Glacier Bancorp Inc (GBCI) 2011 Q2 法說會逐字稿

Good day everyone and welcome to today's program. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions). Please note this call may be recorded. Cities now fly pleasure to turn the conference over to Mr. Mick Blodnick. Please go ahead.

Welcome and thank you for joining us this morning. With me this morning is Ron Copher our Chief Financial Officer, Barry Johnston our Chief Credit Officer, Don Chery our Chief Administration Officer and Angela Dose our Principal Accounting Officer. Yesterday afternoon at the close of the market we reported earnings for the second quarter of 2011. Earnings for the quarter were $11.1 million, a decrease of 10% from last year's quarter.

The only one time non-recurring item for the quarter was a $630,000 loss we took on the sale of the security. And aside from that there were no other notable non-recurring income or expense items. Diluted earnings per share for the quarter were $0.17, that was a decrease of 11% over the prior year's quarter. However, last year's quarter did include a one time gain on the sale of merchant servicing portfolio which added $0.02 to diluted earnings per share.

Excluding the gain on sale earnings were basically flat with last year's second quarter. Quarter earnings held up well and a number of credit trends continue to show further signs of improvement. Although credit expense still had an adverse impact on our performance this past quarter, hopefully, this year will diminish as we move into the second half the year.

Our return on assets for the second quarter was 0.69%. That's also down from 0.85% in the prior year's quarter. Our return on equity was 5.54%, a reduction over last year's 6.25% and still far from the level of performance we deem acceptable. If we can make further progress resolving our credit issues this ratio should return to higher levels. Nonetheless, with historically high capital we don't expect to return to a more normalized ROE in the near term.

Stock holder equity end of the quarter at 12.39%. That compares to 13.44% in last year's quarter. Our tangible common equity was 10.39% compared to 11.2% in last year's quarter. We have a very strong capital base which has allowed us to increase the size of our balance sheet over the past year and should provide additional flexibility to take advantage of future growth.

Loan activity was better than the previous four quarters but still not enough to overcome charge-offs and loans moved to OREO. Because of the soft demand for credit we're seeing the same competitive pressures both on pricing and terms in all our markets that you read and hear about across the country. Attracting or keeping a quality borrower requires sharp pencil If you have any hope of getting the deal done.

Because we're still experiencing weak demand for loans, again this quarter we purchased investment securities to offset the loss of loan footings and cover normal amortization from the investment portfolio. This past quarter we did a good job of maintaining the investment portfolio at its current level. However, each quarter takes a sizeable amount of purchases just to replace the amortization run off.

As we have stated before, this problem is compounded by our resistance to extend the duration of our agency CMO portfolio which constitutes a substantial portion of the overall investment portfolio. Nonetheless, we still believe this to be a sound strategy when interest rates start to increase. Each quarter we have a significant amount of cash flow that's available to be redeployed or reinvested.

Deposit growth, and more specifically demand deposit growth, was once again a real positive for us this quarter as we had nice gains in both the number of accounts and the dollars on deposit. The banks once again did a good job of not only originating new accounts but also reducing their attrition rates. This continues to be the primary focus for all our banks and a key reason our funding costs declined further this past quarter.

Credit quality trends although still elevated show improvement in a couple of areas. Non-performing assets showed a slight decrease for the second consecutive quarter but not at the pace that's acceptable to us. Unfortunately, we were not helped much by mother nature as a historically cold spring hampered our efforts to generate much excitement from buyers until well into the quarter.

The composition of our MPAs also continue to change as we actively work to take possessions of properties and move them to OREO so we have more control over their disposition. This past quarter we added another $17 million to the OREO category and now comprises nearly 40% of total MPAs. As a result our NPLs decreased $23 million during the quarter or 12%. And as a percentage of total loans, non-performing loans decreased from 5.07% to 4.5% during the quarter.

Our exposure to land development loans decreased by $37 million during the quarter as we continue to aggressively work this category of loans. Development loans have accounted for a significant portion of our credit costs the past two years and at quarter end was down to $135 million or 4% of the loan portfolio. Another positive trend for the quarter was the decline in early stage delinquencies.

In the second quarter early stage delinquencies went from $52.4 million to $41.2 million or a 21% decrease. We have done a pretty good job of working delinquencies the past year and although we haven't had the volume of sales of distressed properties we had hoped for, holding delinquencies in check should ultimately make it easier to continue reducing our overall level of MPAs. Net charge-offs for the quarter were $20.2 million. That was an increase over the $15.8 million we charged off in the first quarter.

As we continue to work hard to shrink those categories of loans that have caused the greatest losses, we would expect our net charge-offs to remain elevated but, hopefully, at a somewhat lower level than this past quarter. Our goal for the year was to keep net charge-offs at about 1.5% of loans which is now probably not going to happen, especially if we have the opportunity to sell some of the remaining land development projects. Our loan loss reserve end of the quarter at 3.88%. That's up slightly from 3.86% last quarter as we stated previously. We would expect the provision this year to once again closely match our charge-offs.

