Glacier Bancorp Inc (GBCI) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's second-quarter earnings call. (Operator Instructions). As a reminder, the conference is being recorded.

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

Thank you very much. Welcome, and thank you for joining us today. With me this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; Angela Dose, our Principal Accounting Officer; and Don McCarthy, our Controller.

Yesterday we reported record earnings for the second quarter of 2015. For the quarter, we earned net income of $29.3 million, an increase of 2% compared to the $28.7 million earned in last year's quarter. We produced diluted earnings per share for the quarter of $0.39 compared to $0.38 in the prior year's quarter, a 3% increase.

The quarter's results did contain one-time net expenses of $1.4 million, with the bulk of the figure coming from acquisition and conversion expenses as we completed the platform conversion of Community Bank in the quarter. The figure did contain a one-time $32,000 income item during the quarter.

As we assessed the current quarter's performance, a couple of things stood out. First, the search for my replacement finished in June with the announcement that Randy Chesler will be the new President of Glacier Bank, and taking over as the President and CEO of Glacier Bancorp at the end of 2016.

It was another very strong quarter for organic loan growth, where once again we increased loans at a little bit better than a 10% annualized rate. We had a nice increase in top-line revenues, with both net interest income and non-interest income showing gains from both the preceding quarter and the same quarter last year.

We completed the platform conversion of Community Bank along with the integration of their operation into our Glacier Bank and First Security Bank units. Dividing the bank into two of our existing banks definitely had its share of complexity. I can't say enough good things about those individuals who worked on behalf of Community Bank, Glacier Bank, and First Security Bank, along with members of the holding company, who executed what was nearly a flawless conversion. Collectively, they did a terrific job.

And finally, once again in the current quarter, we saw a significant build in liquidity on our balance sheet in the form of cash, as deposit growth and the cash flow from our investment portfolio far exceeded our ability, and to some extent, our desire to deploy this excess liquidity. This definitely impacted our net interest margin, which contracted by 5 basis points during the quarter, all of which was attributed to the lower return on our investment portfolio. We are currently analyzing a number of options regarding the deployment of this excess liquidity.

Overall, it was another strong quarter for us, and we were very pleased with these results and what was accomplished both this quarter and through the first half of the year.

We again generated a very respectable return on average assets for the quarter of 1.39%. Our return on tangible equity of 12.97% was also commendable, especially considering the amount of tangible equity the Company holds. For the past six quarters, our earnings and operating ratios have been very consistent, and track closely with these types of performance metrics.

Loans grew by 10% on an annual basis in the second quarter, and, through the first half of the year, are tracking at that same pace. If we include the acquisition of Community Bank, our loan portfolio grew at a 14% annualized clip in the first six months of the year. Whether we can hold this pace through the end of the year is yet to be determined. However, we are still experiencing good loan demand that we feel will still carry us for at least another quarter.

With the amount of loans generated so far this year, we now expect to exceed the goal we set for ourselves of generating 6% loan growth in 2015. Maintaining 10% organic growth through the end of the year may still be a stretch. We'll see.

In the current quarter, the largest increase in loan dollars came from commercial and industrial loans, which also explains to some extent the drop in loan yields during the quarter. For the second quarter in a row, we had nice increases in multifamily residential, a loan category we have worked hard to increase. As expected for this time of year, agricultural loans saw a 10% increase, as this loan area continues to become a more meaningful component of total loans.

Not only did we see increases in most loan categories -- the exception being the land, lot, and other construction, which is still more by design -- but again, this quarter, the loan growth generated was spread among business lines and among our many locations and different economies. This type of loan diversification serves us well from a risk perspective.

With the continued strong growth in loans during the quarter, it allowed us to once again reduce the dollar amount of our investment portfolio. Investments stood at 34% of total assets at the end of the quarter, a 3% decrease on a sequential basis, and 5% below where we were at this time last year.

One caveat to this improving trend: recently, due to continued strong deposit growth, a significant amount of cash is once again present on our balance sheet. If it persists, and we can't find enough loan growth to deploy the excess cash, we may look to investing a portion of these dollars back into securities, similar to what we did in the first quarter.

As I just mentioned, we continue to see strong deposit growth both in non-interest and interest-bearing accounts. Our non-interest-bearing deposits have increased 18% in the past 12 months, and interest-bearing deposits are up by 14%. Even excluding the addition of the two banks during the past 12 months, we are still up 10% and 6% on an organic basis, respectively.

Our banks continue to do an excellent job of adding new business and retail customer accounts, and the results are increased deposits, especially non-interest-bearing deposits. Through the first six months of the year, excluding the addition of Community Bank, our banks are on track to increase our checking account customer base by 5%. This is a terrific number, and they should all be very proud of what they are accomplishing in this critically important area of our business.

