GBCI - Glacier Bancorp Inc. (GBCI) Q1 2023 Earnings Call Transcript
2023-04-21 15:01:07 ET
Glacier Bancorp, Inc. (GBCI)
Q1 2023 Earnings Conference Call
April 21, 2023 11:00 AM ET
Company Participants
Randy Chesler – President and Chief Executive Officer
Ron Copher – Chief Financial Officer
Byron Pollan – Treasurer
Tom Dolan – Chief Credit Administrator
Conference Call Participants
David Feaster – Raymond James
Kelly Motta – KBW
Jeff Rulis – D.A. Davidson
Brandon King – Truist Securities
Andrew Terrell – Stephens
Matthew Clark – Piper Sandler & Co.
Presentation
Operator
Good day and thank you for standing by. Welcome to the Glacier Bancorp First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there'll be a question-and-answer session. [Operator Instructions] 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.
Randy Chesler
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 Copher, our Chief Financial Officer; Don Chery, 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 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 the 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. And 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 laws 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 common – per common share of $17.16 at the current quarter end increased $0.76 per share or 5% from the prior quarter or [indiscernible] 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, brokered 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 – 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, and 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 eight basis points in the prior quarter. Noninterest 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 quarter and 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. And 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from David Feaster with Raymond James. Your line is open.
David Feaster
Hey, good morning, everybody.
Randy Chesler
Good morning, David.
David Feaster
Maybe if we could just start talking about on the deposit flow side, some of the drivers this quarter, I know last quarter flows are primarily isolated to some of the top 100 clients or so, was that the case again this quarter? Are the outflows how much, could you – maybe just talk about to how much is just from normal seasonality versus clients paying down higher costs debt or capital purchases or some of the retail borrowers looking for higher rates versus actual fallout from the recent bank failures?
Randy Chesler
Sure. Yes. So obviously, we’ve spent a lot of time looking at deposits and studying inflows and outflows. Byron has done a lot of analysis there. So I’m going to hand it over to Byron to kind of walk you through your responding to some of your questions. So, Byron, go ahead.
Byron Pollan
Sure, David. Appreciate the question. So when we look at our deposit flows, one of the things that I’ll include when we talk about a core deposit flow, 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 account, 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 toward 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 – 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 do – we did see some normal seasonality that’s typical for us to see some outflow in the first quarter. I would say 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 your question.
David Feaster
Yes, 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, in early into the second quarter?
Byron Pollan
Very typical tax related flows. So had a little bit of increase first couple weeks of April, and then some outflows related to tax payment. So nothing outside the ordinary from what we typically see in April.
David Feaster
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 I mean, 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 pay downs of the borrowings?
Byron Pollan
Yes, 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 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.
David Feaster
Okay. And then, so just again, thinking about some of the balance sheet side, obviously, we built up some excess liquidity. How do you think about maintaining that liquidity and just thinking about some of the other dynamics, with the cash flows from the securities book, predominantly funding loan growth, probably don’t start and 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, late in the year. Is that kind of the right way to think about it?
Byron Pollan
I think so. As Randy mentioned, we built a cash balance out of an abundance of caution. I think things are starting to settle down. You could see us release some of that cash that would help us pay down some of this wholesale funding. And then, as you pointed out, the cash flow off of the securities portfolio continuing to fund our loan growth. So just a little bit, 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.
David Feaster
Okay. And could you remind us of the securities cash flows, I think we talked about $300 million. Is that still the right pace?
Byron Pollan
Yes, I think I’m still comfortable with that number for quarterly for the rest of the year.
David Feaster
Okay. Thanks, everybody.
Operator
Thank you. One moment for our next question. Our next question comes from Kelly Motta from KBW. Your line is open.
Kelly Motta
Hi, good morning. Thanks for the question.
Randy Chesler
Good morning, Kelly.
Kelly Motta
Okay, sorry, my model is kind of spinning on me. You guys got some good loan growth this quarter. So 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?
Randy Chesler
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.
Tom Dolan
Yes, 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 [ph] 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 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. Certainly an 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. Multi-family 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 based structures.
Kelly Motta
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. Credit continues to be stellar with 120 basis point reserve 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?
