Glacier Bancorp Inc (GBCI) Q2 2019 Earnings Call Transcript

GBCI earnings call for the period ending June 30, 2019.

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Glacier Bancorp Inc (NASDAQ:GBCI)
Q2 2019 Earnings Call
Jul 19, 2019, 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 Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Randy Chesler, President and CEO. Sir, you may begin.

Randall M. Chesler -- President and Chief Executive Officer

All right. Thank you, Joelle, and 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; Angela Dose, our Chief Accounting Officer; Tom Dolan, our Deputy Chief Credit Administrator; and joining us by phone is Barry Johnston, our Chief Credit Administrator.

So let me first thank you all for joining us today, and hope you all enjoying the summer. Yesterday, we released our second quarter 2019 results. This was a very strong quarter for us with well-balanced performance across the business.

Some highlights and details from the quarter. Earnings were $52.4 million, which was an $8 million or 18% increase over the prior-year second quarter. Diluted earnings per share for the quarter were $0.61, an increase of 17% over the prior-year second quarter. Organic loan balances increased $270 million or 13% annualized. We also had organic core deposit growth of $40.1 million or 2% annualized. Organic non-interest deposit growth was a very strong $120 million or 16% annualized. Net interest margin for the quarter was 4.33% of earning assets, which was stable, down just 1 basis point over the prior quarter. Our loan yields increased 2 basis points from the prior quarter to 5.20% and our cost of core deposits was unchanged. The net interest margin was up 16 basis points over the second quarter a year ago.

Return on assets was a very strong 1.69% for the quarter, a 2 basis points increase over the prior quarter. Tangible book value per share of $15.03 at quarter end increased $0.68 per share from the prior quarter and $1.64 per share from a year ago. We also declared a regular dividend of $0.27 per share, our 137th consecutive quarterly dividend, which was a 4% increase over the prior quarter. And at the end of April, we successfully closed on the acquisition of First National Bank in Layton, Utah, now named First Community Bank of Utah. This is our 15th division and our first stand-alone division in Utah. We now have a leading market position in Davis County and a strong team to help us grow, and we're very excited to welcome First Community Bank to the Glacier team.

We also received all regulatory approvals on our acquisition of Heritage Bank in Reno, Nevada. This is a great community bank, one of the best performers in the industry with a great team and a stable, low-cost deposit base with excellent high-quality, high-margin loans. We expect to close this transaction at the end of July.

Loan production for the first quarter was $990 million, which was once again generally well distributed among all our divisions. Loan pay-downs were $719 million, which is consistent with past seasonality. And the loan portfolio ended the quarter at $8.8 billion.

We still feel good about our 8% loan growth target for the year as our western markets remain healthy and active and our unique business model remains extremely effective. Total investment securities of $2.7 billion, decreased $55 million or 2% during the current quarter and decreased $75 million or 3% from the prior-year second quarter. Investment securities represent 21% of total assets at the end of the quarter compared to 24% at the end of the second quarter a year ago.

Once again, our key credit quality ratios improved in almost all categories across the board. Our talented team of credit professionals continued to do a great job in this area. Early stage delinquencies, as a percentage of loans, at the end of the second quarter were 43 basis points, a decrease of 7 basis points from the prior-year second quarter. Net charge-offs for the quarter were $732,000 compared to $762,000 in the second quarter a year ago. Non-performing assets as a percentage of subsidiary assets at the end of the second quarter were 41 basis points, which is 1 basis point lower than the prior quarter and 30 basis points lower than the prior-year second quarter. At the end of the quarter, the dollar amount of NPAs were $51.9 million, an increase of $1.1 million or 2% from the prior quarter, but the increase was primarily driven by the acquisition that was added in the quarter.

Number of our divisions and divisions' Presidents did an excellent job working through these difficult credits and we expect NPAs to remain stable around this level as we move forward. Of course, there is always the potential for a one-off surprise addition but we remain confident and being able to maintain the low current level.

The allowance for loan and lease losses as a percentage of total loans outstanding at the end of the quarter was 1.46%, which is down 10 basis points from the prior quarter and down 20 basis points from the second quarter a year ago. Provision for loan losses was $0 versus $57,000 in the prior quarter. This reflects our continued very positive outlook on the portfolio and our markets.

Core deposits ended the quarter at $9.7 billion. Total core deposits were organically up 2% annualized or $40 million and increased $184 million or 2% from the quarter a year ago. Non-interest bearing deposits organically were up $120 million or 16% annualized and increased $257 million or 9% over the prior-year second quarter. We've been focusing on growing our share of non-interest deposits for some time now and are pleased to see the growth trend. The cost of our core deposits was stable at 19 basis points unchanged compared to the prior quarter and up 3 basis points from the prior-year second quarter.

