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Glacier Bancorp Inc (NASDAQ:GBCI)
Q2 2020 Earnings Call
Jul 24, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Bancorp Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Randy Chesler, CEO and President. You may begin.

Randall M. Chesler -- President and Chief Executive Officer

All right. Thank you, Tuwanda, 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 Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and Tom Dolan, our Chief Credit Administrator.

Yesterday, we released our second quarter 2020 earnings. And today, we're ready to review the state of the Company and the financial results. The second quarter was very solid and highlights the strong core of the Company and the strength of our team and our business model, despite the stiff headwinds caused by the global COVID-19 pandemic. We continue to navigate through the pandemic extremely well and I'm exceptionally proud of the Glacier team, their commitment and leadership, and their service to their communities.

As I noted in our last earnings call, the Glacier franchise covers almost 1,500 miles from Montana to Arizona, and the impact of the pandemic is different across that franchise. Our unique business model, with 16 different divisions, serving over 140 communities, provides us with a unique capability to respond to our employees, customers and communities in a way that best suits that local market. We continue to take advantage of our model today to respond to the quickly changing conditions.

At this time, most of our locations have moved back to drive foodservice with in-lobby [Phonetic] meetings by appointment. This is in response to a resurgence of the virus in many of our markets. Most of our eight states have active cases and mortality rates well below the national average, but are still seeing increasing cases with more testing. Despite the pandemic, we're amazed at how well customers have adjusted to the circumstances and are carrying on with business.

Our mortgage volume is at record levels with refinancing and new home purchases, our commercial lending business is beginning to pick up and many of our business customers report solid increased activity. As expected, tourism in our Western markets has generally rebounded very well due to a lot of pent-up desire to get out of the house and travel. Our markets were strong before the pandemic, driven by high quality of life, business-friendly environments and low cost of living, and we are seeing some signs that the natural social distancing that comes with our more rural markets will add to the attractiveness of our markets.

And now on to our results for the second quarter. Once again, the second quarter results really highlighted the consistent strength of our core business. We reported earnings per share of $0.66, an 8% or $0.05 increase from the prior-year second quarter. Net income was $63.4 million, which is an increase of $11.1 million or 21% from the prior-year second quarter. And highlighting the Company's core earnings strength, pre-tax, pre-provision net revenue for the quarter was $91.3 million, which was up 41% from the prior-year second quarter.

Core deposits increased $1.8 billion or 16% over the prior quarter, with non-interest-bearing deposit growth of $1.2 billion or 30%. Non-interest-bearing deposits were 38% of total core deposits at the end of this quarter, compared to 34% at the end of the quarter a year ago. Deposits continue to flow into the balance sheet, so we significantly reduced our Federal Home Loan Bank borrowings by $475 million during the quarter to about $40 million and put an additional focus on reducing the cost of deposits, given the drop in interest rates. We were pleased to see our cost of core deposits decline to 14 basis points from 20 basis points in the prior quarter, and the total cost of funding dropped to 21 basis points from 29 basis points in the prior quarter.

The loan portfolio organically increased $1.4 billion or 14% in the quarter and increased $1.5 billion or 17% from the prior-year quarter. All of the loan growth in the current quarter and most of the deposit growth was due to our Paycheck Protection Program or PPP loans. We have approved and closed over 15,000 PPP loans for about $1.4 billion with most of these funds deposited in accounts with us. We expect to earn about $55 million in fee income from these loans. So as part of this effort, we also acquired over 3,000 new customers who received PPP loans from us, totaling close to $298 million in loans, and this was due to a number of our competitors that were struggling with offering the PPP program.

Total debt securities of $3.7 billion, increased $104 million or 3% during the quarter and increased $1 billion or 37% from the prior-year second quarter. Net interest margin was tough to hold as we saw a drop from 4.36% last quarter to 4.12% today, dragged down by the 150 basis point reduction of short-term rates by the Federal Reserve in late March. Pricing on new production during the quarter was around 4.40% [Phonetic] versus our portfolio rate of about 4.85% [Phonetic]. Last quarter's new production yields averaged 4.80% [Phonetic].

The core margin looked better, ending the quarter at 4.21% versus 4.30% in the prior quarter and 4.27% a year ago. The pace of PPP loan forgiveness could help the margin in the next few quarters as fee income will be accelerated upon forgiveness. And last night, the SBA issued some direction on how and when to submit the forgiveness applications, and we look forward to getting started with the process, which, according to the SBA, will most likely start in mid-August. Longer term, though, we still expect lower rates will continue to put downward pressure on our margin.

The return on our debt securities held up well, ending the quarter at 3.16%, up 6 basis points from the prior quarter. Debt security income was $26 million, which was an increase of $5 million or 23% over the prior quarter and 18% over the prior-year quarter. This shows the effectiveness of the actions we have taken to maintain our investment portfolio returns.

