Glacier Bancorp Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.19.13 | About: Glacier Bancorp, (GBCI)

Glacier Bancorp (NASDAQ:GBCI)

Q1 2013 Earnings Call

April 19, 2013 11:00 am ET

Executives

Michael J. Blodnick - Chief Executive Officer, President, Director and Member of Risk Oversight Committee

Barry Johnston

Analysts

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Jeffrey Rulis - D.A. Davidson & Co., Research Division

Joe Morford - RBC Capital Markets, LLC, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

Timothy N. Coffey - FIG Partners, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

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

Michael J. Blodnick

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

Last night, we once again reported record earnings for the first quarter of 2013. Earnings for the quarter were $20,800,000, that compares to $16,300,000 in last year's quarter; that's an increase of 27%.

Diluted earnings per share for the quarter were $0.29 compared to $0.23 in the prior year's quarter, a 26% increase.

There was just a small loss on the sale of investments in the quarter. Aside from that, there were no other extraordinary items recorded.

We earned a return on average assets for the quarter of 1.11%, and return on tangible equity of 10.63%, both were the best quarterly earnings ratios since December 2008.

From an earnings perspective, revenue growth is still a challenge. It has become increasingly difficult to grow earning assets at a pace fast enough to offset the earnings pressure being applied by this low rate environment.

Fortunately, as I previously stated, we still possess a couple of levers that make up for the revenue decline. This past quarter, we continued to benefit from lower credit costs, both in the form of charged off loans and other real-estate-owned expense. And for the first time in 7 quarters, we finally experienced a reduction in premium amortization on our investment portfolio. We certainly hope both of these trends continue through the rest of this year. If they do, we should deliver good earnings even with the challenges to top line revenue growth.

For us, the highlight of the quarter was the announcement of 2 additions to Glacier Bancorp that we feel will provide terrific opportunities to further grow and enhance our franchise.

In February, we signed an agreement to acquire First State Bank of Wheatland, Wyoming, in a cash stock deal totaling $37.9 million. Followed a month later with the March signing to acquire North Cascades National Bank of Chelan, Washington, in another cash stock transaction valued at $29.3 million. We expect both of these new members of our family of community banks to make a significant contribution immediately to our performance. Both banks brought everything we were looking for in a merger partner, a talented and respected management and employee group, further diversification to our loan portfolio and an expansion of our economic and geographic base. We are thrilled to have both of these banks join us and believe they create additional opportunities to expand in these new markets, as well as add earning assets that are different and distinct for much of the rest of the company.

We expect both transactions to be immediately accretive to first year earnings and, over the long term, to be great additions to GBCI.

For one of the few times in the past 5 years we saw growth in our loan portfolio this past quarter. What was even more encouraging is it came in the first quarter, which historically, even in the best of environments, has been a tough quarter to grow loans. So we are hopeful that this is an indication of better things to come, and that as we enter the second and third quarters of the year, which traditionally have been stronger quarters for loan production, that this trend will continue.

Beyond actually increasing our loan portfolio this quarter, we also had a $34 million increase in unfunded commitments, which is excellent for this time of year, and also bodes well for future loan growth over the next couple of quarters. Our goal for the year is to increase our loan portfolio by 2%. Posting a positive number in the first quarter, gives us confidence that we can realize this goal and possibly even exceed it.

With the significant progress that's been made in improving our credit quality, we no longer face the challenge of trying to grow loans while at the same time attempting to dispose of other problem loans. Plus, we now have more resources that can be directed to once again grow loans versus cleaning up and resolving credit issues.

Our investment portfolio decreased this past quarter by $25 million, as we chose not to replace some of the dollars invested in our CMO portfolio.

During the quarter, we also continued to make changes to the mix of the investment portfolio by allocating additional dollars into corporate and municipal bonds, instead of mortgage-related product, as we have done in the past. This shift in the portfolio accounted for part of the reduction in premium amortization last quarter, with the other coming from a slowdown in the velocity of refinances.

Barring any further government intervention or additional refinance programs put in place, we expect refinance activity to continue to decline through the rest of the year.

Deposit growth in terms of dollars slowed in the first quarter compared to what we've experienced the past 2 years. Nevertheless, the number of new accounts, specifically checking accounts, was exceptionally strong considering the time of year.

