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spk13: Good day, and thank you for standing by. Welcome to the Glacier Bank first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star one one on your telephone, and you will then hear an automated message advising you 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 your speaker today, Mr. Randy Chesler, President and CEO of Glacier Bancorp. You may begin.
spk15: All right. Thank you, Catherine, and good morning, and thank you all for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Don Cherry, Chief Administrative Officer, Angela Dose, our Chief Accounting Officer, Byron Pollin, 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 10 of our press release, and we encourage you to review this section. The failure of Silicon Valley Bank and Signature Bank last month created a lot of concerns about the banking industry. Overall, I'm pleased to report The Glacier team did an excellent job managing through the rapidly changing environment over the past few weeks, and we believe our unique business model weathered the storm very well. Our local, relationship-based approach to community banking proved to be extremely stable. Our 17 separate and distinct bank brands operating in 222 locations across eight western states provided further insulation from the events unfolding outside our markets. Deposits grew during March, which was when the banking crisis started and was the period when the system was under the most stress. While many customers were concerned about safety of their deposits, talking about it with their banker, who they know and trust, resolved most of their concerns. Our deposit base has a high degree of balance and granularity. We have over 600,000 retail accounts with an average balance of 14,000. Over 150,000 commercial accounts with an average balance of 63,000. These relationships are spread out over eight states, 75% in rural markets and 25% in metro markets with about 60% of the accounts with us over five years. Our liquidity is strong, with close to $15 billion available through multiple channels. In this quarter, we tested most of these channels, confirmed their operational status and ability to provide us with ready liquidity. Out of an abundance of caution, we used our liquidity to increase available cash to over $1 billion, so we had more than enough cash on hand if needed. We don't have a significant amount of uninsured deposits, only about 32% totaling $6.4 billion. If you remove public funds that are collateralized with high-quality investments from this number, it's closer to 26%. We have more than enough ready liquidity to cover in excess of 100% of these balances and still exceed regulatory minimum capital requirements. Our investment portfolio is structured to be shorter in duration and to generate cash flow. As a result, this portfolio produces enough cash to finance our expected lending growth. And in the event we wanted to sell these investments to reduce borrowing, The current after-tax unrealized loss on both the held for sale and held for investment portfolios, totaling $685 million, could be absorbed by a capital which would still exceed regulatory minimums. Our capital levels are strong and growing, with CET1 increasing 13 basis points from the prior quarter to 12.47%. We believe this level of capital is more than 100 basis points greater than the average of the 21 peer banks listed in our proxy. Credit continues to perform at record levels, and we see little signs of deteriorating credit. There's been some concern about commercial real estate exposure in the industry, primarily in larger cities. Our commercial real estate portfolio is primarily comprised of small properties outside of the city centers with an average loan amount of $600,000. While there are a number of headwinds impacting the banking industry, we are optimistic about the current position of the company. The markets in which we have a presence are among the strongest economies in the U.S. We have ample liquidity and a balance sheet that now has a bias towards being more liability sensitive, a very high quality loan portfolio, a proven banking model, and M&A expertise that is primed to take advantage of this current environment. Some of the specific highlights for the first quarter include Stockholders' equity of $2.9 billion increased 83.6 million, or 3% during the current quarter. Tangible book value per common share of 17.616 at the current quarter and increased 76 cents per share, or 5% from the prior quarter, or 7.6, 7 cents a share, excuse me. Interest income of $232 million in the current quarter increased $6.8 million or 3% over the prior quarter and increased $41.4 million or 22% over the prior year first quarter. Total deposits and retail repurchase agreements of $21.3 billion at the end of the current quarter increased $289 million or 1% during March. and decreased just $213 million or 1% during the current quarter. The loan portfolio of $15.5 million increased $272 million or 7% annualized during the current quarter. The loan yield for the current quarter of 5.02% increased 19 basis points compared to the prior quarter and increased 43 basis points from the prior year first quarter. New production yields for the quarter were 6.96%, up 62 basis points from the last quarter. Available liquidity of $15.1 billion, including cash, borrowing capacity from the Federal Home Loan Bank and Federal Reserve facilities, unpledged securities, broker deposits, and other sources. Credit quality continued to improve to record levels. Non-performing assets as a percentage of subsidiary assets was 12% or 0.12 basis points in the current quarter and compared to 0.24% in the prior year first quarter. Net charge-offs as a percentage of loans was one basis point. The company declared a quarterly dividend of $0.33 per share in the quarter. The company has declared 152 consecutive quarterly dividends and increased the dividend 49 times. Core deposit funding of $20 billion, almost 85% of total funding liabilities, ended the quarter at a cost of 23 basis points versus 8 basis points in the prior quarter. Non-interest-bearing deposits were 35% of core deposits at quarter end, compared to 37% in the prior quarter. We expect deposits to perform more consistent with historic growth trends going forward, with some growth in the second and third quarters of the year, followed by some outflow in the fourth quarter. Competition for deposits and the cost to attract and retain them will continue to increase. We still anticipate borrowings to slowly decline throughout the year and plan to fund our growth for 2023, primarily by using the quarterly cash flow from our investment portfolio. So we remain confident in the dynamic Western markets we serve and our unique business model to continue to deliver strong results. The Glacier team did another excellent job in the first quarter, Despite the market turmoil, they once again kept their focus on shareholders, customers, and communities. So that ends my formal remarks, and I'd now like Catherine to open the line for any questions that our analysts may have.
spk13: Thank you. As a reminder, to ask a question, press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster.
spk14: Our first question comes from David Feaster with Raymond James.
spk13: Your line is open.
spk19: Hey, good morning, everybody. Morning, David. Maybe if we could just start talking about on the deposit flow side, some of the driver's you know, this quarter. I know last quarter, you know, flows are primarily isolated to, you know, some of the top 100 clients or so. Was that the case again this quarter? Are the outflows, you know, how much could you maybe just talk about, too, how much is just from normal seasonality versus clients paying down higher-cost debt or capital purchases or, you know, some of the retail borrowers looking for higher rates versus actual fallout from the recent bank failures?
spk15: Sure. Obviously, we've spent a lot of time looking at deposits and studying inflows and outflows. Byron has done a lot of analysis there. I'm going to hand it over to Byron to walk you through your responding to some of your questions. Byron, go ahead.
