Glacier Bancorp Inc (GBCI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp third-quarter earnings conference call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mick Blodnick, President and CEO. Sir, you may begin.

Welcome and thank you for joining us this morning.

With me this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; and Angela Dose, our Principal Accounting Officer.

Yesterday, we reported record earnings for the third quarter of 2012. Net income for the quarter was $19.4 million, compared to a loss of $19 million for the same period last year. Excluding a $32.6 million after-tax goodwill impairment charge in the year-ago quarter, operating net income was $13.6 million.

The rest of my discussion today and all further comparisons to last year's quarter will exclude the impact of the goodwill impairment charge.

Diluted earnings per share for the quarter were $0.27, an increase of 42% over last year's third-quarter results of $0.19 per share. There were no one-time or extraordinary items, nor did we have any gains or loss on the sale of investments during the quarter, as core operating earnings continue to drive our results.

We earned an ROA for the quarter of 1.03%, and our return on tangible equity was 10.1%. Earnings were driven primarily by a significant increase in non-interest income, which was up 10% on a linked-quarter basis and 15% from the year-ago period, along with lower credit costs, as we continue to see stabilizing asset values and improvement among most of the credit metrics we track.

Although credit costs are still high historically -- by historical standards, we believe we are positioned to take advantage of further credit cost reductions through the rest of this year and into next.

In addition to record earnings, the quarter also generated record growth in non-interest-bearing deposits. We saw an 11% gain in this deposit type in the third quarter alone, as we continue to add new personal and business checking customers at a 6% annualized rate this year. A great deal of the credit goes to our banks for the great job they continue to do in adding more customers and relationships each quarter.

Unfortunately, we haven't been as successful growing our loan portfolio this quarter. Loans decreased $37 million during the quarter as demand remained soft and competition continues to price and commit to terms that we can't justify or rationalize. We have passed on a number of lending opportunities this quarter because they did not meet our underwriting standards or adequately compensate us for the credit and interest rate risk we would have had to accept to get the deal.

We specifically have avoided fixing rates for longer periods of time in this historically low-rate environment, and that has probably led to the most -- or to most of our lost opportunities to further increase loan volume. In addition, we aggressively continued to move land and development loans off the balance sheet, creating further headwinds to grow the portfolio.

With that said, we know we are getting a shot at most credits and recently have seen an uptick in activity, especially in construction requests, which is positive. We hope that as we enter the final quarter of the year that this increase in activity continues.

For the second quarter in a row, we experienced further pressure to interest income as the continuing wave of refinances has led to record amounts of premium amortization, which has significantly impacted both our earnings and the net interest margin. Last quarter on this call, I stated we did not expect a slowdown in refinance volume in the third quarter. However, I didn't expect the volumes to hit the levels that they have the past three months.

Our net interest margin ended the quarter at 3.24%. During the quarter, the yield on our earning assets decreased by 28 basis points. Total paying liabilities, on the other hand, only declined by 3 basis points, causing 25 basis points of net interest margin compression. 17 of the 28 basis points we lost in yield on earning assets were attributable to premium amortization and 10 basis points from a decrease in loan yield.

Premium amortization increased by $3.6 million from the prior quarter and $11.3 million from the prior-year quarter. Although this acceleration in premium amortization has been difficult to offset and significantly reduced interest income, in recent weeks we have seen signs that refinance volume is slowing down. And if this trend continues, it would definitely reverse the amount of premium amortization we're currently expensing.

As I stated last quarter, the benefit we receive from increased mortgage origination fees is currently covering only one-third of the cost from increased premium amortization expense.

Our assets grew during the quarter by 2.6%, with investments making up all of the increase. We were fortunate during the quarter to find the volume and structure of agency CMOs to offset and replace the paydowns. Because of the size and short-term duration of our CMO portfolio, we again this quarter received record levels of payments.

Once refinances slow down, the amount of dollars needed to be reinvested should drop significantly. But that doesn't appear to be the case until sometime early next year, at the earliest.

A majority of the growth in our investment portfolio in the second quarter -- I mean, in the third quarter, excuse me, came from taxable municipals and corporate bonds, as we strive to further diversify this portfolio and reduce our exposure to the amount of amortization we have contended with the past four quarters. Both of these security types are being purchased with maturities ranging between two to three years.

However, because demand for both municipal and corporate bonds has increased substantially the past two quarters, we have seen yields tighten significantly to where it is becoming increasingly difficult to find the investment-grade bonds and meet our yield and maturity expectations.

