Glacier Bancorp (GBCI) Q2 2022 Earnings Call Transcript

Glacier Bancorp (GBCI -2.95%)
Q2 2022 Earnings Call
Jul 22, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Glacier Bancorp second 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, Mr.

Randy Chesler, president and CEO. Please go ahead.

Randy Chesler -- President and Chief Executive Officer

All right. Well, thank you, and good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our chief financial officer; Don Chery, our chief administrative officer; Angela Dose, our chief officer; Byron Pollan, our treasurer; and Tom Dolan, our chief credit administrator. So we ended the quarter -- the second quarter, feeling very good about the strength and health of our core business.

Our leadership position in some of the best high-growth markets in the country continues to be a strong tailwind for the company as we build one of the premier community banks in the Western United States. A few data points about our community banking markets, which include Montana, Idaho, Eastern Washington, Wyoming, Utah, Colorado, Nevada and Arizona. The Tax Foundation recently published the 2022 tax climate index and all eight of the states in which we operate were in the top 20 most favorable markets. The U.S.

Bureau of Economic Analysis measured the gross domestic product growth since 2013 of each of the U.S. states and seven of the states in which we operate were in the top 20. Once again, our markets continue to distinguish themselves as some of the best places to live and work. I'll touch on some of the business highlights first and then provide some additional thoughts on the quarter.

Net income for the quarter was $76.4 million, an increase of $8.6 million or 13% from the prior quarter net income of $67.8 million. Pretax pre-provision net revenue was $92.9 million versus prior quarter of $88.8 million, an increase of $3.4 million or 4%. The loan portfolio, excluding PPP loans, had record organic growth during the quarter of $714 million or 21% annualized. This was a very strong quarter, which we will discuss in detail shortly.

Core deposits continue to flow into our divisions, growing organically by $84.5 million or 2% annualized. The cost of core deposits was 6 basis points, a decrease of 1 basis points from the prior quarter. This is another area that separates our company from the rest that I will discuss in more detail later. Net interest income in the quarter on a tax equivalent basis was $199 million, an increase of $8.6 million or 5% from the $190 million in the prior quarter.

Net interest margin for the quarter as a percentage of earning assets on a tax equivalent basis was 3.23% compared to 3.20% in the prior quarter. The core net interest margin for the current quarter of 3.16% increased 9 basis points from 3.07% in the prior quarter. Noninterest expense of $129.5 million decreased $787,000 or 60 basis points from the prior quarter. Excluding the $2.1 million of acquisition-related expenses, noninterest expense was $127.5 million.

Credit quality continued to improve to near record levels. Earnings per share for the quarter was $0.69 versus $0.61 in the prior quarter. We declared a regular dividend for the quarter of $0.33 per share which was consistent with our prior quarter dividend. The company has declared 149 consecutive quarterly regular dividends and has increased the regular dividend 49 times.

Overall growth in the loan portfolio, not including PPP loans was a record $714 million, again, 21% annualized for the quarter. We're very pleased to grow the portfolio this quarter, while consistently maintaining our strong credit discipline. We stuck to our risk appetite for loan types. We didn't bend on underwriting guidelines and we maintain a risk-based pricing discipline.

With a quarter-end loan-to-deposit ratio of 66% and increasing deposits, we're happy to have the opportunity to rotate cash out of investments and in the loans. The growth in the loan portfolio was driven by continued growth in our markets and a number of customers accelerating financing plans to lock in loans before anticipated rate increases. Our gross new loan production for the quarter before payoffs was a record $2.3 billion, a 27% increase in gross new production of $1.9 billion. Given the strength of our markets, we saw a broad-based contributions to this growth made by each of our divisions across our eight states.

Credit quality improved during the quarter with nonperforming assets to bank assets improving to 16 basis points from 24 basis points in the prior quarter. Early stage delinquencies as a percentage of loans ended the quarter at 12 basis points compared to 12 basis points in the prior quarter. About 80% of the commercial loan growth was from existing commercial loan customers, where we have a very good understanding of the quality of the borrower and the credit. We continue to focus on responsible growth with a through the credit cycle underwriting lens.

