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Glacier Bancorp, Inc. (NASDAQ:GBCI)

Q2 2014 Earnings Conference Call

July 24, 2014 11:00 AM ET

Executives

Michael J. Blodnick – President and Chief Executive Officer

Barry Johnston – Chief Credit Administrator

Analysts

Brad Milsaps – Sandler O'Neill & Partners LP

Jeffrey Rulis – D.A. Davidson & Co.

Michael Young - SunTrust Robinson Humphrey, Inc.

Daniel Edward Cardenas – Raymond James & Associates, Inc.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

Joseph K. Morford III – RBC Capital Markets LLC

Operator

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Investor Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer section and instruction will follow at this time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Michael J. Blodnick

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

Yesterday afternoon we reported earnings for the second quarter of 2014. Earnings for the quarter were a record $28.7 million. That compares to $26.7 million in the prior quarter and $22.7 million in last year’s quarter. That’s an increase of 26%. Diluted earnings per share for the quarter were $0.38, again compared to $0.36 last quarter and $0.31 in the prior year’s quarter, a 23% increase.

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

We earned an ROA for the quarter of 1.47% and a return on tangible equity of 13.47%, both ratios represent the best performance for us since June of 2008, and were similar to the types of returns we historically delivered. It was a very good quarter where more trend lines moved in a positive direction.

We had good loan growth in the quarter, and the outlook for the second half of the year remains favorable. As we are carrying a fair amount of momentum, into the third quarter. We continue to see exceptionally strong deposit growth especially in non-interest bearing deposits. Top line revenue increased 4% on a linked-quarter basis and was up 15% compared to the prior year quarter.

Credit quality continue to trend in the right direction, as delinquencies, non-performing assets and net charge-offs all decreased from the previous quarter. And for the 37th time we once again raised our cash dividend to our shareholders.

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

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

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

Loans grew by $115 million or 12% annualized as every major loan category we tracked grew during the quarter. Not only did all loan categories increased but these gains were well distributed and balanced among all loan types, which was especially encouraging.

We even saw an 8% increase during the quarter in residential construction lending, a statement of our loan portfolio that we have struggle to grow. Hopefully we gain additional traction in residential construction loans through the rest of the summer and fall months. The growth in loans again allowed us to slowdown our security purchases during the quarter.

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

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

This past quarter was no exception. As accounts grew at a rate exceeding 5% annualized. This is a nice increase to our customer base, which expands our opportunities to cross-sell more of our products and services to a larger group of individuals and businesses. Excluding wholesale deposits, interest-bearing deposits increased less than 1% on an annualized basis during the quarter. NOW accounts, which themselves are a very low cost deposit source contributed to much of the increase this quarter in interest-bearing deposits.

Most of our staff time and marketing resources are focused primarily for generating both non-interest bearing and interest-bearing checking accounts. This past quarter the banks had definitely produced some excellent results in both of these deposit category. We continue to maintain a significant amount of capital and were tired this year to find effective ways of deploying it. The acquisition of First National Bank of the Rockies is another example of how we intend to leverage this capital in the future.

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

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

Credit quality trends continued to improve this past quarter as non-performing assets, delinquencies and net charge-offs, all again moved in the right direction. NPAs decreased by $4 million or 4% to $102 million. This figure includes $4.2 million in government guaranteed loans. NPAs are now down to 1.3% of assets. Although, we saw further reduction in NPAs during the quarter, we will have to accelerate the pace of dispositions if we hope to hit our goal of reducing NPAs below $90 million by year end. In order for this to occur, we will have to not only move a couple of our larger OREO for other non-performing properties, but not add any new NPAs to the list.

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

Net charged-off loans were another bright spot this quarter, totaling only $332,000. Through June, total charge-offs this year were $3.3 million with recoveries of $2.2 million, leaving net charge-offs at $1.1 million for the first six months.

