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Glacier Bancorp Inc. (NASDAQ:GBCI)

Q1 2014 Earnings Conference Call

April 22, 2014 11:00 AM ET

Executives

Mick Blodnick – President and CEO

Ron Copher – EVP and CFO

Don Chery – EVP and Chief Administrative Officer

Analysts

Brett Rabatin – Sterne, Agee & Leach

Jeff Rulis – D.A. Davidson

Jennifer Demba – SunTrust Robinson Humphrey

Jacquelynne Chimera – Keefe, Bruyette & Woods

Joe Morford – RBC Capital Markets

Tim Coffey – FIG Partners

Operator

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp First Quarter Earnings Call. (Operator Instructions) As a reminder, today's program is being recorded. I would now like to introduce your host for today's conference. President and CEO of Glacier Bancorp, Mick Blodnick. Please proceed, sir.

Mick Blodnick

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; and Angela Dose, our Principal Accounting Officer.

Yesterday, we reported earnings for the first quarter of 2014. Net income for the quarter was $26,700,000. That’s an increase of 29% compared to the $20,800,000 earned in last year's quarter. To produced diluted earnings per share for the quarter of $0.36, that compares to $0.29 in the prior year quarter, a 24% increase.

As we assessed our first quarter performance, a couple of things stood out. It was a record quarter for earnings, which is unusual for the first quarter of the year. We grew our loan portfolio, something that has and always been possible during the winter months.

Our net interest margin move back above 4%, almost to 1% improvement the past year, as we continue to get a lift, from not only a reduction in premium amortization expense, but also the change in the mix of our earnings assets.

And finally credit quality trended better, especially in the area of net charge-offs. Offsetting these highlights however, was a decrease in mortgage origination income, as mortgage volumes took a substantial drop compared to what we've generated in the same quarter last year.

Nevertheless, the benefit we received this past quarter from lower premium amortization was more than enough to cover the loss of fee income from mortgages. It was a clean quarter with no one-time gains or losses or other non-recurring income or expense items.

We generated a very respectable return on average assets for the quarter of 1.39% and return on tangible equity of 13.07%. Both of these performance ratios were the best we produced in over five years and approach the levels, we consistently delivered for years prior to the economic downturn.

For us, it's always difficult to predict how the year will play out especially after the first quarter where winter definitely has an impact on overall activity levels. With that said, we are hopeful, that as we begun the second quarter warmer temperatures will equate to increased activity especially in the lending area.

Loan growth of 2.5% annualized this past quarter was above expectations considering the harsher winter this year and puts us in a good position to make our goal for the year of 5% loan growth. This was the fifth consecutive quarter we have increased our loan portfolio on an organic basis, after five years of declines.

It appears momentum has continuing to build, as we enter what historically has been our best two quarters for loan production. Once again this quarter, the largest percentage of our loan growth came in commercial real estate.

However, we also had a nice increase in multifamily residential loans. A section of the portfolio, we have long felt, we were underweight in and one that brings further diversification to our overall mix of loans.

One area, we hope would continue to grow was our residential construction portfolio. Unfortunately, this past quarter we experienced 6% decline in this loan type. We hope this was more a function of the cold weather and now the spring is here, we should begin to see a pickup in activity and resulting increase in residential construction lines.

Two other loan sectors; saw decreases in the quarter. They were both our commercial constructions and agricultural loans. However in both cases, these were seasonal reductions and we fully expect both loan types to increase through the next two quarters.

Again this quarter, we repositioned our balance sheet by continuing to change the mix of our earning assets. With the growth in loans, we were able to decrease the size of our investment portfolio by 2%. Primarily, through the reduction in collateralized mortgage obligation.

At quarter end investments represented 40% of total assets. A significant reduction from the 48% this time last year. Our goal is to further reduce the size of our securities portfolio, but that will depend on the amount of loan growth, we can produce. Also in the quarter, we moved $485 million in securities or 15% of the portfolio from the available-for-sale to held-to-maturity.

Since we're basically buying the whole securities. The move to held-to-maturity made sense and reduces the impact and volatility to tangible common equity. On securities, we most likely would not sell in the first place.

Also, transferring these particular investments to held-to-maturity had no meaningful effect on our liquidity. We saw good growth in non-interest bearing deposits this quarter of $22 million or 6% annualized.

Although, we were cognizant of the fact that some of our customers still have excess deposits parked in these accounts. They could withdraw with the right investment or business opportunity arose. We have yet to see that take place.

