Glacier Bancorp, Inc. (GBCI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Glacier Bancorp Investor Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Randy Chesler, President and CEO of Glacier Bancorp. Sir, please go ahead.

All right. Thank you, Chris, and good morning to everybody. Thank you for joining us. I'm here in beautiful Spokane, Washington and very excited to talk to you today about our latest acquisition. Last night, after the close of business, we announced our agreement to acquire Community Financial Group, the holding company for Wheatland Bank, a community bank based right here in Spokane with a presence across Eastern Washington. And joining me on the phone from Kalispell is Ron Copher, our Chief Financial Officer; and Tom Dolan, our Chief Credit Administrator. Wheatland, a nearly 5 decade old institution has great relationships with its customers as a long-standing community bank in Eastern Washington. When combined with our North Cascades Bank division, the new division will become the seventh largest in our 8-state footprint and a leading community bank in Eastern Washington. We couldn't be more excited to welcome Sue Horton, the long-standing Chairwoman, President and CEO of Wheatland as the new President of this combined division. So to jump right into the investor presentation, which was posted to our website Page 3 outlines the transaction. This will be our 25th announced acquisition since 2000, our 13th in the last 10 years. Upon closing, North Cascades will be combined into the new Wheatland Bank division and Glacier will remain with 17 divisions. The transaction is 100% stock with Wheatland shareholders receiving 1.0931 shares of Glacier common stock for each share outstanding. Based on the GBCI closing price on August 7 of $33.97, that results in an aggregate deal value of $80.6 million, inclusive of consideration to Wheatland option holders. Turning to Page 4, this is consistent with our strategy of buying good banks in good markets with good people and Wheatland checks all 3 of these boxes. This transaction represents an opportunity to increase market share in one of the most attractive and growing markets in the U.S. Throughout our diligence, we've been exceedingly impressed with the people at Wheatland Bank and look forward to welcoming them. With Glacier's unique operating model, we keep most of the people and help our acquired banks better serve their customers with expanded products and services. We also offer employees a terrific opportunity to grow their career in banking. Page 5 gives a snapshot of view of Wheatland Bank. They have extensive history and experience in the agricultural lending business, which is one of the largest industries in Eastern Washington. Their financial performance has been admirable, having maintained quarterly profitability for the last 4 decades. They've also been recognized by Bauer as a superior Five Star Bank every quarter for 15 years running, one of the few banks in Washington to accomplish this. One of the hallmarks of Wheatland has been its conservative and effective credit quality management. You can see on Page 6 that net charge-offs have consistently run below peers and have posted impressive results over a long period of time. If you sum charge-offs and recoveries over the last decade, they are in a net recovery position. And since 2000, their cumulative net charge-offs were only $5.3 million. As I'll discuss later in the presentation, our loan diligence covered 100% of the portfolio, and we are extremely impressed with the credit management and the quality of the portfolio. Additionally, the deposit base, as you can see on Page 7 is top notch. Wheatland has consistently had high noninterest-bearing deposits well in excess of peers in the industry overall. And there's a lot of granularity to the deposit base with 17,000 total accounts. The deposits also contain a good mix of consumer versus business with 45% of the balances in consumer accounts and 55% in business accounts, both with low average balances. While they haven't been immune to cost pressures due to recent interest rate moves, they've held in very well, and we expect that to continue. Turning to Page 8. You can see that the new Wheatland Bank division will have a top 5 deposit market share in Eastern Washington. This is a very dynamic and growing market. It is a significant agricultural epicenter with top 4 production in the U.S. of 18 different crops. The region is also home to numerous colleges and universities, is a key transportation hub in the Pacific Northwest, and is benefiting from large investment in national firms such as Amazon and many others. We are excited to be able to grow our market share in such a dynamic region. Pages 9 and 10 of the investor deck outlined the transactions -- transaction and our assumptions, which, as I mentioned earlier, are very consistent with our historic acquisition approach. We are very happy with the financial metrics of this transaction. Our cost savings are conservative at 20% and our credit mark at over 1.3 of the loan portfolio is well informed by loan due diligence of 100% of the portfolio. The resulting transaction metrics are very attractive with minimal tangible book value dilution earned back in less than a year. And additionally, we expect over 4% EPS dilution over 15 -- and a 15% internal rate of return. EPS accretion, that is. We believe this transaction will build great long-term franchise value. The financial pro formas are very attractive, and it's very consistent with our history of buying good banks in good markets with good people. We're very excited to have this exceptional Community Bank join our team, and we welcome the talented Wheatland team to our family of banks. At this point, I'll end my comments, and I will turn the call back over to Chris, the operator, for any questions from our analysts.