As a percentage of loans, net charge-offs for the first half of 2014 are tracking at a 6 basis point annualized rate, far below both our goal for the year of 25 basis points and last year when our net charge-offs totaled 18 basis points. If net charge-offs continue at this run rate in the second half, they would approach some of the best levels we’ve ever experienced.

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

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

In addition, so far this year gains on the sale of OREO had totaled $1.3 million, again exceeding our expenses. Our allowance for loan and lease loss ended the quarter at 3.11%, a reduction from the prior quarter’s 3.2%. The ALLL will see a further reduction next quarter as we bring on First National Bank of the Rockies loan portfolio, without an accompanying loan loss reserve.

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

For the first time in six quarters, we did see a slight dip in our net interest margin. It was one of the few trends this quarter that did move in our favor. For the quarter, our net interest margin decreased 3 basis points to 3.99% from 4.02% the prior quarter.

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

As I stated last quarter, we would be happy to maintain our net interest margin at or near 4%, especially considering the current rate environment and where our margin was not long ago. In order for the margin to improve further from here, we would have to continue to see a noticeable shift in earning assets, out of securities and inter loans. The decrease to the net interest margin was primarily driven by a lower purchase accounting adjustment the last quarter benefited our margin by 7 basis points and this quarter the benefit was only 2 basis points.

This 5 basis points swing reduced our interest income by $880,000 compared to the previous quarter. It was the main reason the margin contracted. The yields on our loan portfolio ended the quarter at 4.86%, excluding the impact of purchase account the yield on our loan portfolio decreased by 2 basis points during the quarter.

However, the lower loan yield was offset by a change in the mix of our assets 7 basis point increase in the yield on our investment portfolio and a small 1 basis point decline in funding costs during the quarter. Excluding the effect of the purchase accounting adjustment, our core net interest margin this quarter was 3.97%, up from 3.95% last quarter.

At quarter end our cost on total paying liabilities was 39 basis points compared to 40 basis points the prior quarter. Another positive this quarter was the yield on new commercial loan production exceeded the yield on the legacy portfolio. So hopefully, we are adding inflection point regarding the yield on loans will begin to see more stabilization as we move forward.

Nonetheless, the competitive pressures continue to take its toll on loan pricing and I don’t expect that to change much in the foreseeable future.

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

Net interest income for the quarter totaled $67.4 million, basically unchanged from the prior quarter and an increase of $12.5 million from last year’s second quarter or 23%. Compared to last year’s second quarter interest income increased by 19% while interest expense decreased by 9%. The combination of loan growth, better investment yields and lower funding costs, all contributed to the vast improvement in net interest income over the same quarter last year. In the current quarter, interest income decreased by $124,000, primarily due to a $422,000 decline in investment income as we reduced the size of the securities portfolio.

Although, the increase in interest income on loans didn’t quite make up for the revenue loss on securities this quarter, going forward it’s our hope and expectation, if we continue to grow loans and maintain the momentum established this quarter on the loan front, it will give us the flexibility to further reduce investment securities and continue to manage the overall size of our balance sheet without conceding further reductions in interest income.

Non-interest income increased by $3.1 million or 16% on a linked-quarter basis to $22.5 million, but was down $718,000 from the same quarter last year, which was a decrease of 3%.

Service charge fee income increased by $1.5 million or 11% during the quarter and fees on sold loans bounced back and registered an increase of $1.2 million or 33% versus the prior quarter.

Our service charge fee income was up $1.8 million from the same quarter last year. However, that did not cover the decrease we saw in fee income on sold loans, which was down $2.7 million from the year ago period. Although we were encouraged by the increased mortgage production we originated this quarter, we were still below last year’s level. As more of this production comes in the form of purchases, it is nearly impossible to replace the loss of refinance volume.

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

Our non-interest expense for the quarter increased by $2.6 million from the prior quarter. As previously stated, $834,000 as a result of a one-time computer conversion expense. In addition, we had $1.7 million increase in other expense, primarily due to the timing of expenses tied to our new market tax credits. A portion of these expenses are offset with the actual tax credits. Non-interest expense increased by $4.2 million, compared to the same quarter last year, or 9%.

