Glacier Bancorp Inc (GBCI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp investor call. (Operator Instructions). As a reminder, this conference is being recorded.

I would like now to introduce the host for today's conference, Mr. Mick Blodnick, President and CEO. Sir, you may begin.

Welcome and thank you for joining us today. With me this morning is Ron Copher, our Chief Financial Officer; Barry Johnston, our Chief Credit Administrator; and Angela Dose, our Principal Accounting Officer.

Yesterday afternoon we reported earnings for the second quarter of 2014. Earnings for the quarter were a record $28.7 million. That compares to $26.7 million in the prior quarter and $22.7 million in last year's quarter. That is an increase of 26%.

Diluted earnings per share for the quarter were $0.38. Again, compared to $0.36 last quarter and $0.31 in the prior year's quarter, a 23% increase.

During the quarter, there were $834,000 in one-time pretax, nonrecurring acquisition expenses. In addition, there was a small loss on the sale of investments of $48,000. Aside from that, it once again was a straightforward quarter with no other extraordinary items recorded.

We earned an ROA for the quarter of 1.47% and a return on tangible equity of 13.47%. Both ratios represent the best performance for us since June of 2008, and were similar to the types of returns we historically delivered.

It was a very good quarter where most trendlines moved in a positive direction. We had good loan growth in the quarter, and the outlook for the second half of the year remains favorable as we are carrying a fair amount of momentum into the third quarter.

We continue to see exceptionally strong deposit growth, especially in non-interest-bearing deposits. Topline revenue increased 4% on a linked quarter basis, and was up 15% compared to the prior year quarter. Credit quality continued to trend in the right direction as delinquencies, nonperforming assets, and net charge-offs all decreased from the previous quarter. And, for the 37th time, we once again raised our cash dividend to our shareholders.

For us, the highlight of the quarter came on May 8, when we announced the acquisition of FNBR Holding Corporation and its wholly-owned subsidiary, First National Bank of the Rockies, with assets of $345 million, headquartered in Grand Junction, Colorado. We have secured all regulatory approvals and look forward to closing the transaction on August 31. Upon closing, First National Bank of the Rockies will be merged into Glacier Bank and will become part of our Bank of the San Juans bank division.

We are excited to expand our present presence on the west slope of Colorado with a bank and a management team that, over the years, has built a well-respected franchise that will provide a terrific base of customers and further diversification for us. We believe there is tremendous potential in these markets, and we are eager to begin to offer an expanded list of products and services that should enhance the overall growth and performance of our Company.

As I stated previously, one of the pleasant surprises of the second quarter was the level of loan growth our banks were able to produce. Our goal for the year was to hopefully increase the size of our loan portfolio by 5%. After this quarter's performance, we are optimistic that we will achieve, if not surpass, that target.

Loans grew by $115 million or 12% annualized as every major loan category we track grew during the quarter. Not only did all loan categories increase, but these gains were well distributed and balanced among all loan types, which was especially encouraging. We even saw an 8% increase during the quarter in residential construction lending, a segment of our loan portfolio that we have struggled to grow. Hopefully, we can gain additional traction in residential construction loans through the rest of the summer and fall months.

The growth in loans again allowed us to slow down our security purchases during the quarter. Our investment portfolio declined by $108 million during the quarter, and now has decreased $678 million or 18% over the past 12 months. For the past year, we have methodically reduced the overall size of our investment portfolio by converting securities to higher-yielding loans. Provided we can sustain the growth in our loan portfolio, we would expect to continue to further reduce the size of our investment portfolio going forward.

Non-interest-bearing deposits increased at a 20% annual rate in the quarter, and excluding wholesale deposits, now represent 26% of retail deposits. We continue to have excellent growth in the number of new checking account relationships as well.

Historically, the second and third quarters of the year are our best quarters for generating checking account relationships. This past quarter was no exception, as accounts grew at a rate exceeding 5% annualized. This is a nice increase to our customer base, which expands our opportunity to cross-sell more of our products and services to a larger group of individuals and businesses.