Yet in this interest rate environment, we cannot square with extending these maturities and durations. We don't believe the risk/reward of owning longer-dated assets at these interest rate levels and at this point in the interest rate cycle is justified.

The third quarter once again produced significant growth in deposits, especially non-interest-bearing deposits, which in the quarter -- which was the greatest increase we have ever experienced in a three-month period. Clearly, some of these dollars are temporary, waiting for the economic uncertainty to clear. Nonetheless, that doesn't diminish the great job our banks have done generating these deposits.

I recognize that in this current low interest rate environment these accounts may not be quite as valuable as they once were, but at some point in the future this zero-based funding source will be very profitable. In the interim, they generate significant amounts of fee income and the opportunity to cross-sell other products.

Our interest-bearing deposits, excluding wholesale deposits, also grew during the quarter, although not at the pace of our non-interest-bearing accounts. These deposits grew at a 1% annualized rate as historically lower rates forced a continued shift in the mix of our deposits to non-interest-bearing transaction accounts. This shift helped to reduce our overall cost of funding.

For the quarter, deposits had a cost of 35 basis points, down three basis points from the prior quarter. Adding our borrowing costs, total funding for the quarter had a cost of 54 basis points, also down 3 basis points from the prior quarter. We continue to look for ways to further lower our cost of funds, and CDs is one area that we will get some additional relief in the near term. However, any further rate reduction in funding is likely to be minimal.

Our capital ratios remain very strong and have allowed us to pay an attractive dividend for 110 consecutive quarters. In addition, we have modeled the proposed Basel III capital standards and surpassed all projected requirements if the rule is adopted in the future. We continue to maintain capital levels that are at or near historic highs, and believe we are in great position and have tremendous capacity to further grow the balance sheet both organically and through acquisitions.

Credit quality continued to show further improvement in the quarter, and we expect this trend will continue through the end of this year and into 2013.

Our nonperforming assets during the second quarter dropped by 11%. If the sales currently scheduled for this quarter materialize, we should see another significant drop by year-end. We set a goal this year of reducing the dollar amount of NPAs by 20%, and we feel comfortable that we should exceed that goal.

Again this quarter, we also had good results in disposing of our OREO properties. For the period, we had OREO sales of $11.4 million and booked a net loss of only $117,000, or 1%. We also had $4.7 million of OREO write-downs during the quarter as we scheduled appraisals on most of the remaining properties in this category and took the appropriate marks.

Net charge-offs was another area where the trend line keeps getting better. In the quarter, we had net charge-offs of $3.5 million, less than half the amount of the prior quarter and down dramatically from the $18.9 million in the year-ago period. It was the lowest level of net charge-offs recorded since the second quarter of 2008.

As we enter the final months of 2012, our goal for the year of keeping net charge-offs below 1% of loans should definitely be achievable. This would also be a marked improvement over the 1.85% in net charge-offs last year.

For the quarter, we provisioned $2.7 million, compared to $7.9 million the prior quarter and $17.2 million in the prior-year period. Because of the drop in loans during the quarter, the allowance for loan and lease loss increased to 4.01%. We believe the loan loss reserve is fully adequate to meet all credit issues, based on the analysis we conducted during the quarter.

Early-stage delinquencies were another bright spot as we ended the quarter at $28.4 million, down from $48.7 million the previous quarter. As we enter the winter months, we would expect delinquencies to increase some, but hopefully we can keep the amount at or below 1% of loans.

Net interest income was down on a linked quarter by $2 million and $7 million from the prior-year quarter. The Company continues to focus on protecting our net interest income. However, the current interest rate environment makes this task increasingly difficult. If the volume of refinances would begin to slow, our net interest income could see a nice rebound.

Noninterest income increased by $2.2 million from the prior quarter, due to improved fee income on deposit accounts of $600,000 and an increase in mortgage origination income of $1.2 million. Compared to the prior-year quarter, the results are even more dramatic, as we increased noninterest income by $3 million, the bulk of which was a $3.6 million increase in mortgage origination fees.

Our noninterest expense on a linked-quarter basis increased by $4 million, due to the $4.2 million increase in OREO expense. Compared to the year-ago quarter, our noninterest expense increased $2 million, or 4%, primarily due to increased compensation expense, most of which was attributable to higher commissions paid to mortgage loan originators.

