Glacier Bancorp, Inc. Q3 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Glacier Bancorp Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Randy Chesler, President and CEO. Please go ahead.

All right. Thank you, Victor, 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 Treasurer; and Tom Dolan, our Chief Credit Administrator. Our leadership position in some of the best high growth markets in the country is a strong tailwind for the company as we continue to grow. A few new data points about our Community Banking Markets, which include Montana, Idaho, Eastern Washington, Wyoming, Utah, Colorado, and Nevada and Arizona. For the 15th year in a row, Utah's economy has been ranked the top of the United States by Rich States, Poor States. Nevada has recovered all of the jobs lost during COVID-19 and has reached an all-time high of 1.4 million jobs, 3,000 more than the previous peak in February of 2020. Rich States, Poor States gives Wyoming 10th place in the U.S. for its economic outlook due to economic conditions and favorable taxes. 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 $79 million, an increase of $3 million, or 5% from the prior quarter net income of $76 million. Pre-tax pre-provision net revenue was $106 million versus prior quarter of $92 million, an increase of $14 million, or 15%. Pre-tax pre-provision net revenue was up $13 million, or 14% compared to the third quarter a year ago. The loan portfolio excluding PPP loans had strong organic growth during the quarter of $457 million or 13% annualized. Core deposits grew organically by $96 million or 2% annualized. The cost of core deposits was 6 basis points consistent with the prior quarter. Non-interest bearing deposits increased $233 million, or 12% during the current quarter. Net interest income for the quarter on a tax equivalent basis was $211 million, an increase of $12 million or 6% from the $199 million in the prior quarter. Net interest margin for the quarter as a percentage of earning assets on a tax equivalent basis was 3.34% compared to 3.23% in the prior quarter. The core net interest margin for the quarter of 3.29% increased 13 basis points from the prior quarter. The loan yield for the quarter was 4.67%, which increased 15 basis points compared to 4.52% in the prior quarter. Credit quality continued to improve to record levels. Non-performing assets as a percentage of subsidiary assets was 13 basis points in the current quarter, compared to 16 basis points in the prior quarter. Net charge-offs as a percentage of loans was 4 basis points. We declared a regular dividend for the quarter of $0.33 per share, which was consistent with our prior quarterly dividend. The company has declared 150 consecutive quarterly regular dividends and has increased the regular dividend 49 times. This was a strong quarter for the company with solid performance across our key metrics. We experienced core deposit growth across our footprint as the team continued to maintain existing customer relationships while also building new ones. This quarter core deposits increased $96 million or 2% annualized. Year-to-date core deposits are up $564 million or 4% annualized. Non-interest bearing deposits increased $233 million or 12% annualized during the quarter and now account for 38% of core deposits. Year-to-date non-interest bearing deposits have increased $515 million or 9% annualized. And our core deposits now totaled almost $22 billion at a cost of 6 basis points. The growth in the loan portfolio was driven by continued demand throughout our footprint, combined with a reduction in payoff volume. Despite the increase in interest rates, our gross new production for the quarter before payoffs was $1.7 billion, with yields at around 5.4%, which was an increase of about 80 basis points versus the yields in the prior quarter. The yield on the loan portfolio ended the quarter at 4.67%, up 15 basis points from the prior quarter and the core loan yield of 4.6% increased 19 basis points from the prior quarter. Given the strength of all 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 non-performing assets to bank assets improving 13 basis points from 16 basis points in the prior quarter. Early stage delinquencies as a percentage of loans ended the quarter at 7 basis points compared to 12 basis points in the prior quarter. About 80% of the commercial loan growth continues to come from existing commercial loan customers, where we have a very good understanding of the quality of the borrower and the credit. And our focus continues to be on responsible growth through the credit cycle underwriting lens. We believe we are very 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. As we noted earlier this year, we are focused on growing net interest income. On a tax equivalent basis, net interest income was $600 million in the first quarter and the first nine months of the year, which was an increase of $111 million or 23% over the first nine months of 2021. As I noted previously, we are well positioned to benefit from this higher rate environment. Our asset sensitive balance sheet is designed to perform well over the long term. Roughly 25% of our loans repriced in any given year, so today's higher rate environment is gathering momentum in our loan portfolio, supportive of increasing income over the long term. We continue to add floor protection to our new loans and current rates are above essentially all loan floors in our existing portfolio. Our securities portfolio is providing roughly $350 million of cash flow per quarter, which is being used upon loan growth. This remix of securities into loans is providing meaningful lift to margin and earnings. Additionally, our high quality core deposit base, 38% of which is non-interest bearing continues to provide stable low-cost funding. We expect that our low beta core deposit base will continue to outperform peers. We are very well positioned to ride out this volatile interest rate environment and to weather the impact of a recession, if and when one occurs. We expect that our proven stable sticky deposit base will once again outperform our peer group and the industry, and we expect our high quality loan portfolio to perform well and also expect to see our loan yields increase as rates move up and enable us to deliver strong net interest income. And when interest rates peak and then decline, the longer term structure of our loan portfolio will continue to generate strong returns. Though the Glacier team did another excellent job in the third quarter. They once again kept their focus on customers and communities, which the results clearly show. So Victor, that ends my formal remarks and I would now like to open the line for any questions our analysts may have.