When rates begin to move up, which it now appears is likely to occur possibly yet this year, we believe this funding base will create a great deal of value for our Company. Even though we have an abundance of liquidity currently on our balance sheet, and deposits have outpaced our loan growth the past few years, there is no intention of taking our foot off the gas as it pertains to organically growing our checking account base. We believe this core funding base will be very important as interest rates begin to move upward.

Credit quality improved during the quarter on a number of fronts. Non-performing assets decreased by 7% on a linked-quarter basis. And as a resolution on one of our larger NPAs appears promising this quarter, we would hope that figure declines further. We still believe we have a reasonable shot at hitting our goal of reducing non-performing assets below $70 million by year-end.

Our non-performing assets ended the quarter at 0.98% of total assets compared to 1.3% a year earlier. It continues to be hard work to lower these non-performing assets. But the banks continue to diligently address the remaining problem assets, and we remain hopeful by year-end to have worked down below that $70 million goal that we set for ourselves.

In the current quarter, we had net recoveries of $381,000. Year-to-date total net charge-offs of $281,000, or 1 basis point annualized, is far below the 15 basis point goal we set for ourselves at the beginning of the year; and on pace to be, if not the best year, definitely one of the best years in this area. For the first six months of the year, net charge-offs are as low of a number as we can reasonably expect. Hopefully we will continue to see this trend of recoveries and low charge-offs through the rest of the year.

Early-stage delinquencies improved from the first quarter, but were slightly elevated from the same quarter last year. Nevertheless, delinquencies appear well contained. Our 30- to 89-day past-due loans stood at 0.59% of loans at the end of the quarter, down from 0.71% last quarter, but higher than the 0.44% for the same quarter last year. I think the banks continue to do a very good job working and controlling their delinquencies.

Our allowance for loan and lease loss ended the quarter at 2.71%, down from the prior quarter's 2.77%, primarily the result of the loan growth generated. Although our ALLL decreased slightly as a percentage of loans this past quarter, our coverage ratio of the ALLL as a percentage of non-performing loans increased to 227% versus 207% the prior quarter, and 172% in last year's second quarter.

In the most recent quarter, we provisioned $282,000 compared to the $765,000 the previous quarter, and $239,000 in last year's second quarter. If credit quality trends continue to remain stable or improve further, we wouldn't expect the loan loss provision to deviate much from its current level.

Moving now to the income statement, net interest income increased $3.8 million or 6% from the same quarter last year, as interest income increased by $4.7 million and interest expense increased by $841,000. The loan portfolio continues to drive both interest income and net interest income.

Due to the reduced level of investment securities, interest income from this sector of the balance sheet decreased 8% from last year's quarter. Interest expense was down slightly from the previous quarter. However, it increased 34% from the prior-year period, primarily due to the cost associated with our interest rate swap contracts.

For the quarter, our net interest margin decreased 5 basis points from 4.03% the prior quarter to 3.98% in the most recent quarter. This compares to a net interest margin of 3.99% in last year's second quarter. So, for the most part, we have been able to maintain a stable margin near 4% for the last year.

The reduction in the margin was due to a liquidity build during the quarter, similar to what we experienced in the fourth quarter of last year. Not only did we have another strong quarter of deposit growth, in addition the cash flow from the investment portfolio was not redeployed, and instead kept in cash. This excess liquidity from deposits, the reduction in securities, and the resulting build in our cash position impacted the net interest margin by 8 basis points this quarter.

During the quarter, the yield on our loan portfolio decreased by 9 basis points, 6 basis points coming from the true yield on the loans, along with another 3 basis points that came from a reduction in paid off non-accrual loans. There was also a change in the mix of loans as we continue to reduce our exposure to higher-yielding land, lot, and other construction loans, and replace them with more commercial and industrial loans.

Even with the lower yield on loans, there was still a positive 3 basis point contribution to the net interest margin as a result of the higher loan balances. In the current quarter, purchase accounting adjustments again added 9 basis points to the margin, unchanged from the prior quarter.

At quarter-end, our cost on total paying liabilities was 40 basis points, down 2 basis points from the prior quarter. The reduction came from both lower deposit costs -- specifically MMDA and CDs -- along with a decrease in our cost of borrowings.

Overall our total cost of funding continues to benefit from the increased dollars we generate in non-interest-bearing accounts. In the current quarter, 23% of our liabilities consisted of this deposit type, versus 21% in the prior-year quarter. We are committed to increasing this ratio further, and would like it to be at 25% of deposits by this time next year.