We ended the quarter with a loan to deposit ratio of 90.27%, up from 87.14% at the end of the prior quarter. The total cost of funding for the current quarter was 45 basis points, up from 43 basis points in the prior quarter and 36 basis points at the end of the prior-year second quarter. The increase in the current quarter was driven by the increased cost of borrowed funds needed to fund our strong loan growth for the quarter. And our 15 divisions continue to do an outstanding job, managing the deposit costs specific to each of their markets.

Interest income for the quarter was $120 million, which was up $5.1 million or 4% from the prior quarter and increased $11.7 million or 11% over the prior-year second quarter. Both increases were primarily attributable to interest rate increases on renewing and new loans and an increase in commercial loans. Interest income on commercial loans increased $4.5 million or 5% from the prior quarter and increased $12.2 million or 16% from the prior quarter -- from the prior-year second quarter.

Our net interest margin as a percentage of earning assets for the current quarter was a stable 4.33% compared to 4.34% in the prior quarter. The core margin, excluding discount accretion and recovery of interest on non-accrual loans, increased 1 basis point to 4.27% from 4.26% last quarter. The yield on loans increased 2 basis points from the prior quarter and the margin was up 16 basis points from the second quarter a year ago. We had a very strong growth in the second quarter and needed to borrow from the Federal Home Loan Bank to support this growth given loan growth was much stronger than deposit growth. As a result, the 2 basis point increase in loan yields was offset by the 2 basis point increase in wholesale funding cost. We'll see how much the wholesale funding costs will have impact will have going forward as the second and third quarters are historically good for deposit growth.

Now there's been a lot of talk about margin this earnings season. The drop of almost 50 basis points in the five-year treasury rate from the end of the first quarter to the end of the second quarter has changed the industry's view on margin and ours as well. We expect along with the market that the Fed will reduce interest rates 50 basis points to 75 basis points in 2019. And our modeling shows that this would have a modest impact on our business and margin in 2019. Going forward in 2019, we believe we'll continue to see a generally stable core margin operating in a tight band around the current levels with a slight downward bias of above the 5 basis points to 7 basis points. The impact on the margin in '20 will depend on the steepness in interest rate curve at that time.

Overall, we feel the Company is very well positioned to navigate through this current environment. In times like this when NIMs are under pressure across the industry, we think our consistent, strong and high-quality loan growth along with our stable and low-cost core funding foundation will continue to support us very well with increasing net income even if our NIM is slightly reduced.

Non-interest income for the quarter totaled $30.8 million, up 8% or $2.4 million from the prior quarter and decreased $994,000 or 3% over the same quarter last year. We had some one-time items last year, which caused a decrease compared to the prior year. Service charges and other fees of $20 million increased $2 million or 11% from the prior quarter, primarily due to seasonality. Gain on sale of loans of $7.8 million increased $2 million or 4% due to seasonality as the second quarter generally marks the beginning of the peak real estate activity in our markets.

Non-interest expense for the quarter of $86.2 million increased $3.3 million or 4% from the prior quarter and increased $4.4 million or 5% from the prior-year second quarter. Comp and employee benefits were up $2.9 million or 6% from the prior year, primarily due to acquisitions and organic growth, which required more employees. Other expenses of $15.3 million increased $3 million or 25% from the prior quarter, primarily due to acquisition-related expenses. Acquisition-related expenses were $1.8 million during the current quarter compared to $214,000 in the prior quarter and $2.9 million in the prior quarter -- in the prior-year second quarter.

Tax expense for the quarter was $12.6 million, an increase of $900,000 or 8% compared to the prior quarter and $3.1 million or 33% from the prior-year second quarter. Our effective tax rate in the second quarter was 19% compared to 18% in the prior-year second quarter. The current quarter efficiency ratio was 54.5%, an 87 basis point improvement over the prior quarter efficiency ratio and a 94 basis point improvement over the prior quarter a year ago. We believe we're on track to meet our full-year efficiency ratio targeted between 54% and 55%.

So the second quarter represents another excellent performance by the Company. In addition, delivering -- to delivering a solid performance for the quarter, the Company announced the acquisition of Heritage Bank of Reno, Nevada, and as I previously noted, Heritage Bank and First National Bank of Layton, which closed at the end of April, will add over $1.1 billion in assets in 2019. We have received all regulatory approvals to proceed with the closing in the Heritage Bank of Reno, which will occur as planned at the end of this month.