Sure. And our first question comes from the line of Jeff Rulis from D.A. Davidson. Your line is open.

Thanks. Good morning.

Good morning, Jeff.

Maybe Randy, I could check-in with you on loan growth, you've done a good job this year of sort of identifying early on low double-digit growth sort of hitting that. I don't know if it's too early to talk about ’23 or either broadly or more specifically just kind of expectations as you close the year end and into ‘23 on net growth?

Sure. Tom and I have been talking quite a bit about that. So Tom, do you want to provide some insight.

Sure. Good morning, Jeff. I'll start with the fourth quarter. As we mentioned last quarter, we experienced significant pull forward growth into the second quarter, followed by some pipeline slowdowns that we discussed previously, mirroring trends seen in the third quarter. I anticipate this trend will persist into the fourth quarter, with expectations for mid to upper-single digit annualized growth. Regarding 2023, it may be too early to make a projection due to ongoing uncertainty.

Okay. Got you. And Ron, also sort of guidance on the expense run rate. I think you have ex-merger costs in the 128 to 130 kind of stick it in there. It's a similar question about how you trend into Q4 and what you think about ‘23 sort of growth off that?

Let me address the fourth quarter specifically. It is coming in at the guidance range of 120 to 130. However, I anticipate it will be in the mid-130s, primarily due to inflation. We are witnessing increases from our vendors, such as those who shovel snow and service our ATMs, as well as rising fuel charges. This trend is affecting many areas. I previously mentioned in the third quarter that our third-party costs would decrease, and they did by $58 million. Despite that reduction, we maintained a consistent level. The increase that offset that $1 million reduction is again largely due to inflation, which is becoming more noticeable. Therefore, we are guiding towards the mid-130s for Q4.

Okay. So, Ron, that's 130 to 131, not like a bit correct?

Yeah. I would suggest a range of 133 to 135.

I would suggest a range of 133 to 135.

Yeah. Jeff, I should mention that in the fourth quarter, we experienced market rate increases, particularly for our frontline employees. This will also be reflected in our results. We are still working on determining the compensation, which is the largest part of our non-interest expense, and that's why I'm hesitant to provide guidance on that right now.

Okay. And just one last question, can you remind us about the seasonality? Do you typically see a rise in costs from Q4 to Q1, or do you think that may not be the case early on?

No, most definitely, you see the seasonal part and large part of this, the restart that spike of wage base and so we see it for no other reason. We see higher compensation costs for that. but it is, definitely correct seasonally higher.

All right. And last one, Randy, or Ron, just looking at the non-interest bearing costs, just flat at this point and looking in last cycle really virtually there was really no beta almost on the non-interest bearing. I guess if you care to compare where you sit in this cycle and expectations. Do you expect similar lack of movement on the non-interest bearing front?

Sure. We can provide some insights on that. I'll pass this to Byron, but I want to emphasize that the increases we’re seeing now are significantly steeper than what we experienced in the previous cycle. So Byron, could you share our expectations or insights on this?

Sure. Yeah. So we've been very pleased with our deposit performance, especially in this rate environment. So far, we've been able to keep our rates pretty much unchanged, but there is pressure building. We're 300 basis points into a rising rate cycle and more to go. And so we're not immune from that. We can't define gravity with regard to deposit costs forever. And especially with the rate hikes that are expected ahead of us, we do expect to see some movement in our overall deposit costs. In terms of what we're expecting, we'll be modeling on our side, our beta expectations over the course of this cycle, kind of if you remind or look at the bigger picture over the course of the entire cycle, that beta may land somewhere in the mid-teens with our expectations.

And Byron, that's a total deposit beta or interest bearing deposit beta?

That would be a total deposit beta.

Okay. I appreciate it. I'll step back. Thank you.

You bet.

Thank you. One moment for our next question. Our next question comes from the line of Brandon King from Truist. Your line is open.

Thank you. Good morning.

Good morning, Brandon.

Good morning. So yes, the growth in non-interest bearing deposits really stood out this quarter relative to your peers. And I wanted to get a sense if you think that could continue near term based off what you're seeing in your market?

Yes, it likely won't be mainly due to seasonality. A lot of our customers tend to build up reserves in the second and third quarters. They start to scale back their operations in the fourth quarter, and in the first quarter, they rely on some of those excess funds. Therefore, we will likely see the historical seasonality trend starting to appear.

