Glacier Bancorp Inc (GBCI) 2010 Q3 法說會逐字稿

Good day, everyone, welcome to today's third quarter Glacier Bancorp's earnings conference call. All participants will be in a listen-only mode. Please note, this call may be recorded. I will be standing by, if you should need any assistance. It is now my pleasure to turn the conference over to Mr. Mick Blodnick. Please go ahead, sir.

Thank you. Welcome, and thank you for joining us this morning. With me this morning is Ron Copher, our Chief Financial Officer, Barry Johnston, our Chief Credit Officer, Don Chery, our Chief Administration Officer and Angela Dose, our Principal Accounting Officer. Last night, we reported earnings for the third quarter of 2010. Earnings for the quarter were $9.445 million. That's an increase of $10.900 million, from last year's quarter, when we posted a loss of $1.5 million.

In the quarter, we did book a $2 million pretax, or $0.02 per share after-tax gain, on the sale of securities. The majority of which were a group of municipal securities, that were nearing their call date. This was the only non-recurring item this past quarter. Diluted earnings per share for the quarter were $0.13. That's an increase of $0.16, over the $0.03 loss in last year's third quarter. The average share count was 17% higher than last year's third quarter, due to the issuance in March of 10.3 million additional shares, as part of our secondary offering.

Our third quarter performance was not bad, on a number of fronts. We continued to have exceptional growth, in both the number and dollar amounts of non-interest bearing transaction accounts. This has been the key component to us achieving a 13% increase in service charge revenue, over last year's quarter. And more important, a 12% increase on a link quarter basis. When many expected opt-in requirements that took effect during the quarter, to have a negative impact on service charge income. We also benefited this last quarter from lower mortgage rates, that led to a significant improvement in the amount of mortgage origination fees we generated.

For the quarter, our gain on the sale of loans increased 31% over the prior year's quarter, and 20% over the previous quarter. Excluding one-time non-recurring gains, the increase in non-interest income from these two categories more than offset the reduction in net interest income we experienced during the quarter. As a result, core operating revenues increased 6% from last year's quarter, and 7% from the prior quarter. Unfortunately, as predicted, our net interest margins saw further compression during the quarter. The margin contracted by 16 basis points during the quarter, to 4.19%.

Loans moved to non-accrual status accounted for 7 of those 16 basis-point reduction, to the margin. This is the sixth consecutive quarter of contraction, in our net interest margin. And as I have said repeatedly, while we understand the pressure to grow earnings, we are also keenly aware of the significant interest rate and liquidity risk that can arise, by stretching for yield to deploy excess liquidity. During a period when loan volume is hard to come by. We have, and will continue to, resist this temptation and are willing to accept the lower net interest margin, rather than face the consequences of an ill-timed extension in our investment portfolio.

At a time of historically low yields, that continue to move even lower. In our estimation, there's currently not much upside to extending our assets, or reaching for higher rates. With our refusal to take on interest rate risk in the investment portfolio, especially at this point in the rate cycle. And the lack of loan demand-we expect further decreases to the net interest margin, until rates move up, or loan volumes increase. With that said, our banks continue to work hard to lower their funding cost. However, these options are becoming more limited.

As I mentioned, we had a nice growth in fee income revenue during the quarter that helped overcome a 3% reduction in net interest income- for both last year's third quarter, and the previous quarter. One hurdle we've had to manage through, especially this past quarter, has been the accelerated volume of prepayments in our higher yielding legacy investments. Causing us to reinvest those dollars in securities, with lower yields. Still, we're convinced that stretching for yield, by adding extension risk to the portfolio, is a bad idea, and not a viable option.

Non-interest expense saw another jump, primarily due to OREO expense. For the second consecutive quarter, we aggressively disposed of properties in this classification. And work to move other loans to OREO status, so we can control the disposition of these assets more timely, and effectively. In the quarter, $9.7 million was charged to OREO expense. Compared with $7.4 million in the prior quarter, and $2.9 million in last year's quarter. In addition to the $9.7 million in OREO expense, we also provisioned for loan loss-$19.2 million in the quarter. That's an increase of $2 million from the previous quarter, but far less than the $47 million we provisioned last year in the third quarter. Which, of course, was the reason for the loss in that quarter.