Excluding wholesale deposits, interest-bearing deposits increased less than 1% on an annualized basis during the quarter. NOW accounts, which themselves are a very low-cost deposit source, contributed to much of the increase this quarter in interest-bearing deposits. Most of our staff time and marketing resources are focused primarily towards generating both non-interest-bearing and interest-bearing checking accounts. This past quarter, the banks have definitely produced some excellent results in both of these deposit categories.

We continue to maintain a significant amount of capital and have worked hard this year to find effective ways of deploying it. The acquisition of First National Bank of the Rockies is another example of how we intend to leverage this capital in the future.

In addition, on June 25, we announced an increase of 6% in our cash dividend to $0.17 a share. This was the second increase to our dividend in the past six months, and the 117th consecutive dividend paid since our initial public offering in 1984.

Our goal is to continue to prudently manage our capital levels, being mindful of our growth potential, the quality of our assets, our ability to support our dividend, and any and all regulatory standards and considerations. However, it has also been our conservative philosophy to carry a higher capital level than what is required. Strategically, this has served us well through all different business and economic cycles of the past, and I do not expect us to change our approach to capital management in the future.

Credit quality trends continued to improve this past quarter as nonperforming assets, delinquencies, and net charge-offs all again moved in the right direction. NPAs decreased by $4 million or 4% to $102 million. This figure includes $4.2 million in government guaranteed loans.

NPAs are now down to 1.3% of assets. Although we saw a further reduction in NPAs during the quarter, we will have to accelerate the pace of dispositions if we hope to hit our goal of reducing NPAs below $90 million by year-end. In order for this to occur, we will have to not only move a couple of our larger OREO or other nonperforming properties, but not add any new NPAs to the list.

Early stage delinquencies, those 30 to 89 days past due, ended the quarter at $18.6 million. That was a 57% reduction from the prior quarter, and down 16% from the same quarter last year. Our first quarter early stage delinquencies were elevated and it was nice to see the progress made in getting that dollar amount down this quarter to the lowest level for us this credit cycle.

Net charged off loans were another bright spot this quarter, totaling only $332,000. Through June, total charge-offs this year were $3.3 million with recoveries of $2.2 million, leaving net charge-offs at $1.1 million for the first six months. As a percentage of loans, net charge-offs for the first half of 2014 are tracking at a 6 basis point annualized rate, far below both our goal for the year of 25 basis points, and last year when our net charge-offs totaled 18 basis points. If net charge-offs continue at this run rate in the second half, they would approach some of the best levels we have ever experienced.

OREO expense for the second consecutive quarter was well contained at $566,000. Offsetting this expense was a $581,000 gain on the sale of OREO. In this same quarter last year, OREO expense totaled $3 million and we recorded a $715,000 gain. The last two quarters we have gains in the sale of OREO that exceeded our expense. That was not the case in last year's second quarter.

We expect this expense to fluctuate each quarter, depending on the volume of sales, but hope the gains generated continue to offset the cost of holding and maintaining these properties. OREO expense through the first half of the year of $1.1 million is 72% below where we were at the same time last year, and also below our internal projections.

In addition, so far this year, gains on the sale of OREO have totaled $1.3 million, again exceeding our expense.

Our allowance for loan and lease loss ended the quarter at 3.11%, a reduction from the prior quarter's 3.2%. The ALLL will see a further reduction next quarter as we bring on First National Bank of the Rockies loan portfolio without an accompanying loan-loss reserve.

In the most recent quarter, we provisioned $239,000, slightly less than our net charge-offs this quarter. This compares to a loan-loss provision of $1.1 million for both last quarter and the prior year quarter. Year to date, we have provisioned $1.4 million versus net charge-offs of $1.1 million. If credit quality trends continue to improve, we should see loan loss provisions remain at these lower levels through the rest of 2014.

For the first time in six quarters, we did see a slight dip in our net interest margin. It was one of the few trends this quarter that didn't move in our favor. For the quarter, our net interest margin decreased 3 basis points to 3.99% from 4.02% the prior quarter.