Got you. And do you think you'll see a decline next quarter or do you think you could potentially hold that flat based off of those seasonal factors?

If you look at our historical rate, there's generally been some outflow as people use those deposits to kind of get through the colder months.

Okay. And then on the net interest margin, I was curious just based off of your deposit beta assumptions and the loan repricing, those expectations and then you have a loan repricing cycle relative to peers. When do you think the NIM could kind of top out? It seems that interest margin could continue to expand maybe past 2023?

Byron, you want to comment on that?

Yeah. In terms of the trajectory of margin, as Randy mentioned in his comments, this rate environment and the amount of rate increase really has built a lot of momentum into our margin. So I would see it continuing to increase through next year. When we look at our interest rate sensitivities, we show margin growing throughout next year and into ’24 as well.

Okay. Very helpful. Thanks for taking my questions.

You bet.

Thank you. One moment for next question. Our next question comes from the line of Matthew Clark from Piper Sandler. Your line is open.

Good morning.

Good morning, Matt.

Excuse me. To wrap up the discussion on deposit beta, could you remind us of your deposit mix in terms of commercial versus consumer? It seems like this earnings season, more sophisticated corporate clients are more aware of current money market rates compared to retail consumers. I'm trying to understand your mix, which could explain the lower beta we are observing over the cycle.

Yeah. This is Byron. I can address that. In terms of the mix between consumer and business, it's about 50-50. So we're about evenly split between the two categories.

Okay. Thank you. And then just shifting gears to the overall margin and kind of the weighted average rate on new loans? Just trying to get a sense for where that yield might be trending here in near term?

We are observing an increase in loan rates. For the fourth quarter, this increase could be around 15 to 20 basis points.

What is the weighted average rate on new production if you have that information?

Yeah. Matthew for the third quarter is about 540.

Okay. Thank you. And then, if you have it as well, the average margin in the month of September?

I'll just get back to you on that one. We get very focused on quarterly roll up, so we'll provide that to you.

Okay. No worries. And then on the borrowings that you took down this quarter, can you give us a sense for kind of the cost and duration and plans to do more or not?

Sure. This is Byron. I can address that. The borrowings on our balance sheet from FHLB are overnight, with a current cost of approximately $325 million. We anticipate this amount will increase, primarily due to the substantial loan growth we have experienced. Additionally, we expect around $350 million in cash flow from the securities portfolio, which will support our loan growth. As loan growth begins to slow down, this cash flow from securities will allow us to reduce that balance, and that’s how we view the trends in our borrowing position.

Perfect. And then last one for me. Just on the net charge-offs and I think the overdraft related charge-offs. Any, I guess, I know it's seasonally or near tourist season and all that a little busier or so more transaction volume. But is there any change in the overdraft products or anything you did differently? I know charge offs aren't up much, but they're still up relative to where they were?

Yeah. No, there's been no changes to the program. I think they're up due to a little bit of seasonality and as we bring on some of the new divisions with our high performance growth program, which is the core relationship checking account there, is driving a little bit more of those charge offs.

Okay. Thank you.

Thank you. One movement for next question. And your next question comes from the line of Kelly Motta from KBW. Your line is open.

Hi. This is Kelly. Good morning. Thank you for the question.

Good morning, Kelly.

Good morning. As we approach the fourth quarter, when you typically issue a special dividend, I'm curious about your perspective on the AOCI swing. You clearly have robust regulatory capital, but I would like to know if TCE factors into your considerations regarding capital returns.

Yeah. And so that's a Board decision where they weigh a number of different factors and certainly one of them is capital levels and outlook as well in terms of what the economic outlook. So yes, Kelly, they're going to weigh those factors in making a decision.

Got it. And maybe a M&A question out there. Obviously, the way markets are going, it makes it more difficult. Just wondering if you have any updated thoughts on M&A in your markets?

I believe our timing has slightly shifted due to the appeal for sellers influenced by certain market conditions. Additionally, from a buyer's standpoint, allowing the credit environment to stabilize is quite crucial. Nonetheless, we are still engaging with potential partners and keeping opportunities open. We anticipate that when the timing feels appropriate, we will resume our M&A strategy.

Got it. Maybe a last question for me. On the expenses and the expense guide, I know when you closed Utah, you were talking about some technology that you were testing out there and potentially looking to roll out. Just wondering if you have any update to commentary on any technology initiatives you may be working on?

Yes, we are currently working on several initiatives that are performing well. I’m pleased to report that we are implementing these within the 54% to 55% efficiency ratio we've discussed. We are also cautious about integrating any expenses related to these initiatives. We expect to generate savings from them since each has a solid business case, and once fully deployed, we anticipate an increase in efficiency. For now, we're focusing on this approach and reengineering several of our platforms while maintaining our efficiency in the 54% to 55% range.

