Glacier Bancorp, Inc. (NYSE:GBCI) Q3 2022 Earnings Conference Call October 21, 2022 11:00 AM ET
Company Participants
Randall Chesler – President & CEO
Ron Copher – CFO
Tom Dolan – Chief Credit Administrator
Byron Pollan – Treasurer
Conference Call Participants
Jeff Rulis – D.A. Davidson
Brandon King – Truist Securities
Matthew Clark – Piper Sandler
Kelly Motta – KBW
Tim Coffey – Janney
David Feaster – Raymond James
Operator
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. [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.
Randall Chesler
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 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. 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 — 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 eight states. Credit quality improved during the quarter with non-performing assets to bank assets improving 13 basis points from 16 — 213 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 — 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 income — 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 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 whether 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.
Question-and-Answer Session
Operator
Sure. [Operator Instructions] And our first question comes from the line of Jeff Rulis from D.A. Davidson. Your line is open.
Jeff Rulis
Thanks. Good morning.
Randall Chesler
Good morning, Jeff.
Jeff Rulis
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?
Randall Chesler
Sure. Tom and I have been talking quite a bit about that. So Tom, do you want to provide some insight.
Tom Dolan
Sure. Good morning, 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 to that fact. There’s still a lot of uncertainty out there.
Jeff Rulis
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?
Ron Copher
Yeah. Let me, again, too early on — excuse me, the next year, but I can address certainly the Q4. So the — came right in at the guide 120 to 130. But for the fourth quarter, I would go with the mid-130s and primarily the reason is inflation. We’ve just seen it, the vendors, the guy who shovels the snow, the people who service our ATMs, we’re seeing 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 cost would come down and they did, they came down $58 million (ph). 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 for the Q4.
Jeff Rulis
Okay. So, Ron, that’s 130 to 131, not like a bit correct?
Ron Copher
Yeah. I would go — if you want to range, choose 133 to 135.
Jeff Rulis
Okay. So upper — okay. Got you. 133 to 135.
Ron Copher
Yeah. Jeff, the other thing I should add some of the — in the 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 non-interest expense part of the hesitation I have to give guidance on that just right now.
Jeff Rulis
Okay. And just — sorry, one last one, just remind us that 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?
Ron Copher
No, most definitely, you see the seasonal part and large part of this, the restart that spike (ph) a wage base and so we see it for no other reason. We see higher compensation costs for that. but it is, [indiscernible] correct seasonally higher.
Jeff Rulis
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?
Randall Chesler
Yeah. We can give you a little color there. I’m going to hand it over to Byron, but I would key 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, you want to talk about our expectations or thoughts?
Byron Pollan
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.
Jeff Rulis
And Byron, that’s a total deposit beta or interest bearing deposit beta?
Byron Pollan
That would be a total deposit beta.
Jeff Rulis
Okay. I appreciate it. I’ll step back. Thank you.
Randall Chesler
You bet.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Brandon King from Truist. Your line is open.
Brandon King
Thank you. Good morning.
Randall Chesler
Good morning, Brandon.
Brandon King
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?
Randall Chesler
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, they’re going to live off some of those excess funds. So we would probably see that the historical seasonality trend starts to kick in.
Brandon King
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?
Randall Chesler
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.
Brandon King
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?
Randall Chesler
Byron, you want to comment on that?
Byron Pollan
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.
Brandon King
Okay. Very helpful. Thanks for taking my questions.
Randall Chesler
You bet.
Operator
Thank you. One moment for next question. Our next question comes from the line of Matthew Clark from Piper Sandler. Your line is open.
Matthew Clark
Good morning.
Randall Chesler
Good morning, Matt.
Matthew Clark
Excuse me. 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 earning 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 the cycle?
Byron Pollan
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.
Matthew Clark
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?
Byron Pollan
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 basis points, 20 basis points of increase in loan rates next quarter.
Matthew Clark
And that weighted average — the weighted average rate on new production if you have it?
Randall Chesler
Yeah. Matthew for the third quarter is about 540.
Matthew Clark
Okay. Thank you. And then, if you have it as well, the average margin in the month of September?
Randall Chesler
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.
Matthew Clark
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?
Byron Pollan
Sure. This is Byron. I can address that. The borrowings that we have in our balance sheet FHLB borrowings, they’re overnight. That cost is roughly in the neighborhood of $325 million 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 balance and so that’s how we view the borrowing position trends.
Matthew Clark
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?
Randall Chesler
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.
Matthew Clark
Okay. Thank you.
Operator
Thank you. One movement for next question. And our next question comes from the line of Kelly Motta from KBW. Your line is open.
Kelly Motta
Hi. This is Kelly. Good morning. Thank you for the question.
Randall Chesler
Good morning, Kelly.
Kelly Motta
Good morning. Maybe switching to capital and your — typically do a special dividend in the fourth quarter of the year and we’re in there now. Just wondering how you view the AOCI swing, you obviously have, healthy analysis regulatory capital, but wondering if TCE plays a consideration into how you guys are thinking about capital returns?
Randall Chesler
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 and making a decision.
Kelly Motta
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?
Randall Chesler
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.
Kelly Motta
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?
Randall Chesler
Yes. We are currently pursuing a number of those initiatives and they’re growing quite well. Happy to say that we’re implementing those within that 54%, 55% efficiency ratio that we’ve talked about. And so we’re very mindful of feathering in any expense associated with those. Meets also expect some of some saves coming out of that because each one 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 we are probably are — like, we said feathering that in, so we’re keeping our efficiency in that 54%, 55% range.
Kelly Motta
Got it. That’s super helpful. Thank you so much. I’ll step back.
Randall Chesler
All right. You’re welcome.
Operator
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.
Tim Coffey
Thank you. Good morning, everybody.
Randall Chesler
Good morning, Tim.
Tim Coffey
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?
Byron Pollan
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.
Tim Coffey
Okay. All right. And then the current rate environment being pretty much straight up is 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 you’ve tightened the credit box on? For instance, I would — I’m looking at to the lots and land loans for instance?
Tom Dolan
Yeah, 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 made kind of back in that 2018, 2019 timeframe seem to service pretty well, not only through the pandemic, but certainly setting 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 hike environment. So ultimately, the moral and everything here is that feeling pretty — feel very comfortable with what we’re seeing on that in terms of what we’re putting on the balance sheet right now.
Tim Coffey
Okay. All right. Well, thank you very much. Those are my questions.
Randall Chesler
All right. Welcome.
Operator
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.
David Feaster
Hi. Good morning, everybody. Happy Friday.
Randall Chesler
Good morning, David.
David Feaster
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 real 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. And then just how much of that deceleration in growth as 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?
Randall Chesler
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 — if 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?
Tom Dolan
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.
David Feaster
All right. That’s helpful. And then maybe just touching on deposits, Tom. 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?
Randall Chesler
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?
Byron Pollan
Pretty clear.
David Feaster
Okay. And then just one last quick one. You talked about the $350 million of cash flows from the securities book. Just curious [Technical Difficulty] what the roll off yield on those are and maybe if you are — if you do like what are — how the rates 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?
Byron Pollan
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.
David Feaster
Okay. That’s terrific. Thanks guys. Great quarter.
Randall Chesler
All right. Thank you.
Operator
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.
Randall Chesler
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.
Operator
And this concludes today’s conference call. Thank you and everyone have a great day.
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