Glacier Bancorp, Inc. (GBCI) Q1 2022 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Glacier Bancorp First Quarter Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions]. As a reminder, today's conference call is being recorded. I will now like to turn the conference over to your host, Mr. Randy Chesler, President and CEO. Sir, you may begin.

Great, thank you, Valerie. 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 Pollen, our treasury, Tom Dolan, our Chief Credit Administrator, and Don Cherry, our Chief Administrative Officer. So we ended the quarter very encouraged by our strong results across the business that are evident in many of the key performance metrics that we'll cover today. Results were better than what we expected given some of the economic uncertainty caused by the biggest quarterly increase in interest rates in decades and steadily increasing inflation. Our leadership position in some of the best high growth markets in the country continues to be a strong tailwind for the company, as we build one of the premier community banks in the Western United States. According to Forbes, the top five states in the U.S. for GDP growth in 2021 were all in our eight-state footprint, Utah, Washington, Idaho, Colorado, and Arizona. I'll touch on the business highlights first and then provide some additional thoughts on the quarter. Net income for the quarter was 67.8 million an increase of 17.1 million or 34% from the prior quarter net income of 50.7 million. Pre-tax pre provision net revenue was 88.8 million versus prior quarter of 87.9 million, an increase of 900,000 or 1%. The loan portfolio excluding PPP loans had very strong organic growth during the quarter up 407 million or 12% annualized. This is a very strong first quarter historically, our first quarters have been a bit more subdued. Net interest income in the quarter on a tax equivalent basis was 190 million. Excluding payroll protection program loans or PPP loans net interest income was 187 million, an increase of 3.2 million or 2% from the prior quarter of 184 million. Net interest margin for the quarter as a percentage of earning assets on a tax equivalent basis was 3.2% compared to 3.21% in the prior quarter. The core net interest margin for the current quarter of 3.07% increased three basis points from 3.04% in the prior quarter. Non-interest expense of 130 million decreased 3.7 million or 3% from the prior quarter. Excluding the 6.2 million of acquisition related expenses non-interest expense was 124 million during the quarter. Core deposits continued to flow into the divisions growing organically by 383 million or 7% during the quarter. The cost of core deposits remained steady at seven basis points. Earnings per share for the quarter was $0.61, versus $0.46 in the prior quarter. Credit quality continued to improve and show strengths in most all measures. We kept our allowance for credit loss reserves flat to the prior quarter at 1.28% of total loans, reflecting our strong credit metrics and our view of the economic outlook. We declared the regular dividend for the quarter of $0.33 per share an increase of a penny per share or 3% over the prior quarter dividend. The company has declared 148 consecutive quarterly regular dividends and has increased the regular dividend 49 times. We completed the core conversion of the Alta Bank division with assets of 4.1 billion, the largest and most complex conversion in the company's history. So core deposit growth continues to be surprisingly strong across our footprint. This is a good example of the value of our long-term focus on core relationship accounts. This quarter, core deposits increased by 383 million or 7% annualized, excluding the Alta acquisition, core deposits increased 2.4 billion or 15% from the prior first year quarter. Non-interest bearing deposits increased 211 million or 11% annualized during the quarter and now account for 37% of core deposits. Total debt securities of 10.1 billion decreased 257 million or 2% from the prior quarter and increased 3.7 billion or 57% from the prior year first quarter. We're pleased to invest more of our excess deposits into loans this quarter, and we continue to purchase debt securities with our excess liquidity. Debt securities represented 39% of total assets at the end of the quarter compared to 40 at the end of 2021. Despite our strong loan growth, our loan to deposit ratio remains low at 64%, giving us plenty of fuel for future growth. Credit quality improved during the quarter with non-performing assets improving to 24 basis points from 26 in the prior quarter. Early stage delinquencies as a percentage of loans ended the quarter at 12 basis points, which was a 26 basis point decrease from the prior quarter. The company's net interest margin as a percentage of earning assets on a tax equivalent basis for the quarter was 3.2% compared to 3.21 in the prior quarter. The core net interest margin for the quarter was 3.07% compared to 3.04 in the prior quarter. The growing margin was driven by higher yields on investments. The yield on debt securities ended the quarter at 1.59% compared to 1.5% in the prior quarter. New investments in debt securities were added at 2.25%. The yield on the loan portfolio ended the quarter at 4.59% down 11 basis points from the prior quarter. We added 1.9 billion in new core loan production with yields around 4.2% which was an increase of about 20 basis points versus the prior quarter. We saw excellent loan growth in our markets with Wyoming, Montana and Colorado leading the growth across our eight-state footprint. We're pleased to see the continued strong performance in commercial real estate lending, growing organically by 235 million in the quarter. New loan production for the quarter was robust, with 1.9 billion in new loans originated. We continue to focus on responsible growth with a through the cycle underwriting lens. We're cautiously optimistic with our low double-digit growth outlook. We've yet to see a material impact of increasing inflation and interest rates on growth outside of the residential mortgage market. Non-interest income of 33.6 million declined 799,000 or 2% from the prior quarter and decreased 6.6 million or 16% from the same quarter last year, due primarily to the reduced gain on sale from residential mortgages. The hot housing market and refinancing slowed down a bit across our footprint. And our biggest concern in the real estate business remains the supply of homes available for sale, increasing interest rates and the increasing cost of housing. We were very pleased to see effective expense control at the divisions. These results are attributed to our unique operating model that empowers the divisions to make operating decisions that are right for their markets, while still delivering excellent results. We continue to wind down the remnants of the PPP program, receiving 108 million in PPP loan forgiveness during the quarter, with 60.7 million of PPP loans remaining. We recognized 3.3 million of interest income from the PPP loans during the quarter and have 1.9 million of remaining fees to be recognized when the remaining loans are forgiven. Our acquisition of Alta Bank continues to proceed very well. We successfully converted Alta over to our core banking system in March. And we are on track to achieve the targeted cost saves in 2022 that we identified when we announced this transaction in May of 2021. We remain very optimistic about the long-term growth trends in Utah. And we're very pleased that the American Legislative Exchange Council ranked Utah the number one state for its economic outlook for the 15th year in a row. The Glacier team got off to a great start in the first quarter, we completed the core processing platform conversion of Alta Bank, the largest and most complex conversion in our history. And the team still achieved record results. We think we are very well positioned to continue to profitably grow in 2022. So that ends my formal remarks. And I would now like to ask Valerie to open the line for any questions that you may have.