Nevertheless, we do a great deal of modeling and formulating strategies to offset the impact of that event should have taken place. One offset is to continue focus on growing our base of checking account customers. Here we've had great results recently.

The number of new checking accounts relationship established this quarter exceeded 5% on an annualized basis. From this time of year, this is an excellent number and especially encouraging considering the best months for generating new checking accounts are still in front of us.

Excluding wholesale deposits, interest bearing deposits increased $49 million or 5% annualized. With most of the increased coming from money market deposit accounts and regular savings accounts because we were able to grow, core non-interest bearing deposits as well as interest bearing deposits again this quarter.

It allowed us to shrink both wholesale deposits and Federal Home Loan Bank borrowing this quarter by 13% and 18% respectively. At the same time, the reduction in the size of our investment portfolio. Also made it possible for us to decrease, the level of both our wholesale funds and borrowings, in the quarter and for the year.

We had another good quarter that saw improving trends in credit quality. Non-performing assets end of the quarter at $107 million, $103 million excluding the government guaranteed loans, that's a 2% reduction.

Currently we are working on a couple of large non-performers that if they cure, would really jumpstart our initiative to reduce non-performing assets below $90 million this year. Our non-performing assets end of the years at 1.37% of total assets compared to 1.79% a year earlier.

This definitely getting more difficult to lower non-performing assets, but the banks continue to work these problem assets hard. So we are hopeful by year-end, we've worked the number down below the $90 million goal, we set.

One real bright spot this quarter, was our net charge-offs, which totaled $744,000 or 8 basis points annualized. The significant drop from the prior quarter and the best net charge-off figure, we have recorded since the first quarter of 2008.

Our goal for the year is to keep our net charge-offs under 25 basis points. So we are off to a good start in that regard. Not only, where our overall charge-offs much lower this quarter, but for the third consecutive quarter we continue to recover substantial amounts of dollars on loans that were previously charged off.

Hopefully, we will continue to see this trend of recoveries through the rest of the year. Early stage's delinquencies was one area, where we took a step backwards. As the $1 amount of 30-89 days past due increased by $10.7 million during the quarter to $43 million.

A couple of large credits totaling $6.7 million went just over 30 days past due and it's since been brought current. However, an additional $6 million is still past due that represents one borrower that is expected to be current by May.

At this time of year, due to a large seasonal employment. We historically see an increase in delinquencies. Our allowance for loan and lease losses ended the quarter at 3.2% basically flat from the prior quarters 3.21%, as the increase in loan balances contributed to the slight decline.

In the most recent quarter, we provisioned $1.1 million which exceeded net charge-offs by $378,000, but was less than the loan loss provision of $1.8 million the prior quarter and $2.1 million in the prior year quarter.

The credit quality trends continue to improve; we could see our loan loss provision decreased further, as we move into 2014. Net interest income increased $17 million or 34% from the same quarter last year, as interest income increased by $16.1 million and interest expense declined by $800,000.

The reduction in premium amortization has been the main catalyst that is led to an increase, in interest income this past year. This was the fifth consecutive quarter, our interest to income benefited from lower premium amortization expense.

As a result, interest to income from investment securities has increased 71% compared to the first quarter of last year. However, interest to income also got a boost from commercial loans, which falls with a 22% increase in interest to income, over the same quarter last year.

For us, additional growth in net interest to income through the rest of this year, will depend upon our ability to generate high-yielding loans and not from decreases and premium amortization, which although expected to stay at these low levels will not decrease much further from here.

For the quarter, our net interest margin increased 14 basis from 3.88% to prior quarter to 4.02% in the most recent quarter. This also was the fifth consecutive increase to the margin, driven primarily by a shift in earning assets away from securities and into higher yielding loans and as mentioned earlier, five straight quarters in which a decrease and premium amortization has had a positive impact on yield of our investment portfolio.

This quarters' reduction in premium amortization of $1.4 million accounted for 6 of the 14 basis points in net interest margin improvement; 3 basis points were attributable to purchase accounting adjustment and the remaining 5 basis points came from the shift to higher yielding loans and securities.

We've seen a dramatic increase in our net interest margin over the past four quarter. From 3.14% to 4.02%, significantly increasing our earnings along the way. Now hopefully, we can hold the margin in this 4% range, at least until such time when increasing interest rate would move it higher.