Non-interest income was driven by record mortgage production. We booked gain on sale of loans of $26 million, which was $14 million over the prior quarter or an increase of 118%, and $18 million or 233% over the quarter a year ago. Mortgage purchase and refinance business continues to be very strong. And we've seen an uptick in the number of our out-of-state buyers in addition to strong local demand.

Credit performance was better than expected, with net charge-offs at $1.2 million or 2 basis points of total loans, about the same as the prior quarter. Delinquent loans were 22 basis points of loans versus 41 basis points last quarter and 43 basis points a year ago. Non-performing assets increased $7 million, but were 27 basis points of assets, which was up 1 basis points from the prior quarter and was 14 basis points less than the level a year ago. For the quarter, excluding PPP loans, our NPAs would have been 30 basis points of assets.

We have also made over 3,000 loan modifications on loans totaling over $1.5 billion, representing about 15% of the portfolio, excluding PPP loans. We have received regulatory flexibility to make these modifications and they are a good way to help customers get through a severe but hopefully short-term business disruption like we're now seeing. Both the PPP loans and the modifications, help customers maintain and build their balance sheets, while they get back to business.

We have also made in excess of $200 million in PPP loans to the modification customers that will provide additional support. We finalized closing many of these modified loans a bit later in the second quarter as we were very busy with handling a record number of loan requests for PPP loans. While most of the modifications are for three months, we'll begin to see the majority of them come up for renewal in a few more weeks. We expect to see a good number of these customers go back to paying as agreed. It's important to note that all of these loans that received a modification were performing as agreed before we gave them the modification.

In addition to relying on the substantial inherent strength of the loan portfolio, we've implemented enhanced monitoring of industries that we think posed higher risk due to the pandemic. The total amount of loans under enhanced monitoring is $630 million or 6.29% of our portfolio. This include loans in the following industries, hotel/motel, restaurants, travel, tourism, gaming and oil and gas.

The largest industry with increased risk in our portfolio is our hotel/motel loans, totaling $422 million or 4.1% of the portfolio. Most of these hotel loans are smaller loans, less than $1.5 million, and have an LTV under 60%. Most of you know that we have not materially increased our position in hotels for over three years. So many of these loans have good amount of equity, which generally translates into a lower debt burden.

The next largest exposure in the higher-risk group is restaurants, totaling $151 million or 1.5% of the loan portfolio. Similar to our hotel portfolio, these are smaller loans within average loan size of $175,000 and comprised of a solid group of operators. Many of these owners have already started to adapt to a new operating model by shifting to take-out while they wait for the ability to reopen fully. We plan to continue with our enhanced monitoring process of these industries for the foreseeable future.

Credit loss expense of $13.6 million for the quarter brings us up to $36.3 million for the year and 1.42% of loans, 1.62% of loans not including the PPP loans, which are 100% guaranteed. This is a 13 basis point increase over the last quarter. This increase is primarily driven by the impact of COVID-19 on the economic forecast and not deterioration in the underlying credit portfolio. Our allowance for credit loss stands at $162.5 million, which we believe is a very adequate and prudent amount given the uncertain circumstances.

Total non-interest expense was $98.1 million, which increased $6.2 million or 7% over the prior quarter and increased $12 million or 13% over the quarter a year ago.

For the quarter, the efficiency ratio was 49.29%, an improvement compared to the prior quarter efficiency ratio of 52.55%. On a year-to-date basis, the Company's efficiency ratio was 50.81%, improving from the 54.93% efficiency ratio for the first half of last year.

The Company's capital levels remain very strong, with CET1 ending the quarter at 12.35%, up compared to 12.14% at the end of the prior quarter and up from 12.19% from the quarter a year ago. Tangible book value per share was $17.08 at the end of the second quarter and increased from $16.35 at the end of the prior quarter and increased from $15.03 from the prior year's second quarter.

Our access to liquidity remains robust, with growth due to an increase in core deposits and borrowing capacity. At the end of the second quarter, the Company had access to over $11 billion in liquidity. This includes $5.6 billion of unused borrowing capacity with $2.6 billion at the Federal Home Loan Bank, $2.6 billion in borrowing capacity at the Federal Reserve discount window and PPP liquidity facility and $400 million of capacity at correspondent banks.

In addition to $1.6 billion in unpledged and marketable securities and cash of $547 million, an additional $3.5 billion in liquidity is available from other sources, including broker deposits, over-pledged securities and loans eligible for pledging at the Federal Home Loan Bank. So in March, we declared our 141st consecutive dividend. With our robust capital and liquidity position, we don't see any change in our dividend strategy at this time. Dividends have been and remain one of our preferred excess capital management strategies.

