Columbia Banking System's (COLB) CEO Melanie Dressel on Q2 2016 Results - Earnings Call Transcript

| About: Columbia Banking (COLB)

Columbia Banking System, Inc. (NASDAQ:COLB)

Q2 2016 Earnings Conference Call

July 28, 2016 4:00 PM ET

Executives

Melanie Dressel - President & CEO

Clint Stein - CFO

Hadley Robbins - COO

Andy McDonald - CCO

Analysts

Aaron Deer - Sandler O’Neill

Matthew Clark - Piper Jaffray

Jeff Rulis - D.A. Davidson

Jackie Chimera - KBW

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System’s Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System.

Melanie Dressel

Thank you, Sherrill. Good afternoon, everyone, and thank you for joining us on today’s call to discuss our second quarter 2016 results, which were released before the market opened this morning. The release is available on our website at columbiabank.com.

As we outlined in our release, this was a good quarter for us. Our second quarter results have traditionally been strong, and with earnings of $25.4 million, this quarter was no exception. Our loan production was second-highest in our history at just under $340, million thanks to the talented bankers throughout our footprint.

I said last quarter that our credit portfolio doesn’t keep me up at night. Our nonperforming assets to period end assets ratio this quarter was 0.36%, the lowest in eight years. As we move forward, our priorities will continue to be growing quality loans, improving our operating leverage and effectively utilizing capital.

On the call with me today are, Clint Stein, Columbia’s Chief Financial Officer, who will begin our call by providing details of our earnings performance. And then Hadley Robbins, our Chief Operating Officer, will cover our production areas. And finally Andy McDonald, our Chief Credit Officer, will review our credit quality information. I will conclude by providing our take on the economy here in the Northwest including Washington, Oregon and Idaho. We will then be happy to answer your questions.

Of course, I need to remind you that we will be making some forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our Securities filings, and in particular, our Form 10-K filed with the SEC for the year 2015.

At this point, I’d like to turn the call over to Clint to talk about our financial performance.

Clint Stein

Good afternoon, everyone. Earlier today, we reported earnings of $0.44 per diluted common share. Our reported net interest income increased $2 million from the prior quarter. The linked quarter change was driven by an increase of $279 million in average earning assets. Non-interest income before the change in the FDIC loss-sharing asset was $22.9 million in the current quarter, up from $21.7 million in the prior quarter.

The increase was due mostly to higher loan, card and merchant processing revenues. Loan related revenue was up $540,000 on a linked quarter basis, driven by increases in loan fee income and interest rate swap income of $285,000 and $190,000 respectively. Higher volumes of card and merchant processing transactions resulted in an increase in non-interest income of $569,000 over the prior quarter.

We continue to see improvement in our mortgage banking revenues but at $600,000 for the quarter, it remains a small part of our non-interest income. Reported non-interest expense was $63.8 million for the current quarter, a decrease of $1.3 million from the prior quarter. However the prior quarter’s reported number was skewed higher with $2.4 million of acquisition-related expense. After removing the effect of acquisition-related expenses, OREO activity and FDIC call back liability expense, our non-interest expense run rate for the quarter was $63.6 million. This is a $1.3 million increase from $62.3 million on the same basis during the prior quarter. This increase is primarily attributed to higher incentive compensation expense, as well as timing-related items such as advertising expense and legal and professional fees.

Last quarter, our reported occupancy expense of $10.2 million, included $2.4 million of acquisition-related expense. After removing the effect of acquisition-related expense, our first quarter occupancy run rate of $7.8 million was consistent with the current quarter’s expense of $7.7 million.

Excluding OREO activity and FDIC call back liability expense, our non-interest expense to average assets ratio was 2.76%, down from 2.79% in the first quarter. Please remember that, for comparative purposes, the calculation for prior quarters also excludes acquisition expense.

On last quarter's call, I mentioned that our expense ratio would likely remain within the 2.79% to 2.89% range in the near-term. Robust asset growth during the current quarter was enough to lower this ratio further despite the modest uptick in expenses.

We still anticipate that our expense ratio will move within this range as we continue to make infrastructure investments in areas we believe will further enhance our long-term competitiveness and profitability. Our current expectation is a quarterly expense run rate of $63 million to $65 million.