Through the first half of the year our loan loss provision of $39 million was above the net charge-offs of $36 million or a coverage ratio of approximately 1.1 times. Switching to what drove earnings for the quarter, we had a nice increase in net interest income of 6% in the second quarter alone. Not only was our net interest income up over the link quarter but it also exceed last year's second quarter.

And with the current low interest rate environment continuing to pressure our yields we felt good about the improvement in net interest income, especially the job that the banks did in further lowering their deposit costs. Our net interest margin finally broke out of a nine quarter slump and improved by 10 basis points in the quarter to 4.01%. We definitely benefited from a slowdown in premium amortization during the quarter. However, we offset some of that benefit by extending the maturity of our funding base.

In the quarter we took advantage of some attractive opportunities and increased long-term borrowings by $90 million. This allowed us to lock in some very favorable borrowing rates and further reduce our interest rate risk exposure. Non-interest income of $17.9 million was up 3% from the prior quarter but unfortunately down 17% from the prior year's quarter.

Gain on sale of loans accounted for much of the decrease versus the prior year's quarter. Although our purchase volume is comparable to last year, refinance activity is way off from what we did in the 2010 quarter. Offsetting some of that reduction to non-interest income was better service charge income which increased 6% from last year primarily due to a greater base of customers and accounts.

Non-interest expense increased $3.7 million or 9% from the prior quarter. The results of higher OREO expense. However, compared to the same quarter of last year we saw a reduction in non-interest expense of $2 million or 4%. This time due to a reduction in OREO expense. OREO continues to be the wild card each quarter and creates a fair amount of volatility in our non-interest expense line.

Aside from OREO the banks continue to do a great job of controlling the other operating expenses. For example, compensation and benefits, by far our largest individual expense category, was down 2% compared to both the prior quarter and the same quarter last year. Our efficiency ratio increased slightly this quarter to 50% versus last year's 49%. Again, as a reduction in mortgage origination income accounted for most of the higher efficiency ratio. Nonetheless, we continue to do a good job of maintaining a very productive and efficient operation.

Overall we continue to see some signs of improvement in credit quality, although again, slower than what we would like to see, and there's more work to be done. We don't expect loan growth to be a catalyst for increased revenues this year in addition to slack demand we also faced the hurdles of continued low interest rates and increasing competitive pressures on loan yields. With that said, we feel confident we are getting looks at most new deals and still control significant market share in many of our locations.

We also expect to continue to get more than our share of new customer relationships, especially that core transaction account. Our markets and the general economies of our footprint continue to hold up well, commodity prices in the form of energy, mining and agriculture remain strong. Tourism, although initially hurt by the late arrival of summer, seems to be gaining momentum recently.

Our capital levels continue to be among the highest in the industry. We're patiently waiting for opportunities to develop that will allow us to leverage some of this capital and improve shareholder returns. Right now, however, most of our attention and effort has been directed at reducing and moving troubled debt off the books. The bottom line is we're not satisfied with this level of performance and expect much better results from ourselves. However, we are making progress and it appears things are getting better.

If we can remove some of the uncertainties currently plaguing businesses and consumers, we could be in for a nice economic run. And with that, that ends my formal remarks. I will now open it up for questions.

Alright. We will take our first question from Chris Stulpin. Please go ahead.

Thank you. And good morning, Mick.

Hi Chris.

Let me see here. You mentioned in your press release and you alluded to I guess $90 million you locked in some borrowings at ten year out maturity. Can you talk about the interest rate for those borrowings and what your thought process is behind such a long maturity?

Yes. For us we just don't feel that going out two to three years does much for you and we never felt that. We still do have some long maturity municipals that we have purchased, not so much recently but in the past couple years. It's a good way to hedge that interest risk on that municipal bond portfolio and also there's one other thing.

We have got from some long-term borrowings that we put on the books, Chris, ten years ago. Those are coming due in 2012. We looked at the dollar amount of those borrowings, it's slightly over $80 million. And part of this $90 million went to, in essence pre-refund, that $80 million for next year. Most of those borrowings that were put on ten years ago were currently replacing at about 1.5% to almost 2% lower rates than what we've got coming due next year in the form of those long-term ten year advances.

So that was really two reasons for us to do this and that was partly to better position ourselves against some of our longer dated maturities that are in the portfolio. Another part of it was to pre-borrow against some of that $80 million that we have coming off the books next year at much better and much lower and better rates. So that was really the catalyst for the strategy.

Great. Makes sense. Thanks. Also you mentioned briefly in your press release you talk about the non-subsidiaries redeeming their federal reserve bank stock and how should we think about the regulatory efficiencies expected to be achieved by this going forward, Mick?