Thank you. [Operator Instructions] Our first question comes from Matthew Clark of Piper Sandler. Your line is open.

Wanted to start on expenses came in well below your $128 million to $130 million guide for the quarter. Can you give us a better sense for what drove most of that? And what your updated thoughts are on the run rate outlook from here?

Sure. Ron, do you want me to take them?

Yes. Hi, Matthew. Ron here. So part of it is the compensation areas just didn't grow as much as it could have. If you look at our FTE count, we're down to -- we had three more folks there. And then it really is just the extraordinary control that the division represented. And they really did an outstanding job. I want to commend them again for that. So on the guide, I did say 128 million to 130 million. We think that's really applicable, if we will trend towards that by the time we get to the fourth quarter. So keep in mind, one of the things we've always said is that we're going to maintain the efficiency ratio 54% to 55%. So you think expenses are well controlled and we'll just trend up over the next several quarters. I won't point out also on the Alta acquisition. We got some of the cost base there. But as we said in the last January call, we said that a lot of those expense savings, cost savings will show up in the second and third quarter more towards the back of the year less than in the first quarter. So it's coming together nicely.

Okay, great. And then shifting gears to the loan yields. I think on a core basis, if you exclude PPP, loan yields are down about six basis points to 437 this quarter. Can you give us a sense on where the weighted average rate was on new production this quarter and your thoughts on the loan yield outlook with I think 25% of your loan book repricing this year?

Yes. Given on the production and then on the repricing, maybe Byron, you want to touch on that. I think that was the second part of your question Matt. But certainly, new production, they're coming in at about 420. And that's a little -- that's about 20 basis points better than where we were at the -- in the last quarter. So we're pleased to see that. Byron, do you want to comment on the repricing?