[Operator Instructions] Our first question will come from David Feaster of Raymond James.

Maybe first, if we could touch on the balance sheet. Obviously, we've got healthy rate marks on both the loans and securities. I'm just curious whether embedded in your EPS accretion expectations, whether if there's any plans for the securities book when you close? As you said, you are going to be marked or loan sales or anything to maybe accelerate the pace of borrowings just as we think about the broader balance sheet and any restructuring or anything, any type of opportunities like that?

Sure. Ron, you want to take that?

Yes. David, with respect to the securities portfolio, we understand that there'll be selling that portfolio possibly, still has to be worked out, but we're hopeful that they will be able to sell the portfolio prior to close, but that remains to be seen. But that will give us an opportunity to pick up after pay downs that I expect through November 30, we would be able to pick up say $210 million of cash from their portfolio. And then we'll have the options to pay down more expensive debt. So we're examining the opportunities but pleased to have that happen. Just one other thing I want you to be aware of in terms of the mark, they have $4.1 million of trust preferred, and they will redeem those out prior to close. So we won't have to mark that to market after the close.

Okay. That's helpful. And then maybe just touching on the ag book and your thoughts on that segment. Obviously, this is something that you all have done in the past, but this is a real core competency for them. Is this a segment that you see opportunities to expand further and maybe deepen across the rest of the footprint? And just maybe any color on the specific types of ag loans that they specialize in and it seems like they're mostly focused on the ag production side. Is that a fair characterization?

Yes, I'm going to have Tom in a minute here to take that, but let me just first say, ag, it's a -- we've been in the ag business overall. It's a little less than just about 10% of our portfolio. We've been in the Washington ag business for quite a while with our North Cascade acquisition. Now that's mainly tree fruit over -- along the Cascades. And this really broadens us out into a much different set of crops that we're familiar with, most of them. But we really like the ag business. We like the ag business we have. Certainly, right now, those yields on ag loans are very attractive. They tend to have a few more noninterest-bearing deposits with us. So that particular segment is a very good fit for what we're already doing. But also, we really like the dynamics of the pricing and the deposit characteristics of that business. It tends to be very long-term loyal relationships that are established, and we also like that. Tom has been out here, obviously, and spent a lot of time looking at it. And Tom, do you want to give some of your insights into the ag portfolio?

Yes, sure. As Randy said, this has been a competency for us for decades. Several of our divisions are focused on agriculture lending and the types of crops produced by Wheatland are crops that we're familiar with and that have shown some considerable strength, especially for the last couple of years. So through the due diligence process, as you would imagine, agriculture was a focus to that. Good, strong borrowers, strong balance sheets. Long-time growers within their markets and with continued forward-looking budgets that certainly support the level of financing received. So very comfortable with the ag book.

That's helpful. And then last for me, the deal time line is pretty quick with the fourth quarter close. It's terrific. I'm just curious, what gives you confidence in that swift of a time line? Obviously, you've been in close contact with the regulators. You've got a great track record with M&A. But I'm just curious maybe what gives you that confidence, whether your sense is that the regulatory landscape is maybe a bit more accommodative to M&A here. And then just any thoughts on the timing of the consolidation of these 2 divisions -- the divisions into one another and the conversion.