Well, really the only efficiency, Chris, is that as hard as they may try still among the regulatory bodies there are still differences, there are still nuances and when we were having to deal with all three of the federal regulatory agencies that being the OCC, the fed and the FDIC, it became clear to us a couple years ago that maybe collapsing into one primary federal regulator would make sense. It would also make it easier for us here at the holding company. It would also make it easier for the banks and ultimately that was the whole purpose in doing it.

And I think there will be some efficiencies because I think when -- now we're dealing with just one primary regulator rather than three. I think it stands to reason that it's going to be a more efficient and productive process so we're early into the game. It just happened here in the quarter so we'll see long-term, but I think already we're noticing that there are some definite efficiencies in what we did.

Great. And just one additional question, please. Other than what I assume is you expect to be slowdown in runoff through pay downs and charge-offs. What are you seeing, are you seeing any signs, or encouraging signs that make you more optimistic for near term positive net loan growth? Because you seem a little more positive this quarter than you did last, actually?

Yes. The quarter was better. Again, as we stated in the press release, if you exclude charged off loans and the loans we moved to OREO we actually increased loans by $7 million. But, hardly is that a sign that loan demand has really started to improve. I will tell you compared to the first quarter and really compared to the three quarters prior to that almost a year now it was definitely the best quarter we've had.

Now, as we have said many times before, we know, we understand that there's seasonality built into our loan demand and our loan production and the second and third quarter, hopefully, all we should be a little bit better. I just don't know what the fourth quarter of 2011, first quarter 2012 will bring. Whether the economy will gain enough traction where we really have hit kind of the bottom end of loan demand.

I have said a number of times recently that I really do believe that at $3.6 billion in loans we are somewhat approaching an inflection point with our loan demand. I mean a company our size will always have a certain base of loans and one of the good examples of this is we look at our residential construction portfolio. If you go back to 2006, I think that portfolio was somewhere north of $400 million.

The last two quarters now, both the first quarter and this quarter, we've been kind of locked in at about $93 million in residential construction loans. Now, that's both custom and pre-sold specs. But at any given time I don't see that $93 million going to $45 million or something like that. I think we have lost a lot of residential construction loans, but I think we're at that point now where probably we're going to stay at this level and if things start to improve, if hope building starts to gain some traction, my guess would be that you could probably increase that number relatively easily to a $175 million or maybe even $200 million.

So I think those are some of the dynamics that are taking place right now. Obviously, Barry has got a much better handle. He's involved with all the banks daily and weekly. Barry, you got any other comments on loan demand and loan volume?

Yes. I think, as Mick mentioned, there is some seasonality built into our numbers. We have some, a fairly small agricultural portfolio. They have been drawing on those lines as they've been plan planting seed and paying vendors for all their costs earlier in the year. We do have some heavy equipment and contractors that have some seasonality. They're drawing on their lines as they're laying pavement and digging ditches, that sort of thing.

So we're feeling better about our loan demand that we've seen. We are actually seeing some term commercial real estate properties that we're looking at there. We're start to fund some of those loans that we approved earlier in the year as they're able to go out and put up some vertical structures. So we anticipate that this quarter and the next quarter are our two best quarters, again as Mick mentioned. Time will tell what will happen the end of the year and the first quarter of next year.

Thank you very much.

You bet, Chris.

And our next question comes from Joe Morford. Please go ahead, sir.

Thanks. Good morning, Mick.

Hi Joe.

I just was curious about your feelings about the prospects for NTA sales now that we are in the summer months and how you feel about the values may realize looking at the, given that you had the charge-off in the second quarter and another $3.5 million or so of OREO losses and write downs in the second quarter.

As I mentioned, we were kind of dealt a bad hand in some respects by the weather that we had here in April and May. I mean it was kind of an extension of winter almost and we didn't get anywhere near the lift we were looking for or that we've seen in past years as far as activity. But starting in June as the weather really started getting nicer and I think continuing through today that activity level has picked up. I think we got a lot of things in the hopper. Still too early to tell if all these things will get done or how many of them will get done, but the activity level has definitely increased, Joe.

Now, from, one of the things that I mentioned in my comments is we continue to move a lot more, and it takes a lot of work, it takes a lot of legal expense, and a lot of time, but we're making very good progress in working with a lot of these borrowers others and moving more and more of this property from MPLs to OREO. Once it's in OREO we're in control. The disposition of those assets is basically much easier. I think, Barry, you've got it figured just in so far this year or for the quarter, the dollars of OREO property that we moved and those projects that we sold, what was the percentage of loss on OREO?

Yes. What we took into OREO year-to-date is just underneath $50 million. It's $49,570,000. And then out of that, in previous balances we've been able to sell about $21.4 million. And with that $21.4 million sale either the loss on sale has only represented about 6.8%. So we're feeling fairly comfortable that we have these bank loan properties written down to some pretty realistic values. And that 6.8% is a give away of your opportunity cost of funds to re-deploy those dollars.

