Glacier Bancorp, Inc. Q2 FY2023 Earnings Call

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 speakers’ presentation, there'll be a question-and-answer session. 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 of Glacier Bancorp. Please go ahead.

All right, thank you, Kevin, 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 Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator. I'd like to point out that the discussion today is subject to the same forward-looking considerations found on page 12 of our press release, and we encourage you to review this section. We remain very optimistic about the long-term position of the company, despite the lingering headwinds impacting the banking industry today. The eight Western States in which we have a presence are among the strongest economies in the U.S. We have ample liquidity, a high-quality loan portfolio, a proven banking model, and M&A expertise that is well-positioned to take advantage of the market when conditions are right. Four of our eight Western States, Idaho, Montana, Arizona, and Utah were in the top 10 states for highest net in migration according to an analysis of Census Bureau Data. All of our eight Western States were in the top half of the country for highest net in migration. And we are once again recognized by Forbes as one of the best banks in the U.S. Some business highlights for the quarter include: total deposits and retail purchase agreements of $21.3 billion at the quarter-end increased $25.5 million or 12 basis points during the current quarter. This momentum continues into the third quarter with deposits continuing to grow. Interest income of $247 million in the current quarter increased $15.5 million or 7%, over the prior quarter interest income of $232 million. Interest income in the current quarter increased $47.7 million or 24% over the prior year second quarter. Net income was $55 million for the current quarter, a decrease of $6.2 million or 10%, from the prior quarter net income of $61.2 million. Total non-interest expense of $131 million for the current quarter decreased $4.4 million or 3%, over the prior quarter and increased $1.1 million or 1%, over the prior year second quarter. Non-interest income for the current quarter totaled $29.1 million, which was an increase of $1.2 million or 4% over the prior quarter, driven primarily by an increase in service charges and the gain on the sale of residential loans. The loan portfolio of $15.9 billion increased $436 million or 11% annualized during the current quarter. The loan yield for the current quarter was 5.12%, an increase of 10 basis points compared to the prior quarter, and an increase of 60 basis points from the prior year second quarter. New loan production yields for the quarter were 7.37%, up 41 basis points from the last quarter. Credit quality continued to perform at near-record levels. Non-performing assets as a percentage of subsidiary assets were 12 basis points in both the current and prior quarter, compared to 16 basis points in the prior year second quarter. Net charge-offs as a percentage of total loans were 3 basis points. We completely paid off $335 million of higher-cost borrowings at the Federal Home Loan Bank, and stockholder equity of $2.927 billion increased $83.2 million or 3%, during the first six months of the current year. Tangible book value per common share of $17.16 at the current quarter-end increased 2 basis points from the prior quarter. The company's liquidity position remains strong, with solid core deposits, customer relationships, excess cash, debt securities, and access to diversified borrowing sources. The company's available liquidity of over $15 billion includes cash borrowing capacity from the Federal Home Loan Bank and Federal Reserve facilities, unpledged securities, brokered deposits, and other sources. The company declared a $0.33 per share dividend in the quarter and has declared 153 consecutive quarterly dividends and increased the dividend 49 times. So we're very pleased to see the growth in deposits and repurchase agreements this quarter. Our 17 Bank divisions clearly demonstrated the effectiveness of our unique business model by leveraging their local customer relationships to grow deposits. Our focus has been primarily to maintain and grow deposits with existing business and retail customers by offering attractive rate options. Most of this outreach was done strategically by leveraging the technology of our marketing platform. We also kept our focus on opening new core relationship accounts, totaling a net add for the quarter of over 4,000 net new retail and business accounts with over $260 million in new deposits. We have continued to reinforce the importance of asking for a strong deposit relationship with all commercial and residential loans. More than 80% of the loan customers in the quarter maintained deposits with us. The Federal Reserve's historic rate increases have changed the deposit mindset for many customers. Our through-the-cycle beta at the end of the quarter for core deposits was 10%. While the beta will continue to increase until the Fed stops raising rates, we still expect to significantly outperform the industry beta. Our net interest margin continued to show signs of pressure from the increasing cost of deposits and funding, and we expect the rate of decline in the net interest margin to moderate going forward, given the forecast for interest rates and the resulting impact on deposits. Additionally, our higher loan yields on new production and renewing loans will continue to generate interest income growth. Once again, loan growth was strong across all of our divisions. Most of the commercial loan growth in the quarter was due to construction draws on previously approved loans. Most of the construction projects are residential, housing-related, either multifamily or new residential. We are very confident in the ongoing viability of the underlying projects, the borrower’s ability to meet the loan requirements, and the vibrant markets in which they are located. Our capital levels are strong and growing, with an estimated CET1 increasing 13 basis points from the prior quarter to 12.47%. We believe this level of capital is more than a 100 basis points greater than the average of the 21 peer banks listed in our proxy. We remain confident in the dynamic Western markets we serve and our unique business model to continue to deliver strong results. Thank you to the Glacier team for delivering another strong performance this quarter. So Kevin, that ends my formal remarks, and I would now like you to open the line for any questions that our analysts may have.

