Glacier Bancorp Inc (GBCI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Glacier Bancorp third-quarter earnings conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mick Blodnick. Mick, your line is now open.

Welcome, and thank you for joining us today. With me this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; and Angela Dose, our Principal Accounting Officer.

Last night we reported earnings for the third quarter of 2013. Net income for the quarter was $25.6 million, an increase of 32% compared to the $19.4 million earned in last year's quarter. Diluted earnings per share for the quarter were $0.35. That compares to $0.27 in the prior year's quarter, a 30% increase.

On July 31 we closed the North Cascade Bankshares, Inc. transaction and are excited to have North Cascades Bank as part of the Company. As with First State Bank of Wheatland, we believe both these franchises will bring great things to Glacier Bancorp in the future.

During the quarter, the Company incurred $335,000 in one-time nonrecurring acquisition expenses. In addition, we recorded a loss on the sale of investments of $403,000. This total of $738,000 in expenses was the extent of our one-time nonrecurring items recorded during the quarter. We earned a return on assets for the quarter of 1.27% and a return on tangible equity of 12.85%, as our performance ratios continue to improve as they have each quarter so far in 2013.

Looking back on the third quarter, just about everything we track or score moved in a positive direction. It was another strong quarter operationally that produced increased earnings, improved performance metrics, solid balance-sheet growth, a much higher net interest margin, and better credit quality. Loan growth once again surprised to the upside as we produced organically the largest increase in over 5 years.

The last two quarters we have generated a 12% annualized increase in our loan portfolio, excluding the two bank acquisitions. If we include the two new banks, our loans are up 18% since the 1st of the year. In the near term, we don't expect to replicate this level of growth as we enter into what normally is a slower period for generating loans.

Nevertheless, the last two quarters' loan production has been excellent and far exceeded our projections for this year. Although we believe loan growth is likely to slow down in the fourth quarter, the pipeline still has some decent volume that should allow us to maintain some of the momentum we built in the first 9 months of the year.

Top-line revenue growth, primarily our net interest income, increased dramatically on both a linked- and prior-year quarter basis. The significant increase in interest income during the quarter was especially encouraging as premium amortization once again decreased, and the growth in loans the past two quarters, especially commercial loans, both helped to increase interest income from the prior quarter by 12%. Credit quality continued to trend in the right direction as delinquencies, although slightly higher than the previous quarter, remained at a low level.

Non-performing assets and OREO expense also decreased from the previous quarter. During the quarter, we added another quality bank, with a very talented group of individuals and directors, to Glacier Bancorp. North Cascades Bank became our 13th bank division, and, as with First State Bank last quarter, we have already begun the integration process of incorporating them into our Company.

As always, with any acquisition, some noise is created in both our balance sheet and income numbers. For some of the more significant sectors of the financials, I have removed the impact of both new banks' additions in order to give a clearer picture of our performance without the impact of the new banks.

As I stated previously, for the second quarter in a row, we produced terrific loan growth that exceeded our expectations. Our goal for the year was to hopefully increase the size of our loan portfolio by 2%. Through the first 9 months of this year, loans have grown by 6%, excluding the loan portfolios we acquired from the two new banks.

In the third quarter, loans grew by $112 million, or 12% annualized, again, excluding the addition of North Cascades Bank. Most of the gains in loans during the quarter came from commercial real estate, and commercial and industrial loans. In addition, most of the increase in construction lending also came from the commercial area.

Another positive during the quarter was the stabilization in residential construction lending where, for the first time in over 5 years, we saw an increase of 9% for the quarter, to $79 million. We hope this will be the first of many quarters that this category moves higher.

With the addition of North Cascades bank, our ag portfolio also grew an additional 19%, up to $284 million, and has nearly doubled in size since the 1st of the year. With the growth we experienced in ag, and commercial and industrial loans this year, we have done a nice job of diversifying our loan portfolio away from a reliance on real estate. The growth in loans also allowed us to significantly slow down security purchases, especially CMOs, and notably shrink the overall size of the investment portfolio by $402 million during the quarter. The few dollars of securities that we did purchase were in municipals and corporate bonds.