spk18: Sure, David. Appreciate the question. When we look at our deposit flows, one of the things that I'll include, when we talk about our core deposit flows, I'll be including repo, our retail repo, in this discussion. Those retail repo accounts are not wholesale funding. They are collateralized accounts. These are our customers. They are core relationships. So when I think of core relationship accounts, I'll be including a retail repo in this discussion. So in the quarter, our core deposits and repo declined roughly $600 million. That was a tremendous improvement over the decline in the fourth quarter. And what I'll do is I'll break this down between the month and kind of track and give you a sense for what happened in January, February, March. So more than 90% of that $600 million outflow happened in January. This was purely rate driven. This was kind of a continuation of what we saw in the fourth quarter. We did adjust our pricing and retention strategies towards the end of January and became much more proactive in defending those balances. And so once we did that, our deposit and repo balances stabilized in February. And in the month of March, our core deposits and repo balances actually grew. And that was in the face of all that noise and volatility that happened in March with all the noise from Silicon Valley Bank. So our divisions did a fantastic job of stabilizing deposits in February and actually growing deposits in a very difficult environment. Now, you'll see the impact of that show up in our cost of deposits. They're on the rise and clearly going up. So we did see some normal seasonality. That's typical for us to see some outflow in the first quarter. I would say that that was kind of accelerated by some rate drivers in January. We put a stop to that in February and actually grew in the month of March. So hopefully that addresses here.
spk19: Yeah, no, that's very helpful. I guess, have you seen that trend persist here early into the second quarter? Have you seen core deposit balances continue to grow? Just curious what the early read is early in the second quarter.
spk18: Very typical tax-related flows. So I had a little bit of increase the first couple weeks of April and then some outflows related to tax. to tax payments. So nothing outside the ordinary from what we typically see in an April.
spk19: So I guess maybe just how do you think about the deposit trajectory from here? It sounds like maybe April's a little bit more outflows from seasonal tax issues, but do you think core deposit balances are kind of at a trough, or would you expect – how do you think it plays out through the course of the year? And ultimately – How do you think about the timing of some of the balance sheet and the paydowns of the borrowings?
spk18: Yeah, I would. Trough is a good word right now. I think that's right. I think from here, we'll probably revert back to some of our normal historic flows. Summertime is really strong for us on the deposit front. Fall is still pretty good. And then as winter sets in, we see some outflows. So I would I would look to or I would anticipate some of those kind of seasonal factors influencing our deposit balance. If you look at a typical year for us where we grow somewhere in the range of 3% to 5%, given headwinds, I would put us at the low end of that range. And so if I had to put a number on it, between now and the end of the year, potentially we could grow 2% would be my estimation.
spk19: OK. And then so just, again, thinking about some of the balance sheet side, you know, obviously we built up some excess liquidity. How do you think about, you know, maintaining that liquidity and just thinking about some of the other dynamics, you know, with the cash flows from the securities book, you know, predominantly funding loan growth, probably, you know, don't start in, you know, 2% deposit growth like we were just talking about. Probably don't really see the borrowings come down in earnest. really until 2024, or maybe early, you know, late in the in the year, is that kind of the right way to think about it?
spk18: I think so. You know, as Randy mentioned, we built that cash balance out of an abundance of caution, I think things are starting to settle down, you know, you could see us release some some of that cash, that would help us pay down some, some of this wholesale funding. And then, you know, as you pointed out, the cash flow off of the securities portfolio, continuing to fund our our loan growth. So just a little bit, you know, I could see maybe if we release some of this cash, that could put a dent in our wholesale funding, but then it's just chipping away from there through the rest of the year. Okay.
spk19: And could you remind us of the securities cash flows? I think we talked about $300 million. Is that still the right pace?
spk18: Yeah, I think I'm still comfortable with that number for quarterly for the rest of the year. Okay. Thanks, everybody.
spk14: Thank you. One moment for our next question. Our next question comes from Kelly Moda from KBW.
spk13: Your line is open.
spk08: Hi. Good morning. Thanks for the question.
spk11: Morning, Kelly.
spk08: Okay. Sorry, my model is kind of spinning on me. You guys got some good loan growth this quarter. Still was pretty decent even with the slowdown we've been seeing. What's your pipeline from here and can you talk about which areas you're seeing the best risk adjusted returns at this stage?
spk15: Sure. That's another area we spent a lot of time looking at as well, and Tom has studied it very closely, so I'm going to ask Tom to cover your question on growth.
spk16: Yeah, I would say, Kelly, first quarter was a little stronger than expected, and I think that's reflective of the strong markets that we operate in through our A-state footprint, and in addition to that, the continued strength on our borrowers' balance sheets that we continue to see. I would say, though, that we would I think we expect growth to continue to slow in the coming quarters. Both customers and certainly our credit officers and our division banks are continuing to be cautious. So I would say for the year, we're probably on the low end of the mid single-digit range. And then in terms of the second part of your question that's providing us some of the growth drivers and some of the areas where we're getting some very good pricing. You know, certainly industrial warehouse has been a good segment for us in the last, probably last year and a half now. And that continues to show some strength. Multifamily has been good as well, even though we've seen that slow down a little bit. And certainly the agriculture portfolio provides a very healthy return, especially as a lot of the operating lines are prime base structures.
spk08: Thanks. And I appreciate all the color as well in the prepared remarks about the granularity of the portfolio and kind of what you're seeing. You know, credit continues to be stellar with 120 basis point reserves and where you are. How do you feel from here? What should we be expecting in terms of credit normalization and anything we should be watching as we look to the year ahead?
spk16: Sure. You know, barring any changes in, any significant changes in the economic forecast in the model or, you know, changes in portfolio mix or asset quality, I really don't expect much change as a percent of loans. So, you know, we keep a close eye on it. We evaluate it every quarter. You know, we're watching the forecast closely. We really haven't seen material deterioration there yet. And certainly, you know, we've got some overlays in the model as well to reflect that. So, you know, as of now, I don't expect much in the way of change.
spk08: Got it. And then in your prepared remarks, you had some commentary about M&A. It seemed somewhat constructive. Can you provide additional color? Do you expect the What's going on in the banking industry and potential headwinds starting to motivate some activity, or is the environment as it stands right now still pretty slow?
spk15: Sure. Yeah. No, you're absolutely right, Kelly. It is slow right now, and it's probably a little difficult to see, but we feel it's going to be good for certain companies and with our experience in M&A. and our strategy, we feel like it'll be a very good time for us. A couple things that will, and of course you need buyers and sellers to make that happen, but I think that some of these headwinds will weigh on people's decisions on how long to kind of hold their position and wait for a better time. I think that will bring folks together, the ability of scale. will be important as some of these headwinds in the industry with expense and a little more headwinds in those areas and cost, regulatory expense and then deposit cost, will, I think, play to our strengths and present some very good opportunities for us. And so we're open for M&A business. We are having some good conversations. And, you know, we feel like that will be a very positive and a good way for us to continue income growth, you know, during a period where there's some, certainly some headwinds in the industry.
