Glacier Bancorp, Inc. Q3 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to Glacier Bancorp's 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. 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 Chief Executive Officer of Glacier Bancorp. Please begin, sir.

All right. Thank you, Norma, good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; Tom Dolan, our Chief Credit Administrator; Don Chery, our Chief Administrative Officer, who is on the road today visiting our Mountain West division. 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. So, we released our third quarter earnings after the close of the market yesterday, and the Glacier Bancorp team delivered another strong quarter. Net income was $52 million for the current quarter, and we generated earnings per share of $0.47. Net interest income ended the quarter at $167 million. Pre-tax, pre-provision net revenue came in at $68 million. Interest income of $265 million in the current quarter increased $18 million or 7% over the prior quarter and increased $51 million or 24% over the prior year third quarter. The current quarter interest expense of $98 million increased $23 million or 30% over the prior quarter. Our net interest margin as a percentage of earning assets on a tax equivalent basis was 2.58% for the current quarter compared to 2.74% in the prior quarter. And although the net interest margin has been negatively impacted by the increase in interest rates in the current year, we experienced a slower pace in the decline in the net interest margin during the current quarter. We like the positive trends on our interest income and expect some moderating trends on interest expense at this point, and believe this sets the stage for margin growth in 2024. During the current quarter, the team continued to focus on our diversified deposit and repurchase agreement products. Total deposits and retail repurchase agreements of $22 billion at the current quarter-end increased $530 million or 10% annualized during the current quarter. With the increased core deposits, we allowed $411 million of higher-cost wholesale brokered CDs to mature and not renew. Excluding these wholesale deposits, core deposits and retail repurchase agreements increased $941 million or 18% annualized during the current quarter. Noninterest-bearing deposits increased $7 million over the prior quarter, representing 32% of total core deposits at quarter-end. We're very pleased to see the strong deposit growth driven by all of our divisions. Our teams were able to leverage their strong existing relationships and market presence to achieve these impressive results. Total noninterest expense of $130 million for the current quarter decreased $1 million or 79 basis points over the prior quarter and decreased $484,000 or 37 basis points over the prior year third quarter. Our divisions continue to show great judgment in managing people and hiring positions only if needed and containing costs in other areas. The current quarter provision for credit loss expense was $5.1 million, which is a decrease of $160,000 from the prior quarter and a $3.3 million decrease from the prior year third quarter. The percentage of provision to loans was essentially flat to the last quarter at 1.19%. Our credit performance continues to be excellent. Nonperforming assets to bank assets of 15 basis points was little changed from last quarter, as was net charge-off to average loans, which ended the quarter at only 4 basis points. Early-stage delinquencies of $15 million at the end of the quarter decreased $10 million from the prior quarter and decreased $6 million from the prior year-end. Early-stage delinquencies as a percentage of loans at September 30 was 9 basis points compared to 16 basis points for the prior quarter and 14 basis points for the prior year-end. The loan portfolio of $16 billion increased $180 million or 5% annualized during the current quarter with the largest dollar increase in commercial real estate, which increased $72 million or 3% annualized. New loan production yields were 7.92%, up 55 basis points from the last quarter. Overall, the portfolio loan yield of 5.27% in the quarter increased 15 basis points from the prior quarter loan yield of 5.12%. Noninterest income for the quarter totaled $30.2 million, which was an increase of $1.2 million or 4% over the prior quarter. We added over 3,000 new retail and business accounts in the quarter with over $360 million in new relationship deposits. We declared a quarterly dividend of $0.33 a share. Glacier Bancorp has declared 154 consecutive quarterly dividends and has increased the dividend 49 times. And we announced the signing of a definitive agreement to acquire Community Financial Group, Inc., the parent of Wheatland Bank, a leading Eastern Washington community bank headquartered in Spokane, Washington, with total assets of $763 million as of September 30. This will be our 25th acquisition since 2000. We've already received some of our regulatory approvals for this transaction and expect to close, as we previously indicated, by this year-end. Our capital levels are strong and growing with estimated CET1 increasing 13 basis points from the prior quarter to 12.55%. We believe this level of capital is more than 100 basis points greater than the average of the 21 peer banks listed in our proxy. So, with that, we remain confident in the dynamic Western markets we serve and our unique business model to continue to deliver strong results. So, Norma, that ends my formal remarks, and I'd now like you to open the line for any questions that our analysts may have.