For the second consecutive quarter, we were pleased with the amount of non-interest income produced. Historically in the second and third quarters each year, we tend to generate greater amounts of non-interest income, and that was the case again this quarter. Non-interest income is especially robust in the area of service charges and other fee income, which were up 10% from the prior quarter and 6% above the same quarter last year.

These gains were primarily driven by a larger base of customers, along with new products and services being offered to the newly acquired banks. In addition, our gain on sale of loans was up 40% from the previous quarter, and 59% above the second quarter of last year.

Mortgage origination volume has been well above last year's production, especially our purchase volume, which so far this year has made up 65% of total production. Hopefully with the strength currently being displayed in some of today's housing numbers, we can carry this momentum through the second half of the year.

Overall, non-interest income was up 14% and 15%, respectively, from the first quarter and last year's second quarter.

Non-interest expense took a sizable leap this quarter, as increases in OREO, new market tax credit, and acquisition and conversion expenses made up the bulk of the increases over the prior quarter.

Total non-interest income -- excuse me, total non-interest expense was up $4.4 million or 8% on a linked-quarter basis. Excluding the above expenses, which totaled $3.1 million, non-interest expense was up $1.3 million or 2.3%. In the current quarter we also saw an increase in compensation and benefits of $500,000, as we had the additional Community Bank staff for the entire quarter.

Non-interest expense compared to the prior year's quarter was up $7.3 million or 14%, with the majority of the additional expense driven by the costs associated with the two acquisitions and subsequent staff increases and data conversions.

Our efficiency ratio for the quarter came in at 56%, 1 percentage point higher than the prior quarter and last year's second quarter. On a linked-quarter basis, our efficiency ratio was definitely affected by the conversion and the new market tax credit expense.

We're still holding to our goal of reaching and efficiency ratio at or near 53%, although that's looking more challenging. Through the first six months of the year, our efficiency ratio was 55%, so we definitely have to hope for continued growth in revenues while finding additional ways to control costs.

Finally, through the first six months of the year, our performance on a number of fronts has exceeded our expectations. We are on track to deliver greater loan growth than what we had originally planned for the year. Our banks continue to generate solid gains in core deposits. Fee income continues to surprise us to the upside. And asset quality, this late in the recovery cycle, is still showing signs of improvement. Hopefully this next quarter we can get the net interest margin back above 4%, while at the same time find a way to stabilize our expenses.

It was another strong quarter, with a number of good things happening that hopefully puts us in a position to carry this momentum into the second half of the year.

And that concludes my formal remarks for the second quarter, and we'll now open up the lines for questions.

Questions?

(Operator Instructions). Jeff Rulis, D.A. Davidson.

On the expense front, a lot of moving pieces there. I know that $1.4 million is non-recurring. I guess you've got the bank on for the full quarter. I guess the new market tax credits -- I guess how does that all settle out if you were to look at run rate, going forward?

Good question, Jeff. On a forward run rate, obviously we're not going to have another $1.4 million in conversion and acquisition-related costs. We have completed all of the acquisition platform conversions, and everything now on all the acquired banks.

New market tax credits are a different story, though. Right now there's two quarters currently -- if you go into the last couple of years, going back about as many as five years now, since we first got involved in new market tax credits, Jeff -- there's been two quarters a year where that expense hit. And of course the offset is on the tax line. And then two other quarters where that expense really was not resident on the income statement.

But we're seeing some -- we think that we really have a niche. And these are complicated deals, but Ron Copher is obviously an expert in this area. We tend to go after more and more of these new market tax credit structures. And hopefully we can add a number of these to our balance sheet and our income statement to where, rather than two quarters a year, it's all four quarters where we have the expense. Because that means that in those same quarters, there's going to be an offsetting benefit to the tax line.

And without getting into a lot of detail on the call, obviously the benefits of the tax line, which certainly doesn't show up in efficiency ratio, doesn't show up in our operating expenses; but oftentimes that's a dollar-for-dollar benefit on the tax line, which actually is as good or better than the cost when we have to book the new market tax credit expenses.

So right now, for example, the third quarter would have normally been a quarter where you wouldn't have seen much in the way of new market tax credits, these last five or six years. But this quarter, now you will, Jeff, because we did book another significant deal. And those expenses should hit in the third quarter.

Hopefully that kind of explains --.

Okay. So, more similar Q2 tax rate in new market costs, versus maybe Q1's tax rate and those associated costs?

Exactly.

Okay. And then the last component would be just any -- are there any pickup of synergies further or mainly complete from -- we back out the $1.4 million; but is there any synergies additionally going forward, or you are at the core rate, less the (multiple speakers)?