Sure. Yes, we've had a lot of discussions about that. Obviously feel good about it, good open lines of communication with our regulators and really respect their opinion on things. And we feel good about this transaction, having had some discussions, obviously, before we made the announcement. But maybe more importantly, this is, for a $28 billion bank, a very manageable acquisition. And I think across, there's not a lot of displacement. So we're actually feeling that we'll be able to better serve these communities with a bigger balance sheet and a broader set of products. There's very little cost reduction across the franchise that we envision and we bring these 2 banks together. I think they'll be able to serve the communities in Eastern Washington really, really well. So that particular part. And I think if you look at this, if you look at the transaction and if you look at the makeup of this bank, it's very much right down the middle of the fairway, just a very, very well-run bank, extremely good credit, very highly rated with CRA, a very solid deposit franchise. So we think all those things together, David, is we feel good about getting this through the process.

Our next question will be from Andrew Terrell of Stephens Inc.

Congratulations on the deal. If I could start maybe just, Randy, if you could characterize or share some color on what Wheatland's historical kind of growth rate has looked like for the balance sheet? And then just on a go-forward basis, what kind of sustainable growth do you think this specific piece of the franchise can deliver?

Yes, I can just talk about this year, they're growing close to 20 loans -- close to 20% this year. They've got very good relationships, solid long-term relationships across this footprint. So we're -- we modeled about 9% just to give ourselves some room, but they're experiencing very positive growth, and that's a function of both the relationships and the strength of the markets as well.

Yes. Okay. And then on the investor, the nonowner-occupied CRE portfolio, I think off memory, it was maybe 49% of the overall loan portfolio. Can you just give us some color on -- are there any specific kind of dominant underlying collateral types within that book? And then just -- I know you gave some good color on the credit review, we're reviewing 100% of the loans, but specific color or comfort around the investor commercial real estate?

Yes. Tom did the 100% review. So we'll let him give you a little more detail about the makeup of the portfolio.

Yes, Andrew. The nonowner CRE portfolio, incredible level of comfort with it. What we saw through that review is significant cash equity into their deals, strong debt service coverage ratio, diversification amongst repayment sources, not only from the tenants, but also good strong guarantor standing behind these deals. In terms of industry concentration, there's not any really one that stands out significantly. It's very diverse among the CRE, no exposure to large downtown office or other types that have gathered a lot of the news recently. So very similar to the GBCI book, low average loan balances, good strong repayment with good secondary support.

Yes. Understood. Okay. And then maybe one for Ron. I appreciate the color at the start of the call around the securities portfolio. And it seems like maybe some repositioning there could be a decent earnings lift maybe relative to expectations. I guess I was just curious, do you assume any securities repositioning on the Wheatland side within the stated 4.2% EPS accretion? And then maybe as a follow-up to that, can you also talk about just -- I think their deposit cost were 86 basis points in the second quarter. Can you talk about where you anticipate that to go in your kind of EPS accretion assumptions?

Andrew, let me take the last part. So they've increased assets, really all banks, they've increased their deposit costs. But it's -- most of that lift has happened as the rates particularly in the second quarter, they were able to rate to keep their balances intact. So it will drift up is what I'm saying to you. Maybe it gets to -- 95% is the worst, certainly in the third quarter through the rest of the year. Of course, that's dependent upon is there going to be another Fed hike or two. We can all have our opinions around that, but very stable just like sticky deposits, particularly when we looked at their noninterest-bearing, just very, very, very good deposit base and relatively low cost compared to many. On the question about the securities book, we don't see any repositioning. Again, as I said at the top, it's very likely if they don't liquidate it right after we acquire it, we will liquidate it and consider what could I do with that cash. Right now, we could just park it at the Fed. Right now, we're getting 5.40% on any cash we have there. If there's another rate hike, that could go to 5.60%, 5.65%. But the beauty of this is that it gives us the option to look at it, certainly, to fund loan growth. They've got a great loan book from a credit quality perspective, as Tom talked about, but even on their rates, you saw in the deck that their margin's at 3.23%, and they've got a variable book for the most part, certainly in the ag side. So it's not a repositioning. It's just having the optionality.