spk08: Thanks. Maybe last question for me on the margin, and I apologize if I missed it, but At 308 and your commentary that you're going to fund off securities flows, should we be thinking of this as kind of the trough margin and some expansion from here, or will these funding pressures continue to kind of maybe have some additional downward pressure in the next couple quarters?
spk15: Sure, yeah. I mean, margin, obviously, that's really tied to the money cost and where we see that going. And Byron will give you a little more detail update or color around the margin.
spk18: Sure, Kelly. As you saw, our margin in the first quarter came in at 308 for the quarter. The best guide I can give you on margin from here would be to look at the March. If you just isolate March within the quarter, That margin was 295. Now, I think that's going to be close to the trough. And from here, I would think stable. If you had to pin me down on a range, I would think we would end the full year somewhere in the 295 to 3% area in terms of net interest margin.
spk07: Right. I appreciate all the color. I will step back.
spk13: Thank you. One moment for our next question. Our next question comes from Jeff Rulis from D.A. Davidson. Your line is open.
spk20: Thanks. Good morning. Morning, Jeff.
spk24: I guess as a jump off point of that last comment on the margin near 3%, I wanted to understand the assumption of what occurs with the nonprofit. core funding sources? Just what is the backdrop in terms of how much you wean off of those sources over the course of the year?
spk18: Sure. So in terms of our wholesale funding balances, we do think that we'll bring that down some over the course of the year to put a number on it. I don't have an estimate for you You know, at this point, but I think it would be a modest decline in wholesale funding between now and the end of the year. The good news is with our participation in the BTFT program, you know, a lot of that wholesale funding cost is essentially locked in for the rest of the year. So regardless of, you know, rates, if the Fed does have some additional hike left, our wholesale funding cost should remain fairly steady from this point on.
spk24: Okay. And just to try to understand the strategy, you know, maybe just to sense for what is it that you need to see to kind of, not that you've got an all clear, but you've talked about operating in an abundance of caution. You see real time what your deposit balances have done, really non-reactionary to sort of the news of the day. So just trying to get a sense for what would be the hesitation to run that loan deposit ratio up, begin to kind of lean into what is a franchise strength is, you know, amongst peers that, you know, you see outflows, you see ramping costs, just trying to get a sense for what do you need to see to go maybe quicker off of those wholesale borrowings to maybe prop up the top line a bit.
spk18: You know, back to loan to deposit ratio, you know, clearly it's on the way up. You know, we've talked internally about, you know, comfort zone. I could see, you know, us going into the end of the high 80s with regard to loan to deposit ratio. We just have to see what the lending opportunities look like in order for us to get there and, you know, what the funding requirements those lending opportunities present And that will really determine our funding strategy from there.
spk15: Yeah, Jeff, I think the deposit flows will be a big driver of that. And, you know, there's going to be a lot of competition for deposits. We talked about our view in terms of, you know, seeing some return to more of the lower end of the historic range. That's going to be the bigger determinant, as well as on balance sheet liquidity in the form of cash, just how much, you know, of that and When they all clear whistleblows, that's been a moving target. And so I think we're feeling actually good about the second quarter. So we'll see if there's any other external events that change that. But I think to answer your question on where the wholesale funding balances go, it's really going to be driven by deposit flows.
spk22: Okay. Okay. Thanks.
spk24: And just one other topic. Wanted to hop to the expense run rate. I, you know, in the release sounds like kind of pleased given the inflation backdrop that, you know, keeping that growth managed. Expectations for the, you get through a seasonal Q1, but just expectations for expense management over the course of the year would be helpful.
spk17: Yes, this is Ron. We appreciate the question. So the guide we gave, you know, coming out of the fourth quarter call was 136 to 138 and, you know, expecting it to be higher towards that 138. I'll give you the new guidance, but I want to give backdrop to why it came in lower and credit to our divisions particularly. So the guide will be for the remaining quarters of this year. 135 to 137 million. And let me focus on components of the current quarter non-interest expense. So our compensation is the biggest component, 60% of it. And on page two of the earnings release, you know, you can see that our FTE was flat. And then when you look at our FTE compared to the year ago, we're down 49%. And so what that reflects is the staffing levels, you know, as we are doing more with less, it really reflects the efficiencies, operational efficiencies we're getting from our technology platform. Again, everybody realizing, you know, we can do better with less. The headcount over that same time period, year over year, has come down 20. I think the divisions have a very, very good handle. Again, no edict came from us. They're making the decisions that are right for their market. Again, compensation being the primary driver of our non-interest expense. I just want to comment on the regulatory assessments. That's up 43%. While it only accounts for 4% of the non-IMS expense, I mean, you know, it's uniform. The FDIC has adjusted it for all banks, and so we're certainly caught up in that as well. And then lastly, our other expenses, excluding the M&A, it's really pretty flat, so I feel pretty good about where the guide is from 135 to 137. I say that because While we were very, very good at controlling expenses, we're still seeing across the various expense categories inflationary pressures. And so I'm just leaving that there.
spk30: OK, thank you.
spk13: Thank you.
spk14: One moment for our next question.
spk13: Our next question comes from Brandon King with Truist Securities. Your line is open.
spk06: Hey, good morning. Good morning, Brandon. Good morning.
spk05: Could you just give us your thinking and thought process around not being more aggressive as far as pricing of core deposits instead of, you know, tapping higher-cost wholesale deposits? funding just optically you know your deposit costs are much lower than periods and i know in stock that's kind of always been the case but just wanted to get a better sense of what the thought process is there strategically sure um i can give you my thoughts to them if byron may want to add to it the um i guess just to step back and you know some contacts we went through a decade of zero to low
spk15: rates and so there was a little muscle memory that had to be developed in terms of competing for deposits um and i think that's you know what we saw in the fourth quarter and to some extent in january um the byron's commentary once we said enough um within a week uh the deposit stabilized and then actually grew so um i think brandon is as simple as that you know it's we had been in a mode for For a decade of operating in one environment, it shifted pretty quickly. And I think we're squarely now out to retain and defend the deposits and keep them with our relationships.
spk23: OK.
spk05: And would you care to share what the spot deposit rate was at the end of the quarter?
spk18: I can give you the average rate for the month of March was 36 basis points. Okay.
spk05: And final question, I know there's been kind of growing consternation about, you know, the work from home trend kind of almost ending from here and not being as prevalent. So could you just give us an update on what the in-migration trends are there in your footprint? And also just a sense of how housing has performed and if there's any notable trends there based off of the increases over the last couple of years, especially post-pandemic.
spk15: Yeah. We continue to see in-migration across all our markets. It's slowed down, but it's still continuing. The return to work, I think a number of the people that have made the move, decided not to return to work. And we see some folks staying put. We have not seen any kind of material outflow. We still have housing shortage across almost all our markets. Prices have held in pretty stable. So we don't see a lot of disruption there, despite the bigger return to work has not really you know, materially change those dynamics.