Sure, on the repricing, about half of what we will reprice is indexed to prime. And so as the Fed is active, as the Senate is active this year, quite a bit of lift from that activity. So there are some floors that are constrained a little bit of that. We do have about $300 million worth of loans that are constrained. They need about 100 basis points of rate hikes before those rates are lifted off the floors. And we have about 150 million in loans that need more than 100 basis points of rate hikes to lift above those floors. So hopefully that gives you some context there.

Okay. And then on the securities portfolio, can you remind us how much is truly floating and what the duration is on the portfolio?

Very little is floating in the securities portfolio. In terms of duration, I have the weighted average life in front of me is close to five years. So the duration would be just a little bit up.

Our next question comes from David Feaster of Raymond James. Your line is open.

I just wanted to touch on organic growth, you guys have posted extremely strong results. Just curious if you could give us some thoughts on obviously, CRE has been a huge driver, but just what are you hearing from your clients? And how do you think growth is going to shape up going forward? Is it primarily still going to be CRE driven? And then, just in the prepared remarks it was a bit interesting not to hear Utah being highlighted. Just curious how growth is turning it also, and maybe thoughts on how the pipelines look in Edmonton in the second quarter?

Yes. No, absolutely. I'm going to have Tom comment on that. But I made a couple of comments on Utah. Very strong growth. It was one of our lead states and also noted their recognition as the recognized, number one economic outlook state in the country. So there's, we're very, very enthusiastic, both on what we see now and the future very bright there. Tom, you want to comment on the rest?

Yes. So I'll give a little color, what segments that was coming in and you mentioned CRE, combination of both CRE construction, which was the predominant growth in the construction in the [ADC Bank] [ph]. And then on the term side, with a very healthy mix between the owner and non-owner. The industry was that we're leading that were industrial, warehouse and multifamily are strongest growth. And really is, Randy mentioned, fairly uniform across the footprint with a couple of things outpacing some others, but the in migration that we continue to see, continues to drive the business growth as well.

Okay, that's helpful. And then maybe just touching on credit more broadly, asset quality remains phenomenal, you've got a conservative approach to credit. Just curious, there's a lot of puts and takes in the macro economy, just given the inflationary environment dislocation disruption overseas, just curious, what keeps you up at night, what you're watching closely as you're managing credit, and whether any of the macro issues or other trends that you're seeing is starting to lead you to tighten the credit box at all?

We're certainly in a period of time that I don't think really ever quite seen before. We've seen inflation and rising rates before but we also haven't seen the level of liquidity on our large balance sheet to withstand and absorb a lot of that inflation. So probably what if, as I say that keeps me up at night would probably be portions of the consumer book, which, as you can tell by our portfolios is not a large percentage of that and neither is it a large percentage of our production. I think the consumer would probably be hit the first in terms of the inflationary pressures. So we continue to watch the entire portfolio very closely. But in terms of how we feel prepared to come into this uncertain market, I'm actually quite comfortable. We tightened up some underwriting guidelines about three years ago, when we started to see cap rates dropped to a level that, in our opinion, was a little more stable and that was three years ago. So since then, we've seen a lot more equity into our deals, a lot more cash availability, our dollars balance sheet that can withstand this at least for a period of time.

Okay. That makes sense. And then, maybe shifting gears to deposits, following up from your commentary, I mean, the core deposit has been surprisingly strong and remain strong. Just curious how you think about deposit growth going forward? Obviously, you've got a huge advantage, as we've talked before, about being able to be disciplined with deposit pricing. But would you expect deposit growth to at least slow or maybe migrate more within the book or even potentially start to flow out as you remain disciplined? And just any commentary on your sense of pricing dynamics in the market currently?