Yes. But -- okay, I appreciate the color. But that's not embedded -- no repositioning or anything is embedded in the EPS accretion assumptions?

Correct.

Our next question will come from Kelly Motta of KBW.

Congrats on the deal. It seems straight out of the Glacier playbook. So it seems like you found a great partner in Wheatland. I'm just wondering in terms of their decision to sell, is there anything you can offer as to their decision to partner with another bank at this stage and if there was a competitive process run as part of finding you guys as a partner?

Sure. Like a lot of the transactions we do, this started years ago, and I've been talking with Sue for 5 years. And I think the timing was just right for Sue. And Wheatland, the Wheatland board, I think that they were very, very careful in evaluating who the best long-term partner would be for them. And we're very happy that they viewed us as that partner. And I think when they reached a point that they felt it was the right transition time for them, that's when we started to have a discussion and were able to do this in a very I think good process. And between, the 2 companies were able to put this together.

That's super helpful. And then I appreciate it seems like this is very minimally dilutive to tangible book. Is there any color on how this impacts your regulatory capital ratios?

Very minimal, given the size of the deal. It's a well-capitalized bank to begin with and the assets are good quality. So when we put the two together, it's a very minimal impact on the key regulatory ratios.

Got it. And then in terms of what you guys bring to Wheatland, what gets them the most excited and you guys most excited? Is it a function of higher lending limits, greater product availability? Where do you think the greatest opportunity is to bring the power of Glacier to Wheatland is doing out in Eastern Washington.

Sure. Well, you hit a number of them. I mean, first of all, what we always tell banks right upfront is we're buying you for the great bank that you are. So don't run out -- you don't need to run out and do anything different just because you have a $28 billion balance sheet. But -- so we want them to just keep doing what they're doing, serving their customers, doing a really great job. They have a number of customers that outgrew the bank at its current size of $750 million. And so I think they're excited about going back to those customers and being able to bring them back into the bank. I think the technology platform that we've built over the last 3 years is very exciting to the company. Our ability to automate a commercial loan processing system, quicker account opening, digital tools, new construction software program. Those are all things they had on their road map, but feel like this is a great way to bring those products together and they feel like their customers are really going to be excited about seeing some of this. As well as in the mortgage business, some new technology that will serve the customers well. So I think that I met with all -- many of the people yesterday, we're going to have some more meetings with them today. One of the things that people get excited about us being part of Glacier opens up a lot of personal opportunities so they can keep doing what they're doing if they like that. If they are relocating within our 8 states, it's a great opportunity to keep doing what they're doing in Arizona, Nevada, Montana, wherever they may be moving, I think that opens up careers for people that are excited about that as well.

Great. Last question for me, if I can sneak it in. It's just maybe a 2-parter more generally on M&A. This is a relatively small deal relative to your size. Does this keep you out of the market for any specific time, one? And two, it seems like this announcement and a couple of other announcements across the space, it feels like the M&A environment might be thawing a bit. Any comments on that in the pace of conversations?

Yes. So the size of the deal, I think, is very, very much outstripped by the strategic significance. This really puts us in all the markets we want to be in, in Eastern Washington when you combine it with North Cascades, it creates some excellent scale. And I think we view this as part of our strategic vision to continue to dig a deeper moat around the markets we're in, this puts us in the top 5. And I think over the years, gives us some great opportunity to grow in some of these markets. So between Spokane, the Tri-Cities in Yakima, that's over 1 million population that we can now serve. And so I think that's what we see as the bigger picture over a number of years here. In terms of the M&A environment, we have other -- we've got multiple conversations. I think that -- I'm not sure if I would call it a thaw. I think though that people are -- we are having discussions. And for us, it's driven more by not how many phone calls we get, but strategically, what transactions can help us do very much what you see happening here.

Our next question comes from the line of Adam Butler of Piper Sandler.

This is Adam on for Matthew Clark. Just stepping back into Kelly's question on M&A and how this acquisition kind of bolsters your footprint in Eastern Washington. Is there any region in particular you would like to increase market share in the future?