In this interest rate environment, it has become increasingly important to control our noninterest expense. This is another area where I feel our banks have stepped up and done a terrific job.

In closing, the operating environment continues to challenge us daily. Generating loan growth is going to be difficult, especially if demand remains tepid and competitive forces make it difficult to justify the risk it takes to get deals done. We refuse to stretch for yield by extending assets or taking additional credit risk to increase interest income. We believe we still have a significant amount of credit leverage that can be realized over the next year as our credit costs decline. And we plan to focus and dedicate significant resources in order to keep adding more checking-account customers that we are confident will provide us a long-term, stable funding base.

In spite of all of the headwinds facing the banking industry, we have produced back-to-back quarters of record earnings. And with the exception of net interest income, we will exceed most of the goals we set for ourselves this year. It was a solid quarter on most fronts.

That concludes my formal remarks. We'll now take questions.

(Operator Instructions). Joe Morford, RBC Capital Markets.

I have just a question first on the credit quality. Charge-offs down, cut in half this quarter. Do you see them going much below that for a prolonged period of time, given just the strength in underwriting in the past few years? And I guess when you think of the potential for further reserve releases, do you see the provision just covering losses and not providing for growth? Or could we actually get to a point in seeing negative provisions or something like that?

Well, I'm not sure we will see negative provisions. I think I mentioned that last quarter.

Whether we continue -- and we didn't quite cover charge-offs; we were about $800,000 light this quarter from what we provisioned. That gap, Joe, might increase a little bit.

But I think your first question was whether or not this trend line of charge-offs will continue. And it could fluctuate a little bit, but we're starting to feel better and better that we've taken the proper march, the proper write-downs. And I'm not saying that we're going to drop in half again, that this quarter we're going to be half of the $3.5 million.

But I think that somewhere in this range is where, probably, we're going to stay now for the next -- possibly the next couple of quarters. It might be up a little bit, could be down a little bit. But I don't see us, at least right now, from the way I read the tea leaves, I don't see us going back to the $8 million, $10 million, $12 million.

Barry, you've got a good handle on that. What do you think?

I think overall while there might be some bumps in the quarters, but overall going through next year our losses are going to be less than what we anticipate they are going to be this year. By how much, it's hard to say, but a best guess, maybe 25%, 30%. They're going to trend down.

So far, through the year, Joe, we've charged off $20 million. And again, I don't know what the fourth quarter holds.

But if we're somewhere, by the end of the year, in that $22 million to $25 million in charge-offs, like Barry said, I think our expectations next year are that we're not going to have $25 million in charge-offs again. Whether it's cut in half, that would not be unreasonable to expect. So maybe you could think, and probably the way we're going to start to look at it is trying to maybe see if we can get charge-offs to be in that $10 million to $15 million range for next year.

Okay, that's helpful. And I guess the other question was just any color on the current mortgage pipeline and the mix that you're seeing between refinancings and purchase activity.

The refinances to purchase activity, last quarter, I think -- we started tracking this because it's very interesting to us, too, to see what kind of impact when refis go away that it's going to have on our mortgage origination fee income.

In the second quarter, we had 48 -- let me make sure I've got the exact number for you here, Joe. I just looked at that this morning, and in the second quarter we had 42% purchases and 58% refis. That was in the second quarter.

This quarter, we had 46% purchases and 54% refis. So, obviously, the trend is going in the right direction.

And a lot of it would have to do, of course, now -- I mean, we would hope that purchases are a little bit more solid, and what's taking place out there would not have a negative impact on the purchase volume, unless rates really spiked up. You can't say as much about the refinance volume. I mean, our hope, as I said in my comments, is that we would not be disappointed at all to see refinance really slow down (multiple speakers).

That was the latest quarter mix was 46% purchases, 54% refis.

That's very interesting. Okay, thanks so much.

Jeff Rulis, D.A. Davidson.

Good morning. This is [Simoneis] filling in for Jeff. I just wanted to ask about the OREO expense. Was the third quarter an outlier, or how lumpy is that expense going forward going to be?

Well, the write-down -- well, the total OREO expense is a little lumpy. You're absolutely right.

And that was probably a little bit higher. I would not take that number as a trend-line number going forward. The quarter before, we had just a little over $2 million in OREO expense. This quarter, we were up above $6 million in OREO expense.