And a few important items before I end my comments. We completed the operational conversion of Heritage Bank in Reno, and I'm pleased to report that the conversion went very smoothly and it will be good to have the Heritage Bank on the Company's core platform. My thanks to the Glacier and Heritage teams for an excellent conversion. S&P selected Glacier to become part of the MidCap 400, moving up from the SmallCap 600. And finally, Bank Director, just this week, published the 2020 Bank Director scorecard and we moved up in the rankings quite a bit. For banks with assets between $5 billion and $50 billion nationally, we are in the Top 5, number four. That's up from number 16 last year. So overall, an outstanding performance from the team.

And that ends my formal remarks, and I'd now ask Tawanda to 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 Michael Young with SunTrust. Your line is open.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, good morning.

Randall M. Chesler -- President and Chief Executive Officer

Morning, Michael.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Maybe just starting on PPP, you guys obviously had recognized the expenses, deferred the expenses rather. And so I was just kind of trying to figure out the cadence of how you expect that the -- both the fees and the expenses to kind of flow back into the income statement as we move forward?

Randall M. Chesler -- President and Chief Executive Officer

So, we've been amortizing the total fees that we expect to earn over a two-year period. So that started in the second quarter. You can see that in our financials. You know, how that's going to change? We do expect it to get accelerated. We just are a little uncertain about the pace of that. As I noted, I mean, just last night, the SBA gave us direction on how to submit the paperwork for those forgiveness loan applications. And so we believe that's going to start in mid-August. They have 90 days. Then they'd turn that around. And so, probably, going to see most -- a fair amount of activity in the fourth quarter, probably spilling over into the first quarter. So some acceleration of those loans will happen in those two quarters. And that's still subject to the SBA sticking to the process that they outlined last night.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay, thanks. And maybe kind of a broader question, just on the overall, maybe, business climate and loan demand. You guys have a very broad footprint, obviously, with a lot of different subsidiary bank. So, just trying to think about kind of what may be driving strength or weakness in various areas and what areas you may see some credit issues pop up if any.

Randall M. Chesler -- President and Chief Executive Officer

Yeah. Well, I'd say, I'm very, very surprised at the strong level activity across the total footprint, starting in Arizona, where you see a lot of press about the virus and issues, but talking to business owners in the market, there is a surprising consistency and back to business that's going on there. And for example, one of our customer builds roads. They are backlogged, they do more business than they ever have with all the infrastructure investment. Another one in the car business, case of can't get enough cars to sell. So, homebuilders reporting a lot of activity on new homes.

And so we still -- we see a surprising amount of activity. No real areas of weakness popping up. If you go, kind of move further north into Utah, similar story, Nevada, all the way up into Montana. So, we're hearing from our customers that business is resuming and nothing is really starting to bubble to the surface at this point as an area that, other than the enhanced risk areas that we've -- that I already mentioned, that areas that we're concerned about.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay. And then maybe just last one for me. You noted kind of the decline in loan yields. I would imagine there has been some, maybe, loan spread widening and we may not expect as fast a turn of kind of refinances and whatnot within the book. So just on a core basis, do you feel like there is an ability to kind of hold loan yields around that -- new loan yields around that 4.40% level or do you think there's going to be incremental pressure from there?

Randall M. Chesler -- President and Chief Executive Officer

You're right about the spread growing a little bit, but we're still fighting the markets and the Fed and the softening on the flat curve. So, we think on that -- if it holds to where it is today, you're probably looking more at kind of 4.25% to 4.50% range in this quarter on new production, and whether I think that holds or gets a little better is really a function of what's going on in the -- on the interest rate curve.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Okay, thanks. I'll step back for now.

Operator

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

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

Thanks, good morning.

Randall M. Chesler -- President and Chief Executive Officer

Good morning.

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

Maybe taking now, maybe the full margin question further, I think maybe remind us -- the moves you made in late Q1 in the securities book certainly helped boost yields in the second quarter. I guess, I'm trying to recall, how does that support strength into the third quarter if at all and maybe just stops overall on the margin? You noted that maybe loan yield pressure, but you've got a lot of liquidity, and just want to see how that shakes out a lot of moving pieces.

Randall M. Chesler -- President and Chief Executive Officer

Yeah. So one of the securities, the debt securities, we've been doing a lot of work there, and I think that strength showed through in this quarter. And Ron has spent a lot of time looking at. So Ron, do you want to give a little more color around the debt security?

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Yeah. So, we bought those late March and the great yields we've got. Put on the munis about 70% of the $725 million rounding were high-quality munis and tax-equivalent yield there was 4.12%. We also bought -- of that $725 million, 30% were corporates, which were the GSIB banks, the large names, TrueIT, JPMorgan, etc. And so those were 4.35%. So you blend it all, we have a 4.20% yield, and that's what showed up in the second quarter and that will continue really, so those things are called, which the munis, they've got a very long call date.