Our first question comes from Jeff Rulis with D.A. Davidson. Your line is open.

Thanks, good morning.

Good morning, Jeff.

I wanted to ask about the timing of when the FHLB advances were paid off. Throughout the quarter, it looks like the average rated 533, and you're trading nearly 100 basis points cheaper on the BTFP. I'm trying to understand when that was removed from the balance sheet.

For sure, well we were happy to pay that down and Byron watched that carefully. Byron, do you want to provide the timing for that pay down?

Yes, I want to say, Jeff that was in June. So that was the timing of the FHLB payment.

Got it. Okay, so presumably you haven't seen a full quarter of that trade, and I guess that would be reflected in your commentary about margin continuing to be pressured but at a declining rate, is that fair?

That's fair. That's fair. That's correct.

Okay. What was the spot rate interest bearing deposit costs at quarter end, and how does that compare to is to the end of March?

Yes, Jeff, this is Byron. The spot rate at the end of June for interest-bearing deposits was 1.27%. Looking back at March, the spot rate for interest-bearing deposits was 70 basis points. So, there was a 57 basis point increase from March 31 to June 30.

Got it, okay. Regarding the expense line, we clearly made adjustments there to alleviate some pressure on the top line. I wanted to know if there are any one-time factors contributing to that $130 million figure. Additionally, I would like to hear expectations for the second half—did we see growth from that base or any comments on costs?

Yes. Hi, Jeff, this is Ron. Thank you for the question. There is nothing really one-time in that $130.6 million. I want to acknowledge the divisions and corporate departments for doing a great job and being mindful of hiring. We experienced a reduction in our full-time equivalents between Q1 and Q2 of 20. More importantly, over the year, we saw a year-over-year reduction of 70 in full-time equivalents. I appreciate their focus on that. The guidance for Q3 will be updated from $132 million to $134 million due to persistent inflationary cost pressures. Despite our effective vendor management, we are still experiencing pressures that should be evident in the third quarter and likely continue into the fourth. I feel confident about that.

Ron, just to clarify that was $132 million to $134 million range for Q3?

Correct.

Okay. And presumably within that ballpark in Q4?

Yes, right now.

Okay, okay, fair enough. And maybe just a last one from me on the beta. Randy, you mentioned that, I guess any update to both the, kind of, terminal beta expectation on total beta or interest bearing beta or both?

Yes, I think we've spent a lot of time looking at that because of some of the changes in the Fed, and there's been a lot of activity there. So, Byron, maybe you can walk Jeff through the current thinking on that.

Sure. Yes, Jeff, last quarter when we reiterated the 15% through-the-cycle beta on total deposits, we noted at the time it was a good estimate, but really dependent on what the Fed does. If you go back to where we were in April, the market was looking for Fed cuts in the back half of the year, and now we're looking for one maybe two more hikes in the back half of 2023. So if you look at market expectations for year-end Fed funds, it is now 100 basis points higher today than it was in April. So clearly that has had an impact on our deposit pricing outlook. Given the rate environment, we do need to adjust our deposit beta assumption. We are now using 25% as our through-the-cycle beta for total deposit costs.

Okay, got it. Thank you. I'll step back.

Next question comes from Matthew Clark with Piper Sandler. Your line is open.

Hey, good morning and thanks for the questions.

Good morning.

Maybe just a little more on the NIM. Do you happen to have the average NIM in the month of June?

Let me take a look. So for June we can give you that, Matthew.

Month of June, the NIM was 267 basis points.

Okay, thank you. And then just on expenses, I think in prior quarters, you talked about doing a lot more with less and the need for having a lot of open vacancies on, in terms of your workforce I guess has something changed, I know the environment obviously changed a little bit, but can you just maybe update us on your thoughts on kind of the resources you have internally and whether that's still the case whether not you need more?

Yes, we are still observing some of that dynamic. In the first quarter, we definitely had lower hiring than anticipated. Each quarter, we take a detailed approach to assess the necessity of open positions. Part of this situation is related to the new technologies we've mentioned, such as the new commercial loan origination processing system, a new account opening platform, and a new construction management platform. People are adjusting to these changes, and as they start to recognize the efficiencies, we are beginning to notice improvements. We experienced a significant adjustment in the first quarter. Ron, would you like to share what we are currently observing?

