Glacier Bancorp, Inc. Q2 FY2024 Earnings Call

Good day, and thank you for standing by, and welcome to Glacier Bancorp's Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. Please be advised that today's conference is being recorded. Now I'd 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, Justin, and good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, Chief Financial Officer; Byron Pollan, our Treasurer; Tom Dolan, our Chief Credit Administrator; Don Chery, our Chief Administrative Officer, and joining us on the phone is Angela Dose, our Chief Accounting Officer. I'd like to point out that the discussion today is subject to the same forward-looking considerations starting on page 13 of our press release, and we encourage you to review this section. The positive trends that were evident in our first quarter came into sharper focus in the second quarter. We have strong EPS growth for the quarter, driven by lower non-interest and credit loss expense. Net income was $44.7 million for the quarter, which increased $12.1 million, or 37% from the prior quarter. Net interest margin grew 9 basis points from 2.59% in the prior quarter to 2.68%. Net interest income ended the quarter at $166.5 million, which was flat compared to the prior quarter. This was driven by a decrease in interest income of $5.6 million in the quarter, primarily due to using cash, which we deposit at the Fed and earn 5.4% on to pay down borrowings at the end of the prior quarter, which drove a decrease in interest expense of $5.6 million. We expect to see net interest income growth in the third and fourth quarters and into 2025. The loan yield for the current quarter was 5.58%. It increased 12 basis points from 5.46% in the prior quarter and increased 46 basis points from the prior year second quarter. Our total cost of funding in the quarter, including non-interest-bearing deposits, decreased 4 basis points from the prior quarter to a total cost of funding of 180 basis points, driven by a reduction in borrowings. Core deposit funding cost increased 2 basis points, ending the quarter at 136 basis points. Borrowing costs increased 14 basis points, but the average borrowing balance decreased by $735 million, which is why interest expense decreased for the quarter. We were pleased to see non-interest-bearing deposits of $6 billion increase $38.4 billion or 3% annualized during the quarter. While core deposits of $20 billion were down versus the prior quarter, excluding the Wheatland acquisition, they were essentially flat to the prior year second quarter. For provision expense, we reserved $3.5 million in the quarter, which includes $5.1 million of credit loss expense and $1.6 million of credit loss benefit from the unfunded loan commitments reserved. We kept the percentage of provision to loans essentially flat to the last quarter at 1.19%. Our credit performance continued to be very stable. Non-performing assets to bank assets and net charge-offs to average loans performed very well. Early-stage delinquencies decreased $12.7 million from the prior quarter. Early-stage delinquencies of $49.7 million as a percentage of loans were 0.29% versus 0.37% in the prior quarter. Non-interest expense ended the quarter at $141 million, down $10.9 million or 7% versus the prior quarter, primarily due to a reduction in regulatory assessments, acquisition-related expenses, and expenses associated with tax credit investments. Additionally, we had one-time branch building sale gains of $1.9 million in the quarter that reduced our expenses. Non-interest income for the quarter was $32.2 million, reflecting a good pickup at the beginning of the summer, including increases in both service charges and gain on sale of residential loans. The loan portfolio of $16.9 billion increased $119 million, or 3% annualized during the quarter, reflecting continued steady, disciplined growth. Stockholders' equity of $3.1 billion increased $26.7 million, or 1% during the current quarter and increased $211 million, or 7% over the prior year second quarter. We also declared a quarterly dividend of $0.33 per share. The company has declared 157 consecutive quarterly dividends and has increased the dividend 49 times. In mid-February, we announced a purchase and assumption agreement with Heartland Bank, who had decided to exit the Montana market. We purchased six Montana branches of its Rocky Mountain Bank division, including the deposits, loans, owned real estate, and fixed assets associated with the branches. As I previously noted, 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 a good knowledge of the customers. This transaction includes high-quality deposits and loans and a great team of employees, too. We expect to close this transaction at the end of the day today and convert these branches to Glacier systems over this weekend. We welcome our new Rocky Mountain Bank teammates and their customers to Glacier Bancorp. So that ends my formal remarks, and I would now like Justin to open the line for any questions that our analysts may have.