Most of the positive impact from lower premium amortization has worked its way through our interest income. Although, again this quarter we did see a decrease of $600,000 to a total of $7 million in premium amortization, we expect this figure will now level out in this range moving forward. Nevertheless, we have benefited significantly the last year and a half from the reduction in premium amortization and our net interest margin has increased substantially over that same period.

As I stated last quarter, we would be happy to maintain our net interest margin at or near 4%, especially considering the current rate environment and where our margin was not long ago. In order for the margin to improve further from here, we would have to continue to see a noticeable shift in earning assets out of securities and into loans.

The decrease to the net interest margin was primarily driven by a lower purchase accounting adjustment that last quarter benefited our margin by 7 basis points, and this quarter the benefit was only 2 basis points. This 5 basis point swing reduced our interest income by $880,000 compared to the previous quarter and was the main reason the margin contracted.

The yields on our loan portfolio ended the quarter at 4.86%. Excluding the impact of purchase accounting, the yield on our loan portfolio decreased by 2 basis points during the quarter. However, the lower loan yield was offset by a change in the mix of our assets, a 7 basis point increase in the yield on our investment portfolio, and a small 1 basis point decline in funding costs during the quarter.

Excluding the effect of the purchase accounting adjustment, our core net interest margin this quarter was 3.97%, up from 3.95% last quarter. At quarter end, our cost on total paying liabilities was 39 basis points compared to 40 basis points the prior quarter.

Another positive this quarter was the yield on new commercial loan production exceeded the yield on the legacy portfolio. So, hopefully, we are at an inflection point regarding the yield on loans and will begin to see more stabilization as we move forward. Nonetheless, the competitive pressures continue to take its toll on loan pricing and I don't expect that to change much in the foreseeable future.

Again, offsetting some of the decrease in loan yield was a slight improvement in funding costs attributable to a larger balance of non-interest-bearing deposits along with rate reductions in NOW accounts and certificates of deposit. All of our banks continue to do a great job generating low-cost deposits and controlling their deposit costs. Our cost of deposits ended the quarter at 22 basis points, down from 23 basis points last quarter.

Net interest income for the quarter totaled $67.4 million, basically unchanged from the prior quarter and an increase of $12.5 million from last year's second quarter, or 23%. Compared to last year's second quarter, interest income increased by 19% while interest expense decreased by 9%. The combination of loan growth, better investment yields, and lower funding costs all contributed to the vast improvement in net interest income over the same quarter last year.

In the current quarter, interest income decreased by $124,000, primarily due to a $422,000 decline in investment income as we reduced the size of the securities portfolio. Although the increase in interest income on loans didn't quite make up for the revenue loss on securities this quarter, going forward it is our hope and expectation, if we continue to grow loans and maintain the momentum established this quarter on the loan front, it will give us the flexibility to further reduce investment securities and continue to manage the overall size of our balance sheet without conceding further reductions in interest income.

Noninterest income increased by $3.1 million or 16% on a linked quarter basis to $22.5 million, but was down $718,000 from the same quarter last year, which was a decrease of 3%. Service charge fee income increased by $1.5 million or 11% during the quarter, and fees on sold loans bounced back and registered an increase of $1.2 million or 33% versus the prior quarter.

Our service charge fee income was up $1.8 million from the same quarter last year. However, that did not cover the decrease we saw in fee income on sold loans, which was down $2.7 million from the year ago period.

Although we were encouraged by the increased mortgage production we originated this quarter, we were still below last year's level. As more of this production comes in the form of purchases, it is nearly impossible to replace the loss of refinance volume.

In the current quarter, 75% of mortgage originations were in the form of purchases. That compares to 66% last quarter and 55% in the second quarter of last year. We are doing a good job of capturing more purchase transactions and we saw a nice lift in the amount of mortgages closed this quarter compared to the preceding one. But, as is the case with most banks, we were still down from what was produced in last year's quarter.

Our noninterest expense for the quarter increased by $2.6 million from the prior quarter. As previously stated, $834,000 was the result of a onetime computer conversion expense. In addition, we had $1.7 million increase in other expense, primarily due to the timing of expenses tied to our new market tax credits. A portion of these expenses are offset with the actual tax credits.