So even if we didn't want to do that, I think we could still hold our own and maybe even break even or hit par on a lot of these OREO properties. What we've seen over the last three years, we've been through, well, three or four in some cases, appraisal cycles and we have seen a lot of these values start to stabilize and so what we're bringing these properties in on our balance sheet are pretty much what we're getting for them in the marketplace. Now, we still have $98 million sitting out there, but we're feeling comfortable that the loss on sale of that is going to be pretty minimal as we start to liquidate these properties.

And I guess if you look at it that way, Joe, if you could freeze time and there wasn't all this velocity of dollars moving in and out but you just took a snapshot right now, we've got $99 million sitting in OREO, at a, call it a 7% loss rate, I mean you're talking roughly $7 million. If what we've done so far would hold true. Now, we all know that there's a lot of subjectivity to that and that's not necessarily the exact way it's going to pan out, but at least that gives you some guideline.

I can't tell you whether values are going to get a little bit better. Barry brought up a good point. We have really pushed down these values because these properties, many of which have gone through multiple appraisal cycles so I think every day that goes by we're further convinced that they're priced right. So it's just a function of getting some buyers to step up and close the deals.

That's very helpful. Appreciate it. Just a couple real quick questions maybe for Ron. The tax rate looked a little light this quarter and I was just wondering any guidance tax rate in general going forward?

I would take the blended average for the six months, 11%. I would actually take that up a bit higher than that. That's more of a run rate than the quarter.

Okay. And then lastly any further room for savings on FDIC insurance premiums? They didn't come down that much this quarter or is this the new run rate?

Yes. No. That run rate is not the right run rate. We're in the process right now with 11 banks. It's a little different story for us and we're analyzing that right now and we will see a reduction. That reduction is give or take, Joe, it's about $400,000 a quarter.

Okay. That's great. Thanks so much.

You bet, Joe. Thank you.

And our next question comes from Brad Milsaps. Please go ahead.

Hey. Good morning.

Hi Brad.

Hey maybe just to follow up on Joe's question in regards to OREO. Do you have a sense sort of in round numbers the composition by loan type that would be, or not loan type, by property type, that makes up OREO and any sense of kind of where you're carrying it versus appraised value or loan-to-value, some sort of initially just kind of get a sense of kind of where you do have those marked?

I can address that. Out of the OREO, the $99 million, the bulk of it is, $38 million is in land development, another $21 million is unimproved land. So that's the majority of it. That's where we've been running it. I don't know, if you get a chance to look in our earnings announcement back in the credit quality summary they're broken out by product type.

That's an increase of course from the $82 million as of 3/31, but it, generally from appraised standpoint, from the original apprised value to where we booked them, it varies by product type, but they are there have been some fairly significant discounts in the land development and unimproved land. We calculated it's almost about a 44% discount from what we're carrying it at to what it was originally appraised. So either through the charge office or write downs in the last couple of years.

We feel fairly comfortable now that what we are seeing as far as tentative offers are pretty realistic. They're coming in closer to the carrying value than they were in 2008, 2009 and 2010.

Brad, just as far as the velocity from first quarter to the second quarter, Barry gave you the numbers. Land development at the end of the first quarter, we had about $28 million sitting in OREO and that's now a little over $38 million. And probably the other category that probably saw a little bit of increase was unimproved land went from about 18.6% to 21%.

So those were primarily the big drivers. We did have though actually we did move a little bit in one to four family. One to four family OREO went from 4.6% to 8.1%, but that's a category where that funnels through OREO pretty quickly. We're not holding onto these houses very long.

Yes. We started a program here, at least in the Flathead Valley, of doing an online bank-owned, it's called Montana bank-owned properties and it's a web page out there. You can go out take a look at it. It's a quasi option. Basically we have a buy now price and then we have a minimum bid, but even, we still have the right to accept or reject any bid.

We by no means are we forced to sell any of these properties. And so far we've been very fortunate in several of these properties that we put out there on the web page at the buy now price, they have gone at the buy now price. And those, the bids on the other properties have been very close to the buy now price that we've sold. So we feel it's just another marketing means to advertise some of our properties, at least here in the Flathead Valley. And depending on the success of that we're looking potentially to roll if out to several other affiliates that are carrying enough OREO to make it worth while.

And one other thing, Brad. I know I, there was some confusion out there. I've seen, I've had a couple of calls and I've heard and read some things that there was some speculation that a lot of these properties were being sold right at the bid price and that was not the case. I can think of one property, one lake frontage property, that, I think the auction amount, or the bid price was like $500,000. That property sold at the buy now price of $700,000.

So like Barry said, two or three of the larger properties there went because, again, as we have said before there is, especially up here, now that's just one bank doing that. That's just Glacier Bank. The other ten banks they're looking at doing potentially something similar to this, but it was Glacier Bank up here in Kalispell that piloted that program. It has been pretty successful.

