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Good day, and thank you for standing by. Welcome to the Glacier Bancorp Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is 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.
All right. Thank you, Victor, and good morning, and thank you for joining us today.
With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator.
I'd like to point out that the discussion today is subject to the same forward-looking considerations found on Page 13 of our press release and we encourage you to review this section.
I'll start with a few new data points about our community banking markets. The eight Western states, which represent our footprint, are among the most dynamic in the country, include Montana, Idaho, Eastern Washington, Wyoming, Utah, Colorado, Nevada and Arizona.
Our eight state average income and GDP growth rate exceeds the national average and the average eight state unemployment rate is below the national average.
USAFacts reports that Idaho's population has grown by 46% from 2000 to 2021.
US News states that Washington as the third best business environment in the United States. In The Tax Foundation's State Business Tax Climate Index ranks Utah eighth in the nation, Montana fifth and Wyoming number one.
I'll touch on some of the business highlights first and then provide some additional thoughts on the quarter.
Net income for the quarter was $79.7 million, an increase of $339,000 from the prior quarter net income of $79.3 million. For the full year, the company had record net income of $303 million, an increase of $18.4 million or 6% compared to 2021.
Pre-tax pre-provision net revenue was $103.6 million versus the prior quarter of $105.7 million, a decrease of $2.1 million or 2%. However, pre-tax pre-provision net revenue was up $15.6 million or 18% compared to the fourth quarter a year ago.
The loan portfolio, excluding PPP loans, had solid organic growth during the quarter, up $397 million or 11% annualized. For the full year, we grew $1.9 billion or 15%.
Noninterest expense of $129 million decreased $1 million or 1% over the prior quarter and decreased $5 million or 4% over the prior year's fourth quarter.
The loan yield for the quarter was 4.83%, which increased 16 basis points compared to the prior quarter. New loan production yields were 6.34%, up 93 basis points from the prior quarter. Investment portfolio yields were 1.87%, up 4 basis points from the prior quarter.
Interest income of $225 million increased $11 million or 5% over the prior quarter and increased 17% over the prior year fourth quarter. For the full year, interest income was $830 million, a 22% increase over 2021.
Credit quality continued to improve to record levels. Non-performing assets as a percentage of subsidiary assets was 12 basis points in the current quarter compared to 13 basis points in the prior quarter. Net charge-offs as a percentage of total loans was 5 basis points.
We declared a regular dividend for the quarter of $0.33 per share, which was consistent with our prior quarter dividend. The company has declared 151 consecutive quarterly regular dividends and has increased the regular dividend 49 times. For the full year, we declared total dividends of $1.32 per share, an increase of 4% over 2021.
And we entered 2023 with strong capital. Our CET1 ratio, which measures capital against risk-weighted assets is expected to end 2022 around 12.19%, a full 100 basis points above the median of our proxy peer group.
So, the most material development in the industry this quarter was the historic increase in interest rates, which created significant volatility in bank deposits. After growing for three quarters, our deposits declined by $1.3 billion, with the largest decline occurring in those accounts with an average balance of $3 million or greater.
60% of the deposit outflows in the quarter were concentrated in just 100 accounts. When the treasury bill rates crossed 4% in early October, it was a significant inflection point, and we began to see an accelerated outflow of deposits, not relationships, primarily to non-banks, mostly for the purpose of purchasing treasury bills. These excess deposits accumulated during the pandemic at ultra-low rates.
Core deposit funding of $21 billion, or almost 90% of total funding liabilities, ended the quarter at a cost of only 8 basis points versus 6 basis points in the prior quarter. Noninterest-bearing deposits remained at 37% of core deposits, unchanged from the beginning of 2022.
Our total cost of funding in the quarter for total funding liabilities of $24 billion, including noninterest-bearing deposits, increased from 15 basis points in the prior quarter to a total cost of funding of 35 basis points in the current quarter. The increase in the total cost of funding was primarily due to our elevated borrowings from the Federal Home Loan Bank because of the deposit outflow, which impacted net interest income and margin in the quarter. Borrowings increased from $705 million at the end of the third quarter to $1.8 billion at the end of the fourth quarter.
