Glacier Bancorp's (GBCI) CEO Mick Blodnick on Q2 2016 Results - Earnings Call Transcript

| About: Glacier Bancorp, (GBCI)

Glacier Bancorp, Inc. (NASDAQ:GBCI)

Q2 2016 Earnings Conference Call

July 22, 2016 11:00 AM ET

Executives

Mick Blodnick - President and CEO

Randy Chesler - President, Glacier Bank

Ron Copher - CFO

Barry Johnston - Chief Credit Administrator

Analysts

Matt Forgotson - Sandler O’Neill

Matthew Clark - Piper Jaffray

Joe Morford - RBC Capital Markets

Jeff Rulis - D.A. Davidson

Jackie Chimera - KBW

Daniel Cardenas - Raymond James

Jennifer Demba - SunTrust

Operator

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp’s Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

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

Mick Blodnick

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

Yesterday, we reported earnings for the second quarter and first half of 2016. For the quarter, our earnings were a record $30.5 million that was an increase of 4% compared to the $29.3 million earned in last year’s quarter. We produced diluted earnings per share for the quarter of $0.40 compared to $0.39 in the prior year’s quarter that was an increase of 3%. For the six-month period, we earned $59.1 million, which was also 4% above the $57 million earned in the first six months of last year.

Year-to-date, we generated diluted earnings per share of $0.78, an increase of 3% compared to the $0.76 in the same period last year. The quarter’s results included $1 million of acquisition expense along with $1.3 million of expense associated with our core consolidation project and reassurance of debt cards to our customer base with the new chip technology. Through the second quarter, we have now converted 6 of the 13 bank divisions with 4 more slated for conversion the weekend of August 65, and the last 3 of our banks in early October.

Our return on average assets for the quarter was strong 1.34%, return on average equity was 10.99%, and we delivered return on tangible equity of 12.96%, all consistent with what we’ve produced over the past couple of years.

During the quarter, as previously discussed, we announced the acquisition of Treasure State Bank located in Missoula, Montana. With assets of $71 million, we’re excited to add Treasure State to our Company and have it become a part of our First Security Bank of Missoula division. We have now secured all regulatory approvals and we look forward to closing the transaction on August 31st. We believe this addition brings tremendous strategic value and we’re thrilled to be adding Treasure State Bank to our Company. Tentatively, we plan on converting their data platform in late October.

We were very pleased with both our second quarter and first half record results, especially considering the major internal initiatives currently underway. In the quarter, we generated all-time record organic loan growth, maintained our net interest margin above 4%, and saw further improvement in a number of credit quality metrics. We continue to see non-interest expense run higher than we would like. However, majority of that expense, particularly this quarter, was attributed to these internal initiatives and acquisition expenses I mentioned earlier. We certainly hope the momentum we’ve built in the first half of 2016 now carries through the rest of the year. In order for that to happen, it will be important that we accomplish three things.

First, we’ll need to increase the loan portfolio at a respectable pace. Currently, the prospects for further loan growth look good. Second, we need to hold our net interest margin near our target of 4%, as we continue to remix our balance sheet with higher yielding loans, replacing investment securities. And third, we need to continue to grow our non-interest income while at the same time we complete the work on CCP. If we achieve these three goals, it should make for solid second half results.

I am now going to turn the call over to Randy for a more detailed analysis of the current quarter and the first half results. Randy?

Randy Chesler

Thank you, Mick, and good morning to those on the phone. And, thank you for joining us. As part of the plan to prepare for Mick’s retirement at the end of this year; and as mentioned by Mick in his last earnings call, we decided as part of the transition process that I’ll cover the quarterly operating details in the earnings call today and going forward.

On the transition, it continues to go very well. August 3rd will mark the end of my first year at Glacier. It’s been a lot of fun and interesting to learn about the unique culture of this great company. Over the first year, Mick and I transitioned pieces of business in order to allow me time to learn how things work and to give people in those areas time to get to know me. This began with having the 13 banks report to me when I started a year ago. At the end of June, given our comfort with how things are going, we completed the transition of all other parts of the business following the timetable we had planned on a year ago.

So, I will now review some of the key operational developments in the second quarter and then open up the line for questions.

So, our 13 divisions led by our bank presidents in each of our markets, once again did a great job across the number of fronts. Loan growth was surprisingly strong. We got off to a good start and things continued to get better throughout the quarter. Loans increased to $181 million or 3.5% over the prior quarter compared to 2.3% growth last quarter and 2.6% a year ago. The 14% annualized growth rate is way above plan. However, we remain comfortable with the credit and pricing dynamics in general. And we’re clearly going to exceed our full year target of 5% but we don’t expect growth to continue at this quarter’s pace -- annualized pace. All five of our primary loan categories grew with the exception of residential real estate. Now, while we funded more residential real estate loans in this quarter than last, we sell most of our residential real estate loans, so lack of growth in our held portfolio is really not a surprise.