Yes, I want to elaborate on what Randy mentioned. The pilot divisions have experienced significant success. That's the advantage of our model. We don't need to implement it across all 17 divisions, and it's really gaining momentum as people recognize the benefits. They're adapting their staffing to align with the technological advancements rather than following the old model.

Okay, great. And then last one for me, kind of a two-part question. Can you give us a sense for criticized classified trends in 2Q versus 1Q? I didn't see anything in the release. And then any update on office CRE. I think it's about 10% of your book and whether or not, you guys have done a deep dive and kind of what you're seeing there as well?

Yes, criticized classified we've never really talked, disclosed that just because there's a lot of subjectivity, Tom can give you a little color, though, I think it's very positive. Certainly, commercial real estate office. We can give you maybe step back and give you the context that we look at when we think about that and where we feel that's going, and obviously, we feel good about it, given kind of our markets and how we're positioned. But, Tom, you want to comment on that?

Matthew on the criticized classified trends, what I'll say is it's continuing to trend in a positive direction. So we continue to see migration towards the less risk side of the loan portfolio, which we're certainly happy to see. We're currently near record lows, just like we see on the non-performing asset side. And then on the office segment, our portfolio in the office book really matches the footprint. Office located in a lot of boots and jeans communities just like that where our divisions are located. Compared to some other portfolios and certainly a lot of the press around office real estate, that doesn't really match our portfolio. The average loan size is $680,000, it's split about 50-50 owner and non-owner, and in terms of performance, especially on the adverse, non-performing side, it's outperforming the rest of the portfolio. So it's really a different office segment from what we're seeing pressure in. We have very limited exposure to metropolitan areas and almost zero exposure to central business districts, no high rises. There's not a single office loan in the portfolio above $20 million. So it's really a collection of small, single-story, kind of, split between owner and non-owner office.

Okay. Thanks again.

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

Hey, good morning everybody.

Good morning, David.

I'd like to ask about the funding side. Could you provide insights into the trends observed during the quarter? It appears that most of the non-interest-bearing outflows occurred earlier in the quarter. How did the flows for non-interest-bearing balances look throughout the quarter? Did they stabilize? What were the main factors influencing that—were they taxes or more outflows due to failures? Also, have you noticed any stabilization in non-interest-bearing balances as we moved into the third quarter, particularly towards the end of the last quarter and early in the third quarter? Lastly, does this stabilization relate to the deposit costs as well?

Yes, let me address some of that, and then Byron will likely have additional comments. We noticed a slowdown in outflows throughout the quarter. Several factors are contributing to this, including tax payments and other events. More than 60% of those balances remain with us. Even when they shift from one category, they transition to another, allowing us to retain them within the company. However, due to the Federal Reserve's actions and the caution surrounding interest rates, this has altered the overall dynamics to some extent. Approximately 80% of those are linked to operating accounts. As we enter the tourist season, we are beginning to see some of those accounts replenish. We believe the most significant changes have already taken place, and although we may continue to experience some outflows, it will not be at the same pace as this quarter. Byron, would you like to add anything or provide further insight?

Yes, David, you're exactly right. Non-interest-bearing outflow happened early in the quarter. By the time we got to June, we did see some outflow, but very, very modest. I'm looking at the non-interest-bearing outflows in June was only $31 million. That has carried forward into July, looking at just a tiny bit of outflow, but very, very modest. We did see some strong trends throughout the quarter in terms of stabilizing deposit balances, and really encouraging signs that our strong seasonal summertime dynamics are gaining traction here as well. I think that's having a significant impact on our outlook for third-quarter deposits.

And did deposit costs kind of have a similar trajectory again, mostly front-end weighted and kind of a stabilization in May to June. Is that a fair characterization?

I do think deposit costs probably increased in the back half of the quarter compared to the front half, related to some special pricing that we had and other initiatives that were in place.

Okay. And then maybe just touching on the deposit growth side, I mean, it's great to hear you talk about 4,000 new accounts growing. I'm just curious where you're seeing success attracting clients. Obviously, you talked about some of the seasonality, but just curious maybe some of the deposit growth initiatives that you have in place to drive core deposits, and ultimately, kind of, how that plays into the deposit growth going forward. When can we start paying down some of the borrowings in those higher cost wholesale deposits? When do you think you can start doing that because that ultimately plays into the NIM trajectory going forward?