spk28: Okay, thanks. Take more questions. Welcome.
spk13: Thank you. And we have a question from Andrew Terrell from Stevens. Your line is open.
spk04: Hey, good morning.
spk11: Morning, Andrew.
spk04: Thanks for the questions. If I could start just on the margin as well, and Byron, I appreciate all the color around the deposits and the kind of pricing strategy there. It's all really helpful. I maybe just wanted to get a sense from you on deposit beta expectations. I know in the past we've kind of talked around, I think, around a 15% total deposit beta through the cycle, but It felt like maybe it performed that expectation. I was hoping to get a sense of whether you still thought 15%, just given the pricing changes that were made recently, if you still think 15% through the cycle for a total deposit beta is kind of the expectation or if there's a chance you could come in above that. Okay.
spk18: Sure. We're still using 15% through the cycle beta for total deposits. We still think that's a good estimate. It really depends on the Federal Reserve and kind of what rates, what happens from here. If we see higher for longer, that is a scenario where I think clearly we'll have to push through that 15% beta to retain deposit balances. If you believe market expectations and the Fed begins to cut, you know, towards the back half of this year, that's a scenario where I think we could maintain and hold to that 15% beta number. So it really depends on, you know, on what the Fed does from here. But, you know, what we're using, we're still using that 15% number in our estimate.
spk04: Yep. Okay. And then maybe just following up on that point, when we look out at the forward curve, there's obviously some cuts baked in starting later this year. And I think, Randy, you might have mentioned prepared remarks around the bias of the balance sheet being maybe a bit liability sensitive. But could we maybe put just like a finer point on that? And I know there's a lot of moving parts, but as we look out into late this year, early next year, how do you think the margin responds as we start to contemplate rate cuts?
spk18: I think the margin will do well with rate cuts. One of the things that when we talk about liability sensitive, it's just modestly liability sensitive. When we ran our models at year end, we were fairly neutral. We did make an adjustment to our March 31 model with the rate shocks. Again, kind of the base case, 15% I think is still a good guide. But we do recognize that a lot of the lag capacity that we have had has been used up in our deposit base. And so talking about up 100, up 200 from here, I think our deposit costs will be more sensitive to those hikes. And so when we're talking about shocks, we did dial up our beta sensitivity in those shock scenarios, creating the liability sensitive overall
spk04: Okay, makes sense. And just to clarify, does that, the 15% total beta excitation, does that include the customer repo deposits as well?
spk18: No, that's total deposit costs and excludes the repo account. I appreciate the clarification. Thank you.
spk04: Got it. Thanks. And if I could ask just two more quick modeling-related questions. Do you have the So the new loan production this quarter, the weighted average loan yields, and then also the weighted average kind of incremental loan yield, and then expectations on the tax rate moving forward.
spk17: Yeah, Andrew, on the production rates for Q1, it was 6.96. And then Andrew, Ron here. So on the tax rates, I would use 18%. I know it was low this quarter, but expecting this to build, I would use 18%.
spk04: Okay. Very good. Thank you, guys, for the questions.
spk17: You're welcome.
spk13: Thank you. One moment for a question. Our question comes from Matthew Clark with Piper Sandler. Your line is open.
spk09: Hey, good morning, everyone. Morning. Just on expenses and just overall efficiency, you know, given kind of the change, you know, maybe culturally or just with the new rate environments have to compete a little more on deposits. You know, when you think about that targeted efficiency ratio longer term of 54, 55%, I mean, Doesn't seem like we're going to be in that range this year. But is there some, you know, do you feel like, you know, that might not be realistic going forward, just given the need to kind of pay up or retain deposits in this environment?
spk15: Yeah, I, Rami, have some comments. But you're absolutely right the way you're looking at it right now. I think the... There are a number, and we've spoken about them, you know, we have a number of efficiency initiatives through our technology platforms that we're spending a lot of time with. I think that that's probably going to be beneficial. And we're still really dialing in, you know, that ability to get back into that 54, 55 range, which is our goal. We do have some tools to get there. And, you know, that's I think your outlook, though, on this year, that's really a question for next year. Ron, did you want to add anything?
spk17: Well, so it will be sensitive to, as Byron was saying, depends on, you know, do we get the rate cuts or do we get further rate hikes, you know, because the bigger component, the more impactful component this quarter was the net interest income. And so while we're doing great on the non-interest expense, it's largely driven by that. But, yeah, it'll be elevated this year, the efficiency ratio.
spk09: Okay. And then just shifting gears to office exposure, I know you guys are in a lot more rural markets than most, so probably a little more insulated, but still some uncertainty around how rural office, I think, does longer term. Can you just quantify your exposure there and any characteristics you'd like to highlight and what the associated reserve is on that exposure?
spk16: Matthew, this is Tom. Total exposures, we're at about 9.6% of the total portfolio. But as Randy mentioned, the average is quite small, about 600,000 scattered across all eight states. And there's immaterial exposure to downtown business districts. In terms of, you know, you mentioned kind of the long-term impact. I think that's the unknown with the office book. You know, what impact is, you know, some of this larger office area that's located in these downtown business districts, if that goes sideways, what's the long-term cascading effect on valuations going forward? That'll be the question yet to be answered. But what I will say is, I think I mentioned it before, about four years ago, we implemented an additional underwriting requirement. In addition to lesser along the value of cost and debt service coverage ratio, we also underwrite a direct debt yield, meaning that for office, it varies by geography and asset class, but typically for office, that minimum threshold is 10%. As cap rates came down, through this cycle, what that dictated was more cash equity coming into purchases. So to your point, I think it's fairly well insulated to market disruption. You know, average LTV in that book is below 60%. And, you know, we keep a pretty close eye on it. We keep monitoring it. Right now it's outperforming the rest of the CRE book. And as I mentioned, some of this disruption in the city center offices thus far had a positive effect. on our type of office that we have. So it's been a unique dynamic over the past few quarters.
spk14: Okay, great. Thank you. Thank you.
spk13: And our next question is a follow-up from Kelly Moda from KBW. Your line is open.
spk08: Hi, I appreciate you letting me back in the queue, but my questions are asked and answered at this point.
spk13: Thank you, and I'm showing no other questions in the queue. I'd like to turn the call back to management for any closing remarks.
spk15: All right, Catherine, thank you very much. We want to thank everybody again for dialing in to our call today. We hope everyone has a great Friday and a great weekend. Thank you.
spk14: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Hello. Thank you. music music Thank you.
spk01: Thank you.