Compensation and benefit expense made up $4.1 million of that $4.2 million increase as we added the staff of North Cascades Bank along with normal annual salary adjustments. We also experienced higher expense in occupancy and computer expense, with some of this increase offset by $2.4 million reduction in OREO expense.

In summary, it was a very good quarter and a strong first half of the year. We have been able to increase our earnings significantly over the past year, while actually decreasing our overall asset base.

Hopefully, we can continue this transformation of replacing low-yielding securities with higher-yielding loans, both organically and through future acquisitions. It was great to see the volume of loan production generated in the quarter and the pipeline looks good as we begin the third quarter. If we can maintain this lending momentum, it will give us the ability to further restructure our balance sheet.

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

So in closing, it was a record quarter that hopefully we can build on throughout the rest of 2014.

And that concludes my formal remarks and we will now turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.

Brad Milsaps – Sandler O'Neill & Partners LP

Hey, good morning.

Michael J. Blodnick

Good morning, Brad.

Brad Milsaps – Sandler O'Neill & Partners LP

Hey, Mick, I appreciate all the color. I just wanted to talk about that the balance sheet for a moment. You guys have done a great job reducing investments. If loan growth stays at this pace, recent AFS book, would you continue to see that part of the investment portfolio continue to come down at a similar pace. Just kind of curious kind of where you view a floor for that piece of the investment portfolio. I assume you want to kind of protect the tax exempt portion.

Michael J. Blodnick

Right, yes I mean I think that clearly the amortization that we see is primarily coming off the MBS and the CMO portfolio, more so than the municipal portfolio, which from time to prime we would call on some of those securities. But no I think you’re absolutely right Brad, that most of the reductions would come from a continued decrease in CMOs and mortgage bags, which I think currently we’re running at about $120 million of quarter pace. So that is probably a good ballpark figure to consider.

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

Brad Milsaps – Sandler O'Neill & Partners LP

Got it, and you guys can also continue to reduce wholesale funding, particularly the Federal Home Loan Bank advance. Can you talk a little bit more I mean, obviously it would be depended upon deposit growth, but the rate ticked up a bit I assume, because the mix within that Federal Home Loan Bank advance book – the mix was just a little different higher cost for leftover some low cost…

Michael J. Blodnick

Exactly, I mean some of the fixed long-term borrowings are still left on the books where we have, as you can only imagine, Brad – I mean, you hit the nail on the head. I mean, we’re decreasing significantly and have over the last year our overall borrowings, but the borrowings that have gone away are those short-term borrowings that we have more flexibility to continually pay-off every day. And what’s left in the entire mix – it’s a smaller pie of borrowings, but the piece that’s fixed in longer-term becomes the bigger and bigger piece of that overall borrowing total dollar amount.

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

Brad Milsaps – Sandler O'Neill & Partners LP

Great. And then just one final question on expenses. I presume that the expense on the new market tax credit will reverse our next quarter and the tax rate would go back up. Any other – otherwise, do you feel like that’s a pretty good run rate for you guys sort of excluding the Colorado deal?

Michael J. Blodnick

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

Brad Milsaps – Sandler O'Neill & Partners LP

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

Michael J. Blodnick

That’s correct.

Brad Milsaps – Sandler O'Neill & Partners LP

Okay. Thank you, Mick.

Michael J. Blodnick

You bet, Brad.

Operator

Thank you. Our next question comes from Jeff Rulis with D.A. Davidson. Your line is open.

Jeffrey Rulis – D.A. Davidson & Co.

Thanks. Good morning.

Michael J. Blodnick

Hi, Jeff.

Jeffrey Rulis – D.A. Davidson & Co.