Commercial real estate loans saw the largest dollar growth with $93 million or 3%. Other commercial loans saw the largest percentage increase and second largest dollar growth totaling $85 million or 7%. Included in other commercial loans are agriculture production loans, municipal loans and other commercial and industrial loans. Our loan production volume was up sharply for the quarter, while pay-offs and sales were up from the prior quarter but consistent with past seasonal trends.

Credit quality improved as total past-due loans ended the quarter at 0.91, $49 million of total loans. Past-due loans also improved compared to prior quarter end, when they stood at 1.03 and from levels a year ago of 1.23. Early stage delinquencies which are accruing loans 30 to 89, ended the quarter at 0.44% or $23.5 million of total loans versus 0.46 at the end of the first quarter and 0.49 a year ago. So, we’re very hopefully that these positive credit trends continue or at least remain stable at these levels. NPAs compared to total assets ended the quarter at 0.82% or $76 million versus 0.88 at the end of the last quarter and 0.98 a year ago. So, we’re moving in the right direction to meet our goal of $65 million for NPAs but a lot of work remains in order to achieve this.

The provision for loan and lease losses was zero for the quarter compared to $568,000 in the prior quarter and $282,000 a year ago. The allowance for losses as a percentage of total loans ended the quarter at 2.46% versus 2.50% at the prior quarter end and 2.7% a year ago.

Now, we appear to be appropriately positioned in the event we begin to see a softening in credit. Now, we don’t expect to see a softening in the short-term but we are very mindful that we’ve been in a positive credit cycle for some time now. Net recoveries for the quarter were $2.3 million compared to $194,000 from the prior quarter and net recoveries of $381,000 from the same quarter a year ago. The bulk of the recoveries this quarter were primarily concentrated in one loan, but the stable economy over the last few years has provided a helpful period of time for a number of our NPAs to begin to improve and facilitate -- and allow us to facilitate some work towards resolution.

Total deposits increased $73 million or 1% from the prior quarter and increased organically a $152 million or 2% from a year ago. Non-interest deposits increased $20 million or 1% from the prior quarter end and organically $87 million or 5% from a year ago. Interest bearing deposits, excluding broker deposits increased $40 million or 0.8% over the prior quarter and organically $65 million or 1.4% from a year ago. Attracting good quality, stable and low cost deposits remains a key focus of the Company and the team across our network does an excellent job in this area. Total borrowings decreased by $17 million compared to last quarter and borrowings are down $74 million or 9% from the beginning of the year and up $5 million compared to a year ago.

Our investment portfolio made up 34% of overall assets, down from 36% at the prior quarter’s end, as we adjust our investment portfolio based on loan demand, deposit growth and for acquisitions as they materialize. The portfolio decreased a $128 million from the last quarter with most of this decrease coming from the CMO and MBS securities. These CMO and MBS securities are lower yielding, and the strong loan demand this quarter has enabled us to replace these securities with higher yielding loans.

Total stockholder equity at the end of June was $1.1 billion, which represents an increase versus the prior quarter of $31 million and $68 million versus a year ago. Shares outstanding at the end of June were 76 million with the book value of $14.76 versus $14.36 at the end of the last quarter and $13.99 a year ago. For the quarter, the increase was driven earnings retention and an increase in accumulated other comprehensive income, generated due to an increase in unrealized gains and on the available for sale investment portfolio, driven by the lower interest rates. All our regulatory capital levels remained far those after required levels.

As Mick mentioned at the beginning, profits continue to grow very nicely and for the quarter net income was $30.5 million, an increase of $1.8 million or 6.2% versus the prior quarter and an increase of $1.1 million or 3.8% compared to a year ago.

Interest income increased $1.7 million, 2% from the prior quarter and $7.5 million or 9.5% from the end of the second quarter a year ago, driven by increased loan balances and relatively stable loan yields. Interest expense was down $251,000 or 3% versus the prior quarter and was up $55,000 or 0.8% from a year ago. Overall, the team has done a really good job of maintaining the positive pricing discipline.

Our net interest margin for the quarter was 4.06. The margin was impacted by a very large interest recovery concentrated in one transaction and it would be closer to 4.02 without this recovery. So, for the first six months of the year, the net interest margin is 4.04% versus 4% for the same period in 2015. The average yield on the earning asset portfolio for the quarter was 4.41%, this compares to 4.37% at the end of the first quarter and 4.35% year ago.

