Glacier Bancorp, Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Glacier Bancorp Fourth Quarter Earnings Conference Call. . I would now like to turn the conference over to your host, Mr. Randy Chesler, President and CEO. Please go ahead.

[Randall Chesler:]

All right. Thank you, Angela. Good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; Tom Dolan, our Chief Credit Administrator; and Don Chery, our Chief Administrative Officer. Yesterday, we released our fourth quarter and full year 2020 earnings, and today, we're ready to review those results. The fourth quarter and full year results really demonstrate the quality of the Glacier team, the strong core of the company and the attractiveness of our business model. We are navigating through the ongoing pandemic extremely well, and I'm really 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, leadership and service to their communities that they have demonstrated this year.

[Operator:]

. Our first question comes from the line of Matthew Clark with Piper Sandler. And your next question is from the line of Jeff Rulis with D.A. Davidson.

[Jeffrey Rulis:]

Could you hear me okay?

[Randall Chesler:]

Jeff, yes, we can.

[Jeffrey Rulis:]

Okay. Great. So Randy, just looking at - nice to scratch out some organic growth in typically sort of quiet the back half of the year, back last quarter. But interested in your thoughts of organic growth opportunity and maybe narrowing that down to kind of areas of the footprint that you think might be leading the way in '21? And just frame up overall, what you think your growth expectations for the year would be.

[Randall Chesler:]

Yes. There are parts of the footprint that are having more organic growth than others. We think we will have low double-digit growth next year, somewhere around 4% to 5%. The - some of the markets is - particularly Arizona, just have an incredible inflow migration, particularly from California. They're getting almost half of the out-migration in that state. So they are extremely well positioned for some very solid growth as well as our business in Reno and Nevada continues to gain from the out-migration. So we expect to see some very, very strong growth. And the rest of our footprint, the growth looks very solid. And so among all our 8 states, we don't have a laggard other than a couple of states that we think will probably be a bit stronger as we move forward. The other one is Colorado, as COVID - as the COVID circumstances improves, that's a market with a lot of very, very attractive business. Circumstances that I think you'll see - as companies want to start to move, you'll see Colorado, and particularly Denver, respond very well. Rest of our markets are very solid, too. Montana, continues to do very well. Idaho continues to do very well. Even Wyoming is perking along. So we're - we feel good about all our markets and then with a little accent on those markets that I went through.

[Jeffrey Rulis:]

Sure. Appreciate it. And then just kind of broadening the - from organic to acquired. More specifically on M&A and thoughts on - as we kind of crawl out of this eventually, do you think - what do you think seller price expectations are from a price discovery? And I'm guessing you've had maybe sporadic check-in points with maybe some - a few banks, but just thinking about - do you think that's going to be a big impediment as you look to M&A or is it a pretty rational group, and you think once we open up, you could see some activity?

[Randall Chesler:]

Well, yes, I think there's a number of factors in M&A. And yes, I do think they're a rational group that will respond to the market data. But I think we have to take a step back. M&A really was in Hibernation for most of 2020 due to the pandemic. It's starting to come out of that. We are - we've had - we have a number of conversations. So I think we have some good kind of real-time indication of where people are. I think that we've reengaged with folks. So people have been so very focused on their business franchise with everything going on that I think now they've just recently taken a step back and over the last couple of months and reopened the door on M&A. So we've got a lot of good discussions. I think there'll be a couple of factors in '21 and '22. Number one, I think we're going to see more people trying to get into the M&A and probably some banks that are less experienced in it. And so I expect it to be a little more crowded. I do expect there could be some price variability because of the inexperience of some of the people that I would expect will get into the market. But in the end, I think the same things that have made us very successful in the past will be in play in '21 and going forward. Number one is the quality of our currency, extremely attractive to sellers. Number two, is our business model where we offer extremely unique opportunity for a bank and maintain a lot of its identity and people and, as a result, have a transaction where the community isn't disrupted and actually better served as a result of it. So very unique that most other companies can't do. So I think it's going to start to heat up. We're going to maintain our very disciplined approach to M&A as we always have. And we're going to engage in a lot of the discussions. But probably a little period here initially where the price discovery has to occur. But part of that's the job of the investment banker to sit down with a seller and talk about valuation. And I think with those discussions, that will really help guide sellers to pricing that I think is really fair in the marketplace.

[Operator:]

. Our next question is from the line of Michael Young with Truist Securities.