Our 15 division Presidents and their teams across our seven states, as well as our senior staff continue to produce market-leading results and I would like to thank them all for their commitment and drive to be the best.

So, Joelle, that ends my formal remarks, and I'd like to now ask you to open the line for any questions that our analysts may have.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Michael Young with SunTrust. Your line is now open.

Michael Young -- SunTrust -- Analyst

Hey, good morning, everyone.

Randall M. Chesler -- President and Chief Executive Officer

Morning.

Michael Young -- SunTrust -- Analyst

I appreciate the updated color on the net interest margin outlook, Randy. I just wanted to see if I could clarify a few points around that. First is that kind of on the core margin or the reported margin with purchase accounting accretion and does that include or exclude the Heritage deal closings?

Randall M. Chesler -- President and Chief Executive Officer

So I'm going to -- so, obviously, given what's going on in the markets, we've taken a close look at this and I've had Ron take it apart for you, so I'm going to ask Ron to cover that.

Ronald Copher -- Chief Financial Officer

Yeah. So the reported margin is what the reduction was, the 5 to 7 basis point, and that will include the acquisition of Layton -- I'm sorry, Heritage and as we add them in July 31st. And, Michael what were the other -- oh, the discount accretion. So that -- we estimate that only from Layton was the minor piece, we only picked up discount accretion of basically $1.9 million on the acquisition and so based, I think that answers your questions, but did you have more or other color you want?

Michael Young -- SunTrust -- Analyst

Yeah. Maybe just a little color around kind of what would drive the higher versus the lower end of kind of that guidance and what offsets are there potentially out there in terms of either reducing deposit costs or using the floor [Phonetic], which already bakes in some of the lower rates into the forward curve. Just some potential geometry around how we might end up a couple of quarters from now?

Randall M. Chesler -- President and Chief Executive Officer

Sure, Michael. So I think we've got some positives coming our way. You've seen really strong growth. We -- like I said, we expect our growth to continue and targeting at 8%. We also have pretty good pricing power through our model across all our markets, so we feel good about that. Headwind on our margin is going to be what -- really what the Fed does in the amount, the steepness, what they actually do whether it's 25 basis points or 50 basis points and then what impact that has on the longer part of the curve, so where the five year goes. The other factor is just going to be our deposit growth and the speed of our growth. So we have a lot of growth this quarter, a little more than we expected and so we didn't have the deposit growth recovered. So our borrowing costs were up.

So I think you kind of rattled through the right factors. So those are the kind of the -- some of the pluses and minuses that we see that really drive whether we're going to kind of bounce around flat or to be downward pressure over the next two quarters of up to 5 to 7.

Michael Young -- SunTrust -- Analyst

Okay. And maybe just one last one on expenses. Any outlook for kind of where we should start the third quarter with the deal folding in, and you didn't really change the efficiency ratio guidance for the year despite maybe the slightly less optimistic view on margins. So, are there some offsets in other parts of the income statements that are helping there?

Ronald Copher -- Chief Financial Officer

Well, from a -- this is Ron, Michael. From a run rate, remember in the second quarter, we had $1.8 million of acquisition-related expenses and so we would see a similar number in the third quarter coming from the acquisition of Heritage. So I would tell you the run rate maybe go up another 1%, but that would be more than covered by the additional income will pick up from the acquisition. So that's why we have an update of the efficiency guidance we still, as Randy said, will come in at between 54% and 55%, and you can see it, it's come down Q1 versus Q2. So we felt comfortable with that.

Michael Young -- SunTrust -- Analyst

Okay, thanks. I'll step back.

Operator

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

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

Thanks, good morning.

Randall M. Chesler -- President and Chief Executive Officer

Good morning, Jeff.

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

Question on just the credit side of things and the provisioning levels are off quite a bit year-to-date and just kind of poking into that a little bit, it really seems to signal that the underlying fundamentals of -- you put on pretty good growth but are the underlying credit fundamentals significantly improved? Is there any switch in methodology here that would underlie the pretty modest provisioning year-to-date?

Randall M. Chesler -- President and Chief Executive Officer

Sure. Barry, do you want to answer that?

Barry Johnston -- Chief Credit Administrator

Yeah. We've had some good loan growth this year, but we have to remember part of it came from acquisitions and those portfolios come over with a discount already attached. From perspective, as we do every quarter, we evaluate our current portfolio, the respective credit metrics and given what we've seen is some fairly significant reductions in non-performing loans and non-performing assets already was included. We evaluate it and that remains fairly directionally consistent and given those improved credit metrics with provisioning was commensurate with the movement in the portfolio.

