Glacier Bancorp - Q1 2024
April 19, 2024
Transcript
Operator (participant)
Thank you for standing by and welcome to the Glacier Bancorp First Quarter Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Randy Chesler, President and Chief Executive Officer of Glacier Bancorp. Please go ahead, sir.
Randall Chesler (CEO)
All right. Thank you, Jonathan, and good morning. 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 was a very welcome result and arrived a quarter sooner than we expected. We believe this trend will continue throughout 2024 and into 2025. It appears that we are entering a higher-for-longer period of interest rates, and that environment is good for the company as are 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 costs 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 Program 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 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 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.
In this quarter, we're very pleased to be recognized by J.D. Power to be number one in retail banking satisfaction in Montana, Idaho, and Washington. Forbes also announced that they ranked Glacier Bank as top 10 in the U.S. 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.
Operator (participant)
Certainly. As a reminder, ladies and gentlemen, if you do have a question at this time, simply press star 11 on your telephone. Our first question comes from the line of David Feaster from Raymond James. Your question, please.
David Feaster (Analyst)
Hey. Good morning, everybody.
Randall Chesler (CEO)
Morning, David.
David Feaster (Analyst)
Maybe just starting on the margin, you were able to, like you talked about, drive the core margin higher quarter-over-quarter. You've been pretty vocal about calling the bottom, and we were able to do it earlier than expected. And then you talked about the higher-for-longer environment being a positive, which makes sense just given the earning asset remix. I guess I was just hoping that you could help us think through the margin trajectory over the course of the year, assuming rates do stabilize here and we stay in this higher-for-longer environment, and just remind us expectations for the benefits of each rate cut if they do arise.
Byron Pollan (Treasurer)
Sure, David. This is Byron. I can touch on margin. I would say, first of all, we're very pleased to see that our margin did grow in the first quarter. I think that was huge, and as you mentioned, a little sooner than we anticipated. I would say the trends are there for growth throughout the year, whether the Fed cuts or not. We do a little better if the Fed cuts, but higher-for-longer is still good for us. I would say in this rate environment with fewer cuts pushed back later in the year, we do give up a little bit of the margin upside. However, our branch acquisition that Randy talked about gives us some of that back. So I would say net-net, we're pretty much in the same place, even with fewer expected rate cuts this year.
I would say overall, I would see our full-year margin coming in at the low end of our previous guide. That's at 2.80%, and that does include the benefit of the branch acquisitions that Randy noted. I would caution you on that, though. There is a potential headwind, and that is with non-interest-bearing migration. If we see some outflow in our non-interest-bearing deposit balances, that could pressure deposit cost and margin if that comes through.
David Feaster (Analyst)
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 think about core deposit growth as we enter into seasonally stronger months?
Byron Pollan (Treasurer)
Sure. Yeah. Non-interest-bearing balances did outflow on a core from an organic perspective. I would say if you break that down within the quarter, all of our outflow happened in January, followed by slight growth in February and March. Again, with the acquisition of Wheatland, they brought in $250 million of non-interest-bearing balances. That was a significant boost to the balance sheet. I do think we could continue to see some additional outflow in future quarters. For example, we do see some seasonal tax outflows this time of year. So that's something that we've seen so far in April. That's consistent with prior years as well. Overall, in terms of core deposits, I do think we could see a little bit of outflow in the second quarter.
I do think we will be returning more toward seasonal trends, which means very strong inflows during the summer months and early fall. And then as we get later in the year, we could see a little bit of outflow. So I see overall kind of getting back to some of the normal seasonality that we see year to year. And so I think that's a positive for us. Overall, in terms of where I see the balance ending, I think we'll end up at the end of 2023 pretty close to where we ended, and this is organically close to where we ended the year last year, with growth coming from the acquisitions of Wheatland and their branch team.
David Feaster (Analyst)
Okay. That's a really helpful color. And then maybe just last one from 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.
Randall Chesler (CEO)
Yeah. Like you said, the increase this quarter was primarily one relationship. We should have some resolution this second quarter on that transaction. More broadly on the portfolio, we're not seeing any specific industry, asset class, or geography that's showing any trends and stress. So no material cracks in the portfolio yet. Certainly, we keep watching. We still regularly stress-test the portfolio, not only for economic trends but also interest rates. Those results continue to be favorable, and we just continue our strong discipline in credit risk management.
