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 speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to 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 and 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. U.S. News states that Washington has the third-best business environment in the United States. The Tax Foundation State Business Tax Climate Index ranks Utah eighth in the nation, Montana fifth, and Wyoming 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%. Our 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 of $397 million or 11% annualized. For the full year, we grew $1.9 billion or 15%. Non-interest 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. We enter 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. 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. 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. Non-interest-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 non-interest-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 show growth in 2023, benefiting from the cash flow rolling out of investments yielding about 150 and 1.5% and being reinvested in new and renewing loans yielding in excess of 6%. 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. That ends my formal re-remarks. Now I'd like to ask Victor to please open the line for any questions that the analysts may have.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Jeff Rulis from D.A. Davidson. Your line is open.
Thanks, Jeff. Good morning.
Morning, Jeff.
Wanted to check in about, just the use of the borrowings. You kinda walked us through sort of the thought process. Just, you know, you've got such a strong deposit franchise and a low loan 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... Appreciate the 2023 outlook on running those down and the impact on margin headed up. 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. When Treasury rates went through that 4%, that's when we really saw a turn with this 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. As we looked at it, we decided not to compete with those Treasury rates because at the time, we had lower cost wholesale funding alternatives.
It really was a funding cost optimization decision. Now, that map 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. At the time, we simply had, you know, lower cost funding options. Now, as Randy mentioned, we were not losing customer relationships. We were 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 was concentrated in 100 accounts. We know who they are. We maintain the relationship. We know where the funds went.
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 solid. In fact, our typical checking and savings account balances, those are balances under $50,000, actually grew in the fourth quarter. 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 rates. 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. 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. 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. Appreciate the rundown there. That's helpful. Maybe if I could just jump back to Randy on the capital side. Just checking in, you know, you're building capital. M&A has been quiet in the past. You've used special dividends. That's been a bit, you know, maybe protecting some capital with the macro environment. Anything to touch on capital, Randy?
Not in particular. As it relates to M&A, you know, we still have the doors open and wanna have conversations. There's some headwinds to putting deals together as everybody as you know, but still having those discussions. Regarding a special dividend, you know, 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 wanna be, sailing into this with a fair amount of capital, and then we'll see what unfolds in 2023.
Appreciate it. I'll step back. Thank you.
Thank you. As a reminder to ask a question, that's star one one. Once again, that's star one one. One moment for our next question. Our next question comes line of Kelly Motta from KBW. Your line is open.
Hi, good morning.
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 to be lower, as well as any changes in demand at this higher rate point in the cycle?
Kelly, you broke up a little bit there. I just wanna make sure I have the right question. Maybe you could just restate it for me.
The essence was, if these funding considerations are impacting how you're managing loan growth going forward as well as I'm sure, you know, 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?
Yeah. Let me ask Tom to cover that.
Yeah. 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. We saw pipelines reduce again. We saw our top line production reduce, but at the same time, so did our payoffs. You know, actually net net between the two of them was about the same dollar amount of reduction. You know, all of which reflective, I think, of the interest rate environment. You know, Cap Rates are still low. With rising interest rates, it's a little bit more difficult to make those pencil to our conservative underwriting guidelines. Just as a reminder, we underwrite not only to Loan to Value and Debt Service Coverage, but also the Debt Yield.
When you've got low cap rates, that typically requires a lot more equity, especially in this higher interest rate environment. I think that's been a headwind there as well. In terms of loan growth outlook for 2023, we're thinking in the low to mid-single digits for the year.
Yeah. 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 coming at us in 2023. I feel like we're well positioned to take care of our customers.
Understood. Now 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 on, in, just, like, the larger balance accounts.
Yeah. If you get back down to the average balances, you know, our accounts, we have more units than a bank our size. We have a lot of smaller accounts. I will get you the average numbers. you know, that's what was the interesting thing here, is that a lot of the outflow was just concentrated in these very large accounts, which we could pretty easily see. Byron, do you wanna add a little color to that?
Sure. In terms of averages, Kelly, our retail deposit accounts average about $15,000 per account, and our business deposit accounts average closer to $60,000-$64,000 per account.
Great. Yeah, that's pretty granular. Got it. Just a 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. Does that kind of imply that we're still gonna 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. Nope. I think you're looking at it exactly right. Back to your point on granularity, you know, I think that's a tremendous strength for us because we have a lot of small dollar accounts. As Byron pointed out, those actually grew throughout the year, including the fourth quarter. That's an important part of our stable, sticky franchise.
Thank you so much. I'll step back.
You're welcome.
Thank you. 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. I know this was a really busy day for analysts with a lot of overlaps.
Randy-
Hello? Yes.
I'm so sorry. I do have a follow-up from Kelly.
Oh. Kelly, the floor is yours.
Let me go ahead and open up her line.
I thought there was other people in the queue. I'll jump right back in. Can we talk about expenses? They were really well controlled. A lot of the banks 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, you know, where we are now is a good run rate to build off of?
Yeah. Ron is, and I and the team spent a lot of time looking at expenses. I'm gonna ask Ron to cover that.