Total funding liabilities had an average rate of 0.38% for the second quarter compared to 0.39% in the first quarter and 0.40% a year ago. We’re very pleased to be able to maintain a solid and relatively stable margin over this period and we remain very focused on trying to continue this trend.

Non-interest income increased $2.5 million or 10.3% from the prior quarter and $957,000 or 3.7% from a year ago. The quarterly increase of non-interest income was driven primarily by the gain on sale of our residential loans. Non-interest expense was up $2.1 million or 3.4% versus the prior quarter and was up $4.5 million or 7.5% compared to 2Q ‘15. The increase over the prior quarter was primarily driven by an increase of other expense of $1.8 million which was primarily composed of acquisition expense, core consolidation project or CCP, as we call it, expense, and some seasonally driven related expenses. The increase in non-interest expense of $4.5 million over 2015 was primarily driven by an increase in compensation, which was impacted by the acquisition of Cañon and regular salary increases.

The efficiency ratio for the quarter was 56.1 versus 56.53 at the end of the prior quarter, and 55.91 at the end of the quarter a year ago. Now, we don’t we expect to hit our efficiency target of 55% this year primarily due to CCP expenses, but we’re looking very closely at the efficiency drivers as we would look to see a path in 2017 to reach our efficiency target.

On June 29th, we declared a quarterly dividend of $0.20 per share payable on July 21st to owners of record on July 12th. This is the second dividend declared this year and represents a 5% increase over the dividend level paid in 2015.

On a final note, I’d like to cover two other items. First, we talked a lot about our core consolidation project or CCP today. This is a very large undertaking, and it’s the largest project of its kind that our technology partner and this Company have embarked upon. And we’ve learned a lot from each of the completed conversions so far. And I think we’ve gotten better at the conversions as we move forward. I do have to say, our employees are doing an incredible job of planning and managing these conversions. And we’re so fortunate to have all these talented individuals as part of our organization. We expect and are very confident that we’ll be completed with the CCP project by the end of the year.

Lastly, we still expect to cross over the $10 billion threshold in 2017. While we’re still sizing the project, we’re taking advantage of the long time horizon to efficiently plan. We certainly don’t expect the cost of this project to be at the same levels as our CCP project.

That concludes my remarks. I thank you for your patience. And I would like the operator to open up the lines, so we can answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Matt Forgotson with Sandler O’Neill. Your line is now open.

Matt Forgotson

I was wondering if you could just remind us, in light of the fall in the 10-year, it stands to reason that securities reinvestment yields are going to tighten. Can you give us a sense of the reinvestment yields that you’re seeing today and how we should factor that into our expectations for your margin?

Mick Blodnick

You mean on just the reinvestment yields on the investment portfolio, the reinvestment yields on the investments portfolio?

Matt Forgotson

Yes.

Mick Blodnick

Ron, do you want to give him a handle on what we’re seeing?

Ron Copher

Yes. So, when we do buy, which has been very limited, is in respect of 10-year yields going down is a great way look at it, just say 2.5%. But, we’re really trying not to buy. And I know the 10 years bounce back. But, we’ll see. But, we’re doing much better to put the yields into the loan book and that’s the principal reason the margin is lifting, as you would expect.

Mick Blodnick

So, I think Matt, this is just one of those environments where like Ron said, we’re just not buying. We just can’t get comfortable with the opportunities we’re seeing out there, especially on the short end of the curve. So, we certainly hope that loan volume maintains, as said, a respectable pace through the second half of the year. So, as Randy said, we can move from 36% of assets to 34%, which we did this quarter and ideally, maybe even move to 32% or 31% by the end of the year or so.

Matt Forgotson

And can you remind us just how the securities portfolio is positioned, what the duration is and how much cash its throwing off roughly per quarter?

Mick Blodnick

It throws off about $90 million a quarter in cash. Duration is just right in that three to four-year range. So, this year, like Randy said -- I mean this quarter, like Randy said, we didn’t really do much in the way of investing any of that cash flow back into the securities portfolio, and all went to fund loans. But, again, if there great environment stays the same as it did this quarter, and we’re certainly expecting that that $90 million is going to stay pretty consistent, that is certainly what we’ve seen for three or four quarters now, that it would be our hope that we would redeploy that $90 million back into loans again in the third quarter and fourth quarter.

Operator

Thank you. And our next question comes from the line of Matthew Clark with Piper Jaffray. Your line is now open.

