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spk00: Good day, and thank you for standing by. Welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. 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.
spk05: All right. Well, thank you, and good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Don Cherry, our Chief Administrative Officer, Angela Dosey, our Chief Accounting Officer, Byron Pollin, our Treasurer, and Tom Dolman, our Chief Credit Administrator. So we ended 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 US Bureau of Economic Analysis measured the gross domestic product growth since 2013 of each of the US 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. Pre-tax, 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 Triple P 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 continued to flow into our divisions, growing organically by 84.5 million or 2% annualized. The cost of core deposits was six basis points, a decrease of one 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 nine basis points from 3.07% in the prior quarter. Non-interest 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, non-interest expense was 127.5 million. Credit quality continued to improve to near record levels. Earnings per share for the quarter was 69 cents versus 61 cents in the prior quarter. We declared a regular dividend for the quarter of 33 cents 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 maintained a risk-based pricing discipline. With a quarter end loan deposit ratio of 66% and increasing deposits, we're happy to have the opportunity to rotate cash out of investments and into 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 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 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, but 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 significantly by 85.5 million or 2% annualized. Year to date, deposits are up 4% annualized. Non-interest 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 one basis points to a total of six 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 nine basis points in the current quarter was a result of increased core loan and investment yields. The tax equivalent yield on debt 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 seven basis points from the prior quarter. However, the core loan yield of 4.41% increased seven basis points from the prior quarter, core loan yield of 4.34%. We added over two 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. Non-interest 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 NBA now forecasts 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, non-interest 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 a 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 worked 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 would like Latonia to please open the line for any questions that our analysts may have.
spk00: Certainly, as a reminder, to ask a question, you need to press star 1 on your telephone. Please stand by while we compile the Q&A roster. And our first question comes from Matthew Clark of Piper Sandler. Your line is open.
spk03: Hey, good morning, guys. Morning. Maybe just starting on the deposit growth kind of outlook from here, you know, 2% annualized, 4%, I think, year-to-date. I guess, what does your pipeline look like on the deposit side, and do you think you can actually maintain growth this year?
spk05: Sure. Yeah, we're very happy to see the growth that we did experience year-to-date, and we're I think Byron, our treasurer, we've obviously spent a lot of time looking at this, so maybe, Byron, you want to comment on the outlook?
spk04: Sure. From a balance expectation, I think we're looking for deposit balances to be roughly flat. We could see some attrition and 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. We think we'll be very successful at 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. We don't see any reason to deviate from that strategy. I think we're looking for balances to be roughly flat from here on out.
spk03: Okay, great. And then the loans and securities being accretive to the portfolio from here, do you happen to know or happen to have the average margin in the month of June?
spk05: 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.
spk03: Okay. 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 to 130 million. Just want to get your updated thoughts on the outlook there, too.
spk04: Yeah, Matthew, this is Ron.
spk05: As Randy said in his remarks, we removed the merger-related expenses, so we have 127.5, which is up 3%. $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 cuts across all of our technology platforms. So what we expect is that's a temporary use of those folks. That expense would come down just by way of example, say a million dollars. Well, what 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 had guided in the first quarter, as you repeated, would be $128 million to $130 million. So it got there a little quicker, but we wanted to keep the engine going.
spk03: 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 and resi, but just any additional thoughts there too?
spk05: 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, you know, which obviously is a slowdown in the second half of the year, which is consistent with what we're seeing in our pipelines overall. And as Randy mentioned in his comments, you know, we had a lot of pent-up demand right at the beginning of the movement, the rates, folks trying to get their deals in while they get it at a little bit more reasonable rates. So, you know, 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 between that low to mid double digits.
spk03: Okay. And is that excluding PPP? I just want to double check.
spk05: Yeah, that would be excluding PPP. We only have, I think, 16 million of PPP left, so it's almost not a factor anymore.
spk03: Yep, just thinking about the comparison to last year. Thanks. You're welcome.
spk00: One moment. Our next question comes from David Feaster of Raymond James. Your line's open.
spk01: Hey, good morning, everybody. Morning, David. 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's 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.
spk05: This is Tom again. Pipelines are coming down. If I had to put a percentage on it, I'd say they're down by about a third from where they were towards the first couple of quarters of the year. And to your point, you know, right up ahead where, you know, borrowers were trying to get ahead of the rate cycle a little bit. So moving forward, from a trepidation standpoint, you know, There's certainly some concern out there with our borrowers with what 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 in their projects, they're still moving forward regardless. So I would call our pipeline today 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.
spk01: Yeah, okay. That makes sense. And then maybe just digging into CRE a bit. Obviously, that was a huge driver of growth this quarter. Are there any segments where you're seeing more demand or better opportunities, or is it markets? And then 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, you know, as we look at CRE, maybe are there any segments that you're more focused on that you see better opportunities? And conversely, are there some that maybe feel frothy or that we might be avoiding?
spk05: I wouldn't say we're avoiding any particular industry just by nature of the industry. We really look at every deal on a case-by-case basis and and look at the totality of the request, including how much equity is coming into the deal, how strong our guarantors are, et cetera. So, you know, for example, and I've mentioned this on prior calls, but we underwrite as one of our components to debt yield, which is 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 um you know coming into the the pandemic our borrowers are pretty good shape and and with the significant migration a lot of our borrowers have become even stronger with the demand characteristics we've seen throughout the footprint um in a multitude of segments from multi-family all the way through various cre segments including warehouse industrial um you know we we've seen the demand pretty pretty steady across a lot of different segments But ultimately, we've seen more cash equity in some.
