Glacier Bancorp, Inc. Q1 FY2024 Earnings Call

Thank you for joining us for the Glacier Bancorp First Quarter Earnings Conference Call. All participants are currently in listen-only mode. Following the presentation, we will have a question-and-answer session. Please note that today’s program is being recorded. I would now like to introduce your host for today's program, Randy Chesler, President and Chief Executive Officer of Glacier Bancorp. Please proceed.

All right. Thank you, Jonathan, and 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; and Don Chery, our Chief Administrative Officer. I'd like to point out that the discussion today is subject to the same forward-looking considerations starting on Page 10 of our press release, and we encourage you to review this section. Yesterday, we released our first quarter earnings and an announcement regarding the approval of our purchase of six Montana branches after the close of the market. We experienced an increase in the net interest margin for the first time since the third quarter of 2022. The company's net interest margin as a percentage of earning assets on a tax-equivalent basis was 2.59% compared to 2.56% in the prior quarter and was primarily driven by the increase in loan yields outpacing the increase in deposit costs. This is a very welcome result and arrived a quarter sooner than we expected. We believe this trend will continue throughout '24 and into '25. It appears that we are entering a higher-for-longer period of interest rates, and that environment is good for the company as our lower rates. Interest income of $279 million in the quarter increased $5.9 million or 2% over the prior quarter and increased $47.5 million or 20% over the prior year first quarter. The loan yield for the current quarter was 5.46%, increased 12 basis points compared to 5.34% in the prior quarter, and increased 44 basis points from the prior year first quarter. The loan portfolio of $16.7 billion increased $534 million or 3% during the quarter. The core deposit cost was 1.34%, which increased 10 basis points for the quarter, which was the smallest increase since the fourth quarter of 2022. Total deposits of $20.4 billion increased $498 million or 3% during the current quarter and increased $279 million or 1% from the prior year first quarter. The $2.7 billion of Federal Reserve bank term funding was paid off during the quarter through a combination of Federal Home Loan Bank advances and cash. Non-performing assets of $25 million at quarter-end decreased $206,000 or 1% from the prior quarter and decreased $6.6 million or 20% from the prior year first quarter. Net income was $32.6 million for the current quarter, a decrease of $21.7 million or 40% from the prior quarter net income of $54.3 million. However, the current quarter included a total of $13.3 million related to credit loss expense from the acquisition of Wheatland Bank, acquisition-related expense and increased expense from the Federal Deposit Insurance Corporation special assessment. We completed the acquisition and core conversion of Community Financial Group, the parent of Wheatland Bank, a leading Eastern Washington community bank headquartered in Spokane, with total assets of $778 million. As you may remember, we consolidated our other Eastern Washington division, North Cascades Bank under Wheatland to create one brand in Eastern Washington. The two divisions have been combined, and the team has done an excellent job bringing our employees and customers together and focusing on building the Wheatland brand across the state. In February, we announced a purchase and assumption agreement with Heartland Bank to purchase six Montana branches from its Rocky Mountain Bank division, including the deposits, loans, owned real estate, and fixed assets associated with the branches. I'm very pleased to announce that we received all regulatory approvals yesterday and expect to close this transaction in July. It is a rare opportunity to purchase six branches of a well-running franchise in good markets where we already have divisional branch leadership and good knowledge of the customers. This transaction includes high-quality deposits and loans and a great team of employees, too. We expect to close and convert these branches in July. We also declared a quarterly dividend of $0.33 per share. The company has declared 156 quarterly dividends and has increased the dividend 49 times. This quarter, we're very pleased to be recognized by J.D. Power as number one in retail banking satisfaction in Montana, Idaho, and Washington. Forbes also announced that they ranked Glacier Bank as one of the top 10 in the US of the world's best banks. And that now makes it five consecutive years we have achieved this recognition. So, Jonathan, 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 David Feaster from Raymond James. Please go ahead with your question.

Hey, good morning, everybody.

Good morning, David.

Starting with the margin, you successfully increased the core margin quarter-over-quarter, and you've previously indicated that the bottom was reached sooner than anticipated. You also mentioned that the prolonged higher rate environment is beneficial, particularly regarding the earning asset mix. I was hoping you could clarify the expected margin trajectory for the year, assuming rates stabilize here and we remain in this prolonged higher rate environment. Additionally, please remind us of the anticipated benefits with each potential rate cut.

Sure, David. This is Byron. I can talk about margin. First of all, we’re very pleased to see that our margin grew in the first quarter. That was significant, and it happened a bit sooner than we anticipated. I believe the trends indicate growth throughout the year, regardless of whether the Fed cuts rates. We see some improvement if the Fed cuts, but maintaining higher rates for a longer period is still beneficial for us. In this rate environment, with fewer cuts pushed to later in the year, we are giving up a bit of margin upside. However, our branch acquisition that Randy discussed helps to offset that. Overall, we are largely in the same position, even with fewer anticipated rate cuts this year. I expect our full-year margin to be at the lower end of our previous guidance, which is $280 million, factoring in the benefits from the branch acquisitions mentioned by Randy. However, I would like to caution you that there is a potential headwind with non-interest bearing migration. If we experience an outflow in our non-interest-bearing deposit balances, it could negatively impact deposit costs and margin.