One of our goals at the beginning of the year was to reposition our balance sheet and reduce our dependence on the investment portfolio. I think we have done a good job so far in this area, as investments in the latest quarter end made up 41% of our assets versus 47% in last year's third quarter. Our goal is to further decrease securities as a percent of assets and, over time, move that percentage to a more normal historic range of between 20% and 30% of assets. However, as refinance volume has slowed dramatically, we won't see the same level of decline in the CMO portfolio in the near term that we saw this past quarter.

Non-interest-bearing deposits increased by $85 million, or 7%, during the quarter, once again, excluding the addition of North Cascades Bank. We not only had terrific growth in the balances of these accounts, but the number of new checking-account relationships also exceeded our expectations during the quarter. All of our banks put a lot of hard work and effort into generating and maintaining these core account relationships, and that effort shows up in these results. In addition, as we analyze the growth in our non-interest income the past couple of quarters, much of the credit can be directly attributed to the great number -- the greater number of transaction accounts we have generated and the fee income they produce.

Excluding the impact of North Cascades Bank and wholesale deposits, interest bearing deposits decreased $81 million, or 2%. The decrease was primarily due to a reduction in retail CDs as the current interest rate environment has made it more difficult to maintain these balances, and we continue to see a shift into other, more liquid types of accounts.

Credit quality metrics this quarter were mixed, compared to the prior quarter, as we saw further improvement in non-performing assets and OREO expense but a slight uptick in delinquencies and net charge-offs. Although non-performing assets decreased again this quarter to $125 million, we will probably not achieve the goal we established for ourselves at the beginning of the year of reducing our non-performing assets below $100 million by year end.

NPAs are now down to 1.56% of assets and, although we saw further reduction in NPAs during the quarter, the pace of decline has definitely slowed. Nevertheless, we continue to work these credits hard and believe that we will continue to lower the dollar amount of NPAs the next couple of quarters.

Net charge-offs nearly doubled from the previous quarter, however, remain at a very manageable level of 13 basis points through 9 months of 2013. At this current pace we should end the year far below the amount we thought we would charge off and, at the same time, have recovered a greater amount of past charge-offs than what we expected so far this year. Through September, total charge-offs this year were $9 million with recoveries of $3.8 million, leaving net charge-offs at $5.2 million for the first 9 months of the year.

Other real estate owned expense, which does tend to fluctuate, nonetheless, this past quarter was one of the lowest levels recorded by us since the credit crisis began. OREO expense decreased by $1.9 million in the quarter to $1 million, and year to date we've expensed a total of $4.9 million compared to $15.4 million in the same period last year, or a reduction of 68%. A stronger real estate market has limited the charges and expenses required to move some of the bank-owned properties this year. And, as values continue to improve, we are seeing greater interest in many of these projects and properties. Hopefully this trend will continue, since we still have $37 million of OREO to dispose of.

Early-stage delinquencies ended the quarter at $26.4 million; that is up from $22.1 million the prior quarter. Most of the increase in delinquencies came from the legacy banks, since both of the new banks have very few delinquent loans. I think our delinquencies are [now] at their normal historical range; and don't expect noticeable improvement from these levels.

However, as we enter the winter months, it would not be surprising to see delinquencies rise the next two quarters as seasonal workers and weather factors slow employment and usually cause past dues to increase. Our allowance for loan and lease loss ended the quarter at 3.27%, a reduction from the prior quarter's 3.56%.

The acquisition of the two new banks the past two quarters has resulted in a 33-basis-point reduction in the ALLL due to the accounting treatment which does not allow the loan-loss reserves from these banks to be carried forward after the transactions were closed. In the most recent quarter, we provisioned $1.9 million, slightly less than our net charge-offs of $2 million this quarter. This compares to a loan-loss provision of $1.1 million the prior quarter, and $2.7 million in the prior-year quarter. If credit quality trends continue to improve, we should see loan-loss provisions remain at these lower levels through the rest of 2013 and into 2014.

This quarter we saw substantial improvement to our net interest margin. For the quarter, our net interest margin increased 26 basis points, from 3.3% the prior quarter to 3.56% in the most recent quarter. This was the third consecutive increase to the margin, driven primarily by a shift in earnings assets away from securities and into higher yielding loans and a reduction in premium amortization, which has given a significant boost to the yield on our investment portfolio.