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

Michael J. Blodnick

No. I mean, we had, but it’s almost every year. I mean, we’re going to have a very slow first quarter. I’ve been saying this for, I can’t tell how many years now that we have to make hay when the sun shines and that has to happen in the second and third quarters of every year. Our first quarter, I don’t think that we saw anything, Jeff, that was out of the ordinary for the first quarter. In fact, we actually were pretty happy with the loan volume we produced in the first quarter. Remember, we had about $26 million increase in loans. And for us, we thought that was pretty darn good because there are so many times in the first quarter we don’t – we just don't see any increase.

So no, I would not say that what we produced in the second quarter was pentup demand coming out of the first quarter. I just think that, as I said earlier, Jeff, you look at the major categories in loans, we grew every one of them, including consumer loans. First time, we’ve done that in a long time. HELOCs, came back up like Barry just said. And it was nice to see growth in residential construction loans again.

We hope – certainly hope that continues because we think that is a good line of business. And we think that we actually drop that overall dollar amount in residential construction. That dropped down further than we would have liked to have seen it.

So that gives us hopefully some opportunities to move and continue to move that piece of the portfolio forward in the next two quarters. Barry, any comments on commercial – I know we’ve had good C&I; good commercial real estate. But nothing that was out and there was no any one category Jeff that just was a major part of the growth, I mean it truly was all of the categories contributing and just nice growth in whether it is C&I, CRE, consumer, HELOCs, ag, resi construction, commercial construction, they all had good growth.

Barry Johnston

Yes. And that is difficult for the second and third quarter so you can see it, especially in C&I and agriculture where they are drawn down on a lot of construction lines that are somewhat seasonal I think so.

Michael J. Blodnick

And, Jeff, we never know what actually closes and what comes to fruition, but as I said, we are carrying some nice momentum into the third quarter, so hopefully certainly be nice to have a repeat in the third quarter because there’s no doubt in the fourth quarter we will see reductions. I mean, ag lines will start to get paid down and things will slow down in the fourth quarter. So this next quarter it is going to be important for us to maintain this momentum. And from everything Barry tells me it seems like that momentum is staying pretty strong.

Jeffrey Rulis – D.A. Davidson & Co.

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

Michael J. Blodnick

I do, I feel way more confident now that we can achieve 5%, I’m not going to go out and say that it’s going to go lot higher than that because you’re just – you’re absolutely right we still have to deal with the fourth quarter and that will be a reduction. But if what we are seeing right now would actually close and if we can get a lot of this production or at least looks that we are getting, if those turn into closed loans, I feel real good about our 5% for the year, and again if we have another quarter like we did this year, I mean like we did just this quarter that that could be north of 5%.

Jeffrey Rulis – D.A. Davidson & Co.

May be just another one on the M&A front, I think as we enter the year you talked about may be the goal was try to get a couple of transactions done with one in the bag, I guess your optimism on maybe finding something else by year-end in those discussions.

Michael J. Blodnick

There is a lot of very, very interesting things that we’re looking at, whether or not we would get another deal that I don’t know Jeff, certainly we’d like to, but we’re certainly getting a look at a lot of things, some of them are very intriguing and interesting to us, others not so much, you so we’ll keep our fingers crossed and hope that we can still see another deal, but I can’t guarantee that.

Jeffrey Rulis – D.A. Davidson & Co.

Fair enough, thanks Mick.

Michael J. Blodnick

You bet, Jeff.

Operator

Thank you. Our next question comes from Jennifer Demba with SunTrust, your line is open.

Michael Young - SunTrust Robinson Humphrey, Inc.

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

Michael J. Blodnick

I think, it’s little bit of both, Mick. I mean I really think that part of it is, that rates will have to really go down to really jack up that premium amortization to any degree, and yet at the same time just the overall size of that portfolio as we just said is contracting and as that contracts there is just that much less premium to amortize, so Michael it’s really functionable. But I really do believe that were kind of down there in a fairly tight range of what we expect to amortize each quarter going forward. And we had a $600,000 reduction this quarter. I’m not sure we’re going to see that. Again, I think it’s going to be right, probably close to that $7 million kind of on a straight line basis going forward.

Michael Young - SunTrust Robinson Humphrey, Inc.