So, we think this will continue to be an underpinning, certainly through next year and feel very good about the -- about that. We initially funded those at FHLB, but as Randy talked about in his remarks, we've been able to pay down those borrowings and so now we're really financing it with deposit cost which came down nicely, so both sides of it has really helped.

And then just on the -- what we have been doing with the excess liquidity, which really showed up toward the latter half of June, we just purchased, a week ago, just about $170 million of securities. 80% were residential mortgage-backed securities Fannie Freddie's, 20% were structured corporate MBSs. And the combined yield 84 basis points. So that's just where the market has come. So that's why -- I want you to know that because that's why opportunistically that three days in late March when we were able to buy what I described, we really pulled forward things that we would have bought otherwise.

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

Okay, thanks. Any detail on the increase in the non-accruals were these sort of pre-COVID stressed or kind of what was in that grouping at the uptick?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. The -- very slight uptick, but Tom -- I'm going to ask Tom to give you a little more color around those.

Tom Dolan -- Chief Credit Administrator

Yeah. So a slight uptick. A little -- about half of it was CRE, the other part was Ag. All of these were pre-pandemic weaker credits. On the CRE side, the pandemic may have kind of put the issues into hyperdrive. But certainly, these were all pre-pandemic issues that likely would have ended up here anyway.

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

Okay. And then just a last one on the deferral breakdown. Randy, I think you mentioned predominantly three months was the timeline. Is -- I don't know if you've got it on a percent of deferrals were 70%, three-month. But just trying to get a sense for what were the mix of timelines on the deferral?

Randall M. Chesler -- President and Chief Executive Officer

It's about 60% three month, 40% six month.

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

Okay. And as those three months have come in, you had $1.5 billion on the deferral at the quarter end and your comment on hoping those come in are vast majority. I guess to date, those that have expired, you've seen a vast majority not seek extension.

Randall M. Chesler -- President and Chief Executive Officer

A little early to tell because, as I pointed out, we finalize these amounts later in the second quarter. And so the three-month, we've just seen very few start to come forward, so I hate to draw conclusions. I think what we've seen is encouraging, but it's just a little bit early because we were so busy with our PPP production, we put the mods on the back burner and got to them later in the quarter.

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

I see. Okay. Well, thank you.

Randall M. Chesler -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of David Feaster with Raymond James. Your line is open.

David Feaster -- Raymond James Financial Inc. -- Analyst

Hey. Good morning, everybody.

Randall M. Chesler -- President and Chief Executive Officer

Good morning.

David Feaster -- Raymond James Financial Inc. -- Analyst

I just wanted to kind of follow up on the redeferral topic and implications for reserve. I mean just from your commentary, it sounds like most of the heavy lifting has been done. I guess, how do you think about reserve builds going forward as we might get some redeferrals and potential risk rating downgrades? Just any thoughts on that.

Randall M. Chesler -- President and Chief Executive Officer

Yeah. The -- I'm going let -- I'm going to have Tom -- ask Tom to give you a little insight into that. But you're specifically, David, asking for the -- what you think our expense will be or did you -- maybe you could just tune your question and also make sure we get to your answer.

David Feaster -- Raymond James Financial Inc. -- Analyst

Yeah. Just interested in your thought, I mean, whether most -- it's sounds -- again, it sounds like most of the reserve build is already completed based on your commentary about incorporating economic scenarios versus credit deterioration. I guess just thoughts on what's the -- how you plan to or just thoughts on additional reserve builds going forward in the back half of the year and implications? Is it primarily going to be driven by potential credit migration from risk rating downgrades as loans get redeferred or just any thoughts on the reserve builds going forward?

Tom Dolan -- Chief Credit Administrator

Yeah. David, this is Tom. I think with the world we know today, we're pretty comfortable with where we're at. But barring any deterioration in our forecasts or material deterioration in the credit portfolio, I would agree with you that probably the heavy lifting is done. But it's still little early, especially given that a lot of our footprint is in higher tourism areas and the early signs are all pointing positive, but it's a little early.

David Feaster -- Raymond James Financial Inc. -- Analyst

Okay. And then I appreciate the commentary on the 3,000 of new customers that you're able to acquire from the PPP program. Just curious how much of this has translated into non-PPP growth? And then maybe similarly, has there been increased opportunities from lenders who might be frustrated at a competitive bank and the larger banks that might be interested in making a change and create in the hiring opportunity for you all?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. So let me start with the 3,000 customers. I would tell you that a fair amount of these were people that we wanted to do business with, that we had been calling on for a number of years. And the PPP, if you can turn the clock back to when this first started, there was a lot of anxiety around this and a number of the money center banks were very slow in their response to the customers. And that was the -- and some of them, the straw that broke the camel's back, and they came over to one of our divisions. And that's a fair portion of those 3,000 of people that we have been looking to get into the bank, and a fair amount of them were with the money center banks.

