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Glacier Bancorp Inc  (NASDAQ:GBCI)
Q3 2018 Earnings Conference Call
Oct. 19, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would like to introduce your host for today's conference, Mr. Andy (ph) Chesler, CEO. Sir, please go ahead.

Randy Chesler -- President and Chief Executive Officer

Alright. Thank you, Michelle. Well, good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Cherry, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; and Angela Dose, our Principal Accounting Officer.

Yesterday, we released our third quarter 2018 results. This was a very strong and well-balanced quarter and continues an excellent year-to-date performance for the Company. Earnings were $49.3 million, an increase of $12.8 million or 35% over the third quarter a year-ago. Pre-tax income was $60.1 million for the quarter, an increase of $12 million or 25% over the prior-year third quarter.

Pretax income of $161 million for the first nine months of the year increased $26.2 million or 19% over the first nine months of 2017. We had loan growth of $175 million or 9% annualized in the third quarter versus growth of $164 million or 10% in the third quarter a year-ago. We grew our core deposits $199 million or 9% annualized in the third quarter.

Diluted earnings per share for the quarter were $0.58, an increase of 12% from the prior quarter, and an increase of $0.11 or 23% over the prior year third quarter. Our annualized return on average assets at the end of the quarter was a very strong 1.66%, up from 1.53% in the prior quarter.

Annualized return on average equity was 13.1%, and our return on tangible equity was 17.4%. We declared a regular dividend of $0.26 per share, which is a 24% increase over the third quarter regular dividend a year-ago. This was our 134th consecutive quarterly dividend paid by the Company.

And in September, we also successfully completed the conversion of Collegiate Peaks Bank in Buena Vista and Denver, Colorado onto our core processing platform. Loan production for the third quarter was $887 million, which was once again generally well distributed among all our divisions. Loan paydowns were $712 million, which is consistent with past seasonality. The loan portfolio ended the quarter at $8.1 billion.

Organically, the loan portfolio increased $632 million or 10% since September 2017 and was primarily driven by growth in commercial real estate loans, which increased $406 million or 12% over the same period. Investment securities of $2.695 billion decreased $103 million or 4% during the current quarter and increased $153 million or 6% from the prior quarter -- from the prior third year -- prior quarter -- prior-year third quarter. Investment securities represented 23% of total assets at the end of the quarter compared to 26% at the end of the third quarter a year ago.

Onto credit, our key credit quality ratios improved in all categories across the board. Early stage delinquencies as a percentage of loans at the end of the quarter were 30 basis points. That's a 19 basis -- that's a decrease of 19 basis points from the second quarter and a decrease of 14 basis points from the prior year's third quarter.

Net charge-offs for the quarter were $2.2 million and were $5.7 million for the first nine months of 2018. Charge-offs for the first nine months of 2018 were 7 basis points of total loans, down 5 basis points from the same period a year-ago.

Non-performing assets, as a percentage of subsidiary assets at the end of the third quarter were 61 basis points, which is 10 basis points lower than the prior quarter and 6 basis points lower than the prior year third quarter.

At the end of the quarter, NPAs totaled $72.1 million, a decrease of $12.4 million or 15% from the prior quarter. We're very pleased to see the reduction in the level of NPAs, as we've been working toward this for some time and hope to see this trend continue. The allowance for loan and lease losses as a percentage of total loans outstanding at the end of this quarter was 1.63%, which is down 3 basis points from the prior quarter and down 36 basis points for the end of the third quarter a year ago. This reflects our positive outlook on our portfolio and markets.

Our low cost, high quality stable funding platform across our western multi-state footprint continued to perform really well for the Company. Core deposits at the end of the quarter were $9.45 billion. Total core deposits were up versus the prior quarter by $199 million or 2% as we continue with our focus on growing relationship based accounts. The bulk of the deposit growth this quarter was all-in non-interest bearing deposits, which increased $188 million or 6% from the prior quarter and organically increased $276 million or 12% from the prior year third quarter.

We ended the third quarter with a loan to deposit ratio of 85%, essentially unchanged from the prior quarter. And we were very pleased to see the total cost of funding for the current quarter unchanged from the prior quarter at 36 basis points and up only 1 basis points versus the prior-year third quarter. Once again, our 14 divisions continued to do an outstanding job, tightly managing deposit costs, specific to each of their markets.