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

Barry, on, I guess just a follow-up, just any initial thoughts on CECL or is that guiding any current provisioning or thoughts kind of going forward either in the number, if it's not just anything you could add to how you're prepping on that end?

Barry Johnston -- Chief Credit Administrator

No, it's not impacting our current evaluation. We are running parallel runs. We're in the process of that. We're doing some data validation and we anticipate that overall with the conversion to CECL, it won't have a material impact on our business.

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

Got you. Okay. And then maybe one last one for Randy, just interested in the reception in Utah with that added scale, you've been in the state, but this is a bigger step and anything from how you think you've been received with the added folks, but also just also general thoughts on the competitive landscape in the state?

Randall M. Chesler -- President and Chief Executive Officer

Sure. Very, very pleased with our First Community Bank of Utah acquisition going extremely well on a number of fronts. Their current pipeline is, I would say, almost double what their normal pipeline ran and why is that; pretty much what we've talked about. When we make an acquisition loan officers can go out and they can offer their customers financing that maybe they couldn't as a $320 million bank now they have a $13 billion balance sheet. And so we don't want to run out and do loans that we haven't done, but we do want to go back to customers that maybe went to competitors and we're seeing that happen.

So they're doing extremely well. They're also -- we've seen a big I think move forward with their ability to take our four branches that we have in the state and pull them into a divisional structure and give them a lot more attention. They're doing a lot of work with that and I think we'll see some nice results there. So in terms of the customers in the market, I think that we've been -- it's been very well received. I don't believe we've really lost any kind of material traction there. So I would say on that one, it's so far going just about as well as could be expected and the team there is, John Jones, our division President and his team are just doing a terrific job.

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

Great, thank you.

Operator

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

Matthew Clark -- Piper Jaffray -- Analyst

Hey, good morning.

Randall M. Chesler -- President and Chief Executive Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

Randy, how many rate cuts do you have embedded in that down 5 to 7 basis points in the NIM?

Randall M. Chesler -- President and Chief Executive Officer

The down -- the bottom of that is 75 basis point. So kind of our worse -- most aggressive scenario would be a 75 basis point rate cut, 50 basis point at the end of the month, followed by 25 basis point in October.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. And then just digging a little deeper with some of the moving parts, can you give us a sense where new business rates are coming in on loans with the movement in the curve? Also maybe talk a little bit about the repricing phenomenon. Remind us how much of the portfolio is floating and maybe hybrids and fixed. And then just with the securities portfolio down to about 21% of assets, I think 15% to 20% is the range, but that should -- I would think also help you defend the NIM. Just want to talk through these other items.

Randall M. Chesler -- President and Chief Executive Officer

Sure. Let me take the loan pricing on current production and then I'll have Ron kind of talk about the repricing and how we feel about the portfolio and the 15% to 20% investment kind of target that we talked about investment portfolio. So new loans for the quarter, the new loans were priced a bit north of 5.30%. And so, you know, that we still feel, we're getting good pricing, but we have a declining reference point being the cost of five-year money, big, big drop quarter-to-quarter.

We think that's going to continue. We would probably guess in this quarter and we're going to see things price kind of north of 5.15% based on where the five-year is, but some of that just going to depend on what happens at the end of the month and what shape the curve take, so kind of watching that carefully. But, generally, we still feel that we're getting good margin over the reference point. It's just the changing steepness of the curve will really dictate where that goes going forward.

In terms of the repricing specifically, there is a lot of moving parts there in our portfolio in terms of floors that we have in place and how much of that book actually reprices every quarter, but specifically was there a specific element of that you were asking about?

Matthew Clark -- Piper Jaffray -- Analyst

Yeah, I was just curious what percent, I just need to reminder, how much of that portfolio is truly floating maybe tied to short-term LIBOR and term [Phonetic].

Ronald Copher -- Chief Financial Officer

Yes, on the freely floating -- this is Ron. Very, very little level is tied to LIBOR. And I think it's 17% or 18%, somewhere in that range is tied to prime. And then you had asked about fix those -- truly fix is running at 35% of the portfolio. So the other part is what we call variable, not freely floating. So that gets back to what we've said is that just about a third of the portfolio will mature or reprice in a single year and so that is still continuing.