spk13: Good day, and thank you for standing by. Welcome to the Glacier Bancorp first quarter earnings conference call. At this time, I'll participate in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone, and you will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Randy Chesler, President and CEO of Glacier Bancorp. You may begin.
spk11: All right.
spk15: Thank you, Catherine, and good morning, and thank you all for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Don Cherry, Chief Administrative Officer, Angela Dose, our Chief Accounting Officer, Byron Pollin, 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 10 of our press release, and we encourage you to review this section. The failure of Silicon Valley Bank and Signature Bank last month created a lot of concerns about the banking industry. Overall, I'm pleased to report The Glacier team did an excellent job managing through the rapidly changing environment over the past few weeks, and we believe our unique business model weathered the storm very well. Our local, relationship-based approach to community banking proved to be extremely stable. Our 17 separate and distinct bank brands operating in 222 locations across eight western states provided further insulation from the events unfolding outside our markets. Deposits grew during March, which was when the banking crisis started and was the period when the system was under the most stress. While many customers were concerned about safety of their deposits, talking about it with their banker, who they know and trust, resolved most of their concerns. Our deposit base has a high degree of balance and granularity. We have over 600,000 retail accounts with an average balance of 14,000, over 150,000 commercial accounts with an average balance of 63,000. These relationships are spread out over eight states, 75% in rural markets and 25% in metro markets, with about 60% of the accounts with us over five years. Our liquidity is strong with close to $15 billion available through multiple channels. In this quarter, we tested most of these channels, confirmed their operational status and ability to provide us with ready liquidity. Out of an abundance of caution, we used our liquidity to increase available cash to over $1 billion, so we had more than enough cash on hand if needed. We don't have a significant amount of uninsured deposits, only about 32%, totaling $6.4 billion. If you remove public funds that are collateralized with high-quality investments from this number, it's closer to 26%. We have more than enough ready liquidity to cover in excess of 100% of these balances and still exceed regulatory minimum capital requirements. Our investment portfolio is structured to be shorter in duration and to generate cash flow. As a result, this portfolio produces enough cash to finance our expected lending growth. And in the event we wanted to sell these investments to reduce borrowing, The current after-tax unrealized loss on both the held for sale and held for investment portfolios, totaling $685 million, could be absorbed by a capital which would still exceed regulatory minimums. Our capital levels are strong and growing, with CET1 increasing 13 basis points from the prior quarter to 12.47%. We believe this level of capital is more than 100 basis points greater than the average of the 21 peer banks listed in our proxy. Credit continues to perform at record levels, and we see little signs of deteriorating credit. There's been some concern about commercial real estate exposure in the industry, primarily in larger cities. Our commercial real estate portfolio is primarily comprised of small properties outside of the city centers with an average loan amount of $600,000. While there are a number of headwinds impacting the banking industry, we are optimistic about the current position of the company. The markets in which we have a presence are among the strongest economies in the U.S. We have ample liquidity, and a balance sheet that now has a bias towards being more liability sensitive, a very high quality loan portfolio, a proven banking model, and M&A expertise that is primed to take advantage of this current environment. Some of the specific highlights for the first quarter include Stockholders' equity of $2.9 billion increased 83.6 million, or 3% during the current quarter. Tangible book value per common share of 17.616 at the current quarter and increased 76 cents per share, or 5% from the prior quarter, or 7.6, 7 cents a share, excuse me. Interest income of $232 million in the current quarter increased $6.8 million or 3% over the prior quarter and increased $41.4 million or 22% over the prior year first quarter. Total deposits and retail repurchase agreements of $21.3 billion at the end of the current quarter increased $289 million or 1% during March. and decreased just $213 million or 1% during the current quarter. The loan portfolio of $15.5 billion increased $272 million or 7% annualized during the current quarter. The loan yield for the current quarter of 5.02% increased 19 basis points compared to the prior quarter and increased 43 basis points from the prior year first quarter. New production yields for the quarter were 6.96%, up 62 basis points from the last quarter. Available liquidity of $15.1 billion, including cash, borrowing capacity from the Federal Home Loan Bank and Federal Reserve facilities, unpledged securities, broker deposits, and other sources. Credit quality continued to improve to record levels. Non-performing assets as a percentage of subsidiary assets was 12% or 0.12 basis points in the current quarter and compared to 0.24% in the prior year first quarter. Net charge-offs as a percentage of loans was one basis point. The company declared a quarterly dividend of $0.33 per share in the quarter. The company has declared 152 consecutive quarterly dividends and increased the dividend 49 times. Core deposit funding of $20 billion, almost 85% of total funding liabilities, ended the quarter at a cost of 23 basis points versus 8 basis points in the prior quarter. Non-interest-bearing deposits were 35% of core deposits at quarter end, compared to 37% in the prior quarter. We expect deposits to perform more consistent with historic growth trends going forward, with some growth in the second and third quarters of the year, followed by some outflow in the fourth quarter. Competition for deposits and the cost to attract and retain them will continue to increase. We still anticipate borrowings to slowly decline throughout the year and plan to fund our growth for 2023, primarily by using the quarterly cash flow from our investment portfolio. So we remain confident in the dynamic Western markets we serve and our unique business model to continue to deliver strong results. The Glacier team did another excellent job in the first quarter, Despite the market turmoil, they once again kept their focus on shareholders, customers, and communities. So that ends my formal remarks, and I'd now like Catherine to open the line for any questions that our analysts may have.
spk13: Thank you. As a reminder, to ask a question, press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster.
spk14: Our first question comes from David Feaster with Raymond James.
spk13: Your line is open.
spk19: Hey, good morning, everybody. Morning, David. Maybe if we could just start talking about on the deposit flow side, some of the driver's you know, this quarter. I know last quarter, you know, flows are primarily isolated to, you know, some of the top hundred clients or so. Was that the case again this quarter? Are the outflows, you know, how much could you maybe just talk about too, how much is just from normal seasonality versus clients paying down higher cost debt or capital purchases or, you know, some of the retail borrowers looking for higher rates versus actual fallout from the recent bank failures?
spk15: Sure. Obviously, we've spent a lot of time looking at deposits and studying inflows and outflows. Byron has done a lot of analysis there. I'm going to hand it over to Byron to walk you through your responding to some of your questions. Byron, go ahead.