We remain very optimistic about the future of our markets and the appeal of our model with a mid- to low double-digit loan growth outlook. That being said, we are well prepared in the event of an economic downturn with strong capital, strong reserves and a very healthy franchise, which will continue to generate high-quality earnings. Core deposit growth was strong across our footprint as the team continued to maintain existing customer relationships while also building new ones. This quarter, core deposits increased by $85.5 million or 2% annualized.

Year to date, deposits are up 4% annualized. Noninterest-bearing deposits increased $71.3 million or 4% annualized during the quarter and now account for 37% of core deposits. And our cost of core deposits in the quarter dropped by 1 basis points to a total of 6 basis points. The net interest margin as a percentage of earning assets on a tax equivalent basis for the current quarter was 3.23% compared to 3.20% in the prior quarter.

The core net interest margin was 3.16% compared to 3.07% in the prior quarter. The core net interest margin increase of 9 basis points in the current quarter was a result of increased core loan and investment yields. The tax equivalent yield on best securities ended the quarter at 1.81% compared to 1.66% in the prior quarter. New investments in debt securities were added at a tax equivalent rate of 3.55%.

The yield on the loan portfolio ended the quarter at 4.34% down 7 basis points from the prior quarter. However, the core loan yield of 4.41% increased 7 basis points from the prior quarter core loan yield of 4.34%. We added over $2 billion in new core loan production with yields around 4.5%, which was an increase of about 39 basis points versus the prior quarter. We have now reached an inflection point with both our investment and loan portfolios where new investments and new loans with higher yields are increasing the portfolio yields.

This will drive margin expansion through the rest of the year. Noninterest income of $28.3 million declined $5.3 million or 16% from the prior quarter primarily due to the reduced gain on sale income from residential mortgages. Gain on sale of residential mortgages of $5 million for the current quarter decreased $4 million or 45% from the prior quarter. The rise in interest rates has substantially reduced residential mortgage and refinance activity.

Rising interest rates are taking a toll on the residential real estate market. The MBA now forecast a market in 2022, that will be down by 40%. We expect our business to reflect the same trends. Excluding the second quarter acquisition expenses, noninterest expense was $127.5 million.

We continue to see very effective expense control at the divisions. The increase in our expenses was driven primarily by corporate technology service firms that were needed to bridge staffing gap while we brought on new hires. The Glacier team did another great job in the second quarter. We successfully managed a record level of new business while we work through a very volatile interest rate environment.

The health of the Glacier franchise is very strong, with a robust capability to source high-quality loans funded with a best-in-class stable and sticky deposit franchise. We are very well-positioned to continue to grow in 2022 and set the stage for a strong 2023. So that ends my formal remarks. And now I'd like Latonia to please open the line for any questions that our analysts may have.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Matthew Clark of Piper Sandler. Your line is open.

Matt Clark -- Piper Sandler -- Analyst

Hey, good morning, guys.

Randy Chesler -- President and Chief Executive Officer

Good morning.

Matt Clark -- Piper Sandler -- Analyst

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

Randy Chesler -- President and Chief Executive Officer

Sure. Yeah. We're very happy to see the growth that we did experience year to date. And I think Byron our Treasurer -- we've obviously spent a lot of time working at that.

So maybe, Byron, you want to comment on the outlook?

Byron Pollan -- Treasurer

Sure. From a balance expectation, I think we're looking for deposit balances to be roughly flat. We could see some attrition as some rate-sensitive balances run off, but we are willing to let some rate-sensitive balances go. We're not going to chase rates in this rate cycle.

And we think we'll be very successful being able to keep our deposit costs flat. If you look back to what we were able to achieve in the last rate cycle, we were very successful at keeping our deposit costs down. We expect to be able to achieve a similar success this time around. And we don't see any reason to deviate from that strategy.

So I think we're looking for balances to be roughly flat from here on out.

Matt Clark -- Piper Sandler -- Analyst

OK. Great. And then the loans and securities being accretive to the portfolio from here, do you happen to know or happen to have the month -- the average margin in the month of June?

Randy Chesler -- President and Chief Executive Officer

We will have to get back to you with that. I don't have that right in front of me, Matthew. We can get that to you.

Matt Clark -- Piper Sandler -- Analyst

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

Ron Copher -- Chief Financial Officer

Yeah. Matthew, this is Ron. The -- as Randy said in his remarks, if we remove the merger-related expenses. So we have $127.5 million which was up $3.4 million compared to where we were at the first quarter.