They do benefit, though, here in the Flathead Valley by having a strong contingent of Canadian buyers coming down and a couple of these properties, especially these lake frontage recreational properties, have been purchased by Canadians. But we have been very pleased at the fact that those properties were being sold at the buy now price and not ever going to bid. So we may continue to, just one more thing that we're doing to test the waters on getting rid of some of this OREO.

Okay. Great. Just one final question. You gave some nice detail on the, kind of the flow rate of the OREO. Just kind of curious if you could do the same on non-performers, kind of what new came into that category and sort of how you view the watch list or classified list versus March 31 or year end?

Well, as far as MPLs go, here again I will go from first quarter to second quarter, but we talked about how land development went from $28 million to a little over $38 million. As far as MPLs during the quarter that figure went from $54 million at the end of March down to $41 million at the end of June. Unimproved land, that went from $23.4 million to $20 million. And we also saw commercial real estate go from about $27 million down to $22 million.

So those were some, I guess one more, that's C&I loans went from $16 million down to call it $12 million. So, again, that's the migration, but you can see the dollar amounts. Still, when you look at non-accruing loans, MPLs, land development still is $41 million, commercial real estate is $21 million, one to four family residential $24 million and unimproved land is $20 million. So those four categories make up well over a $100 million of the $160 million in MPLs.

Okay. Great. Thank you.

And that data, too, is on Page 18 of the press release also, Brad.

Yes. Yes. I know I saw the data. I guess I was more asking sort of the pipeline what you see, what came on that was brand new versus that got resolved or moved to OREO. It obviously has to be coming down if the 89 day past dues are decreasing so I was just trying to get some color around sort of the magnitude of how much more quickly we can see the MPL build kind of slow.

Do you have any sense on what actually came on. Obviously there was still some land development loans, that moved into those categories. Even though the number is way down, there was still some migration there. I know for a fact, Brad, that one to four family continues to cycle through. I mean when you look throughout our region at foreclosures and you look at delinquencies, that number and that volume has increased. Do you have any other sense, Barry, as to any particular category that moved into MPLs?

As we move through this credit cycle we're all, finally we're seeing some resolution of a lot of these land development loans where we're getting those back and taking those into bank-owned properties and transferring them to OREO, sale some OREO, but there is still some in fill there now, so our challenge is trying to get, sell some bank-owned properties and get rid of that to give us some overall net reduction in that. That's where we feel we really have to place our efforts going forward in this next two quarters and next year.

We did see one operating company that --

Right.

moved in during this quarter, Brad, that was a good size.

$8.3 million.

Yes.

So we are seeing some other C&I loans, some other commercial real estate loans that are moving now given the economies here, but nothing major compared to land development and unimproved land.

Okay. Great. Thank you, guys.

You bet.

And our next question comes from the site of Jeff Rulis. Please go ahead.

Hey. Good morning.

Hi Jeff.

Hey Mick. Not to beat up the OREO discussion too much, but just trying to get a sense for that shift from MPLs has been pretty considerable over the last couple quarters and picked up this quarter. Can that continue? Was there something in those properties that were easily shifted to OREO where going forward can we expect continued shift into OREO? And then I guess two-part question would be does that OREO balance the ability to sell those off? Where does the OREO balance? Does it rise from here? Are you going to equally be able to flush it out the back end?

Well, that's the million dollars question. I think there's no doubt that embedded in the NPLs is more future OREO. I mean I could think of a couple of NPLs that are being worked right now at the various banks that will ultimately hopefully end up moving them into OREO. I sense from what I'm seeing out there right now, Jeff, that yes, we will continue to move some OREO property.

Will that more than offset the in migration of NPLs into OREO? That I can't say. And we have, the 30 to 89 day early stage delinquencies has been pretty stable for the last, better part of the last year. It's had a little bouncing around up and down but for the most part been pretty stable. But I'm sure that there is still embedded in that $41 million, there's still some additional dollars that are going to move to NPLs. You know, just knowing the economy and just knowing what we've seen over the last couple of years.

I wish I could give you more definitive answer. I know there's a lot of things being worked on at the four or five banks that have the bulk of these NPAs. Again, Barry and myself have talked, in the best of options we could see a pretty significant amount of OREO go away. That's assuming that a lot of these deals that are on the table right now ultimately close. But on the flip side of that, Jeff, we've seen so many times where you get right up to the 11th hour and deals fall apart, too. So I guess we're not willing to make those kind of firm commitments.

We do like the fact that since June the activity level has picked up, the interest level has picked up. We like the fact, as I said earlier, that we own these properties. We're in control. It depends upon, we're the ones who ultimately make the decision of how aggressive we want to be in disposing of these properties.