Noninterest expense increased by $4.2 million compared to the same quarter last year or 9%. Compensation and benefit expense made up $4.1 million of that $4.2 million increase, as we added the staff of North Cascades Bank along with normal annual salary adjustments. We also experienced higher expense in occupancy and computer expense, with some of this increase offset by a $2.4 million reduction in OREO expense.

In summary, it was a very good quarter and a strong first half of the year. We have been able to increase our earnings significantly over the past year, while actually decreasing our overall asset base. Hopefully, we can continue this transformation of replacing low-yielding securities with higher-yielding loans, both organically and through future acquisitions.

It was great to see the volume of loan production generated in the quarter and the pipeline looks good as we begin the third quarter. If we can maintain this lending momentum, it will give us the ability to further restructure our balance sheet.

We look forward to adding First National Bank of the Rockies to our Company, and the opportunity the bank extends to us in Colorado.

So, in closing, it was a record quarter that hopefully we can build on throughout the rest of 2014. And that concludes my formal remarks, and we will now turn it over for questions.

(Operator Instructions) Brad Milsaps, Sandler O'Neill.

Mick, I appreciate all the color. Just wanted to talk about the balance sheet for a moment. You guys have done a great job reducing investments.

If loan growth stays at this pace, at least in the AFS book, would you continue to see that part of the investment portfolio continue to come down at a similar pace? Just kind of curious where you view a floor for that piece of the investment portfolio, because I assume you want to protect the tax exempt portion.

Right. Yes. I think that clearly the amortization that we see is primarily coming off the MBS and the CMO portfolio more so than the municipal portfolio, which, from time to time, we will get calls on some of those securities. But, no, I think you're absolutely right, Brad, that most of the reduction would come from a continued decrease in CMOs and mortgage-backeds which, I think, currently, we are running at about $120 million a quarter pace. So that is probably a good ballpark figure to consider.

And, like you said, if loan growth stays robust through the rest of the year, hopefully we will continue with this transformation that we started last year. We are well into the second year of this transformation, as you saw by the over $600 million reduction in securities so far, just in the last 12 months.

Got it. And you guys can also continue to reduce wholesale funding, particularly the Federal Home Loan Bank advances. Can you talk a little bit more? I mean, obviously, it will be dependent upon deposit growth, but the rate ticked up a bit, I assume, because the mix within that Federal Home Loan Bank advance book was -- the mix was just a little different; higher costs were left over, some lower cost went off.

Exactly. I mean, some of the fixed long-term borrowings are still left on the books where we have, as you can only imagine, Brad -- I mean, you hit the nail on the head. I mean, we are decreasing significantly and have over the last year, our overall borrowings.

But the borrowings that have gone away are those short-term borrowings, that we have the flexibility to continually pay off every day. And what is left in the entire mix of -- you know, it is a smaller pie of borrowings, but the piece that is fixed and longer-term becomes a bigger and bigger piece of that overall borrowing total dollar amount.

So yes, you are absolutely right. That is why the cost -- it appears that the cost of those borrowings are going up. It is more a change in the mix of the borrowings, and the benefit that we have basically seen by really being able to reduce those borrowings and, as I said earlier, replace them with non-interest-bearing core deposits.

Great. And then, just one final question on expenses. I presume that the expense on the new markets tax credit will reverse out next quarter and the tax rate would go back up. Any other -- otherwise, do you feel like that is a pretty good run rate for you guys, excluding any -- the Colorado deal?

Yes. Yes. I mean, you're absolutely right. The new market tax credit and low income housing tax credits, it fluctuates pretty significantly. Second quarter just happens to be the biggest quarter each year, but then, like you said, the credits offset much of that. Both of those will adjust downward in the third and fourth quarter.

Okay. But, otherwise, that is a pretty good expense run rate for the back half of the year?

That is correct.

Okay. Thank you, Mick.

Jeff Rulis, D.A. Davidson.

A competitor sort of alluded to their pickup in Q2 loan growth was due in part to held-up production in Q1 beyond normal seasonal factors. It was outsized. Any indication that occurred with your book?