We expect deposit outflows to moderate beginning in 1Q and then perform more consistent with historic trends. As a result, we anticipate Federal Home Loan Bank borrowing to slowly decline throughout the year.
We plan to fund our loan growth for 2023 by utilizing the quarterly cash flow from our investment portfolio currently in excess of $300 million per quarter. Our margin should grow -- should show growth in 2023 benefiting from the cash flow rolling out of investments yielding about 1.50% and -- 1.5% and being reinvested in new and renewing loans in -- yielding in excess of 6%.
While we face an uncertain interest rate environment in 2023, we remain confident in the dynamic Western markets we serve and the capability of our unique business model to continue to deliver strong results.
The Glacier team did another excellent job in the fourth quarter and for the full year of 2022. They once again kept their focus on shareholders, customers and communities, which the results clearly show.
And that ends my formal remarks, and I'd like to ask Victor to please open the line for any questions that the analysts may have.
Thank you. [Operator Instructions] Our first question will come from the line of Jeff Rulis from D.A. Davidson. Your line is open.
Thanks. Good morning.
Good morning, Jeff.
I wanted to check in about just the use of the borrowings, you kind of walked us through sort of the thought process. But just you've got such a strong deposit franchise and a low loan-to-deposit ratio. Just wanted to see about the timing of -- again, a little more detail as to the use of that? It came at a cost, but -- and appreciate the '23 outlook on running those down and the impact on margin headed up. But anything else to add on the FHLB? Thanks.
Hi, Jeff, this is Byron. I can address that. I'd like to start by going back to the third quarter. Recall, we were still growing deposits through the third quarter. That turned a corner though when short-term treasury rate presented such a compelling investment alternative in the fourth quarter. Randy mentioned the 4% number. So, when treasury rates went through that 4%, that's when we really saw a turn with the deposit outflow.
We looked at that, and we're not a premium rate bank. We've never been a premium rate bank, that hasn't been our strategy to attract premium rate deposits. So, as we looked at it, we decided not to compete with those treasury rates, because at the time, we had lower cost wholesale funding alternative. And so, it really was a funding cost optimization decision. Now, that math is shifting, especially with the next Fed rate hike where we think wholesale funding rates will be at a level where we can retain deposits at rates below FHLB. So, at the time, we simply had lower cost funding options.
Now, as Randy mentioned, we were not losing customer relationships. We are simply seeing an outflow of excess discretionary balances. That outflow was very highly concentrated. It was concentrated in high-balance accounts that accumulated during the pandemic. 60% of that outflow is concentrated in 100 accounts. We know who they are. We maintain the relationship. We know where the funds went. And when we see value in bringing those deposits back, we know who to call, and we think we'll have a good shot at bringing those back in.
To reiterate, our core deposit franchise remains very, very solid. In fact, our typical checking and savings account balances, those are balances under $50,000, actually grew in the fourth quarter.
So, what do we expect from here? I think, we could see some continued volatility in high-balance accounts. That could offset some of our normal core deposit growth rate. We see the lagging rate pressure, we feel it, and we are addressing it. We do expect deposit rates to go up. We are becoming much more aggressive in retaining those balances. And from here, we do expect deposit flows to normalize.
We think we are well positioned to retain deposits. I think you'll see a variety of solutions employed to retain deposits through the rest of this year. I think you'll see some CD specials. I think you'll see some repo specials. You'll see some money market premier rates that are attractive. I think you'll see some targeted outreach, some negotiated one-off rates. All of these things have been very successful for us in the past.
And the beauty of our model is that we have 17 divisions with the right tools and the right incentives in place, focused on serving their customers, and finding solutions tailored for their markets while optimizing their deposit structure and funding costs.
Thanks, Byron. I appreciate the rundown there. That's helpful. Maybe if I could just jump back to Randy on the capital side, just checking in, your building capital. M&A has been quiet. In the past, you've used special dividends, that's been a bit -- maybe protecting some capital with the macro environment. But anything to touch on, on capital, Randy?