But outside of that I don't know if that answered your question or not, but it's really kind of difficult for me to say we're going to move another $20 million into OREO this quarter but that OREO is actually going to go down $20 million, which would say that you moved $40 million worth of OREO and I just don't know if that's the case. You know, if a lot of things worked out you could make some real progress. I'm just not convinced that all these deals are going to close.

Got you. It's not an easy question to answer. So switching gears a bit on the margin side, broke the string of run off here, or compression. How confident or kind of what's your reading the tea leaves on margins of the trend there? Do we stabilize here, do we, still fighting off further compression, kind of what's the thoughts on the margin?

You know, I think we can stabilize. Now, I'm not saying we're going to still stabilize at four, but I think that what we saw over the prior eight or nine quarters, we're not going to see that. I truly believe we're going to kind of stay in this holding pattern, maybe bouncing around between 390, 4%, somewhere in that range. I mean I just don't see anything that would take us down to that 370, 350 or anything like that. I think it's just going to be a tighter range.

Some quarters could be up, some quarters could be down, some months we've seen where it's been jumping around. I don't necessarily, though, I would never say it because I don't feel a bit confident that you could expect it to go to 410 or 420 this quarter. That's probably not going to happen. So, Ron, you have any other thoughts on margin?

Yes. I concur with Mick's statements in part because we're going to take opportunities as they come to us to extend out for the reasons Mick said. There's just some opportunities that present themselves and so we do that when we can from an interest rate risk perspective and, of course, one of the comments in the press release was, we did just that and we would have had a better margin, bigger spread had we not done that. So it's about protecting the future as it is the current quarter.

Okay. That's it. Thanks.

Yes. That's a got point that Ron made. I mean we definitely did some things during the quarter, we'll probably continue to do some things in this rate environment to protect our exposure to interest rate risk as we move forward.

Alright. Our next question comes interest Jennifer Demba. Please go ahead.

Thanks. I have two questions. The first on margin. Mick, can you give us a since if you think the margin can go up over the near term or do you think we're looking at stable to some compression?

You know, I just don't think, Jennifer, that you're going to see the margin go up much. I think that it's stable here. If there is any compression, it's going to be relatively muted, but, again, we took some additional increase off the table by going out and borrowing nearly $100 million and going out basically ten years on those borrowings. I suspect that if opportunities continue to avail themselves over the next three months or six months, the rest of this year, we're going to continue to do that. And it's the right thing for us to do because, again, we've got some borrowings that are coming due next year that are still funding some longer dated assets. We're able to cut our costs.

It's costing us now in the short run, but in 2012 when those expensive borrowings go away and are being replaced with the ones we're putting on the books now, I mean there's a 150 basis point, to like I said earlier, 200 basis point reduction in expense. So we're, when you're in an interest rate environment like this and it's squeezing your yields and your earning assets, we have turned to the other side of the balance sheet and really looked to gain some upside from the liability side. And I think we have done a pretty good job of picking some times and setting up some parameters, Jenn, when we can step in and take down some of these longer-term borrowings.

And many banks have given investors guidance on what they expect in terms of a revenue impact from changes in check sequencing. Do you see any changes there?

No. We have never, that was something that we thought about years and years ago. When that became a real fad, there was just something that rubbed us the wrong way about that process. We have never done it. We don't intend to start doing it now. And as a couple of banks that we have acquired over time were doing that, that process got changed in a hurry. So no, we do not expect any kind of impact because nothing is going to change for us in the sequencing of how we pay checks.

Okay. Great. Thanks, Mick.

You bet, Jenn.

Our next question comes from Matthew Clark. Please go ahead.

Hey Mick.

Hi Matthew.

On the securities portfolio, can you just give us a sense for the average duration this quarter versus last? And then also what you might be buying relative to the portfolio yield? I think the blended yield is somewhere around 350 these days but just curious how we might see those yields change. Obviously there is some volatility in that with the premium (inaudible) but just curious.

Yes. The purchases this quarter, the duration has definitely shortened up as far as new purchases. We took advantage, as we mentioned last quarter and the quarter before, we took advantage with the disconnect out there on some of the longer-dated munis around the first part of the year after some of the statements by some of the pundits regarding municipal and their default rates and all that and when that, when those rates got out of whack, we stepped in and we bought some of that product.

This latest quarter we really haven't done much of that. In fact two things we've done. We still buy some municipals, but they're very, very short dated municipals. And those yields are, those tax equivalent yields, Matthew, are probably 3% top end wouldn't you say, Ron?

Yes.

But on the CMO purchases we have probably even reigned that in even more. I think prior to this quarter we were looking at durations and weighted average lives in the two year range and I think we've shortened that up to about 18 months. So we definitely have become a little bit more risk averse as far as extension and, of course, that comes with a price, too.

