Glacier Bancorp Inc (GBCI) 2022 Q1 法說會逐字稿

Thank you for standing by, and welcome to the Glacier Bancorp First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Randy Chesler, President and CEO. Sir, you may begin.

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

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 5 states in the U.S. for GDP growth in 2021 were all in our 8-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. Pretax 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 of $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 3 basis points from 3.04% in the prior quarter.

Noninterest expense of $130 million decreased $3.7 million or 3% from the prior quarter. Excluding the $6.2 million of acquisition-related expenses, noninterest 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 7 basis points. Earnings per share for the quarter was $0.61 versus $0.46 in the prior quarter. The credit quality continued to improve and show strength 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 a regular dividend for the quarter of $0.33 per share, an increase of $0.01 per share or 3% over the prior quarter dividend. The company has declared 148 consecutive quarterly regular dividends and has increased the regular dividend 49x. We completed the core conversion of the Altabank 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. Noninterest-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 nonperforming 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 8-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 for the -- 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.

Noninterest 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 divisions -- these results are a tribute 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 Altabank continues to proceed very well. We successfully converted Alta 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 the -- 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 #1 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 Altabank, the largest and most complex conversion in our history and is still -- 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.

(Operator Instructions) Our first question comes from Matthew Clark of Piper Sandler.

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

Sure. Ron, do you want to take that?

Yes. Matthew, Ron here. So part of it is the -- in 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 only had 3 more folks there. And then it really is just the extraordinary control that the divisions represented and they really did an outstanding job [of that one]. I commend them again for that.

So on the guide, I did say $128 million to $130 million. So we think that, that's really applicable as we would 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 of 54% to 55%.

So we think expenses are well controlled and will just trend up over the next several quarters. I will point out also on the Alta acquisition. We've got some of the cost saves there. But as we said in the last -- the 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 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 were down about 6 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. I'll comment 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?

Yes.

But certainly, on 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'll reprice is as indexed to Prime. And so as the Fed is active this year, it will be quite a bit of lift from that activity. So there are some floors that are constrained in little bit of that.

We do have about $300 million worth of loans that are constrained. They need about 100 basis points of rate hike before those rates will lift above 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 5 years. And so the duration will be just a little bit under that.

Our next question comes from David Feaster of Raymond James.

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 been highlighted. Just curious how growth is turning at Alta and maybe thoughts on how the pipeline is looking heading into the second quarter.

Yes. No, absolutely. I'm going to have Tom comment on that. But I even made a couple of comments on Utah, very strong growth. It was one of our lead states and also noted the recognition as the -- recognized as #1 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, do you want to comment on the rest?

Yes. So I'll give a little color what segments the growth's coming in on. You mentioned CRE. A combination of both CRE construction, which was the predominant growth in the construction and the [ADC] book.

And then on the term side, with a very healthy mix between the owner and non-owner. The industry used that were leading that were industrial warehouse and multifamily where our strongest growth. And really, as Randy mentioned, fairly uniform across the footprint with a couple of states 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 and some dislocation and 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?

Yes. We're certainly in a period of time that I don't think really any of us has ever quite seen before. We've seen inflation and rising rates before. But we also haven't seen the level of liquidity on our borrowers' balance sheet to withstand and absorb a lot of that inflation.

So probably if -- if I was to say anything that keeps me up at night, it would probably be portions of the consumer book, which, as you can tell by our portfolio, it's not a large percentage of that and neither is it a large percentage of our production.

I think the consumer book 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 3 years ago when we started to see cap rates drop to a level that in our opinion was a little unstable, and that was 3 years ago.

So since then, we've seen a lot more equity into our deals, a lot more cash availability on our borrowers' 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, core deposit growth has been surprisingly strong. It remains strong. Just curious how you think about deposit growth going forward. Obviously, you've got a huge advantage as we 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. Number one, I think it starts with the foundation that is very strong, we believe. And that those deposit accounts are spread out over 1,500 miles from Montana down to Arizona. They're mainly small balance accounts. We have almost 0.5 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 we start with a very, very solid foundation.

In terms of what we expect, we expect to see the rate of the 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 to 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're certainly experienced in 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 cost. 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 D.A. Davidson.

Ron, I wanted to circle back on the expenses. A core of $124 million you mentioned -- well, maybe just start with -- could you quantify the amount of cost saves out of Alta still to come, out of maybe against the $124 million run rate if you think there's a $1 million or $2 million to come out of that absent any growth overall?

Yes, I think it will be -- I like your $1 million to $2 million range there. I would agree with that. Just knowing that we model 17.5% reduction on their noninterest expense, and we'll get 80% of that, say, in the first [year].

Again, just repeating what I said that the bulk of that will come through more so increasingly in Q2 and a little bit more in Q3 and then level out in Q4. So pretty sustained cost savings in our view. Now that we're past the conversion and again, everything coming together nicely.

Okay. Appreciate it, Ron. And I guess if I take $1 billion to $2 million out of $124 million, and I get to kind of $122 million and change and if we talk about getting back to even the low end of the guidance of getting back to $128 million to $130 million range, I mean, you're still talking about a 5% growth rate after Alta.

