Glacier Bancorp, Inc. (NYSE:GBCI) Q4 2022 Earnings Call Transcript

Glacier Bancorp, Inc. (NYSE:GBCI) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: 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.

Randy Chesler: 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.

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Q&A Session

Operator: Thank you. Our first question will come from the line of Jeff Rulis from D.A. Davidson. Your line is open.

Jeff Rulis: Thanks. Good morning.

Randy Chesler: Good morning, Jeff.

Jeff Rulis: 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.

Byron Pollan: 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.