Glacier Bancorp, Inc. (NYSE:GBCI) Q2 2024 Earnings Conference Call July 19, 2024 11:00 AM ET
Company Participants
Randy Chesler - President and Chief Executive Officer
Ron Copher - Chief Financial Officer
Byron Pollan - Treasurer
Tom Dolan - Chief Credit Administrator
Conference Call Participants
Matthew Clark - Piper Sandler
Jeff Rulis - D.A. Davidson
David Feaster - Raymond James
Kelly Motta - KBW
Brandon King - Truist
Andrew Terrell - Stephen
Operator
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. [Operator Instructions] 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.
Randy Chesler
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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And one moment for our first question. And our first question comes from Matthew Clark from Piper Sandler. Your line is now open.
Matthew Clark
Hey, good morning, everyone.
Randy Chesler
Good morning.
Matthew Clark
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?
Randy Chesler
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
About $280 million.
Randy Chesler
$280 million in loans.
Matthew Clark
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?
Ron Copher
Yes, it just -- estimate -- current estimate is $16 million still over five years, still very positive.
Matthew Clark
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 trick a little higher or have you started to trim deposit rates?
Byron Pollan
Yes, Matthew, this is Byron. I can address that. Yes, we did have a lot of success and continue 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
Okay. And then just any update on the 3% NIM guide for 4Q, does that still hold true?
Byron Pollan
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%.
Matthew Clark
Okay. And then just on security -- securities repricing, I think you have a bigger slug that reprices next year, can you just quantify that amount when that occurs and what yield that's at?
Byron Pollan
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
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?
Ron Copher
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 got $500,000 left, so we're adding back $500,000 there, and then the reduction in the performance-based compensation, $1.8 million. We added up about $143.4 million, which, at the low end of what I previously guided, $144 million to $146 million. So again, compliments to the divisions. All eyes are focused on it.
That being said, there still is very much inflationary pressure as multi-year contracts come from renewal, just 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 six branches, if you will, even though there'll still be branch consolidation, there'll be more units, so we'll have some additional non-interest expense coming from that business combination, but then we're continuing to invest in our control functions, and so just important we keep that up. So again, repeating, $145 million to $147 million for Q3.
Matthew Clark
Okay. Thank you.
Operator
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.
Jeff Rulis
Thanks. Good morning.
Randy Chesler
Good morning, Jeff.
Jeff Rulis
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?
Byron Pollan
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.
Jeff Rulis
Okay. And do you have the exit margin or maybe the June average?
Byron Pollan
I have -- the June margin was 2.70% for the month of June.
Jeff Rulis
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.
Ron Copher
Yes. Ron here. Yes, I would say, it's 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 a point of reference. The gain on sale, that thing will just be flat there, but overall, pretty positive.
Jeff Rulis
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...
Ron Copher
Exactly, as you would expect.
Jeff Rulis
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?
Tom Dolan
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 with Ron, there's some seasonality effect there, too. So I would expect third quarter maybe -- show some -- maybe a little bit of some additional strength and then fourth quarter, once we have the ag production loans start to pay back at the end of their growing cycle, that's usually a headwind.
And then your question on the construction, the migration out of construction into perm, 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 site. So at this point, we're not replacing the construction and development loans as fast as they're moving over to the firm side.
Jeff Rulis
Okay. Appreciate it, Tom. Thank you.
Operator
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.
David Feaster
Hi. Good morning, everybody.
Randy Chesler
Good morning, David.
David Feaster
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?
Byron Pollan
Yes, in terms of the mix, 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
Okay, that's helpful. And then, maybe -- I want to switch to the deposit side. Obviously, seasonally tougher quarter, right? Just given tax payments early in the quarter, and that makes -- honestly, the NIB 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
Sure. Yes, if you look at kind of our flows throughout the quarter, you're exactly right. It was driven by April tax payment. So when we look at our total deposits, we had an outflow in April, and if you put May and June together, a slight increase that -- it wasn't enough to overcome the April outflow, so it really was kind of a tax-based story there. I would say, the non-interest bearing was really encouraging. We did see outflow in April. We saw growth -- I'm sorry, yes, outflow in April, growth in May and June. And that growth in the non-interest bearing is really encouraging. 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
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.
Randy Chesler
Yes. So number one, we're happy to have Wheatland done and converted and doing really, really well at the beginning of the year, and now the Heartland branch acquisition, which will close at the end of today and convert over the weekend, given it's a branch acquisition, in terms of the pace going forward, we've 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 increase holds for regional midsize 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'll look at things from a little under a $1 billion to $4 billion or $5 billion-plus, 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 type of banks that we want to buy.
David Feaster
Makes sense. Thanks, everybody.
Randy Chesler
Welcome.
Operator
Thank you. And one moment for our next question. And our next question comes from Kelly Motta from KBW. Your line is now open.
Kelly Motta
Hi, good morning.
Randy Chesler
Good morning, Kelly.
Kelly Motta
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.
Ron Copher
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, remember, 20% in 2024, and so, -- excuse me, 50% in 2024, so we'll see $2 million show up in Q2, Q3, and Q4. There wasn't much cost saves when we added it right away, but it's -- again doing very, very well with that. So that would speak to Wheatland. No change there is the bottom line. Then with the Rocky Mountain Bank acquisition, we're penciling in 38% cost saves, but 50% of that can come in in 2024. But I only got five, 12 -- I only got five months to get it. So it's about 8% of what we will pick up in non-interest expense.
So base -- taking that into account estimating in Q3, we'll see about $1.3 million of pick up in non-interest expense from that, and then in Q3, $1.7 million, a total of $3 million combined in the next two 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, so it may take a while.
Kelly Motta
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.
Randy Chesler
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.
Kelly Motta
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?
Ron Copher
Yes, Kelly, give me just a second here, the deposits are coming over -- the nominal amount with what they're charging -- let me find it here, one second. Hey, Kelly, let me get back to that. Oh, here it is, it's 1.65% is what it's 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 CDs in particular, and as well, you've seen a rate increase because when I guided in the last quarter, they were at 1.59%, now they're at 1.64%. So I think they've done a good job to retain deposits.
Randy Chesler
You're talking about the Rocky Mountain…
Ron Copher
The Rocky, yes, this is Rocky, Yes.
Kelly Motta
Got it. Thank you.
Operator
And thank you. [Operator Instructions] And one moment for our next question. And our next question comes from Brandon King from Truist. Your line is now open.
Brandon King
Hey, good morning.
Randy Chesler
Good morning, Brandon.
Brandon King
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?
Byron Pollan
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.
Brandon King
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?
Byron Pollan
Sure. I think when we were looking at the change in the ADA, 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 cash 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 with 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 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
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?
Byron Pollan
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.
Brandon King
Okay. Thanks for taking my questions.
Operator
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.
Andrew Terrell
Hey, good morning.
Randy Chesler
Good morning, Andrew.
Andrew Terrell
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?
Byron Pollan
Sure. Yes, we did put on -- we did put on $1.5 billion in swaps in Q4. We haven't done anything new since then and so just -- 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 Mountain, 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
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.
Randy Chesler
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.
Andrew Terrell
Okay. 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 close, is that fair?
Randy Chesler
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
Yes, okay. And then do you have the non-interest-bearing split?
Ron Copher
Yes, Ron here. It's 31%. It fluctuates a little bit, but they're pretty good at gathering deposits.
Andrew Terrell
Yeas. Okay. So pretty in line. Okay. Thank you for taking the questions.
Randy Chesler
You're welcome.
Operator
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.
Randy Chesler
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.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.