Matthew Clark

First one, just in terms of the accretion in the quarter, can you give us that contribution to the margin?

Mick Blodnick

The accretion from the first quarter was 13 bps versus 11, last quarter. So, we had 2 more basis points of increase. You’re talking about the purchase accounting accretion, right?

Matthew Clark

Yes.

Mick Blodnick

Yes. So, the loan yield, it was 13 bps versus the 11 bps. Now, on the margin -- if you want to just talk about the margin?

Matthew Clark

Yes, on margin, I think it was 7 last quarter.

Mick Blodnick

It was 8 this quarter.

Matthew Clark

And then, new money yield [ph] in the production that you put on this quarter, just curious what the weighted average rate was there.

Mick Blodnick

New production?

Matthew Clark

Yields on new production, what the weighted average yield was?

Mick Blodnick

I think I looked at those numbers last week. It seemed like, Matt, on the new production side, we were right in that 453 range down from 476 the quarter before.

Matthew Clark

And then, how should we think about the CCP expenses in the third and fourth quarter?

Randy Chesler

I think if you -- it is still fluid, but I think if you look at our expense in the first quarter and look at our expense in the second quarter, somewhere between those two bookends is probably good a estimate for the next two quarters.

Matthew Clark

And then, the loan growth you guys put on was obviously pretty impressive. I was hoping you could dig a little deeper and give us a sense for where it’s coming from; is it market share gains; is it just more business with existing customers; how much of that’s the municipal lending that you guys have started to do more of? And also, looks like you’ve been willing to get back into doing some land and other types of construction here.

Mick Blodnick

As far as municipal loans, it was not a major contributor. We did have some in the second quarter but it wasn’t the number we saw in the first quarter of the year, Matthew. But, I think we’re teeing up some additional municipal loans in the third quarter and fourth quarter. So that we’re certainly hoping that that number is going to be a bigger number. When it comes to construction and land development, there was a little bit more in the way of land development loans this quarter versus last quarter, but some of the bigger drivers, really commercial construction. I mean commercial construction was up just about $40 million during the quarter. So, residential construction was up 10, but the bigger driver in that land line and other construction category by far was other construction, and that’s predominantly commercial.

Matthew Clark

And again, is this -- are you seeing this come from other banks, or is it market share gains…

Mick Blodnick

You’re more -- you’re on top of [multiple speakers].

Randy Chesler

Just from a perspective, our second and third quarters are always are best quarters for loan growth. Traditionally, the first and last quarters, due to some seasonality aren’t as prevalent as the second and third quarters. So, what we’re seeing is draws on revolving lines of credit, lot of construction companies draws on agricultural operating lines of credit. And this quarter, we had a couple of extra ordinary items and we had a couple of large transactions that will not be reoccurring. And we also bought a portfolio from a competitor bank over $20 million that lot of FSA guaranteed loans that they no longer wanted to service. So, we have some noise in those numbers. So, that’s why we had such a strong quarter.

Most of the other construction is new. It’s new construction. We aren’t taking it from a competitor for say, or we aren’t trying to refinancing a lot of competitor’s debt; it’s all new production. So, we’re feeling pretty comfortable with those numbers; in that, we aren’t pricing accordingly; we’re originating new.

Mick Blodnick

Also had agriculture loans draw on their lines in this quarter, which is seasonal event, which will -- should be kind of way -- it is a onetime event that we’ll see that get repaid at the end of the year.

Matthew Clark

Okay. And then, just last one on the tax rate little higher, that expected this quarter. Should we expect that to drop back down 24, 24.5?

Ron Copher

It’s Ron. I would go with the 25% for the rest of the year.

Matthew Clark

Okay, into next year as well?

Ron Copher

No, let me get through the second half of the year. Please, I’ll encourage you to ask that question in the fourth quarter.

Operator

Thank you. And our next question comes from the line of Joe Morford with RBC Capital Markets. Your line is now open.

Joe Morford

I understand the positive growth is an important focus internally and you still have a fair amount of liquidity. But, given how it’s lagged loan growth year to date, are you considering any more formal initiatives to spark that or should we just see it pick up seasonally here in the middle of the year?

Mick Blodnick

I think it will pick up, it always does seasonally. We’re not really going to change our playbook too much in that respect, Joe. We continue to have great results on our initiatives through HPC. Growth in the number of accounts continues, both retail and business continues to be very strong. We do have obviously the remixing of our assets and it’s helping us to fund some of that loan growth that’s coming up a little bit short from just core deposit growth. But, the third quarter and into the early fourth quarter are also really good and historically, Joe, been good quarters for us for deposit. So, we’ll take a look at where we are at the end of the third quarter into the early fourth quarter, recalibrate if that trend line that you just mentioned continues, we’ll certainly address it. But, I’m hoping and guessing that with just the growth in the overall number of customers that that in and of itself is going to go a fairly long ways to helping to fund any future loan growth.