Interest income increased $5.2 million to $123 million or 4% from the prior quarter, and increased $26.4 million or 27% over the prior-year third quarter. Both increases were primarily attributable to the increase in interest income from commercial loans and rising interest rates.

Interest income on commercial loans increased $4.8 million or 6% from the prior quarter, and increased $20.7 million or 34% from the prior-year third quarter.

Our net interest margin, as a percentage of earning assets for the current quarter was 4.26% compared to 4.17% in the prior quarter. The 9 basis points increase in the net interest margin was primarily the result of increased yields on the loan portfolio and it also included a 2 basis point increase in loan discount accretion for a total of 8 basis points attributed to the discount accretion.

The current quarter net interest margin increased 15 basis points over the prior-year third quarter net interest margin of 4.11% and would have been an increase of almost 30 basis points if the same federal tax rates in effect in 2017 were in effect today. The increase in the core margin from the prior-year third quarter was a result of the remix of earning assets to higher yielding loans, improved interest rates on the loan portfolio, and very stable funding cost.

Non-interest income from the quarter totaled $32.4 million, an increase of $588,000 or 2% from the prior quarter, and an increase of $1.2 million or 4% over the same quarter last year, driven by increased accounts from our recent acquisitions.

Service charges and other fees of $19.5 million increased $700,000 or 4% from the prior quarter, and increased $2.2 million or 13% from the prior-year third quarter. The increases were primarily due to the increased number of accounts from organic growth and acquisitions. Gain on sale of loans decreased $886,000 or 11% from the prior quarter as a result of some housing seasonality and decreased $1.9 million or 21% from the prior-year third quarter, as a result of some seasonality and timing of loan origination.

Other income increased $1.5 million or 56% from the prior quarter, and was primarily due to a $2.3 million gain on the sale of a branch building and increased $767,000 or 22% from the prior-year third quarter due to the branch sale.

Non-interest expense for the quarter was $82.8 million, and that increased $1 million or 1% over the prior quarter, and increased $14.3 million or 21% over the prior-year third quarter. Comp and employee benefits of $49.9 million increased by $904,000 or 2% from the prior quarter and $8.6 million or 21% from the prior-year third quarter, primarily due to the increased number of employees from acquisitions.

Occupancy and equipment expense increased $1.4 million or 22% over the-prior year third quarter and was also attributable primarily to our acquisitions. OREO expenses increased $2.5 million from the prior quarter and $1.9 million from the prior-year third quarter, with the increase driven by a single property, which we wrote down $2.2 million in the quarter.

Other expenses decreased $1.9 million or 13% from the prior quarter, and was primarily driven by a decrease in acquisition related expenses. Acquisition related expenses were $1.3 million during the current quarter compared to $2.9 million in the prior quarter and $245,000 in the prior-year third quarter.

Tax expense for the third quarter was $10.8 million, which is a decrease of $837,000 or 7% from the prior-year third quarter and was attributable to the Tax Act. The effective tax rate in the second quarter of 2018 was 18% compared to 24% in the prior-year third quarter.

Our efficiency ratio for the quarter was 52.3% and was a 318 basis point decrease from the prior quarter efficiency ratio of 55.4%. The decrease was the result of an increase in interest income and the sale of the branch building combined with the Company controlling operating cost and a decrease in our acquisition-related expenses.

In closing, the third quarter of 2018 represents another excellent quarter for the Company. We finalized the integration process as planned for Collegiate Peaks at the end of the third quarter and now we have successfully integrated both our First Security and Collegiate Peaks Bank acquisitions that we closed at the beginning of the year. Our 14 division presidents and their team across our seven states really rose to the occasion in the third quarter and delivered some very strong results across all aspects of the business.

That ends my formal remarks and I'd like to now ask Michelle to please open the line for any questions that you may have.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Andrew Liesch with Sandler O'Neill. Your line is open. Please go ahead.

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

Hey guys.

Randy Chesler -- President and Chief Executive Officer

Good morning.

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

Good morning. Just if you can provide some color around the margin outlook. Just seems like with the impressiveness in the funding base and the cost of funds there staying pretty flat and the inflows here in non-interest bearing accounts, but then stronger loan yields at the margin would have to continue marching higher. I'm just wondering if you can provide some color around your outlook on the margin.

Randy Chesler -- President and Chief Executive Officer

Yes. No we're very, very pleased with the margin results this quarter. I think there very positive underlying trends that we see this quarter should continue. I'm going to ask Ron to make a couple of comments, if he would. I know he spends a lot of time looking at the margin.

