Glacier Bancorp, Inc. (GBCI) Q2 2022 Earnings Report, Transcript and Summary

Good day. And thank you for standing by. Welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Randy Chesler, President and CEO. Please go ahead.

All right. Well, thank you 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 Cherry, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer, Byron Pollen, our treasury and Tom Dolan, our Chief Credit Administrator. So we ended the quarter, the second quarter feeling very good about the strength and health of our core business. 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. A few data points about our Community Banking Markets, which include Montana, Idaho, Eastern Washington, Wyoming, Utah, Colorado, and Nevada and Arizona. The Tax Foundation recently published the 2022 tax climate index and all eight of the states in which we operate were in the Top 20 most favorable markets. US Bureau of Economic Analysis measured the gross domestic product growth since 2013 of each of the US states, and seven of the states in which we operate were in the top 20. Once again, our markets continue to distinguish themselves as some of the best places to live and work. I'll touch on some of the business highlights first, and then provide some additional thoughts on the quarter. Net income for the quarter was $76.4 million, an increase of $8.6 million or 13% from the prior quarter net income of $67.8 million. Pretax pre-provision net revenue was $92.9 million versus prior quarter of $88.8 million, an increase of $3.4 million or 4%. The loan portfolio excluding PPP loans had record organic growth during the quarter of $714 million or 21% annualized. This is a very strong quarter, which we will discuss in detail shortly. Core deposits continued to flow into our divisions, growing organically by $84.5 million or 2% annualized. The cost of core deposits was six basis points, a decrease of one basis points from the prior quarter. This is another area that separates our company from the rest that I will discuss in more detail later. Net interest income in the quarter on a tax-equivalent basis was $199 million, an increase of $8.6 million or 5% from the $190 in the prior quarter. Net interest margin for the quarter as a percentage of earning assets on a tax-equivalent basis was 3.23% compared to 3.20% in the prior quarter. The core net interest margin for the current quarter of 3.16% increased nine basis points from 3.07% in the prior quarter. Noninterest expense of $129.5 million decreased $787,000 or 60 basis points from the prior quarter. Excluding the $2.1 million of acquisition related expenses, noninterest expense was $127.5 million. Credit quality continues to improve to near record levels. Earnings per share for the quarter was $0.69 versus $0.61 in the prior quarter. We declared a regular dividend for the quarter of $0.33 per share, which was consistent with our prior quarter dividend. The company has declared 149 consecutive quarterly regular dividends and has increased the regular dividend 49x. Overall growth in the loan portfolio not including PPP P loans was a record $714 million, again 21% annualized for the quarter. We're very pleased to grow the portfolio this quarter while consistently maintaining our strong credit discipline. We stuck to our risk appetite for loan types, we didn't bend on underwriting guidelines and we maintain the risk based pricing discipline. With a quarter end loan to deposit ratio of 66% and increasing deposits, we're happy to have the opportunity to rotate cash out of investments and into loans. The growth in the loan portfolio was driven by continuing growth in our markets and a number of customers accelerating financing plans to lock in loans before anticipated rate increases. Our gross new loan production for the quarter before payoffs was a record $2.3 billion, a 27% increase -- gross new production of $1.9 billion. Given the strength of our markets, we saw broad based contributions to this growth made by each of our divisions across our eight states. Credit quality improved during the quarter with nonperforming assets to bank assets improving to 16 basis points from 24 basis points in the prior quarter. Early stage delinquencies as a percentage of loans ended the quarter at 12 basis points compared to 12 basis points in the prior quarter. About 80% of the commercial loan growth was from the existing commercial loan customers, where we have a very good understanding of the quality of the borrower and the credit. We continue to focus on responsible growth with a through the credit cycle underwriting lens. We remain very optimistic about the future of our markets and the appeal of our model with a mid to low double digit loan growth outlook. That being said, we are well prepared in the event of an economic downturn with strong capital, strong reserves and a very healthy franchise which will continue to generate high quality earnings. Core deposit growth was strong across our footprint as the team continued to maintain existing customer relationships while also building new ones. This quarter, core deposits increased by $85.5 million or 2% annualized. Year-to-date deposits are up 4% annualized. Noninterest bearing deposits increased $71.3 million or 4% annualized during the quarter and now account for 37% of core deposits. And our cost of core deposits in the quarter dropped by one basis points to a total of six basis points. The net interest margin as a percentage of earning assets on a tax-equivalent basis for the current quarter was 3.23% compared to 3.20% in the prior quarter. The core net interest margin was 3.16% compared to 3.07% in the prior quarter. The core net interest margin increase of nine basis points in the current quarter was a result of increased core loan and investment yields. The tax-equivalent yield on debt securities ended the quarter at 1.81% compared to 1.66% in the prior quarter. New investments in debt securities were added at a tax-equivalent rate of 3.55%. The yield on the loan portfolio ended the quarter at 4.34%, down seven basis points from the prior quarter. However, the core loan yield of 4.41% increased seven basis points from the prior quarter, core loan yield of 4.34%. We added over $2 billion in new core loan production with yields around 4.5%, which was an increase of about 39 basis points versus the prior quarter. We have now reached an inflection point with both our investment and loan portfolios, where new investments and new loans with higher yields are increasing the portfolio yields. This will drive margin expansion through the rest of the year. Noninterest income of $28.3 million declined $5.3 million or 16% from the prior quarter, primarily due to the reduced gain on sale income from residential mortgages. Gain on sale of residential mortgages of $5 million for the current quarter decreased $4 million or 45% from the prior quarter. The rise in interest rates has a substantially reduced residential mortgage and refinance activity. Rising interest rates are taking a toll on the residential real estate market. As the NBA now forecast the market in 2022 that will be down by 40%. We expect our business to reflect the same trend. Excluding the second quarter acquisition expenses, noninterest expense was a $127.5 million. We continue to see very effective expense control at divisions. The increase in our expenses was driven primarily by corporate technology service firms that were needed to bridging staffing gap while we brought on new hires. The Glacier team did another great job in a second quarter. We successfully managed a record level of new business while we work through a very volatile interest rate environment. The health of the Glacier Bancorp franchise is very strong, with a robust capability to source high quality loans, funded with a best-in-class stable and sticky deposit franchise. We are very well positioned to continue to grow in 2022 and set the stage for a strong 2023. So that ends my formal remarks. And now I'd like Latonia to please open the line for any questions that our analysts may have.