Thank you. And our first question comes from the line of Matthew Clark with Piper Sandler. Your line is now open.

Hey, good morning.

Good morning, Matthew.

Just a few questions around the margin to start and try to get some visibility going into the next quarter. Do you have the spot rate on deposits at the end of September and then the average margin in the month of September?

Byron, do you want to take that?

Yeah, Matthew, this is Byron. The spot rate at the end of September for total deposits was 1.17%. The margin for the month of September was 2.59%.

Okay. Great. And then the BTFP comes due in March, I think it's about $2.7 billion. What's your plan on that front? You added some cash or built some cash this quarter. Is that the plan to continue to accumulate cash and pay the whole thing off? Or do you expect to refi some portion of it?

Currently, we are exploring various options and we're in a strong position with over $1.7 billion in cash. We are assessing our choices and looking into alternative funding. Our primary aim at this time is to ensure we are well-prepared for future actions. We'll have a clearer understanding of our situation as we move forward, but our objective is to reduce our obligations. The exact level at which we can achieve this is still uncertain.

Okay. And then shifting gears to expenses. Any updated thoughts on the run rate outlook here for Q4 and into next year?

Ron here, Matthew. Yeah, so the guide will be $132 million to $134 million, and we feel very comfortable with that as an estimate. Fourth quarter, typically, we've got some cleanup and just leaving room for that as well.

Okay. And then the uptick in nonperformers. I know it's coming off a small base, and it's only $10 million, but any color around what drove that increase in terms of the types of borrowers and geography and kind of plans to resolve them?

Sure, Matthew. This is Tom. Yeah, as you said, starting off with a low number, so any movements going to move the needle. Really, what this quarter was about was really just a business-as-usual situation, just the ongoing ebb and flow of NPAs. There's no common theme. And both of them are non-owner CRE. One is the student housing, the other one is self-storage were really the larger drivers.

Okay. Thank you.

Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is now open.

Hey, good morning, everybody.

Good morning, David.

Regarding core funding, it's encouraging to see stability in noninterest-bearing deposits, along with notable growth in interest-bearing deposits. Could you provide insight into the trends you're observing in core funding? Also, where do you see the greatest opportunities for increasing core deposit growth? Lastly, concerning new account growth, what strategies are proving successful in attracting new relationship clients?

Sure. I'm happy to address that, and Byron might want to add later. We're very pleased with the growth in our core funding. It's largely attributed to our divisions and model. They have strong relationships and customers, which has led many existing customers to move their deposits back to us from other institutions. This trend is very encouraging. We don't need to look far beyond our current relationships to see the growth we've achieved. Additionally, we are also satisfied with the new accounts we’re bringing in. We're noticing a good amount of new customers as we scale our presence in various markets. By becoming one of the larger institutions providing excellent service, especially as some competitors falter, we can attract more new clients. Our divisions focus consistently on acquiring high-quality new customers, and they have an effective process for this. It begins with taking care of our existing customers and strengthening those relationships, while also maintaining a strong strategy for attracting new accounts that’s proving successful for us.

That's great. Following up on the margin commentary, I'm curious how you view the margin and the NII trajectory in the context of a prolonged high-interest-rate environment. It seems likely that funding pressures may persist in the near term. Given the larger balance sheet, we might see NII stabilize, but there could be some margin compression in the first or second quarter of next year. If rates remain high, how do you see the margin and the NII trajectory evolving?