I mean you're just not going to get the yields, but we also look at the level of dollars that we have in these various buckets. One other thing we've done this year, not so much in the quarter but this year that we had done before, is we did go out there, maybe we talked about this last quarter, but we did go out there, Matthew and buy a block of about $50 million in corporates and those are in that three year maturity range. And those were in that two and a quarter to two and three quarters coupon so, that kind of gives you an idea, Matthew, of what we've been buying. You want to add anything more to that, Ron?

Yes. The $50 million corporates we bought in the bank holding company sector just bought the largest banks and feel very comfortable with that. We continue to study other opportunities to mitigate some of the amortization risks as well as diversification as we actively manage that portfolio.

That's the one thing. We have always in the past primarily invested in CMOs, agency CMOs and municipals, but you get to a point and, again, with loan demand still tepid at best we're looking for other alternatives. And in the investment portfolio we feel that we've got to diversify that portfolio and that does some of the things that we've done on the corporate side. We actually may do some more and expand those corporates through some other industries making sure that the quality of the companies we're doing it with. We're less concerned about the coupon and the yield than we are the quality of the issuer.

Great. Okay. And then just on the loan front, I think your yields are down about 5 basis points. Just trying to get a sense for the pricing pressure, the rates at which your, it sounds like more and more banks are willing to compete on rate now that we all know that rates are staying low for a lot longer. Is that the stance you're taking and kind of what kind of yields are you seeing on the stuff you're booking?

Yes. There's no doubt that we have, it's just the nature of competitive forces. I mean we have had to get more aggressive. Especially we keep what harping on this with all of our banks is, make sure that we're being aggressive for the really good quality borrowers. There's a lot of credits that don't deserve razor sharp pricing and that's always, Matthew, that's always an issue because you run the risk of certain interest rates becoming, or being assumed to be the new norm and everybody gets them. So we're very careful and we're very cognizant of that.

We've been working very hard to make sure that if we got a really sharpen our pencil it's for a very good borrower. Both whether it's a new one or an existing one and we've had to become far, far more competitive. Now, I'm not so sure that in our markets and with our market share that we have in our markets that it's as cutthroat as what I read about in some of these other states and some of these other regions of the country. But it's still definitely way, way more competitive than it was a year ago at this time. Barry, you might want to give Matthew some indications as to just how that, what type of pricing and terms we're seeing out there. Just in general terms.

Right. You know, Matthew, it's not only the pricing, but it's the term of the fix. Where we're probably seeing more competitive pressures, traditionally we never fixed anything over five years and where we have seen a lot of quotes coming in now is a ten year fixes and some 15 year fixes. Now, traditionally we just haven't been out there.

Now have we had to move out there in a couple cases? Yes we have done some ten years fixed for some of our existing customers where we have a relationship not only on the lending side but the deposit side. So we've had to move off the needle to get that done. Now we've enhanced those quotes by some pre-payment penalties, a few other things. We've looked at matched funding and a few other things to eliminate interest rate risk. But it is becoming more and more of a norm to see terms start moving out. We've been fairly fortunate.

We go out and price those off the swap markets and we've been staying fairly competitive of what the quotes are out there so we haven't had to go sub-swap market pricing at this point yet, but that's today. Who knows what's going to happen tomorrow because it really is, there has, two or three years ago all the irrational pricing went out of the markets.

We could pretty much demand what we wanted as far as both quality of borrower and terms. And in the last six months we have seen some, what we feel, is some pretty irrational pricing coming be back into the market, especially from some of the regionals that we compete with. So it's not the local community banks. It's the larger regionals that are really getting aggressive.

Okay. Thank you.

You bet.

And our next question comes from Dave King. Please go ahead.

Thanks. Good morning everyone.

Hi Dave.

Most of my questions have been asked and answered. I guess just one quick one. Mick, you've talked in the past about not seeing material pickup in M&A until next year maybe at the earliest. Can you talk about what kind of activity or what, if any activity, you're seeing these days out there and the types of conversations you're having?

Not much. There just really hasn't been much activity. There hasn't been a lot of inquiries. I think all of you know that a lot of the FDIC deals have definitely slowed down. With us, what we've really focused, as I maybe mentioned in my remarks, we really focused on trying to get our asset quality numbers down and I think that's been a good strategy because there just hasn't been much activity that I have seen on the M&A front. Now, have I changed when that activity is going to take place? I just, I have a hard time seeing where 2011 is going to spur a renaissance in M&A activity. I just don't think it is.

I just think we're still out next year and, David, it hasn't even gotten to the point where you've had enough inquiries to determine whether or not the spread on the bid/ask is still wide. I read and I hear anecdotally that that's the case. That there's still a disconnect between sellers and buyers. But we've never, we just haven't had enough conversations and had enough inquiries where I could really even tell you if that's the case or not. So from an M&A perspective it continues to be pretty slow.