No. I mean, we had -- but it is almost every year. I mean, we are going to have a very slow first quarter. I have been saying this for -- I can't tell you how many years now that we have to make hay when the sun shines, and that has to happen in the second and third quarters of every year.

Where our first quarter, I don't think that we saw anything, Jeff, that was out of the ordinary for the first quarter, in fact we actually were pretty happy with the loan volume we produced in the first quarter. Remember, we had about a $26 million increase in loans. And, for us, we thought that was pretty darn good because there are so many times in the first quarter we don't -- we just don't see any increase.

So no, I would not say that what we produced in the second quarter was pent-up demand coming out of the first quarter. I just think that, as I said earlier, Jeff, you look at the major categories in loans, we grew every one of them, including consumer loans. First time we have done that in a long time. HELOCs, you know, came back up like Barry just said.

And it was nice to see growth in residential construction loans again. We hope -- certainly hope that continues because we think that is a good line of business. And we think that we actually drop that overall dollar amount in resi construction, that dropped down further than we would have liked to have seen it.

So that gives us hopefully some opportunities to move and continue to move that piece of the portfolio forward in the next two quarters.

Barry, any comments on commercial -- I know we have had good C&I; good commercial real estate. But nothing that was out. And there was no any one category, Jeff, that just was a major part of the growth. I mean, it truly was all of the categories contributing and just nice growth whether it is C&I, CRE, consumer, HELOCs, ag, resi construction, commercial construction. They all had good growth.

Yes. And that is difficult for the second and third quarters, where you usually see it, especially in C&I and agriculture where they are drawing down on a lot of construction lines that are somewhat seasonal in nature.

And, Jeff, we never know what actually closes and what comes to fruition, but as I said, we are carrying some nice momentum into the third quarter. So hopefully, it would certainly be nice to have a repeat in the third quarter because there is no doubt in the fourth quarter we will see reductions. I mean, ag lines will start to get paid down and things will slow down in the fourth quarter.

So this next quarter it is going to be important for us to maintain this momentum. And, from everything Barry tells me, it seems like that momentum is staying pretty strong.

Right. That was sort of my follow-up is that it sounds pretty positive and yet you still kind of hang onto that 5% loan growth goal. And the idea is that you are running ahead of that pace, but Q4 could stall out and you still feel comfortable that mid-single digit is the right guidance or goal.

I do. I feel way more confident now that we can achieve 5%. I am not going to go out and say that it's going to be a lot higher than that, because you are absolutely right; we still have to deal with the fourth quarter and that will be a reduction.

But, if what we are seeing right now would actually close and if we could get a lot of this production or at least looks that we are getting, if those turn into closed loans, I feel real good about our 5% for the year. And, again, if we have another quarter like we did this year -- I mean like we did just this quarter, that could be north of 5%.

Great. Maybe just one other one on the M&A front. I think as we entered the year, you talked about maybe the goal was to try to get a couple transactions done with one in the bag. I guess your optimism on maybe finding something else by year-end and those discussions.

There is a lot of very, very interesting things that are looking at -- whether or not we would get another deal done, I don't know, Jeff. Certainly, we would like to, but we are certainly getting a look at a lot of things. Some of them are very intriguing and interesting to us; others, not so much. So we will keep our fingers crossed and hope that we can still see another deal. But, I just can't guarantee that.

Fair enough. Thanks, Mick.

Jennifer Demba, SunTrust.

This is Michael Young on for Jennifer. Mick, just wanted to ask you a quick question about your outlook for more stable premium amortization on the bond book. Is that more a function of your outlook for the forward yield curve or the size of the securities book coming down over time?

I think it is a little bit of both, Mike. I mean, I really think that part of it is that rates would have to really go down to really jack up that premium amortization to any degree. And, yet, at the same time, just the overall size of that portfolio, as we just said, is contracting. And as that contracts, there is just that much less premium to amortize. So Michael, it is really a function of both.

But I really do believe that we are kind of down there in a fairly tight range of what we expect to amortize each quarter going forward. And we had a $600,000 this reduction quarter. I am not sure we are going to see that again. I think it is going to be right probably close to that $7 million, kind of on a straight line basis going forward.