After declining by $1.9 million in the first quarter, we saw premium amortization drop an additional $3 million in the second quarter and $3.2 million in the third quarter. With refinance volumes slowing significantly during the latter quarter, we would expect a corresponding decrease in premium amortization to take place this next quarter. This should set the stage for additional expansion of our net interest margin in the near term. In addition, if we can continue to grow our loan portfolio at a reasonable growth rate, this would also allow our margin to expand further.

During the quarter, the net interest margin benefited by 6 basis points, as a result of the purchase accounting adjustments attributed to the two bank acquisitions. So, as we begin the final quarter of the year, the net interest margin, hopefully, will be one ratio that continues to get better.

The yield on our loan portfolio increased for the first time since March of 2011. For the quarter, the yield on our loan portfolio averaged 5.06%, up 2 basis points from the prior quarter. As we stated last quarter, our expectations were the reduction in loan yields would continue, but at a slower pace.

We were pleased to see an actual increase in loan yields during the quarter and hope this trend continues. Unfortunately, competition for good quality loans remains intense, placing constant pressure on loan yields. And we don't expect that to change much in the foreseeable future.

In addition to the higher loan yields, the margin also benefited from a 2-basis-point decline in funding costs during the quarter. At quarter end, our cost on total paying liabilities was 41 basis points, compared to 43 basis points the prior quarter. If we stay in the current low rate environment, which appears likely, we should see further small reductions in funding costs coming primarily from retail CDs and federal home loan bank borrowings.

One of the main highlights of the quarter was a significant improvement in net interest income. For the quarter, we generated net interest income of $69.5 million. That is an increase of $7.4 million, or 12%, from the previous quarter, and an increase of $7.5 million from the prior year's quarter. This was the second consecutive increase in our net interest income after eight consecutive quarters of decreases. Once again, a combination of loan growth, better investment yields, and lower funding costs all contributed to the vast improvement in net interest income.

A majority of the increase in interest income this quarter came from commercial loans, which gained $4.4 million, and investments, which were up $2.1 million. The growth in our commercial loan portfolio and the reduction in premium amortization were the key drivers for both of these asset categories producing greater interest income. We don't expect this same heightened level of increase again this quarter, but do look for interest income to continue to move higher from here.

Non-interest income increased by $651,000 on a linked-quarter basis, to $23.9 million, and was down $100,000 from the same quarter last year. Excluding the loss on the sale of investments, we had an increase of $1.3 million over the prior quarter and an increase of $300,000 in non-interest income over the year-ago quarter.

Service charge and other fee income were up substantially, increasing by $2.1 million, or 17% during the quarter and more than offset the decrease in fees on sold loans or otherwise our mortgage origination fees, which declined by $451,000. Although we did see a reduction in mortgage origination fees during the quarter, the bigger story, I felt, was the terrific job our banks did in diminishing the impact to our fee income by maintaining a significant portion of the fee income from mortgage originations. With the slowdown in refinance volume this past quarter and to only drop $450,000 in fee income, I thought was exceptional.

As refinances have slowed, the percentage of purchases versus refinance volume has completely flip-flopped since the first quarter. This past quarter, 64% of the dollar volume of mortgage originations came in the form of purchases, with refinances making up 36%. In the first quarter of this year, the percentages were exactly the opposite, with refinances making up 64% and purchases 36%. Our banks continue to work very hard at capturing more and more of this purchase volume, and their success was evident in this past quarter. Nevertheless, we still expect further decreases in mortgage origination income in future quarters, even if we successfully generate more purchase volume.

The increase in service-charge fee income was very encouraging and continues to demonstrate the value we receive from an expanding customer base. In addition, the third quarter is traditionally our best quarter to generate service-charge income, as we benefit from tourists visiting our markets as well as more activity among our own customer base.

We continue to do a good job of controlling our non-interest expenses. Our expenses increased by $1.9 million from the prior quarter, but only $190,000 from the prior-year quarter, with compensation and benefits as a result of the acquisitions accounting for all of the increase.

The most recent quarter benefited from a decrease in OREO expense of $1.9 million and $5.3 million when compared to the prior-year quarter, respectively. Our efficiency ratio of 54% was an improvement from both last quarter's 56% ratio and last year's 55% efficiency ratio. Our bank divisions continue to focus on operating as efficiently as possible, and again this quarter, those efforts paid off.