I would probably suspect -- and it's probably more the timing. The third quarter, as I mentioned in my remarks, is a time where we oftentimes -- it's just the way it's happened over the last three or four years. We do tend to have more appraisals and that come in. We value and try to establish the marks in that at this time of year. I wouldn't expect that the fourth quarter is going to see the same level of OREO expense.

But it is lumpy, so it's a little bit more difficult to say this is a downward or upward trend line that is going to be pretty consistent. It's got a lot of volatility built into it. I would just say this quarter's number was probably a little bit higher than what you could expect in the fourth quarter and probably over the next couple of quarters.

All right, thanks. And on the reserves, is there any chance that you might be charging down reserves more aggressively in the upcoming quarters, because they seem kind of elevated?

Well, we're going to have to think about that.

I mean, there's some pressures. I think the regulatory community likes the fact that banks are keeping their reserves higher. Arguably, I think we know our reserve sits as one of the highest out there. We track the number; we know where we're at compared to where the rest of the industry is and we understand that we've built a large reserve. But I think we're just going to have to analyze it each quarter and determine what's the appropriate number.

I certainly would not expect any type of significant reserve release, though. I wouldn't bake that in.

I think we feel the reserve is going to definitely cover future loan growth for quite a period of time, and of course, as I said, we may see some where it's been our strategy and our philosophy to make sure that we covered charge-offs, at least covered charge-offs for the last three or four years. We may not continue to do that dollar for dollar, but I would look at any type of negative provision, at least unless something changes dramatically. Barry, do you have any other thoughts on that?

No. From an absolute dollar standpoint, our reserve has gone down, but it's the denominator side that keeps on pushing that percentage up. So we think that loan losses next year are going to be a little less. And as Mick stated, I don't think we'll cover losses at 1 to 1, so on an absolute dollars, it will continue to decline.

And of course, the provision, accordingly -- that will also decline. So far we've provisioned a little over $19 million. We've almost covered again.

I know, if many of you on the phone heard me talk early in the year, I think I was stating that we may not be doing that. Well, here we are three quarters through the year and we've kind of done that again.

But I'm not so sure that in 2013, especially with the credit trends -- if they continue to demonstrate the same kind of quarterly improvement, we may back off a little bit from covering all of our charge-offs. But then, we also expect charge-offs to be less next quarter -- I mean, next year. So that in and of itself would probably lower the amount of the provision.

Okay, yes, that's helpful. Lastly, on the tax rate, in the past two quarters you were sub-20%. What are you expecting in the fourth quarter or going forward in the tax rate?

Well, I think we've been stating over the last couple of quarters that -- and I think, Ron, 22% is what we've been guiding to. We don't guide much, but I guess we have been telling everyone that 22% is probably good number to use.

Joseph Gladue, B. Riley.

Mick, last year at this time, I guess, you were a little bit hopeful going into the winter months in regards to disposal of OREO properties, more so than usual for the winter months. Just wondering if you could give us your outlook for those disposals fourth quarter or first quarter, going forward.

I'm probably just as -- you know, I probably am just as positive as we enter this fourth quarter as I was a year ago, Joe.

You never know -- as you've heard me say many times, you never know until the deals get completed and that's something Barry always talks about, too. We've seen a lot of transactions in the past blow up in the 11th hour. But we're seeing far, far less of that than we were two or three years ago.

The deals that we've got right now -- maybe it's a function that a lot of these credits and a lot of these properties and a lot of these assets have been written down over the last three or four years to levels that make them attractive. Maybe it's just the interest rate environment. Maybe it's the fact that they feel that real estate especially is going to start to gather some traction here.

Whatever the reason, Joe, we're starting to see more and more deals that there was an interest, we've been working on them, and they are getting done. And we've got a fair number, as I said in my comments, of transactions and deals right now that are scheduled to or very well could close in the fourth quarter. And again, unless they all blow up, and that has not been the case here recently, I think we're going to have some good disposition in the fourth quarter.

Now, it's too early to project into the first quarter. It's hard enough to project a quarter at a time. And maybe the first quarter of the year, just like last year's first quarter, where actually we -- I think our NPAs actually grew ever so slightly in the first quarter from where they ended the fourth quarter of last year.

I don't know; maybe that would be the case again this year. I kind of doubt it, but we do have a lot of things in the hopper right now. And if some of those -- not necessarily -- we wouldn't really need all of them, but if some of those, which I'm sure they will, come together, we could have another nice quarter of dispositions. Barry, have you got any additional color?