Absolutely. And maybe just kind of staying on that topic, could you talk about the trends that you saw in the quarter, especially on NIB and core deposits and how that progressed throughout the quarter? And just kind of the early read on the second quarter so far, and just how you're thinking about core deposit growth as we enter into seasonally stronger months?

Sure. Non-interest bearing balances experienced some outflow on a core organic basis during the quarter. Most of the outflow occurred in January, followed by slight growth in February and March. The acquisition of Wheatland contributed $250 million in non-interest bearing balances, which significantly boosted our balance sheet. We might see additional outflow in upcoming quarters, particularly due to seasonal tax outflows, which we have already observed in April, consistent with previous years. Regarding core deposits, I anticipate some outflow in the second quarter, but we are likely to align more closely with seasonal trends, which typically see strong inflows in the summer and early fall. Later in the year, some outflow may occur again, but overall, we seem to be returning to a normal seasonality that we observe year after year, which is a positive indicator. By the end of 2023, I expect our balance to be near where we ended last year, primarily driven by the acquisitions of Wheatland and new branches.

Okay. That's really helpful color. And then maybe just the last one for me. Touching on credit. I mean broadly, credit remains pretty benign. You guys are aggressive managers of credit. NPAs still are low, but early-stage delinquencies did tick up and it sounds like it's primarily on one credit. I'm just curious if you could touch on what drove that? And then your thoughts on credit more broadly, what you're seeing, what you're watching more closely and your thoughts on credit as you stretch your book.

The increase this quarter was mainly due to one relationship. We expect to have some resolution on that transaction in the second quarter. Overall, we are not observing any specific trends in stress across industries, asset classes, or geographies. There are no significant issues within the portfolio at this time, and we continue to monitor it closely. We regularly conduct stress tests on the portfolio for both economic trends and interest rates, and the results remain positive. We maintain a strong focus on credit risk management.

And so that credit, what industry was it in? And it sounds like you're expecting a resolution with no losses or anything pretty quickly?

The industry in question is hospitality, and the structure resembles an RV cabin. The sponsor is currently engaged in other projects that are being developed, which has slowed down the usual pace during winter. However, with some funds allocated to support these other ventures, we anticipate a return to the normal trend this summer.

That’s great color. Thanks, everybody.

Thank you. One moment for our next question. And our next question comes from the line of Kelly Motta from KBW. Your question please.

Hey, good morning. Thanks for the question.

Good morning, Kelly.

Maybe just starting with expenses. It looks like you came in right down the middle of where you said you went last quarter. Just wondering, if we look ahead, if there's any sort of puts and takes, cost savings we should be incorporating with Wheatland as well as how we should be thinking about any of the associated costs with the Heartland Bridge transaction you announced.

Yeah, Kelly, Ron here. Yeah, thanks for the recognition. We hit it right down the middle there. So that's pretty good. The point I want to make is the divisions, corporate departments, everybody continues to focus on that. The guide that I want to give for Q2, I'm going to stick with the $144 million to $146 million. But we're going to be on the high end of that. I think as we get through the second quarter. But speaking to Wheatland, we do expect to about another $2 million of cost savings that we'll have there. And those will be spread out over the three quarters ratably. One thing to keep in mind, another reason why I say the high end of that range closer to the $146 million. We only had two months of Wheatland in there, and now we're going to have a full three months. So that helps explain why it would be at the high end of that range. And then let me pause there. Any questions on that information?

No, I think that was explained quite well. Thanks, Ron.

Okay. Regarding the branch acquisition of Rocky Mountain, the key takeaway is that we will factor in $0.03 per share for operating income over the five months of 2024, with the transaction-related expenses mostly accounted for in the third quarter. We expect to close the transaction in July, so that operating income can be seen as $0.015 in each quarter. On an after-tax basis, the transaction expenses will amount to $0.05, which will mostly appear in the third quarter, with minimal impact anticipated for the fourth quarter. Overall, we're feeling optimistic about this.

Got it. That's helpful. Maybe turning to loan growth. Can you just provide an overview of what pipelines look like right now, how they're forming, where you're seeing the most opportunities and your outlook as you look ahead through the balance of this year.