David Feaster (Analyst)
That credit, what industry was it in? It sounds like you're expecting a resolution with no losses or anything pretty quickly.
Randall Chesler (CEO)
Yeah. The industry that it is in is hospitality. And what's behind it, it's really more of like an RV cabin-type structure. And it's the sponsor is just involved in some other transactions that are coming out of the ground. And so instead of where these projects are typically slow in the winter, some funds left there to support some other projects, and we expect it to return back to its normal trends this summer.
David Feaster (Analyst)
That's a great color. Thanks, everybody.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Kelly Motta from KBW. Your question, please.
Kelly Motta (Analyst)
Hey. Good morning. Thanks for the question.
Randall Chesler (CEO)
Morning, Kelly.
Kelly Motta (Analyst)
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, as 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 branch transaction you announced.
Ron Copher (CFO)
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 144-146. 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 about another $2 million of cost savings that we'll have there, and those will be spread out over the 3 quarters ratably. One thing to keep in mind, another reason why I say the high end of that range closer to the 146, we only had 2 months of Wheatland in there, and now we're going to have a full 3 months.
That helps explain why it would be at the high end of that range. Let me pause there. Any questions on that information?
Kelly Motta (Analyst)
No. I think that was explained quite well. Thanks, Ron.
Ron Copher (CFO)
Okay. But let me then get into the branch acquisition of Rocky Mountain. The thing that everybody should take away is we're going to, on an operating basis for the 5 months of 2024, we're factoring in the $0.03 per share. That's operating. But we've got the transaction-related expenses that'll largely be expensed in that third quarter. Again, we're going to close that in July. So the operating will be $0.03 over that 5 months, just $0.015 in each quarter, if you will. But then the transaction expenses on an after-tax basis, that's $0.05. So that'll show up primarily in that third quarter, and then very little I expect will show up in that fourth quarter. But we feel pretty good about it.
Kelly Motta (Analyst)
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?
Thomas J. Dolan (Chief Credit Administrator)
Sure. Yeah, Kelly. This is Tom. Yeah. Just to rewind the clock a little bit, we saw pipelines muted pretty much throughout 2023. Now that there's been a little more stable guidance around where interest rates are going, we've seen our pipelines pick up a little bit in the first quarter, which is encouraging. And so our guidance for the full year, we're still at the low to mid single digits. I think we'll probably see some stronger growth in Q2, Q3. Q4 tends to be a little bit slow. So for the overall year, low to mid single digits. And then in terms of specific industry or geography, it's fairly widespread across industries and across our eight-state footprint. So nothing's really standing out as an outlier.
Kelly Motta (Analyst)
Got it. That's helpful. And then maybe last one for 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 was 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?
Thomas J. Dolan (Chief Credit Administrator)
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 enough to 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. From there, just add the branch acquisitions that will happen later in the year.
Kelly Motta (Analyst)
Thanks, Tom. I'll step back.
Operator (participant)
Thank you. One moment for our next question. Our next question comes from the line of Jeff Rulis from D.A. Davidson. Your question, please.
Jeffrey Rulis (Analyst)
Thanks. Good morning.
Randall Chesler (CEO)
Morning, Jeff.
Jeffrey Rulis (Analyst)
Byron, sorry to get back on the margin, but I just wanted to clarify. I think when you said kind of low end at 2.80%, we're talking about trajectory towards that at your end. Is that correct way to think about that?
Ron Copher (CFO)
Yeah. We do think it will be growing quarter-over-quarter and on the full year end up in that 2.80% area. So I would just say from here, continued growth quarter-over-quarter. 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.
Jeffrey Rulis (Analyst)
Okay. But I mean, I think we were talking last quarter about potentially kind of Q4 exiting the year. You could nip 3%. I think that included maybe some rate cuts. And you talked about this time around that rate cuts would be better, understanding that it's still trending up. So am I thinking about that right, that even with a 2.80% low guide, maybe not the high end exiting at 3 with cuts if that doesn't play out? But I mean, without cuts, let me put it this way, it's probably something north of 2.80% to end the year. Is that fair if we're getting an average for the full year at 2.80%?