The operating net interest margin declined 3 basis points during the quarter as a result of a slight shift in our average earning asset mix. During the quarter, investment balances increased 48 basis points to 27.3% of average earning assets.

Now, I'll turn the call over to Hadley to discuss our production results.

Hadley Robbins

Thank you, Clint. Total deposits at June 30, 2016, were $7.67 billion, an increase of $76 million from $7.6 billion at March 31, 2016. On a year-to-date basis, total deposits have increased $234 million or about 3.2%. About $145 million of this increase was a non-interest bearing DDA.

Core deposits were $7.45 billion, which represents 97% of total deposits. The average rate on interest-bearing deposits remained low at 8 basis points compared to 7 basis points for the prior quarter. The average rate on total deposits remained unchanged at 4 basis points.

About 54% of our deposits are linked to business and 46% to consumers. Our branches continue as the most important touch-point for our customers, and represent one of our largest investments. We evaluate the performance of our branches on an ongoing basis and look for opportunities to improve the customer experience and become more efficient. This discipline has positioned us to identify opportunities to consolidate 10 branches over the last 18 months.

Loans were $6.11 billion at June 30, 2016, representing a net increase of about $230 million or 3.9% over the first quarter of 2016. The second quarter increase was largely driven by significant levels of new loan production in the amount of $338 million and more active line utilization. Line utilization increased from 52.6% in the first quarter to 54.5% in the second quarter, and seasonal borrowings became more actively, most notably in agriculture. Historically, agricultural activity builds in the second and third quarters and then recedes in the fourth and first quarters.

New production was predominantly in commercial real estate and construction loans and C&I. Term loans accounted for $220 million of total new production while new lines represents $118 million. The mix in new production was fairly granular in terms of size. 22% of new production was over $5 million. 25% was in the range of $1 million to $5 million and 53% was under $1 million. In terms of geography, 59% of new production was generated in Washington; 26% in Oregon; and 15% in Idaho and a few other states.

Following the pattern of new production net loan growth in the second quarter was concentrated in commercial real estate and C&I. Commercial real estate and construction loans ended the second quarter at $3.14 billion, up about $127 million from the prior quarter. The mix of assets types was well diversified.

For the first quarter the largest increase by asset type were the following; hotel, motel, multi-family and office. C&I loans ended the second quarter at $2.52 billion, up about $117 million from the previous quarter. Industry segments with the highest loan growth in the second quarter include agriculture, finance and insurance, construction and healthcare.

During the second quarter, the tax-adjusted weighted average coupon rate for the loan portfolio was 4.36%. The average coupon rate for new production was 4.20%, well below the loan portfolio coupon rate. Under current market and competitive conditions, this gap is likely to continue, however we've seen the pace of decline in the tax-adjusted portfolio coupon rate begin to diminish. The tax-adjusted coupon rate for the loan portfolio declined from 4.40% as of December 31, 2015, to 4.36% at June 30, 2016. For the same period during the previous year, the tax-adjusted coupon rate dropped from 4.54% to 4.44%.

In looking forward, the bank’s deal flow remains active and the pipeline volumes are holding fairly steady. I expect positive net loan growth in the third quarter.

That concludes my comments. I'll now turn the call over to Andy.

Andy McDonald

Thanks Hadley. For the quarter, we had a provision for loan losses of $3.6 million. As you know, we maintain separate allowance accounts for the different portfolios. The breakout of provision expense by portfolio is as follows.

The originated portfolio had a provision of $3.75 million. The discounted portfolio had a release of $200,000, and the purchase credit impaired portfolio had a provision of $91,000. The provisions were driven by charge-offs and loan growth in the originated portfolio, net recoveries and the continued contraction in the discounted portfolio and a change in expected cash flows in the purchase credit impaired portfolio.

I would like to add a little more color concerning loan growth. For the quarter across all portfolios, loan growth was approximately $230 million. However loan growth within the originated portfolio was $300 million, as the discounted and PCI portfolios contracted by $58 million and $12 million, respectively. So as you can see, loan growth had an impact on the provision for the quarter.

We had net charge-offs of $2.8 million for the quarter split between the originated portfolio, which had net charge-offs of $2.3 million and the purchase credit impaired portfolio, which had net charge-offs of $610,000. The discounted portfolios had mixed results with a consolidated net recovery of $90,000. So when you put it all together for the quarter, net charge-offs amounted to about 23 basis points on an annualized basis, down from last quarter’s 28 basis points.