Stockholder equity ended the quarter at 13.61%, versus 12.23% in last year's quarter. Our tangible common equity ratio increased to a historic high of 11.38%, compared to 9.75% in last year's quarter. Our capital strength has served us extremely well the past three years, during these challenging times. We will also have no problem meeting the higher capital levels required of the industry in the next few years. In fact, at these levels, we not only have the capital to meet the new standards, but have the ability to grow the Company once the economy starts to gain some traction, and the M&A market resurfaces. We think there will be numerous opportunities to grow our franchise, and reward our shareholders over the next couple of years.

Credit quality continues to show signs of stabilizing, although still at levels that are historically too high. As we stated last quarter, we were not expecting non-performing assets to necessarily continue to trend down, as they did in the second quarter. And that, indeed, was the case, as we saw non-performers increase slightly from last quarter. We commented that we still had up to $30 million in land, development loans and unimproved land, that could potentially migrate to non-performing status last quarter. Unfortunately, we did move $20 million of that amount to non-accrual status, during this quarter. Still, we were able to absorb these latest addition, and keep our asset quality ratios pretty much unchanged.

That doesn't tell the whole story. I think the banks did a lot of work the past three months to position ourselves to begin making some real gains in this area. For example, the last two quarters, the banks have maintained their early stage delinquencies. Again, those are loans delinquent 30 to 89 days-at less than half the dollar amount we had at year end. Hopefully, this will reduce the amount of loans that could potentially move to non-performing status.

We also took some credit charges and writedowns in the quarter on properties that are scheduled to close, and move off our books this quarter. These charges and write-downs to some of our OREO property-and properties we moved into OREO-should make the disposition of these assets less of a challenge going forward. Nonetheless, we still have work to do. And moving these assets continues to come with a steep cost. However, we made some additional progress this quarter, and now need to carry this momentum into the final quarter of the year.

Although we never forecast these things, we're beginning to see some positive results in credit quality. That hopefully, will translate into lower NPAs, and reduced credit expense. Net charge-offs for the quarter were $26.6 million, or 2.7% annualized. Higher than what we experienced the first two quarters, as we wrote down a number of credits prior to moving them to OREO. We had hoped to keep our net charge-offs below 2% this year. That's unlikely to now to be the case, considering the plan to continue aggressively disposing of NPAs through the rest of this year. Which will probably result in continued high charge-off levels.

So, even though there is some reasons for optimism on the credit quality front, it's still a daily grind to work these troubled assets off our balance sheet, while getting a reasonable price for them. Our loan loss reserve ended the quarter at 3.37%. That's down from 3.51% last quarter, but up from 3.10% in the same quarter last year. As we stated previously, our loan loss reserve each quarter is a compilation of all 11 of our banks doing their own independent analysis of their reserve requirements. Half the banks this past quarter saw a reduction in their ALLL , while the other half increased their loan loss reserve. We continue to see weak loan demand. And again, this quarter we saw a decrease in the loan portfolio.

It appears loans for the year are going to be down somewhere around 5%. If we factor out charge-offs, that figure will be closer to 3% or 4%. The only good news here, is that much of this decrease is coming from the loan categories that have been the most problematic. We reduced the amount of land, lot and other construction by 5%. And residential construction loans by 8%, just in the third quarter alone. These two loan categories make up 66% of our non-performing assets, 73% of our OREO, and 66% of our net charge-offs this year.

Reducing our exposure to both these loan categories is another reason to be a little bit more confident that credit quality is moving in the right direction. Land development loans, which have been the biggest source of non-performing problem assets for us, decreased this quarter by $3.1 million, to $81.5 million. This was offset, however, by an increase in unimproved land of $3.9 million. Once again, considering the $20 million that moved into the last two categories this quarter, we're pleased that there was very little change in the total dollar amount of NPAs in these categories.