Ron Copher -- Chief Financial Officer

Yes, that really is a continuation of what we have said in the second quarter release and that is the -- it's really the focus the divisions have and my hats off to them, they're really focused on getting the non-interest bearing accounts. And you'll notice that we've had some slight increases in the interest bearing. But when you can continue, and I expect that we'll continue to have great growth in our non-interest bearing, that goes a long way toward increasing the margin. So I'm optimistic on that standpoint. And then the loan production yields, the growth in that likely to continue. So we're pretty optimistic the core is running pretty well.

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

That's great. And then just looking at the loan pipeline where it stands now, I mean normally you have a little bit of slowdown here in the fourth quarter, is that normal seasonality what you would expect in the year (ph)?

Ron Copher -- Chief Financial Officer

Yes, that's -- we see it every time this year. Generally the third and fourth quarter is a little slower than the first and second. So nothing out of the norm there.

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

Got you. And then just one last question, the -- have the cost saves from the acquisitions this year, are those all in the run rate right now?

Randy Chesler -- President and Chief Executive Officer

For the most part, yeah.

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

Okay.

Randy Chesler -- President and Chief Executive Officer

Both the acquisitions have now been converted and there's always a little bit of time after the conversion where some of the expenses are still there, but then they begin to drop off. And we finished our last one at Collegiate Peaks in September. So there may be a little bit of trailing expense, but certainly First Security Bank having done that one earlier this year, most of that is out of it -- most of the saves are reflected. There is a little bit of -- there will be a little carryover, but not much.

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

Okay. Thank you. I'll step back.

Operator

Thank you. And our next question comes from the line of Jacque Bohlen with KBW. Your line is open. Please go ahead.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Hi. Good morning everyone.

Randy Chesler -- President and Chief Executive Officer

Good morning, Jacque.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

(inaudible) in a little bit along -- more on loan yields, I wonder if you could provide us a refresher with how much of your portfolio, number one, is variable, and number two, how much of it reprises on a quarterly or shorter basis?

Randy Chesler -- President and Chief Executive Officer

Ron, do you want to take that?

Ron Copher -- Chief Financial Officer

Yes, Jacque, Ron here. So the loan portfolio and the variable part is about 64%, say -- just call it two-thirds if you will, and then the other part is the fixed portion. And then I don't have the quarterly that -- with reprice, but we would tell you it's 40%, 45% of it with reprice within a year and that's been pretty much the historic pattern. Remember from an asset liability perspective, we price a lot of our loans off the five-year, and we always have a rolling book and so we get more lift in the second year after the first year of raise and that's what you're starting to see. As these loans are starting to reprice both from a maturity standpoint and certainly from the variable part that's what's given us that lift.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. In that 45%, is that 45% of the total portfolio or 45% of two-thirds of the portfolio?

Ron Copher -- Chief Financial Officer

It's the two-thirds of the portfolio.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. And just generally speaking when those are repricing on what rates are they repricing off of, prime, LIBOR, a different metric?

Ron Copher -- Chief Financial Officer

It's largely off the -- we index to the five -- predominantly index to the five year Federal Home Loan Bank of the Des Moines rate and then we add a spread to that and some of those are contractual, but then if there is variable growth we get a chance to lift those occasionally.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, that's helpful. Thank you. And I apologize if I somehow missed this in your prepared remarks, but I have in my notes from last quarter that new generation was around 520 (ph) and I know that you've said that it increased this quarter, and I wondered if you have that number.

Randy Chesler -- President and Chief Executive Officer

You're talking about new loan production yields?

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Yeah.

Randy Chesler -- President and Chief Executive Officer

So it's moved up quite nicely. Right now we're as you know right around the 530s (ph) for new production. So it's moved up commensurate with the increase in rates.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay. And then just one last one for me. Obviously your bank divisions are doing a fantastic job of developing non-interest-bearing balances. I guess, number one, do you expect that -- how much longer can it continue to keep funding costs flat basically as rates rise?

Randy Chesler -- President and Chief Executive Officer

Well, when we look -- we spend a lot of time looking at it this quarter. I mean, when you think of our position as a commercial lender, we feel like there's still quite a bit of room to grow there of our penetration of non-interest. If you look at our non-interest balances of only about 31% of the total, we think there's good room to grow. We're also seeing now that we have over the last year really focused on looking for that relationship with the loans we're making, that's paying dividends, we think our product is very strong in the market that we offer. We are picking up some business as the bigger banks kind of move away from our target market of smaller companies. And so all that we feel is -- are very good trends for us going forward.