Yes, I think we are kind of at the core rate there. As I look through -- and I think one of the things that we've got to be sensitive to is, with the -- I've looked at some of the regulatory expenses and burden that we've had to add over the last 12 months, both in people and in consultants and in systems. That hopefully now is starting to ebb. I just think that we've really got to start to focus on making sure that those expenses don't continue to just pile up, and pile up, and pile up every quarter.

I think there could be a little bit of a relief, going forward. I think we've done everything we really need to do in that area. Certainly CCP, as we continue down that road for the next five or six quarters, especially in 2016, that's going to bring some additional expenses as we convert the existing banks onto the new [gold bank], as well as the development of the new gold bank. There's going to be some programming and some software and expense there. But I think a majority of those expenses are going to hit next year, and not so much in this third quarter or fourth quarter.

A lot of the work that's being done -- and there is a lot of great work being done throughout the Company on CCP, but it's more internal. Now certainly that takes time, and it takes effort, and it takes people away from some of their other responsibilities. But I don't think and we don't expect that the actual dollar amount is going to be real high. But when we start to get into the conversion process in 2016, I think you're going to see some additional expenses definitely ramping up.

But as I've been saying for the last couple of months, once this project is completed, and we're shooting for a late 2016 completion date, I believe in 2017 and 2018 the real benefits of all this hard work and effort will really start to show themselves.

Got it, okay. And maybe one other one, just on the margin. You have alluded to hopeful about maybe pick that up above 4%, or back with a 4 handle. Is the thought of just deploying some of that excess liquidity, or is there something inherent that makes you feel positive that we could see margin moving the other direction next quarter?

No, I don't think -- I don't want anyone to get the impression that loan yields are going to spike up or anything like that. The constant change in mix, as I mentioned -- as we can continue to de-emphasize land, lot, those kinds of loans that traditionally have been higher-yielding loans, and you're replacing them with more commercial, industrial -- obviously ag was a big component of our growth this time -- but those are priced fine. Although probably there's pressure on those ag credits from where they used to be priced.

I think, though, that the reason I made the comment that we'd like to get back up 4%, when you are carrying that kind of cash, and we did not deploy it again -- I saw what happened to us in the fourth quarter when we did not deploy what was even a larger build in cash and kept it in Fed funds for the better part of the quarter. That really hammered our margin pretty well in the fourth quarter, if you go back and look. We were able to take that cash and not deploy all of it, but we certainly deployed a portion of it into shorter-term investments, and it really helped our first-quarter margin.

Well, now we saw the same thing. We saw a significant build in cash. We did not invest it. We kept it in Fed funds. And that certainly was the driver that lowered the margin by the 5 basis points.

So if we can take a portion of that cash again - which is probably going to be what we're going to do; we haven't -- Ron and Jeff and myself haven't necessarily come up with the final thoughts on this yet, and we're still exploring some alternatives. But I would suspect that definitely a portion of that cash is not going to remain in Fed funds through the third quarter.

Got you. Thanks, Mick.

Joe Morford, RBC Capital Markets.

I was curious, you talked about seeing pretty good loan demand, and seemed fairly optimistic going into the back half of the year. I was just curious what your -- where do you see the mix coming from? What are going to be the big drivers? And recognizing there's some seasonality in some of the different portfolios. And also curious, just your plans for retaining versus selling on the residential mortgage side.

Well, let me -- right now, Joe, we're seeing still pretty consistent loan growth. Boy, Barry and myself were talking about it this morning, if we could generate another $120 million in the third quarter of organic loan growth, similar to what we've done the last two quarters, that would be terrific. We've improved and closed a lot of loans, and there's a lot of those loans that haven't been advanced on yet. So that could be a catalyst in the last half of the year to further increase the balances.

I would suspect that with some of our initiatives on the C&I front that we would expect to see more volume there; commercial real estate also. Your latter question, though, regarding how much in the way of 1 to 4 family residential loans we're going to hold on the portfolio, I wouldn't hold much hope that that was going to move the needle very much at all. We are comfortable originating and selling. And I don't believe we're going to probably change that strategy or that formula much as we move forward.

So I think as you look, we could see -- we saw a really nice increase in ag loans during the quarter. I think that that has the potential of moving up a little bit more through the third quarter before it starts to decrease in the latter quarter of the year.

Consumer loans; as the consumers continue to -- and we continue to offer some products that have been fairly popular on the consumer front, I would hope that that would add something in the third -- especially in the third quarter. Fourth quarter, for us, it's always tough. Because you do start to see ag credits paid down, the holidays starts to come around, winter starts to set in, and things do slow down. I think that's why we're still a little bit nervous to say that we're going to generate 10% loan growth for the entire year.