Deposit growth, especially among core transaction accounts, was once again very strong for the quarter. This low cost funding source continues to help offset some of the pressures we're experiencing on the asset side. We are constantly on the lookout for the cheapest source of funding. And the growth we have achieved this year in non-interest bearing accounts, has given us flexibility to reduce higher cost deposits, and pay down more expensive borrowings.

Nonetheless, even though this has been a real positive for us this year, this lower cost benefit is still not enough to keep our net interest margin from slipping. You may have noticed that our efficiency ratio is lower this quarter. To avoid past confusion as to how the ratio is being calculated, we have moved to a more standardized format, consistent with industry reporting by S&L Financial. As a result, our efficiency ratio, or at least our reported efficiency ratio for the quarter and year-end, came in at 50%. This compares to 47% in last year's third quarter, and 46% for the prior year's first nine months.

The banks continue to do a great job of controlling expenses. However, this past quarter, especially, we saw higher compensation expense- the result of higher commissions paid on greater mortgage origination volume. And also, we saw advertising expense tick up, primarily due to the cost associated with marketing, the most recent asset auction and our continued focus on generating low-cost checking accounts. Overall, we saw some signs of credit quality positioned to start to improve. Although there's more work to be done.

We are now through this year's selling season, and will most likely see a slowdown in activity until next spring. However, we still have a number of things in the pipeline that could close in the fourth quarter. We have made great progress the past year in transforming the composition of our balance sheet- to one less reliant on borrowed funds. Our loan-to-deposit ratio has gone from 112% in September of last year, to 90% this year. After the events of the past three years, this more stable funding base should serve us well going forward.

Our capital levels continue to be among the highest in the industry. Hopefully, it won't be long before we start to see some opportunities to deploy this capital, in ways to further increase shareholder value. We're still not satisfied with our earnings performance this quarter, as credit costs were higher than we expected. Demand and valuations for these distressed properties, although better than last year, was still depressed. But now we're starting to think the inflow of these problem assets is going to slow, barring any drastic change in the economy.

We can't do much about the interest rate environment. And currently, much of our margin pressure is a result of low rates. We are not currently benefiting as much right now as we will, when rates move up. And our large base of transaction accounts again demonstrate their real value. Until then, we will continue to grind through this environment, knowing the worst is probably sitting in the rear view mirror. And those are my remarks and comments. And we'll now turn it over for any questions.

(Operator Instructions)

We will take our first question from Matthew Clark. Please go ahead.

Good morning, Mick.

Hi, Matthew.

How are you doing? Just the first one on, I think we had talked about last quarter the marks that you were taking as things kind of came into non-accrual and then what you ended up as those migrated into OREO, what the subsequent marks were there to kind of unload those properties. Just curious if you guys have done any more work to give us a better sense as to where your non-performers might be market here and where the key loss might be or the ultimate severity of some of these properties you're shaking out?

Well, I'll give you my thoughts and I'll turn it and I'll let Barry give you his thoughts. On the one hand, no, Matthew, we didn't do a lot more work because as we said last quarter, these things -- I guess you can get a general sense of where the mark is on an average. But we still, even this quarter, we had property that got disposed with virtually no loss, and we had property that got disposed of and you lost 70% of the original loan amount, and it was kind of everything in between.

I still want to say that probably those numbers we gave last quarter in that 30%, 40%, if you really ran an average on all of these, would probably be still about as close -- I don't see that there's been a lot of improvement in the marks. I also don't feel that the market has deteriorated. The one thing we did see this quarter was a fair amount of demand for properties.

I think that was pretty well demonstrated with the auction we conducted last month in -- here in the Flathead Valley where in about 75 minutes we sold over $5 million worth of property, and yet that all went at levels that were probably even lower than that 30% to 40%. Some of it went in the -- there was 50% marks on some of that stuff. So -- but that was at an auction. We've had others, we've had other dispositions and disposed of other properties that the marks were not egregious.

So again, I guess the only way we're ever going to do it, we just don't take the time and probably don't feel it is going to be all that relative to us historically to track every one of these things and to track the loss in the mark we took. We're more focused right now on just trying to get the best prices we can and move on. Barry, you got any other things to add to that?