Yes, we have three large projects that have buy/sells on them. And as Mick said, the buyers are real. We've dealt with them. We understand them, and so we're feeling fairly confident that we will have a pretty good quarter as far as the sale of OREO.

In a few cases, Joe, we've got hard earnest money on these things. It's probably highly unlikely that those buyers are going to walk away from that earnest money. So I think we feel pretty confident that we're going to see some further dispositions and reductions. So --

The other thing is we just don't have anything coming in, either, that is on the drawing board. So that has been the struggle, two steps forward, one step back. But this quarter, I just don't see anything big coming into the OREO portfolio.

And that's a great point that Barry makes. At this point in the cycle, it's just as important that the in-migration is very, very small because it really does -- then everything we do sell tends to lower the number.

All right. Well, that leads perfectly into my next question, which was I wonder if you could tell us what the trends are in inflows to either nonaccruals or classified loans, relative to the second quarter.

Boy, both those trends are going downward and they're going the right direction.

I mean, this was not the lowest that we've had in the last couple of years, but there was only one other quarter where we had early-stage delinquencies that were below this range. And actually, there was -- like usually happens, but this time there was one fairly large credit that just didn't get renewed and came over September 30. That thing has been renewed. I think that was $2.6 million.

So the number could have been even a little bit better if we would have gotten that one credit completed. We were just waiting on some things, and it just couldn't happen. But it's been done now. So the number could have been a little better. That's a number we track a lot.

However, we are heading into the winter months. And we do recognize that in a number of our markets, Joe, we have seasonal employment. When you've got the two large national parks and you've got a big huge tourist industry, there are some layoffs. And historically, that third quarter has been one of the best quarters for early-stage delinquencies.

We would expect that maybe in the fourth quarter, but primarily in the first quarter, that we could see a tick up, as I said in my remarks, in those 30- to 89-day delinquencies, but, again, ticking up to a much lower level than what we saw in the past.

And I'll ask just one more. I just wondered if you could give us your outlook and what you're seeing in regards to M&A opportunities.

All I'm going to say there is the activity has been -- has picked up quite a bit.

Any comment on seller expectations? Are they getting more realistic?

You know, I believe so. Clearly, I think that's going to be the key.

We are in a new -- I think we're in a new day and age, and I think that's going to be the key as to just how many deals do get done is it's going to really fall back on sellers' expectations.

And it appears that, from some of the deals that I've seen around this part of the country -- of course, every deal is different. But I think that it's starting to settle in. And I think a lot of this has to do, though, with not just sellers' pricing expectations, but I think sellers are looking at the tea leaves and saying, wow, if I have to put up with three or four more years of this interest rate environment, if I have to put up with 400 new rules coming out of Dodd-Frank, if those are the environment that I've got to work with, and if I've got -- and on top of that, if there is some fee income that I've traditionally had that's going away, maybe there's a lot of other reasons as to why we need to align ourselves or look for a strategic partner.

So, a lot of different reasons for individuals. The age, sometimes, of Boards and management teams clearly plays a part in that. So we'll just see. But bottom line is I think the activity level has picked up.

Jennifer Demba, SunTrust.

Hi, Mick. I think my questions have actually been asked. Thank you.

Brian Zabora, Stifel Nicolaus.

I've got a question on OREO again. Last year in the fourth quarter, you saw an uptick. It was partially due to the timing of exam cycles and you were getting updated appraisals for those exam cycles. Has that timing changed with the collapsing of charters? And did you do more updated appraisals in the third quarter as compared to last year?

Exactly, that's exactly what we did. The timing is different now with just the one exam.

So we've had all of our external credit reviews. We've had numerous appraisals of that all done in advance of an exam that now, with just the one, is going to be a little bit earlier than what we would have experienced last year when we were still having 11 of them.

I think you hit the nail right on the head. That's exactly what pushed some of these into the third quarter. Any other color (multiple speakers)

No, with the single charter, the examination is scheduled in the fourth quarter. So in preparation of that, we did update all of our values, both on OREO and impaired loans.

And also, I think we got a little -- somewhat aggressive on OREO write-downs in anticipation of that to reduce classified assets. So it's a good point.

And then, I think you mentioned in construction lending, you're seeing some demand. Which markets do you see maybe better demand in your footprint? And can you size the opportunity?

Yes, it's -- we're seeing, definitely, some construction opportunities.