And so, step one is we now have a deeper relationship with them with the PPP. They all -- all the -- we did require accounts to be opened. So we do have that established now. And I think that is a project for the next year for us is to deepen those relationships. So we just had last month an all hands-on deck, meeting with all our divisions, talking specifically about how do we spend a day and a half talking about how to deepen those relationships now that we have them in the bank. And if you think about it, it's like a small acquisition for us, this 3,000 new customers into the bank all with lending relationships that are an opportunity.

So, we'll see how we do. We are very focused on it, and that's one of the things we have on our to-do list for the next year is further deepen those relationships and pull over the good business that's sitting on another bank right now.

In terms of new commercial lenders, we're pretty well staffed. I mean, I think we always maintain a list of people who want to come on over to Glacier, but -- and as really good opportunities present themselves, we take advantage of it. But I think there is -- generally, we have a good shortlist in most of our markets of people we know we'd like to have join us when the time is right. But right now, our focus is on those 3,000 new customers and how to deepen that relationship over the next 12 months or so.

David Feaster -- Raymond James Financial Inc. -- Analyst

Okay. That's great. And then just one more. You talked about the commitment to the dividend. With as much excess capital as you have and a strong credit performance, when do you think you can return to dividend growth? What are you hearing from the regulators? Do you think you'd get pushed back if you tried to raise your dividend now? And just maybe any overall thoughts on capital deployment and capital return?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. Well, we're very thankful that we're in a position to pay a dividend and continue to pay a dividend. There hasn't been a lot of industry discussion around this, other than, initially, there was some of the bigger banks got some direction to slow it down. I think you just need to be smart about it, I guess, from our point of view, which is to have a very -- maintain very solid capital and very solid liquidity and keep your payout ratio in a reasonable range, because I think it's a legitimate regulatory concern at this point to make sure that banks retain capital and don't push it all out through dividends.

So I think it's sensitive, maybe, more of an issue for companies that are paying out a higher percentage of earnings with less capital. But from an industry regulatory standpoint, I don't think it's on the front burner. But from our standpoint, we don't really want it to become an issue, so we're going to be proactive to make sure we take steps to ensure that we're always able to pay a dividend.

David Feaster -- Raymond James Financial Inc. -- Analyst

That's great. Thank you.

Operator

Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler. Your line is open.

Matthew T. Clark -- Piper Sandler & Co. -- Analyst

Hey. Good morning, guys.

Randall M. Chesler -- President and Chief Executive Officer

Morning.

Matthew T. Clark -- Piper Sandler & Co. -- Analyst

On the comp expense, you benefited from the deferred origination cost [Indecipherable] stuff on the PPP about $8.4 million or so. You also had strong production on the mortgage side, and so that probably masked some of that relief. I guess, how should we think about the run rate of comp expense that was $58 million this quarter?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. So you're right about kind of the dynamics in play there with a deferral and then underneath that is increased mortgage comp expense due to the record level of production we're having. So Ron, maybe you can give Matthew a little view of kind of the run rate that we think we're going to see there.

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Yeah. So, Matt, you're right. That $8.4 million, that's certainly a benefit, but that's ended. That's not going to continue. So -- and we did have higher compensation expense that you alluded to. So, roughly $66 million would be where I would think the run rate would be for the compensation expense for the third quarter. And you notice that we added some people, so included in that higher compensation is -- we had a great mortgage banking income, so we paid on that production, and then we had the higher body count. So that's -- but that's all baked in that.

Matthew T. Clark -- Piper Sandler & Co. -- Analyst

That's great. Okay, thank you. And then just on the PPP, the $1.4 billion, looks from the release that you only had $166 million of that, that went toward the higher risk industries that you're focused on. Is there some other portion of your PPP portfolio, at least from an industry -- industry's perspective, that may be of more concerned, just given the support that they needed?

Randall M. Chesler -- President and Chief Executive Officer

Not that I'm aware of. I don't know, Tom if you have any -- I mean we'd certainly look at where the PPP has gone and it did -- there was a bit of a match up with the mods, but the PPP was pretty widespread. So I don't know, Tom, do you have any thoughts on that?