Thank you. And one moment for our first question. And our first question comes from Matthew Clark from Piper Sandler. Your line is now open.

Hey, good morning, everyone.

Good morning.

First one for me, just on the Heartland loans and deposits that are coming over this evening. Can you just update us on those balances?

Sure. Ron, would you like to share the totals? We have $403 million in deposits, and the loan figures are finally coming in.

About $280 million.

Okay, got it. And then just on the accretion that's expected to come through, I think it was assumed to be $17 million over five years previously, any update to that number?

Yes, the current estimate is still $16 million over five years, which remains very positive.

Okay. And then on the deposit costs, the increase slowed here, which is good to see, I guess, what's your outlook for kind of the upcoming quarter? Do you feel like you can stabilize here? Do you feel like you might trickle a little higher or have you started to trim deposit rates?

Yes, Matthew, this is Byron. I can address that. We have had a lot of success and continue to stabilize our deposit costs. I think we can maintain that. We are still testing customer acceptance of lower rates, and we are seeing some success in certain cases. However, we are still experiencing some rate migration, which poses a challenge. Overall, I believe we will be able to continue achieving stabilization in our total deposit cost.

Okay. And then just any update on the 3% NIM guide for 4Q, does that still hold true?

Yes. In terms of margin, I think the same drivers we've discussed before are still there. We're pretty much in the same place, we have very strong dynamics, including asset repricing momentum, that is still there, on top of that, we have the Rocky Mountain branch acquisition that, as Randy said, settles today, so that will provide some boost. So as we go through the year, we are expecting to see growth. And as we exit the year, I do think we'll be in the neighborhood of 3%.

Okay. Regarding securities repricing, I believe you have a larger amount that will reprice next year. Could you provide the specifics on that amount and the yield associated with it?

Yes, we do have some chunkier treasury securities that will mature beginning really in the fourth quarter of next year, somewhere in the neighborhood of $250 million. I don't have a yield for you on that, but consider them to be low.

Yes, okay. And then just on expenses, some moving parts there this quarter, the branch sale gain, I think there was a refund on FDIC insurance relative to your prior estimate, you've got the merger charges and then the performance comp adjustment, seems like the adjusted run rate maybe going forward, or at least when you normalize it for this quarter, was around $143.4 million. Any updated thoughts on the run rate guidance here in 3Q and 4Q?

Yes, Ron here. Matthew, let me explain how we arrived at our figures. We recorded $141 million in the second quarter. After subtracting the merger-related expenses of $1.8 million and adding back the $1.9 million gain from the sale of the former branch, along with the $500,000 left from the FDIC accrual and the $1.8 million reduction in performance-based compensation, we total approximately $143.4 million. This is at the low end of our previous guidance of $144 million to $146 million. Kudos to the divisions for their efforts. However, we are still facing inflationary pressures as we renew multi-year contracts. With that in mind, our guidance for Q3 is $145 million to $147 million. This is influenced by the addition of six branches, even with ongoing branch consolidation, leading to higher non-interest expenses from that business combination. We are also continuing to invest in our control functions, which is essential. Therefore, I’ll reiterate our Q3 guidance of $145 million to $147 million.

Okay. Thank you.

Thank you. And one moment for our next question. And our next question comes from Jeff Rulis from D.A. Davidson. Your line is now open.

Thanks. Good morning.

Good morning, Jeff.

Byron, I just wanted to go back to the margin. So to get to three, like we got to double the sequential increase of the second quarter, I just want to make sure that that's the case. You see an acceleration of margin from the Q2 jump-off point, is that right?

Yes. We do see some acceleration. I don't know if doubling is the right way to think about it, but we do see some acceleration in the third quarter and some momentum carrying into the fourth quarter as well.

Okay. And do you have the exit margin or maybe the June average?

The June margin was 2.70% for the month of June.

Great. Thank you. I wanted to hop over to the fee income side. I thought that that was a pretty impressive quarter, as Randy said, that service charge, miscellaneous fees, gain on sale, maybe not interested in your thoughts about the sustainability of that growth rate or is that sort of a leg up from a full quarter of Wheatland trying to unpack or is it maybe some seasonality tailwinds. Anyway, just checking in on that growth rate and see the comfortability of that going forward.