Ron Copher (CFO)
That's right. Yeah. We'll be approaching the high twos 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 guide, as I mentioned.
Jeffrey Rulis (Analyst)
Okay.
Randall Chesler (CEO)
Yeah. So just the margin does grow, Jeff, and reaches that almost 3% in the fourth quarter. But then the full-year margin is closer to what Byron is saying. When you take the full-year margin, that's going to be closer to the 2.80 in that range.
Jeffrey Rulis (Analyst)
Okay. And Randy, as you mentioned on this call, and I think prior calls, that there's momentum into 2025 as well as we kind of our prior discussions, that's correct as well?
Randall Chesler (CEO)
Yes.
Jeffrey Rulis (Analyst)
Okay. And then sorry for the follow-ons. The expense side, Ron, yeah, I just wanted to kind of range back. I appreciate the one-time expenses with the branch deal. But if we think about IN maybe in 2Q run rate of $146, where does that head to in if you get some cost saves, but then you bring on HTLF or whatever division they call that, where does that head in the third quarter in terms of quarterly kind of run rate X the transaction costs, more core?
Ron Copher (CFO)
Yeah. So in the third quarter, first off, the Rocky Mountain branches that we'll pick up, we'll only have them for 5 months. So we've said we'll have a 38% cost savings overall, but we're only going to have 50% of that occur, and then you've only got 5 months. So it won't be a big cost savings in that respect. It'll show up in 2025 because we're going to have 100% cost saves there because of the being in the market, having to convert right away, it's not a typical stock deal. So there'll be some slight trending up in the third but in the fourth quarter, but I'm not ready to quantify it just yet. I want to see what we're going to get when we actually close on the deal.
Jeffrey Rulis (Analyst)
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 2023, you kind of circled the wagons with your team in terms of bringing customers back. And I guess just a high level, do you feel like you've sort of reestablished the bank with those customers in terms of maybe some leeway late in 2022 and just kind of feeling where you are competitively on the deposit side and kind of a year removed, if you will?
Randall Chesler (CEO)
Yeah. Yeah. A lot's happened since 2022. I think the team did an excellent job of going back out after the if you go back to some of the turbulence we had in the market, both with rates moving up quickly and people moving based on market rates and then the fear around the Silicon Valley Bank failure. The team, I think of all the customers we want to bring back in have done a very good job of bringing them back. And in fact, I think that the current status right now is there are some very good customers kind of up for grabs in the market. And based on what other banks are doing, and so I think we're not only feel good about holding onto the good customers that we had back in 2022, but growing some relationships with some new customers.
Right now, it looks very favorable. I still think the banking environment overall could be a bit fragile, but as of right now, Jeff looks very favorable.
Jeffrey Rulis (Analyst)
Got it. Thanks for the perspective. Appreciate it. Thanks.
Randall Chesler (CEO)
Welcome.
Operator (participant)
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.
Matthew Clark (Analyst)
Hey. Good morning. Thanks for the questions.
Randall Chesler (CEO)
Morning.
Matthew Clark (Analyst)
Maybe just to close the loop on the margin, if you could give us the spot rate on deposit costs at the end of December and then the average NIM at the end of March. And then the average NIM in the month of March.
Byron Pollan (Treasurer)
Sure. Spot rate on total deposits on March 31 was 1.36%. And then the spot margin in the month of March was 2.61%.
Matthew Clark (Analyst)
Okay. Great. Thank you. 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?
Ron Copher (CFO)
Yeah, Jeff. Ron here. So on the deposits, we'll pick up $463 million. I'm going to throw a $7 million in there for repos, but the deposits pure are $463 million. The yield on that that we're getting just on the coupon is the 4.37%. That's what's coming over. I'll get to the fair value mark and the accretion in a second. On the loans, $296 million coming in, again, a yield of 5.37%. On the deposits, the yield on average cost is 1.59%. In order to retain deposits, they've had to price up and also some migration, as you can imagine. So on the loan marks, the accretable dollar amount is $17 million. That includes both the rate mark and the credit mark and combined $17 million. Fully amortize that over five years.