spk18: Sure, David. Appreciate the question. When we look at our deposit flows, one of the things that I'll include, when we talk about our core deposit flows, I'll be including repo, our retail repo, in this discussion. Those retail repo accounts are not wholesale funding. They are collateralized accounts. These are our customers. They are core relationships. So when I think of core relationship accounts, I'll be including a retail repo in this discussion. So in the quarter, our core deposits and repo declined roughly $600 million. That was a tremendous improvement over the decline in the fourth quarter. And what I'll do is I'll break this down between the month and kind of track and give you a sense for what happened in January, February, March. So more than 90% of that $600 million outflow happened in January. This was purely rate driven. This was kind of a continuation of what we saw in the fourth quarter. We did adjust our pricing and retention strategies towards the end of January and became much more proactive in defending those balances. And so once we did that, our deposit and repo balances stabilized in February. And in the month of March, our core deposits and repo balances actually grew. And that was in the face of all that noise and volatility that happened in March with all the noise from Silicon Valley Bank. So our divisions did a fantastic job of stabilizing deposits in February and actually growing deposits in a very difficult environment. Now, you'll see the impact of that show up in our cost of deposits. They're on the rise and clearly going up. So we did see some normal seasonality. That's typical for us to see some outflow in the first quarter. I would say that that was kind of accelerated by some rate drivers in January. We put a stop to that in February and actually grew in the month of March. So hopefully that addresses here.
spk19: Yeah, no, that's very helpful. I guess, have you seen that trend persist here early into the second quarter? Have you seen core deposit balances continue to grow? Just curious what the early read is early in the second quarter.
spk18: Very typical tax-related flows. So I had a little bit of increase the first couple weeks of April and then some outflows related to tax. to tax payments. So nothing outside the ordinary from what we typically see in an April.
spk19: So I guess maybe just how do you think about the deposit trajectory from here? It sounds like maybe April's a little bit more outflows from seasonal tax issues, but do you think core deposit balances are kind of at a trough, or would you expect how do you think it plays out through the course of the year? And ultimately, How do you think about the timing of some of the balance sheet and the paydowns of the borrowings?
spk18: Yeah, I would – trough is a good word right now. I think that's right. I think from here, we'll probably revert back to some of our normal historic flows. You know, summertime is really strong for us on the deposit front. Fall is still pretty good. And then as winter sets in, we see some outflows. So I would – I would look to or I would anticipate some of those kind of seasonal factors influencing our deposit balance. If you look at a typical year for us where we grow somewhere in the range of 3% to 5%, given headwinds, I would put us at the low end of that range. And so if I had to put a number on it, between now and the end of the year, potentially we could grow 2% would be my estimation.
spk19: OK. And then, so just, again, thinking about some of the balance sheet side, you know, obviously we built up some excess liquidity. How do you think about, you know, maintaining that liquidity and just thinking about some of the other dynamics, you know, with the cash flows from the securities book, you know, predominantly funding loan growth, probably, you know, don't start in, you know, 2% deposit growth like we were just talking about. Probably don't really see the borrowings come down in earnest. really until 2024 or maybe early, you know, late in the year? Is that kind of the right way to think about it?
spk18: I think so. You know, as Randy mentioned, we built that cash balance out of an abundance of caution. I think things are starting to settle down. You know, you could see us release some of that cash. That would help us pay down some of this wholesale funding. And then, you know, as you pointed out, the cash flow off of the securities portfolio continuing to fund our our loan growth. So just a little bit, you know, I could see maybe if we release some of this cash, that could put a dent in our wholesale funding, but then it's just chipping away from there through the rest of the year. Okay.
spk19: And could you remind us of the securities cash flows? I think we talked about $300 million. Is that still the right pace?
spk18: Yeah, I think I'm still comfortable with that number for quarterly for the rest of the year. Okay. Thanks, everybody.
spk14: Thank you. One moment for our next question. Our next question comes from Kelly Moda from KBW.
spk13: Your line is open.
spk08: Hi. Good morning. Thanks for the question.
spk11: Morning, Kelly. Okay.
spk08: Sorry, my model is kind of spinning on me. You guys got some good loan growth this quarter. It was pretty decent even with the slowdown we've been seeing. What's your pipeline from here and can you talk about which areas you're seeing the best risk-adjusted returns at this stage?
spk15: Sure. That's another area we spent a lot of time looking at as well. Tom has studied it very closely. I'm going to ask Tom to cover your question on growth.
spk16: I would say, Kelly, first quarter was a little stronger than expected. I think that's reflective of the strong markets that we operate in through our A-state footprint. In addition to that, the continued strength on our borrowers' balance sheets that we continue to see. I would say, though, that we would I think we expect growth to continue to slow in the coming quarters. Both customers and certainly our credit officers and our provision banks are continuing to be cautious. So I would say for the year, we're probably on the low end of the mid single-digit range. And then in terms of the second part of your question that's providing us some of the growth drivers and some of the areas where we're getting some very good pricing. You know, certainly industrial warehouse has been a good segment for us in the last, probably last year and a half now, and that continues to show some strength. Multifamily has been good as well, even though we've seen that slow down a little bit. And certainly the agriculture portfolio provides a very healthy return, especially as a lot of the operating lines are prime base structures.
spk08: Thanks. And I appreciate all the color as well in the prepared remarks about the granularity of the portfolio and kind of what you're seeing. You know, credit continues to be stellar with 120 basis point reserves and where you are. How do you feel from here? What should we be expecting in terms of credit normalization and anything we should be watching as we look to the year ahead?
spk16: Sure. You know, barring any changes in, any significant changes in the economic forecast in the model or, you know, changes in portfolio mix or asset quality, I really don't expect much change as a percent of loans. So, you know, we keep a close eye on it. We evaluate it every quarter. You know, we're watching the forecast closely. We really haven't seen material deterioration there yet. And certainly, you know, we've got some overlays in the model as well to reflect that. So, you know, as of now, I don't expect much in the way of change.
spk08: Got it. And then in your prepared remarks, you had some commentary about M&A. It seemed somewhat constructive. Can you provide additional color? Do you expect the What's going on in the banking industry and potential headwinds starting to motivate some activity, or is the environment as it stands right now still pretty slow?
spk15: Sure. Yeah. No, you're absolutely right, Kelly. It is slow right now, and it's probably a little difficult to see, but we feel it's going to be good for certain companies and with our experience in M&A. and our strategy, we feel like it'll be a very good time for us. A couple things that will, and of course you need buyers and sellers to make that happen, but I think that some of these headwinds will weigh on people's decisions on how long to kind of hold their position and wait for a better time. I think that will bring folks together, the ability of scale. will be important as some of these headwinds in the industry with expense and a little more headwinds in those areas and cost, regulatory expense and then deposit cost, will, I think, play to our strengths and present some very good opportunities for us. And so we're open for M&A business. We are having some good conversations. And, you know, we feel like that will be a very positive and a good way for us to continue income growth, you know, during a period where there's some, certainly some headwinds in the industry.
