Glacier Bancorp Inc (GBCI) 2022 Q3 法說會逐字稿

Good day and thank you for standing by. Welcome to the Glacier Bancorp's Third Quarter Earnings Conference Call. (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, Randy Chesler, President and CEO. Please go ahead.

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

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, Nevada and Arizona. For the 15th year in a row, Utah's economy has been ranked the top in 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 tenth place in the U.S. for its economic outlook due to economic conditions and favorable tax system.

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. Pretax pre-provision net revenue was $106 million versus prior quarter of $92 million, an increase of $14 million or 15%. Pretax 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.

Noninterest-bearing deposits increased $233 million or 12% during the current quarter. Net income -- 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.

Nonperforming 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. Noninterest-bearing deposits increased $233 million or 12% annualized during the quarter and now account for 38% of core deposits. Year-to-date noninterest-bearing deposits have increased $515 million or 9% annualized, and our core deposits now total 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 loan -- core loan yield of 4.41%.

Given the strength of all of our markets, we saw broad-based contributions to this growth made by each of our divisions across our 8 states. Credit quality improved during the quarter with nonperforming assets to bank assets, improving 13 basis points from -- to 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 with a through the credit cycle underwriting lens.

We believe we are very well -- 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.

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 -- in the first 9 months of the year, which was an increase of $111 million or 23% over the first 9 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 reprice 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 forward protection to our new loans and current rates are above essentially all loan flows in our existing portfolio. Our securities portfolio is providing roughly $350 million of cash flow per quarter, which is being used to fund loan growth. This remix of securities into loans is providing meaningful lift to margin and earnings. And additionally, our high-quality core deposit base, 38% of which is noninterest 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.

So 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.

(Operator Instructions) And our first question will come from the line of Jeff Rulis from D.A. Davidson.

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 and you're 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 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. Jeff. I'll start with the fourth quarter. We've -- as we talked last quarter, we saw a lot of pull-forward growth into Q2 that -- and then some pipelines slowing up a little bit as we discussed last quarter. That's kind of reflective of what we saw in the third quarter. I think that trend is going to continue in the fourth quarter, but we expect somewhere in the mid- to upper single digits annualized for the fourth quarter.

And then in terms of 2023, I think it's a little early to make a projection of that in fact and there's still a lot of uncertainty out there.

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

Yes. Let me -- again, too early on -- excuse me, the next year, but I can address certainly the Q4. So the -- came right in as the guide, $120 million to $130 million, but for the fourth quarter, I would go with the mid-130s. And primarily, the reason is inflation. We're just seeing at the vendors, the guy who shovels the snow, the people who service our ATMs. We're seeing in fuel charges. We're seeing higher increases. And it's amazing, it's across the board is what I would tell you.

One of the things that I mentioned in the third quarter -- excuse me, the call we had for the second quarter, I said our third-party costs would come down. And they did, they came down to $15 million. So -- but we held pretty steady. So the increase that overcame that $1 million reduction is, again, primarily inflation, but we're just seeing it more and more. So that's why we would guide to the mid-$130 million for the Q4.

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

Yes, I would go -- if you want to range, choose $133 million to $135 million.

Okay. So upper. Okay. Got you. $133 million to $135 million.

Yes. Jeff, the other thing I should add, some of the -- in the -- this fourth quarter, we have had market rate -- market increases, especially for our frontline employees, and so that's going to show up as well. Still trying to figure out how we're going to address, what compensation will be. And that's the largest component of our noninterest expense, part of the hesitation I have to give guidance on that just right now.

Okay. And just sorry, 1 last one. Just remind us the seasonality of that. Do you typically see -- I know we're not talking '23, but do you generally see a pickup Q4 to Q1 in costs? Or do you think at least early on?

No, most definitely, you see the seasonal part, a large part of this restart at tighter wage base, and so we see a turnover, the reason we see higher compensation cost for that. But it is -- what you observed is correct, seasonally higher.

All right. And last one, Randy or Ron, just looking at the noninterest-bearing costs just flat at this point and looking in last cycle, really virtually there was really no beta almost on the noninterest-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 noninterest-bearing front?