Yes, let me take the first part of that and then Byron, if you want to take the thoughts around the pay down. A couple of things, David. Number one, we're very happy that most of this growth is from existing customers. We've always had very good relationships, we had a decade of being very passive about reaching for deposits. That's all changed. The team has done an excellent job leveraging our existing relationships to pull that in. We include repos as part of deposits; we just view that as a secured deposit. When you look at total deposits from our perspective, deposits and repurchase agreements, we saw an increase. We did use quite a bit of technology with our marketing platform that allows us to target the customers that we think are good candidates to make an offer to, in terms of increased rate, without cannibalizing a very solid foundation of stable deposits. The new accounts, it's something we've been onboarding for decades; it’s our continual focus on bringing new accounts into the bank with very attractive low barrier products for both business and retail. It works very well, and with the in-migration numbers I mentioned earlier, we're still opening a lot of new accounts from people from California, Texas, and other markets, part of that 4,000 new net new accounts. We have also emphasized the importance of asking for a deposit relationship with every commercial and residential loan. More than 80% of the loans made in the quarter came with a deposit relationship. That's really the three-pronged strategy that we will continue to pursue that has worked very well for us. Byron, you want to touch on the pay down thoughts?

Sure. Yes, David, I do think that we'll have an opportunity this quarter to chip away at our wholesale brokered deposit balances. We've, of course already paid off our FHLB borrowings. So we made as much progress there as we can. If we're able to see some of these early signs in July, the seasonal trends, and the good flows that we've seen so far month-to-date in July, if those can continue through the rest of the summer as we expect they will, that will give us some flexibility to pay down some of our brokered CD balances.

Okay. That's helpful. And then maybe last one from me, just touching on the growth side, it sounds like the majority of the CRE growth was construction, and you guys had alluded to that before. I'm just curious maybe, the pulse of your clients at this point. How is demand exclusive of those construction fundings in the pipeline, and where are new loan yields, and what's your thoughts on growth going forward and your appetite for credit?

Yes, this is Tom. I can touch on that. Overall demand, certainly, we're not seeing the same level of top-line volume given the higher rates and the fact that we're more selective in our credit appetite. I mean, we've always been selective for decades and very conservative, probably more so, even now. As Randy mentioned, most of the growth in the first and second quarters was due to draws on existing construction loans. I would expect it to decelerate in the next couple of quarters. We'll probably see a little bit of slowing in Q3, further slowing in Q4 as tailwinds from those construction draws start to abate, and those projects finish rolling into the firm. Of course, as I mentioned, with the lower top-end volume, we’ll probably see overall net loan growth slow in the second half of this year and certainly in coming quarters.

That's helpful. Thank you.

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

Hey, good morning.

Good morning, Andrew.

Maybe for Byron really quick. Do you have the spot cost on the customer repurchase agreements at the end of June this quarter?

Yes. Spot cost for repo accounts at June 30 was $299.

Okay. And then just trying to wade through the last of the margin here. I guess, would you still anticipate margin compression in the third quarter versus the June margin of 267 basis points?

From what we're looking at, the full quarter expectation for the third quarter should be pretty close to that same level.

Okay, got it. And then just, I think you guys mentioned $230 million of new client deposit growth earlier in the call. Can you just talk about what the incremental funding or deposit cost is related to that $230 million, or just more broadly, how the incremental deposit cost compares to new loan production yields that I think are in the low-7s?

A lot of the growth is coming from our CD portfolio, and I want to say the average rate of our new issue CDs in the second quarter was between something close to like $470 million.

Okay.

The other thing I’d say is a good portion of those balances are just in the transaction accounts. So now, savings and the spot rates on those are under 50 basis points.

Got it. Understood. Ron, regarding the operating expense this quarter, specifically in compensation and employee benefits, was there any significant change in the deferred origination costs this quarter that may have contributed to lowering that expense in the compensation line?

No.

And if so can you quantify?

It's a very, very little impact from that because we grew loans in the first quarter and the second quarter; there wasn't any appreciable difference in that growth rate that would have an impact on the deferred compensation side of it.

Understood. And then maybe one last one from me if I could sneak it in just, it looks like the dividend payout ratio was, kind of, approaching 70% this quarter, and it sounds like, there will be a little more margin compression. Just maybe wanted to get a sense for the comfortability with the dividend or is that today.

Yes, I think we're very comfortable with it. We've got very strong capital; it's an important part of the strategy. We think the margin compression over the longer term is a shorter-term problem that will right itself in 2024. So we're very comfortable at those levels.

Okay. Thanks for taking the questions.

Our next question comes from Brandon King with Truist. Your line is open.

Hey, good morning.

Good morning, Brandon.