At quarter end, our cost on total paying liabilities was 40 basis points unchanged from the prior quarter and down 6 basis points compared to last year's first quarter. It's unlikely; we will see much further reduction in our funding cost, this rate cycle. With that said, we continue to work very hard to increase our transaction account base.

Although currently, this may not have an immediate impact to our cost of funds, we believe attracting a greater percentage of these low cost deposits will have a positive effect on our funding cost in a higher interest rate environment.

Clearly, we profited the last year as net interest income significantly. As the slowdown in refinance volume led to lower premium amortization. Unfortunately, this decline in refinance is also caused to significant reduction in mortgage origination fee income.

Nevertheless, the overall net outcome was still a huge positive that definitely benefited our company. Non-interest income decreased by $3.6 million from the prior year quarter as mortgage origination fees declined by $5.5 million or 60%.

As we enter the second quarter find any unforeseen interest rate surprises. We should see better mortgage volume from both purchase transactions and new construction. It is still too early to tell what impact if any, the new qualified mortgage, and ability to repay rules are having on our production levels.

It will most likely take a few more quarters to better under the implications rules having on mortgage volume. With that said, the mortgage pipeline appears to be firming up some as we strive to replace refinances with purchase transaction and construction loans.

Upsetting the decrease in mortgage origination fees was an improvement in service charge income of $1.6 million as our base of customers continues to expand providing additional opportunities to grow this income stream.

Even though we experienced a nice increase from the same quarter last year. On a linked-quarter basis, we were still down $1.4 million because of the fewer number of days in the first quarter each year. We had best experienced modest reductions in service charge income compared to the other three quarters.

With that said, as we enter the next two quarters. If account growth maintains its current pace, we should see increase to fee income, in this area. Although, service charged fee income was down from the always strong third and fourth quarter. We were pleased at just, how well this revenue source held up during the quarter.

Our banks continue to generate a larger and larger customer base, especially the two new banks because they had implemented and are beginning to benefit from our customer acquisition strategies. So far to the first quarter of the year. Our checking account base which contributes most of the service charge income grew at even a faster pace than what we achieved in 2013.

Part of this came from the two new banks, but we also saw nice growth from our legacy banks. I thought we did a pretty job of managing non-interest expense during the quarter as the banks continue to hold the line on those expenses they have control over.

Sequentially, our expenses decreased by $3 million from the prior quarter with $1.8 million of that amount coming from OREO related expenses, which tend to fluctuate from quarter-to-quarter. In addition, other expenses were also down $2.1 million on a linked-quarter basis. Again, primarily due to the debit card fraud and loan buyback expense we had last quarter.

Excluding these two line items, the remaining expenses were basically flat from the prior quarter. Our efficiency ratio for the quarter came in at 53% as compared to 54% the prior quarter and 55% in the same quarter last year.

In summary, 2014 has gotten off to a good start. If loan growth accelerate through the remaining three quarters. We hopefully should hit both our balance sheet goals and earnings targets for the year.

Our net interest margin continues to get better, asset quality is still improving, and so far our operating expenses remained in check. If we can maintain some of these trends and improve upon others. We should be in a position to have another good year.

And with that, that is the end of my formal remarks and we will now open the lines up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will be coming from the line of Brett Rabatin from Sterne, Agee. Your line is open.

Brett Rabatin – Sterne, Agee & Leach

Hi, Mick. Good morning.

Mick Blodnick

Hi Brett.

Brett Rabatin – Sterne, Agee & Leach

Wanted to, I guess first start with the loan portfolio and thinking about growth and you mentioned in multifamily in the 5% growth target. Can you talk about how much you think, you might grow multifamily this year and where you're seeing in pricing there and then just generally how much [eq] pickup, you think you'll see in the portfolio maybe in the second quarter here?

Mick Blodnick

As far as the multifamily side of it. I mean, that was some of what surprise to us because it hasn't been a portion of the loan portfolio that we've historically have had a lot of real successes. It's not been a piece of the portfolio or section of the portfolio breadth that we've actually gone after in a big, big way.

We just happen to have a couple of nice transactions during the quarter that came from existing customers. As far as, our ability to continue to grow that. I'm just really not sure; I just don't think that there is enough of those kind of opportunities within our market. There's a lot of players that really do focus on multifamily lending that seem to be all over that type of loan and that just happen in the past with us.