Noninterest bearing deposits decreased by 1% during the quarter. After careful review, we don't believe that the expiration of the transaction account guarantee program, better known as TAG, had much to do with the decline. It appears a stronger stock market and firming real estate values had more to do with the drop in checking account balances. Interest-bearing deposits increased by 0.5%, but even that growth came in the form of wholesale deposits. So core deposits were soft this quarter.

Now that we are through the first quarter, I expect deposits to increase over the next 2 quarters, continuing a trend that we see most years, as the impact of tourism kicks in.

We continue to maintain capital levels that are near historic highs. Our tangible common equity ratio ended the quarter at 10.7%, compared to 10.5% in the prior-year quarter. And our tangible book value per share was $11.14, that's up from $10.43 in the prior-year quarter.

Our pro forma analysis of both pending transactions indicates that our tangible common equity ratio will decrease, but still remain near 10%. With this level of capital, we have plenty of capacity to further grow the franchise or explore other alternatives to deploy capital.

Yesterday, the company paid a cash dividend of $0.14 for the first quarter. We will continue to analyze the adequacy of our capital and the level of earnings in the hopes of declaring additional increases to the cash dividend in the future.

Our goal is, and always has been, to increase our cash dividend by 10% a year. Credit quality improved again this past quarter, as nonperforming assets decreased by $8 million or 6%, down to $135 million. Nonperforming assets are now 1.79% of total assets. We saw reductions in every loan category with the exception of consumer loans, which had a small increase during the quarter. Some of the larger decreases, once again, came from land development, unimproved land, and 1-4 family residential loans. The progress we made this quarter was somewhat unexpected after the success we had lowering NPAs in the prior quarter. Fortunately, we benefited from increased interest among buyers, and an improving real estate market, both of which have made it easier to dispose of some of our distressed assets.

Hopefully, as we move into the prime selling season in our part of the country, we will move a couple more of our larger problem credits.

Once again, our target for this year is to reduce nonperforming assets to below $100 million. The first quarter has us off to a good start to achieve that goal. With the progress made this past quarter, I feel we can expect additional improvement in credit trends in future quarters. If this year's sales activity is anything like last year's, we should be positioned to further lower nonperforming assets and enhance our overall credit quality.

Typically this time of year we see an uptick in our 30 to 89-day delinquencies due to large seasonal workforce tied to construction and the tourist industry. Although early stage delinquencies were higher this quarter on a sequential basis, they were far below last year's first quarter number. At $32 million, these delinquencies were down 24% from the same quarter last year.

Net charged-off loans were another bright spot this quarter. Through March, total charge-offs were $3.6 million with recoveries of $1.5 million, leaving net charge-offs at $2.1 million for the quarter. As a percentage of loans, net charge-offs were 24 basis points, just under 0.25%, on an annualized basis -- far below both our goal for the year of 0.5%, and last year, when our net charge-offs totaled 0.83%.

In addition, OREO write-downs and losses for the quarter totaled $462,000. This compares to gains on the sale of OREO of $664,000 during the quarter. This is the first time in a number of years that we recorded a net gain in OREO dispositions, and hopefully, is another good indicator going forward as we continue to sell and write down other OREO properties.

Our allowance for loan and lease loss ended the quarter at 3.84%, basically unchanged from the prior quarter and down from 3.98% at the end of the first quarter last year. In the most recent quarter, we provisioned $2.1 million, the amount of our charge-offs. This compares to a loan loss provision of $2.3 million the prior quarter, and $9.6 million in the prior-year quarter. If credit quality trends continue to improve, as we believe they will, clearly, we would again this year see a further decrease to the amount of our provision for 2013.

One definite positive realized in the first quarter was the improvement in our net interest margin. For the quarter, our net interest margin increased from 3.05% the prior quarter to 3.14% in the most recent quarter. However, our margin was significantly below the 3.73% at this time last year. One of our biggest challenges this past quarter and year has been managing through an unprecedented low interest rate environment, which has and continues to cause significant declines in both our net interest income and net interest margin. This low interest rate environment has also allowed and sustained a wave of refinances which in turn caused a significant increase in premium amortization, greatly reducing our interest income.

