Glacier Bancorp Inc (GBCI) 2015 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 is being recorded.

I would now like to hand the conference over to Mick Blodnick, President and CEO of Glacier Bancorp.

Welcome and thank you for joining us today. With me this morning is Randy Chesler, President of Glacier Bank; Ron Copher, our Chief Financial Officer; Barry Johnston, our Chief Credit Administrator; Angela Dose, our Principal Accounting Officer; and Don McCarthy, our Controller.

Yesterday we reported earnings from the third quarter of 2015. For the quarter, we earned net income of $29.6 million. That's an increase of 1%, compared to the $29.3 million earned in last year's quarter. We produced diluted earnings per share for the quarter of $0.39 compared to $0.40 in the prior year's quarter, a decrease of 2.5%.

The quarter's results consisted of only $259,000 of one-time acquisition and conversion-related expenses from the announced transaction with Canon National Bank, as well as a few trailing expenses from the completed platform conversion of Community Bank.

Overall, we were pleased with the performance achieved this past quarter in what is continuing to be a very challenging operating environment for banks. In July, we announced the acquisition of Canon Bank Corporation and its wholly-owned subsidiary, Canon National Bank. With assets of just over $250 million, this marks our initial entry onto the front range of Colorado and should push our total assets by the end of the year to near or right at $9 billion. We are very excited about the opportunities Canon presents in what will now be our largest market.

In addition, we are adding a talented group of individuals, which is the real key to the success of all of our partnerships. We have secured all regulatory approvals and have scheduled the closing of the Canon transaction for October 31.

It was another very strong quarter for organic loan production, although the net increase was not as robust as the first two quarters of the year. We experienced a number of large payoffs during the quarter that offset what was a record quarter for loan production.

We had a nice increase in revenue from net interest income compared to both the prior quarter and the same quarter last year. Most of the benefit came from interest income earned on commercial loans, which posted a gain of 4% from the prior quarter and 13% from last year's third quarter.

Taxes were considerably higher this quarter compared to the prior quarter, due to the lack of new market tax credits. There's definitely some lumpiness on a quarterly basis depending upon when those credits hit. The second quarter had the highest level of credits we earn each year. In addition, the large new market tax credit we expected to book in the third quarter got pushed into the fourth quarter, which further led to the linked-quarter difference in our tax rate.

The positive growth again this quarter was very strong, especially in the non-interest-bearing deposit category. On a linked-quarter basis, non-interest-bearing deposits increased 9% and were up 19% from the same quarter last year. For us, this is probably the high-water mark for transaction deposits for 2015 as we would expect some reduction by year-end.

During the quarter, our investment portfolio increased by 8% as we deployed excess cash that had built up on the balance sheet the prior quarter. We're actively monitoring our cash position to make sure we don't experience a similar buildup in future quarters.

We again generated a solid return on average assets for the quarter of 1.36%. We were also happy with the return on tangible equity of 12.79% that we delivered this quarter; both performance ratios were consistent with what we have produced over the past couple of years.

Loans grew by 6% on an annualized basis in the third quarter and through three quarters increased by 9%. If we exclude the addition of Community Bank earlier this year, organic loan growth is up 7%. Once again, we had one of the best quarters ever in loan production. Unfortunately, paydowns and payoffs were also much higher than normal and masked some of what could've been a much stronger quarter for loans.

Commercial loans again accounted for much of the loan growth. It was also encouraging to see growth in our residential construction portfolio, something we've been talking about and hoping would materialize for some time now. If the housing market continues to gain momentum, we should be able to continue to grow our construction portfolio. Loan demand appears to be holding up for this time of year and we still expect to exceed the goal of 6% organic loan growth that was set for 2015.

At the end of the quarter, investments as a percentage of total assets stood at 36%, up 2% from the previous quarter and unchanged from the prior-year quarter. Two factors led to the increase in investments. The first was our decision to absorb much of the excess cash that had accumulated on our balance sheet the prior quarter. The other factor was the substantial increase in deposits in the most recent quarter that had to be deployed.

During the quarter, the investment portfolio increased by $228 million, the majority of which was in short duration agency securities. We will continue to monitor our liquidity position and, going forward, continue to actively adjust our investment portfolio based on loan demand and deposit growth.

Credit quality was basically unchanged from the prior quarter with slight increases to nonperforming loans and net charge-offs, offset by reductions in early-stage delinquencies and troubled debt restructurings. Our NPAs ended the quarter at 0.97% of total assets, compared to 1.21% a year earlier.