Okay. And, just one other question on the asset quality front. I know there are a couple of larger problem loans that have been outstanding for a while. Has there been any movement on those? Does that underpin some of the lower credit costs lately or do many of those still linger?

Come again, now?

There were a few kind of -- I was just curious about the largest outstanding asset quality issues, that some of those have been worked through in the first half of 2014. And that underpinned the lower credit cost on the whole, or if some of those were still coming through the pipeline.

Well, we are not seeing much new coming through the pipeline. Barry, do you want to --

No, just what it is, is at a certain dollar level, I think we are just going to have a core base of nonperforming assets. Given the size of our organization, it has grown significantly the last 5 to 6 years and we are a little over 1% now.

I would hope we could get that underneath 1% here shortly, but at some point we are just going to have a core base. And part of those are going to be some large ones. We have probably four or five what we'd consider on the large side.

In some cases, those are performing non-performers that, at this point, there is really just not a lot we can do with them until, contractually, we have an opportunity to make an action in either trying to move those or maybe restructure them.

So -- but, we have one or two that are on the horizon that might come into the mix, as any organization would. We're hoping that we can get those resolved successfully, where we don't have to place those on accrual. But at the end of the day, there is just not a whole lot of opportunities out there to significantly reduce nonperforming assets by any significant dollars. We just continue to chip away at the corners and try to minimize our loan losses.

And, Barry brought up some great points. I mean, the one thing that we still are committed to, of course, is to try to get NPAs down below $90 million. But, as you can see, it is coming in small chunks anymore. So whether we -- we are going to work very, very hard to do that.

And, as Barry said, we still have four or five larger projects, properties out there on nonaccrual or in OREO. And if one of those would resolve, then I think we would feel pretty good that we probably could get that number down below $90 million. But, if they don't, like I said in my remarks, we would have to step it up from what we have done the first half of the year if we wanted to get down below $90 million. But, I think we are going to get close to it.

Okay. Thanks.

Daniel Cardenas, Raymond James.

Just a quick question on the dividend. I mean, it has been increasing at a nice rate here. And your payout ratio looks to be around 44%, 45%. Is that kind of where you see the payout ratio maxing out at, or can that go a little bit higher?

I think it could go a little higher. We talk about that a lot at the Board. Historically, there has been times, especially during the downturn, where that was clearly higher than that.

I think historically, Dan, we have always been in that 35% to 50% range and we are always comfortable, especially with the level of capital that we have, with that kind of a payout. So we will continue to address it on a quarterly or six-month basis.

And we have been building capital in the Company. So we certainly are -- and the Board is certainly well aware of that, too, and we discuss that a lot. So could we go a little bit above that? Certainly.

And I don't think it would -- based on what we see and based on the structure of the balance sheet, and everything else that we take into consideration, Dan, when we are looking at increases to the dividend, that could certainly go higher.

Good. And then, I think you mentioned that historically you have always liked to operate with maybe a little bit more capital than is needed. With a TCE ratio around that 11.25%, I mean, where do you kind of draw the line in the sand? Where do you lose your comfort level and what does the TCE ratio have to hit before you start to feel a little squirmy?

I think, for us, I don't know; I mean, things could change, Dan, but somehow 9% seems like a level that we wouldn't want to see us going much below. It is just, philosophically, who we are and what we have always -- the way we have always approached capital and always wanted to make sure that we had plenty, and in most times, way more than enough.

And clearly, right now, we are sitting at a lot more capital, but we are trying to deploy it effectively, like I said, and trying to do the right things. I think that -- but, I don't see us going much below that 9%.

Okay great. Good quarter, guys. Thanks.

Jacque Chimera, KBW.

Mick, were you surprised by the quick turnaround of the reg approval that you had on the Bank of the Rockies?

Not surprised, but thankful, and we have got a very good relationship with our regulators. I think we keep them involved and aware of everything that we are looking to do. We don't want to surprise them on anything. And, as a result, I think that that has been one of the biggest benefits to getting all three of these transactions the last year and a half completed well in advance of our expectation dates.