This past quarter's premium amortization of $21.4 million, although still high by historical standards, did increase -- or did decrease, excuse me, did decrease by $1.9 million from the prior quarter. This led to a 13 basis point improvement in our investment portfolio yield in the first quarter, and an 8 basis point increase in our overall yield on earning assets.

Unfortunately, premium amortization was still $8.1 million greater than the same quarter last year. Nonetheless, there is some cause for hope that we will continue to see this line item decline further as we move through 2013. Most of what we read and track would suggest and point to a slowdown in refinance volume, which would subsequently lower premium amortization going forward.

One issue we were not able to escape this quarter was the continuous pressure on loan yields. Although for the most part I thought our banks did a very good job of managing their loan portfolio yields, considering the competitive forces currently in play we continue to see pressure on our interest income. At quarter end, our loan yields stood at 5.10%, down 8 basis points from the prior quarter. We expect further compression in loan yields this year, but hopefully at a slower pace of decline.

Offsetting some of the decrease in loan yield was a 2 basis point decline in funding costs during the quarter.

At quarter end, our cost on total paying liabilities was 46 basis points. This reduction, however, has not been enough to offset the impact of lower-yielding earning assets on net interest income. Since it appears that these low interest rates are going to stay down here for a while, we expect to see continued pressure on our revenue growth, especially in net interest income.

Competitive forces have made the task even more trying, as loan pricing continues to be extremely aggressive, not only impacting loan production but also both our net interest income and net interest margin.

Total net interest income declined by $1 million during the first quarter, and decreased by $7.8 million over the same quarter last year, an amount very similar to the increase in premium amortization.

We continue to attempt to protect our net interest income. However, this past quarter, there was not enough earning asset growth to offset the yield pressure. The decrease in premium amortization expense definitely helped. Unfortunately, it came late in the quarter.

As I have previously mentioned, if we see a significant slowdown in refinance volume and subsequently premium amortization, it would directly benefit both net interest income and the margin.

Noninterest income decreased $2.4 million on a linked quarter basis, but was up $2.6 million from the first quarter of last year, which was an increase of 13%.

Fees on sold loans, primarily mortgage origination income, remained at historically high levels. For the quarter, we generated $9.1 million in this category, down only slightly from the previous quarter, and up $2.3 million from the same quarter of last year.

The first quarter of each year is somewhat challenging in other fee income areas, primarily due to a shorter quarter and seasonal influences.

Aside from fees on sold loans, most other categories of noninterest income were basically flat compared to last year.

If we do see a decline in refinance activity as many again expect, it will most likely impact future quarters' fee income, especially gain on sale of loans. However, there should be a compensating reduction in premium amortization that could offset any other reduction in fee income.

Our noninterest expense for the quarter decreased by $4.6 million sequentially, and $5.6 million from the prior-year quarter, due primarily to lower OREO expense. There was very little change in most of the other expense categories as our bank divisions continue to do an excellent job of controlling the cost of most other line items.

OREO expense was down to $884,000 this quarter -- that's total OREO expense -- compared to $6.8 million in the prior-year quarter. Although OREO expense is volatile from quarter-to-quarter, our trend line in this area continues to improve. Compensation and benefit expense -- always the largest expense for a financial institution -- was also well-contained. Increasing by only 4% from a year ago.

In summary, 2013 is off to a good start. We need to ratchet up our loan growth further to help offset the effects of lower loan yields. At the same time, we need to continue to work hard at maintaining the lower credit cost we achieved this past quarter.

We're excited to bring on our 2 new banks the next 2 quarters and believe they will be very good additions to our family of banks.

It's been a very busy and exciting first quarter for all of us. We definitely believe we made some significant strides towards positioning the company for more growth and higher earnings as we move forward. And these strategic initiatives we have put in place this quarter should enhance our company's performance for years to come.

And those are the end of my formal remarks. So we'll now open the lines up and take some questions.

Operator

[Operator Instructions] Our first question comes from the line of Brad Milsaps with Sandler O'Neill.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Mick, I was just curious, can you maybe talk a little bit about your loan growth prospects? Any certain part of your footprint that's showing you a little bit more growth. I know you mentioned the 2% number. Just kind of curious kind of what your thoughts are on kind of where you'll -- what categories you'll see a lot of that be driven from? And do you feel like you've run off the bulk of the portfolio that you wanted to get rid of and you can kind of start to grow from this point going forward? I'm just kind of curious how much that would impact the number as well?