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, great. Thanks for the background color. I appreciate it.

Randy Chesler -- President and Chief Executive Officer

You are welcome.

Operator

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

Matthew T. Clark -- Piper Jaffray -- Analyst

Hi. Good morning.

Randy Chesler -- President and Chief Executive Officer

Good morning, Matthew.

Matthew T. Clark -- Piper Jaffray -- Analyst

Want to talk a little bit about the construction and development portfolio. I think it's up to about a little over 13% of total loans. Just wanted to get a sense for whether or not you're seeing any slowdown in production activity given what rates have done and just kind of general housing slowdown nationwide and how you might manage -- and how you manage that portfolio going forward?

Randy Chesler -- President and Chief Executive Officer

The construction piece.

Matthew T. Clark -- Piper Jaffray -- Analyst

Yeah.

Randy Chesler -- President and Chief Executive Officer

Yea, so Barry and I would we have -- we talk a lot about that. So I'm going to let Barry give you a little insight there.

Barry Johnston -- Chief Credit Administrator

Yes, basically this past quarter we saw a reduction in customer non-owner occupied single-family residential. I think that's a little seasonal. Saw a 14% growth in pre-sold and spec and that's a reflection of just we've got lots of builders out there trying to fill the demand for affordable housing, the inventory is pretty tight across our markets, not a lot of supply. So we've seen some increase there and anticipate that will probably continue.

Then on -- in regards to the total land locked in other, that grew about 6%. Some of it is in land development. We're seeing a few more loans there where financing borrowers who are going to build homes and sell-offs. Nothing really large increase in absolute dollars, nothing big, but percentage wise pretty good.

Other construction which is the -- comprises the bulk of that portfolio's $487 million. That stayed relatively flat this quarter, again I think it's seasonality. That portfolio is comprised of various commercial, primarily commercial vertical construction. About $100 and some million of multi-family of which the biggest part of that is low-income housing tax credits projects that we finance across our footprint. We have them all the way from Montana down to Colorado. So it's really a good product. We have about $80 million in there of educational dormitory properties that we're financing at various colleges and universities across our footprint. And then we have some medical offices buildings and they are about another $71 million is in there. So outside of those three classes there it's spread out across all other office buildings warehouses and that sort of products. So usually for the bulk of it is owner occupied or owner managed, a very little outside investment properties for the most parts. Is that (inaudible) ?

Matthew T. Clark -- Piper Jaffray -- Analyst

Okay. Yes, there's -- it sounds like there's still capacity to grow, it doesn't sound like you're pulling back necessarily?

Barry Johnston -- Chief Credit Administrator

No, given the class of product, it's kind of our bread and butter. So I won't see us limiting production there. The only two classes that we have put a limit on is hospitality and then conventional multi-family. We just see that's -- we're at our max limit there of about $200 and some million in each one of those classes.

Matthew T. Clark -- Piper Jaffray -- Analyst

Okay, great. And then just shifting back to deposits, can you give us a sense for where that growth in non-interest bearing is coming from competitively whether or not the big banks or not?

Randy Chesler -- President and Chief Executive Officer

Sure. Couple of things about that. Number one is when we look at all the divisions, it's pretty well spread out among all the divisions. So we're seeing it across the footprint. A lot of it is continued blocking and tackling. We just kind of updated the volume on this whole area over a year ago with some enhanced training around our product offering. And really Barry I know is really kind of asked for total relationships quite a bit more and I think that's working for us.

And if there's one thread, your question on big banks, a number of the divisions report Wells Fargo is continuing to kind of lose some relationships and so I think we're benefiting from that in the markets where they are with us as well. And I think in general, if the larger banks are in the market we tend to be benefiting from that.

Matthew T. Clark -- Piper Jaffray -- Analyst

Great. And then did you happened have the spot rate on your interest-bearing deposits at the end of September? Just wondered if it moved much at all relative to the quarter.

Randy Chesler -- President and Chief Executive Officer

Let's take a look. So that is on the release, I believe, if you look at the core deposits do you have a quarter-over-quarter -- it looks to be -- if you look at it over this quarter versus a year ago we're up 3 basis points in the core deposit and it moves around between DDA, savings, money market and CDs. The bulk of that increase is on the CD side.