No, it really varies by a couple of factors, the biggest being the product type. Single-family residential low end, very little marks, high end, yes, you're looking at 30% to 40%. Land acquisition and development loans, anywhere from 50% to almost 70% in some cases. But bare land , maybe 30%, 40%. So it really varies by product type and varies by disposition method. The auctions of course, we know we've taken lot larger discounts than we have than by just totaling the properties and holding for better values. So, it's really kind of a mixed bag in trying to put a number on it. It is just very difficult.

And one other thing I'll add to Barry's comment, Matthew, is geography plays a part in that, too. It really depends upon whether you've got raw land or land development project in Boise or whether you've got it in Boseman or Durango or some place like that, so.

Got it.

The one thing I can add is we disposed of about $60 million in OREO last year and our write-downs, I think, lets see -- our write-downs year to date, loss on sale, just to give you an idea, is $6.3 million. So we're taking about a 10% hit on OREO, which -- but that is after you already discounted coming out of the loan portfolio. So overall, yes, I'd say 30, 30%, 30%, 40%, on an NPA, Matthew.

Okay. Great, thank you. And then based on what you see in terms of migration and your outlook, can you give us a better sense for the reserve release we might continue to see here, at least in magnitude? Should we start to get used to the amount of reserve release you guys had this past quarter, or you think that might come back in again?

It very well could come back in again. We are a different animal in that respect. When you have got those 11 banks out there and they're all doing their own individual detailed analysis every quarter, it's really tough for us to say where that number is ever going to end up, Matthew.

I know that's not maybe the answer you want to hear, but that's just the plain fact is that that number could be higher next quarter, it could be lower again. It really depends upon the individual 11 banks, and as I said in my comments, once -- what you see is the compilation. You don't see the 11 different bank analysis and what they feel they need to do. Like I said, this last quarter, we had -- there was a further reduction in the ALLL from the second quarter, yet half of our banks increased their loan loss reserve during the quarter. So, it's just going to depend.

Okay. Okay. And then just the last one on the securities portfolio, I guess it is about 30% of -- I think it's up 30% of earning assets.

That's correct.

Can you give us some sense for how you guys are protected for rates up so you don't get whip-sawed? And I'm sure you guys are keeping it relatively short, but any update on duration and the type of product you're buying to, again, to kind of protect yourself?

Yes, the duration numbers are pretty incredible. They really are. We don't disclose that -- maybe we do. We'll maybe we'll talk about that in the Q. I don't think we even do it in the Q.

The duration is just -- we have inflicted some pain on ourselves, obviously, by staying this short for this long. Our duration in that entire billion dollar CMO portfolio is not much greater than a year. And the key is that when we buy this structured product that Ron and Ken purchased, there is no extension. These things have set final stated maturities. There is no extension if rates start moving up. We will be taken out of these.

Now unfortunately, we've been buying this product for the better part of two years now, ever since loans really started slowing down, and we're already being impacted by product we bought two years ago with these very, very short average lives and short durations, because they're doing exactly what they were intended to do when we bought them. They're coming back to us in the form of amortization and prepays, just like they were expected to do. Unfortunately, we never thought we were going to be at even a lower rate environment when we bought those securities a couple of years ago.

So, that's just adding to the pain that we're suffering on the net interest margin. But, as I said in my comments, we're not going to change that. We're willing to accept the pressure that's being applied to the margin, but we know that when rates do start back up again, that portfolio is going to throw off a lot of cash every month that could be hopefully redeployed in loans at that time, but not -- even not in loans, you would still be able to redeploy them in higher-yielding securities.

Great. Thank you.

You bet.

We will take our next question from Jeff Rulis. Please go ahead.

Good morning.

Hi, Jeff.

Hi, question, and this is sort of a one-off from the prior question. But you've prepared us for net charge-offs out stripping the provision earlier this year, and it's largely followed. But I guess in the last quarter, it further diverged, and I guess if you could speak to, should we expect more of that to come and in a related way, is this a growing comfort that -- about the loss content despite the increase in NPAs?