Our banks continue to work at lowering their nonperforming assets; however, we didn't make the progress we hoped for this quarter. And although there's still interest in a couple of our larger distressed credits, so far we have not been able to bring these deals to a final resolution. As a result, I doubt that will now hit our goal of reducing NPAs below $70 million by year-end. Nevertheless, I remain optimistic we can achieve some further decreases in the fourth quarter.

In the current quarter we had net charge-offs of $577,000 compared to net recoveries of $381,000 last quarter. Year-to-date total net charge-offs of $858,000 equates to 2 basis points annualized and continues to run far better than what was expected.

Early-stage delinquencies decreased significantly from the second quarter, but were slightly above the same quarter last year. Nevertheless, delinquencies appear well contained. Our 30- to 89-day past-due loans stood at 0.36% of loans at the end of the quarter, down from 0.59% last quarter and 0.39% for the same quarter last year. I think the bank has continued to do a very good job working and controlling their past-due loans.

Our allowance for loan and lease loss ended the quarter at 2.68%, down from the prior quarter's 2.71%, primarily due to the increase in our loan balance. Our coverage ratio, a percentage of our loan-loss reserve divided by nonperforming loans, was 224% in the current quarter. That compares to 187% in last year's third quarter.

In the most recent quarter we've provisioned $826,000 compared to $282,000 the previous quarter and $360,000 in last year's third quarter. Both loan growth and credit quality trends will continue to dictate the amount of dollars allocated to the loan-loss provision; however, we currently don't see any significant change from the above range.

Moving to the income statement, top-line revenue of $98.9 million increased 2% on a linked-quarter basis and was up 6% from the same quarter last year. Net interest income increased $1.8 million sequentially with contributions coming from both investments and commercial loans. Net interest income increased $3.8 million, or 5%, from the same quarter last year as interest income increased by $4.7 million and interest expense increased by $879,000. The loan portfolio was the catalyst that drove both higher interest income and net interest income versus the same quarter last year.

Due to the lower yield on the investment securities, interest income from this sector of the balance sheet decreased 2% compared to last year's quarter. Interest expense was down slightly from the previous quarter; however, it increased 14% from the prior year, primarily due to the cost associated with our interest-rate swap contracts.

For the quarter, our net interest margin decreased 2 basis points from 3.98% the prior quarter to 3.96% in the most recent quarter. This compares to a net interest margin of 3.99% in last year's third quarter. The decrease in the margin was due to a 3 basis point reduction in our purchase accounting adjustments due to lower discount accretion during the quarter.

In the previous quarter, purchase accounting adjustments contributed 8 basis points to the net interest margin versus 5 basis points in the current quarter. Until interest rates start to move up, we believe our net interest margin will remain range bound with a slight bias downward. With that said, I wish I was more optimistic that interest rates will indeed move up anytime in the near future.

During the quarter the yield on our loan portfolio decreased by 2 basis points to 4.82%, primarily due to the change in the mix of loans. This was partially offset by a 1 basis point reduction in our overall cost of funds, which ended the quarter at 39 basis points. Overall, our total cost of funding continues to benefit from the increased dollars we generate in non-interest-bearing deposits.

The impact on our funding cost of adding $162 million of zero-cost deposits is significant. It helps to stabilize the net interest margin and reduces the pain of this excessively long period of very low interest rates that has had on our earnings. In the current quarter 25% of our liabilities consistent of this deposit type, versus 23% in the prior year quarter.

Non-interest income was unchanged from the prior quarter at $25.8 million as a nice increase in service charge income of $672,000, or 5%, was offset by reductions in mortgage banking fee income of $274,000 and other income of $381,000. The decrease in other income was expected and the result of large incentives that were paid in the second quarter each year, but absent in the third quarter. However, the nationwide slowdown in mortgage originations was more surprising and unexpected.

We did post a 6% increase in non-interest income over the same quarter last year. Once again service charge fee income was up 5%, consistent with the growth we've experienced in our overall customer base. In addition, mortgage origination fees were also 22% higher than last year's quarter.

As we enter the fourth quarter we should see a reduction in service charge income as the tourist season has ended. It will be interesting to see if mortgage volume bounces back this quarter. Mortgage rates are certainly attractive, but the industry is still in the process of implementing TRID. Hopefully, preparing and implementing TRID accounted for some of the slowdown in originations this past quarter and now, going forward, volumes will hopefully improve.