Yes, Ron here. I would say it's sustainable. Tourism is still very active in our communities. We are very focused on opening checking accounts, and all of that is positive. The gain on sale will remain flat, but overall, it looks pretty positive.

Okay. And Ron, would expect seasonality there, so it sounds like Q3 pretty strong and robust, but maybe as we get into Q4 and first quarter, maybe softens up a bit or...

Exactly, as you would expect.

Okay. And one other one, just to kind of touch on the loan balances, a decline in the construction segment, my guess is that's kind of finished projects, and I guess more interested in the go forward, is that pipeline refilling? What would be the outlook on the second half for growth? You've been pretty consistent in the low-to-mid-single-digit, but wanted to see if that's changed at all, what you're seeing into the second half?

Yes, Jeff, it's Tom. I don't see that changing; we believe low-to-mid-single-digits will carry through to the end of the year. As you mentioned with Ron, there's some seasonal effects as well. I would expect the third quarter to show some additional strength, and in the fourth quarter, we typically face headwinds when the agricultural production loans start to pay back at the end of their growing cycle. Regarding construction, the trend of moving from construction to permanent loans is accurate. We observed this in the second quarter. Overall, we experienced a nice increase in the pipeline during the first quarter, which has stayed consistent throughout the second quarter. However, the types of deals in that pipeline have shifted slightly, with a decrease in construction and development sites. Currently, we're not replacing construction and development loans as quickly as they transition to the firm side.

Okay. Appreciate it, Tom. Thank you.

And Thank you. And one moment for our next question. And our next question comes from David Feaster from Raymond James. Your line is now open.

Hi. Good morning, everybody.

Good morning, David.

I wanted to maybe touch on your thoughts on the earning asset side and somewhat kind of the mix. It seems like you're going to have enough securities cash flows to fund loan growth with potential for excess, especially with any type of core deposit growth as we kind of go into a seasonally stronger period. I'm curious, how you think about plans for, if you do have any excess liquidity, would you opt to reduce borrowings or let non-core funding run off or reinvest into shorter duration securities and kind of maintain the earning asset size, just kind of curious anything about the size of the balance sheet going forward and the mix?

Yes, regarding the balance sheet mix, if we accumulate any excess liquidity, our priority would be to reduce our wholesale funding balance. We currently have some overnight FHLB advances, and we will work to pay down those borrowings. Excluding any mergers and acquisitions, including the Rocky deal that is finalizing today, I expect our balance sheet to remain relatively stable through the end of the year. Additionally, we will factor in the additional loans from the Rocky transaction. Overall, I would characterize our balance sheet as stable, plus the contributions from the Rocky deal, for the remainder of the year.

That's helpful. I want to switch to the deposit side. It's obviously a seasonally tougher quarter due to tax payments early in the quarter, which makes the non-interest-bearing growth you observed even more impressive. Could you also discuss some of the trends you experienced regarding core deposits throughout the quarter and into early July, along with your expectations for core deposit growth moving forward and how pricing is trending?

Certainly. During the quarter, we experienced some interesting trends in our flows. The April tax payments significantly influenced our total deposits, resulting in an outflow in that month. However, when combining the figures for May and June, we observed a slight increase that did not completely offset the April outflow. The non-interest bearing deposits showed promising growth after the April decrease, with an encouraging upward trend in May and June. This growth is beneficial for our cost stabilization efforts. The industry is indeed facing challenges with deposits, which we are experiencing as well. However, we typically see some seasonal strength, so when comparing our historical seasonal patterns with the current industry challenges, I am optimistic about seeing some growth. I anticipate a slight increase in our third quarter balance outlook, while projections for the fourth quarter suggest it may remain flat. Overall, this outlines my perspective on our deposit trends for the remainder of the year.

Okay, that's helpful. And then just last one for me. Curious, kind of what you're seeing on the M&A front. Obviously, you're an acquirer of choice across your footprint. You've got this branch acquisition closing now, but I'm curious, your thoughts on maybe the pace and pulse of the conversations you're having and expectations for consolidation near term, your appetite to participate in that, and if you're still expecting to focus kind of on that sub $1 billion asset size deal or if you've got any interest in larger transactions, just given the increased scale.