Tom Dolan -- Chief Credit Administrator

No. I mean, I think the industries are pretty widespread that did receive a PPP. Outside of what we have in the enhanced risk portfolio, there is nothing that gives me any immediate concern. So for example, in our -- when you look at some of the industries that did receive PPP, we had some healthcare, some construction -- construction has remained very strong through the pandemic. And healthcare, once elective procedures were open back up, the pent-up demand that existed through the shutdown really is keeping a lot of the medical providers very busy.

A lot of the conversations I had with our providers and also our contractors state that the summer vacation plans are over. We're very, very busy right now and things are looking good. Outside of that, Matthew, it's pretty widespread and nothing of over concerns.

Matthew T. Clark -- Piper Sandler & Co. -- Analyst

Okay. Thank you. And then just on credit migration, I mean, it sounds like you're kind of just going through the deferrals now. But I guess, how are you going to risk rate as we move through this process? Have you seen any migration yet or do you feel like there might be some as you -- as some of these deferrals come up for a renewal?

Tom Dolan -- Chief Credit Administrator

We haven't seen any migration yet, Matthew. But I certainly would expect some as we roll some of these modifications up, especially in this higher risk portfolios. So as we continue to dig through each of those credits at a very detailed credit perspective, I would expect some deterioration. But I don't expect anything significant or serious, at least as of yet.

Matthew T. Clark -- Piper Sandler & Co. -- Analyst

Okay. Great. Thank you, guys.

Randall M. Chesler -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question comes from the line of Gordon McGuire with Stephens. Your line is open.

Gordon McGuire -- Stephens Inc. -- Analyst

Good morning.

Randall M. Chesler -- President and Chief Executive Officer

Morning.

Gordon McGuire -- Stephens Inc. -- Analyst

Ron, I was hoping we could round out the expenses. The release mentioned a state regulatory assessment credit or an adjustment. I guess, the past couple of quarters, the FDIC credit has helped. Can you help us think about the run rate for that line item?

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Yeah. The state expense will go back up to about $200,000, and so that -- it's not a big number, but it was nice to have a rebate for the first half. It's not -- by the way, they have not ruled out a second rebate for the remainder of the year, but we'll wait to see what that is. But the -- what was the other part? States and then what...

Gordon McGuire -- Stephens Inc. -- Analyst

I think that was it. I was trying to get a gauge for what the run rate for the regulatory assessment expense was. And I think you said $600 a quarter in addition to $1.6 million.

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Let me look here, one second. I was -- $1.5 million per quarter. Pardon me. I think that will change.

Gordon McGuire -- Stephens Inc. -- Analyst

Thank you. And then I was hoping you could provide a little bit more color into origination volumes and mortgage, the margins this quarter and what's the outlook there heading into the third quarter.

Ron J. Copher -- Executive Vice President and Chief Financial Officer

On the origination of the loans and...

Randall M. Chesler -- President and Chief Executive Officer

Yeah, the mortgage...

Gordon McGuire -- Stephens Inc. -- Analyst

The mortgage volume.

Randall M. Chesler -- President and Chief Executive Officer

Volume, yeah, obviously, was substantial. And we are just way above where we were in the prior year in terms of the level of activity. If your question is on the spread that we're seeing there, those are holding really nicely. The pricing on those is obviously going to be dependent on where the market price is. So future as -- it's going to look like it's going to be another strong quarter.

We've been very surprised at the level of activity, but it's maintain a lot of almost the concern about shortage of inventory because the builders weren't able to build houses for the first quarter and now there is a lot of demand. That coupled with, as I noted, the out of -- the increase in the out-of-state purchase services, now almost 20% of our purchase volume is from people outside of the market, that's almost double what it was in the first quarter. So a lot of activity there.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay, good. And then, Ron, you brought down the customer repo costs this quarter, but still yielding around 1%, it's, I guess, the smaller balance relative to the total balance sheet. But is there still opportunity to bring those costs lower?

Ron J. Copher -- Executive Vice President and Chief Financial Officer

There is. Definitely. One thing to point out, all of the -- when you look down our funding liabilities, interest-bearing deposits, certainly even wholesale, all categories dropped. And so we still got some room. The CDs, that book rolls off, that will come down. And then definitely in the repo, to your point, there is room.

Gordon McGuire -- Stephens Inc. -- Analyst

Good. Thank you.

Operator

Thank you. Our next question comes from the line of Jackie Bohlen with KBW. Your line is open.

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

Hi. Good morning, everyone.

Randall M. Chesler -- President and Chief Executive Officer

Morning, Jackie.

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

I was wondering if you could provide a little bit of color on the unfunded commitment expense that was in that other line item, actually on non-interest expense, and just what the driver was in the quarter and then what your expectations are going forward?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. I'm going to ask Tom to talk about that. That's been a little frustrating with the new accounting rules, how that has kind of entered our landscape now. And we've talked to our accountants about a way to reduce that volatility and the answer is there is none. And so maybe, Tom, you can give a little more color on kind of what has occurred and maybe what your expectations are.