In summary, with one quarter left in 2013, to date we have been very pleased with what we have accomplished, and hope to continue and keep this momentum going into 2014. We have now closed and are in the process of integrating our two new banks. We believe both additions will make significant contributions to the future success of Glacier Bancorp. It was great to see another quarter of surprisingly strong loan production, and the pipeline for this time of year remains encouraging. We think premium amortization could see further declines over the next couple of quarters, which would further enhance our net interest margin and interest revenues.

Overall, it was a very good quarter and one that our people should be very proud of what they have been able to accomplish. And those are the end of my formal remarks, so we will open the lines up for questions.

Thank you.

(Operator Instructions)

Our first question comes the line of Jennifer Demba of SunTrust Robinson Humphrey. Your line is now open.

The margin, you said you think it can go up further in the next one or two quarters as premium amortization comes down. If you look out past fourth and first quarter, do you think that you can hold a relatively stable margin, or will lending competition and loan repricing kind of take over and compress the margin a little bit?

They could. That is a very good analysis. I think that we feel comfortable in the near term, Jennifer, with some of the tail winds coming from premium amortization still and then again, some of the outsized loan growth that we have been able to generate. After that, we still could see even after moving into the second and third quarter, we could see maybe the margin stabilize or maybe even continue to move up a little bit.

You are not going to see the level and size of movement that we have seen the last couple of quarters. But that would be basically predicated on what kind of loan growth we would be seeing at that time, then moving into the middle part of 2014. And if loan growth was still fairly robust and we could continue to decrease the size of our investment portfolio, yes, I think that we could see a margin that would move up a little bit more. But again, not at the kind of steps that we have seen the last two quarters.

Thanks a lot.

You bet.

Thank you. Our next question comes from the line of Brad Milsaps of Sandler O'Neill. Your line is now open.

Mick or Ron, just want to talk little bit about the balance sheet moving forward, kind of get a sense of, what kind of earnings asset base you guys would about over the next few quarters. Obviously, I see that the bond portfolio was down quite a bit from point to point. It looks like cash was up. Just kind of curious what your plans are there, trying to get a sense of kind of the moving pieces there? Would you anticipate earning assets being higher linked quarter, or is this kind of in this range, maybe you get more margin expansion from a better mix?

I think we are probably little bit more range bound, I don't see assets moving up significantly. I think as we have been saying the last couple of quarters, we kind of want to keep our powder dry in the hopes that next year again we can -- we are fortunate enough to do some additional M&A activity. And we just don't know if the loan volume that we are seeing and we have seen the last couple of quarters, what that -- if that is going to be with us again next year as we move into March, April, May. If that is the case -- one thing for sure, Brad, is we are not going to see the reduction in securities going forward that we saw in the third quarter. And that is quite simply because, obviously, prepayments have slowed down significantly throughout this last quarter from what we were experiencing earlier in the year.

So, CMO balances are not declining now at the rate they were back in -- even during the summer. So we are going to have more CMO balances remaining on the books, not removing them, depending upon the amount of loans coming on the books, that would be the driver. If loans really started and kept at a decent pace, we could see some incremental growth in the asset base, because I don't believe you are going to see another $402 million or $403 million in reduction in securities, for sure.

Okay rate. I appreciate the color there. Then on expenses, I appreciate all the detail you gave. I know, with the two banks you acquired being not within your market, cost savings are not as evident, but you always seem to get some. Would we expect to see some of those come through the fourth quarter maybe from the Wheatland deal and then North Cascades maybe in the first part of the year?

No, I don't think you will see them in the fourth quarter on Wheatland. I think it is going to be next year. Obviously some of the big savings are when we actually do the data conversions, and they are not slated until early second quarter with Wheatland and early fourth quarter with North Cascades of next year. So, no, I wouldn't expect -- we are already getting some cost saves, but the major ones, Brad, I would say are going to start to show themselves in 2014. We won't get much of any in the fourth quarter.

Okay. Great. Thank you very much.

You bet.

Thank you. Our next question comes from Joe Morford from RBC Capital Markets. Your line is now open.

I just wanted I guess to follow up on Jen's question on the margin, maybe just get a better sense of expectations in the near-term. What kind of magnitude of increase might we see in the next quarter or two given that it's not just premium amortization and so on, but also the benefits, the tailwinds you've got of reduced funding costs and perhaps stable to higher loan yields, improved earning asset mix? Could it be like what we have seen in the last couple quarters?