So all the NIM commentary is helpful, but from an NII perspective and with the possibility of maybe one or two more Fed rate hikes in the back half of this year. When do you think NII could stabilize going forward and also maybe assuming next year Fed funds are stable?

Yes, one of the factors I would highlight is the Federal Reserve. I believe that once it becomes evident that the Fed has finished its rate hikes, that's when we will see our margin and net interest income stabilize. Therefore, the extent of their actions is crucial. Will it be one more increase? Two? How long will they maintain this period of higher rates? These are all factors that will influence our margin in the coming months.

And do you think there is a quarter or two lag after a pause to re-stabilization, or do you think it will be pretty immediate?

We could see a little lag, there's a possibility of a quarter's worth of lag in that before we start to see stabilization. So I think that's a fair way to think about it.

Okay, and then we've loan repricing average loan yields were up 10 basis points sequentially, and I know you have a lot of fixed rate and adjustable rate repricing coming online, but is that a good, kind of, trajectory as far as what you can see from a benefit from a loan yield repricing?

Yes, Brandon it's Ron, I think we'll do better than the 10 basis points. The weight on that this quarter was the construction draws. We're getting higher rates, but some of those loans were made first, second quarter last year. There is still advancing. But yes, I expect better than 10 basis points.

Okay. And then just lastly, there was a decent uptick in service charges. I wonder if there's anything one-time in nature driving that just more context around it?

No, that's a function of usage and seasonality. So that’s typically what we see starting in the second quarter. Little bit of a pickup.

And that's a good base to go off going forward, correct?

I think so, yes.

Okay, that's all. Thanks for taking my questions.

You bet.

Our next question comes from Kelly Motta with KBW. Your line is open.

Hi, good morning. Thanks so much for the questions. I apologize about beating a dead horse about deposits and margin. But if I could, I'm going to do it would it kind of, I appreciate all the color Ron about and Byron about the deposit betas. But when it comes to your commentary about deposit betas, I'm just wondering what that assumes as far as DDAs as a percentage of total deposits, obviously, there's been a lot of focus on that lately with run-offs across the industry?

Yes, I think we will continue to see a little bit of run-off in the non-interest bearing, as we said that pace is going to materially slow, but I think we'll maintain a concentration greater than 30% of non-interest bearing total deposits.

Got it. Thanks for that. And then again I really appreciate the June margin at about 267 basis points and the commentary around the outlook there. Just trying to get a sense, is that kind of assuming we get one or two more rate hikes? Is that a good estimate of where merchant troughs, based on kind of just putting together everything, or is there still more pressure off of that 267 basis points to go?

Yes, in terms of our rate outlook that we're using to model and make some estimates around forward-looking margin, we do have two more hikes in there. I think the third quarter will be influenced by one more hike. The fourth quarter will be influenced by potentially a second hike. That's just an estimate that we're using in our model.

Okay. So under that would you anticipate additional pressure and kind of where we are assuming that that's the trajectory that rates follow. Do you have an idea of the level and the timing of when margin would trough?

That does put additional pressure on our fourth quarter margin relative to the third quarter. We're at trough, would probably be the first or second quarter of next year, assuming that two hikes and they're done.

Got it. And then, so that seems to imply that there could be some relief thereafter should the Fed be done, rounding out the margin question for me there. Do you have a sense of where margin could exit 2024 then under that sort of set of assumptions given what you're seeing on the funding side, as well as the repricing of your own loans?

Yes, sorry, we haven't looked that far out, but we'll have to dig into that and get back to you on that expectation.

Got it, got it. And I guess finally last one for me, I know you mentioned the brokered funding that you put on during the quarter, and mentioned that there might be some opportunity to pay some of that down this upcoming quarter, depending on if you get the seasonal inflows. Can you just kind of remind us the cadence of when that brokered funding matures? And how we should expect either I guess the roll-off of that as we get through the next year or two?

Yes, most of that will mature within the quarter. Most of the issuance with one, two, three months when it was done. We did dabble a little bit of six-month maturities, but I would say the lion's share of the $475 million will mature within the third quarter, you can give us an opportunity to evaluate it, do we roll it or do we allow some run-off to happen, based on where we are at that point in the quarter with core deposit growth. I think the core deposit flows will determine how much we let off.

All right, thank you so much for the questions. I'll step back.

You're welcome.

And I'm not showing any further questions at this time, I'd like to turn the call back over to Randy for any closing remarks.

All right, thank you, Kevin. And just want to thank everybody for dialing in today. A lot going on in the industry. So I appreciate you taking the time and have a great Friday and a great weekend. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.