And I want to address that. The bulk of that, call it, $2 million, $2.1 million was in the corporate technology service firms as we were hiring, looking for people to help us. We had to hire the firms to help us with our data warehouse that's up across all of our technology platform. So what we expect is that's a temporary use of those folks that expense would come down.

Just by way of example, say $1 million. Well, what's kind of -- you're going to see is you're going to see a rotation other expenses outside firms will come down, but compensation will grow. So when you put all that together, I'm comfortable saying that in Q3, the range would be from, say, $127 million to $128 million. And that is consistent with what I guided in the first quarter and you repeated would be $128 million to $130 million.

So got there a little quicker, but we wanted to keep the engine going.

Matt Clark -- Piper Sandler -- Analyst

Great. And then just on the loan growth outlook. I just want to clarify your comments, Randy. It sounded like mid-single digit to double digit is the outlook.

And any additional color on where you expect the slowdown to occur? I assume it's somewhat commercial real estate related, but -- in resi, but just any additional thoughts there, too.

Tom Dolan -- Chief Credit Administrator

Yeah, Matthew, this is Tom. The outlook we gave at the beginning of the year was low double digits. I think we've moved that up to low to mid-double digits. I think we're probably looking at somewhere between 12% to 15% for the year.

So -- which obviously is a slowdown in the second half of the year, which is consistent with what we're seeing in our pipeline overall. And as Randy mentioned in his comments, we had a lot of pent-up demand right at the beginning of the movement in the rates folks trying to get their deals and while they get it at a little bit more reasonable rate. So I think for the second half of the year, we'll see slower quarterly growth but should still kind of finish up the year somewhere then that low to mid-double digit.

Matt Clark -- Piper Sandler -- Analyst

OK. And the -- is that excluding PPP? I just wanted to check.

Tom Dolan -- Chief Credit Administrator

Yeah, that would be excluding PPP. We only have, I think, $16 million of PPP last year. So it's almost not a factor anymore.

Matt Clark -- Piper Sandler -- Analyst

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

Randy Chesler -- President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from David Feaster of Raymond James. Your line is open.

David Feaster -- Raymond James -- Analyst

Hi. Good morning, everybody.

Randy Chesler -- President and Chief Executive Officer

Good morning.

David Feaster -- Raymond James -- Analyst

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

Tom Dolan -- Chief Credit Administrator

Hey, David, this is Tom, again. Pipelines are coming down. If I had to put a percentage on I'd say they're down by about a third of where they were toward the first couple of quarters of the year. And to your point, right on the head, where borrowers were trying to get ahead of the rate cycle a little bit.

So moving forward, from a trepidation standpoint, there's certainly some concern out there with our borrowers with what impact -- long-term impact interest rates and inflation are going to have. But when the metrics make sense, in terms of the return they're looking for their projects, they're still moving forward regardless. So I would call our pipeline today is still very healthy. I would say the prior several quarters was quite frothy, but we're still maintaining a pretty healthy pipeline.

The growth that we're forecasting for the latter half of the year is quite frankly, probably a little bit more normalized.

David Feaster -- Raymond James -- Analyst

Yeah. OK. That makes sense. And then maybe just digging into the CRE a bit.

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

Tom Dolan -- Chief Credit Administrator

Yeah. We're -- I wouldn't say we're avoiding any particular industry just by reach of the industry. We really look at every deal on a case-by-case basis and look at the totality of the request, including how much equity is coming into the deal, how strong our entries are, etc. So for example, and I've mentioned this on prior calls, but we underwrite as one of our components to that yield, which were with where cap rates have come in the last couple of years as they've come down as a result of our debt yield requirements that ultimately required more cash equity into deals.

And coming into the pandemic, our borrowers are in pretty good shape. And with the significant migration, a lot of our borrowers have become even stronger with the demand characteristics we keep out the footprint in a multitude of segments from multifamily all the way through various CRE segments, including warehouse, industrial. We've seen the demand pretty steady across a lot of different segments. But ultimately, we've seen more cash equity in some.

David Feaster -- Raymond James -- Analyst

OK. OK. And then maybe just touching quickly on the securities book. Just kind of taking the deposit commentary and the growth outlook together.