Yeah, David, this is Byron. I can address that. I think higher for longer sets up really well for us. We're already seeing signs of slowing deposit cost increases. And so that's going to be very helpful. Every month, we have loans that are repricing higher into this rate environment. We're getting the remix of cash flow from investments into loans. And with the pace of deposit cost increases slowing, I think that's going to be helpful long-term for the margin. And as that deposit cost really levels off, I think we'll see growth next year, as Randy noted in his comments in '24. The timing of that, we're still trying to pin down. We're right in the middle of our budgeting process. And so, a lot of it has to do with our outlook for growth in loans and deposits. A lot of it depends on the Fed and what the Fed does. Do they need to get more aggressive in order to really stem inflation? We'll have to see. But I am very optimistic about the trajectory for margins in the higher for longer environment.

Okay. That's terrific. And then last one for me. I'm just curious, maybe touching on the loan demand side. What are you hearing from your clients? What's the pulse across your footprint? How is the pipeline shaping up as we head into the fourth quarter? Where are new loan yields? And then especially just digging into the CRE side, I'm curious where you're seeing good opportunities there? And what type of deals still pencil at these higher rates?

Yeah. I think I'd just say overall, and I want Tom to fill in the details. But overall, the rates are getting to a point where it's starting to reduce loan demand and customers still feel I think, relatively confident. But at these rates, they're really rethinking some of their projects, not all of them, but we are seeing a deceleration in the incoming business. Tom?

Certainly, it requires significantly more cash equity to make deals work at the current interest rates compared to a year ago. Our pipelines have decreased from the last couple of quarters and are lower than last year, but have stabilized in recent months. We're still aiming for just under 8% on the commercial real estate side. What we are observing is that the deals coming through generally require more cash equity upfront.

That makes sense. Appreciate, guys. Thank you all.

You're welcome.

Thank you. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is now open.

Thanks. Good morning.

Good morning, Jeff.

I wanted to inquire about the pace of the decline in the wholesale brokered CDs. Was that decline consistent throughout the quarter? You went from close to $500 million down to under $100 million, so I wanted to understand if that change was steady over the quarter or if it fluctuated.

The decline in brokered mostly occurred in July, with the majority happening in that month and a small amount continuing into August and September.

I see. Okay. So, you probably captured a decent amount of that benefit in cost of funds? Or just trying to get a sense for, Byron, as you range-bound these variables into timing, and I know that I respect the still working on the timing, but a bottom of the margin in the fourth quarter, all things being equal, would you be surprised if that is the bottom in Q4?

It's possible to see scenarios where that occurs, but there are also risks involved. On one hand, as Randy mentioned, we are accumulating cash that adds to net interest income, but this does exert pressure on margins. Ultimately, it depends on what the Federal Reserve decides to do, and they may need to adopt a more aggressive approach. Additionally, the stabilization of our noninterest-bearing balances has been beneficial to margins. However, if we experience further runoff in those balances, it could impact our margins. Therefore, while I can envision a situation where we reach a bottom in the fourth quarter, there are numerous variables that need to be considered as we observe how things unfold.

Okay. And you said the September average was 2.55%?

I'm sorry, what are you asking?

September margin average?

The September margin was 2.59%.

Okay. I appreciate it. And then just a couple of housekeeping, Randy, on the Wheatland close, again, for year-end, does it seem more back into the quarter or just specific timing?

Well, we're still getting the regulatory approvals, but we're being conservative towards the end of the year. Back end, yes, that's probably more likely.

Got it. And for the last question, Ron, you mentioned expenses for the fourth quarter. It's been an outstanding year regarding expenses. I'm uncertain what that indicates for 2024. You've done a great job maintaining control over them. I'm not sure if it's because you are continuing to discover efficiencies. Could you share your thoughts on expense growth for 2024?