Tom Dolan -- Chief Credit Administrator

So yeah, Jackie, there are two primary reasons we had an increase in the quarter. First, we've seen a reduction in the utilization rates of our revolving lines of credit. It's actually been fairly significant over the quarter. Customers are using their lines of credit less and less, which, from my chair, speaks to the strength of their balance sheets and the lack of need for borrowed funds. But the negative side of that is it increases the unfunded balances and the unfunded liability that goes along with it.

And then secondly, similar to the funded allowance for credit loss, the unfunded is sensitive to changes in the economic forecast as well. And on the unfunded side, there's -- it's made up of a combination of revolvers, also construction loans. And construction loans are newer. They have longer weighted average lives and can be -- can have a -- as Randy mentioned, a little bit more volatile change. So expectations in the future, we're starting to get into the growing season on the Ag portfolio. I think we'll see some utilization there.

We will also see some seasoning of the construction portfolio as those draws continues. So a little difficult to project it out, but certainly I think we'd expect maybe not quite the volatility we saw this quarter.

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

Okay. So -- and correct me if I'm not thinking about this properly, but was there an offsetting, maybe a lower amount of provision expense, related to the $6.9 million in unfunded commitments because you had those wide balances go down, so meaning that because your commercial balances decline as utilization declines, you had a lower reserve requirement, but then that increased your unfunded commitment requirement? Am I thinking about that properly?

Randall M. Chesler -- President and Chief Executive Officer

Yeah. I think you're thinking about it properly. I mean, I can't -- I don't have a number to nail down what the difference was between the two, but you know -- well, that follows the logic behind it is balances decrease, it shifts from the funded to the unfunded side.

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

Okay. And if I adjust for the swing in unfunded commitments, which were roughly around $10.5 million quarter-to-quarter, it looked like other expenses were low outside of that, and I pulled merger charges out of other, so maybe that's the variance there. But was there anything else unusual in the quarter that caused that item to be lower?

Randall M. Chesler -- President and Chief Executive Officer

No.

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

Okay. So, outside of unfunded commitment, there's a pretty good run rate you say?

Tom Dolan -- Chief Credit Administrator

Jackie, you've dealt with the $8.4 million of the deferred comp coming from the PPP origination...

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

Yeah. And I'm speaking specifically to just the other expense line item and looking at the quarterly variances there.

Randall M. Chesler -- President and Chief Executive Officer

Yup, that's correct.

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

Okay. Thank you. And then one last one that's -- sorry, it's once again a little bit technical. When I look at the fees that were just closed on the PPP loans, and thank you for providing that level of detail, does that include the loan origination cost offset in there?

Randall M. Chesler -- President and Chief Executive Officer

I believe those are the gross fees. So what table are you looking at there for the PPP? is it in the release?

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

It was in the release. Sorry, right now, I've just got it in my model, so I'm not sure where I pulled it from. It's the $7.3 million.

Randall M. Chesler -- President and Chief Executive Officer

For the quarter, $7.3 million.

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

Yeah. I'm just wondering if that's the growth number or if that's already net of the deferred loan origination cost.

Ron J. Copher -- Executive Vice President and Chief Financial Officer

That's the net number.

Randall M. Chesler -- President and Chief Executive Officer

Yeah.

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

Okay. Perfect.

Randall M. Chesler -- President and Chief Executive Officer

Yeah. The number I quoted in my $53 million, that's the gross number not netted out by anything.

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

Okay.

Randall M. Chesler -- President and Chief Executive Officer

Yeah.

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

Okay, great. Thank you. Sorry for being so technical.

Randall M. Chesler -- President and Chief Executive Officer

No, that's good. You're welcome.

Operator

Thank you. Our next question comes from the line of Tim Coffey with Janney. Your line is open.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

Great, thanks. Morning, everybody.

Randall M. Chesler -- President and Chief Executive Officer

Morning.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

Randy, as we look at kind of the portfolio with enhanced monitoring on it, it looks like it's come down a bit quarter-over-quarter. What's your approach to that portfolio? Is that kind of actively managing it down or continue with what you have or would it be something like you're open to the right opportunity in these categories?

Randall M. Chesler -- President and Chief Executive Officer

I'm going to ask Tom to make a comment on that. That's -- we carved that out early of the area that we thought due to that COVID-19 would have the most risk. I think it's proven to be an area that we think does have the risk. In terms of how we're managing it, Tom, do you want to give some insight on that?