Sure. Just to take a step back, we observed that our pipelines were fairly muted throughout 2023. With more stable guidance on interest rates, we've noticed a slight uptick in our pipelines during the first quarter, which is a positive sign. For our full-year guidance, we are maintaining expectations of low to mid-single-digit growth. I anticipate stronger growth in the second and third quarters, while the fourth quarter typically slows down. Overall, we expect low to mid-single-digit growth for the year. Regarding specific industries or regions, the opportunities are quite widespread across various sectors and our HP footprint, with no particular area standing out as significantly different.

Got it. That's helpful. And then maybe last one from me. I appreciate the color around margin and your expectation now that that's on the lower end of the previously provided range. Just wondering, as we think ahead, there are a lot of moving parts this quarter with the BTFP repayment. And just how should we be thinking about the size of the balance sheet portion? Do you still expect the balance sheet to grow through the balance of the year? Or is loan growth mostly going to be funded with securities flows and whatnot?

I do think loan growth will be funded with securities outflow. We do continue to see about $250 million of cash flow coming off of our securities portfolio. I think that's going to be a massive fund. The loan growth that Tom will see on his side of the balance sheet. So I think overall, our cash balance will probably maintain it in the range that you see it now, somewhere between $700 million and $800 million. So likely to see a fairly stable balance sheet; that's where we ended the quarter organically. And from there, just add the branch acquisitions that will happen later in the year.

Thanks a lot. I’ll step back.

Thank you. One moment for our next question. And our next question comes from the line of Jeff Rulis from D.A. Davidson. Your question please.

Thanks, good morning.

Good morning, Jeff.

Byron, sorry to get back on the margin, but I just wanted to clarify. I think when you said kind of low end at $280 million. We're talking about trajectory towards that at year-end. Is that correct way to think about that?

Yes. We do think it will be growing quarter-over-quarter and on the full year, end up in that $280 million area. So I would say from here, continued growth quarter-over-quarter. And we have a lot of positive dynamics in the structure of our balance sheet and the repricing of our assets that are not dependent on Fed cuts. And so that's really where you're going to see the growth in our margin for the rest of the year.

Okay. I think we were discussing last quarter about potentially exiting the year at 3%. This might include some rate cuts, and you mentioned this time that understanding rate cuts is important since we're still seeing an upward trend. Am I correct in thinking that even with the low guide of $280 million, if cuts don’t happen, the ending figure might be higher than $280 million? Is it fair to say we could average around $280 million for the full year?

That's right. Yeah. We'll be approaching the high 2s as we exit the year, and as I mentioned, what we give up with fewer Fed cuts, we kind of get back with the addition of the branches that are coming onto the balance sheet. So some puts and takes there, but overall, I do see us continuing to grow margin. And I think on the year, we'll be close to that low end of the previous guidance, as I mentioned.

Okay. And Randy, as you mentioned on this call and I think in prior calls, there's momentum into '25 as well as we kind of prior discussions, that's correct as well.

Yes.

Okay. I apologize for the follow-up questions. Regarding the expense side, Ron, I wanted to touch on this. I recognize the one-time expenses related to the branch deal. However, if we consider a high-end run rate of $146 million for the second quarter, what could we expect in the third quarter assuming we achieve some cost savings and incorporate HTLF or its corresponding division? What would the quarterly run rate look like excluding transaction costs and focusing on the core business?

In the third quarter, we will only have the Rocky Mountain Bank branches for five months. We anticipate achieving a 38% overall cost savings, but only half of that will come into play during this period. Therefore, the cost savings will not be significant at this point. The full impact will be felt in 2025 as we expect to realize 100% of the cost savings then. Since this deal involves immediate market operations and is not a typical stock transaction, there may be a slight increase in costs in the fourth quarter, but I cannot quantify that just yet. I want to assess the situation after we close the deal.

Okay. One last one, Randy. It's kind of a high-level question. I guess, we're a year removed from kind of the liquidity crisis or the peak of that. And I think in early '23, kind of circle the wagons with your team in terms of bringing customers back. And I guess just at a high level, do you feel like you've sort of reestablished the bank with those customers in terms of maybe some led away late in '22? And just kind of feeling where you are competitively on the deposit side and kind of a year removed, if you will.

A lot has happened since 2022. I believe the team did a fantastic job of reaching out after the turbulence we faced in the market, especially with the rapid rise in rates and the concerns surrounding the Silicon Valley Bank failure. The team has successfully worked to bring back many of the customers we wanted to retain. Currently, there are some strong customers available in the market, and considering what other banks are doing, we feel confident not only in retaining the good customers we had in 2022 but also in building relationships with new ones. Overall, it looks very positive. Although I still think the banking environment could be somewhat fragile, at this moment, it looks encouraging.

Thanks for the perspective. Appreciate it. Thanks.

Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Matthew Clark from Piper Sandler. Your question please.

Hey, good morning, thanks for the questions.

Good morning.

Could you provide the spot rate on deposit costs at the end of March, as well as the average NIM for March?