Michael J. Blodnick

Well, there's still, as I mentioned earlier, there still are some distressed properties and projects out there that we'd kind of like to push out the door, which are still not necessarily in OREO, they're in NPLs, which would affect -- which would provide a headwind if we were successful in disposing of those, Brad, to our overall loan growth. But we're winding that down now, there's no doubt about it. And we really think that some of the larger projects that we can be successful in getting rid of some of them. A lot of those are already in OREO, so those would not be impacting our loan numbers. So it's kind of a mixed bag there but the larger projects probably are sitting in that OREO bucket. As far as your first question regarding where are we seeing the activity or the loan growth, I would probably say that it's -- there's no one area, Brad, where it's just exceptionally stronger than the rest of the footprint. I mean, I think we're seeing deals and opportunities and loans coming from all the banks. If I had to pick one area though, I guess, that maybe we're seeing a little bit stronger loan growth, it'd probably be coming out of Idaho, coming out of that Spokane, Coeur d'Alene, Boise area. But it's not real significant as far as what we're seeing there versus what we're seeing in Montana, Wyoming, Colorado. So it's hard to put your finger on one particular market that's really driving a lot of loan growth. But I suspect that if you look through the first quarter's numbers. And as I said in my remarks, we were very, very pleasantly surprised to have an increase in the first quarter, because that usually doesn't happen even in the best of times. I'm not sure that we can pinpoint one exact bank or one exact market for causing most of the growth. Barry, you have any other thoughts or you have any other comments?

Barry Johnston

Probably where most of our growth is coming from is the other construction category, it's probably the -- any commercial real estate projects. We have some hospitals under construction, 4 or 5 apartment complexes that are going up, and then we advanced on some office buildings. And so that's probably -- and that kind of goes with this time of the year, as these projects start coming out of the ground. We've had a real mild winter in our area this year, so a lot of the construction projects that normally wouldn't start until the second quarter of the year actually have come out of the ground, and that's what we're seeing some of that growth is on that commercial real estate, both owner and nonowner-occupied.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Great. And then maybe a question for Mick or Ron. You guys did a nice job on expenses in the first quarter. Looked like other expenses were down quite a bit. Sort of absent any reductions related to mortgage banking commissions, is this a pretty good run rate for the year? Do you have any other expense initiatives planned? I know you had the charter consolidation a few quarters ago. Anything else on the horizon that would move that number plus or minus either way?

Michael J. Blodnick

I don't really think so, Brad. I think that, I think it's probably -- you're looking at a pretty decent run rate going forward.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Okay. Great. And Mick, do you happen to have the accruing TDR number?

Michael J. Blodnick

I do. It was $80 million down from $100 million. So it was a 20% drop from end of year.

Operator

Our next question comes from the line of Jeff Rulis with D.A. Davidson.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

Mick, following up on the OREO cost, anything sort of -- I don't know if it's one-time, I mean it's historically a more challenging quarter for you guys on the real estate side. And I think -- do you take away that it -- there were certain projects or something you felt good about moving that, that was a lower number? Or you alluded to kind of the firming up of real estate, encouraged by that trend?

Michael J. Blodnick

I really do think, Jeff, that some of the real estate trends and the valuations that we're seeing is really propping up that number. That's not to say that from quarter-to-quarter, you might have that one project where we choose to just finally get rid of it, we're willing to take maybe a larger loss than we needed to if we held onto it. But take for example in this last quarter, there was 1 piece of OREO that we sold. And I think there was virtually no loss at all on that piece of OREO. And it was a reflection, Jeff, of the fact that real estate values have firmed and this was on some developed lots, and they wanted those developed lots. So if we can continue to see that kind of firming -- we haven't probably in our markets, at least I am not aware and I don't think Barry has informed me that anywhere in our footprint have we seen -- maybe with the -- a little bit with the exception of Boise. I'm hearing that there's some shortage of maybe nice developed lots down there. But for the most part, we still have a fair number of subdivisions and lots available, unlike what you're hearing in some of the other parts of the country. I did talk to one local realtor here just yesterday, and the one area that we are probably very, very similar to most of the other parts of the country is the inventory of homes is very, very tight. There's not a lot of homes out there for sale. This particular realtor was crying for listings, wasn't crying for buyers. So maybe that bodes well. We had a big meeting yesterday among all of our real estate staff from all of the banks. And I think that was one of the things we talked a little bit about is what kind of resi construction opportunities are we going to be seeing over the rest of this year and into 2014. But I do think that we still could, Jeff, have that one -- we could still have that one project, an OREO that we decide we're just done with it, we want it gone. But for the most part I think that we've marked these things pretty conservatively. And this increasing real estate values that we're experiencing, I think bodes pretty well for us to not have to take a lot of significant charges as we move forward.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