So as of June 30, 2016, our allowance to total loans was 1.13% compared to 1.18% as of March 31, 2016. The modest decrease in the provision to total loans continues to reflect the overall credit quality of our loan portfolio. This quality can be seen in our impaired asset quality ratio, which remains extremely low at 12.7%. Our reserves covered non-performing loans by a margin of 3x, and OREO is a modest $10.6 million.

For the quarter, nonperforming assets decreased $14 million, primarily due to a decrease in nonperforming loans. As a result, NPAs were about $35 million or 38 basis points at period end assets. As we discussed last quarter, we anticipate to keep bouncing around at these low levels.

At quarter end, loans 30 days or more past due and not on non-accrual were about $10.4 million or 18 basis points. This is up from last quarter when past dues were around $8.4 million or 15 basis points.

In summary, we are pleased with how the portfolio has performed. That concludes my comments, and I will now turn the call back over to Melanie.

Melanie Dressel

Thanks Andy. The economies in our three-state area consisting of Washington, Oregon and Idaho are as diverse as our landscape. However leading economic indicators in this part of the country, particularly in the metro areas, are continuing their forward momentum. Overall, we have excellent job creation and strong gross domestic product.

Washington and Oregon are number one and number two respectively for personal income growth in the country and the population and labor force of all three states continues to grow. While Washington added more than 1,100 jobs over the last year, the unemployment rate for June held steady at 5.8%, where it’s been since last December. This is due to the concurrent growth in the labor force which increased by over 97,000 from a year ago. Over 33,000 were in the greater Puget Sound area. Seattle now ranks fourth for growth among the 50 biggest cities, and as Seattle Times columnist recently noted “unless Amazon stops hiring, you may as well get used to it”.

Unemployment data for Oregon continues to bring good news even though the unemployment rate ticked up to 4.8% in June from 4.5% in May. This is far below the 5.8% level posted a year-ago and slightly lower than the national average today. The state’s labor force grew to an all-time high of over 2 million last month. However recent job gains have been more than enough to keep pace with population growth.

In fact, Oregon reached a milestone in terms of recovery and expansion. Not only has the state added enough jobs to regain all of the great recession losses, they have cut back up with the population growth. Even as the economy faltered, people were still moving to Oregon.

Idaho’s employment picture continues to be quite healthy. For the third consecutive month, the state’s unemployment rate has been a low 3.7% compared to 4.2% a year ago. The U.S. Census Bureau recently reported that the state ranked fifth nationally for overall job creation coming out of the great recession.

We often get questions about the role agriculture plays in our economies, so I thought I’d briefly cover some highlights. Agriculture has remained a key component of our economic success. We’re very lucky to live and work in the Northwest with our diverse climate, rich soil and usually abundant water.

Washington is number one in apples and hops in the country. Oregon is number one for Christmas trees, hazelnuts and all different types of berries. And you won't be surprised to hear that Idaho produces the most potatoes in the United States, but it also produces the most food-size trout. In 2014, the state reported $16 billion worth of food and agricultural products to people around the world, half of which were grown right here in Washington.

In Oregon, agriculture directly or indirectly supports more than 325,000 full or part-time jobs, making up almost 14% of total jobs in the state. And Idaho generates $25 billion from sales or over 20% of the state’s total economic output.

Our ports are very important to the region as well. They certainly help us to move all that agricultural production. Northwest Seaport Alliance, the consolidated container operation the Port of Seattle and the Port of Tacoma, reported container imports grew 4% month-over-month in June, the highest June volume in the past four years. However the weakened Alaskan economy, due to the low oil prices, has hurt domestic volumes, which are down 11% year-to-date.

We’re closely watching economic indicators in light of concerns about international economic conditions, particularly in China, as well as more regional concerns, and we regularly survey our business customers throughout our market area in a variety of industry segments to better understand the economic conditions and identify what they see as opportunities in areas of concern. Our recently completed second quarter survey reveals that over 90% of our business customers remain confident in the future of their own business, and in fact their feelings about their industry’s business conditions were at an all-time high, particularly in retail.