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

Michael J. Blodnick

Come again now.

Michael Young - SunTrust Robinson Humphrey, Inc.

I was just curious about the largest outstanding asset quality issues. Some of those have been worked through in the first half of 2014 and that underpinned the lower credit costs on the whole or some of those were still coming through the pipeline I guess.

Michael J. Blodnick

Well, we’re not seeing much new coming through the pipeline. Barry, you want to…?

Barry Johnston

What it is at a certain dollar level, I think we’re just going to have a core base with non-performing assets given the size of our organization that’s grown significantly last five years to six years. We’re a little over 1% now. I would hope we could get that underneath 1% here shortly, but at some point we’re just going to have a core base. And part of those are going to be some large ones. We have probably four or five what we’d consider on the large side.

In some cases those are performing non-performers that at this point there’s really just not a lot we can do with them until contractually we have an opportunity to make an action and are trying to move those or maybe restructure them. But, we have one or two that are on the horizon that might come into the mixes as any organization would. We’re hoping that we can get those resolved success where we don’t have to place those on our accrual. But at the end of the day there’s just not a whole lot of opportunities out there to significantly reduce non-performing assets by any significant dollars. We’ll just continue to chip away at the corners and try to minimize our loan losses.

Michael J. Blodnick

And Barry brought up some great points. I mean the one thing that we still are committed to of course is to try to get NPAs down below $90 million, but as you can see, I mean, it’s coming in small chunks anymore. We’re going to work very, very hard to do that. And as Barry said, we still have four or five larger projects, properties out there on non-accrual or in OREO. And if one of those would resolve, then I think we feel pretty good we probably could get that number down below $90 million. But if they don't, like I said in my remarks, we would have to step it up from what we have done the first half of the year if we wanted to get down below $90 million. But we’re going to be close, I think we’re going to get close to it, so.

Michael Young - SunTrust Robinson Humphrey, Inc.

Okay thanks.

Michael J. Blodnick

You bet Michael.

Operator

Thank you. Our next question comes from Daniel Cardenas with Raymond James. Your line is open.

Daniel Edward Cardenas – Raymond James & Associates, Inc.

Good morning guys.

Michael J. Blodnick

Hi Dan.

Daniel Edward Cardenas – Raymond James & Associates, Inc.

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

Michael J. Blodnick

I think it could go a little higher. We talk about that a lot at the Board. Historically, there has been times especially during the downturn, where that was clearly higher than that. I think historically Dan, we’ve always kind of been in that 35% to 50% range, and we’re always comfortable, especially with the level of capital that we have with that kind of a payout.

So, we’ll continue to address it on a quarterly, or six-month basis. And we have been building capital in the company. So we certainly are – and the Board is certainly is well aware of that, too. We discussed that a lot. So could we go a little bit above that? Certainly and I don’t think it would, based on what we see and based on the structure of the balance sheet, and everything else that we take into consideration Dan, we’re looking at increases to the dividend that could certainly go higher.

Daniel Edward Cardenas – Raymond James & Associates, Inc.

Good. And then I think you mentioned that historically you’ve always liked to operate with may be a little bit more capital than it’s needed, with the TC ratio around that 11.25%, where you kind of draw the lines in the sand, I mean where do you lose your comfort level. What is the TC ratio have to hit before you start to feel a little squirmy?

Michael J. Blodnick

I think, for us, I don't know; I mean, things could change, Dan, but somehow 9% seems like a level that we would want to see us going much below it’s just philosophically who we are and what we’ve always doing with all of these approached capital. And always want to make sure that we had plenty and most times quite more than enough. And, clearly right now we’re sitting at a lot more capital, but we’re trying to deploy it effectively, like I said, trying to do the right things. But I don’t see us going much below that 9%.

Daniel Edward Cardenas – Raymond James & Associates, Inc.

Okay, great. Good quarter, guys. Thanks.

Michael J. Blodnick

Thanks, Dan.