Matthew Clark -- Piper Jaffray -- Analyst

Great. And then just on the remix -- the asset remix, Randy?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. I think we want to keep it right around 20%. That's -- we're getting close to that. There is some flexibility around there, but that's kind of the 15% to 20%, I'd say, we're kind of targeting more of the higher end of that to maintain. So there is still some room there depending on growth and the pace of the growth, but that's still where we want to maintain that.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, and then just switching gears to the loan growth. Can you quantify the production in the quarter and the payoffs, and did you guys purchase any loans in the quarter?

Randall M. Chesler -- President and Chief Executive Officer

We generally do not purchase any loans. We don't do participations. There was probably a very small amount of -- that's one of the benefits of the acquisition. As you know, the banks that we buy, if they have participated loans, they can go back out and get some. So there was a small amount by First Community Bank of participated loan, but very, very small. In terms of the production and -- so for the quarter, we had growth of -- that was the number covered that in the comments here, $989 million of production and we had about $719 million of payoffs.

Matthew Clark -- Piper Jaffray -- Analyst

Great.

Randall M. Chesler -- President and Chief Executive Officer

And that's pretty consistent with seasonality in past, those payoffs.

Matthew Clark -- Piper Jaffray -- Analyst

And can you speak to where you're seeing the most strength within the footprint or by affiliate?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. We looked at that and it's surprisingly broad-based. We're just -- we saw growth in pretty much every division. So there was really no stand out there really going to drove the results. We continue to see good activity in Denver, our Arizona franchise growing quite nicely. But other than a couple places doing a little bit better, it's generally very, very well spread out.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then Barry, just last one. The credit mark on the portfolio, so we can adjust the reserve?

Barry Johnston -- Chief Credit Administrator

Help me out there, credit mark on the acquisition.

Matthew Clark -- Piper Jaffray -- Analyst

Just acquisition, just so we can gross up the reserve.

Barry Johnston -- Chief Credit Administrator

Well, it came over at $1.9 million, First Community Bank through discount.

Matthew Clark -- Piper Jaffray -- Analyst

Thank you.

Barry Johnston -- Chief Credit Administrator

Thanks.

Operator

Thank you. And our next question comes from Gordon McGuire with Stephens Inc. Your line is now open.

Gordon McGuire -- Stephens Inc. -- Analyst

Good morning, gentlemen.

Randall M. Chesler -- President and Chief Executive Officer

Good morning, Gordon.

Gordon McGuire -- Stephens Inc. -- Analyst

Just to make sure I heard this correctly, the 5 to 7 basis points that was through the end of this year. So we should be thinking about the 4Q reported NIM maybe being 5 to 7 basis points lower. If the --

Randall M. Chesler -- President and Chief Executive Officer

Yeah, just -- so we think our -- we've got a very stable NIM, that's the range from flat to down 5 to 7 at the most conservative end of our estimates and that's over the next two quarters.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. And what does that assume for the five-year, is it -- are you assuming that it comes down with the cuts kind of a parallel shift or are you assuming that it holds in a little bit higher, maybe the curve gets a little bit steeper?

Randall M. Chesler -- President and Chief Executive Officer

We have a very slight steepening in the model.

Gordon McGuire -- Stephens Inc. -- Analyst

Got it. Just on the liquidity, I think you mentioned being able to bring securities down to 15% maybe assets. I'm just wondering kind of from a liquidity standpoint, you've done a good job letting loan growth, outstripped deposit growth and bringing down some of the higher cost deposits. At what point do you think you might have to start growing the CDs or the money markets a little bit more? And how should I think about the trade-off between maybe getting more competitive in the pricing of those products versus the borrowings that you'd like to move lower?

Randall M. Chesler -- President and Chief Executive Officer

Sure. Well, so first of all, just our general growth rate in the investment portfolio, I think our target is -- as Matthew asked about that, I think we want to keep it right around the 20% range; don't really want to go significantly below. That can, if we need to, but we'd like to keep it in that range. So some of this borrowing is going to be driven by deposit growth. This is our second and third quarter, our best quarters for deposit growth. So we'll see where those come in. If we need to borrow, then we had the Federal Home Loan Bank, which is one of our least cost and we like it because we don't have to commit like a CD to a long-term rate, we can borrow and then pay that off depending on the flow of loan growth. No plans. We have been letting our CD book runoff for like, I'd say, years. It's slow for two reasons, one is we think it's a bit of a product that's changing for demographically appeals to a very specific segment.