Yes. We can give you a little color there. I'm going to hand it over to Byron, but I would tee it up by saying we are -- the steepness of the raises here is far exceeding what we saw in the last cycle. So there's a much steeper aggressive curve here. So Byron, do you want to talk about our expectations or thoughts?

Sure. Yes. 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 defy 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 cost.

In terms of what we're expecting, what we're modeling on our side, our beta expectation over the course of this cycle, kind of the -- you might want to look at the bigger picture over the course of the entire cycle. That beta may land somewhere in the mid-teens would be our expectation.

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

That would be a total deposit beta.

One moment for your next question. Our next question comes from the line of Brandon King from Truist.

So yes, the growth in noninterest-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 on what you're seeing in your markets.

Yes. The -- likely not be and mainly due to seasonality. Our -- a lot of our customers really build up reserves in the second, third quarter. They start to throttle back their businesses in the fourth quarter and first quarter, and they're going to live off some of those excess funds. So we would probably see that, that we'll see the historical seasonality trends start to kick in.

Got you. And do you think you'll see a decline next quarter? Or do you think you could particularly 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. Then on the net interest margin. I was curious just based off of your deposit beta assumptions and the loan repricing, those expectations. Then you have a longer repricing cycle relative to peers. When do you think the NIM could kind of top out? It seems that net interest margin could continue to expand maybe past 2023.

Byron, do you want to comment on that?

Yes. I -- in terms of the trajectory of margin, as Randy mentioned in his comments, this rate environment and the amount of rate increase really has brought a lot of momentum into our margins. 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.

One moment for our next question. Our next question comes from the line of Matthew Clark from Piper Sandler.

Just to close the loop on the deposit beta discussion. Can you remind us what your mix of deposits is relative to commercial versus consumer? It just seems like this earnings season so far, there's been a lot more -- the more sophisticated corporate commercial wealthy customers are more in tune with where money market rates are these days relative to the retail consumer. I'm just trying to get a sense for your mix and that might be part of the reason why we're seeing lower beta here over this cycle.

Yes. 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 2 categories.

Okay. Okay. 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 the near term.

In terms of loan rates, we do see some lift. It could be -- in terms of fourth quarter -- fourth quarter increase, it could be 15, 20 basis points of increase in loan rates next quarter.

And that -- the weighted average rate on new production, if you have it?

For the -- yes, Matthew, for the third quarter, it's about 540.

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

Let us 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 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 that we have on our balance sheet, FHLB borrowings, they're overnight. That cost is roughly in the neighborhood of 3.25 right now. We expect that, that will go up. And that's really driven by the strong loan growth that we have seen. And we do see about $350 million of cash flow that's coming off the securities portfolio, that's going to fund loan growth. And so we'd have to -- once we see loan growth slow a little bit, then the cash flow from securities will be able to catch up and then chip away at that borrowing balance. And so that's how we view the borrowing position currently.

Perfect. And then last 1 for me. Just on the net charge-offs, and I think the overdraft-related charge-offs. Any I guess I know it's seasonally, our tourist season and all that, a little busier, so more transaction volume. But is there any change in the overdraft products or anything you did differently? I just -- I know the charge-offs are not much, but they're still up relative to where they were.

Yes. 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 one of those charge-offs.

And our next question from the line of Kelly Motta from KBW.

Maybe switching to capital and you're, typically do a special dividend at -- in the fourth quarter of the year, and we're in there now. Just wondering how do you view the AOCI swing? You obviously have healthy amounts of regulatory capital, but wondering if TCE plays a consideration into how you guys are thinking about capital returns?

Yes. And so that's a Board decision where they weigh a number of different factors, and certainly, 1 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 an 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?

We really don't. I think, if anything, our timing has shifted out a bit due to the -- what you just touched on, which is certainly the attractiveness to a seller based on some of the marks. But also from a buyer perspective, just letting the credit environment settle out a little bit. I think is really important. At the same time, we continue to talk to people and keep the door open and fully expect when we feel the time is right to get back into the M&A strategy.