We're pleased to have completed the Wheatland conversion successfully and it's performing well at the start of the year. The Heartland branch acquisition will finalize today and its transition will occur over the weekend. Considering it's a branch acquisition, we anticipate a moderate pace moving forward. We're engaged in various discussions, and if the stock price for regional midsize banks continues to rise, we expect to see an increase in activity, allowing more people to pursue deals. Previously, we could assess deals based on the strength of our currency, but now, more participants can engage in the process, so we expect activity to increase. Our target range for acquisitions remains unchanged, typically between just under $1 billion to over $4 or $5 billion, depending on availability and strategic fit. It's important for us to maintain discipline in choosing the type of banks we want to acquire, despite the high volume of inquiries and opportunities we receive.

Makes sense. Thanks, everybody.

Welcome.

Thank you. And one moment for our next question. And our next question comes from Kelly Motta from KBW. Your line is now open.

Hi, good morning.

Good morning, Kelly.

I wanted to circle back to expenses. I appreciate the color of the moving parts of the quarter and the Q3 outlook. It sounded like from your remarks around that, there's some inflationary headwinds still. Can you remind us what cost saves are left from Wheatland, as well as how you should expect the Heartland branch acquisition cost saves to flow through? And is it fair to say that, net-net, that range is probably still good to carry forward, at least for the next couple of quarters or just wondering kind of the puts and takes as we look ahead from that understanding, you might have some cost saves there.

Let me start with Wheatland, reiterating what I mentioned in our earlier call from April. We expect to achieve 50% cost savings in 2024, which will result in $2 million reflected in the second, third, and fourth quarters. Initially, there weren't significant savings right away, but we're performing very well overall. Regarding the Rocky Mountain Bank acquisition, we are anticipating 38% cost savings, with half of that expected to materialize in 2024. However, I only have five months to realize that, equating to about 8% of what we will save in non-interest expenses. Considering this, we estimate around $1.3 million in non-interest expense savings in Q3, followed by $1.7 million in Q4, totaling approximately $3 million over the next two quarters. I also want to mention that we will have branch consolidations, leading to some branches being put up for sale, but I have not accounted for any gains or losses from that process. I do not anticipate any losses. However, my guidance of $145 million to $147 million does not include any potential gains from the branches that may be sold in the coming months, which could take some time to finalize.

Got it. That's super helpful. And as we look ahead, assuming we get some rate cuts either later this year and through next, just wondering if there's any change in how you're anticipating deposit costs to react on that. You guys have obviously done a good job managing those on the way up, but I'm just curious, it's encouraging to see some of that cost moderating. Just curious what you were expecting with that.

Yes, relative to any kind of rate reductions, I think we're pretty cautious on expecting that those are going to transfer right to the customers, so we have pretty conservative assumptions built into our expectations around that, Kelly. I know that if you talk to different banks, they have different expectations about how much of that they can pass on to their customers right away. And I guess our view is it's been a long way up to this point and that it's going to take a while to move off given the rates and the certainty that people feel like those are going to continue.

Got it. That's helpful. Maybe last for me, with the deposits you're picking up, do you have what the incremental cost of that funding is?

Yes, Kelly, give me a moment. The deposits are coming in at a nominal amount of 1.65%. To retain these deposits, they have had to backfill with CDs, and we have seen a rate increase; last quarter, they were at 1.59% and now they are at 1.64%. I believe they have done a good job in retaining these deposits.

You're talking about the Rocky Mountain...

The Rocky, yes, this is Rocky, yes.

Got it. Thank you.

And thank you. And one moment for our next question. And our next question comes from Brandon King from Truist. Your line is now open.

Hey, good morning.

Good morning, Brandon.

So, as I understand, are you expecting to hit that 3% net interest margin with the balance sheet, I guess flattish from these levels, and is that including Heartland branches?

That does include the Heartland branches, and when I say flat, that's organic without Rocky, so there would be some growth coming from the acquisition of the Rocky loan.