Joe Morford

And then, the other question is just and you touched on some of this, but I guess to wrap up I’m curious as how sustainably you feel the margin is of 4% here and what is some of the main things you are focused on to defend it there?

Mick Blodnick

We stay down lower for longer, it’s not going be an easy -- it’s not going to be easy to maintain that 4% target. And we’re still getting pressure on the loan portfolio. I mean, I look at what our legacy portfolio is at versus new production, and there’s still compression there. We did benefit this quarter slightly on our overall funding. So, that helps a little bit. But, I mean, the pressure is still there, Joe, and it’s not abating. If we can continue to remix which we’ve done the last two or three quarters now and if we can continue to move some of those lower yielding assets in the form of our investment portfolio off the balance sheet and replace them with some higher yielding loans, that certainly is going to go long-long ways for us to maintain that for. And we’re going to do everything we can. But, I can’t guarantee for long term if we stay down or God forbid, go lower like we did late last -- it just puts pressure. And we’re not the only ones to face that pressure. I mean, every bank in the country is struggling. In fact, I would say that we have absolutely managed through this better than most, whether it’s the markets we’re in; whether it’s shape and the scope of our balance sheet that’s allowed us to have some benefits in this area. But, we’re certainly pleased with where we’re at. Maintaining it over the long haul in this rate environment, it’s just going to be a challenge.

Operator

Thank you. And our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is now open.

Jeff Rulis

Question on the non-interest income, obviously you cited that the mortgage revenue is pretty strong but the service charge and fees were up nicely. Any explanation for what drove the sequential a jump there?

Mick Blodnick

Yes, just more accounts. I mean we are -- the banks are doing a terrific job, Jeff, of generating more and more accounts. And we got off to kind of a slow start in the first quarter and we were actually behind plan and behind our expectations, but boy in the second quarter, those numbers came roaring back. And what’s really impressive in my mind is that’s taking place under the backdrop of CCP. Because you’ve got a lot of individual in this Company that are impacted one way or another with this major internal project. Now granted that a lot of those people are not necessarily right out there in the frontline but even all of our frontline people have a part to play in this project. So, for us to really step it up and we really saw a step up in the second quarter as far as the number of customers that we generated.

I think plain and simple that’s been the main reason, because it isn’t, Jeff, because we went in and raised fees in this line item or that line item. That just hasn’t really taken place. So, it’s more a function of just how many customers we’ve been able to attract. And we certainly hope these -- the second quarter, as I’ve said this for years-and-years, second and third quarter, we got to make hay while the sun shines and that’s when we do and that’s when we add the bulk of our new account customers. And so, we’ve got this quarter now to continue that pace and that trend line before we probably will see a slowdown in the fourth quarter, which we again traditionally do.

Jeff Rulis

And Mick, you mentioned on the loan growth side that it was fairly widespread I guess geographically speaking. But was there any area that you’d point to that had particular strength and then maybe a follow-on to that would be -- how about the timing of the loan growth throughout the quarter, was it frontend loaded, backend pretty steady?

Mick Blodnick

I can tell you about the frontend, backend loaded, it was not; it was pretty steady throughout the quarter. I mean, it was very, very consistent when we were looking at production numbers. Barry, what do you think regarding any of the banks that you saw and you’ve seen that over contributed or…

Barry Johnston

Outside of a couple of large transactions that we mentioned, it was just pretty evenly based throughout all the divisions.

Mick Blodnick

Which just makes us feel good because that’s geographic distribution; there is a fair amount of economic. Our economies and our markets throughout these six states are different. So, it adds that level of diversification. So, I think we’re feeling pretty good. We’re not looking at one state or one bank that’s causing all of the growth or adding to all the growth. The 13 banks for the most part are all making a contribution.

Operator

Thank you. And our next question comes from the line of Jennifer Demba with SunTrust. Your line is now open. Due to no response, we will go to the next question. And our next question comes from the line of Jackie Chimera with KBW. Your line is now open.

Jackie Chimera

I wondered if you could provide an update for us, I mean if there is any change to the interchange impact of what would happen when cross 10 billion? I know in the past, you said it’s roughly around the $1 million for every billion in assets.