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

Yes. We are currently pursuing a number of those initiatives, and they're going quite well. I'm happy to say that we're implementing those within that 54% or 55% efficiency ratio that we've talked about. And so we're very mindful of feathering in any expense associated with those. We also expect some saves coming out of there, because each 1 of them does have a business case and we see that fully deployed. There should be some efficiency pickup. But for right now, we're doing that. We are reengineering a number of our platforms. And -- but we are, like I said, feathering that in, so we're keeping our efficiency in that 54% 55% range.

And our next question comes from the line of Tim Coffey from Janney.

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 costs 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 as Randy mentioned or it was discussed earlier, we could see a little bit of runoff 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, I do see that we could see a little bit of runoff, particularly with the rate environment and competitive pressures that are building out there.

Okay. All right. And then the current rate environment being pretty much straight up has created some unintended consequences for other institutions as far as they've reported this quarter. Is there anything in the loan portfolio that you're keeping a special eye on or maybe have tightened the credit box on, for instance, I'm looking at the lots and land loans, for instance?

Yes, Tim, this is Tom. We haven't changed any of our underwriting standards in the last couple of years to encourage growth. If anything, we've tightened up over the last couple of years. Some of those efforts that we've made kind of back in that 2018, 2019-time frame, seem to serve us pretty well not only through the pandemic, but certainly sending us up for this environment.

And in terms of measuring out the rate increase, every new commercial loan originated goes through a pretty robust stress test to stress those cash flow numbers in terms of rate track environments. So ultimately, tomorrow if everything here is feeling pretty -- feel very comfortable with what we're seeing on the -- in terms of what we're putting on the balance sheet right now.

And our next question will come from the line of David Feaster from Raymond James.

I just -- I wanted to touch on the loan growth side again. Growth was really good in the quarter, especially CRE. Just curious, first, I guess, whether there's any segments that drove that, that you're seeing exceptional strength there? And how demand is trending? Are you starting to see a slowing of demand or more projects falling out of the pipeline just given higher rates? Just -- and then just how much of that deceleration in growth that you kind of talked about in the fourth quarter is maybe strategic versus slower originations or those types of things? Just curious, any commentary there.

Yes. Let me -- I'm going to hand it over to Tom. I would just tell you, David, we are being very selective. And I think that we've -- there's a lot of other banks out there very hungry. And we -- it doesn't fit squarely in the box, we're letting them win those transactions. But I'll let Tom comment on your questions about is there a particular segment that's growing, kind of what we look forward to in demand. So Tom, do you want to comment on that?

Sure. And the CRE growth, really what precipitated that in the third quarter was, a lot of the construction volume we have seen in prior quarters, now that those have now rolled through to completion and stabilization, they've moved out of that construction segment over to the front segment, which is why you saw the commercial acquisition, development construction line items drop quarter-over-quarter. That was expected, that was anticipated.

And in terms of the volume and in 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, and as Randy said, holding true to our credit discipline. The projects that we are looking at typically have a very strong equity, cash equity position in them and some good strong secondary support in the form of credit strength as well.

All right. That's helpful. And then maybe just touching on deposits. I don't want to beat a dead horse here, but maybe just on the interest-bearing flows. I'm just curious maybe how much of that is attributable to more rate-sensitive deposits that you guys are letting go versus maybe some cash burn at clients or those types of things? And I guess -- if you had -- I know it's a small portion of your portfolio, but I mean how much more, I guess, would you qualify rate-sensitive balances do you think are left really in that -- in your deposit base?

Yes. The -- so I'd say overall, as you can see from where we're positioned with 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 that part of their balance sheet is important to them. It's already placed someplace else. And we focus on the core relationship account. And so that's -- I think the overarching way, to kind of answer that question. Byron, did you want to add anything to that?

No, that's pretty good.

Okay. And then just 1 last quick one. You talked about the $350 million of cash flows from the securities book. Just curious what the roll-off yields on those are? And maybe if you are -- if you do -- what are kind of rates are on new purchases and how you think about that? Or is it truly just kind of coming out of there and to fund the loan growth?

Yes, the runoff rate is close to $150 million, and it really is just in runoff mode. We are purchasing a couple of targeted pro MBS or CRA focused investments, 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.

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

Yes. I appreciate that and we thank everybody for their great questions. And we appreciate you dialing in 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 for participating. You may now disconnect. Everyone, have a great day.