However there was known from last quarter’s survey about the uncertainty regarding the political climate, which continued to be the second most frequently cited reason to postpone expanding their business. And just under one quarter of the business owners are planning capital expenditures in the next three to six months. Government regulations and taxes continued to be the top issue most of our customers face in their companies.

So to summarize, our diverse economies in our part of the country continued to perform better than most, and we continue to be optimistic about our future here in the Northwest.

I’d like to wrap up by talking a little bit about our dividend. Our financial performance and our optimism about our continued opportunities in the Northwest help us to support our decision to increase our regular cash dividend to $0.20 per common share. This is a 5% increase from the regular dividend we paid during the second quarter and 11% increase from the regular dividend paid during the first quarter of this year.

For the 10th consecutive quarter, we are also paying a special cash dividend, which will be $0.19 per common share. Both dividends will be paid on August 24 to shareholders of record as of August 10, 2016. The total dividend payout of $0.39 constitutes the payout ratio of 89% for the quarter and a dividend yield of 5.2% based on yesterday’s closing price.

So with that, this concludes our prepared remarks this afternoon. As a reminder, we have Clint Stein, Hadley Robbins, Andy McDonald here with me to answer questions. And now, Sherrill will open the call for questions.

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions] And our first question today comes from Joe Morford, RBC Capital Markets. Your line is open.

Melanie Dressel

Hi Joe.

Unidentified Analyst

Yes, good afternoon. It’s actually Jeanette DeRouche [ph] pinch-hitting for Joe. Hi, how are you?

Melanie Dressel

Good.

Unidentified Analyst

Just wanted to get a little bit more detail on the deposit growth given that that lagged your loan growth this quarter. Was that more a function of dynamics in the market, or are there, say other things at play here, and then how does that dovetail into the fairly significant increase that we saw in your FHLB Advances?

Melanie Dressel

Clint or Hadley. Hadley.

Hadley Robbins

Well, I'll start with deposits and you can talk about FHLB advances. Deposit growth for the quarter was really driven by the business side of our portfolio and that we didn't see much lift in the consumer side, and a lot of that’s attributed to I believe the reward for deposits. We're not able to provide high levels reward for deposits. And so the consumer side of the deposit business is steady and static but businesses where we’re seeing the growth that we do have. And I would probably anticipate the growth rate to be at about the same pace in the future.

Clint Stein

I'll just add on the Federal Home Loan Bank advances. Our strategy as it relates to overnight funds is to manage them at or near zero. And so what happens is from time to time we’ll have some deposit [ph] inflows and cash flow throughout the portfolio. We put those to work and then maybe loan growth kicks in. And so it does create, you know, just if you're looking at it at a 10 point of time like the balance sheet does, the potential that one day one week, couple of weeks it could be $100 million, $200 million of borrowings and/or $100 million or $200 million in overnight funds. So our strategy hasn't really changed, but when you look at it over the course of several months or the year, I think you will see that we tend to be at or near zero with our overnight funds and borrowings as well.

Unidentified Analyst

Okay, that's very helpful. So it's not in a way shape or form related to any kind of interest rate risk management, where you perhaps are trying to link lengthen the duration of the liabilities?

Clint Stein

No, not with the borrowings. Now we have extended the duration a little bit on some of the things that we are putting into the investment portfolio. The portfolio duration is still 3.7. An instantaneous shock of 300 basis points, it only extends is to 4.2. So we certainly have flexibility, but with respect to the advances, that's not an interest rate risk play.

Unidentified Analyst

Okay, thanks. And then, if I may, one additional question. It was interesting to see the buyback program. And is this in anyway to be read as perhaps your M&A prospects, opportunities are not as great as they might have been in the past?

Melanie Dressel

No, it's just that our prior repurchase program had expired and we always like to have as many tools in our tool chest as we can.

Unidentified Analyst

Okay. So it's not that we are going to see any kind of significant repurchases in the near-term?

Melanie Dressel

It's just another tool. So it just kind of rounds everything out for us.

Unidentified Analyst

Okay. All right. Well, thank you so much.

Melanie Dressel

Thank you.

Operator

Thank you. Your next question comes from Aaron Deer, Sandler O’Neill & Partners. Your line is open.

Melanie Dressel

Hi, Aaron.