That's good news. On the CMO side, you've talked about hopefully sort of minimizing the premium amortization. But is there -- within that portfolio, any more moves to sort of actively move away from the CMO exposure going forward?

Michael J. Blodnick

Yes. I mean, I think we will. I mean, it's still -- they're so -- that portfolio is huge, so -- I mean, it's not like we will probably just cut the cord tomorrow and just stop buying CMOs. But in this first quarter, we, as I mentioned, we did start to change the mix. We didn't buy anywhere near as many CMOs as we have the last 3, 4, almost 5 years now. I would suspect some of those trends are going to continue. The other thing, Jeff, is if we could start to see a strengthening in loan growth, that obviously would take some pressure off of our need to further backfill with CMO securities. So we're hoping that we can finally start to see better loan growth volume. And in addition, I think you will continue to see a reshuffling of the mix.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

And then one quick last one, just a housekeeping. The First State closing, does that look like an end of quarter, end of Q2 event at this point?

Michael J. Blodnick

Well, right now, we're keeping our fingers crossed. But every indication is that we should be closing on May 31.

Operator

Our next question comes from the line of Joe Morford with RBC.

Joe Morford - RBC Capital Markets, LLC, Research Division

I guess, just curious, your current thoughts on the reserve and provisioning, particularly with the reserves still hanging up near that 4% level and generally all [ph] accounts, the credit trends moving in the right direction, recognizing the portfolio's not growing too much right now. When should we start to see that start to come down at maybe a little faster pace?

Michael J. Blodnick

I didn't mention any in my formal remarks but I figured that maybe this question would come up, so -- and it's a very good question. One of the reasons that we were probably a little on the conservative side, and Barry and myself talked about this quite a bit throughout the quarter. As you know, we haven't been a company that's been too anxious to release reserves. We recognize that, that reserve and that allowance that we have is fully satisfactory. But we also -- because of the transactions -- we also wanted to make sure that on a pro forma basis, that we're still comfortable with our loan loss reserve. And remember, under purchase accounting, we're not bringing any reserves over when we close on First State Bank and when we close on North Cascades National. So with no reserve coming over, I mean we wanted to make sure that -- where are we going to be? And I've done the math, and it looks like we're still, even with the addition of First State Bank and North Cascades, and with no provision coming over on either those transactions, we should still be right around 3.5%, between 3.4% and 3.5%, ALLL. So we kind of want to wait and -- we didn't want to do anything, we wanted to make sure we fully covered our charge-offs this quarter. Didn't want to go out there and do something goofy, and have some purchase accounting numbers that came out differently than what we expected. So we should have, as I mentioned just before to Jeff, we should have -- keep our fingers crossed -- we're hoping to have First State Bank closed and completed the end of next month, and then we'll be looking to close -- right now our tentative date to close on North Cascades is July 31, we're hoping we can stay on track for that closing. But my expectations are that even after we close both those transactions, and even bringing no reserve over, I think our reserve is still going to be definitely adequate. The other good thing is, as we've mentioned on the conference calls with the investors, after both of those transactions, both banks are bringing over some very, very attractive and very strong loan portfolios, especially from a credit quality perspective. So we're going to have to wait and see how the dust settles, see what some of our other credit quality numbers look like. But we fully expect that each of those transactions are further going to lower all of our credit quality ratios and lower them by -- in a good way.

Joe Morford - RBC Capital Markets, LLC, Research Division

And when you do start getting to that point of [indiscernible] might release some more reserves that you're more likely to go just a 0 provision rather than, say, a negative provision?

Michael J. Blodnick

Absolutely. No doubt. I just never -- I just can't even think of a scenario that would ever -- where I would ever want to go to a negative provision. Not after all the hard work these last 5 years, I would never recommend and I just can't imagine us even contemplating that one, Joe.