We are currently in the budgeting phase, and I want to ensure I don't jump ahead of the team or my thoughts. I appreciate the acknowledgment of the hard work that has been accomplished. I believe this approach will carry into 2024. We are concentrating on headcount, full-time equivalents, and maximizing the technology and operational efficiencies that we are experiencing.

Thank you. Our next question comes from the line of Kelly Motta with KBW. Your line is now open.

Hey, guys. Good morning.

Good morning, Kelly.

It was nice to see the deposit growth this quarter. I believe some of that was seasonal inflows. Do you have an estimate of the dollar contribution from that? And as those funds flow out, how should we think about the dollar amount of net interest income? Would you expect that to trend lower from this Q3 level?

I can address the seasonality aspect. We made significant strides in growing deposits during the third quarter. Part of this growth was attributed to the usual seasonal strength we experience in the summertime. Additionally, our pricing strategy contributed to this increase. What is particularly promising is that the growth we saw in the third quarter occurred alongside a slower overall rise in costs compared to the second quarter. It's challenging to determine the exact proportion of that growth attributable to seasonal factors versus rates, but I would estimate that about half came from seasonal influences, while the other half was driven by other factors mentioned by Randy in his comments.

Thank you, Byron. Can you clarify the seasonal trends? I know summer typically shows strong performance, but does that primarily result in outflows in the fourth quarter, or does it gradually continue over the next couple of quarters? I would appreciate your insights on the dynamics we should consider, as well as whether you are holding any cash that might have contributed to your securities yields this quarter. I'm trying to understand how the security deals might be affected if that cash is released alongside the seasonal deposits, and what the overall timing looks like.

From a seasonal perspective, the fourth quarter presents a bit of a mixed situation. We expect some strength in the first half of the quarter, with activity picking up in the latter half. Overall, I anticipate deposits to be flat or slightly up in the fourth quarter. Regarding securities, the cash flow is increasing with the portfolio, and we now expect it to be around $250 million per quarter. We had previously hoped for stronger growth, but since the portfolio is in runoff, those cash flows have decreased somewhat. As for your question about holding cash for seasonal outflows, I do not expect any significant seasonal outflows that would necessitate using our cash reserves at this time.

We see tourism as a consistent factor across all of our markets, and many of our customers are accumulating reserves in the third quarter to sustain them in the fourth quarter. This is a reason for our generally flat or occasionally declining performance. Additionally, the situation could be affected by events in the fourth quarter. If a government shutdown occurs, it may lead to increased demand for cash than we initially expected. We are operating in an uncertain environment, but typically, as Byron mentioned, the fourth quarter tends to be stable.

Thank you so much for all the color. Just kind of a high-level question. Are there any markets that are performing particularly well as of late versus others that might be slower and ones that you might be watching more closely? Just interested, since you guys do cover much of the West, wondering about what you're seeing on the ground there.

Yeah. In the eight states, so from Montana down to Arizona, I would say it's pretty even across all our states. Arizona continues to have a very, very strong economy. But we also see continued growth in Idaho, Utah, and Colorado. And so, just all doing well, I think the same trends that drove the growth prior to the pandemic are still there, lower cost of living, higher quality of life, little business-friendly environments, still pulling in, we're still seeing the immigration and I think good economic activity as well despite kind of amazing if you think about all that external headwinds outside the banking industry, still seeing a fair amount of optimism and growth.

Thank you so much for all the color. I'll step back.

Thank you. Our next question comes from the line of Brandon King with Truist. Your line is now open.

Hey, good morning.

Good morning, Brandon.

Yeah. So loan yields uptake pretty materially compared to my expectations. So I just wanted to get a sense of are you expecting a similar type of increase in loan yields for the next couple of quarters?

Yes, Brandon, this is Tom. Not to the same level. I wouldn't expect that. I think we're starting to near kind of the top of the new production yield curve. And as Randy mentioned earlier, they're at a level now that it's starting to impact the pipeline and demand.