spk08: Thanks. Maybe last question for me on the margin, and I apologize if I missed it, but At 308 and your commentary that you're going to fund off securities flows, should we be thinking of this as kind of the trough margin and some expansion from here, or will these funding pressures continue to kind of maybe have some additional downward pressure in the next couple quarters?
spk15: Sure, yeah. I mean, margin, obviously, that's really tied to the money cost and where we see that going. And Byron will give you a little more detail update or color around the margin.
spk18: Sure, Kelly. As you saw, our margin in the first quarter came in at 308 for the quarter. The best guide I can give you on margin from here would be to look at the March. If you just isolate March within the quarter, That margin was 295. Now, I think that's going to be close to the trough. And from here, I would think stable. If you had to pin me down on a range, I would think we would end the full year somewhere in the 295 to 3% area in terms of net interest margin.
spk07: Right. I appreciate all the color. I will step back.
spk13: Thank you. One moment for our next question. Our next question comes from Jeff Rulis from D.A. Davidson. Your line is open.
spk20: Thanks. Good morning. Morning, Jeff.
spk24: I guess as a jump off one of that last comment on the margin near 3%, I wanted to understand the assumption of what occurs with the nonprofit. core funding sources? Just what is the backdrop in terms of how much you wean off of those sources over the course of the year?
spk18: Sure. So in terms of our, you know, wholesale funding balances, we do think that we'll bring that down some over the course of the year to put a number on it. You know, I don't have an estimate for you You know, at this point, but I think it would be a modest decline in wholesale funding between now and the end of the year. The good news is with our participation in the BTFT program, you know, a lot of that wholesale funding cost is essentially locked in for the rest of the year. So regardless of, you know, rates, if the Fed does have some additional hike left, our wholesale funding costs should remain fairly steady from this point on.
spk24: Okay. And just to try to understand the strategy, you know, maybe just to sense for what is it that you need to see to kind of, not that you've got an all clear, but you've talked about operating in an abundance of caution. You see real time what your deposit balances have done, really non-reactionary to sort of the news of the day. So just trying to get a sense for what would be the hesitation to run that loan deposit ratio up, begin to kind of lean into what is a franchise strength is, you know, amongst peers, you know, you see outflows, you see ramping costs, just trying to get a sense for what do you need to see to go maybe quicker off of those wholesale borrowings to maybe prop up the top line a bit.
spk18: You know, back to loan to deposit ratio, you know, clearly it's on the way up. You know, we've talked internally about, you know, comfort zone. I could see, you know, us going into the end of the high 80s with regard to loan to deposit ratio. We just have to see what the lending opportunities look like in order for us to get there and, you know, what the funding requirements those lending opportunities present and that will really determine our funding strategy from there.
spk15: Yeah, Jeff, I think the deposit flows will be a big driver of that, and there's going to be a lot of competition for deposits. We talked about our view in terms of seeing some return to more of the lower end of the historic range. That's going to be the bigger determinant, as well as on balance sheet liquidity in the form of cash, just how much of that and When they all clear whistleblows, that's been a moving target. And so I think we're feeling actually good about the second quarter. So we'll see if there's any other external events that change that. But I think to answer your question on where the wholesale funding balances go, really going to be driven by deposit flows.
spk22: Okay. Okay. Thanks.
spk24: And just one other topic. Wanted to hop to the expense run rate. I, you know, in the release sounds like kind of pleased given the inflation backdrop that, you know, keeping that growth managed. Expectations for the, you get through a seasonal Q1, but just expectations for expense management over the course of the year would be helpful.
spk17: Yes, this is Ron. We appreciate the question. So the guide we gave, you know, coming out of the fourth quarter call was 136 to 138 and, you know, expecting it to be higher towards that 138. I'll give you the new guidance, but I want to give backdrop to why it came in lower and credit to our divisions particularly. So the guide will be for the remaining quarters of this year. 135 to 137 million. And let me focus on components of the current quarter, non-interest expense. So our compensation is the biggest component, 60% of it. And on page two of the earnings release, you can see that our FTE was flat. And then when you look at our FTE compared to the year ago, we're down 49%. And so what that reflects is the staffing levels, you know, as we are doing more with less, it really reflects the efficiencies, operational efficiencies we're getting from our technology platform. Again, everybody realizing, you know, we can do better with less. The headcount over that same time period, year over year, has come down 20. I think the divisions have a very, very good handle. Again, no edict came from us. They're making the decisions that are right for their market. Again, compensation being the primary driver of our non-interest expense. I just want to comment on the regulatory assessments. That's up 43%. While it only accounts for 4% of the non-interest expense, I mean, you know, it's uniform. The FDIC has adjusted it for all banks, and so we're certainly caught up in that as well. And then lastly, our other expenses, excluding the M&A, it's really pretty flat, so I feel pretty good about where the guide is from 135 to 137. I say that because While we were very, very good at controlling expenses, we're still seeing across the various expense categories inflationary pressures. And so I'm just leaving that there.
spk30: OK, thank you.
spk14: Thank you. One moment for our next question.
spk13: Our next question comes from Brandon King with Truist Securities. Your line is open.
spk06: Hey, good morning. Morning, Brandon. Morning.
spk05: Could you just give us your thinking and thought process around not being more aggressive as far as pricing of core deposits instead of, you know, tapping higher-cost wholesale deposits?
spk15: funding just optically you know your deposit costs are much lower than periods and I know in Stork that's kind of always been the case but just wanted to get a better sense of what the thought process is there strategically sure I can give you my thoughts of them if Byron may want to add to it the I guess just to step back and you know some contacts we went through a decade of zero to low rates and so there was a little muscle memory That had to be developed in terms of competing for deposits. And I think that's, you know, what we saw in the fourth quarter and to some extent in January, the Byron's commentary. Once we said enough, within a week, the deposit stabilized and then actually grew. So I think Brandon is as simple as that. You know, it's, we had been in a mode for For a decade of operating in one environment, it shifted pretty quickly. And I think, you know, we're squarely now out to retain and defend the deposits and keep them with our relationships.
spk05: Okay. And would you care to share what the spot deposit rate was at the end of the quarter?
spk18: I can give you the average rate for the month of March was 36 basis points. Okay.
spk05: And final question, I know there's been kind of growing consternation about, you know, the work from home trend kind of almost ending from here and not being as prevalent. So could you just give us an update on what the in-migration trends are there in your footprint? And also just a sense of how housing has performed and if there's any notable trends there based off of the increases over the last couple of years, especially post-pandemic.
spk15: Yeah. We continue to see in-migration across all our markets. It's slowed down, but it's still continuing. The return to work, I think a number of the people that have made the move, decided not to return to work. And we see some folks staying put. We have not seen any kind of material outflow. We still have housing shortage across almost all our markets. Prices have held in pretty stable. So we don't see a lot of disruption there, despite the bigger return to work has not really you know, materially change those dynamics.
