Glacier Bancorp, Inc. Q4 FY2022 Earnings Call

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. 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, including 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 has the third-best business environment in the United States. In The Tax Foundation's State Business Tax Climate Index, Utah ranks 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 by $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 Q1 and then perform more consistently 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 show growth in 2023, benefiting from the cash flow rolling out of investments yielding about 1.5% and being reinvested in new and renewing loans 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. 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 the use of the borrowings; you explained the thought process. However, you have a strong deposit franchise and a low loan-to-deposit ratio. I wanted to know more about the timing and details regarding this. It came at a cost, and I appreciate the 2023 outlook on reducing those and the potential impact on the margin. Is there anything else to add on the FHLB? Thank you.

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 rates 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 overview; it's very helpful. I wanted to circle back to Randy regarding capital. You're building capital, and M&A activity has been quiet. In the past, you've utilized special dividends, possibly to protect some capital given the macro environment. Is there anything you can share about 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.

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 a 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, I think, the interest rate environment. Cap rates are still low. So, with rising interest rates, it's a little bit more difficult to make those adjustments 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 a lot of smaller accounts, which means our average balances are skewed. Our institution has more units than a bank of our size typically does. It's interesting to note that the outflow was primarily concentrated in very large accounts, which we could identify easily. Byron, would you like to provide some additional insight on this?

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 specific. Understood. I just need some clarification on the first quarter deposit outflows. You mentioned in your prepared remarks that you expect those to moderate. Does that mean we might still see some decline in Q1, but it will not be as significant as what we experienced in Q4, followed by stabilization afterward?

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 I'm glad you could make it.

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 were 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?

We spent a lot of time looking at expenses. I will ask Ron to cover that.

Yes, Kelly, I appreciate the well-controlled approach, which is crucial. It relates back to the division’s model, where local teams make decisions that are appropriate for their market, whether concerning compensation or other non-interest expenses. To start, in the fourth quarter, we reported $129 million; however, if we adjust for a $2.5 million gain from the sale of previous branch buildings and $800,000 from M&A, we arrive at about $130.7 million adjusted. The concern is that we guided to $133 million, and we significantly fell short of that. The $800,000 reduction in compensation expense directly resulted from careful hiring controls, with a reduction of six FTE on average during the quarter, although it was closer to 24 in reality. The division has done an impressive job throughout the year by achieving more with less. Year-over-year, we are down 46 FTE, and we've navigated through that effectively, which is noteworthy. Regarding our guidance of $133 million to $135 million, we expect it to rise by about 2.5% to 3% over the subsequent year. However, we must consider ongoing economic uncertainties. Inflation is still a factor, although it may be moderating. Since Q1 is typically higher, applying the 2.5% guidance would suggest a figure of $138 million for the first quarter, or between $136 million and $138 million, with gradual increases expected as we reinvest 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 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.

It seems that the balance sheet is somewhat smaller than we initially anticipated due to the deposit runoff. However, as you transition into higher-yielding assets based on the information you've provided regarding the securities, and as you begin to reduce FHLB, do you consider this to be a point of stability 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, and 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 in 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 to 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 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, Ron, I'm having difficulty with the expense base. For Q4, I estimate it to be around $131 million core if we add back the branch gain and deduct the merger costs. That looks like a significant increase going into Q1. I understand you mentioned it's typically high during that season. Is there a chance that progress throughout the year may decline from that Q1 peak?

Well, Jeff, it goes back to the guidance. We were very confident, as I mentioned on the previous earnings call, about the merit increases that several of our divisions, particularly some of the larger ones, implemented, which were balanced by the reduction in headcount. However, we expect that trend will not persist and will reverse. There are still challenges with hiring, but we believe hiring will improve. In terms of our merit increases, they will all start at the beginning of the year. That's why we set the $133 million to $135 million range that I mentioned last quarter. This is why I'm confident when I say 2.5%, it could be 3%. I would maintain that guidance. Additionally, while the first quarter is projected to be higher, we have some merit increases, FICA, traditional costs, and restricted stock to consider. For noninterest expenses, take FDIC insurance premiums as an example; they have risen by 40%. We continue to see pressure from our vendors, and while we are reviewing contracts, it’s important to note that we benefit from having our 17 divisions to help manage this.

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?

I would estimate that the range would be approximately $545 million to $555 million for the full year. Typically, we'll see higher numbers in the first quarter, and then it will decrease from there. That's the guidance I can provide.

Okay. Full year, you're saying $545 million to $555 million?

Yes.

Thank you, Ron. I appreciate it. I'm a bit slow to catch that. On the fee income side, I have a similar question. We know mortgage activity is facing challenges, but what are your thoughts on growth from what appears to be a relatively low point in the fourth quarter? Do you have any expectations regarding fees?

Yes. In the fourth quarter, the significant drop in fees was primarily driven by mortgage gains. Additionally, this quarter was slightly shorter, which also contributed to the change. The main factor at play is definitely related to mortgages. While we're hoping for some improvement, I don't see any signs of that at the moment. If mortgage activity picks up, we may see an overall increase in fees. However, regarding account fees, they appear to remain stable with no major changes expected.

Okay. Thank you.

You're welcome.

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