I just read last night -- I wished I had -- I should have bought it in here today. But I read one economic report last night that talked about housing and how, based on the current workforce in the country versus the level of housing that we've worked ourselves down to, it wouldn't take -- it's not a major stretch to expect that housing starts and housing construction over the next couple of years is going to heat up.

I think that -- you know, I was talking with Barry, and Barry is the one that kind of gave me the fact that -- because he's talking to all of our banks all the time -- that he's starting to see more and more construction projects out there.

I don't know if I would say that, well, it's Boise now. Boise is going gangbusters, or it's western Montana. I think it's just a little bit better in a lot of our markets, probably is the way I would describe it. I can't think of one market that has just really accelerated. Are you seeing anything like that? I don't believe so.

It's pretty much across the board as far as product line. We are seeing some healthcare, some assisted living centers, some hotels, motels. And then, we're seeing some 1 to 4 and we're seeing some commercial, warehouses, transportation facilities, a few things like that. And so, there's not any one area that's really standing out.

But across the board, we are -- we have some commitments out there to fund some construction loans. Those will start drawing down this coming year. Most of these projects are anywhere from 120 to 180 days in funding times. So I anticipate our construction loan totals this coming quarter and early next year will continue to grow.

Great. Then my last question, on FHLB borrowings, if you continue to see the strong deposit growth, do you plan to take some of that down? Or do you want to keep some type of a level of a little bit longer-term funding?

Ron, do you want to answer that?

Yes, we have drawn it down to just -- in the press release, that will demonstrate that. So as Mick alluded to, those deposits still come in. The banks continue to make those efforts.

So the mix of that is largely driven by, certainly, cost. Mick again said that there wouldn't be too much more reduction. And so, we opportunistically look for opportunities to extend. And over the past several quarters, certainly last year, we'd talked about extending with borrowings at the Federal Home Loan Bank in relation to the -- some of the munis that we've put on that were longer dated. And that was just to manage interest rate risk.

So it's not that we have any definite one goal. It depends on what the opportunities are and our desire to manage our interest rate risk.

Daniel Cardenas, Raymond James.

Most of my questions have been asked. Just a couple of quick ones, I know it's early, Mick, but can you maybe give us a quick update on the charter consolidation and if you're beginning to see the benefits you hoped you would see from it?

You bet. Yes, every day we stumble or we explore or we discover something that we could do just a little bit differently.

I think if you talk to the banks, I think that the time that they are committing now to growing their franchises and growing their banks is increased exponentially. I think it doesn't show up, necessarily, so much in the loan growth, but I think there's other factors, Dan, at work there. I mean, we've had a lot of looks at a lot of things, and ultimately either got outbid or decided that's just not what we're going to do, we're not going to go there to get that deal at that kind of pricing or those kinds of terms.

On the deposit side, we are -- those banks are doing an incredible job. I think it has also allowed them, as I said in my remarks, to focus on their operating expenses, doing things that with 11 separate charters they have not been able to spend the same amount of time focusing on the business, focusing on their earnings. Instead, having to focus too much on regulatory compliance issues, accounting compliance issues. Those are things now that we're doing more centrally.

I think we're much more efficient and proficient at doing that than we used to be. Clearly, there are some expenses that we're seeing. I'm noticing that a number of the banks' FTE accounts are moving in the right direction. I also really believe that as we get a little bit further into this, there will be some additional hard dollar savings from some of our consultants, some of our business partners. And we're working on those right now, and we would expect that we're going to see some more of that.

I've always said that the reason we did the charter reorg was not that we had X amount of dollars that we knew we were going to save. There were, believe me, dollars, and we have already saved dollars. And I think some of that is reflected in already, if you look at some of our -- excluding OREO, if you look at some of our operating expenses and especially our non-interest expense lines, we're definitely doing better there.

And I also think it's helped the banks focus more on noninterest income. Here again, we had a really nice quarter for miscellaneous account income or checking/deposit type income.

So we expect, Dan, that that's only going to continue as we get a little bit further away from May 1. It was absolutely the right thing for us to do. I don't believe -- here we sit, almost five, six months since the change. And if you asked any of our 11 bank presidents, I would beat you're going to get the same answer all the time, that the customers didn't even know anything really took place.

But from a back-office perspective, from a burden perspective, we released a lot of -- we really did, we released a lot of burdensome type of costs when we made the change. And it was definitely the right thing to do.