Would you expect that the securities books probably peaked here just given the organic growth outlook and cash flow is probably reallocated toward loans? And then the new securities that you are putting on, just curious what you guys are buying? Are we starting to shorten up duration? Just any commentary on that would be helpful.

Byron Pollan -- Treasurer

From a balance perspective in the securities portfolio, I do think it's peaked. And so likely to see some remix where that securities cash flow coming in will be allocated to the loan portfolio. In terms of what we're buying, it's very limited, very limited right now. So I don't know that we're really shortening duration.

But for the most part, what we're buying is kind of targeted pool CRA-related event.

David Feaster -- Raymond James -- Analyst

OK. All right. Thanks, everybody.

Randy Chesler -- President and Chief Executive Officer

You're welcome.

Operator

And our next question will come from Brandon King of Truist Securities. Your line is open, Brandon.

Brandon King -- Truist Securities -- Analyst

Hey, good morning.

Randy Chesler -- President and Chief Executive Officer

Good morning.

Brandon King -- Truist Securities -- Analyst

Yeah. So I wanted to put kind of on balance sheet growth with strong loan growth in the quarter and deposit growth lag. And I noticed that borrowings increased a bit. And with the outlook going to the second half of the year with slower loan growth for deposits flat.

I'm wondering what is your appetite to use borrowings to fund loan growth? They are starting to limit to that to where you could face some kind of slow loan growth further, the strain as far as amount of borrowings on the balance sheet.

Byron Pollan -- Treasurer

Brandon, this is Byron. I can address the borrowings. So I think what we're seeing here is just a temporary mismatch in the timing of cash flow. And so as we see, we did have some very strong growth in the second quarter with lighter deposit growth.

We're backfilling that with a couple of things. One is the runoff of the securities portfolio, that's funding some of the loan growth. But also, we are using FHLB advances to kind of plug any gaps. We do think that that's somewhat of a temporary cash flow mismatch.

And so as we progress through the year, likely to see some of that security cash flow, be able to pay down those short-term borrowings.

Brandon King -- Truist Securities -- Analyst

OK. And could you remind us again what the cash flow is of the securities portfolio, what the outlook is over the --

Byron Pollan -- Treasurer

We're getting about $1.5 billion a year. And so that breaks down to about $375 million a quarter. It has slowed a little. I think previously, we were looking at about $1.8 billion a year.

That's moderated to about $1.5 billion a year. So that -- I do expect that will be a consistent amount of cash flow through the rest of the year.

Brandon King -- Truist Securities -- Analyst

OK. Great. And then on the efficiency types, I'm curious with the growth expected and top line growth in II. And I know you managed company to 52% to 54% efficacy ratio.

But I'm wondering if there's a potential for that to kind of drop to lower to cost of the 50% over the next year. Is that a potential?

Randy Chesler -- President and Chief Executive Officer

No, Brandon, I think that 54%, 55% range is one that we intend to stick with. We'll revisit it maybe toward the end of the year. We've got a lot of initiatives in place that will address efficiency. So some of this we'll revisit.

But for right now, we feel like that's a very solid range that we'll continue to be in.

Brandon King -- Truist Securities -- Analyst

OK. Thanks for answering my questions.

Randy Chesler -- President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Andrew Terrell, Stephens Inc. Your line is open.

Andrew Terrell -- Stephens, Inc. -- Analyst

Hey, good morning.

Randy Chesler -- President and Chief Executive Officer

Good morning.

Andrew Terrell -- Stephens, Inc. -- Analyst

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

Randy Chesler -- President and Chief Executive Officer

No. I did say that MBA is calling for a 40% drop in the market and that we're expecting similar trends in our business. But I think Ron can give you a little more color, and we've talked about it with the gains, that's obviously what's driving the noninterest income, a big part of it. But I think Ron can give you a little more color.

If that's your question, Andrew, to try to fine-tune that a bit.

Andrew Terrell -- Stephens, Inc. -- Analyst

Yeah, that would be very helpful.

Ron Copher -- Chief Financial Officer

OK, Andrew. Yeah, Ron here. So you saw the growth in the residential portfolio in the second quarter was 12%, 48% annualized and compare that to the first quarter was 7%. So the gains were down because of the portfolio, the higher amount of loans.