Sure. The number one, I think it starts with the foundation that is very strong, we believe in that. Those deposit accounts are spread out over 1500 miles from Montana, down to Arizona, they're mainly small balance accounts, we have almost half a million relationship accounts. And we do focus on getting relationship accounts. These are operating accounts for people, for consumers and businesses across that entire area. So you start with a very, very solid foundation. In terms of what we expect, we expect to see the rate of deposit growth throttle back a little bit. I think we're seeing that already in this quarter. In terms of the beta, though, and the sensitivity, the rates, because of what I described initially and that is that we really focus on these transaction accounts across the large geographic area, both businesses and consumers. We think they'll be very, very stable. And when you look at our history, we certainly experienced than that. The last time rates went up significantly, our deposit really stayed very well, we didn't see a lot of outflow had very little increase in costs. So we expect the same dynamic here. There is so much excess liquidity among many banks, that there's going to be probably a lag effect as well, given how much excess deposits are sitting out there for banks today.

Our next question comes from Jeff Rulis of DA Davidson. Your line is open.

Ron, I wanted to circle back on the expenses. A core of 124, you mentioned, maybe start with, could you quantify the amount of cost savings out of Alta still to come out of maybe against a 124 run rate? If you think there's a million or two to come out of that absent any growth overall?

Yes, I think it'd be like a million to $2 million range there, I would agree with that. Knowing that we modeled 17.5% reduction in their non-interest expense, and we'll get 80% of that say in the first year. Again, just repeating what I said the bulk of that will come through more so in pre-sell in Q2 and a little bit more in Q3 and level out in Q4. So pretty sustained cost savings in our view. Now that we are past the conversion and again, everything coming together nicely.

Okay. Appreciate it Ron and I guess, if I take, 1 million or 1 million out of 124. And I get to kind of 122 and change. And if we talk about getting back to even the low end of the guidance of getting back to 128 to 130 range. I mean, you're still talking about a 5% growth rate after Alta. And I just trying to figure it out, not going to beat you up on doing well on managing costs, I just am trying to figure out as that ramps what else is in the expense run rate that maybe it's adding more FTEs. You said that's been down, but where's the expense growth coming from?

That will be in the people factor. We're having to -- you heard us say, we do more with less. But when you only had three FTE, we're at a point now where, we're going to have to -- in each of the market, each market being different, got to increase the headcount, particularly to where the turnover is at the lower level, not so much in the executive level. So that is primarily where it's going to happen as well, business developments going to go up. We don't do a lot of travel during the first quarter. So I could see that that's going up. Also some amortization of some of the equity, we've plowed into our various tax credit projects, you saw that our tax rate went down. And in large measure, that's because of the additional tax benefits came into the first quarter we will continue to build and with that comes from amortization of the equity is run through non-interest expense for certain tax credits.

Got it. Thanks, Ron. I guess if I still got you on nitpicky questions, but the provision level, I guess, 7 million all in, the actual reserve or the provisioning something inside of that. Any sort of high low. I know, this is a tough question, but just trying to get given your growth, call it 12% or, double digit any thoughts on provisioning level as we transition through the year, a lot can change, but just trying to get a sense for 7 million in the quarter. And kind of where that ends.

Jeff, this is Tom here. Our provision was largely attributed to the growth we saw in the first quarter, I think, as a percent of loans. We feel very comfortable with it, based on what we know today, certainly barring any changes in economic forecasts or portfolio quality.

Okay. Thanks, Tom. And Randy, last question on -- another crystal ball question. Just talking about any real estate concern that you have in your footprint. The fundamentals are fantastic, you've got low supply and demand is very high in migration trends. You mentioned, rising rates it’s got to be monitored on affordability. But any update or thoughts on the real estate within your footprint and any concern there?

Well, I think there's two broad areas, the residential and the commercial. On the residential, and I think Tom kind of touched on this. We're watching that closely. We're making sure exactly the loans that we're putting in our portfolio, the credit quality and the parameters, given the increase in value that's occurred across the entire footprint. So I think that's an area that we're watching very closely. There is a very, very strong demand. So even with higher interest rates, we see a long way back to an area that we would have to start making other changes. And by that, I mean, the market is still so [indiscernible], that higher interest rates just might bring it back to a normal market as a phase one, and we've to see that. So phase one meaning where property sit on the market for 60, 90 days and selling price is a percentage of asking price, we've yet to see that. So we're watching that. But the supply and demand characteristics appear to be still very, very tight and that's probably positive. On the commercial side, we start from a basis where a lot of our markets have not been over built in the past. There's a lot of in migration and demand driving the projects and the use of the projects. So we were watching valuations there as well and cap rates. And that's my comment on, viewing credit with a through the cycle lens. We continue to do that on both sides.