Well, I think there is some comfort. And I guess part of the reason we feel that way, Jeff, is that we're looking at what's happening within the various categories of loans. For example, as all of you know, land development loans, not so much residential construction this year. Residential construction was a bigger problem in '08 and '09. This year, most of the issues have centered around that land, lot and other construction category. But we continue to see where that category becomes a smaller and smaller and smaller piece of the overall portfolio. And then if you even break that piece out into strictly land development loans, you can see where just, again, this quarter, we had another nice $10 million, $11 million reduction in that.

Now, you could argue that, yes, you're reducing it because you're charging some of this stuff off, and that's absolutely the case. But we're also seeing where we're -- where those figures are going to start to drop even more, or at least at that same pace going forward because of some of the things that are probably in place to take effect in the fourth quarter, and then we hope that also takes and carries on into 2011. Hopefully, there is no guarantees, but hopefully at an even accelerated pace. Because we have taken these charges now.

We've written down a lot of these loans as we've moved them into OREO. So, that was one of the things that caused the higher charge-offs this time. It wasn't just so much that we were just charging things off that we were selling.

It was more a fact that the higher charge-off level came from us actually writing down loans to be moved into OREO to where now we control those assets and hopefully can dispose of them much more quickly and efficiently. But it comes with more pain when you do that. And a lot -- take, for example, the auction now. The auction, we took all the charges in the third quarter on the auction, and yet we haven't benefited yet, from the reduction in NPAs. That's going to happen when all of those purchasers close that deal this quarter.

And that's just one example of some of the things we did in the third quarter to position ourselves better for hopefully less hits but maybe even more leverage and more aggressively moving some of these problem assets off in this quarter and future quarters. Barry, you want to add anything more to that?

Yes, I think what we've really seen is a key is that when we looked at a lot of these problem loans or non-performing loans and OREO, in 2008 we had no offers. 2009 we had low offers and finally in 2010, we're starting to see some reasonable offers. And there's a balance between a hold and hope, or sell and suffer, and I think we're somewhere in between those two. Where the property makes sense to hold it, and it's an attractive property and it's just an issue of market timing, we're going to hold those properties.

But where we see something that just isn't going to move anytime soon, yes, we decided to take the discounts on those properties. And some of our borrowers actually stepped up to the plate and said, okay, yes, it is time to sell, take our lumps and go on, so. And there's some potential buyers out there. We definitely see some more aggressive buyers in this last quarter coming up, so hopefully, as Mick mentioned , we'll see some fruits of the labor there.

And next year it's going to be a challenge again, but it all depends on how aggressively you want to discount these properties to move them, so. But the positive thing is that everything is stabilized, we just aren't seeing the properties coming into the pipeline as they did in the second and third quarters of last year. And we've been pretty much able to hold our own and work through these problems. And again, hopefully, although hope isn't a source of repayment or an action plan, next year we're able to benefit from a little better market and decrease in new loans coming into the NPA status.

Jeff, let me just add one other thing to what Barry said, and that is that we have benefited with our proximity, and I've mentioned this in some of the later -- latest road shows and that. We have benefited this year from our proximity to Canada. I may have mentioned that on last quarter's call, but it really continued to show its value and its worth this last quarter as so many individuals from Canada continue to come down here. Take the auction, for example, there was a number of Canadians that purchased property in that auction.

In addition to the auction, we've seen and we've been talking to a number of Canadians who are very interested in some of these other projects and properties. We sold a very large OREO property this quarter to a Canadian. And I think that they recognize for the first time in decades that their dollar, obviously, has parity with our dollar. Things are less expensive here than they'd probably find up in Canada, and they just love the area. And so when you consider that Calgary is the largest city that we're located next to, with well over 1 million people, there is a lot of individuals that enjoy this area.

Now, I'm not saying that all of our banks have that same benefit from the Canadians and the Canadian dollar, but our two largest banks, they both have markets that border Canada, and I think that those are the two that really have seen some real benefit coming out of Canada in regards to the interest level on some of these distressed properties.