Non-interest expense decreased by 1% compared to the previous quarter and increased 9% from the same quarter last year. New market tax credit expense accounted for a large portion of the decrease on a linked-quarter basis. Unfortunately, the increase to our tax line because of fewer new market tax credits this quarter far outweighed the benefit from lower operating expenses.

Comparing the current quarter to last year's third quarter, compensation and benefits comprised the majority of the increase in operating expenses. The addition of First National Bank of the Rockies plus Community Bank contributed to most of the increase; however, an increase in regulatory and compliance burden has also required us to add staff in those areas as well.

Our efficiency ratio for the quarter was 54%, down 2% from the prior quarter and unchanged from last year's third quarter. On a linked-quarter basis our efficiency ratio benefited from the nice increase in revenues coupled with lower operating expenses.

Although we made progress in the most recent quarter, it now looks like our goal of reducing our efficiency ratio to 53% for 2015 is out of reach, considering that through nine months our efficiency ratio was 55%. I believe until we see a higher interest rate environment measurably moving the efficiency needle downward will be a challenge.

With three quarters of the year in the books, we are right where we thought we would be from an earnings perspective. We're excited to close the Canon National transaction next week and start the integration process. Our core consolidation project, or CCP, is right on schedule and the staffs of all of our banks have been working very hard to complete this important task.

In addition, we have also begun the design work for the Dodd-Frank Act Stress Test, or DFAST, which will be required once we surpass $10 billion in assets, which we believe is most likely to occur sometime in 2017. Completion of CCP is a necessary component in our ability to comply with the DFAST and is scheduled for completion by the end of 2016.

We continue to deliver greater loan growth than what was originally projected and low-cost organic deposit growth has been at historic levels. Fee income so far this year is well above plan and, in spite of a number of costly regulatory initiatives we currently have underway, our emphasis has to be on controlling operating expenses, especially as we grind through this low interest rate environment.

With that said, this past quarter and year to date we have generated positive operating leverage, which continues to be a focus at the Company level and at each of our bank divisions. Overall, we were pleased with third-quarter results. Our performance metrics through three quarters remain solid; now we have to finish strong.

Those are my formal remarks for the third quarter and we will certainly open the lines up for questions.

(Operator Instructions) Matthew Clark, Piper Jaffray.

Good morning, guys. Maybe just first on energy and -- are you seeing anything, any kind of slow down as it relates to the drop in oil prices, whether it be coming down from Canada in housing or --? Just wanted to get an update on that front.

That is a great question, Matthew, and obviously any impact we would see would be on a second derivative basis, because we're just not -- the latest energy boom that was experienced in western North Dakota, eastern Montana really didn't impact us much. As I think we've mentioned in prior quarters, obviously we had much more of an impact about seven or eight years ago with the slowdown and the drop in natural gas prices down in southwest Wyoming, but obviously that's been something that we worked through years ago.

I think there's still some service work that we are seeing slowdowns in. Again, we are not a big -- we don't have a lot of service work business either, but we certainly are hearing anecdotally that there's a slowdown in that area.

Your question, though, regarding Canada is a more interesting one because it's still difficult. And we haven't seen a lot of numbers yet Matthew, out of Canada. Certainly we know that there's been a slowdown up there and certainly we know it has had an impact.

The amount of that impact on some of our markets down here from either a real estate perspective, a retail perspective, a tourist perspective as we start to come into the ski season, I think that's still yet to be determined as to how great it is. Still see a lot of Canadian cars down here on any given weekend. Whether or not they are spending the same level of dollars, I'm hearing -- again anecdotally -- that that's probably not the case.

But overall from an energy perspective, no, I don't think that it's moving the needle one way or another for us.

Barry, you got anything else to add to that?

No, it would all be secondary. We don't have any direct oil and gas production, so we do have some totals to those service providers that do workover rigs, some back pumps, some construction, but nothing direct. So we feel pretty comfortable with the impact is going to be minimal, if any.

Okay. Then on loan growth into the fourth quarter; I know things tend to slow down for you all in the fourth and first, but it seems like you're still optimistic that you can exceed your full-year guidance of 6% for the year. Can you just talk to the pipeline and what you might be seeing coming into the fourth quarter that might keep you from falling off as much as you might in the past?

I think that volumes are still staying relatively good. I will let Barry comment. He sees it every week, so he lives and breathes it. But I look at a lot of the numbers coming out of production reports and that and they still seem to be decent.

Now, I think the wildcard again this quarter is going to be payoffs and paydowns. We know we've got one more large credit that that project got sold. There was no financing. Well, there was a little financing needed to the buyer, so we will benefit a little bit but not anything like what we had outstanding.