Mick Blodnick

Yes, and we’re still sticking with that analysis. Like Randy said, we’re going making plans of crossing over in ‘17. So, if we cross over in ‘17, this is going to be a July 1st of ‘18 issue unless we get some relief something we’re not holding our breath. But it’s still that million per billion in assets. And so pretax we’re talking and we’ve been pretty consistent as you know Jackie over the last couple years. Our best projections are for about $10 million pretax.

Jackie Chimera

And then, I am assuming that the crossover would be as a result of some M&A that had yet to be announced. And so, maybe you could just provide an update on the discussions that you’re having and how you’re thinking about acquisitions in general?

Mick Blodnick

M&A, it’s been fluid; I mean, there has been a lot of things to look at. We’ve been approached a number of times. Some of the things probably initially right off the bat didn’t make a lot of sense, but, there is other ones that we certainly think do. We’ve got the Treasure State Bank transaction scheduled to close at the end of next month. Any given quarter. Jackie, we’re looking at a couple of other opportunities. Some of these we certainly hope will pan out, some of them don’t for a myriad reasons. But sticking with our long-term plan of trying to acquire a couple of banks or at least announce a couple of acquisitions a year, we’re still hopeful that that’s going to take place in the ‘16.

Certainly, we announced Treasure State this year. We will close Treasure State this year. It’s going to be the only -- it’ll be the only bank that we close in ‘16, because even if we’re fortunate enough Jackie to announce another transaction this year, we will not be closing it until ‘17. And let’s just say on worst case base, we didn’t even do another M&A and we certainly don’t believe that to be the case, but if we didn’t, Randy and myself have talked about this in the past that at $9.2 billion at the end of the second quarter and with Treasure State yet to come on, call it we’d be somewhere close to $9.3 billion is that $700 million enough runway without acquisitions to allow for organic loan growth through ‘17 where you don’t even cross over to ‘17, that could be the case. I would not argue that organically maybe you could do that especially if we remixed the balance sheet especially the earning assets. But I just don’t believe that’s going to be the case. I think the opportunities are there. I think that the states that we operate within which tends to be smaller banks, I think the pressures in that have not abated. And I just don’t see a scenario where we don’t get another deal or two done by the end of ‘17 for sure.

Jackie Chimera

And realizing that the time period is a short one, have you noticed any change in the conversations that you’ve been having in post Brexit world?

Mick Blodnick

No, not at all. I don’t think that piece has come up in any of the dialogs whatsoever.

Jackie Chimera

I guess, what I am getting at, are people more concerned with the downfall in rates than they were maybe earlier in the year. Have spirits been dampened at all or are those that are struggling still struggling and there hasn’t really been a change?

Mick Blodnick

Intuitively, I’d say that you’re spot on and those -- maybe those dialogs are going on and those discussions are going on around those four tables. But at the M&A level, it at least hasn’t been discussed or it hasn’t been a big thing. And maybe the whole reason for a reach out from one of these banks is because of exactly what you just said, but they certainly haven’t brought that up in any of the discussions.

Jackie Chimera

Okay, maybe a more relevant discussion on next quarters call, and thanking for the added color, I appreciate it.

Operator

Thank you. And our next question comes from the line of Daniel Cardenas with Raymond James. Your line is now open.

Daniel Cardenas

Just a couple of follow-up questions here or quick questions here, as it relates to CCP, you said you’ve done about six of your institutions. Are these the larger ones? I mean are you going by size from biggest to smallest, and is there a difference in cost to conversion based on the size of the institution?

Mick Blodnick

No. I think Dan, we mix them, so there we haven’t done in terms of largest and onwards. So, it’s been a good mix, just to load balance the conversations.

Daniel Cardenas

And then, I missed the number of banks you plan to convert this quarter, your initial comments; can you give that to me again, please?

Mick Blodnick

Well, we have seven more to go. We expect to do four in this quarter and then three in the fourth quarter.

Daniel Cardenas

Okay, perfect. And then, just kind of jumping over to the loan portfolio, maybe if you could give me a quick update as to what line utilizations look like at quarter-end and maybe how that compared to the end of last year.

Barry Johnston

I don’t have those numbers.

Mick Blodnick

Yes. We’d be guessing, Dan. We could certainly get to those, but we have that data -- we don’t have it here with us, but if you we want to call Barry offline or something we can probably get you the number.

Daniel Cardenas

Okay, just general sense; I mean, do you think that number is a little bit higher than it was six months ago?

Mick Blodnick

Yes, because certainly all the ag lines, if nothing else, I can guarantee you that ag lines are more advanced upon than they were six months ago. Regarding other C&I, just traditional, C&I credits, I don’t really have a feel; Barry would have more of a feel for if other businesses in that are drawing, about the only one but I know obviously f is the ag credits.