spk01: Okay. Okay. 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 flows probably reallocated towards 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 here? Just any commentary on that would be helpful.
spk04: From a balance perspective in the securities portfolio, I do think it's beat. 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. For the most part, what we're buying is kind of targeted pool CRA-related events. Okay. All right.
spk01: Thanks, everybody.
spk04: You're welcome.
spk00: And our next question will come from Brandon King of Chura Securities. Your line is open, Brandon.
spk07: Hey, good morning.
spk05: Morning, Brandon.
spk07: Yes, so I wanted to touch again kind of on balance sheet growth. With strong loan growth in the quarter and deposit growth lagging, I noticed that borrowings increased a bit. And with the outlook going to the second half of the year with slower loan growth, but deposits in the cloud, I'm wondering what is your appetite to use borrowings to fund loan growth? There is a certain limit to that to where you could potentially kind of slow loan growth further to constrain as far as the amount of borrowings on the balance sheet.
spk04: 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. you know, we're backfilling that with a couple of things. One is the runoff of the securities portfolio. You know, that's funding some of the loan growth. But also, we are using FHLB advances to kind of plug any gap. We do think that that's, you know, 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.
spk07: Okay. And could you remind us again what the cash flow is of the securities portfolio, what the outlook is?
spk04: 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. You know, I think previously we were looking at about $1.8 billion a year. that's moderated to about $1.5 billion a year. So I do expect that will be a consistent amount of cash flow through the rest of the year. Okay.
spk07: Great. And then on the efficiency front, I'm curious, being with the growth expected and top-line growth in NII, I know you manage the company to 54% efficiency ratio, but I'm wondering if there's a potential for that to kind of drop lower, to closer to 50% over the next year. Is that a potential?
spk05: No. Brandon, I think that 54-55 range is one that we intend to stick with. We'll revisit it maybe towards 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.
spk07: Thanks for answering my questions.
spk00: Thank you.
spk05: You're welcome.
spk00: One moment. Our next question comes from Andrew Thoreau of Stevens Incorporated. Your line's open.
spk02: Hey, good morning. Good morning. Hey, I apologize if I missed this in the prepared remarks, but did you provide an expectation for mortgage banking for the year?
spk05: No. I did say that, you know, MBA is calling for a 40% drop in the markets. and that we're expecting similar trends in our business. But I think Ron can give you a little more color. We've talked about it with the gains. That's obviously what's driving the non-interest 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.
spk02: Yeah, that would be very helpful. Okay, Andrew.
spk05: Yeah, Ron here. You saw the growth in the residential portfolio in the second quarter was 12%, 48% annualized. And compare that to the first quarter with 7%. So the gains were down because we portfolioed a higher amount of loans. And that was more due to the, what I'll call the disruption, 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 some mortgages closed 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 to $8 million in each of Q3 and Q4. And then that's how we'll get to what Randy mentioned from the NBA perspective.
spk02: Okay, 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 were really high back in 2020, 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?
spk05: Yeah, no, we're a very... happy with our mortgage business. It's a core offering for us being, you know, 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 can 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, you know, improving efficiency and expense management through really managing in that way.
spk02: Okay. Perfect. Thanks for the color, and thanks for taking my questions.
spk00: Thank you. Again, ladies and gentlemen, if you do have a question, please press star, then 1. Our next question will come from Jeff Rulis of DA Davidson. Your line is open.
spk06: Thanks. Good morning. Morning. Really just a question on maybe a couple housekeeping items on maybe just the tax rate expectations on that, and then I missed the new production loan yields this quarter versus last.
spk04: Yeah, Jeff, Ron here. So let me speak to the tax rate.
spk05: I said last quarter that it would ramp up somewhere between 19 and 20%. I could see it reaching, it'll be a ramp up, you know, hitting say 19 to 19 and a half percent just to bring that in a little bit as we get closer to the year.
spk04: So that's the outlook.
spk05: So on new production, This quarter, you know, we had new production on loans on the – we're right around 459, and that's about 39 basis points over the prior quarter.
spk06: Got it. Thanks, Randy. And, Randy, just switching gears, you know, I think economic concerns and a market correction, you know, I think leads to some M&A pause by – by nature, but any kind of update on conversations on that front and I guess your appetite to seek partnerships?
spk05: Sure. Well, our time, our outlook remains the same. I think, you know, we did, we have been saying we wanted to get through the alpha conversion, make sure that that went well. as well as making sure a number of technology projects we have proceed. All that's gone really well. So we talked about, you know, at the earliest end of the year and or next year that we would make an announcement. The one thing that I think is obviously a change is certainly our – View on credit, you know, I think we're going to be taking 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.
spk07: Fair enough. Thanks. That's it.
spk00: Thank you. I would now like to turn the conference back over to Mr. Chesler for closing remarks.
spk05: 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, asking some great questions. I want to thank everyone else for dialing in today, and I hope you have a great Friday and a great weekend. Thank you.
spk00: This concludes today's conference. Thank you for participating. You may now disconnect.
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