Not in particular. As it relates to M&A, we still have the doors open and want to have conversations. There are some headwinds to putting deals together as everybody, as you know, but still having those discussions.
Regarding a special dividend, that's completely up to the Board. I would tell you, we put a lot of effort into building the capital and feel like, at this point in the cycle, that's where you want to be, sailing into this with a fair amount of capital, and then, we'll see what unfolds in '23.
Appreciate. I'll step back. Thank you.
[Operator Instructions] Our next question comes from the line of Kelly Motta from KBW. Your line is open.
Hi, good morning.
Good morning, Kelly.
I'd like to continue on the kind of balance sheet side of things. I appreciate all the color on how you anticipate on funding the growth ahead with the deposit flows moderating and cash flows off the securities book. Just wondering if these funding considerations are helping to guide maybe your outlook for loans bit lower, as well as any changes in demand at this higher rate point in the cycle?
So, Kelly, you broke up a little bit there. I just want to make sure I have the right question. Maybe you could just restate it for me.
So, the essence was, if these funding considerations are impacting, how you're managing loan growth going forward, as well as I'm sure demand is coming in at this point in the cycle, just wondering maybe if you could hit on both sides of the things, as well as what your outlook is for loan growth over the next few quarters?
Yes. Let me ask Tom to cover that.
Yes, good morning, Kelly. From a demand perspective, we've seen that kind of continue to reduce over the past couple of quarters. Fourth quarter was no exception. So, we saw our pipelines reduce again. We saw our top-line production reduce, but at the same time, so did our payoffs. And so, actually, net-net, between the two of them was about the same dollar amount of reduction. All of which reflect of -- I think, of the interest rate environment.
Cap rates are still low. So, with rising interest rates, it's a little bit more difficult to make those [indiscernible] to our conservative underwriting guidelines. And just as a reminder, we underwrite not only to loan-to-value and debt service coverage, but also the debt yield. And so, when you've got low cap rates, that typically requires a lot more equity, especially in this higher interest rate environment. So, I think that's been a headwind there as well.
But in terms of loan growth outlook for 2023, we're thinking in the low to mid-single digits for the year.
Yes. And Kelly, we're not throttling back growth. We have more than enough rolling off the investment portfolio to fund the level of growth that we see organically coming at us in '23. So, we feel like we're well positioned to take care of our customers.
Understood. And on the deposit side, I appreciate the color about this being 100 accounts, and you're very well aware of who they are. Can you just remind us about like the typical granularity of your deposit portfolio, maybe average account size and things like that? Because it seems like it was concentrated in just like the larger-balance accounts.
Yes. We have -- our average -- so, if you get that down to the average balances, our accounts, we have a lot of -- we have more units than a bank of our size. We have a lot of smaller accounts. And so, we'll get to the average numbers. But that's -- what was the interesting thing here is that they were -- a lot of the outflow was just concentrated in these very large accounts, which we could pretty easily see.
Byron, do you want to add a little color to that?
Sure. In terms of averages, Kelly, our retail deposit accounts averaged about $15,000 per account, and our business deposit accounts averaged closer to $60,000, $64,000 per account.
Great. Yes, that's pretty granular. Got it. And just some point of clarification or trying to put some numbers around first quarter deposit outflows. You, in your prepared remarks, said you expect that to moderate. Is that -- does that kind of imply that we're still going to see some decline in 1Q, it just won't be as great as we saw in 4Q, and then kind of a stabilization thereafter?
Exactly. I think you're looking at it exactly right. And back to your point on granularity, I think that's tremendous strength for us, because we have a lot of small dollar accounts. And as Byron pointed out, those actually grew throughout the year, including in the fourth quarter. So, that's an important part of our stable sticky franchise.
Thank you so much. I'll step back.
You're welcome.
Thank you. And I'm actually not showing any further questions in the queue at this moment. I'd like to turn the call back over to our President and CEO, Randy Chesler, for any closing remarks.
Great. Well, very good. Appreciate it. I know this was a really busy day for analysts with a lot of overlaps, and...
Randy?