I don't think so. You know, I hate to put a figure to it, Joe, we ended the quarter at 356 and as I said, six basis points of that was purchase accounting adjusting, the discount accretion that flowed into the margin. There will definitely be more of that -- we suspect there will be more of that in the fourth quarter, but just to what magnitude, is it going to be another five or six basis points? Probably not. I think it would be a little less than that. Can we count on two or three basis points from the discount accretion? Okay, that would raise it a little bit. Clearly we have got $112 million of additional organic loans on the books that even if you average during the last quarter, that would be, we had $60 million all quarter, a little less, $55 million all quarter long. We will have that much more earning assets in the fourth quarter. That is going to help, because those are much higher yields than the security portfolio.

But one of the things that we saw a pretty significant reduction -- I think premium amortization I know you said Joe excluding -- somewhat excluding that, I think that is going to be one of the drivers in the fourth quarter. I mean because we saw what was taking place during the quarter, and we were tracking July, August, September and obviously, those numbers got better in the tail end of the quarter than they did in the beginning. So we would expect that momentum from premium amortization to carry through into the fourth quarter.

But, I also think that we are not going to see the huge reduction in security volume as I said to Brad earlier, that we saw last quarter. So I think that securities and their lower yields are going to probably going to stay closer to the level. I mean we will see some reduction, but I am just telling you that the cash flow coming off of the CMO portfolio the last couple of months has dropped dramatically.

You remember, all of you remember earlier in the year, we were running at a pace of a little over $200 million in cash flow every month. And I am just here to say in the most recent quarter, the last couple of months, that was less than half of that dollar amount of cash flow. So -- and still slowing down. So I don't think we are going to be reducing the investment portfolio and obviously those yields, although the yields are much better now, too. Because we are not experiencing that kind of premium amortization. Our investment portfolio -- the yields on that investment portfolio have gone up nicely in this last quarter, and we would expect that trend to at least stabilize and at least not drop anymore going forward.

But, the bottom line is putting a number, I hate to put a number on the margin. We can hope that we could add another 10 basis points, 5 basis points for the margin. I think we could probably do 5, can we do 10 again? I don't know. Hopefully we can have this conversation three months from now, and we will surprise everybody, but right now I would not want to go out there and say that you are going to see another 15, 20, 25 basis point increase to the margin. Because I'm just not sure it's there.

Okay. That make sense and a lot of good color there. I appreciate that. I other question is just on the M&A, kind of your current expectations there. We have seen a flurry of activity lately a little further west of you in the Pacific Northwest and just kind of curious what that kind of pace and tone of conversations in your primary markets have been. How optimistic are you on that front?

Well, as I mentioned last quarter, I think we are not limited by the opportunities. We are more limited by our capacity. Right now we want to do a good job of integrating both First State Bank and North Cascades, and we are in the process of doing that right now. And it is going very well, but there is a lot of work to do. There's lots of interest. Again, I don't think as many of you know this, we are not looking for that marquee transformational kind of deal. That is not who we are and that is not what we do.

But there's been a lot of, in our minds, strategic possibilities that those discussions are taking place and I would hope that next year we could have the same kind of success we had this year with First State Bank and North Cascade. And I think the banks that we would be looking at would still be probably in that same asset range. Again, I don't want to disappoint someone that we are out there about ready to announce a $1 billion or $2 billion bank deal, because that is just not us, and that is not who we are, and that is not in the cards I don't believe.

Okay. Thanks very much.

You bet. Thanks, Joe.

Thank you. Our next question comes from Brett Rabatin from Sterne, Agee.

I wanted to go to the mortgage banking, and the decline was pretty minimal. I was just hoping to get a little more color around the originations this quarter, a gain on sale if you have it and just sort of thinking about the production you had in Q3 versus Q2 and how you guys were able to keep that at a high level despite the refis?

Okay. As far as, I don't know if I have got some of those right in front of me. We had a little over $7 million in mortgage origination fee income for the quarter. And as I said earlier, that was down about $450,000 from the prior quarter. So we still generated a little over $7 million. That compares to $8.7 million in the year ago quarter. When I break out the dollar volume of originations, in the most recent quarter we had right at about $286 million in mortgage originations. And that compared to about $292 million the prior quarter. Again, the makeup of -- take the prior quarter, that $292 million, there was $161 million in purchases and $130 million in refis. There was 55%, 45% purchase refi split the quarter before.

