Glacier Bancorp Inc

F:GLC

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by, and welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Randy Chesler, President and CEO of Glacier Bancorp. Please go ahead.

[Randall Chesler, executive]

All right. Thank you, Justin. With me here in Kalispell this morning is Ron Copher, Chief Financial Officer; Byron Pollan, our Treasurer; Tom Dolan, our Chief Credit Administrator; Don Cherry, 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 had strong EPS growth for the quarter driven by lower noninterest 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% onto 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 noninterest-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 noninterest deposits of $6 billion increased $38.4 million 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 expense from the unfunded loan commitments reserve.

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. Nonperforming assets, the 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. Noninterest 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 onetime branch building sale gains of $1.9 million in the quarter that reduced our expenses. Noninterest 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 49x. In mid-February, we announced a purchase and assumption agreement with Heartland Bank, who had decided to exit the Montana market. We purchased 6 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 6 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.

[Operator]

[Operator Instructions]

And our first question comes from Matthew Clark from Piper Sandler.

[Matthew Clark, analyst]

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?

[Randall Chesler, executive]

Sure. Ron, do you want to go through what the -- we just are totaling up the numbers today. So I believe where we ended up were $403 million in deposits and loans run were finally...

[Ron Copher, executive]

About $280 million.

[Randall Chesler, executive]

$280 million in loans.

[Matthew Clark, analyst]

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 5 years previously. Any update to that number?

[Ron Copher, executive]

Yes. It just estimate -- current estimate is $16 million, still over 5 years [short] -- very positive.

[Matthew Clark, analyst]

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? You feel like you can stabilize here? Do you feel like you might trick a little higher? Or is there -- have you started to trim deposit rates?

[Byron Pollan, executive]

Yes, Matthew, this is Byron, and I can address that. Yes, we did have a lot of success in continuing to stabilize our deposit costs. I think we can hold that. So from here, we are -- we do continue to test customer acceptance of lower rates. We are having some success in some cases. We still see a little bit of rate migration, so that's kind of a headwind there. But overall, I think we will be able to continue to see cost stabilization in our overall total deposit cost.

[Matthew Clark, analyst]

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

[Byron Pollan, executive]

Yes. In terms of margin, I think the same drivers we 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, settled 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%.

[Matthew Clark, analyst]

Okay. And then just on securities repricing. I think you have a bigger slug that reprices next year. Can you just quantify that amount and when that occurs and what yield that's at?

[Byron Pollan, executive]

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.

[Matthew Clark, analyst]

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. It seems like the adjusted run rate maybe going forward or at least when you normalize it for this quarter, it was around $143.4 million. Any updated thoughts on the run rate guidance here in 3 and 4Q?

[Ron Copher, executive]

Yes, Ron here. Matthew, let me just take our audience through how we get there. So we had $141 million in the second quarter. If you subtract out the merger-related expenses of $1.8 million but then add back what you mentioned, we had the gain on the sale of the former branch $1.9 million. The FDIC, we accrued $1.5 million in Q1, but that $500,000 less, so we're adding back $500,000 there. And then the reduction in the performance-based compensation of $1.8 million, you added up at about $143.4 million, which at the low end of what I previously guided, $144 million to $146 million. So again, complements to the divisions.

All eyes are focused on it. That being said, there still is very much inflationary pressure as multiyear contracts come for renewal to headwinds in that regard. With that in mind, the guide for Q3 is $145 million to $147 million. And the reason for that, we're going to have some -- obviously, we're picking up the 6 branches, if you will, even though there will still be branch consolidation, there will be more units. So we'll have some additional noninterest expense coming from that business combination, but then we're continuing to invest in our control functions. And so just important, if we keep that up. So again, repeating $145 million to $147 million for Q3.

[Operator]

And our next question comes from Jeff Rulis from D.A. Davidson.

[Jeff Rulis, analyst]

Byron, I just wanted to go back to the margin. So to get to 3, like we got to double the sequential increase of the second quarter. I just want to make sure that, that's the -- you see an acceleration of margin from the Q2 jump-off point. Is that right?

[Byron Pollan, executive]

Yes. We do see some acceleration here. 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.

[Jeff Rulis, analyst]

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

[Byron Pollan, executive]

I have. The June margin was 270 for the month of June.

[Jeff Rulis, analyst]

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

[Ron Copher, executive]

Yes. It's Ron here. Yes, I would say it' sustainable. Tourism is still very active for our communities. Service charges, new accounts. We continue to be very focused on opening checking accounts. All of that is a positive. Just the point of reference, the gain on sale of that thing will just be flat there, but overall, pretty positive.

[Jeff Rulis, analyst]

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

[Ron Copher, executive]

Exactly as you would expect.

[Jeff Rulis, analyst]

Okay. And one other one, just to kind of touch on the loan balances, a decline in the construction segment. My guess is as 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 with what you're seeing into the second half.