And they have just been great to work with, number one, and I think that the banks that we have acquired have been good quality banks. Some of them have struggled a little bit in the past, but they have worked all the way through those challenges.

And, yes, I am ecstatic that we have gotten approval this quickly. But I think it comes with both us and our main regulator keeping absolute open lines of communications all the time as to what we are doing. And if there is something that I sense that they are not too crazy about, or they have got some issues, I am -- probably down the road, I will back off. I just -- life is too short.

But, it has been great. It has been a great working relationship and we have been blessed, Jacque, by having these deals approved very efficiently and on time.

Yes. I mean, the speed is very nice to see. Does it impact at all -- at least, my perception of a move up of the close date, does that impact the conversion that you had originally scheduled for the October, November time frame?

Yes. In fact, I can tell you that, just yesterday, I think that conversion did get moved up. And we will be, hopefully, before the end of the year now, converting them, which will allow us to complete not only North Cascades, but complete First National Bank of the Rockies before year-end, which is -- Jacque, it is something that we don't aspire to do.

I mean, we are always okay with extending these out and doing them very methodically. But an opportunity came up for us to push this one forward about six months, and we jumped on the chance. And sometimes it is just getting our main data provider or our main software provider to give us a date and an opening.

But, if we get both of these done and, of course, Marcia Johnson, who is our Chief Operating Officer, and she takes care of all of -- she is in charge of these conversions, she definitely felt this could get done and wanted to try to move on that sooner date. And so we chose and she chose yesterday to do that, and we are now scheduled for early December on First National Bank of the Rockies.

So that will be great, because whenever we can get those major conversions done that quickly, it makes life a lot easier for everyone else, too.

Okay. Great.

So that was news as of just yesterday.

My question was well-timed. I'm guessing that will move up some of the cost savings assumptions, then, maybe a quarter or two early?

Yes, because with them, with First National Bank of the Rockies, they own the software, they own their own data center and everything. There is no big penalties that we will be paying if we came off the system early or we took them off the system early. There is none of that. So it is just a terrific -- if there was one bank to do that.

Other times, it wouldn't be -- moving it up would not be that big of an advantage. It is always an advantage having everybody on the same system. But, sometimes some of these penalties are so egregious that you pay a penalty to move them up earlier, you are just paying a bigger penalty. That is not the case with First National Bank of the Rockies. So it really made sense for us to push that thing forward.

Okay, great. That's really nice to hear. Thanks for all the color, Mick. I appreciate it. Really nice quarter.

(Operator Instructions) Joe Morford, RBC Capital Markets.

I was encouraged with the deposit growth. It really seems to have accelerated recently and I was just curious if you could talk a little bit more about what is driving that, and then also whether this $13.5 million service charge income number is sustainable going forward.

First question, regarding the deposit growth, now, Joe, some of that is definitely seasonal. I mean, we definitely get a pop in the second and third quarters when it comes to deposit growth, especially on the noninterest income -- checking account, NOW account, MMDA growth, as tourism is going full bore. You have got the cherry crop coming in. I mean, there is just a lot of things going on throughout Montana.

But, definitely, Colorado, Idaho, Wyoming, they all benefit at this time of the year because we are in areas that are highly dependent and benefit a lot from the tourist industry. But, then, just to the overall economy has been awfully good, too. So yes, part of it is seasonal, but, yet, part of it is just I think our bank is doing a terrific job of generating more and more and more accounts, which ultimately just feeds a larger and larger and larger deposit base.

Now, your second question regarding fee income on that deposit base, yes, I think, once again, it is somewhat seasonal, Joe. I mean, you are going to see that be larger in the second, third quarter than it ever was or it ever will be in the first quarter.

But, at the same time, if we can continue to grow our customer base, excluding acquisitions, I mean, just organically by over 5%, that is going to definitely help. Even if, down the road, regulatorily or something, there would come a day where there is some pushback on our opportunity to charge a fee or something like that, or maximize what a charge would be, I think that the larger customer base would absolutely benefit us at that time.