Yeah. Kelly, appreciate, really appreciate, well controlled because that's precisely what it is. It gets back to the division, the models, local people making decisions that are right for their market, whether it's compensation or other non-interest expense. Let me start there. If you take the fourth quarter, you know, $129 million flat reported, 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 adjusted. The question, I think is, you know, we guided to $133 million, we came in substantially below that.
Eight hundred thousand of that was the lower compensation expense, and that is a direct result of, you know, the control on the hiring. We had a reduction during the quarter of six FTE. On an average, it was actually closer to 24. The divisions 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. You know, that's been a remarkable thing, and I wanna point that out. On the guide, just the 133-135, we would estimate that that would then go up, say, 2.5%-3%, over the course of the, of the year. You know, the math is the math.
The thing I would tell you is, you know, there's still economic uncertainty. The higher inflation is still out there. I say high. It may be moderating, but it's still coming higher. Q1 is seasonally higher. I would say if you took the 2.5% guide, you'd be at $138 million for first quarter, $136 million-$138 million, and then it'll slowly, you know, 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 know, 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-to-date betas or so-cycle betas?
Sure. Kelly, this is Byron. We had 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 cost.
Got it. 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. As you remix into higher yielding assets from what you've given us on the security side, and start to roll off of FHLB, do you see this as a bottom for your margin?
You know, in terms of margin, we do see a very modest lift this year. You know, 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 loans. 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 lifts from new production rates. We feel those loan yields will carry momentum beyond the top of the Fed's rate cycle. 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, you know, 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 margin.
Great. Thanks for the color. last area for me is just credit. Obviously, metrics are really pristine, but we are, you know, 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 the normalized level of charge-offs? Are there any areas too, 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?
Yeah. Kelly, it's Tom. You know, there's no one specific industry or specific geographic location within the footprint that has an outsized area of concern. You know, we're really not seeing any early warning signs in anywhere in the loan portfolio, which is encouraging, especially, you know, living through inflation now for the past several quarters at that pace to not really see any early warning signs yet is encouraging. You know, that being said, you know, I think there are certainly a lot of economic headwinds. You know, certainly the inflation on and the pressure on consumers and how that will cascade into 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 the greater than they've had during the last recession. That's also encouraging. In terms of where we think it's gonna go in the future, without the early warning signs, you know, we don't really envision any material deterioration in at least in the coming couple quarters. That being said, for the last, you know, 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.
You know, there could be an instance in the coming, couple of quarters that if we see an opportunity to exit, a weaker credit, you know, we'll do that if it makes sense.
Got it. Appreciate you guys letting me step back on.
Sure.
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.
We do have one other question. One moment.
Okay.
We have a follow-up from Jeff Rulis from D.A. Davidson. Your line is open.
Hi. Yeah, we're rushing the gate here.
Hey, Jeff.
Hey. Ron, I'm struggling with the expense base. I mean, for Q4, I kinda see it as about a $131 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, you know, that as I mentioned on the previous earnings call, you know, the merit increases at several of our divisions, a couple of the larger ones put in place, that was mitigated by the reduction in the headcount. We expect that will not continue. It'll reverse. You know, there are still challenges with hiring, but, we think that, you know, hiring will come back. Then, you know, when you think about our merit increases.
You know, they're all gonna start here at the beginning of the year. That's the reason we anchored to the 133-135 range that I gave last quarter. That's why I'm confident when I say 2.5%. It could be 3%. I would stick with that guide. Again, first quarter being higher. You know, we've just got some merit increases. We've got the FICA, you know, the traditional things. We've got some restricted stock that's vested. Then on the non-interest expense, I mean, let me just use as an example, FICA. Not FICA, excuse me, FDIC insurance premium, they're up 40%.
We still see a lot of our vendors, and we're looking at the contracts, but we see that, you know, the pressure they're putting on us to pay up. Again, thank God we have the 17 divisions to look at that.
Sure. Maybe taking it a different way. If I look at, say, you had $519 in total expenses in 2022. If I look at full year, you know, let's strip out the seasonality. What's a good growth rate for 2023? Is it the, like you said, 2.5%-3% off of a $519 base?
I would estimate the range would be say $545-$555, somewhere in that range for the full year. That'll, you know, again, we're gonna run higher as we traditionally do, in the first quarter, and then we, you know, go lower from there. That's the guide I would give you.
Okay. Full year, you're saying $545-$555?
Yep.
Okay. Appreciate it, Ron. Thank you for, I'm slow to pick that up. Maybe just on the fee income side or just a similar question. Obviously, we know kind of mortgages 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?
Yeah, when we, you know, we look at the fourth quarter fees, the mortgage gains was the big driver there of the drop off. You had a little bit shorter quarter this quarter. Those two things are the bulk of the change. We don't, you know, it's really the big mover there is gonna be mortgage, and we hope to see some improvement. I don't see it right now. If that picks up, then, you know, we should see the overall fees. In terms of the account fees, those pretty much look to be in line. We don't see a big, big change there.
Okay. Thank you.
You're welcome.
Thank you.
Okay. Victor, 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 wanna thank you again for all your questions. Again, busy day, and we appreciate you checking in. Kelly and Jeff coming back for a couple of questions, happy to answer them. We hope everyone has a great weekend. 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-