And our first question comes from Matthew Clark of Piper Sandler.

Hey, good morning, guys. Maybe starting on the deposit growth kind of outlook from here, 2% annualized 4% I think year-to-date. I guess how does -- what is your pipeline look like on the deposit side? And do you think you can actually maintain growth this year?

Sure. Yes, we're very happy to see the growth that we did. Experience, year-to-date and I think, Byron Pollan, our treasurer, we've obviously spent a lot of time looking at that. So maybe Byron you want to comment on the outlook?

Sure. From that balance expectation, I think we're looking for deposit balances to be roughly flat. We could see some attrition and some rate sensitive balances run off. But we are willing to let some rate sensitive balances go. We are not going to chase rate in this rate cycle. And we think we'll be very successful being able to keep our deposit costs flat. If you look back to what we were able to achieve in the last rate cycle, we were very successful at keeping our deposit costs down. We expect to be able to achieve the similar success this time around. We don't see any reason to deviate from that strategy. So I think we're looking for balances to be roughly flat from here on out.

Okay, great. And then the loans and securities being accretive to the portfolio from here. Do you happen to know or happen to have the monthly average margin in the month of June.

We will have to get back to you with that.

I don't have that right in front of Matthew, we can get that to you.

Okay. And then just shipping expenses. I think last quarter, we talked about kind of a glide path to fourth quarter run rate of $128 million to $130 million just want to get your updated thoughts on the outlook there too.

Yes, Matthew, this is Ron. As Randy said in his remarks, if we remove the merger related expenses. So we have $127.5 million which is up $3.4 million compared to where we were at the first quarter. And I want to address that. The bulk of that call it $2 million, $2.1 million was in the corporate technology service firms as we were hiring, looking for people to help us. We had to hire the firms to help us with our data warehouse that cuts across all of our technology platform. So what we expect is that is a temporary use of those folks. That expense would come down just by way of example, say a $1 million, well, what's going to, you're going to see it, you're going to see a rotation other expenses outside firms will come down, but compensation will grow. So when you put all that together, I'm comfortable saying that in Q3, the range would be from, say, $127 million to $128 million. And that is consistent with what I had guided in the first quarter and we repeated would be $128 million to $130 million. So got there a little quicker, but we wanted to keep engine going.

Great. And then just on the loan growth outlook, just want to clarify your comments, Randy, it sounded like mid-single digit to double digit. Is the outlook and any additional color on where you expect the slowdown to occur? I assume it's somewhat commercial real estate related, but in resi, but just any additional thoughts there too.