Interesting. Okay. And not to take too much time, but just one quick one, Mick, any changes to your acquisition outlook, I guess any recent events that may have altered your previously-discussed view?

No, not really. I still think it's going to be a late 2011 before much really happens out here in this part of the country. We're seeing, of course, as you all know, we're seeing a lot more activity in the northeast these days, but those were parts of the country that just didn't have much in the way of residential, commercial, construction and land development loans, so.

Okay, thanks for your thoughts.

You bet.

And we will take our next question from Brett Rabatin. Please go ahead.

Hello, good morning, Mick.

Hi, Brett.

Wanted to ask a housekeeping issue on the service charges this quarter. You usually do have fairly strong service charge growth in 3Q and then typically an abatement somewhat in the fourth quarter. Is that something you expect this year as well, and then can you give a little color on Reg E and give us an update on that?

You bet. We haven't disclosed the actual numbers, but our overall opt-in was in the top quartile. And again, we've got the number where we ended, but some of our banks were approaching the top decile, other banks didn't quite have those kinds of numbers. But overall, we were very, very pleased. But with that said, there was nothing in that requirement that was a positive. It wasn't as if, unless you had 100% opt-in, you can say whatever you want about how great it was, and I believe our banks did a fabulous job. They truly did. And all of that -- but really, at the end of the day, all that did is it reduced the pain that you would have otherwise experienced on the fee income front.

What I did is I looked at this quarter, and you're right, Brett, this is always a good quarter, because it incorporates July, August too is are the highest tourist months. Tourism was very, very good around our region. The two national parks had fabulous years. You could just see there was a lot of tourist dollars being spent. But I also went back to last year where we also had very good years, and I compared our revenue this year with last year's revenue, we were still up. So, I think that the banks continued to do a good job. They did a great job with opt-in, we didn't see the falloff that I think many expected coming into the quarter or at the end of last quarter. And we're doing everything we can, Brett, to make sure that it's less and less of a non-event.

Okay. And then I wanted to make sure I understood correctly, Mick, your comments regarding the impaired piece of the construction portfolio. And you had mentioned earlier, last quarter you said $30 million was potentially impaired in that land A&D book in particular, and you moved $20 million in non-performing this quarter. Is essentially then the message that the level of impaired loans is essentially reaching its floor as you see it, as we head into the winter selling season?

As we -- and Barry can comment on this, too -- but as we discussed this with all of the banks, I just don't see that many land development and A&D type loans left out there that have not already been identified, have not already been classified, criticized, whatever and are not on our radar screen.

We have been working through that portfolio now for over two years, and that's one of the reasons I think we're feeling just a little more comfortable, is the fact that this category of loan, which has been the -- it's been over half of our issues that we've had to deal with over the last two years, is really starting to show where the problems have been identified, the problems are being addressed, and there's just not that much left out there that could become a problem. I think that's the real issue here, is we just don't see that many more development projects or anything that could even roll into this category. Barry, I'll let you throw your two cents worth in.

Yes, I agree. When we have land development, $81 million in non-performing is -- represents what is total land development --

So, you've got 110ish left, that's accruing and (inaudible)?

So, we've -- on those impaired loans, either we have reserved for the potential offer in almost all cases, we've written those balances down. So, and the other big thing is we've had a couple of years now with new appraisals coming through the cycle, reflecting the new values. And frankly, those appraisal are pretty conservative, and we haven't seen much in the change of -- going -- values decreasing in the last six to eight months like we did a year, year and a half ago versus those values when we came off the highs in 2007.

So, two things. I'd kind of echo what Mick says, the volume isn't there like it was and two, the values have kind of bottomed out. So, given those two factors, we're just anticipating that why we still -- there will still be some loans that come on non-performing status, I think, in this next quarter and next year. We just won't see the volumes we have in the past.

In fact, Brett, as I look through the actual categories and analyze the categories this last quarter, NPAs, you could really go back to one to four-family real estate loans and CNI loans as more of a reason as to why the NPAs were up. And not so much the land development or the resi construction as it's been in the past. But the charges and the credit costs have always centered around those more than the one to four-family.