As I said earlier in my remarks, purchases were 64% of the $286 million this quarter, or we had $183 million in purchase volume and only $103 million in refinance volume. I would suspect that those --I believe it is not only because we are entering a slower time of the year, Brett, but I think with the uptick in rates, even though I know they have backed off a little bit, we could see those purchase refi numbers move a little bit. Maybe we see a little bit of a surge in refis this quarter, but I still think the $286 million in volume will be down. I just can't tell you how much.

But once again, we were, as I said earlier, we were absolutely pleased because I have been -- I look at what is happening nationally, and the numbers and the fall off in volumes. And for us to only witness about a $6 million, $7 million reduction in overall originations, I thought that was excellent. Again, not expecting us to be able to necessarily hold that in the fourth quarter or even the first quarter of the year, and it is going to be hard to say why. Again, is it interest rate driven? Is it the fact that we are going to enter winter, and things will slow down, not as many people are building, they are not as apt to be looking to buy a second home. But bottom line, our bank, I thought they did a great job on the purchase side, and that is something we have been definitely stressing with them is we have to capture more and more and more of the purchase market. And I think they stepped up and did a fabulous job of doing that this last quarter.

Yes, impressive. I assume you gained some market share there. The other thing I guess I was curious about was just thinking about loan growth that you experienced this year versus kind of your prior earlier guidance, thinking about 2% growth. Can you talk about what's changed relative to earlier in the year. What played out that ended up being better than expected? Is it the economies in your local markets? Have you added some lenders that have helped? Have you -- are there new product lines, CRE, [wise] or what have you that have really aided your growth?

No, I come back to -- there is a couple of reasons, Brett, I think, and I will let Barry comment on -- he is very close to it. I will let him comment also, but I think there is two things that I would like to comment on. Number one, the economies in our markets are good. They are really good. I said last quarter, I said the quarter before, we love operating in the Rocky Mountains. I think that even though we can sit here and complain about competition, and we got competition, I am still not so sure that it is to the level that you see in some other sectors or other parts of the country. The economy has been really sound. I mean we have got a lot of good things going for us and have had all of this year. So I think that has definitely benefited. Tourism for one. We had an incredible year throughout, almost every one of the markets and all of the states that we operate in and as you know, they are all dependent, not dependent, but tourism is a big, big part of what we do. We could not have asked for better attendance numbers at the park. Just the traffic and volume that has been throughout this part of the country. It was excellent. So, the economy definitely had something to do with it, the improvement in tourism, the number of people that were coming to the Rockies for vacations, and that was up significantly.

But, I also really believe that the reorganization that we did last May, in May of 2012, that took all of the back office regulatory and compliance burden off of those banks and allowed those bank Presidents and those Chief Credit Officers and those senior lenders and all the way down through the line lenders, far more time to go out there and generate loans. That is where I really feel we have benefited dramatically, and that was a major reason as to why we have been able to produce the kind of numbers that we have produced. And I have heard this time and time again from our bank Presidents that they did not recognize and realize how much time was being spent on the regulatory and compliance side until a lot of that went away. Then they were able to get back out there. And so many of our Presidents and Chief Credit Officers they are great at developing new business. Some of them are just excellent at getting out in their markets, getting out on the streets in being able to get deals done. And I think that has been a big, big part of why we have been able to far exceed our expectations and our projections that we've laid out for ourselves earlier in the year. Barry, do you have any other comments?

Yes, the other side of it too, I think that is a big part of it, but there is, there is an inlet and an outlet as far as loan totals. One of the things that we have demonstrated in our credit metrics, we just aren't having the pay offs on problem loans, the charge-offs, the transfers, the OREO that we have been having the last three or four years, and pretty much that has come to a slow drip, if you will. So that has helped the balance sheet quite a bit. The other side of it is we haven't offered any new products per se, but we have taken a look at some of the existing ones as far as pricing and terms. And we have started this year being a little more aggressive than we have traditionally. We have looked at some funding options on the other side to minimize some interest rate risk, to go out a little longer on the curves of some of those products.

Between those three or four different events, our loan totals have went up. Now would we expect to see this in the fourth quarter? Probably not, it is traditionally it's been a pretty slow time for us. Historically the first quarter of next year is the same thing. But we anticipate that we are going to keep something reasonable. I don't think we are going to see any loan totals decline this coming quarter, but if we can maintain the status quo, I think we will feel pretty good about it.