Aaron Deer

Hi. Good afternoon, everyone. I guess I'll stick with the capital theme. You guys have obviously been doing the special dividends now for a while. Over the past year given that and I guess more importantly, the balance sheet growth that you’ve had, your TC ratio been kind of drifting down. With that down to what, 9.7% [ph] now, would it be your expectation that you continued to be kind of as active with the specials going forward or is there a point at which you decide that you want to hold that level so that you are ready for any acquisitions or opportunities that come along?

Melanie Dressel

Well, we still have enough capital that we believe that we’ve got lot of dry powder. So doing the special dividend has just been one of the levers that we've used and we don't want to send a signal that we are not interested in doing acquisitions at all or that we wouldn't be able to do them from a capital perspective.

Aaron Deer

Okay. So it's more - so it is reasonable to think that those would continue until maybe something was announced on that front in terms of acquisition?

Melanie Dressel

I suppose that that is how you could interpret that. The regular dividend was increased this quarter. I think that that would be the stronger message how confident we are in our earnings. And we just look at it every quarter and kind of look at what the potential acquisition targets might be out there and how it all relates, and then of course you look at your different loan buckets and how the loan portfolio is growing. So it's all a big picture and a lot of different factors that go into those discussions.

Aaron Deer

Sure. Okay, thanks. And then, Andy, a question for you. Just wondered if you can maybe give us some color on the credit resolutions that supported the healthy drop in the NPLs this quarter?

Andy McDonald

Yes, as we talked last quarter, it was impacted by a couple of credits and we were able to resolve those. So what bumped us up last quarter is - a lot of that was resolved this quarter and so we were able to get back down. So, one is I had mentioned to you before was a real estate transaction. That property got sold. So that kind of resolved that issue. The other one was a food-related company and they sold to a larger national competitor and so we got paid off on that one.

Aaron Deer

Okay, great. Thanks for taking my questions guys.

Melanie Dressel

Thanks Aaron.

Operator

Thank you. And our next question is from Matthew Clark from Piper Jaffray. Your line is open.

Melanie Dressel

Hi Matt.

Matthew Clark

How you doing?

Melanie Dressel

Good.

Matthew Clark

Good. Hadley, I think I missed your comments about the loan pipeline. Is that pipeline going in the third quarter up year-over-year in linked quarter, or is it down some just given all the production that you guys did this quarter?

Hadley Robbins

Actually it's pretty static compared to what we saw in the first quarter. So first and second quarter is pretty consistent, and my expectation is it will hold that way end of the third quarter.

Matthew Clark

Okay. And then it sounded like some more production came out of Idaho, I think 15% this quarter. I think historically you guys have been around 10% since you got into that market. Can you just talk about the traction you're gaining there?

Hadley Robbins

Well, I think a lot of the lift in Idaho is related to Ag borrowings as they’ve come on in the second quarter, plus we've been able to identify some new clients that are reasonably sizable, so it made a difference there. I think that the activity in Idaho is fine and we expect to grow that market over time, as you would expect it just takes time to build the rhythm and that's what we are in the process of doing.

Matthew Clark

Okay. And then on the coupons in the quarter, new production, I think they were up 6 basis points to 4.20%. I assume that's related to the construction contribution, but as an add-on to that, I think you talked about your core portfolio - or that portfolio being around 4.36% million.

Hadley Robbins

Right.

Matthew Clark

I guess that's also coupon, but the overall core loan yields when you think about it that way, excluding the $4.4 million of accretion this quarter I think puts the yield at 4.70%, down only a basis point. But just as we think through the core margin outlook, I think is it still fair to assume that that differential, that 50 - I’m sorry - yes, 50 basis point differential to 4.20% and the 4.70% is really going to be ongoing pressure on core the margin. Is that fair?

Hadley Robbins

There is one thing to factor into that thinking is what's coming up for repayment in the next year. We've got about $1.3 billion that’s turning over. And of that $1.3 billion, the coupon rate on that is about 4.17%. And so what you can see is that the new production and what we expect to turn over, at least given the results of this last quarter, are fairly within the same range. And so part of the answer to your question is, I would expect that differential to remain and in part I’m thinking about what I just spoke to regarding the portfolio that's turning over and the pricing that we've got on it. Hopefully that's helpful for you.

Matthew Clark

Yes, that is okay. Great. And then just last one for me really on credit. Andy, I think you talked about the non-performers kind of bouncing around plus or minus in this range. I would assume that comment also relates to your expectations for charge-offs and the reserve kind of starting to stabilize here too. Is that fair?

