s very strong, and we still believe a lot of those long-term growth trends that make Utah the number one growth market in the country and number one economic economy on a lot of fronts, they are incredibly well positioned to take advantage of that. They have got a very good team in place in all the right markets. So we’ve seen that – we’ve seen the results of that as we’ve brought them on board, and I think they are very well positioned for ‘22.

[Jeff Rulis, D.A. Davidson]

Great. And maybe a last one, a little more mechanical maybe for Ron, just on the expense front, if you’ve got a general idea of kind of the core base this quarter, if we get out the merger cost. But then as you kind of – what do you think you is settle in run rate on a quarterly basis with Alta, I guess, pre and post conversion? Thanks.

[Ron Copher, Chief Financial Officer]

Yes. Jeff, it’s Ron here. So on the – excluding the merger related, our best estimate for the fourth quarter is $122 million to $125 million. And that run rate will stay probably true for the first quarter and then in the next year and then the second quarter as we begin to really get into the cost savings as we modeled. That could come down, it just depends on how fast we’re going to realize that. In the merger model, as we published, we said we could say 17.5% of their non-interest expense, and that would be over 2022. So it all looks good.

[Jeff Rulis, D.A. Davidson]

Great. Thanks, I will step back.

[Operator]

Thank you. Our next question comes from David Feaster of Raymond James. Please go ahead.

[David Feaster, Raymond James]

Hi, good morning, everybody.

[Randy Chesler, Chief Executive Officer]

Hi, David. Good morning.

[David Feaster, Raymond James]

I just wanted to start maybe on the fee income side. It was nice to see another strong quarter. Mortgage continues to outperform. I just wanted to get a sense of the trends that you’re seeing in mortgage and maybe whether you’d expect to kind of track MBA forecast? And then just any updates on the mortgage outlook, just given the inclusion of Alta and some of the opportunities and capabilities that they bring to the table?

[Randy Chesler, Chief Executive Officer]

Yes. So yes, the – one of the very nice things about Alta is they have very high-quality mortgage business led by a very capable team and leader. So we think that, coupled with what I mentioned before and the strength of those markets, it’s a great opportunity to do well. In terms of the future, MBA right now is forecasting about a 35% drop in origination volumes next year. We don’t – we think we will be maybe off closer to 25% versus this year. And a good part of that is the lift we will get from bringing – from adding Alta on to our platform. And again, in a lot of our markets, we should benefit because we do well in purchase environments. We have strong market share. It’s – if there is any limiting factor, as I noted in my comments, it’s just the supply of houses for sale. So, we are – we think it will be another really good year for the mortgage business.

[Operator]

[Operator Instructions] Our next question comes from the line of Brandon King of Truist Securities. Your line is open.

[Brandon King, Truist Securities]

Hello. Good morning.

[Randy Chesler, Chief Executive Officer]

Good morning Brandon.

[Brandon King, Truist Securities]

Yes. I wanted to touch on the CRE growth that was pretty strong in the quarter and it seems like you gained momentum there, if you could just discuss what you are seeing there in the outlook going forward? And you also mentioned the intense pricing – intense competition from competitors. And are you competing on price a little bit there to get some of that growth? Just wanted more color on that?

[Tom Dolan, Chief Credit Administrator]

Sure, Brandon. This is Tom. The pipeline remains very solid. Obviously, given our markets, it’s going to be centered in series. So, we are happy to see that growth in the third quarter. We definitely are seeing continued pressure on pricing and even more so in some of the larger metro markets, some of the smaller markets where we have controlling market share, we are able to hold pricing a little bit better, which is why I think on average, we are still seeing new production just slightly north of 4%. But for a paper, which is obviously our focus and once deals are north of seven figures, we are continuing to see some pretty strong pricing pressure there. And we are certainly willing to compete there on that side for the right opportunity and the right relationship rather than compromising credit quality. We have not done that nor will we do that. So, I would say the outlook for the fourth quarter, given our pipeline and some of the tailwinds we have with some of the unfunded construction projects that we have booked, I think gives us a lot of momentum going into the fourth quarter.

[Brandon King, Truist Securities]

Okay. Thanks. And then on to excess liquidity management, I know deposit growth remained strong. And I know you are deploying most of that excess equity into securities book. But is there a certain level of cash to earning assets that you are trying to manage to based off the level of deposit growth that you are getting? Is there a certain level that you are managing to?

[Randy Chesler, Chief Executive Officer]

No. I think that we have a certain – we have a ballpark cash range that we maintain on the balance sheet to – for certain liquidity measures we have. But that’s what we would consider our baseline and that’s to meet obligations and more for just business management. But other than that, it’s a function of the ability to reinvest it and how quickly we want to – our read of the markets and how quickly we want to reinvest the cash that we are seeing come in.