That's helpful. So what about maybe other markets like Colorado and that market? I mean because we've heard from some that there has been a little bit of pickup in activity there. Is that still on your radar screen of somewhere to expand.

Oh, absolutely. Colorado is a state that we would like to have a bigger presence in. I know of a number of investment bankers that usually keep us aware of activity and haven't heard too much so either I'm not talking to the right investment bankers or maybe a lot of this is just that. It's just a lot of talk.

Okay. Helpful. Thanks so much.

You bet, Dave.

Our next question comes from Brian Zabora. Please go ahead.

Thanks good morning.

Hi Brian.

Question on that charge offs. Were there any sizeable one or two credits that drove the charge off number this quarter?

Let's see. Yes. There was, we took some significant charge-offs on a related borrower down in the Boise market for related land development projects and we took a couple million dollar charge-off on that.

Okay. And then C&I was up in the quarter. Was there any, again, sizeable charge off there or are you seeing any weakness with your borrowers on the C&I side.

There has been a few, not a lot, but there's been a few C&I loans that yes, it showed some weaknesses like Barry referred to earlier, one operating company.

Right. And then on that loan we took a $2.2 million loss on that and that was an operating line.

Yes. And that was about, those were the largest. I don't know of any other ones that were greater than $2 million individually.

Correct.

But one of them was an operating company and the other one was basically a land development loan.

Right. Thanks for taking my question.

You bet, Brian.

Alright and our final question comes from Tim Coffey. Please go ahead.

Thank you. Mick, I was wondering if you were concerned at all given the length of winter that the selling season this summer and spring could be truncated?

Well, I think it could be because I think we're seeing some of that truncation right now because, as I have said over and over, we were still getting snow in parts of northern Montana and northern Idaho into mid May. I think that it has accelerated the interest. It's always tough to say, Tim, what the next, now, next year we may not have any winter at all. That's just the way it could go. But right now we're still figuring that it's going to be a normal year. We've got July, August, September and October to dispose of properties because once November and the holidays hit we expect it to slowdown and if the weather is like it was last year, that could happen even a little bit sooner.

Again, we're trying a lot of different things to, and each of the banks are trying different things to generate some interest in these properties. I do like the fact that they've had good success in moving NPLs to OREO because once we, I have said it before today and I will say it again, once we are in control of those projects it just makes the disposition a little bit easier. But yes, I think your question of truncating that into a shorter time period, that is going to happen. And if it does, then, third quarter and maybe into the early part of the fourth quarter we could see some better results when it came to these dispositions.

If it is (inaudible) shorter would, I mean it sounds like from everything you said today you're not opposed to getting more aggressive on the pricing?

Yes. To [a reason]. I mean that, Tim, is l really a project to project decision. I mean there are some projects that we know, or we feel at least, that there's value and there's no sense in really rifling that thing out of the portfolio. Other ones you are willing to be more aggressive in selling that property. It really is almost property specific and market specific. Some of our markets the values have held up better. When we get something back, we don't expect to take the loss that other markets are seeing.

One positive thing is we have worked so much of our exposure in Boise down to low levels that that was a, Barry just mentioned there was one other one that we had a fairly significant write-down this last quarter, but we are getting down to about the end of that exposure in that market. So that should bode well for the future. Again, it's pretty much market specific and it's project specific as to how aggressive or non-aggressive we're going to be. Barry, do you have anything to add to that?

No. It goes by project and it comes down to if we feel that the appraised value is a little high on something given what we're seeing in the market places, yes we might move on something and take our lumps. But in other cases we have a lot of projects that we just don't want to, we see the value, we see the locations and we're better off to hold and hope rather than sell and suffer.

And we saw that on that online auction, too. That some of these values and some of the demand was stronger than what we expected it and a lot of those, a number of those properties were being sold at the buy now price versus the bid price. They never, ever got to a bidding situation so it's just, again, it's property by property, project to project.

Okay. Speaking of the online auction when the properties were moving at the buy now prices, were those properties that already had existing buildings on them or did you see it across-the-board and they also included the raw land stuff.

It's both.

Okay.

It's both. We were pleasantly surprised we moved some dirt.

At the buy now price. So, again, that just goes to show you, Tim, that it really depends upon, you have buyers out there and if a certain buyer has a certain interest in a certain piece of property whether it's dirt or whether it's a project or if it's a home with a residence, it really does depend upon the buyer's interest level and like we said we've sold some dirt at those buy now prices, too, so it's been good.

Thanks. Those are all my questions. I appreciate the time.

You bet.

And it does not appear we have any further questions at this time.

Okay. Well, very good. Thank you all for joining us this morning and your continued interest and support of the Company. Everyone have a great summer weekend. It's sounding like it's going to be exceptional around here so we're going to look forward a great Saturday/Sunday. So take care, everyone, and we'll talk to you next quarter. Bye now.

And this concludes today's teleconference. Thank you for your participation. You may now disconnect.