Tom Dolan
Sure. Barring any changes in – any significant changes in the economic forecast in the model or changes in portfolio mix or asset quality, I really don’t expect much change as a percent of loans. So, we keep a close eye on it. We evaluated every quarter. We’re watching the forecast closely. We really haven’t seen material deterioration there yet. And certainly, we’ve got some overlays in the model as well to reflect that. And so, as of now, I don’t expect much in the way of change.
Kelly Motta
Got it. And then, in your prepared remarks, you had some commentary about M&A, it seems somewhat constructive. Can you provide additional color has – but 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?
Randy Chesler
Sure, yes, 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. 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 so 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 we feel like that will be a very positive and a good way for us to continue income growth during a period where there’s some – certainly some headwinds in the industry.
Kelly Motta
Thanks. Maybe last question for me. On the margin, and I apologize if I missed it. But at 3.08% 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?
Randy Chesler
Sure. Yes. 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 that or color around the margin.
Byron Pollan
Sure, Kelly. As you saw, our margin in the first quarter came in at 3.08% for the quarter that 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 2.95%. 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 2.95% to 3% area in terms of net interest margin.
Kelly Motta
Right. I appreciate all the color. I will step back.
Operator
Thank you. One moment for our next question. Our next question comes from Jeff Rulis from D.A. Davidson. Your line is open.
Jeff Rulis
Thanks. Good morning.
Randy Chesler
Good morning, Jeff.
Jeff Rulis
I guess, it’s a jump off one of that last comment on the margin near 3%. I wanted to understand the assumption of what occurs with the noncore funding sources. Just what is the backdrop in terms of how much you wean off of those sources over the course of the year?
Byron Pollan
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 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 BTFP program, a lot of that wholesale funding cost is essentially locked in for the rest of the year. So regardless of rates if the Fed does have some additional hike left, our wholesale funding costs should remain fairly steady from this point on.
Jeff Rulis
Okay. And just to try to understand the strategy, maybe just to sense for what is it that you need to see to kind of, not that you’ve got it 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, as you know, amongst peers, it – 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?
Byron Pollan
Back to loan to deposit ratio, clearly it’s on the way up. We’ve talked internally about comfort zone. I could see us going into the end of the high 80s in – with regard to loan and deposit ratio. We’ll just have to see what the lending opportunities look like in order for us to get there and what the funding requirements those lending opportunities present. And that’ll really determine our funding strategy from there.
Randy Chesler
Yes, 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 you know of that. And when they all clear whistle blows, that's been a moving target. And so, I think we're feeling that actually good about the second quarter. So we'll see how – if there's any other external events that change that. But I think that the answer to your question on that where do the wholesale funding balances go, really going to be driven by deposit flows.
Jeff Rulis
Okay. Okay. Thanks. Just one other topic, wanted to hop to the expense run rate, in the release sounds like, kind of please, given the inflation backdrop that 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.
Ron Copher
Yes, this is Ron. We appreciate the question. So the guide we gave coming out of the fourth quarter call was 136 and 138, 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 million 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 2 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 as we are doing more with less, it really reflects the efficiencies, operational efficiencies we're getting from our technology platform. Again, everybody realizing, we can do better with less. The headcount over that same time period, year-over-year has come down 20. So I think the divisions have a very, very good handle. Again, no EBIT 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 a 43%, while that only accounts for 4% of the non-interest expense, I mean, 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.
Jeff Rulis
Okay, thank you.
Ron Copher
Sure.
Operator
Thank you. One moment for our next question. Our next question comes from Brandon King with Truist Securities. Your line is open.
Brandon King
Hey, good morning.
Randy Chesler
Good morning, Brandon.
Brandon King
Good morning. Could you just give us your thinking and thought process around not being more aggressive as far as pricing of core deposits instead of tapping higher cost wholesale funding just optically, your deposit costs are much lower than peers and I know historically that's kind of always been the case, but just wanted to get a better sense of what the thought process is there strategically?
Randy Chesler
Sure. I can give you my thoughts and if Byron may want to add to it, I guess just to step back and some context, 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 what we saw in the fourth quarter and to some extent in January to 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. We had been in a mode for a decade of and 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.
Brandon King
Okay. And would you care to share what the spot deposit rate was at the end of the quarter?
Ron Copher
I can give you the average rate for the month of March was 36 basis points.
Brandon King
Okay. And final question, I know there's been kind of growing consternation about 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?
Randy Chesler
Yes, 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 kind of work – return to work has not really materially changed those dynamics.