The margin should be pretty healthy, both actual and then with the purchase accounting marks as well.
Matthew Clark (Analyst)
Okay. Great. Thank you. And then just on your efficiency ratio, 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 this year and then into next year?
Ron Copher (CFO)
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 because that factors in, even though I can say they're M&A. So I would tell you it'll 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 the 74%-75% range.
Matthew Clark (Analyst)
You mean lower if it's excluding?
Ron Copher (CFO)
Lower. Yeah. Yep. Yep.
Matthew Clark (Analyst)
Okay. So lower than the 69, 70, not higher with the X merger charges?
Ron Copher (CFO)
Yep. That's right.
Matthew Clark (Analyst)
Okay. Is that by the fourth quarter this year? Is that what you're suggesting, or how are you thinking about next year?
Ron Copher (CFO)
It would be for the full year.
Matthew Clark (Analyst)
For this year?
Ron Copher (CFO)
Yep.
Matthew Clark (Analyst)
Okay. Okay. All right. That's it for me. Thank you.
Randall Chesler (CEO)
You're welcome.
Operator (participant)
Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Andrew Terrell from Stephens. Your question, please.
Andrew Terrell (Analyst)
Hey. Good morning. If I could just follow up quickly on the expenses, the 144-146 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.
Ron Copher (CFO)
Yeah. 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.
Andrew Terrell (Analyst)
Okay. Got it. And then I don't know. I might have missed this, but are you able to provide just the operating expense add we should expect in the third quarter from the branch acquisition? We can probably get there with the accretion math, but I think it'd be helpful if we had the operating expense figure.
Ron Copher (CFO)
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 non-interest expense we'll pick up from that.
Andrew Terrell (Analyst)
Okay. That's helpful. I appreciate it. If I could 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 looks like the cash position normalized a lot with some of the BTFP repayment. Can you maybe just provide the spot securities yield at March 31st or just share kind of expectations for how the reported securities yield should trend in the second quarter?
Randall Chesler (CEO)
Yep. We're just double-checking the numbers here to give that to you. And just while Byron is checking, the expenses that Ron gave you for the branch acquisition is $3 million for the till the end of the year, so.
Ron Copher (CFO)
Right. From the July 31st through the end of the year, five months.
Andrew Terrell (Analyst)
Okay. Got it.
Randall Chesler (CEO)
Yep. Go ahead.
Ron Copher (CFO)
Circling back to the investment yields on our tax-exempt securities, it's at a 3.52%, and our taxable investments are at a 1.60% yield.
Andrew Terrell (Analyst)
Okay. Perfect. And then maybe just a reminder on the, I understand the repricing story on the loan side. Can you just remind us on the bond book side just how much in kind of quarterly cash flow you expect there?
Ron Copher (CFO)
Yeah. We're getting about $250 million a quarter in cash on our securities portfolio. That includes principal paydown and interest payments.
Andrew Terrell (Analyst)
Okay. Very good. Thank you for taking the questions.
Operator (participant)
Thank you. One moment for our next question. Our next question is a follow-up question from the line of Kelly Motta from KBW. Your question, please.
Kelly Motta (Analyst)
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 the fixed loan repricing coming off over the course of this year and next?
Ron Copher (CFO)
Sure. Give me a quick second here. So fixed-rate loans maturing this year, well, I would say from March 31 to December 31, just under $900 million of fixed-rate loans are maturing.
Kelly Motta (Analyst)
Got it. That is helpful. And then last question for me, and I hate to beat a dead horse. I just want to make sure I'm understanding the guidance correctly. Byron, when you said you now expect margin at the low end of the provided range, call it 280, is that assuming last quarter, you assumed three rate cuts? Is that assuming a higher-for-longer no change in rates here, or? I just want to make sure I'm understanding the provided guidance on that.
Ron Copher (CFO)
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 a September, December cut is not that big in our model. It's a basis point or two at this point.
Kelly Motta (Analyst)
Got it. Thank you so much. That's all for me.
Operator (participant)
All right. 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.
Randall Chesler (CEO)
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.
Operator (participant)
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.