Now, is that the only one this quarter or are there going to be others like we had in the third quarter where there were a number of large credits that paid off? That's going to be, Matthew, I think the wildcard for us.

Still I think loan production is still, for this time of year -- we have had an incredible fall so far. Weather-wise has not hampered anything in this region of the country. So does that hold through the rest of the quarter? Does the weather hold up? Those are going to be key elements as to what happens to loan production, especially like, as I mentioned in my formal comments, for the first time we had a nice increase in residential construction loans. We certainly like to see that keep moving in that direction.

But we are also well aware of the fact we are entering winter in some of our markets. If that winter is mild, if that winter isn't like -- isn't as harsh as normal, we could fare much, much better.

Barry, what are you seeing as far as --? We are almost a month into the quarter or three weeks into the quarter.

I don't see anything outstanding. We definitely aren't going to have the home runs we had in the first and second quarter; that's a given, especially given the seasonality.

We have a lot of operating lines out there to contractors that are seasonal based. Some agricultural credits, of course. This is traditionally -- the fourth quarter is a time where we see some paydowns on those lines.

And, of course, single-family construction. You can't build houses when you have snow on the ground. It's pretty hard to come out of the ground if -- so that will be key. I'm just hoping that we have something similar to this quarter or a little better, but I won't see anything beyond that.

If we do end up having -- if we can even duplicate --

This quarter.

-- third quarter's net income, which was almost exactly what we did in the fourth quarter of last year -- I think net organic loan growth was $60 million, $65 million versus the $69 million we posted in the third quarter. If we could do that then obviously we are going to be closer to 7.5%, 8% loan growth for the year, which would be terrific and much, much better than what we had projected when the year got started.

And having a large land development loan payoff just isn't going to help.

It's not going to help, no, and that's what that was. It was a large land development loan.

Can you quantify the production in the quarter and the elevated payoffs or paydowns?

We had loan production of $454 million and the loan payoff number was -- I've got it right here. The loan payoff number was $485 million. And the quarter before -- that production number, Matthew, of $554 million was an all-time record for us. The quarter before was a previous record; we did $502 million. But, unfortunately, payoffs in the second quarter were $382 million and payoffs in the third quarter $485 million.

So you can see that, absent that $50 million higher payoff number than what we had, that was exactly why we didn't do what we did in the second quarter. We were down about $50 million in organic loan growth from the second quarter to the third quarter and you could see right there where the numbers were. Payoffs were just way higher.

Okay, I'll step back. Thanks.

Jeff Rulis, D.A. Davidson.

Thanks. Good morning, Mick. On the mortgage outlook, I guess I would like to get your thoughts on in 2016 I guess Mortgage Bankers Association expecting 9% to 10% decline in originations. I guess as you see your platform, can you -- is your experience -- do you think that will be different if you've got lines in the water? Maybe just kind of comment on what you think for mortgage for 2016.

You know, that is interesting you ask that question because, Jeff, we were looking at what we had done -- and we were surprised because as the quarter started to develop I think --. When we were talking at the end of the second quarter if anyone would've asked me, I would've felt that our third-quarter mortgage origination volume would've been as good and probably better than what we did in the second quarter. I mean weather-wise, everything. The pace of how things happen around our six states, it just tended -- in my estimation it tended to lead to a higher number.

Well, as we started getting in towards the end of August, first part of September, I'm seeing that that volume is not there. And at the end of the quarter we sized up where we were at and our mortgage origination volume is down about 8%. Now, if there's any good news to that our fee income on mortgage origination was only down 6%, but that's not a lot of comfort when it's still down from where we were hoping it would be higher and a better number.

But then about a week or two ago I saw where nationally the mortgage bankers commented that in the third quarter mortgage originations in this country were down 8%. Absolutely right on top of where we were. So I sat back and I thought, wow, that's kind of interesting that they are exactly where we ended up.

Now that gets back to your question. If Mortgage Bankers Association is looking at a 9% to 10% drop next year, well, be hard to argue that we're going to differ -- we're going to be too different from that. I keep thinking that home building for sure, housing starts, are finally starting to gain some traction.

I mean you got first-time homebuyers. You got the Millennials. You got some of these people that we keep reading about who -- you got high rents. You got some of these motivations for these groups to maybe start to reconsider renting versus homeownership. I've got two kids myself that are thinking about that as we speak.

So I don't know; I guess I'm hoping that if housing continues to gain a little traction that maybe that kind of a decline would not be there. But I really don't have too much else right now that would tell me or indicate to me that we are going to move considerably away from what the national averages are projected to be. Does that kind of answer the question?