Could you explain the decrease in average taxable debt securities? There was a significant drop in the average, and cash income fell from $15 million to $2 million. Is there anything specific to mention regarding these changes?

Sure. When we examined the change in the Average Daily Assets, we need to refer back to the first quarter and consider the balances related to the BTFP. We did reduce the BTFP balances, which occurred very late in the quarter, around March 20. We paid off the BTFP and replaced it with FHLB advances, but at a reduced amount. As Randy mentioned, we utilized some of the excess cash on our balance sheet to pay down wholesale funding, and with the amount of BTFP we paid off, we didn't replace it with as many FHLB advances. Since this action took place late in the quarter, it did not significantly affect the Q1 average, but it did impact the Q2 average as it was completed by April 1. This explains the change in averages from Q1 to Q2.

Okay. So I guess that cash interest should continue to be kind of running, I guess, maybe a little higher than $2 million, is that fair?

And cash will fluctuate day to day as we manage inflows and outflows of loans and deposits, et cetera, but when we look at the Q2 average for cash, it should be fairly consistent in Q3 and Q4. That's kind of the stable-to-flat comment that I made earlier.

Okay. Thanks for taking my questions.

And thank you. And one moment for our next question. And our next question comes from Andrew Terrell from Stephens. Your line is now open.

Hey, good morning.

Good morning, Andrew.

I had a question about the most recent disclosure in the Q regarding the swap positions, which I saw was about $1.5 billion of swaps against the bond portfolio that were added late last year. So my question is, first, were any additional swaps added this quarter? Secondly, did you realize the benefits from the swaps in the second quarter? Lastly, could you provide an overview of your hedging or derivative strategy?

Yes, we added $1.5 billion in swaps in Q4. We haven't made any new additions since then. Overall, we're examining our position regarding a liability-sensitive balance sheet and considering market expectations for potential rate cuts. We are assessing whether we are at an inflection point concerning the front end of the curve. We're also reviewing our projections for growth in loans and deposits, along with the pending acquisition from Rocky Mountain, as we integrate all these factors. However, from an interest rate risk perspective, we haven't acquired any additional swaps and currently have no plans to add new swaps in the near term.

Okay. I appreciate it. And if I could ask a couple more around the deposits coming over with the branch acquisition, I think you said $403 million, if I recall, I think last quarter we talked about $460 million or so. One, just curious, anything kind of specific driving the decline sequentially in those deposits or is it just kind of more broadly deposit pressure that we're kind of seeing across the industry. And then also if you have the non-interest-bearing split of the acquired deposits would be helpful.

Sure. What's going on there is some of what's going on in the industry, just some headwinds on deposits and also some sorting out. So we worked with Heartland and the other buyer of the branches. We probably started off with a gross number and I think ended up with a net one. There was some customers that we sorted through that were actually being banked at some of the other branches, and so we sorted those out as well. So once we finish that, plus kind of normal runoff, as you would expect, branch sale maybe a little accelerated run-off, that's why we're happy to close it today and convert it this weekend, I think we'll get our arms around that. But a little of both, Andrew, it was both that industry headwinds and then what I would call sorting between the branches of what relationships and deposit accounts go where, and we sorted out a few that went with the other purchaser of the remaining Rocky branches in Montana.

Okay. I presume that after this, if we're looking at a net figure versus a gross figure, you would feel more confident about your expectations regarding any deposit attrition following the acquisition close. Is that correct?

Yes. I think now that we close it, the behavior will be much similar to the Glacier Bancorp behavior that we've seen.

Yes, okay. And then do you have the non-interest-bearing split?

Yes, Ron here. It's 31%. It fluctuates a little bit, but they're pretty good at gathering deposits.

Yes. Okay. So pretty in line. Okay. Thank you for taking the questions.

You're welcome.

And thank you. And I am showing no further questions, I would now like to turn the call back over to Randy for closing remarks.

Right. Well, thank you, Justin. And we thank everybody for dialing in today, really appreciate it, and we wish everyone, have a great Friday, enjoy the summer, and, reach out if there's any other questions that you have. Thank you for joining us today.

This concludes today's conference call. Thank you for participating. You may now disconnect.