[Michael Young:]

I wanted to maybe just ask on net interest income. I heard the comments about the NIM pressure. I think that's something we're seeing generally across the industry, and it's incredibly difficult to predict with both PPP and purchase accounting accretion and kind of balance sheet movements that are going on. But as we just think about sort of the NII dollar trajectory from here, maybe if it's easier to talk about on a core basis, kind of ex PPP. Do you have an outlook on kind of that? And can we trend higher as some of the extra liquidity is deployed into securities? Or do you plan to just kind of hold that liquidity and wait for the growth to return?

[Randall Chesler:]

Yes. I'm going to ask Ron to give you a little more detail there. We've had a lot of discussion about it. Obviously, net interest margin is going to be under pressure because of the rates. But net interest income is really what we're focused on because the margin can go down, but net interest income is what drives EPS and growth in the company. So Ron, do you want to give a little color to that question?

[Ronald Copher:]

Yes. So the upward trajectory will occur to the extent that we can have the organic loan growth, and I'm going to segue in a second to PPP. But if we can grow the organic loans, and we can get yield to, say, 4%, you'll see some trajectory going up there. But realistically, if the deposits continue to come in and whether that's 5% growth, 10%, that depends upon stimulus and a whole bunch of other factors. We will continue to put that into the investment portfolio. And so that - you've observed that the loans are certainly - they're down as a percentage of our earning assets. Our investment securities are up. But we'll put that money to work. And so our net interest income will expand. Let me just talk, though, about - so the - we've got the PPP round 2 - round 1. We had 37% of our loans forgiven, got $910 million remaining. And so we think that forgiveness will occur primarily in this first half, and that's a net positive. Coupon is nice. But getting those processing fees and we're averaging 3.75%, that's real positive. And then, of course, we're already underway with the second version of the PPP program. So that will help. But we think forgiveness on that program would occur likely more in the fourth quarter, and it could range from 40% to 60%. We don't know. We know it's going to be easier. We know there's more eligible expenses. So with that all in mind, yes, there's definitely upward trajectory of our net interest income.

[Michael Young:]

Okay. That's helpful. And Randy, I guess, the flip side of that equation is kind of managing the company, the expense base and kind of what you're talking to the various presidents about as a result of kind of the outlook for the year. So maybe could you just talk about the messaging and maybe what the goals are maybe from an efficiency ratio standpoint, given all the moving pieces on revenue?

[Randall Chesler:]

Yes. We think efficiency is going to be a very, very important measure. It is the most prominent part of our compensation plan. So I think that can answer part of the question about focus. And so yes, we think that, that's an important lever. We still intend to be in the same range that we talked about last year, 54%, 55%. And that gives us good opportunity to - we think it's a good efficiency rate and also gives us an opportunity if we are able to overachieve that to invest back in the business. So we're - 2021 still targeting the range of 54%, 55%.

[Michael Young:]

Okay. And maybe just last one for me just on those investments. I know with pandemic and kind of with some of your footprint maybe being shut down, but some of it not, have you kind of realized any areas of investment that are needed? And what are the plans for 2021 there?

[Randall Chesler:]

So, Michael, we lost a little bit of your question. If you can reask it, we would appreciate it.

[Michael Young:]

Yes, sure. Sorry about that. Can you hear me now?

[Randall Chesler:]

It's okay. Yes.

[Michael Young:]

Okay. So I was just asking about kind of the areas of investment in 2021, if they're more technology-focused, given maybe some things that were raised through the pandemic and some shutdowns or if there are going to be more people and lender hiring kind of focus?

[Randall Chesler:]

Yes. We continue to invest in technology across the entire company in ways that we think we can improve either internal process and reduce expense and improve control and on the business side. So we have a number of investments, some are geared towards improving the customer experience in terms of opening accounts. We've made that a lot easier and quicker and virtual. So people, especially in this environment, can do it without coming into a branch and quickly. We've also invested in our mortgage business technology to set the stage for further growth and better control. We've invested in some enhancement to our payment services products. So those are just some of the examples, Michael. But we really - when we think about investments, number one are any kind of control items where we feel we can reduce risk or high priority, and then revenue-enhancing investments are also prioritized. So to the - we have our top 10 initiatives every year, and we're going to stay focused on those - some of those I mentioned in response to your question. But those are the areas that we like to make investments in, and again, staying in that 54%, 55% range, we don't really follow kind of a big cliff investment strategy where we take a big dollar investment. We do these in bite-size pieces, which we like because we can control the investment. We can see the result. We can make sure the things are working the way we like, and we feel like - and we have seen that we get a very good result by following that process.