Operator

Our next question comes from the line of Jennifer Demba with SunTrust Robinson Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Mick, a follow-up on Joe's line of questioning. So your net charge-offs were around, I think, 80 basis points last year. Would you -- and they obviously went down substantially in the first quarter. Would you envision them being sort of half the rate of last year this year, or what do you think will play out here in 2013?

Michael J. Blodnick

That's probably a really good estimate, Jen. I mean, I'd love to have them end the year at 24 basis points, which was the annualized run rate coming out of the first quarter. But that may be -- that may just be a little bit naïve. I think you're probably much closer to thinking that if we could end the year in that 40, maybe even as high as 50, depends how aggressive we got from charging some additional things off. But I think you're closer to hitting the mark with about half of where we were last year.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

And you said you guys are still, even with the deals that you have pending, you feel like you have enough capital to continue to acquire if something comes available. Have you seen any new conversations emerge after announcing the 2 deals recently?

Michael J. Blodnick

Yes. I think that whenever you do something like we did in a 30-day period, I think you're probably going to get other individuals' attentions and other community bankers' attentions -- and some of those dialogues have taken place. But I think I've been pretty clear, Jen, about one thing, and that is that we're going to be very methodical and thoughtful about getting these 2 integrated and getting them integrated right. But once again, we've got the ability to do something. I'm just -- right now, we're just not looking that aggressively to do something. If something absolutely was so compelling, certainly we'd take a look at it. But with some of the conversations that have transpired over the last couple of months since these transactions were announced -- some of those, maybe a year from now we might entertain doing something. Others, I'm not so sure. But for the time being, we're going to really be focused now over the next 2 to 3 quarters on getting both Wyoming and Washington integrated.

Operator

Our next question comes from Jacque Chimera with KBW.

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

Mick, I wanted to just swing back over to the securities portfolio and the kind of the less CMOs that you're booking and then the other things that you're putting into that portfolio. Assuming that mortgage volume just maintains the refinance and payoffs and everything like that, as you continue with this new plan, will you still see positive impacts in the future quarters, just from the reshuffle alone?

Michael J. Blodnick

We should. Yes. Most definitely, Jacque, we should. I mean, this first quarter, obviously we didn't see the cash flow come off of the CMO portfolio that we saw in the fourth quarter. And that was a good thing. So it didn't make us run as fast just to replace some of the dollars as we had to back in quarters 3 and 4 of last year. But there's no doubt that as we start to reshuffle the deck a little bit on the investment portfolio that just that reshuffling alone -- forget the fact like you said that refis don't go down a lot -- that will have some positive impact to premium amortization. What would really be an added catalyst would be if we did see that slow down in refis. And I've said to all of you before, and you know this very well, that we understand, and I even mentioned in my remarks that we would give up fee income if [ph] refis. Just for example, I just got the numbers, and for the first quarter of the year, 63% of our mortgage volume was refis and 37% were purchases. We're going to work hard on moving that purchase transaction number higher, big part of what Barry and Don Chery and them spent yesterday with all of our mortgage people on was to come up with strategies as to how to do that. But let's just say that refis, as you said, Jacque, stay at the same level, I still think that we're going to see better, better premium amortization. And if they are to lower like some experts around the country think, and some of them are calling for a pretty significant lowering of refis. That's going to hurt our fee income. There's no way were going to replace all that fee income with purchases. But boy, that would really be a good thing for the premium amortization side.

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

Now understood. And just also circling back to the comment you had about the lack of inventory and the possibility of residential construction. Is that a necessity to see purchase volume increase meaningfully? I mean outside of just the ratio shift that happens as mortgage refi comes down?

Michael J. Blodnick

Yes, I think it's somewhat hand-in-hand. You're right. I mean, if we can have all -- that's an excellent question. We could have all the intent in the world of increasing purchase activity. But as that realtor told me yesterday, if there's nothing to purchase -- because there's not a lot of inventory out there for individuals to purchase -- that's going to make that, that much more challenging. Which then, I think, if that is a prolonged issue -- I mean, we saw the numbers that came out yesterday, day before. I mean, new housing starts now for last month were at an annualized rate of 1 million housing starts. Now I recognized a disproportionate amount of that was multifamily. But I'm not sure that we're going to continue to see that disproportionate amount of multifamily to single-family. I think that trend could start to move over a little bit more into single-family construction. And that's maybe what it's going to take in order to allow people to purchase their homes because it's just sounding like, right now, that inventory levels are pretty lean.