Great, thanks for the color. And then, just quickly, you had indicated earlier activity is picking up on the M&A side. Perhaps it's a bit early for this as well, but when you're talking to potential acquirers, when you're looking at considerations, is it still mostly for -- are they looking for stock, or is cash king right now?

It appears to be all over the place. I just can't pin one trend down there, Dan, or I'd be probably lying to you.

Just in very general terms, I think that in discussions that I've had throughout this year, our stock is something that is highly valued and highly sought after. And maybe part of that is because of the consistency over, like I said, 110 quarters with the dividend; the fact that the dividend, especially in this interest rate environment, is extremely attractive. Maybe it's just the consistency of the Company through these hard times and that. But it appears as though, for us, that the leaning -- I would say, of all the discussions I've had, the leaning tends to be more on the stock side.

I think there's also one other -- I think there's one other thing there, Dan. And that is that I think people recognize that with the liquidity built into the stock, that even for those individuals that want a tax-free exchange initially, but then, I think the back of their minds they always recognize, hey, if I've got to get cash, I can get cash. This is very, very liquid stock.

Fred Cannon, KBW.

Most of my questions have been answered. But I did have one on the securities portfolio. You gave great detail on the prepayment acceleration and the effect on the margin. On the securities portfolio, though, I note in your press release that you have about a 96 basis-point yield on the $2.6 billion of taxable securities you currently have. Given what you're discussing, I wouldn't think necessarily that what you're reinvesting that in would be much above 100 basis points at this point in time. Is that fair, given that you don't want to take duration risk?

Yes, yes, Fred, that's absolutely the case. Where we are at with the lack -- our focus on not taking the duration risk, you are right there, right on 1%.

Fred Cannon. That's great. Tough interest rate environment (multiple speakers)

Absolutely.

Brad Milsaps, Sandler O'Neill.

Just a quick follow-up on expenses. You guys always do such a great job of keeping a very tight lid on operating costs. But just looking at the personnel line item, it looks like you're going to be up maybe $10 million year over year. And I know a lot of that is driven by the mortgage banking. I was just curious if you could break that down as you see refi volumes decline. What would be your outlook on the personnel side of things?

I don't have the exact specifics. I can certainly get those to you at a later time.

A majority of the increase, as I said in my comments, was related to the commissions paid. If refinance volume -- it's really hard to determine because in a perfect world, and maybe this would never happen, but in a situation or in an environment, Brad, where we gained a lot of purchase volume going forward, for whatever reason, even though we dropped some refinance volume, that would not necessarily slow down that commission expense. Where if we -- if refis do come to an end, and as a result not only did refinance come to an end, but purchase volume is following right along with it, then I think you would see a pretty significant drop in compensation expense.

But in addition to the mortgage origination commissions, although the bulk or a majority of it, that was not the only thing that lead to higher compensation. Of course, every year you have some level of merit raise. I mean, merit raises. Like most other banks, we have done the same thing the last couple of years.

And 2012 over 2011 probably saw some additional increase that maybe would not be resident in 2013 because we had a couple of our banks and their Boards -- a couple years ago, when things were not going well, they made some tough decisions and they did some things with their commissions. And they brought those -- not the commissions, but -- I'm sorry, not their compensation. But they ended up bringing some of those back in in 2012, which led to a little bit of a spike over 2011's numbers.

We're not going to see that same thing next year. But in addition to the mortgage, as I said last quarter we did do some additional -- we brought a consultant in last year to make sure that some of our benefit plans were appropriate and that we were paying appropriately. Because I think that we've always watched that line item very, very carefully, but you still absolutely have to stay competitive out there.

So we did some things, benefit-wise, that I think also had some, definitely had some, impact to the 2012 numbers.

If we can generate certain performance metrics -- because this is all tied to specific, objective performance measures -- if we hit those measures, we've been accruing at a certain level to make sure that those are covered. If we don't hit those levels, then obviously we will have to back off some of the accruals by year-end.

So it's kind of tough and it's a little dicey, Brad, to say specifically what's going to happen next year with compensation. But I do believe that the mortgage origination piece is the key, and what way that goes will determine a lot as to what our compensation either decreases or increases in 2013.

Thank you. And at this time, I'm not showing any further questions in the queue.

Okay. Well, very good. Thanks, everyone, both for your attendance this morning and those individuals with your follow-up questions. If you have any other questions that come to mind, by all means give me a call.

But with that, we'll close down the call. And I'd like to wish each and every one of you a great weekend, and thanks for joining us this morning. Bye now.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.