[Operator:]

Your next question is from the line of Jackie Bohlen with KBW.

[Jackie Bohlen:]

Randy, I wanted to stick with expenses. But looking more at the run rate in the fourth quarter and kind of stripping out what may have been unique starting with that other expense line item. And I know that in the third quarter, you had a little over $2 million unfunded commitment expense, and that's now - was small in the quarter, but it's captured in the provision. So if I normalized for that, and then I've also got in my notes that you had about $2 million in third-party consulting fees. It looks like that line item was up quite a bit this quarter. So I'm just wondering if there was anything you unique in there that won't be repeating next quarter.

[Randall Chesler:]

Yes. There's what I would call a lot of clear-the-deck activities in there that we think we got some expenses incurred in there that won't be repeated. But we wanted to clear out. So there were some product expenses and legal expenses, a combination of many items in there. But if I had to categorize them, I would say, onetime expenses and kind of clear the deck. So we start '21 with as fresh a slate as we possibly can.

[Jackie Bohlen:]

And do you have just a roundabout estimate of how much that might have amounted to in the quarter?

[Randall Chesler:]

Yes. I think that I'm going to ask Ron to cover that because I think your question gets that kind of our run rate expectation for '21. So I think he can answer both of those for you.

[Ronald Copher:]

Yes. Those items are roughly $3 million to $4 million, if I recall. I do want to comment, though. On the $2 million of third-party consulting expenses over in the third quarter. I didn't know if you were putting that into fourth...

[Jackie Bohlen:]

Yes. Yes, I got it in the third.

[Ronald Copher:]

Okay. Great.

[Jackie Bohlen:]

Okay. And then I guess also, which leads into the - it's more of the run rate question because, yes, Randy, that's what I'm getting at it. Just thinking about compensation. And I know there's been some push and pulls in terms of incentives, given the changing environment between early this year and later this year. So just want to see what a normalized run rate would be for compensation next year, understanding that we're going into the first quarter, which will be seasonally high?

[Randall Chesler:]

So Jackie, you're - the connection blurred a little bit there, but I believe you were asking about the run rate of expenses, and there was a question about compensation. But maybe, Ron, you want to just talk about general run rate, and then we'll see if - Jackie, if you have any other questions.

[Ronald Copher:]

Yes, Jackie. So on the compensation, let's use $72 million for the comp because we're going to have some higher calories people, et cetera. So that would be fair. But the important thing, really more important is that when we originate the PPP loans like we did in the second quarter, particularly, we're going to have some compensation expense that's going to be pulled out of compensation. It then gets added to the loans, and we then amortize that as part of the yield on the PPP loan. And so just ballparking where we think, we're going to have less demand, we think, for the second round of PPP loans, and that number could range anywhere from $4 million to $6 million that will come out of compensation. Again, that's just so you see it, that the run rate for the comp would be $72 million.

[Jackie Bohlen:]

So just so I understand clearly, does that $72 million already includes the reduction of $4 million to $6 million? Or would that $72 million temporarily decline to $66 million to $68 million.

[Ronald Copher:]

Temporarily declined. Thank you. Good clarification.

[Operator:]

Your next question is from the line of Matthew Clark with Piper Sandler.

[Matthew Clark:]

Do you have any cost saves left from your most recent deal to be realized?

[Randall Chesler:]

Cost saves on M&A?

[Matthew Clark:]

Yes, from the SBA's deal?

[Randall Chesler:]

I don't know. I think that a lot of our - certainly, in Nevada, and in Arizona, our combination of - in Arizona, the foothills with the State Bank of Arizona has been done. We've converted it as part of what we tried to recognize this year to clear out any kind of acquisition expense. Cost savings. They're going to be very efficient because they picked up a lot of scale, specifically in Arizona as they've gotten bigger. But the cost saves as a result of the acquisition, I would say that we've recognized that, and that business now is positioned well as a complete bank and configured in a way that we think it needs to be to go forward.

[Matthew Clark:]

Okay. Great. I just had some additional savings in my numbers, so I'll take It out. Okay. And then do you happen to have the weighted average rate on new loan production this quarter as well as kind of the weighted average rate on new securities so we can get incremental margin going forward?