Tom Dolan -- Chief Credit Administrator

Yeah. Tim, that's a great question. I would say we're managing it very closely. The reductions -- combination of normal amortization and then, as I mentioned earlier, we had some paydowns on the revolving side, which a portion of -- were from the enhanced risk portfolio. And just like anything, there are stronger credits and there's weaker credit. So in terms of new originations, I wouldn't say that we're actively looking to increase the hotel or restaurant portfolio, but there's -- there may be the exception here and there, just really depends on the individual credit in and of itself.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

Okay. No, that's helpful. And then also comparing to the prior quarter, there was a fair amount of modifications in that portfolio at the -- I think when you reported on in May. How many of those are coming up on their 90-day expiration?

Tom Dolan -- Chief Credit Administrator

As Randy mentioned, we have about a 60-40 split between 90 days and six months. We're just now starting to see those hit exploration. So, the 90 days is probably going to be within the next four weeks to six weeks, and then of course the six months will be longer. The answer is -- the modifications on the enhanced risk is kind of disbursed throughout the time frame we are writing them altogether.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

Sure. Okay. I understand. And then on the PPP loans, do you have an idea of what percentage of those are under $150,000?

Randall M. Chesler -- President and Chief Executive Officer

Why our average is below $100,000, we have one of the more granular ones. In terms of what percentage of our total loans that we did are under $150,000, we -- Ron has got that number. Ron, what it's -- we add there with...

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Well, of the total, it's roughly $600 million, excuse me, is in that range of below the $150,000.

Randall M. Chesler -- President and Chief Executive Officer

Okay. So $600 million to the $1.5 billion, is the low $150,000.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

All right. And then on mortgage banking, congratulations on a record year.

Randall M. Chesler -- President and Chief Executive Officer

Thank you.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

If -- yeah, If volumes stay elevated like they have, would you consider putting more of these into the portfolio, if organic loan growth starts to slow down or stall in the second half?

Randall M. Chesler -- President and Chief Executive Officer

No. We like our portfolio rate where it is. The portfolio is there to help customers that just don't quite fit the box. We don't look at it as a way, as a growth engine, but it's a way to maintain relationships with brokers and with our branch customers. So, we don't look at that as a way to significantly grow and its percentage of our portfolio has actually stayed about flat, shrunk a little, we're very happy with keeping it right where it is.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

Okay. And then on deposit costs, where were -- what were deposit costs at June 30?

Randall M. Chesler -- President and Chief Executive Officer

So, total deposit costs, you're looking at total funding cost or core deposit costs?

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

I'd take core deposit costs.

Randall M. Chesler -- President and Chief Executive Officer

So Ron, if you want to go back to the end of this quarter, so...

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Yeah. Just for the -- you're talking right at June...

Randall M. Chesler -- President and Chief Executive Officer

At the end of June [Speech Overlap].

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Yeah. So we were at decline, so 13 basis points is what that is and it includes the CDs at 88% [Phonetic], and again there's definitely room over time, so there's time deposit, of course, but 13 basis points, and it dropped steadily from April to May to June.

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

Okay. Great. Those are all my questions. I appreciate it. Thank you.

Randall M. Chesler -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And we have a follow-up from Gordon McGuire with Stephens. Your line is open.

Gordon McGuire -- Stephens Inc. -- Analyst

Hi. Thanks for the follow-up. I apologize for bringing expenses back. Ron, did you say that the compensation run rate for the third quarter is $66 million or $56 million?

Ron J. Copher -- Executive Vice President and Chief Financial Officer

$66 million.

Gordon McGuire -- Stephens Inc. -- Analyst

And does that assume strong mortgage and commissions at a similar level to 2Q?

Randall M. Chesler -- President and Chief Executive Officer

Pick it up.[Phonetic]

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. So fourth quarter would be the expectation that probably moves lower from that number?

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Yeah. To the extent that the gain on sale would decline, yeah, the variable expense for the commissions would similarly decline.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. All right. Thank you.

Randall M. Chesler -- President and Chief Executive Officer

Yeah.

Operator

Thank you. I'm showing no further questions. I would like to turn the call back to management for closing remarks.

Randall M. Chesler -- President and Chief Executive Officer

All right. Thank you, Tawanda, and I want to thank everybody on the call today for dialing in and spending part of your summer with us. We appreciate it. We want to wish everyone have a great day and a fantastic weekend. Thank you.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Randall M. Chesler -- President and Chief Executive Officer

Ron J. Copher -- Executive Vice President and Chief Financial Officer

Tom Dolan -- Chief Credit Administrator

Michael Young -- SunTrust Robinson Humphrey -- Analyst

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

David Feaster -- Raymond James Financial Inc. -- Analyst

Matthew T. Clark -- Piper Sandler & Co. -- Analyst

Gordon McGuire -- Stephens Inc. -- Analyst

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

Timothy N. Coffey -- Janney Montgomery Scott -- Analyst

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