Matthew T. Clark -- Piper Jaffray -- Analyst

Right. I guess I was just looking for the end of September, not the current quarter.

Randy Chesler -- President and Chief Executive Officer

Okay. End of this September from the -- you mean, beginning of the quarter to the end of the quarter?

Matthew T. Clark -- Piper Jaffray -- Analyst

Yep.

Randy Chesler -- President and Chief Executive Officer

So, let's see, pretty much the same, like it's up about 1 basis point.

Matthew T. Clark -- Piper Jaffray -- Analyst

Okay. And do you -- I guess -- that's great. It doesn't seem like you anticipate any meaningful pressure here in the near term to have to raise deposit rates.

Randy Chesler -- President and Chief Executive Officer

That's right. We talked to all our divisions and we're just not hearing that.

Matthew T. Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Randy Chesler -- President and Chief Executive Officer

You're welcome.

Operator

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

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

Good morning.

Randy Chesler -- President and Chief Executive Officer

Good morning, Jeff.

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

The question on the -- just looking at the commercial loan balances in -- I guess in the regulatory classification, some fluctuations in those balances. Is that a product of pay-offs, is there some seasonality going on, just wanted to kind of dig into that C&I category a bit?

Barry Johnston -- Chief Credit Administrator

Yeah, generally third quarter as -- starts getting colder we will have a lot of revolving lines that are paid out. You will also have some agricultural production lines. But as our commodity producers sell their crops they will pay those down. So generally that's -- we see those reductions this time of the year.

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

So, Barry, as you've grown the ag portfolio, could you see potentially more seasonality than you've had in the past?

Barry Johnston -- Chief Credit Administrator

Right now the portfolio is split about 50/50 between term real estate and production. My guess is is that we will continue to grow that portfolio, but the variances probably won't be that much different than what they've been traditionally because we'll probably be adding more totals, will offset any variability to paydown and in operating lines.

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

Got it, OK. And then on the gain on sale, just interested in your view on -- maybe a broader view on '19. If you're looking at that kind of outlook or budget, where do you see that revenue stream I guess year-over-year in '19 versus what you've seen this year?

Randy Chesler -- President and Chief Executive Officer

For the -- so the gain on sale primarily driven by the residential real estate business. Right now when we look at our total originations year-over-year we're running pretty close to even. There's some variability in how the gains get recognized due to when they come on onto our platform. And also, I think the tailwinds that we have are in many of our markets there is still a housing shortage and we think that that's going to continue. We see good demand. We are still seeing good in-migration which is driving the housing demand. The headwind is just really interest rates. As they move up, the question is what kind of impact that will have. So at this point we're really looking for a continuation of pretty much the same level of business that we had this year going into '19.

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

Okay. And margin wise any thoughts on sort of the margin in that business year-over-year?

Randy Chesler -- President and Chief Executive Officer

Well, it's been doing pretty well. I think we did make some internal shifts to move to a little bit toward -- more toward mandatory delivery and that's helped our margin as the business got a little more competitive. So it's held at pretty flat year-over-year when you look at the numbers. The one offset the other. So we were able to increase our gains because we moved to mandatory that took up some of the competitive issues. So I think -- and that's another thing as we look at '19 that should stay pretty stable.

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

Okay, great. And one last quick one on the -- the NPA balance, I can't recall if there was something transitory in 2Q because you sort of reverted to NPA balances back to kind of where it was in 1Q. Is there anything kind of that's fluctuated through there in 2Q that's now gone?

Randy Chesler -- President and Chief Executive Officer

No, the only thing I would say is, there was -- and I think we made this comment in the second quarter, there was a bit of a timing. We had some things fall into NPA at the end of that quarter that a couple of them got resolved pretty quickly in the early third quarter. So with a combination of some quick fixes that -- properties that went in and then they were resolved pretty quickly, as well as some structural because I think what I would call reduction of some of the more longer-term NPAs that are in there because we're really -- I think we've talked about it. We're trying to focus on that area and identify loans and try to work them out and move them along. So I think what you're probably referencing is in the second quarter, we had a couple of properties. One was a short term -- well, it was a healthcare facility that went in and pretty quickly went back out. That was about a third of that $12 million.

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

Okay. Great. Appreciate it.

Randy Chesler -- President and Chief Executive Officer

Yeah, a little less actually than that but around there.