Operator

Your next question comes from Jackie Chimera with KBW. Your line is open.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

Hi, good morning everyone.

Michael J. Blodnick

Hi, Jackie.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

At the end of the week I can’t rely on him. Were you surprised by the quick turnaround and the rate approval that you had on the Bank of the Rockies?

Michael J. Blodnick

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

And I think that the banks that we’ve acquired have been good quality banks. Some of them have struggled a little bit in the past, but they’ve worked all the way through those challenges. And, yes, I’m ecstatic that we’ve gotten approval this quickly. But I think it comes with both us and our main regulator, keeping absolutely open line for communication all the time as to what we’re doing.

And there is something that I sense that they’re not too crazy about or they’ve got some issues. I am probably down the road or back off. Life is too short, but they – it’s been a great working relationship and we have been blessed, Jackie, by having these deals approved very efficiently and on time.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

Yes, now with that, I mean the speed is very nice to see. Does it impacted out just at least, my perception of a move up of the close date, does that impact the conversion that you had originally scheduled for the October, November timeframe.

Michael J. Blodnick

Yes. I can tell you that, just yesterday, I think that conversion did get moved up. And we will be hopefully before the end of the year now converting them, which will allow us to complete not only North Cascades, but complete First National Bank of the Rockies before year end, which is Jackie, it is something that we don't aspire to do. I mean we are always okay with extending these out and doing them very methodically.

But, an opportunity came up for us to push this one forward about six months and we jumped on the chance and sometimes it’s just getting our main data provider or our main software provider to give us a date in an opening. But, if we get both of these done, and of course, Marcia Johnson, who is our Chief Operating Officer and she takes care of all then – she is in charge of these conversions. She definitely felt this could get done and wanted to try to move on that sooner date. And so, we chose – she chose yesterday to do that. And we are now schedule for early December on First National Bank of the Rockies. So that will be great, because whenever we can get those major conversions done that quickly, it makes life a lot easier for everyone else to.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

Okay, great.

Michael J. Blodnick

So that was news as of just yesterday.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

My question was well timed. And I am guessing that will move up some of the cost saving assumptions by maybe a quarter or two early.

Michael J. Blodnick

Yes, because I mean with them with First National Bank of the Rockies, they own the software, they own their own data center and everything. There is no big penalties that we will be paying. If we came off the system early or we took them off the system early. There is none of that so, it’s just a terrific. If there was one bank to do that other times, it wouldn’t be moving it up would not be that big of an advantage. There is an always an advantage Jackie having everybody on the same system, but sometimes, some of this penalties are so egregious that you pay a penalty to move them up earlier, you just paying the bigger penalty. That’s not the case with First National Bank of the Rockies. So, it really make sense for us to push that thing forward.

Jacquelynne L. Chimera – Keefe, Bruyette & Woods, Inc.

Okay. Great, that’s really nice to hear. Thanks for all the color, Mick, I appreciate it, really nice quarter.

Michael J. Blodnick

Thanks Jackie.

Operator

(Operator Instructions) Our next question comes from Joe Morford with RBC Capital Markets. Your line is open.

Joseph K. Morford III – RBC Capital Markets LLC

Hi, good morning Mick.

Michael J. Blodnick

Hi Joe, how are you?

Joseph K. Morford III – RBC Capital Markets LLC

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

Michael J. Blodnick

First question, regarding the deposit growth, now Joe some of that is definitely seasonal. I mean we definitely get a pop in the second and third quarters when it comes to deposit growth, especially on the non-interest income, checking account, NOW account, M&DA growth as tourism is going full bore you’ve got the cherry crop coming in.

I mean, there’s just a lot of things going on throughout Montana, but definitely Colorado, Idaho, Wyoming. They all benefited this time of the year, because we are in areas that are highly dependent and benefit a lot from the tourist industry.

But then just the overall economy has been awfully good too. So yes, part of it is seasonal, but yes, part of it is just I think our bank is doing a terrific job of generating more and more and more accounts, which ultimately just speed a larger and larger and larger deposit base.