But that's -- we have -- again, with our model, we have the divisions that can price those products depending on their markets. But we don't have a corporate strategy to use that as a way to grow deposits. We are really focused on the non-interest growth and so really, you saw that 16% growth; that's been something we've been working on for the last year or so. Really looking for the relationship accounts for connected with our loans as well as existing business that coupled with our just bread and butter. We grow our core checking accounts every year. That's continuing, that's bringing in good, high-quality, stable deposit growth and those are really the kind of the levers we're leaning more on.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. So growing kind of the lower cost core and then if that kind of fall short from where you maybe hope it would be you'd use the borrowings to manage the liquidity?

Randall M. Chesler -- President and Chief Executive Officer

Yes.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. And then, I'm not sure I may have missed it, did you provide an update on Durbin? Is that still about $4 million to next quarter?

Randall M. Chesler -- President and Chief Executive Officer

I'm glad you asked that. So we've been talking about Durbin for over a year. And we try to keep the estimates updated because we keep growing as we are waiting. And as you know, in July, we finally hit the point where Durbin will kick in. So Ron does have some updated numbers for you.

Ronald Copher -- Chief Financial Officer

So the number -- as we said in the first quarter call, we said $17 million to $20 million and updating that now to be a range of $20 million to $22 million. And that does include the Heritage acquisition and Layton. And so that's for the full year.

Gordon McGuire -- Stephens Inc. -- Analyst

That was -- if I remember the -- I'm trying to think about for next quarter, I think that higher range that you gave for 2020 was higher than what you gave for 2018. Is that -- should I be thinking about $5 million next quarter?

Ronald Copher -- Chief Financial Officer

Yeah, It wouldn't go any higher than that.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. That's all I had. Thank you.

Randall M. Chesler -- President and Chief Executive Officer

All right. You're welcome.

Operator

Thank you. And our next question comes from Andrew Liesch with Sandler O'Neill. Your line is now open.

Andrew Liesch -- Sandler O'Neill -- Analyst

Good morning.

Randall M. Chesler -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Liesch -- Sandler O'Neill -- Analyst

Just a few questions around the loan growth in your outlook here. What was -- much of this growth this quarter was -- was anything that pulled forward from the third quarter or maybe was it pent-up demand from wasn't booked in the first?

Ronald Copher -- Chief Financial Officer

Yeah. No, I think we did. There is some element of that. So our first quarter loan growth was soft. We had the weather in Montana and some of our surrounding states that really did put a damper on loan production. We think some of that did get pulled into the second quarter. We're looking at pipeline right now and feel like third quarter is looking pretty good, probably not as strong as our second quarter, but still a decent a decent growth rate, but there was a bit of a pull-forward from the first quarter into the second quarter. You're correct about that.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then, on capital that continues to build here; certainly, some of it is from AOCI shift, but where do you guys feel the most comfortable managing your capital levels and operating the bank?

Randall M. Chesler -- President and Chief Executive Officer

Well, so you see the range we're in. We continue to evaluate that. We're being a little more cautious on it this year because we think there'll be a bit of a shift, not for us but for the industry post CECL. So we want to see the impact that has on capital and see if there is an adjustment in the industry around levels. So I think we feel good where we're. We always run at a conservative level of capital. We feel it certainly would be easier to lower it and our metrics would look better, but it's there -- we like the stronger conservative capital because our game plan is to run through multiple cycles with the Company and we feel that that just gives us a lot of opportunity to do that. We want to continue to pay dividends through multiple cycles. We feel that extra capital versus the industry helps us do that. So we'll continue to be above our peer group there and I think levels we're seeing right now, we feel pretty good.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. Thanks. You've covered all my other questions.

Randall M. Chesler -- President and Chief Executive Officer

All right. You're welcome.

Operator

Thank you. And our next question comes from Luke Wooten with KBW. Your line is now open.

Luke Wooten -- KBW -- Analyst

Good morning, guys.

Randall M. Chesler -- President and Chief Executive Officer

Good morning, Luke.

Luke Wooten -- KBW -- Analyst

Just wanted to touch briefly, I know we've spent a lot of time on the margin, just kind of wanted to hear how securities yields were coming in. I know that they dropped slightly sequentially, but just wanted to hear what do securities were coming on at and how that looks going forward with the curve?

Randall M. Chesler -- President and Chief Executive Officer

Sure. Ron, do you want to cover that?

Ronald Copher -- Chief Financial Officer

Yeah, Luke, so that the yields, if you look back at the margin table, the second quarter, we came in at the same as what we had on a portfolio basis. We really didn't grow the portfolio in fact had a little bit run off and so depend upon what we're buying, we're able to hold that yield and we think that will be the case going forward.