[Brandon King, Truist Securities]

Okay. And then also on that note, based off what you have seen recently, are you more confident in the strong growth in deposits, those excess cash balance is staying on the books from customers?

[Randy Chesler, Chief Executive Officer]

Yes. We continue to see the deposits come in always a little more than we expect. Every quarter, we think it’s going to slowdown. And at this point, we don’t see a big catalyst that’s going to drive those deposits out.

[Brandon King, Truist Securities]

Okay. Thanks for answering my questions.

[Operator]

Thank you. At this time, I would like to turn the call back over to Randy Chesler for closing remarks. Actually, I am sorry, sir, one moment. I believe we do have another question in queue. Tim Coffey of Janney. Your line is open.

[Tim Coffey, Janney]

Thank you. Randy, can you kind of talk about the trends in business formation that you are seeing within your footprint? I mean there has been a lot of growth in the population in your states. And I am wondering kind of what you are seeing in terms of business formation and what you are doing to attract some of those new businesses to the bank?

[Randy Chesler, Chief Executive Officer]

Sure. Yes, I think we are just really starting to see that. We always knew that, that would follow the end migration. So, the people really started to come in first. And so we see two things developing now more clearly. One is businesses are coming – relocating in. I will talk about that in a second. And also, we have people – we have businesses looking to expand to meet the bigger population base. So, we have two things really starting to happen. And we are – we see the stress in the service around the footprint in terms of – with more people added just not enough service provider. So, that’s unfolding. And we are starting to see – we are beginning to see that more with warehouse storage building as the first prong of that. I would say the most active of state in our eight-state footprint for new business relocating in is Arizona. They are getting a very good flow of business interested in going to Arizona from California. So, that’s probably our most active market where we are really starting to see those trends develop.

[Tim Coffey, Janney]

And as you start to see these trends progress further, do you think that it could increase your annualized loan growth rate or just results in better credits in the portfolio or mix?

[Randy Chesler, Chief Executive Officer]

Well, we are also looking for good quality. So, I think that’s pretty consistent. It will certainly help with the growth rate. And we are just – we are starting the budgeting process. So, it’s a little early to tell what that growth rate will look like. I think you are already seeing real strong growth start to break out in this quarter. We are going to enter the – or in the third quarter. We’re going to enter the fourth quarter with a lot of momentum. And we will see still a bit early through the budgeting process, though we will know more at the end of this quarter, just what ‘22 looks like. But at this point, I would say the – we are very optimistic about ‘22.

[Tim Coffey, Janney]

Okay, great. Thank you. Those are my questions.

[Randy Chesler, Chief Executive Officer]

You’re welcome. So, anyone else in the queue?

[Operator]

Yes, sir, actually. We have a follow-up question from Jeff Rulis of D.A. Davidson. Your line is open sir.

[Jeff Rulis, D.A. Davidson]

Thanks. Hi Randy. Just had a couple of housekeeping maybe for Ron, looking at the other expense line item, if we exclude merger expenses, that was up linked quarter by a couple of million. Is – any detail on what was in that line?

[Ron Copher, Chief Financial Officer]

It really is a sundry amount, different accounts. There is nothing particular.

[Jeff Rulis, D.A. Davidson]

Got it. And then Ron, the tax rate ticked down a bit, any thoughts about how you closed the year and maybe outlook for ‘22 with Alta on board?

[Ron Copher, Chief Financial Officer]

So, just on the tax expense, I think we will end the year just somewhere between 19% and 19.5%. And it ticked down in the third quarter because of the pandemic. We are pretty significant investor in low-income housing tax credits in particular. And so when you have to amortize the equity, we were using projections from all of the different syndicators that we work with. And when the schedule K-1s came in, we had to true it up. So, that’s a one-time reduction. But clearly, a benefit that showed up. So, 19.1% is where we are right now. And I think we will finish a bit higher if you could even use 19.3%, somewhere in that range. And then for 2022, I would take that to as high as 20.5%, no higher than 21%. The reason I have to give that range, we are looking to put on more tax credits once we were in the past the LOI and the merger agreement, I have been talking to syndicators about putting on more Federal tax credits. Low-income housing certainly, but we are also looking at increasing our new market tax credits and those reduced credits faster. So, depending upon when I can close those, when they are available, that’s the reason for the fluctuation in the tax rate.

[Jeff Rulis, D.A. Davidson]

Thank you.

[Operator]

And Mr. Chesler, the queue is clear, standing by for your remarks.

[Randy Chesler, Chief Executive Officer]

Alright. Thank you, Latif. And well, we want to thank everybody for dialing into the call today. I wish you a great Friday and a great weekend. Thank you.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.