That's why we don't get quite as concerned when we have to take back a one to four-family home, because it just doesn't seem like the marks, like Barry said earlier, are anywhere near as devastating as what they've been on land development and on other types of A&D properties.

Okay. That's great color. I won't take any more time . If you get a chance, please follow up on the -- I'd like to follow up on the raw land portfolio as well. Thanks, guys.

Thanks, Brett.

And we will take our next question from Brian Zabora. Please go ahead.

Hi, good morning.

Hi, Brian.

Could you give us a sense maybe overall, classified loans, what that's done this quarter versus last?

Hitting on -- we don't disclose classified, but it has basically been relatively stable. It really hasn't changed much in the last quarter.

Okay.

Again, I think the reason here is that we were -- I think the banks were pretty aggressive in going out there and identifying those loans with weaknesses. And as a result, I just don't think there's a lot of new issues that have arose over the last three months that were not earlier already identified, Brian.

Okay. And secondly, you had an auction last quarter, do you plan anything in this upcoming quarter?

No, once again, as I mentioned in my comments, we're entering the fourth quarter. I think and I hope, that we've got some things in the pipeline that could still be kind of exciting for us and help us in this whole area of troubled asset disposition. But as far as a lot of new things coming in the fourth quarter, auctions would just not be a -- wouldn't be much of an alternative until we get into next spring.

We may do some again because, although we didn't like -- I don't think anybody ever does like the actual prices you get in auctions these days, we were -- this latest auction that we went through last month, it pretty much was right on what we had expected. Now, you could say that we've lowered our expectations over the last couple of years, and I am sure we have done that, but boy, this thing was really, really close as to what we thought we would end up. So, yes, that's another avenue, something we'll probably definitely be looking at again next spring. But I doubt if we'll be taking those kinds of actions over the winter months.

Thanks for taking my questions.

You bet, Brian.

And we will take our next question from David King, please go ahead.

Thanks, good morning, everyone.

Hi, David.

Hi. A lot of my questions have been answered. I guess just following up on Brett's question, this -- that $20 million of inflows you had this quarter. Does that then suggest there's only $10 million or so that could come on NPA over the next couple of quarters here?

That's about where we see it. Again, I think we've really circled the wagons pretty good on this portfolio anymore, and it's pretty hard to imagine what else could creep up unless something would just, Dave, come right out of left field, and we just don't see that right now. So -- and there's no guarantee that even that last $10 million would necessarily move.

Right.

But we -- we projected that last quarter, and $20 million of it definitely did come on this quarter. Whether we see the last $10 million or not, hopefully we don't, but I don't see much beyond that.

That's encouraging. And then I guess --

David, David, just let me add to that. And that's predicated on the fact that we're hopefully we're going to see better markets next year and some of this stuff will start to move. In these real estate markets stay as depressed as they are and there's just no buyers out there, yes, we could see a little bit more of that. But as Mick said, we pretty well got everything identified that we think we see.

Thank you. Helpful. And then as far as the dollar amount of loans that went onto OREO this quarter, just wondering what that might be and trying to get a sense of that $6.4 million of fair value marks. What kind of drove that and what kind of severity that was, does that drive that 30% to 40% number higher, lower?

Well, you know, the total -- are you talking about the total $9.7 million, or are you just talking about the $6.4 million piece of the $9.7 million, Dave?

The $6.4 million of the $9.7 million. Just trying to get a sense of how to think about stuff that's moving on to OREO and those kind of marks, and stuff that's in OREO, those kind of marks as opposed to losses on sale.

I think those marks are about the same. Well, actually, we took some -- as Barry said, we took some further writedowns of OREO as we pushed it out the door. Not too many that -- although there was some examples of OREO that didn't get pushed out the door that once again, new appraisals and that warranted us making a further reduction in OREO.