Luke Wooten -- KBW -- Analyst

Okay. Yeah, that's helpful, thanks. And then just kind of a housekeeping question. I saw that on the other expense line item, and this is excluding the impact of the $1.8 million from acquisition costs, was up about $1.4 million sequentially. Just wanted to see if that's a good run rate or if there seasonality in there.

Ronald Copher -- Chief Financial Officer

Yeah, there is seasonality in there. Thank you for that question, because it caught our attention too. So we look through it and just sundry things and that similarly happened in the first quarter. So it is truly season. It was more this quarter than it was the first quarter and that's typical. I wasn't surprised; let me put it that way.

Luke Wooten -- KBW -- Analyst

Got you. Yeah. Thank you. And then just lastly, with the two acquisitions coming on this quarter and next, I believe Heritage and FNB both had higher loan yields. So I just wanted to see if you like, backing out the impact of those on the loan yields this quarter, what would have loan yields have been excluding the impact from First National Bank.

Randall M. Chesler -- President and Chief Executive Officer

Well, so, remember we closed it at the end of April. So we just had two months on the books. And in terms of your question, you know what the yield have been without those.

Luke Wooten -- KBW -- Analyst

Yeah, just kind of -- I know you guys had given the good information on the new loan yields coming in at, I think you said north of 5.3%.

Randall M. Chesler -- President and Chief Executive Officer

Yeah.

Luke Wooten -- KBW -- Analyst

But just kind of wanted to see if there is a lot of -- because was I thought 2 basis points up sequentially and just kind of wanted to see if a lot of that was impacted by FNB and how that kind of looks for Heritage coming on next quarter.

Randall M. Chesler -- President and Chief Executive Officer

Yeah. No, First National Bank, like I said, we got two months out of it. It was the loan portfolio, you know, on that's acquisition, $250 million into our $8 billion, really didn't have a big impact. And so we can separately kind of maybe get back to you on Heritage, that's going to have -- it's a much bigger bank, that's going to have a bit of a more of an impact.

Luke Wooten -- KBW -- Analyst

Okay. That's helpful and then just lastly on credit. NPAs remain very low, but I just saw that there was one non-accrual put on from pre-sold and spec construction. Just kind of wanted to hear your thoughts on that and if that might have been brought over from the FNB or if that was organic.

Randall M. Chesler -- President and Chief Executive Officer

Yeah, go ahead, Barry.

Barry Johnston -- Chief Credit Administrator

Yeah. That's what -- it came over from FNB. They have a very relatively large pre-sold and spec portfolio about $30 million for that size of bank and they had a challenge with one or two credits. Some of it was administrative past dues rather than total NPAs.

Luke Wooten -- KBW -- Analyst

Okay, that's helpful. Thank you.

Randall M. Chesler -- President and Chief Executive Officer

Luke, one of the things we find with acquired bank is they're not as tuned into the focus on a quarterly performance and so some of that just the growing pains with the new division is to kind of for us -- these administrative past dues that get cleaned up are more important to get that in the quarter than kind of letting them go. So that's one of the things we typically go through with the new bank.

Luke Wooten -- KBW -- Analyst

That's helpful. Thank you. And that's all my questions.

Randall M. Chesler -- President and Chief Executive Officer

All right.

Operator

Thank you. And our next question comes from Michael Young with SunTrust. Your line is now open.

Michael Young -- SunTrust -- Analyst

Hey, thanks for the follow-up. Just wanted to kind of given the macro outlook, turning a little more of a headwind for a lot of banks, are you seeing a change in kind of the M&A discussions broadly and any thoughts around pipeline there; obviously, you've done kind of your two deals I guess for this year, but just going forward in a post CECL world, are you still pretty active?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. So we continue to have some good conversations and so I guess on our view probably wouldn't announce anything till next year possibly earlier things move in the right direction, but we'll see. We've got $1.1 billion, we got two great banks. We're very focused this year on just making sure of those are closed and integrated and -- but we do have a couple of discussions going into next year possibly. So we haven't seen a big fall off. And in terms of CECL, it's an interesting question, a lot of people are still trying to figure out exactly what that is going to mean and so we are in the process of tuning our M&A models to make sure that we account for some of the changes that will occur with CECL, but I don't think that's been play through the market in terms of what that might mean for evaluations and things like that, but I think that the fundamentals that kind of drove interest over the last couple of years, which is more generational change, the banks get to a point and want liquidity and look for some options. We see that continue to probably to be the biggest theme right now.