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then, just lastly. There -- a lot of banks had a decline in their mortgage banking income between 4Q and 1Q, but yours held pretty flat. Was that volume-driven? Gain-on-sale-driven? Were there any major changes between the 2 quarters?

Michael J. Blodnick

No. I mean, the volumes were pretty much intact. We've set some goals for all the banks this year. They're going to be challenging goals, and it's not going to be easy for them. But I think, in the first quarter, most of that maintaining of that level of gain on sale or mortgage origination fee income was the fact that our volumes stayed pretty much intact. It wasn't that we were -- in fact, if anything, I think, in the first quarter, we saw some -- we didn't see some of the spreads out there on service release premium that we saw in the third and fourth quarter when those spreads were widening because there was so much volume and so much activity that rates were being -- I don't know if it was artificially maintained higher, but I think those moved back in, in this last quarter. So definitely, as a result we would have had to have had just as good a volume.

Operator

[Operator Instructions] Our next question comes from the line of Tim Coffey with FIG Partners.

Timothy N. Coffey - FIG Partners, LLC, Research Division

Mick, I wanted to talk about the securities book one more time. Given the changes that are going to be happening to the balance sheet going forward with the acquisitions, are you in a position to start unwinding the securities books? You talked about reshuffling the mix and lowering the concentration of CMOs. But on the aggregate portfolio, should we expect that it's going to start declining going forward?

Michael J. Blodnick

Tim, we wouldn't really have to at this point in time because, I think, if you add both of these transactions, I mean, it's going to take -- and even maintained the investment portfolio at its current size, I mean, we're going to be somewhere in that $8.5 million (sic) [billion] asset range. I think what's going to drive -- 2 things are going to drive our -- the size of that investment portfolio, Tim. Number one, clearly, right now, if you get closer to $10 billion in assets, that's going to be an absolute key consideration as to letting and drawing that investment portfolio down. No doubt about that. But we've got a ways to go there. I think, in the interim, we're going to be looking at, okay, the securities we are buying, are they creating any kind of earnings and incremental net income for us? If some of the things we've done this last quarter, we're still comfortable what they are, we'll do that. The other thing, I guess, too, Tim, is once we get both of the transactions closed, then we can sit back and see just exactly where we're at and what we've actually done to the balance sheet. And then from that, and that won't be till late third quarter by the time we get them both done, then we'll probably sit back and decide just what is our strategy going forward. I would not expect that between now and the middle part of August, Tim, that we're going to make any major strategical changes aside from what we've been doing, that is to have some change in the mix of the investment portfolio. I would not expect that you're going to see that come off by $200 million, $300 million, $400 million.

Timothy N. Coffey - FIG Partners, LLC, Research Division

But sort of a long-term goal of yours is to reduce the securities...

Michael J. Blodnick

Absolutely. I mean, yes. I mean, I can see, at some point in time, if we're successful, which I think we can be, in adding more and more community banks to the company, then we've got, and we've said this over and over, we've got that great lever in this investment portfolio. And ideally, we would like to be, 3, 5 years from now, we'd like to be a $9.5 billion bank with a 15% or 20% investment portfolio. And that would come by more and more, preferably, organic growth or acquisitions. And as we get closer to that $10 billion in assets, pare back that investment portfolio.

Operator

I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Mick Blodnick for closing remarks.

Michael J. Blodnick

Okay. Well, I appreciate all of you taking the time this morning to join us. Again, I thought it was a pretty good start to 2013. Hopefully, over the next 3 quarters, we can add to what we've started. As I mentioned in my formal remarks, we are very, very excited to be bringing on First State Bank and North Cascades National Bank. We'll be working very hard over the next 3 quarters of this year to close and begin the integration process, especially in the back office side. I think both of these transactions are going to create a great deal of opportunities for us, as far as the ability to further grow our franchise, both down in Southeast Wyoming and Northern Colorado, as well as Central Washington. So we're excited, and with that, I hope everybody has a great weekend, and I look forward to talking to you later. Bye now.

Operator

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

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