Matthew, this is Tom. The outlook we gave at the beginning of the year with low double digit. I think we've moved that up to low to mid double digits. I think we're probably looking at somewhere between 12% and 15% for the year. So which obviously is a slowdown in the second half of the year, which is consistent with what we're seeing in our pipelines overall, and as Randy mentioned in his comments, we had a lot of pent-up demand, right at the beginning of the movement in the rates, folks trying to get their deals in while they get it at a little bit more reasonable rate. So I think for the second half of the year, we'll see slower quarterly growth, but should still kind of finish off the year somewhere between that load of it double digit.

Okay, and the -- is that excluding PPP? I just want to double check.

Yes, that would be excluding PPP. We only have I think $60 million of PPP less, so almost not a factor anymore.

Yes. Just thinking about the comparison to last year. Thanks.

Our next question comes from David Feaster, Raymond James.

Hey, good morning, everybody. Just want to follow up staying on the growth front, sounds like we did have some pull forward of demand. I'm just curious how the pipeline stands as we head into the back half of the year, maybe how the composition has changed. And just any thoughts on the pulse of your clients at this point? Are you starting to see some more trepidation just given the economic outlook, just any commentary on that would be helpful?

Hi, David. This Tom again. Pipelines are coming down, I, if I had to put a percentage on it, I'd say that they're down by about a third of where they were towards the first couple of quarters of the year. And to your point, you hit right over head, where borrowers were trying to get ahead of the rate cycle a little bit. So moving forward from a trepidation standpoint, there's certainly some concern out there with our borrowers with what impact, long-term impact interest rates and inflation are going to have. But when the metrics make sense, in terms of the return, they're looking for their projects, they're still moving forward, regardless. So I would call our pipeline today still very healthy. I would say the prior several quarters was quite frothy. But we're still maintaining a pretty healthy pipeline. And the growth that we're forecasting for the latter half of the year is quite frankly probably a little bit more normalized.

Yes. Okay. That makes sense. And then maybe just digging into CRE a bit. Obviously, that was a huge driver of growth this quarter. Just curious are there any segments where you're seeing more demand or better opportunities? Or is it markets? And then as we look at, as we look forward, obviously, there's some headwinds in certain sectors right, and higher rates are weighing on cap rates. I'm just curious as we look at CRE, maybe are there any segments that you're more focused on that you see better opportunities? And conversely, are there some that maybe feel frothy or that we might be avoiding?

I wouldn't say we're avoiding any particular industry just by nature of the industry. We really look at every deal on a case by case basis and look at the totality of requests including how much equity is coming into the deal, how strong our mentors are, et cetera. So for example, and I've mentioned this on prior calls, we underwrite is one of our components to debt yield which -- where cap rates have come in the last couple of years as they come down as a result of our debt yield requirements that ultimately required for cash equity into deals. And coming into the pandemic, our borrowers are in pretty good shape. And with the significant migration, a lot of our borrowers have become even stronger with the demand characteristics we see throughout the footprint in a multitude of segments from multifamily all the way through various series segments, including warehouse industrial. We've seen the demand pretty steady across a lot of different segments, but ultimately, we've seen more cash equity at some.

Okay. And then maybe just touching quickly on the securities book just kind of taken the deposit commentary and the growth outlook together, would you expect that the securities books probably peaked here just given the organic growth outlook and cash flows probably reallocated towards loans, and then the new securities that you are putting on, just curious what you guys are buying or restarting to shorten up duration, just any commentary on that would be helpful.

From a balanced perspective and the securities portfolio, I do think it’s peaked and so likely to see some remix where that securities cash flow coming in will be allocated to the loan portfolio. In terms of what we're buying, it's very limited right now, so I don't know that we're really shortening duration. But for the most part, what we're buying is kind of targeted pool CRE related to this.

Our next question will come from Brandon King of Truist Securities.

Hi, good morning. Yes, so I wanted to touch on kind of on balance sheet growth, with strong loan growth in the quarter and deposit growth lagging. And I noticed that borrowings increased a bit and with the outlook going to the second half of the year with slower loan growth where deposits remain flat. I am wondering where is the appetite to use borrowings to fund loan growth in these, there is a certain limit to that to where you can play some kind of slow loan growth further to constrain as far as the amount of borrowings from the balance sheet.

Brandon, this is Byron. And I can address the borrowings. So I think what we're seeing here is just a temporary mismatch and the timing of cash flow. And so as we see, we did have some very strong growth in the second quarter with lighter deposit growth, we're backfilling that with a couple of things. One is the runoff of the securities portfolio that's funding some of the loan growth. But also, we are using FHLB advances to kind of plug any gaps. We do think that somewhat of a temporary cash flow mismatch. And so as we progress through the year, likely to see some of that security, certain security cash flow be able to pay down those short-term borrowings.

Okay. And could you remind us again with the cash flow ways of securities portfolio, what the outlook is over the next year [Inaudible].