Hello? Yes?
I'm sorry. We do have a follow-up from Kelly.
Kelly, the floor is yours.
Let me go ahead and open up her line.
I thought there was other people in the queue. So, I'll jump right back in. Can we talk about expenses? They were really well controlled. A lot of the things that I'm seeing are having a lot of pressure on that expense line item. Just wondering as we look out to this next year, maybe if you could discuss any investments or bigger-ticket items that you're making, as well as just any overall comments on how you're managing through the inflationary pressures? And if where we are now is a good run rate to build off of?
Yes. We -- Ron and I and the team spent a lot of time looking at expenses. So, I'm going to ask Ron to cover that.
Yes. Kelly, really appreciate well controlled, because that's [indiscernible] what it is, and it gets back to the division, the model, local people making decisions that are right for their market, whether it's compensation or other noninterest expense. So, let me start there.
So, if you take the fourth quarter, $129 million flat reported, but adjust that for the $2.5 million gain from the sale of former branch buildings and then $800,000 of M&A, you get to about $130.7 million adjusted. And so, the question, I think, is we guided to $133 million, and so we came in substantially below that, and $800,000 of that was the lower compensation expense, and that is a direct result of the control on the hiring. We had a reduction during the quarter of six FTE on an average, it was actually closer to 24. So, the division did a pretty good job, as they have done all year, doing more with less. Just year-over-year, we're down 46 FTE and we've been able to manage through that. So that's been a remarkable thing, and I want to point that out.
So, then, on the guide, just the $133 million to $135 million, we would estimate that, that would then go up, say, 2.5% to 3% over the course of the year. So, the math is the math. The thing I would tell you is the -- there's still economic uncertainty. The higher inflation is still out there, I'd say, high. It may be moderating, but it's still coming higher. So, Q1 is seasonally higher. So, I would say, if you took the 2.5% guide, you'd be at $138 million for the first quarter -- $136 million to $138 million, and then it will slowly migrate up from there as we make investments back in our company.
Thanks. Appreciate that. If I could turn a little back to the margin. You guys have been obviously really well controlling your deposit costs. I think, it was Byron mentioned potentially running some CD specials. Just given the premium on liquidity that we have now, what are you guys now assuming for cycle today -- betas? -- cycle betas?
Sure. Kelly, this is Byron. We previously mentioned mid-teens, and I think we're still there. I think mid-teens is still the right guide for our full-cycle beta on our deposit.
Got it. So, just thinking through the pieces, it seems like it's -- the balance sheet is a bit smaller than we had perhaps thought with the deposit runoff. But as you remix into higher-yielding assets from the -- what you've given us on the security side and start to roll off FHLB, do you see this as a bottom for your margin?
In terms of margin, we do see a very modest lift this year. The asset momentum that we've previously described is still in place. You mentioned the securities runoff, that cash flow coming off at 1.5 into loan, that's providing a lot of help to the margin. We've got some loan repricing into this higher rate environment. We're seeing meaningful lift from new production rates. And we feel those loan yields will carry momentum beyond the top of the Fed's rate cycle.
Now, the near-term headwinds, of course, include the wholesale funding costs that we've talked about, deposit cost increases as we are getting more aggressive in our deposit pricing. However, on balance, we do think the asset momentum will be enough to more than offset the funding costs through the end of the year, with that momentum providing ample capacity to compete for deposits and grow margins.
Thanks for the color. Last area for me is just credit. Obviously, metrics are really pristine, but we are starting to get into a more challenging environment. Just wondering, I mean, it feels like there's no direction but up, but what are you anticipating as a normalized level of charge-offs? Are there any areas to where the risk-adjusted returns aren't looking as attractive at this point or maybe areas that you think we could see more softness here in this upcoming year?
Kelly, it's Tom. There's no one specific industry or specific geographic location within the footprint that has an outsized area of concern. We're really not seeing any early warning signs than anywhere in the loan portfolio, which is encouraging, especially living through inflation now for the past several quarters at that pace to not really see any early warning signs yet is encouraging.