Now your, second question regarding fee income on that deposit base, yes, I mean I think, once again, it's somewhat seasonal Joe, I mean, you're going to see that the larger in the second and third than it ever was or ever will be in the first quarter. But at the same time, if we can continue to grow our customer base excluding acquisitions, I mean just organically by over 5%, that's going to definitely help even if down the road regulatorily or something that would come a day where there is some push back on our opportunity to charge a fee or something like that. I think or maximize what a charge would be I think that the larger customer base would absolutely benefit at that time.

So, if we've seen no, I am not projecting or predicting any changes, but if we don’t see much in the way of regulatory adjustments, I think we keep growing our base of customers at this pace and we should be able to extend that service charge fee income number and increase it over the next quarters and year.

Also, Marcia Johnson, again, does a lot of negotiating with a lot of our vendors that provide fee income to us and do this terrific job of negotiating these contracts. I mean, there are things that even if the volume did not increase, we’re going to make more money this year just because of the deal that we’re struck and the negotiations on new contracts that took place on a couple of large vendors. So we benefit from that perspective too and that’s something she works very, very hard at. So, I think it’s a combination of some of the things that her – and her staff do, really watching what we pay vendors and what kind of revenue they are willing to pay us back and then a growth in the overall base of customers.

Joseph K. Morford III – RBC Capital Markets LLC

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

Michael J. Blodnick

Well, as I’ve said a number of times here in the last six months, every one of those starts to complaint about how competitive it is and how cutthroat it is. But I’m the one that gets an opportunity to travel around the country, talk to other CEOs, other peers and sometimes I think and I’ve mentioned this to Barry, sometimes maybe we should count on blessings, because it’s competitive as we think it is. You view what goes on in other parts of the country. I’m not sure we don’t have it pretty good.

And like Barry always said, there’s couple of benefits that we have. I mean, obviously, we compete against a number of very large superregional banks and we compete against a lot of credit yield into the smaller community banks. And the benefit that we have is, Joe, we can pretty much do deals of almost any size, especially in our market because we’re not in the metropolitan areas.

We’re not looking at the mid-tier companies. I mean, our business is Main Street business, small businesses, and there is just hardly a deal that we can't – that we can’t handle. I mean that’s not the case with small community banks. They just can't do that. So I think that’s an advantage for us that we probably wouldn't have if we were in larger metropolitan areas, simply because I think you just have a lot more banks of our size. We are just pretty blessed that hey there’s not very many smaller regional banks throughout the Rockies. And from a competitive perspective I think it helps us.

Joseph K. Morford III – RBC Capital Markets LLC

Sounds good great Mick. Thanks for your thoughts.

Michael J. Blodnick

You bet Joe. Thank you.

Operator

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

Michael J. Blodnick

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

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

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

So with that everybody have a great weekend, enjoy your summer. We’re going to have some great weather here. And one final point before I get off the phone, this last week, obviously there has been some devastating fires in Central Washington and clearly they impacted some of the communities that we operate within.

Scott Anderson, who is the President of our North Cascades Bank and his management team and his entire staff, I just want to mention that they did an absolute terrific job the last seven to 10 days, not only keeping everyone of those offices open and functioning, but obviously stepping up in some of those communities, especially those of a very, very hard hit, and really doing what community bankers do. And that is supporting those communities and making their lives especially during some tragic times for some of these family just a little better so. My hats off to Scott and his whole team, it’s been a very, very rough seven to 10 days, where last night was that they are finally getting some containment and control on those fires.

So we can only hope that the overall damage and that was not all that bad. Economically, I don’t think it really was, but on a personal level it certainly – it certainly was. There was some individuals lost homes, property and our thoughts and prayers go out to them. But again, I just wanted to say that, during a time of crisis I think community banks do step up and that was absolutely the case this last week with North Cascades Bank and that management team so.

With that, everybody have a great weekend and we’ll talk to you little later. Bye now.

Operator

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

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