And that was more due to the -- what I'll call the disruption of the sudden spike in interest rates, whether you're looking at a fixed rate product or an arm. And so we elected chose to help our customers get the mortgages close quicker. So that resulted in putting those into the loan portfolio. We also have -- we can't sell construction loans, so you see some of that growth being in there as well.

But coming to the outlook, we would see that our growth in that portfolio would be more close to the first quarter run rate, 7%. But then getting to the gain on sale, so we had $5 million in the second quarter, we could see that stepping up. $7 million to $8 million in each of Q3 and Q4. And then that's how we'll get to the -- what Randy mentioned from the MBA perspective.

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. Great. That's very helpful. I appreciate it.

And then just given the kind of really quick shifts we've seen in kind of the mortgage market. I'm curious, one, when volumes are really high back in 2020 to 2021. Did you alter staffing or anything within your mortgage division? And then kind of going forward in a more kind of normalized mortgage market, any changes you're looking to make in the business?

Randy Chesler -- President and Chief Executive Officer

Yeah. No, we're very happy with our mortgage business is a core offering for us being a community bank to serve the markets with a high level of service. We are getting more efficient there, and we have allocated as the volumes have changed. Our approach is more we reallocate those people within the company.

So you could see our FTE quarter to quarter is flat. Part of the reason for that is we're able to take, reallocate people working in the mortgage business and have them reallocate to other parts of the business. So we are getting improving efficiency and expense management through really managing in that way.

Andrew Terrell -- Stephens, Inc. -- Analyst

OK. Perfect. Thanks for the color, and thanks for taking my questions.

Operator

Thank you. [Operator instructions] Our next question will come from Jeff Rulis of D.A. Davidson. Your line is open.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Good morning.

Randy Chesler -- President and Chief Executive Officer

Good morning.

Jeff Rulis -- D.A. Davidson -- Analyst

Really just a question on maybe just a couple of housekeeping items. On the -- maybe just the tax rate expectations on that. And then I missed the new production loan yields this quarter versus last.

Ron Copher -- Chief Financial Officer

Yeah. Jeff, Ron here. So let me speak to the tax rate. I said last quarter that it would ramp up somewhere between 19% and 20%.

I could see it reaching -- it will be a ramp-up hitting, say, 19% to 19.5% just to rein that in a little bit as we get closer to the year. So that's the outlook. The -- so on new production this quarter, we have new production on loans on the -- we're right around $459 million, and that's about 39 basis points over the prior quarter.

Jeff Rulis -- D.A. Davidson -- Analyst

Got it. Thanks, Randy. And Randy, just switching gears. I think, economic concerns and a market correction, I think leads to some M&A pause by nature.

But any kind of update on conversations on that front? And I guess your appetite to seek partnerships.

Randy Chesler -- President and Chief Executive Officer

Sure. Well, our time -- our outlook remains the same. I think we did -- we have been saying we wanted to get through the Alta conversion and make sure that that went well, as well as make sure a number of technology projects we have perceived all that's gone really well. So we talked about at the earliest, end of the year and for next year that we would make an announcement.

The one thing that I think is obviously change and certainly our view on credit. I think we're going to be -- take a deeper look given some of the uncertainty there. But in terms of our interest in pursuing that as a strategy, that hasn't changed.

Jeff Rulis -- D.A. Davidson -- Analyst

Fair enough. Thanks. That's it.

Operator

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

Randy Chesler -- President and Chief Executive Officer

All right. Well, very good. I appreciate the questions. I know it's a busy season for our analysts.

So we appreciate you taking the time with us, and as always of asking some great questions. I want to thank everyone else for dialing in today, and hope you have a great Friday and a great weekend. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Randy Chesler -- President and Chief Executive Officer

Matt Clark -- Piper Sandler -- Analyst

Byron Pollan -- Treasurer

Ron Copher -- Chief Financial Officer

Tom Dolan -- Chief Credit Administrator

David Feaster -- Raymond James -- Analyst

Brandon King -- Truist Securities -- Analyst

Andrew Terrell -- Stephens, Inc. -- Analyst

Jeff Rulis -- D.A. Davidson -- Analyst

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