That being said, I think there are certainly a lot of economic headwinds, certainly the inflation and the pressure on consumers and how that will cascade in the commercial borrowers is left to be seen. On the other side of that, I feel our borrowers are coming into this time of uncertainty probably from a position of strength, greater than they've had, certainly, greater than they've had during the last recession. So that's also encouraging.
So, in terms of where we think it's going to go in the future, without the early warning signs, we don't really envision any material deterioration in -- at least in the coming couple of quarters. That being said, for the last two years, we've been in a very aggressive campaign, if you will, to work up or work out weaker credits in the portfolio. That effort continues. So, there could be an instance in the coming couple of quarters that if we see an opportunity to exit a weaker credit, we'll do that, if it makes sense.
Got it. Appreciate you guys letting me step back on.
Sure.
I am good now. Thank you.
No problem. Victor, let me check back with you to see if anyone else is in the queue and would like to ask a question before we wrap up.
Yes. We do have one other question. One moment.
Okay.
And we have a follow-up from Jeff Rulis from D.A. Davidson. Your line is open.
Hi. Yes, we're rushing to get here.
Hey, Jeff.
Hey. So, Ron, I'm struggling with the expense base. I mean for Q4, I kind of see it as about a $131 million core, if you add back the branch gain and less merger costs. That seems like a pretty big jump into Q1. I know that you said that's seasonally high. Is it possible the -- kind of the progress throughout the year is down from that Q1 high point?
Well, Jeff, it gets back to the guide, we were very confident that the -- as I mentioned on the previous earnings call, the merit increases that several of our divisions, a couple of the larger ones put in place, that was mitigated by the reduction in the headcount. But we expect that will not continue. It will reverse. There are still challenges with hiring, but we think that hiring will come back.
And then, when you think about our merit increases, they're all going to start here at the beginning of the year. And so, that's the reason we anchored to the $133 million-$135 million range that I gave last quarter. And so, that's why I'm confident when I say 2.5%. It could be 3%. So, I would stick with that guide. And again, first quarter being higher, we've just got some merit increases. We've got the FICA, the traditional things. We've got some restricted stock [indiscernible].
And then, on the noninterest expense, I mean, let me just use as an example, FICA, not FICA, excuse me, FDIC insurance premiums, they're up 40%. And so, we still see a lot of our vendors and we're looking at the contract, but we see that the pressure they're putting on us to pay up, again, thank God, we have the 17 divisions to look at that.
Sure. Maybe take it a different way. If I look at, say, you had $519 million in total expenses in '22, if I look at full year, let's strip out the seasonality, with a good growth rate for '23, is it that, like you said, 2.5% to 3% off of a $519 million base?
So, I would estimate the range would be, say, $545 million to $555 million, somewhere in that range for the full year, and then that will -- again, we're going to run higher as we traditionally do in the first quarter, and then we go lower from there. So that's the guide I would give you.
Okay. Full year, you're saying $545 million to $555 million?
Yes.
Okay. Appreciate it, Ron. Thank you for -- I'm slow to pick that up. Maybe just on the fee income side, just a similar question. Obviously, we know kind of mortgage is on its back, but your thoughts on kind of growth from what looks like a pretty low point in the fourth quarter? Any expectations on fees?
Yes. When we look at the fourth quarter fees, the mortgage gains was the big driver there of the drop-off. And so -- we had a little bit shorter quarter this quarter. So, those two things are the bulk of that, the change. So, we don't -- it's really -- the big move there is going to be mortgage. And we hope to see some improvement. I don't see it right now. But if that picks up, then we should see the overall fees. But in terms of the account fees, those pretty much look to be in line. We don't see a big change there.
Okay. Thank you.
You're welcome.
Thank you.
Okay, Victor, I'm back checking with you. Do we have any other questions?
I'm not seeing anything else in the queue at this moment.
All right. Very good. Well, I want to thank you again for all your questions. Again, busy day, and we appreciate you checking in, and Kelly and Jeff, coming back for a couple of questions, happy to answer them. So, we hope everyone has a great weekend, and we again appreciate your participation in the call. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.