If we have another quarter like we did the past two quarters, we would certainly be on track for that, but then we always plan for the fourth quarter being a quarter where we could see flat to maybe no loan growth. Now, the last couple of years, we've had a little bit of loan growth in the fourth quarter, certainly slower than what you saw in the second and third. This year, it will be interesting to see just how much of the additional draws that are still out there to be made on some of these larger projects, how much of that carries us through to the end of the year. But, right now, we're feeling pretty good about the level of volume we're seeing.

Barry, you got anything to add that that?

Yes. We had such a great first quarter. It really got us jumpstarted into the year, and then we followed it up with this quarter. And the activity that we're seeing, I think we're going to have a reasonable third quarter. So I guess the real question mark is, what's going to happen in the fourth? That's always our challenging quarter.

Okay. That's helpful. And then along the lines a little bit, just now that we're a little further into the peak tourist season, I was just curious what kind of impact are you seeing, if any at all, from the weaker Canadian dollar.

I think it's definitely had an impact on the retail side. We've talked to a number of our Main Street merchants and businesses, and they certainly have seen a reduction in Canadian spend. I don't think we've seen -- and I still, Joe, have not seen border crossing numbers. My guess is they are probably -- they are going to be down. And I just haven't seen how far down. Just as you look -- just from an eyeball perspective, there are still a lot of Canadians down here in the valley, every weekend, every day. But I'm hearing anecdotally they're just not spending the kind of money they used to spend.

With all that said, tourism is just exactly what we expected this year. We have had terrific volume. The park, Glacier Park, up 26%. I haven't seen the Yellowstone numbers yet, but I would expect that they have got to be up. But the earlier opening in Glacier, along with the tremendous weather we had in the month of June, it just kick-started that season off in a fashion that we've never seen before. Those numbers were way (technical difficulty).

Now, the concern is we need some rain up here. We've got a fire going right now, as we speak, over on the East side of the park. And we need to get that contained so that it doesn't impact tourism like it did back in 2005 when the fires really raised havoc in the park and basically shut the park down that year.

So, weather has been a little bit better, been a little bit cooler from June, and numbers so far are very, very, very good. So, maybe part of the reduction in the Canadian traffic is absolutely being made up by more individuals coming to the area from other states.

Right. We could use some rain out here, too, in California. And then last, just a quick little housekeeping. You mentioned with the margin, the purchase accounting impact this quarter. Was there anything else meaningful in terms of interest recoveries or premium amortization that really affected the margin much this quarter?

No, no. We had the majority of the impact to the actual net interest margin, Joe, the 8 basis points, which was more than the 5 total that we saw in lower margin, came out of that cash and investment component. Even though the yield -- as I said in my comments -- even though the yield on our loan portfolio was down 6 basis points, and we didn't have quite the payoff of non-accrual loan impact we did in prior quarters this quarter, we still -- just of the sheer volume of loans that we put on the books, and that change in the mix of our balance sheet, it actually contributed 3 basis points to the margin. So that wasn't the negative.

The negative came on the investment side, and that's hopefully something that we're going to address. And before too far into this quarter, we're going to see if we can get that turned around.

Okay. That's great. Thanks a lot.

Matthew Clark, Piper Jaffray.

First on the expenses, tax credit amortization: just can you maybe first quantify the tax credit amortization in the quarter, and the related tax benefit? Was it roughly $1.1 million in the expense line? I just want to hone in on that number.

Yes, the expense line was definitely $1.1 million.

Okay.

And the credit on the tax line was basically that same figure.

Okay.

(multiple speakers) But you've got to remember, you know: the tax -- and that's what I said earlier, Matthew -- the impact of that $1.1 million on the tax line is far more valuable than the $1.1 million expense to new market tax credits.

Right.

So net-net, it's a positive to us.

Yes. And then when you think about the deal, the new deal that you have for the third quarter, and thinking about the investments you've made to date, how should we think about forecasting that related amortization, and also the tax rate going forward, just so that we're not off by much?

Ron, you want to --?

Yes. So Matthew, we'll have a $600,000 gross credit. Let's just say -- let's speak in after-tax dollars completely. So that will be about $450,000 of tax credit to the bottom line. And then you could presume that that will be then about $375,000 of expense. Again, those are pre-tax dollars in the expense but the credits are after tax, so you have to gross them up if you want to compare apples to apples.

And that's for the new deals?

Yes.

Okay. So, tax rate, going forward, could be a little bit lower than where it is here in the third quarter.

Right. So traditionally in the third quarter -- I'm just looking back at the last two years' third quarter -- we're running just roughly around 25%. So you would expect it would be, say, 22%, if I had to ballpark it.

Okay.

We will definitely have benefit for the full year as well, but it will show up in the third quarter when you look year-over-year.