Okay. Great. Thanks for all the color.

Thank you. Next question comes the line of jeff Rulis of DA Davidson.

Mick, on the service charges, you mentioned making some internal deposit processing changes. I guess maybe just provide what that was. Good growth this quarter, would it lead to additional growth going forward?

Well, we, as we look at the numbers and service charges, yes, I think as we add more and more customers, again they will slow down a little bit like everything else, Jeff. We won't open and we won't create as many new relationships in the fourth and first quarter as we did these last two quarters. But right now we're in the process, in fact today is the first big day for North Cascades Bank. And they are now on high performance checking. Early indications from Scott Anderson, our President, it is doing really, really doing well over there. We expect when a new bank like that brings on high performance checking, that they are going to do very well over the first couple of years, and we don't see any reason why North Cascades won't actually help our numbers through the fourth quarter. Probably be larger than they otherwise would have been. So we have got that going for us.

Now some of the banks did change some of their pricing and some of their handling of things like overdrafts and how they handle overdrafts and how willing they are to overdraw account. Some of these things we have been trying to standardize the banks to do it all the same way. And I think in that standardization we saw a nice uptick in the income for the quarter, and that's what I think we were alluding to in the press release. But outside of that, that third-quarter where it is such a busy tourism, I mean our ATM volume and our income off of ATMs is always much higher in the third quarter. That will definitely slow down. Our interchange fee income, much greater as people tend to spend money.

Now, interchange is an interesting one, Jeff, as we enter the holidays that is one where we expect to see that at least stay at that level, maybe even increase slightly as people prepare themselves for Thanksgiving and Christmas and New Year's. So, interchange fee income maybe could even be a little bit higher or at least not decline much from where we saw in the third quarter. But it is really all about driving more and more relationships, and the banks have done a fantastic job increasing of their customer counts. Even the banks that have been on HPC for going on 20 years, we are still seeing this year good increases even though they have a significant percentage of market share right now.

So, I think with North Cascades coming on today and starting their program I think that is going to take us through the fourth quarter nicely. First State Bank, in southeast Wyoming, they have been on the program a little bit longer, but they are still relatively new to the program. I think they can still produce some good additions. And then the legacy 11 banks continue to work very, very hard. And some of the legacy banks, some of those original 11 that have been on the system, I am amazed at some of the volumes coming out of Pocatello and Idaho Falls at Citizens Community Bank. Mountain West Bank in Coeur d'Alene is another one that has posted some significant increases coming out of Boise and the Panhandle of Idaho. So even some of the existing banks have posted some really good numbers. So, that is what it's going to be all about. Can we continue to grow the customer base at the level that we have, and I think there is some things out there that even if we see a little slow down here at the end of the year, I still think we will be growing that base.

Sounds good. Thanks Mick.

Jacquelynne Chimera, KBW.

I was wondering if you could touch a little bit on NPAs. I know obviously you continue to see improvement, but we only got the bottom line and the quarter figure on NPLs, and that looked pretty steady. What has been going on as far as inflows, outflows, transfers, REOs, things like that?

You know we actually did have, there has been a couple of -- and there was one larger credit that flowed into NPLs this quarter. That figure was a little over $3 million or right at about $3 million. That was a credit that was no big surprise or anything, but it finally did move into non-performing status. That obviously hurt our numbers a little bit, and that was really one of the few. We have had a couple, though, each quarter, Jacque, that tend to move in and then you have got to not only cover that addition, but try to sell or move other NPLs off of the books so that you see a net reduction.

Barry and myself were talking about this yesterday. I think even though the fourth quarter, well last year's fourth quarter was excellent. I think the fourth quarter historically hasn't been necessarily a great quarter for us to reduce NPLs. I think we are starting to feel a little bit better. There is a few things that are on the table right now that if those get done this quarter, we could, we are not going to -- I'm not trying to tell you that we are going to see some $20 million or $30 million reduction to NPLs, that is not in the cards. But with a little bit of luck, we think we could go from maybe $125 million down to $115 million. If we got below that it would really be a surprise and that would be one of the larger credits or OREO properties that we didn't expect to get done, you know, it did get done. But, I would say that we are going to see continued improvement in that area. Our goal definitely for next year will be to cross below $100 million.