Sure. Spot rates on total deposits on March 31 was 136 million. And then the spot margin in the month of March was 2.61%.

2.61%. Okay. Great. Thank you. And then on the Heartland branch deal, can you help quantify the loans and deposits that are expected to come over, even if it's somewhat of a range and then the related margin on those combined balances?

Sure, Jeff, this is Ron. We're expecting to see an increase in deposits of $463 million. I'll also add in $7 million for repos. The yield from the deposits is $437 based on the coupon. I'll discuss the fair value adjustments and accretion shortly. For loans, we're bringing in $296 million with a yield of 5.37%. The average yield on deposits stands at 1.59%. To maintain deposits, they have had to increase pricing and manage some migration. The accretable dollar amount for the loans is $17 million, which includes both the rate and credit marks, fully amortized over more than five years. This should result in a healthy margin, both in actual terms and concerning the purchase accounting marks.

Okay. Great. Thank you. And then just on your efficiency ratio. It's higher than I'm sure you'd like it to be, I think, on an operating basis, about 72%, well above kind of your longer-term goal, 54%, 55%. Where do you think that efficiency ratio can get to by the fourth quarter of this year and then into next year?

I would say, just to give you a range, again, we're going to have to factor in the fact that we have those transaction costs coming in, so that factors in, even though I can say there M&A. So I would tell you, it will probably be 69%, 70% is realistically the best that we can do. That's all in. And if you pull out the operating, I would say, we could get to 74%, 75% range.

You mean lower, if it's excluding...

Lower, yeah.

Okay. So lower than the 69%, 70%, not higher with the ex merger charges? Okay.

Yeah. That’s right.

Okay. Are you suggesting that this will be by the fourth quarter of this year, or how are you considering next year?

It could be for the full year.

For this year.

Yeah.

Okay. All right, that’s it for me. Thank you.

Welcome.

Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question.

Hey, good morning.

Good morning.

If I could just follow-up quickly on the expenses, the $144 million to $146 million and maybe kind of higher end of that for the second quarter. I just want to clarify, is that on an operating basis, so excluding any merger charges? Or is it kind of fully loaded on a GAAP basis? I don't know if there are any merger expectations in 2Q?

Yes. So it is excluding the merger-related expenses in the second quarter. So we'll still have some trailing and estimated to be no more than $2 million trailing M&A expenses.

Okay, I understand. I may have missed this, but can you provide the operating expense increase we should anticipate in the third quarter from the branch acquisition? We can likely calculate it with the accretion math, but having the specific operating expense figure would be helpful.

Yeah, I would say it's going to be including the limited cost savings, again, just because it's a matter of time. I would go with $3 million additional noninterest expense will pick up from that.

Okay. that's helpful. I appreciate it. If I can go back to just the margin briefly, if I look at the taxable securities yields in the quarter, it was, I think 2.13%, but it looks like the cash position normalized a lot with some of the BTFP repayment. Can you maybe just provide the spot securities yields at March 31 or just share kind of expectations for how the reported securities yield should trend in the second quarter.

We're just verifying the numbers to provide you with the figures. While Byron is checking, the expenses that Ron mentioned for the branch acquisition amount to $3 million until the end of the year.

And circling back to the investment yields on our tax-exempt securities at 3.52% and our taxable investments are at a 1.60% yield.

Okay, perfect. Could you remind us about the bond book side and how much quarterly cash flow you expect there?

Yeah. We're getting about $250 million a quarter in cash on our securities portfolio. That includes principal pay down and interest payments.

Okay. Very good. Thank you for taking the questions.

Thank you. One moment for our next question. And our next question is a follow-up question from the line of Kelly Motta from KBW. Your question please.

Hey, thanks so much for letting me jump back in. I just wanted to follow-up two related questions on the margin. First, can you remind us on the fixed loan repricing coming off over the course of this year and next?

Sure. Just a moment. From March 31 to December 31, nearly $900 million of fixed-rate loans will be maturing this year.

Got it. That is helpful. And then my final question is about understanding the guidance correctly. Byron, when you mentioned that you now expect the margin at the low end of the provided range, approximately $280 million, does this assume a scenario of higher rates being sustained, with no changes in rates, rather than the three rate cuts you previously anticipated last quarter? I just want to clarify my understanding of the guidance you provided on that.

Sure. Sure. In that margin guide, we do have two cuts in our forecast, one in September, one in December. I would say because we do assume that there will be a lag between when the Fed cuts and when our deposit pricing will be able to come down, we're not getting a lot of benefit from a September, December cut in that current forecast. So the difference between higher for longer, no cuts and September, December cut is not that big in our model. It's a basis point or two at this point.

Got it. Thank you so much. That’s all from me.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Randy Chesler for any further remarks.

All right, Jonathan, thank you. We want to thank everybody for dialing into the call today. Have a great Friday and a great weekend. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.