And should we assume that you re-up these types of things as we look beyond this year and forecast that tax rate?

We're looking at a number of projects. Let me say it's too early to tell. Great question, but I don't want to go there yet.

Yes. Some of these that are coming towards the end of their life cycle, we certainly don't know if we're going to have the opportunity to replace those, Matthew, or not.

We're hopeful.

We're hopeful.

Okay. And then just on the loan growth in the quarter, honing in on C&I: and just curious if there was a change in line utilization that helped contribute to that growth this quarter; and, if so, what the line utilization was this quarter (multiple speakers).

That's a good question. We'd have to drill down. I didn't really see much in the way of line utilization. Part of the C&I increase was a continuation of us putting on a lot of these municipal type loans that hit the C&I category. I'm sure though, Matthew, that in this time of year that we did have some further utilization of some of the existing lines.

I just don't -- Barry, do you have that number handy?

It usually runs about $1 billion a year in unfunded commitments. I think it was 900 -- and I looked last quarter and it hadn't moved much. I haven't seen the numbers this quarter, but it usually holds pretty steady. And that number is always kind of hard to tell. Because you're going to have some seasonality as the summer rolls in, and then as contractors -- primarily contractors draw on their lines for summer projects. And then it goes back down -- well, the unfunded portion increases through the end of the year. So that was probably part of it more than anything. If there is a draw down on it, it would be through the construction.

Of course, then, that's in a separate category, too, though. That's resi construction.

And this would be, like, commercial contracts.

Oh, commercial. Okay.

So, we could certainly drill down, Matthew, if you needed that information, but I don't have that right now.

That's all right. Okay. And then in terms of payoffs, can you maybe quantify what payoffs were in the quarter, relative to last? I'm just curious if they were down much.

Yes, let me get that number. This quarter we -- again, this is somewhat of an estimate. It's always hard to quantify every last thing. But this current quarter, we had about $382 million in payoffs. And last (technical difficulty) we had $339 million in payoffs. We were about $43 million more this quarter than the prior quarter.

Okay. And then on the loan yield front, I know a lot of the growth this quarter came from C&I, which tends to be obviously lower yielding. But just thinking about loan yields in general, on the average coupon that you are putting on the books today -- I think you know had previously we -- I think we've talked about how your new business is coming on close to the portfolio yield. But obviously that wasn't the case this quarter. Is there renewed pressure out there on pricing yet all? Or is this, again, just a mix change this quarter?

I'm not so sure that the new loans aren't coming on similarly. I really do believe that the lower yield has more to do with mix than it does -- and maybe that's what you're saying, too -- that, at the end of the day, it depends upon the kind of loans you are putting on, too, as to whether the yield is lower. But if you look at just category to category, if you are looking at what our C&I portfolio -- legacy portfolio is versus new C&I loans being put on, I don't think there's a lot of difference anymore in those yields.

Where you see a difference in the overall loan yield is where you see a big reduction in land and lot loans, like we had this quarter. I can guarantee you that replacing them with C&I loans came to the total loan portfolio at a much lower yield than what we were getting before on the legacy loans.

The loan yield ended the quarter -- just the pure loan yields, Matthew -- ended at 4.64%. I don't think that's a very far from the average of what we would be booking new production. I got to believe that we're definitely somewhere in the ballpark.

And, for example, in the first quarter -- well, and at 4.64% legacy, that still is a little bit higher. But first quarter, our loan production on all of our new production we generated a 4.41% yield on that new production. This quarter it was 4.44%, so certainly haven't seen any decay from first to second quarter; still, though, slightly a decay in the overall yield. Again, that 4.44%, though, is taking into account where a lot of that production is coming from, and just taking an average. A lot of that production is coming in the C&I front; not on the land, lot, and other category.

Okay. And then just last one on M&A. Can you just update us there on whether or not you are seeing -- I know you are looking to get a couple of deals done here with the CEO-elect, Randy, over the next year or so. I'm just curious if you are seeing more activity on that front or not.

Yes, the activity has been pretty good. I was mentioning in the last two months, when I was on the road and doing a number of road shows, that the volume was nothing like we saw 12 or 15 months ago, where we were getting presented with so many deals we couldn't even take care of them all, or couldn't even look at them all; where it really had slowed down to a more -- at a pace that we were certainly more able to do some analysis and really take a good, hard look at some of these things.

Just seems like, though, now, over the course of the last couple of weeks that things have just picked up again, and inquiries have escalated. Opportunities seem to be showing to us, and it's kind of funny the way that works. Because like I said, during the month of May and June, I felt that the pace was pretty consistent; and we were able to just, every month, look at maybe a deal or so. It seems like in the last two weeks there's been a lot more activity. So maybe it's the time of year. Not sure exactly what's driving the recent increase; but yes, there's a lot of interesting things to look at.