We're getting about $1.5 billion a year. And so that breaks down to about $375 million a quarter, it has closed a little. I think previously we were looking at about $1.8 billion a year. That's moderated to about $1.5 billion a year. So that, I do expect that will be a consistent amount of cash flow through the rest of the year.

Okay. Great. And then on the efficiency products, I'm curious be with the growth expected and top line growth in NII, I know you manage the company to 52% and 54% efficiency ratio, but I'm wondering if there's a potential for that to kind of chop the lower to cost of the 50% over the next year, is that a potential?

No, Brandon, I think that 54%, 55% range is one that we intend to stick with. We'll revisit it maybe towards the end of the year. We've got a lot of initiatives in place that will address efficiency. So some of this will, we'll revisit, but for right now we feel like that. That's a very solid range that we'll continue to be in.

Our next question comes from Andrew Terrell with Stephens Incorporated.

Hey, good morning. Hey, I apologize if I missed this in the prepared remarks. But did you provide an expectation for mortgage banking for the year?

No, I did say that NBA is calling for a 40% drop in the market. And that we're expecting similar trends in our business, but I think Ron can give you a little more color. We've talked about it with the gains. That's obviously what's driving the noninterest income. A big part of it, but I think Ron can give you a little more color. If that's your question, Andrew, to try to fine tune that a bit.

Yes, that would be very helpful.

Okay, Andrew. Yes, Ron here. So you saw the growth in the residential portfolio in the second quarter was 12%, 48% annualized. And compare that to the first quarter was 7%. So the gains were down because the portfolios, the higher amount of loans, and that was more due to the, what I'll call the disruption of a sudden spike in interest rates, whether you're looking at a fixed rate product [Inaudible]. And so we elected chose to help our customers get the mortgages closed quicker. So that resulted in putting those into the loan portfolio, we also have, we can't sell construction loans. So you'll see some of that growth being in there as well. But coming to the outlook, we would see that our growth in that portfolio would be more close to the first quarter run rate 7%. But then getting to the gain on sale. So we had $5 million in the second quarter, we could see that stepping up $7 million to $8 million in each of Q3 and Q4. And then that's how we'll get to what Randy mentioned, from the NBA perspective.

Okay, great. That's, it’s very helpful, I appreciate it. And then just given the kind of really quick shifts we've seen in kind of the mortgage market, I'm curious one, when volumes are really high back in 2020- 2021. Did you alter staffing or anything within your mortgage division, and then kind of going forward in a more kind of normalized mortgage market. Any changes you're looking to make in the business?

Yes, no, we're very happy with our mortgage business. This is a core offering for us being community bank to serve the markets with a high level of service. We are getting more efficient there. And we have allocated as the volumes have changed. Our approach is more we reallocate those people within the company so you can see our FTE quarter-to-quarter is flat. Part of the reason for that is we're able to take reallocate people working in the mortgage business and have them reallocate to other parts of the business. So we are getting improving efficiency and expense management through really managing in that way.

Our next question will come from Jeff Rulis of D.A. Davidson.

Thanks. Good morning. Really just a question on maybe just a couple of housekeeping items on the maybe just the tax rate expectations on that and then I missed the new production loan yields this quarter versus last.

Yes. Jeff, Ron, here. So let me speak to the tax rate. I said last quarter that it would ramp up somewhere between 19% and 20%. I could see it reaching, it'll be a ramp up hitting say 19% to 19.5% just the range that little bit we get closer to the year. So that's the outlook.

So our new production this quarter. We have new production on loans on the, we're right around 459. And that's about 39 basis points over the prior quarter.

Got it. Thanks, Randy. And Randy, just switching gears, I think economic concerns and a market correction, I think leads to some M&A pause by nature. But any kind of update on conversations on that front? And I guess your appetite to seek partnerships.

Sure. Well, our time, our outlook remains the same. I think we did -- we have been saying we wanted to get through the Alta conversion, make sure that that went well. As well as making sure number of technology projects we have precede all that's gone really well. So we talked about at the earliest end of the year, and/or next year that we would make an announcement. The one thing that I think is obviously changed, and certainly our view on credit. I think we're going to be take a deeper look, given some of the uncertainty there. But in terms of our interest in pursuing that as a strategy that hasn't changed.

Thank you. I would now like to turn the conference back over to Mr. Chesler for closing remarks.

Right. Well, very good. I appreciate the questions. I know it's a busy season for our analysts. So we appreciate you taking the time with us. And as always, asking some great questions. I want to thank everyone else for dialing in today and hope you have a great Friday and a great weekend. Thank you.

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