Okay. Can you provide insights on the near-term loan repricing? I’d like to know about back book levels and what’s in the repricing pipeline?

Every year, about 20% of the entire portfolio either returns or reprices. This includes the variable rate, which accounts for 90% of loans. We're continuing to observe this trend in practice as well.

Okay. And that adjustable portion, how much is that portion you mean?

I'm sorry, are you asking about the floating portion?

No, the adjustable rate portion that...

Yeah. So that would be 11% of the 20%.

Okay. So not floating, but kind of fixing and adjusting every five years or so.

You're welcome.

Thank you. Our next question comes from the line of Andrew Terrell with Stephens. Your line is now open.

Hey, good morning.

Good morning, Andrew.

I appreciate all the color on the deposit kind of expectations. It was good to see the growth this quarter. I was just curious, for the incremental or the mix of the incremental deposit growth that you would expect, would you expect that to look similar to 3Q, so a heavier tilt towards CD balances? And then, can you just maybe talk to us a little bit about your CD pricing strategy? Where are new time deposits or where did new time deposits come on at during the third quarter?

Sure. I can touch on that. In terms of growth drivers going forward, I think should we see growth, it probably looks similar to what we saw in the third quarter. In terms of kind of product mix, CDs are clearly a very popular product right now. Pricing strategy, each division is priced for their market. And so that's one thing that I love about our model is we can optimize to 17 different markets around our footprint. We're competitive in our pricing. I would say most of our CDs, the new CDs that we're bringing in are somewhere in the range of 4% to 5%.

Got it. Okay. Thank you. And then just wanted to revisit the deposit beta guidance last quarter, I think the expectation was revised to a 25% through-cycle beta expectation. Is that still in the cards? Or do you think we could see some incremental pressure to that 25%?

Right now, I see it as we're still on track to hold to the 25%. I mentioned the declining pace of cost increase. I think we're right on the path right now. So, very encouraged by signs and the progress that we've made so far. We did see some meaningful increase second quarter, third quarter, but that cost increase is really leveling out. And so, if we're able to hold on that path, then we're right on track for 25% through the cycle beta.

Yeah. Okay. And then just I wanted to kind of ask the margin question maybe a different way, because I know the margin is going to be influenced by some of the cash that was put on this quarter and presumably maybe a little bit of cash build going forward. But in terms of net interest income dollars, would you expect that Q3 was the trough in NII? Or could we see maybe some leveling off again in the fourth quarter before NII starts to grow throughout 2024 in line with kind of some of your margin commentary?

I think leveling off is probably the right word. We've seen some encouraging signs of stabilization, and I believe we will see the fourth quarter come in very close to where we were in the third.

Okay. If I could ask one more for Randy. Maybe just wanted to get your updated thoughts on the M&A landscape as we sit today, and I know you've got a current deal pending that sounds like it will close by the end of the year. But as we move into 2024, just how you're thinking about M&A as a strategy for Glacier?

We're quite optimistic. Our optimism stems from the reduced number of companies actively pursuing opportunities compared to the past. This is a positive sign for us, given our experience. The level of activity remains roughly the same, with ongoing discussions that aren't as robust as they were two years ago before the pandemic. However, there are promising conversations happening. As banks reassess their balance sheets and consider prolonged higher rates, we anticipate an increase in discussions regarding the future and the patience some banks might have in waiting for positive changes versus exploring other options. Many strong banks are asking these important questions. While we need to move into 2024 to see how this develops, we haven't observed a surge in deals, but we are encouraged by the steady and meaningful conversations with some solid banks.

Okay. Thank you for taking the questions, and congrats on a good quarter.

Thank you.

Thank you. At this time, I'd like to turn the conference back to Mr. Randy Chesler for closing remarks.

Okay. Thank you, Norma. We appreciate everybody dialing in, having a conversation about how the quarter went, very happy with it, and we hope you all have a great Friday and a great weekend. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.