Brandon King
Okay. Thanks for taking my questions.
Randy Chesler
Welcome.
Operator
Thank you. And we have a question from Andrew Terrell from Stephens. Your line is open.
Andrew Terrell
Hey, good morning.
Randy Chesler
Good morning, Andrew.
Andrew Terrell
Thanks for taking 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 15% total deposit beta through the cycle, but it felt like maybe performed that expectation.
I was hoping just get a sense of whether you still thought 15% just given the pricing changes that were made recently, if you still take 15% through the cycle for total deposit betas kind of the expectation or if there's a chance you could come in above that?
Randy Chesler
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 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 what the Fed does from here. But what we're using, we're still using that 15% number in our estimate.
Andrew Terrell
Yes. Okay. And then maybe just following up on that point when we look out of the forward curve, there's obviously some cuts baked in starting later this year, and I think, Randy, you might have mentioned in 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 of response as they start to contemplate rate cuts?
Randy Chesler
I think the margin will do well and 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 for at year-end, we were fairly neutral. We did make an adjustment to our March 31 model with the rate shocks. And so 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 in our deposit base.
And so if we're 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 result.
Andrew Terrell
Yes. Okay. Makes sense. And just to clarify, does that the 15% total beta expectation, does that include the customer repo deposits as well?
Ron Copher
No, that's total deposit costs and excludes the repo account. I appreciate the clarification. Thank you.
Andrew Terrell
Got it. Thanks. And if I could ask just two more quick modeling related questions. Do you have the – the new loan production this quarter, the weighted average loan yields, and then also or the weighted average kind of incremental loan yield, and then expectations on the tax rate moving forward?
Randy Chesler
Yes, Andrew, on the production rates for Q1, it was 6.96.
Ron Copher
And then Andrew, Ron here. So on the tax rate I would use 18%, I know it was low this quarter, but expecting this to build, I would use 18%.
Andrew Terrell
Okay. Very good. Thank you guys for taking the questions.
Randy Chesler
You're welcome.
Operator
Thank you. One moment for question. Our question comes from Matthew Clark with Piper Sandler & Co. Your line is open.
Matthew Clark
Hey, good morning everyone.
Randy Chesler
Good morning.
Matthew Clark
Just on expenses and just overall efficiency, given kind of the change, maybe culturally or just with the new rate environments have to compete a little more on deposits when you think about that targeted efficiency ratio longer term of 54%, 55%, I mean, it doesn't seem like we're going to be in that range this year, but is there some – do you feel like, that might not be realistic going forward just given the need to kind of pay up or retain deposits in this environment?
Randy Chesler
Yes, I 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. 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 that ability to get back into that 54%, 55% range, which is our goal. We do have some tools to get there. And 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?
Ron Copher
Well, it will be sensitive to it. Byron was saying depends on, do we get the rate cuts or do we get further rate hikes, 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 yes, it'll be elevated this year, the efficiency ratio.
Matthew Clark
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?
Tom Dolan
Yes, Matthew, it’s Tom. Total exposures running about 9.6% of the total portfolio but as Randy mentioned, that's the average is quite small, that's 600,000 scattered across all eight states and there's immaterial exposure to the downtown business district. So in terms of, you mentioned kind of the long-term impact, I think that's the unknown with the office book, what impact is some of this larger office theory, locating these downtown business districts. If that goes sideways, what's the long term cascading effect on, on valuations going forward? That'll be the – that's the question yet to be answered. But what I will say is, and I think I've mentioned it before, about four years ago we implemented an additional underwriting requirement in addition to, lesser longer value or cost and debt service coverage ratio.
We also underwrite to debt yield, meaning that and for office, and it varies by geography in asset class, but typically for office, that minimum threshold 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 theory book. And as I mentioned, some of this disruptions 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.
Matthew Clark
Okay. Great. Thank you.
Operator
Thank you. And our next question is a follow-up from Kelly Motta from KBW. Your line is open.
Kelly Motta
Hi, I appreciate you letting me back in the queue, but my questions are asked and answered at this point.
Operator
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.
Randy Chesler
All right, Catherine, thank you very much. We want to thank everybody again for dialing into our call today. We hope everyone has a great Friday and a great weekend. Thank you.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
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Glacier Bancorp, Inc. (GBCI) Q1 2023 Earnings Call Transcript