Andy McDonald

Yes, I mean, if you look at the bank’s performance over like the last seven or eight quarters, I think our provision averages out about $3.2 million, $3.3 million, and I wouldn't expect a provision to be all that different. We might be a little bit under that. We might be a little bit over that but it's going to be in that range.

Matthew Clark

Got it. Okay, thank you.

Melanie Dressel

Thanks Matt.

Operator

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

Melanie Dressel

Hi Jeff.

Jeff Rulis

Thanks. Hi Melanie. A question on the branch consolidations. You talked about 10 consolidated over the last 18 months. Are you through the bulk of that or is this kind of –I would assume ongoing, you’re always looking for efficiencies but was there some low-hanging fruit and now it's one a quarter or maybe what the - any color on that?

Andy McDonald

Well, you know, I think if you want to go back in time let's say to beginning of 2010 - and I'm going to - this is going to be an approximation. There is about 39 branches that have been consolidated, some of which of course are related to the M&A activity that we've had. And we've had an ongoing effort over that period of time at looking in our branches and developing performance-related criteria that represents what we'd like to achieve and that we are never really in a hurry to close branches, preferring to find ways to make those locations profitable and accretive for the bank, and that in cases where we feel that there are better ways to achieve that meaning consolidating with other branch, we do that. And so it's an ongoing effort and it's a well thought out disciplined approach. And so I would expect that to be a story going forward, but there is not like a big bulk of branches that we're looking at right now.

Jeff Rulis

Okay. So maybe the pace slows but [indiscernible] going.

Andy McDonald

Yes.

Jeff Rulis

Yes. And then, Hadley, do you have the payoff activity Q2 versus Q1?

Hadley Robbins

Yes. Hang on just a second, I’ll get it for you. Go ahead and ask another question. I’ll find it.

Melanie Dressel

Feel like we need a little music here.

Hadley Robbins

I got it.

Jeff Rulis

So maybe more of a softball for just kind of - again, I know you guys have been prepping for the $10 billion mark through acquisitions in the back-office and other. I guess internally your budgets, is that looking kind of like a 2017 or a 2018 event assuming it's all organic. Any color you could touch on that?

Melanie Dressel

Well, I think if you just extrapolate where we are at today and how we got there that looks for like 2017 organic event. But that doesn't mean that that an acquisition couldn't take us well over that number, neither way we are prepared for it. Organically it’s just going to cause us more money initial until we make up the impact from the Durbin amendment.

Jeff Rulis

Got it. Okay.

Hadley Robbins

Jeff, the payoff activity or prepay activity for the second quarter was about $100 million. First quarter was about $81 million.

Jeff Rulis

Great. Thank you.

Operator

Thank you. Our next question comes from Jackie Chimera from KBW. Your line is open.

Melanie Dressel

Hi Jackie.

Jackie Chimera

Hi Melanie. Layering onto Jeff’s question, is it still an appropriate number a little over $7 million for the interchange impact of the $10 billion cross?

Melanie Dressel

Clint?

Clint Stein

We updated that number. The $7 million was when we looked at our full-year 2014 activity. Based on 2015, it's just a touch over $9 million pre-tax.

Jackie Chimera

Okay. Thank you. I must have missed on that. And how sustainable do you think that the debit card income increase is? Was that just a seasonal fluctuation that way you happen to have a good benefit in the quarter, or are you seeing a change in behavior?

Hadley Robbins

It's seasonal and I think that's most of the activity.

Jackie Chimera

And do you think that will probably continue in the 3Q and trend down again in 4Q?

Hadley Robbins

It is normally kind of a push at year-end and then it goes down as you go through the holiday season and then it tapers off.

Jackie Chimera

Okay. And then just lastly, Hadley, I was wondering about the churn in the construction portfolio and how much that we’re not seeing in there just by looking at end of period numbers? What are you seeing in terms of growth on just on average basis and how much is coming on versus flowing off from project completion?

Hadley Robbins

Well, we've got a fair number of construction projects that will continue to drawdown over the next 36 months, and so we've got a decent pipeline of that type of activity. And I think that we are fairly selective as we've said before as it relates to construction activity that's related to multi-family. So we are carefully moving forward with that taking room for customers that we've done business with over the years that have the type of projects that fit our credit criteria. But the construction book I'm feeling reasonably good about actually.