Great. Thanks, Mick.

Jacque Chimera, KBW.

Looking to the multifamily growth that you had in the quarter, where are you seeing that -- in what parts of your market?

It's broad-based, Jacque. There is really no one state; there is no one bank. None of these projects are huge, but it just seems like we've had a nice supply of all of the banks bringing a project or two to the table. And collectively we're seeing a nice increase.

It's always been a category of our loan portfolio that we always felt we certainly did not have a big concentration in. We didn't have any kind of concentration to speak of. In fact, the amount was lower than what we used to have. But we're starting -- but with what we've done over the last couple of quarters, we're starting to obviously build a larger portfolio on the multifamily side.

We like the fact, Jacque, that it is well diversified among the geographical footprint. But at the same time, we're constantly reading about multifamily, and we don't want to get too far ahead of ourselves on this, too. But so far, the transactions and the deals we've seen have been pretty robust, so we feel pretty good about it.

Barry, you got anything else to add on the multifamily side?

There's a big fear out there that multifamily is the next bubble. But when you look at the vacancy rates, you look at the demographics, I think it's going to be a product that's going to perform probably, definitely in the near term, probably mid- to long-term. And it all kind of depends on whether the Millennials start buying homes or not. But up to this point that has not been the case.

We're at that $195 million right now. We probably can take on a few more, probably $30 million, $40 million more without a problem. And then probably, at that point, would have to start maybe cherry-picking the projects that really make sense for us. But so far, it's been a good product for us and it has performed well.

Okay. That's very helpful. Thank you. And then just looking at the land contraction in the quarter, was that just timing -- or construction and land contraction -- was it timing of projects in completion? Or was it more of a concentrated effort to reduce your exposure there?

Well, it was kind of a little bit of both. We certainly are focused on reducing our exposure to land development and raw land type loans, Jacque. So that was absolutely something in our sights to continue to work towards. But this last quarter, a pretty significant portion of the decline in land, lot, and other construction came on that construction component. And I think it was just that -- just like you said -- I think it was the fact that there was a number of larger projects that had been out there; that those projects wrapped up, either went into permanent financing, or we were paid off on those construction projects.

So, it was a little bit of both. Certainly we would like to see the commercial construction piece continue to grow, or at least replace what ran off this last quarter. On the land lot side of it, certainly not so much. We are still pushing to move some of those projects and those properties off the books.

Okay. And I think you had mentioned that you have some unfunded commitments that could fund in future quarters, could drive some of the loan growth you are looking for.

Yes, there are some, but they will probably draw this next quarter; and then, again, the fourth quarter is always really a tough quarter for us for loan totals. So I would imagine as this weather holds, pending any fire-related issues or weather-related issues, we may see some additional draws there. Traditionally, that's been the case.

Okay.

The fourth quarter would be a question mark.

Okay. And then just lastly, a comment that you had in the press release, it was something about the FHLB borrowings that you took on in the quarter that were attractively priced, prior to Seattle merging into Des Moines. Do you anticipate less attractive rates from Des Moines?

No. No, I don't believe so. I think this was just one unique opportunity that we took advantage of. And obviously, Jacque, it was -- in our minds, it was an opportunity and we seized it; certainly didn't help our liquidity any. But we think that over the term of that, that it was the right thing to do. And as we try to absorb some of that excess liquidity, I think that this particular borrowing will in no way, shape, or form, hurt our earnings. Yes, it was a one-time deal and we took advantage of it.

Okay. Was it a little longer-term in nature than what you generally take on?

It was.

Okay, great.

Yes, it definitely was.

Thank you very much for the color. I appreciate it.

Matthew Forgotson, Sandler O'Neill Partners.

Mick, just as you think about the excess liquidity on your balance sheet, how much do you see in dollar terms? And then as we get a sense of the rotation into higher-yielding securities, where could we reasonably expect you to put that money back out at?

Well, in the first quarter when we had this same phenomenon take place, now you know we basically lived with, at that time, over $400 million, most of which was retained in Fed funds, earning us, let's, say, 20 basis points. And that might be even a little bit high, but let's just use that as a benchmark.

Then in the first quarter, when we were able to take -- not all $400 million, of course; we took about half of it -- and we kept it short within about a 2, 2 1/2 year weighted average maturity range. And we were able to get between 1.25% and 1.50%. So, somewhere between 1% and 1.25% of additional yield on those dollars that were residing in the fourth quarter, pretty much in cash and overnights, we were able to improve that in the first quarter.