So I think, we were fortunate that we saw an increase this last quarter, but I'm not expecting that's going to be an area. It would be greater, if we could continue to grow because it is a nice piece of diversification as I say, in my remarks away some of our more traditional lines of loans, but I just don't believe that we are going to see that they ramp up a whole bunch, more the rest of the year.

In regards to [eq], we are coming to our obviously our two best quarter. I haven't put up percentage on it. I don't know Barry, if you have this as far as what we hope to increase but let's face it. The overall portfolio is twice as large as it was a year ago and that's come primarily from the addition of the two new banks

What we will get over the next two quarters, with the operating lines being drawn on. It's going to definitely add to [eq] outstanding. But as far as a percentage, my best guess is that over the next two quarters that we will maybe see a 10% to 15% increase from the outstanding at the end of the year.

So you take that number, you're probably talking $25 million to $35 million breadth and then by the end of the year. Our expectations of everything goes away most of those lines to be paid back down, but we'll have this for over the next six to seven months. We will have this increase in [eq] lines outstanding.

And again, my guess would be that's going to range somewhere in the $25 million to $35 million range.

Brett Rabatin – Sterne, Agee & Leach

Okay. I'm sorry, great color and the other thing I was just curious about, you talked about holding the margin at 4%. Can you maybe talk a little bit about, the loan portfolio yields going forward. I mean, keep them portfolio with the present yield and then any additional benefit you think, you might get on a premium am going forward?

Mick Blodnick

If we do get any benefit on premium am, it's going to be much smaller. It's even going to be much smaller, I mean. If we go back four quarters and I look at these numbers recently. We had about $3 million reduction in the first quarter or maybe that was, yes that was first quarter or second quarter of last year followed by a $3.2 million reduction followed by a $6 million in the fourth quarter and then like I said $1.4 million this quarter.

We could see some reduction because I think, if you looked at March's number and carry March into the next three months that would probably give you a slight reduction, but believe I think that most of the gains there have already been noted and we've already received most of the benefit coming from premium amortization.

On the loan side; it appears as though, we've kind of hit that inflection point where we haven't seen yields on the loan portfolio change much here over the last two quarters that little bit of reduction in the fourth quarter, but as I noted this last quarter. The yield on the loan portfolio was flat.

I don't expect that there is a lot of further reduction. It seems like at the margin. The yield that we're putting new loans on is not materially depressing that overall loan yield and that's probably makes some sense.

I mean we've gone through a number of years now with that, that reduction in yield has been absolutely been an every quarter event, but I think again I think we've hit that inflection point now and we're expecting that yield kind of holds in this range, not obviously going to see any kind of increase in that yield until rates start moving up, but don't believe we're going to see a lot of additional contraction.

Now what will benefit us more than anything in the margin is the change of the mix. I mean, if we can as I said drive more and more volume into these higher yielding loan assets and out from the investment portfolio that obviously will do us some good and that's really where the focus is right now, but I just again make sure that we're doing everything we can, to try to generate more loans and maybe take pressure up about having to buy more and more securities.

Brett Rabatin – Sterne, Agee & Leach

Okay, great. I appreciate that color.

Mick Blodnick

You bet Brett.

Operator

Thank you. Our next question will be coming from the line of Jeff Rulis from D.A. Davidson. Your line is open.

Jeff Rulis – D.A. Davidson

Thanks, good morning.

Mick Blodnick

Hi Jeff.

Jeff Rulis – D.A. Davidson

Hi Mick. Just a question on the, I guess visibility on the gain on sale one, I know that's a one a tough one to predict but, kind of approaching a bottom here. Is that to debt, I guess approach zero, any sort of outlook on that front?

Mick Blodnick

You mean gain on sale, on the security portfolio?

Jeff Rulis – D.A. Davidson

No, within in the mortgage banking.

Mick Blodnick

Oh! The gain on sale on the fee income side.

Jeff Rulis – D.A. Davidson

Right, yes.

Mick Blodnick

Yes, I mean we've, as I said. I mean, there's 60% drop in mortgage origination fee income just from the same quarter last year that's much. I mean, we were expecting that was going to be down pretty significantly and yet I think it was even down more than what we had estimated from the same quarter last year.

Again, I'm hoping Jeff that we have seen kind of the bottom, we're certainly as we enter the spring now. We are certainly starting to see a little bit more activity that activity has got to come in the form as I said earlier purchases and construction. Although, there is always going to be some refinances out there and we still do some refinances.