Barry Johnston

That’s a tough number to always get our arms around. And the only numbers that we have, Angela gave me, is our unfunded commitments stand at about 1.1 billion versus 944 million last year. So, how much they’re actually drawn on the overall revolving lines, it’s just a tough number to originate.

Daniel Cardenas

And then, may be just a quick update on how the tourist season is going right now for your markets?

Mick Blodnick

They are still at record levels at Yellowstone. But, we’ve got to be at record levels up here at Glacier. We got an earlier start to the year than we have the last six or seven years, now that measure road construction project is completed. So, the park opened up earlier. Knock on wood, we’ve had a much cooler summer ever since June and July rolled around, the summer’s been just completely the opposite of last year. And I knock on wood because we certainly don’t need the ravaging forest fires that we saw in July, August and September of last year. So far, it’s looking pretty good around here, I mean a couple of fires down -- actually, you mentioned the question, a couple of fires actually around Yellowstone Park as we speak, Dan, but nothing major, nothing massive, nothing that I don’t think it’s going to be totally running out of control like in the last year. And that’s critical for us because believe me, once the word gets out that there is forest fires in the area, the tourists, they do shut it down and a lot of them just don’t come. They don’t want to fight the smoke and they don’t want to fight where they can’t see in there. So, we’ve been very, very fortunate. And as a result, I think that we’re going to continue with very strong tourist dollars coming into our markets.

Randy Chesler

Hey Dan, I think from Durango, all the way up to Kalispell and over to Coeur d’Alene, I think low gas prices continue to help us quite a bit. And I think the world events, people being a little maybe a little more cautious about travel also helps. Just folks can get in the car and got to a lot of great places. So, I think those things really helped as well.

Operator

Thank you. And we do have a question from the line of Jennifer Demba with SunTrust. Your line is now open.

Jennifer Demba

Just wondering, this is actually a question on the management transition. Just wondering, you said that kind of -- it sounds like the transition is substantially complete now; Randy, wondering what has surprised you in the 12 months you’ve been in place, either to the positive or negative, since you’ve gotten up to Montana?

Randy Chesler

I think the biggest surprise really has been the quality, the deep quality of the team. I mean, I think throughout the 13 divisions, I’ve been out to all 13 divisions a number of times. And we not only have a really good team of strong folks here as a holding Company but if you go into each of those 13 banks and in addition to the presidents and their staffs, very-very solid. So, that was unexpected but a great, pleasant -- very pleasant surprise.

Operator

Thank you. And we have a follow-up question from the line of Matt Forgotson with Sandler O’Neill. Your line is now open.

Matt Forgotson

Just on the loan growth, I know heading into the year, we were thinking 5% annualized growth. You’ve blown through that in the first quarter and in the second quarter. And I know we are going to slow from here. But just in terms of the market dynamic, was this -- is the outsized growth -- does that reflect an opening that you guys saw and are capitalizing as some of the others fell back or was that just a favorable winter and having some of that production pull forward? So, what accounts for the deviation relative to the initial view of where we are today?

Mick Blodnick

I think that first and foremost as usual, I think we try to take a conservative approach. When we’re putting plans in place, we don’t’ want to shoot for the moon and then just be totally disappointed. So, as you know, Matt, we’ve backed off of what our expectations were for 2015. We’ve backed those things off even more. I mean, but you’ve got to remember, we were making these assessments back in October, September or October of the prior year going into the year. And if you remember last September, October, we were facing energy plays and energy that was collapsing. You were facing economy that some people were speculating for ‘16 which was not going to be that terrific.

We always did feel that residential construction and housing was going to be one of the bright spots, and I think that’s certainly played out in our minds and in reality. But, you’re right, we had a great winter, we really didn’t have much of a winter throughout the Rockies. And that certainly, like you said, helped to get us off to a very, very, very good start. Then that momentum continued into the second quarter. But like Barry said and like Randy said in his remarks, some of those were couple of large deals that we’ve been working on for a long time, and you might work on some of these. I think of one credit we’ve been working on for a little over year, and it just so happens that in the second quarter that deal closed. Don’t necessarily see a lot of that in the third and fourth quarter.

Barry also mentioned that we got a huge lift this quarter on the ag side, not just from the normal advancing on the operating lines but from an opportunity to pick up certainly a significant portfolio of ag credits that we feel very, very comfortable with, the likes that most of those were guaranteed. And that’s not going to happen every quarter for sure. I mean, that was kind of one time opportunity on the loan side.