Operator

Thank you. And our next question comes from the line of Michael Young with SunTrust.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning.

Randy Chesler -- President and Chief Executive Officer

Good morning, Michael.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Randy, wanted to just touch on the efficiency ratio. I appreciate the color on kind of the expense trajectory in the cost saves post the deals. But I think for Glacier as a whole we've kind of been stuck around the mid $50 millions (ph) for some time with the core consolidation project and various things related to crossing $10 billion in assets. But it seems like now we should really start to make some progress on that going forward with an expanding net interest margin and improve more stable sort of expense growth. Is that a fair characterization?

Randy Chesler -- President and Chief Executive Officer

Well, let me just back up for a minute and point out, remember the efficiency ratio went up because of the changes in the tax law. So when you say, we don't really view it as we're stuck around $55 million (ph) because the -- if you factor into where we were back in at the -- if you take out the tax rate at the end of the year, the change we're kind of in the $54 million (ph) range tax. The tax change had a negative impact on the efficiency because it reduced the amount the impact of the tax advantage loans and investments. So our efficiency actually went up with the new tax law. But if you look at it where it is now, it's -- especially this quarter, it's down nicely. Now some of that has had gains, so if we take the game out, it's more in the kind of the $50 million -- mid-$54 million range. And so I think that's the right range for us. I don't see a big -- I think a steady grind. I think that trend is down, but at a more measured pace and that just comes from operating efficiencies. We're a high service business. So we're just very cautious about the costs that we take out and just very mindful of that. But we continue to, what I would call, it's a slow grinding march on efficiency. That's not going to stop and this quarter is really good, but I would look at it more kind of in the $54 million range because if you take the game out, that's really where the efficiency is this quarter.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. And then on the NPAs, I think you've kind of talked a little bit about trying to work those down. Any sort of time horizon over what you'd expect that to kind of transpire and do you expect any more kind of OREO marks or larger charge-offs provisions to kind of accomplish that over the foreseeable future?

Randy Chesler -- President and Chief Executive Officer

No. So on that I think we had a really good -- two pieces, one is just the NPA that we can talk about, OREO, specifically charge-offs, but we had a really good quarter down $12 million, very, very happy with that. We think there is some more downward movement there over the next couple of quarters, don't know exactly when that will happen because we're in the process of working those out. But don't expect to see any increase there and should see a little more improvement. Tough to put a time on it because it's all subject to buyers and when they pull the trigger. But I think the trend there is good.

On the OREO, don't see another circumstance like we had this quarter. We had won a very large credit. There is -- out of the 43 properties in OREO, there's only two north of $1 million, one of them we just wrote down. The other was markdown down before it went in. I don't think there's anything left on that one to take down. So the one that we did market has been in OREO for nine years, have been in there for quite a while. Very unique circumstance and we just decided this was the -- had some interest in the property and just decided to recognize what the market was telling us which was what you saw in terms of the writedown, but don't expect that to continue.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. And similarly, you don't see any additional charge-offs to kind of move that down, the NPA level down?

Randy Chesler -- President and Chief Executive Officer

Not any kind of material extent, no.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. And then one last one, just on the deposit growth this quarter obviously very strong in DDA and you've already talked about it a good bit. But any characterization about how much of that is coming from retail versus small business or larger commercial clients just kind of give us a little additional color?

Randy Chesler -- President and Chief Executive Officer

In the non-interest bearing accounts?

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Yes.

Randy Chesler -- President and Chief Executive Officer

Yes. Well, it's pretty well spread out. There when you say larger customers, there -- for us, the larger customers, I mean with over $1 million in one of those non-interest bearing accounts. So pretty well spread out. There was no mega account that really move that number. There was quite a few. Once again we take a hard look at that and just -- there is not one account in there that kind of accounted for a material part of that. So it's very diverse and spread out among the 14 different divisions, which we were happy to see.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay, great, thanks for all that.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Tim Coffey with FIG Partners. Your line is open. Please go ahead.

Timothy N. Coffey -- FIG Partners LLC -- Analyst

Great. Good morning everybody.

Randy Chesler -- President and Chief Executive Officer

Hi. Tim.

Timothy N. Coffey -- FIG Partners LLC -- Analyst

Hey. Really I was wondering if you provide a little more color on the growth in the commercial real estate portfolio, perhaps not quarter-over-quarter but over, say, last few five to six quarters on organic basis. What kind of opportunities are you seeing there, especially as it relates to kind of non-owner occupied CRE, which seems to be growing a bit faster than owner occupied?