It's a far cry from what it was, this time last year. So our hope is that with, the spring better weather coming, a renewed focus among our mortgage originators to really get our and reestablish and continue to firm up relationships with builders and realtors that this quarter hopefully will be the low point, when it comes to gain on sale.

Jeff Rulis – D.A. Davidson

And I apologize if this was addressed, I hopped on a little late. The compensation cost does that, anything one-time in there. Is that, I guess is there some seasonal [adds] or is that kind of core rate that we should assume going forward?

Mick Blodnick

On the compensation, I think that's pretty core. I mean, we've seen the reduction in compensation from the mortgage side obviously with the lower volume of mortgage originations. You know there's somewhat of an offset on the expense side, to those lower fee, when that comes clearly from the lower compensation expenses, but at the same time each quarter or each quarter especially the first quarter of the year obviously our FICA expenses move up.

We had some extraordinary expenses in the form, we paid some directors fees during the quarter that was paid in the first quarter that will not be paid to the rest of the year. A few minimal things like that Jeff, but nothing that I believe is so material that you could see a significant reduction moving forward.

So I think the compensation figure that you saw, is pretty core and one that you could probably rely on through the rest of the year.

Jeff Rulis – D.A. Davidson

Okay, thanks Mick.

Mick Blodnick

You bet.

Operator

Thank you. Our next question will be coming from the line of Jennifer Demba from SunTrust. Your line is open.

Jennifer Demba – SunTrust Robinson Humphrey

Thanks. Good morning.

Mick Blodnick

Hi Jennifer.

Jennifer Demba – SunTrust Robinson Humphrey

Just wondering, what kind of progress you think, you can make on the non-performing assets over the course of this year. Mick, based on what you're seeing right now.

Mick Blodnick

Well as I mentioned, we've got a couple of larger deals that there is never any guarantee Jennifer that they ever get done. They don't get done, until we are absolutely closed, but a couple of the remaining larger non-performers are currently in the process and it looks pretty encouraging that we could move a couple more of these.

As I said in my remarks, I mean our goal this year is to remove NPA's down to that $90 million get below or at that $90 million level. We started the year at $107 that's a $17 million reduction, which would be just about 20%, just slightly over 20% that's our goal for the year.

We think it's achievable, it's some of things that are looking like I said encouraging right now, do materialize. I definitely believe we can get down to that $90 million. I mean, obviously we'd like to get below that but that is our goal for the year is to see if we could, reduce that number by approximately another 20%.

It gets a little bit more difficult, as I have said in past quarters. As you get lower and lower and to the bottom of that barrel. Some of the remaining non-performing assets. It's not as if they're bad assets, it's just maybe they have a single utility. It's going to take the absolute life borrower in order to move that or to sell that property and in some cases, some of the property is just not the most attractive.

So you got a little bit of both and we are in the process working very, very hard again to this two or three transactions out there that if they do close I really do believe we will hit our goals till the year.

Jennifer Demba – SunTrust Robinson Humphrey

Thanks.

Operator

Thank you. Our next question will be coming from the line of Jacquelynne Chimera from Keefe, Bruyette & Woods. Your line is open.

Jacquelynne Chimera – Keefe, Bruyette & Woods

Mick, I wondered if you could give us an update on the two acquisitions you did last year and how the conversions are coming in the integration and everything.

Mick Blodnick

You bet Jacky. This Friday, we are converting on First State Bank of Wheatland that will be the final piece of integration that we will have to complete regarding that entire integration process. I think, both their staff and our staff both are technology people. Our operation staff have done a great job. Knock on wood, I mean you never get through any conversions without some hiccups and some things that get missed, but right now through all the testing when everything is been done, it's really looking good.

So my hats off to the staff at First State Bank, I think they've done an incredible of job focusing on this conversion and we are going to be flipping the switch on Friday evening, on that particular one. So we are off the two, that we partnered with last year that one will be totally integrated and then it's, we are in the process of doing the network conversion at North Cascades Bank, they're scheduled for that October, November timeframe for their conversion.

Once again, I think that with the staff that they have and I think we get a little bit better and we learn more and more from these conversions every time, we do them and we've done a lot of them. I would expect that last piece of that integration goes very, very well also.

So Jacky, if you want to call me next week. I can give you a better senses to how First State Bank's done, but our expectations are that it's going to go very, very well and talking with Marcia Johnson, our Chief Operations Officer. She's feeling very, very good and has said that the staff down there has been incredible to work with and she really feels good, where that conversions going this weekend.