spk28: Okay, thanks for taking my questions. Welcome.
spk13: Thank you. And we have a question from Andrew Terrell from Stevens. Your line is open.
spk04: Hey, good morning.
spk11: Morning, Andrew.
spk04: Thanks for the questions. If I could start just on the margin as well, and Byron, I appreciate all the color around the deposits and the kind of pricing strategy there. It's all really helpful. I maybe just wanted to get a sense from you on deposit beta expectations. I know in the past, we've kind of talked around, I think, around a 15% total deposit beta through the cycle, but It felt like maybe it performed that expectation. I was hoping to get a sense of whether you still thought 15%, just given the pricing changes that were made recently, if you still think 15% through the cycle for a total deposit beta is kind of the expectation or if there's a chance you could come in above that. Okay.
spk18: Sure. We're still using 15% through the cycle beta for total deposits. We still think that's a good estimate. It really depends on the Federal Reserve and kind of what rates, you know, what happens from here. If we see higher for longer, that is a scenario where I think clearly we'll have to push through that 15% beta to retain deposit balances. If you believe market expectations and the Fed begins to cut, you know, towards the back half of this year, that's a scenario where I think we could maintain and hold to that 15% beta number. So it really depends on, you know, on what the Fed does from here. But, you know, what we're using, we're still using that 15% number in our estimate.
spk04: Yep. Okay. And then maybe just following up on that point, when we look out at the forward curve, there's obviously some cuts baked in starting later this year. And I think, Randy, you might have mentioned prepared remarks around the bias of the balance sheet being maybe a bit liability sensitive. But could we maybe put just like a finer point on that? And I know there's a lot of moving parts, but as we look out into late this year, early next year, how do you think the margin responds as we start to contemplate rate cuts?
spk18: I think the margin will do well with rate cuts. One of the things that when we talk about liability sensitive, it's just modestly liability sensitive. When we ran our models at year end, we were fairly neutral. We did make an adjustment to our March 31 model with the rate shocks. Again, kind of the base case, 15% I think is still a good guide. But we do recognize that a lot of the lag capacity that we have had has been used up in our deposit base. And so talking about up 100, up 200 from here, I think our deposit costs will be more sensitive to those hikes. And so when we're talking about shocks, we did dial up our beta sensitivity in those shock scenarios, creating the liability sensitive overall Yep.
spk04: Okay. Makes sense. And just to clarify, does that, the 15% total beta excitation, does that include the customer repo deposits as well?
spk18: No, that's total deposit costs and excludes the repo account. I appreciate the clarification. Thank you.
spk04: Got it. Thanks. And if I could ask just two more quick modeling related questions. Do you have the So the new loan production this quarter, the weighted average loan yields, and then also the weighted average kind of incremental loan yield, and then expectations on the tax rate moving forward.
spk16: Yeah, Andrew, on the production rates for Q1, it was 6.96.
spk17: And then Andrew, Ron here. So on the tax rates, I would use 18%. I know it was low this quarter, but expecting this to build, I would use 18%.
spk04: Okay. Very good. Thank you, guys, for the questions.
spk17: You're welcome.
spk13: Thank you. One moment for a question. Our question comes from Matthew Clark with Piper Sandler. Your line is open.
spk09: Hey, good morning, everyone. Morning. Just on expenses and just overall efficiency, you know, given kind of the change, you know, maybe culturally or just with the new rate environments have to compete a little more on deposits. You know, when you think about that targeted efficiency ratio longer term of 54, 55%, I mean, Doesn't seem like we're going to be in that range this year. But is there some, you know, do you feel like, you know, that might not be realistic going forward, just given the need to kind of pay up or retain deposits in this environment?
spk15: Yeah, I, Rami, have some comments. But you're absolutely right the way you're looking at it right now. I think the... There are a number, and we've spoken about them, you know, we have a number of efficiency initiatives through our technology platforms that we're spending a lot of time with. I think that that's probably going to be beneficial. And we're still really dialing in, you know, that ability to get back in that 54, 55 range, which is our goal. We do have some tools to get there. And, you know, that's I think your outlook, though, on this year, that's really a question for next year. Ron, did you want to add anything?
spk17: Well, so it will be sensitive to, as Byron was saying, depends on, you know, do we get the rate cuts or do we get further rate hikes, you know, because the bigger component, the more impactful component this quarter was the net interest income. And so while we're doing great on the non-interest expense, it's largely driven by that. But, yeah, it'll be elevated this year, the efficiency ratio.
spk09: Okay. And then just shifting gears to office exposure, I know you guys are in a lot more rural markets than most, so probably a little more insulated, but still some uncertainty around how rural office, I think, does longer term. Can you just quantify your exposure there and any characteristics you'd like to highlight and what the associated reserve is on that exposure?
spk16: Matthew, this is Tom. Total exposures, we're at about 9.6% of the total portfolio. But as Randy mentioned, the average is quite small, about 600,000 scattered across all eight states. And there's immaterial exposure to downtown business districts. Dave Kuntz, In terms of you know you're you mentioned kind of the long term impact, I think that's the unknown with the with the office book. Dave Kuntz, You know what impact is in some of this larger office theory, the phone gave me downtown business district if that goes sideways what what's the long term cascading effect on. Dave Kuntz, On valuations going forward that that'll be the that's the question yet to be answered, but what I will say is. I think I've mentioned it before, about four years ago, we implemented an additional underwriting requirement. In addition to lesser along the value of cost and debt service coverage ratio, we also underwrite the debt yield, meaning that, and for office, it varies by geography and asset class, but typically for office, that minimum threshold is 10%. And so as cap rates came down, through this cycle, what that dictated was more cash equity coming into purchases. So to your point, I think it's fairly well insulated to market disruption. Average LTV in that book is below 60%. And we keep a pretty close eye on it. We keep monitoring it. Right now, it's outperforming the rest of the CRE book. And as I mentioned, some of this disruption in the city center offices thus far had a positive effect on our type of office that we have. So it's been a unique dynamic over the past few quarters.
spk14: Okay, great. Thank you. Thank you.
spk13: And our next question is a follow-up from Kelly Moda from KBW. Your line is open.
spk08: Hi, I appreciate you letting me back in the queue, but my questions are asked and answered at this point.
spk13: Thank you, and I'm showing no other questions in the queue. I'd like to turn the call back to management for any closing remarks.
spk15: All right, Catherine, thank you very much. We want to thank everybody again for dialing in to our call today. We hope everyone has a great Friday and a great weekend. Thank you.
spk13: This concludes today's conference call. Thank you for participating. You may now disconnect.
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