Randy Chesler -- President and Chief Executive Officer

Sure. I'll give you my comments on it and then ask Barry to fill in. So we see good growth. I think the thing I would point out is our non owner occupied commercial real estate loan and our business is different in a lot of ways than maybe what most people think of when you say non-owner occupied commercial real estate, most of that is in-market customers developing smaller projects in their community. So we feel very good about that. An that -- we continue to see some good activity there. Our customers are growing and making investments, and that I think is what you see reflected in the numbers and it's very spread out in terms of product type. And just feel if there's any one headwind in that area, it's just interest rates. And do they go -- do they rise to a point that they make some of the development uneconomical, haven't seen it yet, don't think we're too close to that, but if there is one concern there it's up. But generally, that's been a good -- I think a good segment that we're very comfortable with. Barry, do you want to add anything?

Barry Johnston -- Chief Credit Administrator

Yes, one other thing we also see is with our recent acquisitions, the Foothills Bank, Bank of San Juans, Collegiate Peaks and now we'll start to see it with First Security Bank at Bozeman is after the acquisition what the increase in the legal lending, (inaudible) small community banks are able to pursue larger commercial real estate terminals. And we see that almost -- we've seen it historically with the last 15 or 20 acquisitions that we've made. So they have an opportunity to pursue customers that underneath their previous legal lending limit was a challenge for us. So we see a lot of organic loan growth coming from that sector.

Timothy N. Coffey -- FIG Partners LLC -- Analyst

Great, thanks Barry, that was going to be my follow-up. If I can switch gears a little bit to M&A, is your focus still on smaller markets or are you becoming more open to perhaps looking at bigger markets?

Randy Chesler -- President and Chief Executive Officer

Really, Tim, our strategy hasn't changed. We operate in -- I guess it depends on how you define bigger markets. But we operate in some larger markets as well as some smaller markets, mainly smaller markets. We prefer to be the bigger bank in the smaller market if we can from an M&A standpoint. But sometimes there's also good community banks like Collegiate Peaks operating in a close to a very large market. So our strategy and what we look for really hasn't changed. I think a good bank in a good market with good people, if we can find that, then we're going to take a hard look at it.

Timothy N. Coffey -- FIG Partners LLC -- Analyst

Okay. And then I know you have a long-term view on M&A, but has the recent volatility in the market slowed any conversations or any kind of slowing impact on discussions?

Randy Chesler -- President and Chief Executive Officer

Volatility in the stock market?

Timothy N. Coffey -- FIG Partners LLC -- Analyst

Yes, in overall bank valuations?

Randy Chesler -- President and Chief Executive Officer

No I don't -- at least from our perspective, I don't think it had much of a change. I think that the market is very active. I think our position is the preferred acquirer in our areas that we focus upon, really hasn't changed at all. We continue to get a lot of early phone calls from people and early -- I mean we're generally I think the first phone call. So that continues to work really well for us and I think the stock market is going to -- it's going to have its moves up and down and many of the folks that we're talking to are making the decision based on other factors in terms of Asia, the management team, the preference of the ownership group in terms of the bank and whether they need more liquidity and how they're going to pursue that. So the market volatility up until now really hasn't had any material impact on any of the discussions that we have.

Timothy N. Coffey -- FIG Partners LLC -- Analyst

Okay, great. Well, those are my questions. Thank you, very much.

Randy Chesler -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to Randy Chesler for any closing remarks.

Randy Chesler -- President and Chief Executive Officer

Thank you, Michelle. Well, we appreciate everybody taking time out of their morning to dial in and get the update on the Company and pretty proud of the results this quarter. Appreciate your interest and as always, if you have any questions, just give us a ring. Have a great weekend and thank you.

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.

Duration: 47 minutes

Call participants:

Randy Chesler -- President and Chief Executive Officer

Andrew Liesch -- Sandler O'Neill & Partners -- Analyst

Ron Copher -- Chief Financial Officer

Jacquelynne Bohlen -- Keefe Bruyette & Woods Inc. -- Analyst

Matthew T. Clark -- Piper Jaffray -- Analyst

Barry Johnston -- Chief Credit Administrator

Jeffrey A. Rulis -- D.A. Davidson -- Analyst

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Timothy N. Coffey -- FIG Partners LLC -- Analyst

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