Jackie Chimera

Okay. So is it safe to say you're carefully monitoring your concentration limits there so that you still have the ability to lend when you want to?

Hadley Robbins

Absolutely.

Jackie Chimera

Okay. Thank you.

Melanie Dressel

Thanks Jackie

Operator

Thank you. And our next question is from Matthew Clark, Piper Jaffray. Your line is open.

Matthew Clark

Hi. Just looking through your numbers and thinking about your guidance on the expense to asset ratio, maintaining it at that 279 to 289 range. If you just take the high end of your expense guidance of $65 million for the upcoming quarter, you assume some margin pressure consistent with what you just witnessed in the second, and maybe a bump up in fees. It would imply you're going to show some additional improvement in that ratio maybe down toward the low 270s. Just curious if there is something that we are not - may not be considering as you look out here in the second-half whether it's fees or what have you?

Hadley Robbins

No. What I was trying to highlight because I read all your notes this morning and it was expenses went up. And so I was trying to do a better job of, I guess, articulating and I guess maybe I failed at that a bit. From quarter-to-quarter, we kind of have a core run rate, but there is always something where whether it's one quarter versus another that maybe we have an advertising campaign going on. Maybe it's legal or professional services depending on when those hit. And over the course of the year if you look at it, it would be a fairly smooth annual number. But from quarter-to-quarter, it's not uncommon for us to have our expense base move around $1 million or $2 million. And so I think that our goal hasn’t changed in what we've said last quarter was we expect to see that ratio continue to trend down, but we also know that - for example, in the first quarter legal and professional and advertising came in a little lower than what I would have expected.

And back to the timing element of it in the second quarter, those came in higher than what they were in the first quarter. And so you mix in that with asset growth, we had really strong loan growth in the second quarter, so that increased our earning assets, I think it was $279 million. And those things helped the ratio. I think that if we looked at are expense run rate and kept our average assets flat with the first quarter, we would have come in at $285 million. So just trying to give you guys two different ways of looking at it to give you a hard dollar kind of range of what we think would be normal course of business stuff, but then also give you the expense ratio so that as we continue to grow and reinvest in the franchise that you kind of have a way to gauge improvement in our operating leverage.

Matthew Clark

Okay. And I guess one piece of it though could be mortgage. I know that’s a line item that tends to get buried in your fees just because it's not a big number, but it was I think $600,000-plus this quarter. So can you give us a sense for what maybe a more reasonable run rate might be? I would assume that you might get some of that back in the third quarter and obviously the fourth and first? And thanks for that [ph].

Clint Stein

Well, and I’ll let Hadley jump in here if he wants to add to this because I know that mortgage production is something that he pays close attention to. It was $600,000 as I mentioned in my prepared remarks. And part of the reason I wanted to include it even though it's a small piece of the total pie was many of our competitors have a lot more substantial portion of their non-interest income coming from mortgage activity. And so I wanted to highlight for you that our number is fairly modest in relation to nearly $23 million in total non-interest income.

For perspective in the first quarter, that number was $513,000, the fourth quarter of last year it was $450,000. So it is up but $150,000 out of $600,000 and $600,000 out of $23 million. It's not a huge driver to the bottom line results. Hadley anything?

Hadley Robbins

I would just add that it's a business line that we spend some time trying to get better positioned and better organized and staff with the right people, and we believe that we have that. And that I would expect over time for you to see the mortgage component of our non-interest income start to grow, and that's the intent.

Matthew Clark

Got it. And then just a quick one on the tax rate. Is 30.5% the right rate to use or is it 31% here going forward?

Clint Stein

I think 31% is a good estimate. I mean, from one quarter to the next, it might flip to either side of 31% but when I look at it, 31% is kind of the number I typically plan on.

Matthew Clark

Okay. Thank you.

Melanie Dressel

Thanks Matt.

Clint Stein

Thanks Matt.

Operator

Thank you. That concludes the questions in the queue today.

Melanie Dressel

All right. Well, thanks everyone for being with us today. We really appreciate your interest and we hope you enjoy the rest of your summer. Thanks.

Operator

Thank you very much. Ladies and gentlemen, this concludes today's call. You my now disconnect.

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