But it does get -- in some respects it gets a little tougher, as I said last quarter, some of the properties in OREO that we own, they are unique, they are single utility. It is going to take the right buyer. Some of the NPLs though, I think that we could see very, some are curing in a few of those next year. That is our hope obviously, but we got all of the low lying fruit got taken care of in 2011 and 2012, and there is no doubt about it, even though we have an improving real estate market, maybe an economy that is improving, at least in our region of the country. It is still some NPLs and some distressed properties that now they are a little bit tougher, a little bit tougher to fix, so, do you have any thoughts?

What happened in the quarter we started NPLs about $89.8 million and we charged off a little over $3.1 million, and then we transferred $3.2 million into OREO so that was about $6.2 million that went out. But we had an increase of about $4.9 million of which $3 million of that was in one relationship. So, we nibbled a little away at it, not as much as we would like, but it is still moving in the right direction.

And just the improvement in the economy and home values, do you think that will keep charge-offs low over the next couple quarters barring some unforeseen circumstance?

Yes, I really do. I think we actually hit the charge-offs pretty hard this quarter. I think we were coming in to our safety and soundness exam. We wanted to make sure that everything that should have been charged off was absolutely charged off at the end of the quarter before we went through the exam. And that was a little bit higher. Like I said it was double what we saw in the second quarter, but I think the banks really tried to clear the decks a little bit when it comes to charge-offs. What has really been -- and this could continue for quite some, quite some time I think, Jacque. and that is that we charged off a lot of loan in 2010, '11 and '12.

And I think the banks did a good job making sure that at some point in time we were going to get some of that money back. And this year so far, $3.8 million in recoveries is pretty good, and I think we are going to see, or I think we got the ability to get more of that in future quarters as far as recoveries. So I am feeling pretty good about net charge-offs. As we said, we have charged of 13 basis points through the first nine months, our goal was to try to get net charge-offs under 50 basis points. I guarantee you we are going to be there. Can we stay under 20 basis points? Well, there is a good shot that we could do that this year.

Okay. Great. Everything else I had has already been covered. Thank you very much.

Our last question comes from Daniel Cardenas of Raymond James. Your line is now open.

Just a quick housekeeping. What was a TDR balance for this quarter?

Barry, TDRs.

Yes.

Accruing or non-accruing?

I can --

We've got both.

Total was $127.767 million and of that $40.917 million was not accrual and $86.850 million was accrual.

On the accruing side, Dan, that was up about $6.4 million from the prior quarter, and I think Barry just said the majority of that was the addition of the new banks.

Yes. The non-accrual actually dropped from $45.4 million down to the $40.9, so that was positive. We had about a $4 million plus decline.

In non-accrual.

Non-accrual TDRs.

Good. That just going back to the margin for a quick second. Are you seeing any competitive pressures starting to emerge on the deposit side of the equation?

Not yet. Really haven't seen anyone going out there and trying to capture longer term funding at all, Dan. Definitely on the short end of the curve, no we really haven't seen much pressure. Obviously the credit unions are always going to be tough competition on the deposit side, and some of our markets and some of our banks experienced much tougher competition from the credit unions than others. That seems to be a market by market phenomenon. But, I haven't seen recently, Dan, where they have gone out and done something different than their past practices of the last couple of years.

And one last question in terms of the average life of your loan portfolio, is that pretty stable, say over the past year or are we seeing an extension?

No, that has been pretty stable. You know, it is kind of interesting that you know even on the commercial side and on some of these AG and commercial and industrial loans that we book, for the most part those were shorter-term credits. So we haven't seen a great deal of extension as we do our asset liability modeling every quarter. That hasn't been much of an issue.

All right. Great. Thanks guys, good quarter.

Thank you.

Thank you, and I am showing no further questions at this time. I would like to turn the call back over to Management for any further remarks.

Okay. Well, thank you all for joining us this morning. Once again, it was a very nice quarter I think from just about every perspective. I thought our banks and our management team here at the holding company did some really nice things. We certainly want to continue this momentum through the end of this year and into the end of 2014. Like I said earlier, I like the economy I like some of the things we are seeing in the Rocky Mountain region that we operate within. So hopefully, this economy will continue to say robust, and we can benefit from that growth and that strength. With that, thank you all for joining us this morning and have a great weekend. Bye now.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may disconnect. Have a great day, everyone.