Yes. So again, back to strategically what we try to do is we look at all our markets in the 8 states and look at areas that we think we can increase our presence. And across the 8 states, I think there's some very good opportunity to continue to do that. I think we continue to be interested in Utah. We continue to be interested in Colorado. We think that's a great market over the long haul. So I think our optionality is good across all those markets with 8 states to kind of look at. And so I wouldn't put one state above the other, other than to say we'll look at those areas where we think we can build further market presence where we're not in the top 5 and look at good partners to help us get there.

Okay. Great. That's very helpful. And in your prepared remarks, I believe you said that the 20% expense save target is relatively conservative. I was wondering if you could provide some color with what included in your expectations and the timing as well, if you could see that maybe completing further -- more quickly or not.

Sure. Yes. The 20% is conservative. The reason I say that, I think we've already identified in excess of 20%. But we don't -- these don't -- for us, we don't cut our way to success. We invest our way into success. So we'll see where the cost saves, very, very confident that pro forma 20% will be achieved very easily. It's a makeup of a number of things in those cost saves. There's a fair amount that's just the advantage of our scale. So the operating contracts that we bring, some of the back-office functions that we have, we could do at less costs. So it's really a combination of some of the vendor saves as well as less so some people saves. But you put that together, that's the 20%. And based on what we're seeing already, we feel very good that, that will be achieved in the time frame outlined here.

Okay, great. Those are all my questions, and congratulations on the deal.

[Operator Instructions] Our next question will come from Jeff Rulis of D.A. Davidson.

Randy, you've covered quite a [Audio Gap] ground. Maybe just kind of circling back again, not to beat it up. But just on the M&A side, understand that it's not led by calls that you get more about if it fits your strategy, I guess I'm more interested as an industry question about those calls. I mean do you get the sense -- I think you cautioned against a thawing, but the inbound rate, has that changed in your view over the course of the year? And again, not that you're going to jump on every opportunity, but I just want to get a sense for what that inbound flow is like.

Yes. Jeff. The -- it's certainly not where it's been two years ago, a year ago. I think that there are good discussions to be had. I guess maybe the way to kind of frame it for you is I think the discussions now are with what I would view as longer horizon sellers and that people who can see the value of our currency, at least from our perspective. The conversations we have right now are more with people who see that the long-term value of the currency and maybe less concerned about a multiple today, but more what that looks like over a longer horizon. And not all sellers have that frame of mind. But there are a number that do. Those are the conversations that we're having. And so there's a number of people that -- sellers that are looking at the world that way. I think when you kind of take -- look at the future of banks, for banks, they have to weigh that, whether it's worth waiting if they decide to sell or thinking about selling for the environment to improve, which it will or look at something now and write it up as those things happen. So -- probably again, the best way to frame it is the people we're having discussions with, I think, are looking at the longer term, looking at the currency today, but also where they believe it will be over time, and those are the folks having some interest in having some discussion.

Okay. That's good detail. And maybe just a last housekeeping -- I guess 2 questions, perhaps for Ron. Just want to get a sense for the conversion timing, if indeed, this is the fourth quarter close. And then secondly, you have a goodwill estimate, I'm guessing around $30 million, but if you could touch on both of that.

Yes. So closing November 30, as Randy said, we think that will happen. And then the conversion we anticipate being mid-March 2024. And Jeff, I don't have that number, but I will call you right after this call here, I don't have it in front of me. But I feel good about where that ended up, given really because we focused on the fair value mark and feel good about that. And then obviously, the difference is the goodwill.

[Operator Instructions] I am seeing no further questions in the queue. I would now like to turn the conference back to Randy Chesler for closing remarks.

All right. Thank you, Chris, and thank you, everybody, for joining us today. Exciting opportunity here in Eastern Washington, Sue and I are about to hit the road. And visit with people, talk to them about this transaction. So we're very excited about that. And I wish everyone a great rest of the week and enjoy the rest of this summer. Thank you for joining us today.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.