[Tom Dolan, executive]

Yes, Jeff, it's Tom. I don't see that changing. Low to mid-single digits is where we think we're going to carry through the end of the year. And just like you're discussing what we're on, there's some seasonality effect there, too. So I would expect third quarter maybe show some -- maybe show a bit of some additional strength in the fourth quarter once we have the ag production loans start to pay back at the end of their drilling cycle that's usually a headwind.

And then your question on the construction, the migration out of construction in the firm, that's exactly right. That's what we saw in the second quarter. In terms of pipeline overall, we really saw some nice lift in the pipeline in the first quarter, that lift has remained constant throughout the second quarter.

But in terms of the types of deals that comprise that pipeline, probably a little bit less so on the construction and development side. So at this point, we're not replacing the construction and development loans as fast as they're moving over to the firm side.

[Operator]

And our next question comes from David Feaster from Raymond James.

[David Feaster, analyst]

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 specially 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 it if you do have any excess liquidity, would you opt to reduce borrowings or let noncore funding runoff or reinvest into shorter duration securities and kind of maintain the earning asset side. Just kind of curious if you think about the size of the balance sheet going forward and the mix.

[Randall Chesler, executive]

Yes. In terms of if we do have any excess liquidity that builds on the balance sheet, I think our first thing to do would be to chip away at our wholesale funding balance. So we do have some overnight FHLB advances, and we'll chip away at those borrowings. In terms of the overall size, I do think, and let's, first of all, set aside M&A and the Rocky deal that's closing today. From an organic perspective, I do see a fairly stable balance sheet from -- through the end of the year. Now to that, we would add the incremental loans that we're getting from the Rocky transaction. So I would say overall, stable plus Rocky is how I would think about our balance sheet for the rest of the year.

[David Feaster, analyst]

And then maybe I want to switch to the deposit side. Obviously seasonally buffer quarter, right, just given tax payments early in the quarter. And that makes honestly, the NIV growth, you saw a bit even more impressive. But also maybe you could walk through some of the trends that you saw from a core deposit perspective throughout the quarter and into early July. And just general expectations for core deposit growth going forward and how pricing is trending?

[Ron Copher, executive]

Sure. Yes. If you look at kind of our flows throughout the quarter, you're exactly right. It was driven by April tax payments. So when you look at our total deposits, we had an outflow in April. And if you put May and June together, a slight increase, it wasn't enough to overcome the April outflow. So it really was kind of a tax day story there. I would say the noninterest-bearing was really encouraging. We did see outflow in April, we saw growth -- I'm sorry, yes. So outflow in April, growth in May and June. And that growth in the noninterest-bearing is really encouraging. And that does go a long way towards helping us with that cost stabilization that we talked about a little bit earlier.

The industry is facing headwinds on the deposit front, and we're no different. At the same time, this is kind of seasonally, we see some strength. And so when you put our historical seasonal strength up against some of the industry headwinds, I do think we'll see some growth. I would say in terms of the third quarter balance outlook a little bit up. And if we look beyond in the fourth quarter, probably flat from there. But that's overall how I see our deposits through the rest of the year.

[David Feaster, analyst]

Okay. That's helpful. And then just last 1 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?

[Randall Chesler, executive]

Yes. The -- so number one, we're happy to have Wheatland done, converted and doing really, really well at the beginning of the year and now the Heartland branch acquisition which will -- closed at the end of today and over the weekend, given it's a branch acquisition. In terms of the pace going forward. Recently, we'll see the run-up in repositioning or the increase in bank general bank stocks will have an issue. But prior to that, I'd say, still moderate activity. We're having a number of discussions. And so I would expect if the stock price increased holds for regional mids banks, you'll see more -- you'll see an increase there.

More people can do a deal. We could pencil a deal out prior given the strength of our currency, but now more people can do that. So probably expect to see activity pick up. And in terms of scale, our targets really hasn't changed. I mean we will look at things from a little under $1 billion to $4 billion, $5-plus billion just depending on what might be available. And if it's strategic to us. And again, I think the key there is to -- we get a lot of calls, we get a lot of looks. It's to stay very very disciplined on where we want to be and the banks that we want to buy.

[Operator]

And our next question comes from Kelly Motta from KBW.

[Kelly Motta, analyst]

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 base 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 so 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.

[Randall Chesler, executive]

Yes. So let me start with Wheatland and basically repeating what I said in earlier call back in April. We'll see the cost save -- I'd say, remember, 20% in 2024. And so 50% in 2024. So we'll see $2 million and show up in Q2, Q3 and Q4. There wasn't much cost saves when we added a runaway, but again, doing very, very well with that. So that would speak to Wheatland, no change there in terms of the bottom line. Then with the Rocky Mountain Bank acquisition, we'll pencil in 38% cost saves, but 50% of acting come in 2024, but I only got 5 12 -- I only got 5 months to get it. So it's about 8% of what we will pick up in noninterest expense.