Jacquelynne Chimera – Keefe, Bruyette & Woods

Okay, so is it safe to assume that then in the latter half of second quarter and fourth quarter, there will be a little bit of expense release associated with those conversions?

Mick Blodnick

That is correct.

Jacquelynne Chimera – Keefe, Bruyette & Woods

Okay and how do future discussions, look I know that you've said that two to three deals similar to what you did last year, is kind of what you're looking to do this year, if that's something that you think is achievable?

Mick Blodnick

Yes, I think there's an outside chance. Obviously, we are ready through the first quarter and there's nothing at this point in time, but lots of dialog, lots of discussions, lots of interesting things to discuss and look at so we are still hopeful. For us to put three together that might be a stretch but, it will certainly be nice to get one more done yet this year and if we could work on two that would be great.

Again, you just never know and all I can really say on the [bone] is that, there's been a lot of dialog, there's been a lot of interest from a lot of banks in Glacier and we'll just see where that takes us.

Jacquelynne Chimera – Keefe, Bruyette & Woods

And Washington, Utah and Colorado remained kind of your key markets of choice?

Mick Blodnick

Yes, I'd have to say we look at all six of them, all of the States and the only reason I mentioned Washington, Utah and Colorado is because you just don't have many HHI issues, market concentration issues in those States that we have more of an issue in Montana, Idaho and Wyoming, but I don't want to misinform or give anyone the wrong impression that we are not looking and we have not had dialog with banks in those other states also.

But I just think that the opportunities Jacky for us and the headwinds of doing transactions are much easier in those states.

Jacquelynne Chimera – Keefe, Bruyette & Woods

Okay, so discussions are taking placed broadly across the footprint.

Mick Blodnick

Across the footprint, that is correct.

Jacquelynne Chimera – Keefe, Bruyette & Woods

Okay. Great, thanks for the update.

Mick Blodnick

You bet. Thank you Jacky.

Operator

Thank you. Our next question will be coming from the line of Joe Morford from RBC Capital Markets. Your line is open.

Joe Morford – RBC Capital Markets

Thanks, good morning Mick.

Mick Blodnick

Hi Joe.

Joe Morford – RBC Capital Markets

Most of my stuff has been asked, but just one follow-up on credit quality. I mean given the drop in net charge-offs and the fact, you're still get some recoveries and prospect of getting NPA's down further. When might we see you perhaps take down the reserve at a little faster pace?

Mick Blodnick

Yes, I mean obviously we do the analysis every year, every quarter. We want to make sure that it's that reserve is fully adequate; we believe it is, at the end of the quarter. Can't really say whether we would take it down a whole bunch from here. I mean clearly, we got a lot of growth that could be added to that loan portfolio and still retained a very adequate in our mind, be very adequate [reserve].

I think Joe, the biggest thing for us is, we're going to have to see if credit trends do continue to improve. We expect that they will, but then probably the big driver is going to be two things; number one what kind of organic loan growth can we put on the books and then how successful are we in the M&A arena because like it or not.

Every time we do a transaction and under purchase accounting rules. We don't carry that ALLL over. So I mean, if it's going to be bank that's got any signs of loan portfolio that's going to have to be absorbed by our existing ALLL and we are mindful of that and I think that's one of the things that gives us some comfort that the level of the ALLL is where it is, we like where it is.

We think it's adequate for the type of business that we hope to produce organically as well as the additional business, we hope to put on the balance sheet via the (indiscernible). So it's about probably, I guess all I really have to say.

Joe Morford – RBC Capital Markets

That's enough.

Mick Blodnick

It's adequate.

Joe Morford – RBC Capital Markets

I would think so, okay that's helpful. Thanks Mick.

Operator

Thank you. Our next question will be coming from the line of Tim Coffey from FIG Partners. Your line is open.

Tim Coffey – FIG Partners

Good morning Mick.

Mick Blodnick

Hi Tim.

Tim Coffey – FIG Partners

I have a question about, you're possibly for net recovering going forward. Given that you know, you're entering the best two quarters of decision for you guys and the options in your specimen on the construction side, in terms of loans that's going forward. Does that all increase your options for net loan recoveries next couple of quarters?

Mick Blodnick

We've had, Tim we've had really three good quarters in the row now. Where recoveries have been awfully strong? It's one of those things where it's really difficult to gage, if now the second quarter that's going to continue. I mean, I would suspect that total charge-offs are going to behave.