Michael Young -- SunTrust -- Analyst

Okay. And just a quick housekeeping one, just the other fee income and mortgage gain on sale. Those were -- I guess, really the other fee income was a little low. Anything in there that was kind of one-off front?

Ronald Copher -- Chief Financial Officer

No, it's to be directed [Speech Overlap]

Michael Young -- SunTrust -- Analyst

$3 million or so. Okay.

Ronald Copher -- Chief Financial Officer

Yes.

Michael Young -- SunTrust -- Analyst

And same with mortgage that's about the right level to expect going forward into the seasonally stronger 3Q.

Randall M. Chesler -- President and Chief Executive Officer

Yeah, this is -- we saw a big pickup. Our mortgage business continues to be very healthy. These are our two best -- two strongest quarters. So, yeah, I think you will -- we see things running around the same range.

Michael Young -- SunTrust -- Analyst

Okay, perfect. Thank you, guys.

Operator

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

Randall M. Chesler -- President and Chief Executive Officer

Hey, Matthew.

Matthew Clark -- Piper Jaffray -- Analyst

Thanks. Hey, again. Just wanted to touch on deposit costs and wanted to know whether or not you thought that deposit costs -- or when do you think deposit cost will peak and whether not you think they might go down at the Fed cuts 25 basis points?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. So our core deposit costs remained unchanged at the 19 basis points. Whether they're going to go down, I think for us, they're going to stay pretty much right in that range. There's been a lot of talk about that and will customers -- banks that are more rate sensitive and who raise their rates during this, will they be able to bring them down, we don't know. But for our customers, I think we've established kind of our where we sit with them and we've kept our kept our rate stable, don't really expect to see much of a change there for us at the 19 basis points.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great, thanks.

Operator

[Operator Instructions] Our next question comes from Don Worthington with Raymond James. Your line is now open.

Don Worthington -- Raymond James -- Analyst

Thank you. Good morning.

Randall M. Chesler -- President and Chief Executive Officer

Good morning, Don.

Don Worthington -- Raymond James -- Analyst

Probably just have -- only have one other question. Are you seeing any lending sectors or geographies where you're becoming more cautious than maybe you were earlier in the year?

Randall M. Chesler -- President and Chief Executive Officer

There is nothing, I'll let, Barry be jump in, but there is no particular area that's emerging that were -- that's new. I think Barry mentioned it in the first quarter, Ag is something we're watching closely. But other than that, I don't believe that we're seeing any other areas emerges -- areas we're concerned about. Barry, do you want to comment on that?

Barry Johnston -- Chief Credit Administrator

No. It's -- probably Ag is the one area, but for the most part, a lot of our producers are adjusting input costs there. So we do have some challenges in some hard grains, as like a lot of banks to. About the only other area that we're looking at is acquisition and development lending, as this credit cycle matures. That's probably one area that we will keep a real close eye on, but it's very small percentage of our overall portfolio. So other than that, there's nothing else that [Indecipherable]

Don Worthington -- Raymond James -- Analyst

Okay, great, thank you for the color.

Randall M. Chesler -- President and Chief Executive Officer

All right. You're welcome.

Operator

Thank you. And our next question comes from Gordon McGuire with Stephens Inc. Your line is now open.

Gordon McGuire -- Stephens Inc. -- Analyst

Hey, just a quick follow-up from one of my earlier questions. What's the average rate you're paying on the new FHLB advances? As those balances grown the cost has come down. So I'm just wondering what you're paying for new growth in those balances?

Ronald Copher -- Chief Financial Officer

Yeah, we borrow overnight. So it's 2.20%, it's where it come at and that's been trending down, never low enough, but, yeah.

Gordon McGuire -- Stephens Inc. -- Analyst

All right, thank you.

Randall M. Chesler -- President and Chief Executive Officer

You bet.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Randy Chesler for any closing remarks.

Randall M. Chesler -- President and Chief Executive Officer

All right. Thank you, Joelle. I want to thank all of you again for dialing in today. Really appreciate it. We want to wish you all a continued great summer and a great weekend. So thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Randall M. Chesler -- President and Chief Executive Officer

Ronald Copher -- Chief Financial Officer

Barry Johnston -- Chief Credit Administrator

Michael Young -- SunTrust -- Analyst

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

Matthew Clark -- Piper Jaffray -- Analyst

Gordon McGuire -- Stephens Inc. -- Analyst

Andrew Liesch -- Sandler O'Neill -- Analyst

Luke Wooten -- KBW -- Analyst

Don Worthington -- Raymond James -- Analyst

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