So taking that into account, estimating in Q3, we'll see about $1.3 million of pickup in noninterest expense from that. And then in Q3, $1.7 million, a total of $3 million combined in the next 2 quarters. And just to want to point out, we have branch consolidation. So we'll have some branches for sale, but I have not factored in any gains or losses. I'm not expecting any losses, I can assure you that. But none of my guide $145 million to 147 million includes any gains on any of the branches that will be put up for sale, say, in a couple of months, that may take a while.

[Kelly Motta, analyst]

Got it. That's super helpful. And as we look ahead, assuming we get some rate cuts either late or 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're expecting with that?

[Randall Chesler, executive]

Yes, relative to any kind of rate reductions, I think we're pretty cautious on expecting that they're 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 that certainty that people feel like those are going to continue.

[Kelly Motta, analyst]

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?

[Randall Chesler, executive]

Yes. Kelly, just give me a second here. The deposits are coming over the nominal amount with what they're charging, I'll find it here. One second. Kelly, let me get back to that. Here it is. It's 1.65% is what is coming over at. And so that, again, they have had to in order to retain deposits because that's the premium that they'll receive. They've had to backfill with TDs in particular and as well, you've seen a rate increase because when I guided in the last quarter, they were at 159 now they're at 164. So I think they've done a good job to retain deposits.

[Tom Dolan, executive]

You're talking about the Rocky.

[Kelly Motta, analyst]

The Rocky -- this is Rocky. Yes.

[Operator]

[Operator Instructions] Our next question comes from Brandon King from Truist.

[Brandon King, analyst]

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

[Ron Copher, executive]

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

[Brandon King, analyst]

Okay. And then could you help me reconcile, I guess, the movement in average taxable debt securities, it was a pretty meaningful drop on an average basis and also the cash income dropped to $2 million from $15 million. So just could you help me reconcile that? Is there anything to call out there?

[Ron Copher, executive]

Sure. I think to when we were looking at the change in the AEA, we have to go back to the first quarter and talk about the BTFP balances that we had. So we did pay down BTFP balances, and that happened very late in the quarter. And so somewhere around March 20 that we paid off the BTFP and we replaced that with FHLB advances, but at a lesser amount. And so as Randy mentioned, we took some of the excess that we had on the balance sheet, and we paid down wholesale funding. And so we put -- with the amount of BTFP that we paid off, we didn't replace it as much FHLB advances. And because that happened very late in the quarter, it didn't influence the Q1 average that much. But of course, it did influence the Q2 average because it was -- that was all done by the time we got to April 1. So I think that's what you're seeing with the change in the averages from Q1 to Q2.

[Brandon King, analyst]

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?

[Ron Copher, executive]

And cash will fluctuate day-to-day as 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.

[Operator]

And our next question comes from Andrew Terrell from Stephens.

[Andrew Terrell, analyst]

I had a question around the most recent disclosure I saw in the Q on kind of the swap positions that you guys have was about $1.5 billion of swaps kind of against the bond portfolio that I think were added late last year. So I guess the question is, one, any incremental swaps added this quarter? And then do you have the benefit that you saw from the swaps realized in 2Q? And then just more broadly, can you talk about kind of your hedging or derivative strategy?

[Ron Copher, executive]

Sure. Yes, we did put -- we did put on $1.5 billion in swaps in Q4. We haven't done anything new since then. And so overall, one of the things that we're looking at is how we're positioned from a liability-sensitive balance sheet. We're looking at the market expectations for potential rate cuts. Are we at a potential inflection point in terms of the front end of the curve at least. And so we're looking at our projections for growth in loans and deposits, the acquisition that's coming on from Rocky Mount. All of those things kind of pulling that together. But from an interest rate risk perspective, we haven't put on any additional swaps and don't have any plans in the near term to add any new swaps to the book.

[Andrew Terrell, analyst]

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 like $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 noninterest-bearing split of the acquired deposits, wouldn't it be helpful.

[Randall Chesler, executive]

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 runoff -- 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.

[Andrew Terrell, analyst]

Yes. Okay. But I guess -- so presumably, I guess, post that, if this is more of kind of a net versus the gross number, you would feel better about your expectations around any deposit attrition kind of post the acquisition closed. Is that fair?

[Randall Chesler, executive]

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

[Andrew Terrell, analyst]

Okay. And then do you have the noninterest-bearing split?

[Ron Copher, executive]

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

[Operator]

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

[Randall Chesler, executive]

All right. Well, thank you, Justin, and we thank everybody for dialing in today, really appreciate it. And we wish everyone to 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.

[Operator]

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