I don't see at least we are not seeing anything out there right now, but it would be a big surprise. Although, I have been surprised many times. So I mean, the time I say that is now the time we're in this quarter something will come out of nowhere that no one could have foreseen or no one expect, but as we are looking at Tim is right now. It appears to us, charge-offs should remain fairly well behaved and there was a lot of dollars charged off.

As unfortunately we all know, during those down years and I think the banks were doing a really nice job of recovering some of those and that's what we really experienced here over the last three quarters. Well second quarter, the third quarter this year Tim, carry that on. We certainly hope so, we certainly believe there are loans out there to be recovered on.

It's just one of those where I can't really I'd just be speculating is to whether this next quarter is going to be as good as the last three, could even be better. I mean, there's clearly some loans out there that could be recovered on that would make that recovery another very, very or make this quarter for recoveries, another good quarter.

Tim Coffey – FIG Partners

All right, understood and then the answer with the income probably you gave it seems (indiscernible) that could be probably without this and premium amortization issues. My question that was on, interest expenses I mean that's been coming down fairly steadily. Are we going to appoint where it's going bottom exactly rise marginally.

Mick Blodnick

I don't see it rising in the near term Tim. You're right though, I mean it's not getting any lower. I mean like take for example this last quarter. I mean it flat-lined from the fourth quarter and even if you go back to the third quarter and compare third to fourth quarter. I mean, it was like 1 basis point or 2 basis point so. It's just really been now three quarters, where we haven't seen much movement on the interest expense line.

And I will not expect that to go down much. As I said, we work very, very hard at generating a lot of transaction accounts and the banks have done a great job of doing that and the new banks are really doing a nice job in that area.

Unfortunately though, when you bring it in a non-interest bearing account. It's not materially different than what we borrow money at and what we pay on other types of accounts and yet we still recognize the long-term inherent value built in those and that's why we continue to just drive down to each and every one of the banks the importance of growing that non-interest bearing, deposit base.

So that's and I think that during the summer months Tim, we usually see those balances increase as tourism increases just the overall activity level increases throughout our footprint. So it would be our hope that piece of our overall funding continues to get larger and larger, and larger. Maybe not, right now having a noticeable impact on our funding cost, but expectation with us is down the road.

Where the rates, do start to move back up those will be very, very valuable deposits and that's just the way we're approaching it.

Tim Coffey – FIG Partners

And then during your comment. You mentioned, some sort of deposit account of 5%, is that kind of the target growth for you?

Mick Blodnick

No, that's actually so far on an annualized basis, that's exceeding our goal. Our goal was 3%, so through the first quarter, we have seen better growth than what our expectations were and what our plan called for, that's why I'm saying if we can continue to hold that target growth for the rest of the year that will be outstanding.

And it will trump, what we did last year. Last year, our growth was over 4%, we figured that it was going to be tough because we had a very, very good year in 2013. Felt, that was going to be very difficult to replicate. So we actually brought down our expectations a little bit and we are calling for 3% growth this year, but through the first quarter we did a lot better than that.

So now, I'm going to be very interested to see if that momentum can be maintained and the pace of 5% transaction account growth will hold through the remaining three quarters of the year. If it does, then that will be outstanding.

Once again, Tim you're talking 5% on a much, much bigger base too. I mean, we're approaching 300,000 checking account customers. So I mean, it's one thing they're 100,000. Where 5% means 5,000. We're at 300,000, it means 15,000 new accounts. So it's a bigger deal for us and one that we really focus on, the banks really spend a lot of energy and time and effort in this area.

And so far through the first quarter, it's paid off.

Tim Coffey – FIG Partners

All right. Mick, I appreciate. Those were all my questions.

Mick Blodnick

Thanks Tim.

Operator

Thank you. We have another question from the line of Brett Rabatin from Sterne, Agee. Your line is open.

Brett Rabatin – Sterne, Agee & Leach

My (Indiscernible) thank you.

Operator

And at this time I'm not showing any further questions.

Mick Blodnick

Okay, well thank you all very much for joining us this morning and again. I believe, we've got the year off to a good start. Now the key for us, is to continue to maintain this level of momentum. Hopefully as we enter, what historically and traditionally for us has always been the two busiest quarters.

We certainly, certainly hope that is the case in 2014. So with that, thank you all for joining us this morning and have a great rest of the week. 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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