I would suspect that -- I haven't seen the final numbers yet, Matt, as to the deposit increases and where they came from. Clearly, we are building up a lot of non-interest-bearing deposits, and there is a portion of those deposits that are going to be very core. Historically, we know that. And when you're growing the account base at the pace that we are growing our account base, we can assume that a certain amount of dollars are going to be core, and those core DDA-type dollars have a much longer average life.

This has been demonstrated over many, many years. So, where we didn't do it the first time, maybe this time one of the things we're looking at is maybe we -- knowing that we've got a long term funding base -- may be we'd look to do something a little bit different on our reinvesting of this cash, and maybe go out a little bit longer on a small portion of it.

We haven't made our minds up yet. We may just keep it all short and do exactly what we did in the first quarter. Or we may choose to take a portion of this $300 million and maybe extend it out a little bit, knowing that we're probably not going to see the kind of loan growth that we would need to absorb it.

If we can get a little bit better yield and still feel comfortable that we've got the right interest rate/risk mix, we may do that, too. But those decisions have not completely been made. But I think, at a minimum, you can expect that there is going to be redeployment of this -- or a deployment of this cash into something better than Fed funds.

In terms of operating expenses -- sorry to belabor the point. But directionally, off of what looks like a core expense basis, $58.3 million or so in the quarter -- directionally next quarter, Mick, do you see that trending up or down? And then the second leg of that question would be, what would you consider to be a reasonable growth rate for stand-alone Glacier?

Well, that gets to be harder and harder and harder, Matt, because stand-alone Glacier isn't standing alone very long anymore. It seems like every quarter -- we've done four deals here -- and every time what are normalized certainly become not normalized numbers. There's just so much noise moving through the expense line. If we stood pat for a couple of quarters, I would expect, especially with CCP right now gaining all of the steam and everything that we've got going in that area, I would say that at best we would hope to keep those numbers flat.

I don't want to say that you're going to see a decrease in operating expenses. But it's hard to imagine, as I said earlier, that with all the resources and all of the costs that we've added to the Company on the regulatory front, compliance front, I think we're pretty well covered there.

But if we were just going to stand -- again, stand pat, but still -- considering all of the internal things that we are working on over these next 5 to 6 quarters, I don't think we're going to expect to see anything in the way of lower operating expenses.

Okay. And then just lastly, just with regards to the securities-to-assets ratio; your expectations for how much remixing you can get done by, call it, by year-end. And then your view, which appears to have evolved over the last several quarters, about crossing that $10 billion mark with something north of the 20%. What's your most recent thinking there?

Crossing over the $10 billion? Maybe you could re-ask that question?

Yes. So, just in terms of crossing the $10 billion mark, initially I think the thinking was that you wouldn't want to cross over with a securities-to-assets ratio greater than 20%.

Oh, I see, yes. Yes, that looks now probably to be something higher than that, Matt. When we were talking about that a year, year and a half ago -- and I can't absolutely say that we still would not try to achieve that -- but we run a number of simulations, and one of them would be that we could still be near 30% investment and still crossing over. The closer we get to $10 billion and the more we analyze this whole thing -- do you continue to hold the balance sheet down, letting the investments continue to roll off, and then, just for the sake of not crossing over with more than 20%?

One of the things that I've mentioned over the last quarter or two is (technical difficulty) that when you look at our investment portfolio and you look at the makeup of our investment portfolio, and you look at how we stack up to a lot of other financial institutions, our investment portfolio is a darn good yield. And some of those investments are in the form of municipals that you just can't find those yields. It would not make any sense to try to push those out the door, because you never could replace those kind of yields.

And I think these are some of the things, Matt, that we've come to the realization that, yes, if the entire investment portfolio was made up of securities generating 1% to 1.5%, certainly we would drive that down to 20% off the balance sheet, and no more, before crossing over.

But when you look at a fairly significant portion of that investment portfolio yielding much, much higher than that, it makes it more difficult to take a hard line on, hey, we're never going to cross over with more than 20%. I'd say, now, as we again continue to analyze this, that percentage could be higher, could be maybe as high as 30%.

A lot of it also will depend upon how successful we are on the loan side, too.

Thank you.

Thank you. At this time, I'm showing no further questions.

Well, very good. Thank you all for taking time today in joining us. Again, we thought at the -- through the first six months of the year, it's been a very good start. Obviously the numbers that we've achieved in the first and second quarter were better than our projections coming into the year.

Now it will just be a function of whether we can continue to deliver this same level of performance as we move into the third and fourth quarters. So, we're going to do our best to keep this level of production on the loan side and the deposit side, as well as on the earnings front.

So, with that, thank you all very much for joining us this morning, and you all have a great weekend. Bye now.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a great day.