[Ronald Copher:]

Yes. This is Ron here. So the incremental rate on the loan production in the fourth quarter, 4% is really where it was. And again, I say that because the bigger the loan, the tighter the quality. But the smaller loans, it would be higher than that. In fact, I would say it really came in around 4.15%, if I look at my notes here. 4.15%, just to clarify. And then on the investment securities. Gosh, I wish it was higher. If we can get 90 basis points, we're celebrating up here, high-fiving everybody, and that's just the market today. And to Randy's point in his remarks, we're staying short and keeping the quality. Primarily, we're investing in the 10-year dated maturity, residential mortgage-backed security, and we get good cash flow off of that and trying to catch - be ready when rates rise.

[Matthew Clark:]

Okay. Great. And then just any change in the way you're looking at tax credit investments with the change in the administration and whether or not that might cause your tax rate to go up a little bit going forward or not?

[Ronald Copher:]

We are. So the nice thing is that the yields that we're getting on the low-income housing and especially the new markets has been really pretty good. And so we've - when we make an equity commitment, we haven't even necessarily booked all those credits. So you're going to see more credit coming on in the future, irrespective of what's going on with the current administration because we make these investments over a 2- or 3-year time horizon. So you're going to see those investments come on in - and like for instance, you noticed that our tax rate for 2019 was 19%. Then it was also 19% for 2020 because we significantly grew, even though we significantly grew our income, I'm going to say, taxable income, book income, et cetera. We picked up the munis. So we're going to get a lift there on the tax-equivalent yield. We'll also get a lift because we've gotten more of these tax credits. So it bodes well for us. I think we're pretty tax efficient. I'll even go out and say that I think our tax rate for '21, maybe it will be 20% because of the things that we've made investments. And again, the munis we put on in the first quarter of last year and then more so the continuing buildup of tax credits.

[Operator:]

And your next question is from the line Michael Young with Truist Securities.

[Michael Young:]

Just wanted to follow-up on kind of the fee income side, in particular, the gain on loan sales. Obviously, the expectation is for volumes in the markets to be down a little bit next year with refi trending lower. But I would imagine the work-from-home move to your areas is a positive, and you guys have been making a lot of investments in that business. So should we expect that to, I don't know, track industry trends, or with market share gains, should you do better than that? Just any outlook on that would be helpful.

[Randall Chesler:]

Sure. Yes. No, we've - so we think the mortgage business will probably be in line with the mortgage bankers' forecast of around a 25% decline in business. We think our gains will probably be off a little more than that for a couple of reasons. One is our markets are stronger than the national market. Unfortunately, we don't have the inventory. So as they shift into purchase, in many of our markets, we just don't have the houses to sell. And so that's probably going to hold us closer to the national forecast on business. The other shift is as the business shifts from less - more purchase and less refi and the overall business declines a little bit in the marketplace. Our ability to get a premium pricing may deteriorate a little bit. So we're expecting a little less gains on the mortgages. So the gain will be off, maybe a little bit more than what the MBA is calling for in mortgage originations.

[Michael Young:]

Okay. Perfect. Yes, that's kind of what I was expecting. And then maybe just on the reserve or allowance from here. The day 1 kind of CECL reserve for you all. You were at kind of a 1.50% sort of rate, 1.5% of loans. So as PPP winds off and we kind of get beyond this pandemic impacted macro outlook, et cetera. Is that where we should still expect that reserve level to trend down towards? Or would it be lower than that due to some mix shift or any other indicators?

[Randall Chesler:]

Yes. Let me - I'm going to ask Tom to give you some color on that. I'd just tell you that right now, where we're positioned, and right now, what we see as the economic forecast. We just don't expect a lot of change in that level until we get a lot more certainty in the look forward. But Tom, do you want to add some color to that?

[Tom Dolan:]

Yes, not too much more to add. But we evaluate the economic forecast on a regular basis. And until there's a material change in the future, we just - we don't see a lot of reduction in the allowance. But certainly, as we saw this last year, a lot can change quarter-over-quarter. But given what we know today, I don't foresee any significant changes.

[Operator:]

And I'm showing no more questions at this time. I would like to turn the call back to management for closing remarks.

[Randall Chesler:]

All right. Thank you, Angela. Well, I want to thank everybody for dialing in today. For those of you not in the West, all of our ski resorts are open, Montana, Wyoming, Idaho, Utah, Colorado, Nevada and even Arizona has ski resort with a lot of snow. So some with new snow and others with snow on the way. So it's a great time to come out and visit. The other thing we'd like to say is please keep your COVID guard up. We still have ways to go before this virus is behind us. And we shall - I hope you all have a great day and a wonderful weekend. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.