But, with that said and getting back to your original question, I think on the municipal front, we’ve been working hard and the bank presidents and chief credit officers have been working hard try to uncover a few opportunities on that front. This last quarter, as I said earlier, we didn’t get quite the number in dollars that we had probably expected, a few of those probably got pushed out into the third quarter that we originally thought were going to be second quarter events. But hey, they are still on the table. And so, we’re hoping that that will help us as we move into the third quarter of the year to at least, again as I’ve said two or three times this morning, keep our loan growth at a reasonable pace.

I mean, certainly with what we did in the first half of the year, what we know and what we expect to close in the near-term in the next month or two, we would certainly be disappointed now if loan growth for the year doesn’t come in at that -- again at that 7%, 8%, 9% range. Are we going to be at 14%? I can’t imagine that to be the case. I mean, in the fourth quarter if everything goes according to plan, we should have a lot of these ag operating lines pay down; if they don’t, then that’s a different issue that we’re going to have to deal with. So, we don’t see that in the cards right now either. So, we’ll get that pay down on a lot of those lines. And then, as tourist season starts to wind down, a lot of other businesses that are squarely focused on the tourist industry, they’ll start to pay back down too.

So, we’ve gone through this for many, many years. We looked at what we did in ‘15 and the first, second, third and fourth quarter. Certainly the fourth quarter was a significant slowdown. We don’t see any reason why we don’t see that same level of slowdown in the fourth quarter, which is going to normalize these numbers from this quarter.

Again, I don’t want to minimize the fact that it was a terrific quarter for loan volume, best ever, and best ever by a significant amount. However, it’s probably not going to be those same increases in the second half of the year, especially in the fourth quarter. But again, I think we’ve done enough already and will have done enough through three quarters where it’s going to be another -- it could be another pretty doggone good year for organic loan growth.

Randy Chesler

And Matt just to give you a little more just context on that, I think Mick, Barry and I started off the year being very clear to the lenders that this was not the time to get out over your skis. So that’s I said the growth was a little surprising because our message at the beginning was hey, we think where the cycle is, let’s not get out over our skis this year, let’s make good loans. And so, we still think we’re sticking to that but with all the things that Mick has laid out that feels a lot of good quality growth.

Matt Forgotson

Randy, while I have you, just you’re now a year into this, you are familiar with life above the $10 billion mark. What do you think the Company needs once CCP is digested? What else do you need to put in place to be able to cross with confidence?

Randy Chesler

Well, let’s start with there is a lot of very good things in place here already. So, one of the critical areas needed as you go over 10 is a very robust enterprise risk management function. And I think T.J. who leads that for us is very, very strong and he’s got a very good department. So, I think that a lot of -- the pieces of that particular infrastructure are in place, which will be very helpful. Probably the areas we have -- area we have the most work to do is around treasury and [indiscernible] where we’ve outsourced some of those services in the past and most banks, the majority, if not all of the larger banks have those functions in-sourced.

So, you need to think of stress testing and the requirements around DFAST past really being at the end of the day creating a balance sheet, new income statement that demonstrates -- that shows the effects of the stress testing and the ability to explain how you’ve got there. That’s probably the area we’re focusing on to close.

The point I made in the comments about taking advantage of the time, as I really think as Mick pointed out will be over some time in ‘17 but we won’t really be required to submit DFAST results until ‘19 if that’s the timing. So, we’re taking advantage of that and planning and really looking at things, so we do this in a most efficient manner possible. And also recognize, this Company is very different than other companies. So, I think we have a very straight forward business model. So, I think the way we’re approaching it, in conjunction with the regulators, we’ve had a lot of discussions with them and we’re working -- we want to work closely with them. We think we’ll take advantage of the time and do this in the most efficient manner possible.

Operator

Thank you. And I am not showing any further questions at this time. I’d now like to hand the call back to Mick Blodnick for closing remarks.

Mick Blodnick

Well, thank you all very much for being with us today. Once again, we thought we delivered a very, very solid strong quarter on a number of fronts that we’ve discussed this morning. We certainly are excited about the prospects and the momentum that we’re carrying into the third quarter. We certainly hope that that momentum continues; if it does, like I said earlier, I think we’re in for a good second half of the year. And you can be assured the entire 2,300 people are going to do working very, very hard to make sure that that happens.

So, with that, I hope everybody on the call has great weekend. We’ve got a Chamber of Commerce weekend planned for Northwest Madonna; weather is going to be terrific up here. And we’re looking forward to the weekend and hope all of you have a great weekend also. So, thank you for joining us this morning. And, we’ll talk soon. 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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