Our next question comes from Brandon King of Truist Securities. Your line is open.

I wanted to touch on CRE pay downs. I know we've heard from other banks saying that kind of slow this quarter with higher interest rates. And I want to know if that's occurred with your portfolio, and kind of how much of that contributed to the strong growth this quarter.

So Tom, you want to take that.

It’s slow down from a historical average, but it's still ahead, one is still elevated, where I would say it has slowed down as maybe refinance to another institution is it's more the case now that the project is -- the project developers are taking advantage of the cap rate environment and selling the project and we may not capture the buyer in terms of financing.

Okay. And then also kind of in that same theme, with interest rates rising, we're hearing about some banks not raising their or actually lowering their spreads to be more competitive. And just from a competition standpoint, what are you seeing in your market since the Fed rate increase?

Yes, spreads have compressed over the last nine months or so. I would say in the last three to four months, though we've kind of that bottomed out. And we're starting to see rates increase not only for us, but also our competitors. And as I've said on prior calls, our pricing competition seems to be more intense in the larger metro areas versus the more rural markets, which are able to set the prices a lot better with less competition, which is why I think we're able to have our average production yield, as Randy mentioned, at 420, which seems to be pretty strong and show some strong growth in the third quarter.

Okay. And then, lastly, with the strong core deposit growth, what does it take around deploying the excess liquidity? Now I know that deposit goes kind of keeps a floor on that excess liquidity getting lower, but with higher rates with securities, are you expecting to buy more securities going forward, any change in that strategy?

I will let Byron comment on that, Brandon. No, but I think at a very high level, no, we're going to continue to reinvest those. I will let Byron give you a little more color.

Sure. Our hope is that excess liquidity can go into the loan portfolio where it’s unable to achieve some pretty impressive growth rate. To the extent that we do have excess liquidity built on the balance sheet. Our strategy has been to deploy that excess cash. And I think we would continue to do that. We have seen with the recent market rates, it has rather lose some compelling opportunities to put that money to work at some pretty decent level. So I would see us continuing the strategy that we have.

Thank you. Our next question comes from Kelly Motta of KBW. Your line is open.

Thanks for the question. It's nice to see Alta showing through with that [closing verdict] [ph]. Just wondering what the appetite is for M&A? I know it's a larger deal for you. So you've in the past said it's a later in the year event if you start to look again, but just wondering if there's any changes there as well as the pace of conversations at the market?

Yes. No. Good morning, Kelly, no, no change. Still the same my glide past for the next transaction.

Great. Okay. Rod, just a nitpicky question for you. I saw the tax rate went down. You mentioned some tax credit investments, do you have what a good tax rate for the year would be?

I would say it's going to be, just assume it's going to be right between 19% and 20%. I've increased that because I think it's going to be a better year than what we have said. You asked me in October last year, I said it’s a lower rate, but I'm expecting that to do better given all the net interest income growth and et cetera. So somewhere between 19% and 20%.

Right. That's really helpful. And then lastly, just on the reserve, it held pretty flat at 128 as a percentage of loans, just wondering if there's still a large like qualitative adjustment in there, if there's conservatism that if things continue to improve then the lost content remains low, if there's additional releases of that, that we could see throughout the year.

Ron, you want to comment on that.

There's certainly a qualitative component, but in terms of a large qualitative component, that's not the case. So which is why we feel pretty comfortable with our the percent of loans that we see today.

Thank you. Our next question comes from Andrew Terrell of Stephens. Your line is open.