And I'm just trying to figure -- not going to beat you up on doing well on managing costs. I'm just -- I'm 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 is the expense growth coming from?

It will be in the people factor. We're having to -- you've heard us say we do more with less. But when you only had 3 FTEs, we're at a point now where we're going to have to -- in each of the markets, each market being different, we've got to increase the headcount, particularly 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 development is going to go up. We don't do a lot of travel during that first quarter. So I could see that 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. In a large measure, that's because of the additional tax credit that came into the first quarter. It will continue to build and with that comes some amortization of the equity. It runs through noninterest expense for certain tax credits.

Got it. I guess if I can still got you on nitpicky questions. The provision level, I guess, $7 million all in, the actual reserve or the provisioning, something inside of that. Any sort of high level -- I know this is a tough question, but just trying to get -- given your growth of, 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 heads.

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. Fair enough. And Randy, a 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, demand is very high, in-migration trends. You mentioned rising rates that got to be monitored on affordability. But any update or thoughts on the real estate kind of within your footprint and any concern there?

Well, I think there's 2 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 -- we know 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. We -- 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, work at the market is still so frothy that higher interest rates just might bring it back to a normal market as a Phase 1, and we've yet to see that.

So Phase 1, meaning where properties sit on the market for 60, 90 days and selling price as a percentage of asking price, we've yet to see that. So we're watching that. But the supply and the 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 overbuilt in the past. There's a lot of in-migration and demand driving the projects. And so -- and the use of the projects. So we're watching valuations there as well in 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.

I wanted to touch on CRE paydowns. I know we've heard from other banks saying it kind of slowed 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, do you want to take that?

It's slowed down from a historical average, but it's still a headwind, it's still elevated. Where I would say it has slowed down is maybe refinanced to another institution. It's more the case now that the project developers are taking advantage of the cap rate environment and selling the project but maybe 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 markets since the Fed rate increase?

Yes. Spreads have compressed over the last 9 months or so. I would say, in the last 3 to 4 months, though, we've kind of passed that, bottomed out, and we're starting to see rates increase, not only from 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 pricing 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 showed some strong growth over the prior quarter.

Okay. And then lastly, with the strong core deposit growth, how -- what are you thinking around deploying the excess liquidity now? I know that deposit growth kind of keeps a floor on that excess liquidity getting lower. But with higher rates of securities, are you expecting to buy more securities going forward? Any change in that strategy?

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

Sure. Our hope is that excess liquidity can go into the loan portfolio. We're at times able to achieve some pretty impressive growth rates. To the extent that we do have excess liquidity build 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 rate, it has rather [loosened] some compelling opportunities to put that money to work at a pretty decent level. So I would see us continuing the strategy that we've had.

Our next question comes from Kelly Motta of KBW.

It's nice to see Alta showing through. With that closed and converted, 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 in the market.

Yes. No. Kelly, No, no change there. Still the same glide path for the next transaction.

Great. Okay. Ron, 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 we're -- I think it's going to be a better year than what we -- if you asked me in October last year, I would have said a lower rate, but I'm expecting us to do better given all the net interest income growth and et cetera. So somewhere between 19% and 20%.

Great. 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 continued to improve and the loss content remains low, if there's additional releases of that, that we could see throughout the year?

Tom, do 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.

Our next question comes from Andrew Terrell of Stephens.

Just maybe a more technical question. Just as we think about kind of given the move in 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 time frame?

And then I guess, is it fair to think that if the new money yield last quarter was 2.25%, 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 steady, 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 cash flow 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 at this point.

Yes. No, 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 performed last cycle. Just trying to get a sense of maybe how [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 it was very, very low. And so we are assuming that, 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, again, I would say, low double digit. And then we realized, once we get through 200 basis points of rate hike, we will see more traction and our betas will increase and so our 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 hopefully, Andrew, that addresses your question.

(Operator Instructions) Our next question comes from Tim Coffey of Janney.

Randy, if I could ask you about kind of the real estate infrastructure in your markets. Given that your in-migration you've talked about on this call and the success you've had in, 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 in-migration?

Yes. No, we do believe there's legs there. The -- 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 a pretty tight supply in most of our markets. And so a couple thousands or so of new entrants into the market tends to move the needle.

So I think that the trends look very good. And we're starting from a point where there wasn't a lot of supply, given the amount of inflow and then balanced off against what now is a much longer building cycle to get a project done. We're not seeing an imbalance at this point.

Okay. Good color. And then I kind of want to understand a bit more about your inflation expectations in terms of how it impacts the markets, right? Because if I look at your demographics, 4 of your 8 states have a median household income below the national average, yet you don't really expect any change to deposit betas, and you're not really seeing too much in terms of a credit outlook. So how exactly 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 acute across all our states. I think we will see that continue to increase. The inflation, probably the biggest pain point across our 8 states is going to be fuel prices that those continue to stay high. That is an expense. And given the long expenses, we have more -- that's a bigger factor in people's expenses than in other parts of the country.

So I think that right now, housing and fuel costs are probably the 2 biggest pain points for people. And we're just keeping an eye on those and what the impact would be or will be.

Okay. But you're not necessarily seeing any slowing in retail spend within your footprint right now?

We are not. No.

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 you 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.