As far as the actual marks go, once again, I'm going to have to almost punt on that, because I don't think we do real good job of tracking each and every one of those as to what kind of a hit we took. Barry, maybe you've got a little bit better sense on that. When it comes to OREO, with the exception of a few credits that maybe have been in there a while that we have taken some further hits, most of that stuff is moving out the door, and I guess I look at it as it's gone and lets move on to the next project. But Barry, do you track any of that on Dave's question?

It's a good question. It's really tough to track because you have three variables, you have time when the OREO came into the distance. How long you hold it, and then you have writedowns if you haven't sold it during the years due to valuation adjustments. And then if you do sell it, you have the net loss on sales. So, it is a lot of moving parts. Generally, if you look at -- we took in, what, 67, I believe it's $67 million in OREO this past year, we ended up with a little over $60 million.

So, it was about net-net, and loss on sales to date is $6.3 million. Now, if you add the $9.7 million in writedowns this year, you're looking at $15 million, $16 million in either writedowns or loss on sale on about a $60 million portfolio.

That's helpful.

So, that will give you number of what is in there. Now, some of that is selling costs and a few other things --

Right.

-- for evaluation. But again, it's -- historically, you can look at those loss rates but really, it is a factor of how aggressive you want to be in liquidating --

And move them out.

-- proper and moving them out. Again, it was hold and hope or sell and suffer. And we have taken the option to hit some middle ground there, depending on the type of property.

One other thing, David, and I'll comment on this too, just to add to what Barry said -- that's been a tough decision for us, probably easier for other companies in the fact that we really didn't have to sell a lot of this stuff. We really have got the capital and that to be able to hold onto this, if we truly wanted to and wait for a better day. I sense -- well, I don't sense, I can just tell you that after a while, these levels start to wear on you to the point where you're just not certain just how soon this market is really going to bounce back and levels are going to come roaring back to where holding this stuff would have really been a really smart strategic decision.

So, that's when you have to start to make some decisions. And it is more difficult for us because clearly, like I've said, we just do not absolutely have to -- we've got the resources, we got the capital to hold this stuff. But it does start to grind on you after a while and if there are properties out there that are -- you just got to sense that they're just not going to get a whole bunch better. We have more recently been much more aggressive in just blowing them out the door and moving on.

Right, makes sense. And then I guess lastly, maybe following up on the M&A question, Mick, understanding it may not be until late next year, before you find some opportunities, I just want to get a sense at to what is driving that outlook. Is it just not having any conversations with banks out there in your markets? Is it there is conversations but they're just not ones that might make sense to your franchise?

We're having conversations, but right now, it still seems to me like the bid-ask spread is just still too wide. I'm not sure that the kinds of companies that we would be interested in have adjusted their expectations to where we think those expectations should be.

Now, that's not to say that a year from now, if the world looks different and the economy is a lot different, maybe you would not be -- maybe you would be more inclined to -- I'm talking about us, to increase what we would be willing to pay. But the numbers that we look at right now versus the numbers that sellers are expecting, still a pretty wide margin there. That -- and then the other thing, Dave, I think is just the overall economy out west here. We're not interested in going outside of this Rocky Mountain region. And I think we're all still sitting back there scratching our heads, wondering just what we would get ourselves into if we took on an M&A deal right now.

Very helpful. Thanks so much, guys.

Thank you.

It appears we have no further questions at this time. I would like to turn the call back over to our presenters for any closing remarks.

Well, again, as I mentioned in my comments, it was a quarter that had -- it was mixed at best. There was some good things that we accomplished this quarter, but there's still definitely some headwinds out there. The margin is going to, I believe going to continue to be a headwind for us. I like some of the things we're seeing on the asset quality front, but yet there's still a lot of work to do there, also.

So, we're going to keep rolling up our sleeves and working through this over the next couple of quarters. But just knowing the strength of the balance sheet, our capital base and our core operating earnings are still very, very strong. So, we have the ability as a Company to bounce back very, very quickly once we start to see some light at the -- or further -- I think we're seeing some right now, but further light at the end of the tunnel on the credit cost side. So, with that, thank you all today for joining us, and have a great weekend, and thanks for your support. Bye, now.

This concludes your teleconference. Thank you for participating, you may now hang up your line and please have a nice day.