Hey, just maybe a more technical question. Just as we think about kind of given the moving rates modeling out, securities yields throughout 2022. Can you just remind us how much cash flow we should expect from the bond book over the next 12 months? And is it fairly kind of ratable throughout that timeframe? And then, I guess, is it fair to think that if the new money yield last quarter was two and a quarter, it's probably moved up from there?

Sure, Andrew, this is Byron. We get about $450 million of cash flow off of the bond book every quarter. So that is about 1.8 billion a year. And that's fairly stay fairly consistent. In terms of new investment, and the rate that we're getting on that, we're looking at opportunities to reinvest at 3.75% to 4%. That if you look at the rate of the runoff, cashflow, versus the new opportunities in the market, we're picking up 225 to 250 basis points over that runoff rate. So very, very helpful to the bottom-line end of March.

Yes, definitely compelling. I appreciate the color. So, I guess looking at the 10-K, the interest rate sensitivity, disclosure. I think you put a note in there regarding the growth in core deposits, and then updated deposit pricing assumptions that improved the stated kind of rate sensitivity. Can you just help us out with what exactly you assume in terms of deposit pricing or deposit beta assumptions within that sensitivity analysis? And then, just I mean, given how great you perform last cycle, just trying to get a sense of maybe not punitive, your assumption might be?

Sure, I can comment on that. So we looked at what our deposit beta was through the last cycle and was very, very low. And so we're assuming that will continue for this rate cycle. So for the first 100 basis points, we have a single digit beta assumption. For the second 100 basis points, I would say low double digit, and then we realize once we get to 200 basis points of rate hike, we will see more traction and our betas will increase. And so modeling does reflect that. But in terms of the first 200 basis points, I think we would expect this rate cycle to be very similar to what we experienced in the last rate cycle. So, I hopefully, Andrew that addresses your question.

No, that's perfect. I really appreciate the color and thank you all for taking my questions.

[Operator Instructions] Our next question comes from Tim Coffey of Janney. Your line is open.

Great, thank you. Thanks for taking my questions today. Randy, I think I ask about kind of the real estate infrastructure in your markets. Given that your migration we've talked about in this call and the success you've had and say the commercial real estate, industrial warehouse and multifamily. Are there legs to this demand cycle? Or do you think you're kind of getting to the point where there is enough real estate infrastructure for the migration?

Yes. No, we do believe there's legs there. And you have to go back to the starting point, there has not been historically the infrastructure built out in these Western markets. So in many of our markets, different than other parts of the country, the existing stock was not there. And so there is demand. And the in migration has been strong. And we've seen pretty tight supply in most of our markets. And so a couple,1000s or so of new entrants in the market tends to move the needle. So, I think the trends look very good. And we're starting from a point where there wasn't a lot of supply and given the amount of inflow, and then balanced off against what now is a lot, much longer building cycle. And to get a project done, we're not seeing an imbalance at this point.

Okay. Good color. Thank you. And then, I kind of understand a bit more about your inflation expectations in terms of how it impacts the markets, right? Because I look at your demographics, four of your eight states have a median household income below the national average, you don't really expect any change to the positive betas, and you're not really seeing too much in terms of credit outlook. So how exactly I mean, is inflation going to impact your markets do you think?

Well, we certainly see wage inflation continuing so that those lower household incomes are going to go up because of the situation with employment, where there is a lot more jobs available than there are people to fill them. And that's really across all our states. But I think we will see that continue to increase. The inflation probably the biggest pain point across our eight states is going to be fuel prices that -- those continue to stay high. That is an expense and given the long expanses we have more -- that's a bigger factor and people's expenses than in other parts of the country. So I think that right now, housing and fuel costs are probably the two biggest pain points for people and we're just keeping an eye on those and what the impact would be, or will be.

Okay. Do you unnecessarily seeing any slowing in retail spend within your footprint right now?

We are not, no.

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Randy Chesler, for any closing remarks.

All right. Thank you, Valerie. And I want to thank everybody for dialing in today. Really appreciate it. I know analysts have a very, very busy season. So we appreciate you joining us today. Have a great Friday and a great weekend. And thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.