Got it. That's super helpful. Thank you so much. I'll step back.

All right. You're welcome.

Thank you. One moment for our next question. And your next question comes from the line of Tim Coffey from Janney. Your line is open.

Thank you. Good morning, everybody.

Good morning, Tim.

Hey, Randy. How should we be thinking about total deposit growth going forward in this current rate environment? Because if you really want to keep your deposit cost low, you could. You've got plenty of on balance sheet deposits already as well as access to additional liquidity. So I'm just kind of wondering would it be unreasonable to think that deposits actually stay relatively flat in the near term?

Near term, I think, what we've Randy mentioned or discussed earlier, we could see a little bit of run off in the fourth quarter. And so that's some of the seasonality factors we do traditionally have a very strong third quarter, fourth quarter is not quite as strong. So looking at where we just ended and I do see that we could see a little bit of one-off, particularly with the rate environment and competitive pressures that are building out there.

Okay. The current rate environment is rising and has created some unintended consequences for other institutions this quarter. Is there anything in the loan portfolio that you're particularly monitoring or maybe you've tightened the credit standards on? For example, I am referring to the lots and land loans.

Yeah, Tim. This is Tom. We haven't altered any of our underwriting standards in the past few years to promote growth; in fact, we've become stricter recently. The measures we implemented back in 2018 and 2019 have held up well throughout the pandemic and have positioned us favorably for the current environment. As for assessing the rate increase, every new commercial loan we originate undergoes a thorough stress test to evaluate those cash flow figures in light of the rate hike environment. Ultimately, I feel very comfortable with what we are seeing regarding what we are adding to the balance sheet right now.

Okay. All right. Well, thank you very much. Those are my questions.

All right. Welcome.

Thank you. One moment for next question. And our next question comes from the line of David Feaster from Raymond James. Your line is open.

Hi. Good morning, everybody. Happy Friday.

Good morning, David.

I wanted to discuss loan growth again. It was very strong this quarter, particularly in commercial real estate. I'm interested in knowing if there are specific segments driving this strength and how demand is currently trending. Are you noticing any slowdown in demand or more projects dropping out of the pipeline due to higher rates? Additionally, I'm curious about how much of the deceleration in growth you mentioned for the fourth quarter is strategic compared to slower originations. Any insights would be appreciated.

Let me hand it over to Tom. I want to mention, David, that we are being very selective. There are many other banks eager for business, and if a deal doesn't fit our criteria, we are allowing them to take those transactions. Tom, would you like to address the questions regarding any particular segments that are growing and what demand trends we can expect?

Sure. And the CRE growth really what participated out in the third quarter was a lot of the construction volume we had seen in prior quarters now that those have been rolled through to completion and stabilization they've moved out of that construction segment over to the firm segment, which is why you saw the commercial acquisition development construction line items drop quarter-over-quarter, that was expected as anticipated. And in terms of the volume and production, a little less on the construction demand for the reasons you noted, higher rates a little more difficult for deals to pencil unless there's a tremendous amount of equity, as Randy said, holding true to our credit discipline, that the projects that we are looking at typically have a very strong equity, cash equity positions in them and some good strong secondary support in the form of guarantor strength as well.

That's helpful. I'm curious about the deposits, particularly the interest-bearing flows. How much of that can be attributed to more rate-sensitive deposits that you're allowing to leave versus potential cash burn from clients? Although it's a small portion of your portfolio, how much more would you estimate remains in the rate-sensitive category within your deposit base?

Yeah. So I'd say overall, as you could see from where we're positioned, where our cost and historical performance, we focus on the relationships. And I think that shows in the cost and the volatility of our deposit franchise in that. A lot of the rate seekers are really not in our core customer base or at that part of their balance sheet is important to them. It's already displaced someplace else and we focus on the core relationship account. And so that's I think the overarching way going to answer that question. Byron, you do want to add anything to that?

Pretty clear.

Okay. Just one last quick question. You mentioned the $350 million in cash flows from the securities book. I'm curious about the roll-off yield on those and how the rates on new purchases compare. Do you see this as mainly a way to fund loan growth?

Yeah. The runoff rate is close to $150 million and it really is just in runoff mode. We are purchasing a couple targeted pool NBS or CRA focused investment, but very limited. So the $350 million it’s running off, it's running off at $150 million, it's going into loans. And so there's close to 400 basis points of lift in that runoff.

Okay. That's terrific. Thanks guys. Great quarter.

All right. Thank you.

Thank you. I'm not showing any further questions in the queue. I'd like to turn the call back over to Randy Chesler for any closing remarks.

Yeah. Appreciate that and we thank everybody for their great questions and we appreciate you dialing today. We want to wish everybody a great Friday and a great weekend. Thank you again for calling in.

And this concludes today's conference call. Thank you and everyone have a great day.