So if we see, though, and I am not projecting or predicting any changes, but if we don't see much in the way of regulatory adjustments, I think we keep growing our base of customers at this pace and we should be able to extend that service charge fee income number and increase it over the next quarters and year.

Also, Marcia Johnson, again, does a lot of negotiating with a lot of our vendors that provide fee income to us. And she does a terrific job of negotiating these contracts. I mean, there are things that, even if the volume did not increase, we are going to make more money this year just because of the deal that was struck and the negotiations on new contracts and that, that took place on a couple of large vendors.

So we benefit from that perspective, too. And that is something that she works, very, very hard at. So I think it is a combination of some of the things that her and her staff do, really watching what we pay vendors and what kind of revenue they are willing to pay us back, and then a growth in the overall base of customers.

Okay. That makes sense. I guess, last question, just briefly, the loan yield seems to be stabilizing. I was just curious what your read is on the competitive environment currently.

Well, as I have said a number of times here in the last six months, every one of us like to complain about how competitive it is and how cutthroat it is. But I am the one that gets an opportunity to travel around the country, talk to other CEOs, other peers. And sometimes I think -- and I mentioned this to Barry -- sometimes maybe we should count our blessings, because as competitive as we think it is, you view what goes on in other parts of the country, and I am not so sure we don't have it pretty good.

And, like Barry has always said, there is a couple benefits that we have. I mean, obviously, we compete against a number of very large superregional banks. We compete against a lot of credit unions and smaller community banks.

And the benefit that we have is, Joe, we can pretty much do deals of almost any size, especially in our markets, because we are not in the metropolitan areas. We are not looking at the mid-tier companies. Our business is Main Street business, small businesses, and there is just hardly a deal that we can't handle.

And, yet, that is not the case with small community banks. They just can't do that. So I think that is an advantage for us that we probably wouldn't have if we were in a larger metropolitan area, simply because I think you'd just have a lot more banks our size.

We are just pretty blessed that, hey, there is not very many smaller regional banks throughout the Rockies. And, from a competitive perspective, I think it helps us.

Sounds good. Great Mick, thanks for your thoughts.

This concludes our Q&A session. I would like to turn the call back to management for further remarks.

Well, thank you all for joining us today. Once again, we were just thrilled with what we were able to produce this quarter. The earnings increases that we generated over last quarter and over the same quarter last year were obviously beyond our expectations, especially, again, when you consider that the increase of 26% in earnings came with a decrease in the overall size of our balance sheet. I don't think there is too many banks that probably have pulled that off over the last year.

We are going to continue to work hard at transforming that balance sheet and turning, hopefully, more and more of our earning assets into higher-yielding assets. And that is a goal for all of us.

So it was a good quarter. We are very, very pleased with what all the banks were able to produce. Now we are keeping our fingers crossed and hoping that that same kind of loan and deposit growth can continue through this next quarter. And, if it does, I think we will be happy to report earnings next quarter.

So with that, everybody have a great weekend. Enjoy your summer. We're going to have some great weather here.

And one final point before I get off the phone -- this last week, obviously, there has been some devastating fires in central Washington. And, clearly, they have impacted some of the communities that we operate within. Scott Anderson, who is the president of our North Cascades Bank and his management team and his entire staff -- I just want to mention that they did an absolute terrific job the last 7 to 10 days, not only keeping every one of those offices open and functioning, but obviously stepping up in some of those communities, especially those that were very, very hard hit, and really doing what community bankers do. And that is supporting those communities and making their life, especially during some tragic times for some of these families, just a little bit better.

So, my hat is off to Scott and his whole team. It has been a very, very rough 7 to 10 days. Word last night was that they are finally getting some containment and control on those fires. So we can only hope that the overall damage and that was not all that bad.

Economically, I don't think it really was, but on a personal level, it certainly was. There was some individuals that lost homes and property, and our thoughts and prayers go out to them. But, again, I just wanted to say that, during a time of crisis, I think community banks do step up. And that was absolutely the case this last week with North Cascades Bank and that management team.

So with that, everybody have a great weekend and we will talk to you a little later. Bye, now.

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