Yes, I was just trying to get a feel for if you think your market or your platform is poised for any different experience and I guess that answers it. So appreciate it.

Not as we see them today, no.

Got you. Maybe one other one just on the use of cash and the deployment into securities. I guess you mentioned deposits up kind of drove part of that decision. I guess as you look out, is any a part of that decision also monitoring the rate world and thinking that if we are at lower rates for longer; was any part of that decision let's get some cash to work here because things look more bleak perhaps? Was that any part of the decision?

No, no, I think the only decision that we made this quarter was we -- once again, after two really strong quarters for loan growth, we probably in the second quarter delayed from doing much with both the amortization that came off of our investment portfolio in the second quarter. We didn't really redeploy that amortization because we are still seeing -- we are trying to feel our way around, Jeff, what was happening on the loan side.

But then this quarter that was compounded by this huge growth in DDA accounts and to leave that in Fed funds just didn't make any sense to us. And I don't think it was so much us trying to make a rate call, it was more that let's just keep it short obviously. Because if we were making a rate call and feeling that rates were going to stay down lower for longer, maybe we would've extended some of these investments out longer.

We didn't do that, but we just felt compelled to take and move that cash out of something that was generating 20 bps and move it into something that was doing maybe 70, 80, 90 basis points better than that and still keep it safe in agencies and not make any interest rate play.

Okay, thank you.

It will be interesting -- one other comment, Jeff. It's going to be interesting because last year, if you remember, in the fourth quarter we also had a big build up in cash and a lot of that had to do with deposit growth.

Now, you heard my comments earlier this morning that normally the third quarter is the high-water mark for deposits. Tourists start to move away and a lot of things -- deposits and cash gets absorbed to pay down lines and that coming into the end the year, but that was not the case last year. Last year we had a huge buildup in cash.

Now I don't know; are we going to see a replication of what took place last year? Are we going to move back to the historical norms? We don't know yet, so we're going to be tracking that carefully.

The one thing I can tell you, Jeff, is that if we start to see a continual buildup in cash, we're not going to do like we did last year and wait until mid first quarter to deploy it. We are monitoring our cash position every day now and going to try to stay and get ahead of the power curve.

Okay, appreciate it. Thank you.

Joe Morford, RBC Capital.

Thanks, good morning. I guess question on the core consolidation project. Sounds like the work there is on track. Is the first conversion still scheduled for the first quarter and is there any change to the thoughts as to how much that project will cost you and/or the timing of these expenses through the year?

No, not really. It is on target. We've had -- this whole week this week we've had Jack Henry in working with all of the teams on the design work for [Gold Bank], which obviously is a key component of the entire CCP project.

Everything is still tracking according to the project plan. Yes, Joe, the first bank is still scheduled for first quarter and so far we are plugging away.

As far as the costs, really no change there from what we've guided to. Most of the costs are going to come in 2016, as we've said previously, and I don't see any real change in the dollar amount.

Now, again, how much of those costs next year get capitalized? I can't speak to that yet, Joe, so we will have to take that as those costs hit. But not really much in the way of anything new or different based on schedule, cost, or timing.

Okay. And you mentioned it being a necessary component for some of the DFAST stuff that you want to do. Does getting this done hold you back at all from some of the things you might want to get going on for your DFAST prep work or --?

No. In fact, Randy's leading the team. He's been there, done it before. He is leading the team to -- that process and some of that design work, Joe, has been started already. So we're kind of right now at the, I'd say, still the early stages deciding exactly who is going to do what, how we're going to do it, when we're going to do it, but I think the plan right now is to start moving forward right now.

And getting that -- obviously CCP, like I said, is a key component to DFAST and our final ability to deliver on that stress test, but we are working on it right now. Again, plan is to kind of make sure that we are prepared and ready before we cross the $10 billion threshold.

Again, remember there are some opportunities -- even when you cross $10 billion you've got to stay over $10 million for four consecutive quarters. Do we cross over and then do something with the balance sheet where we don't stay the next quarter over $10 billion and the clock starts over again? I guess there is some of those -- there is some of that flexibility, Joe, that we have.

But again, as I said, our plan right now is that sometime in 2017 we hit the $10 billion, which means that four consecutive quarters after that would be 2018. Then you've got your submissions and your runs and all this. We plan on being ready long before it's required.

Sounds good. Thanks for the update, Mick.

Matthew Forgotson, Sandler O'Neill.

Good morning, Mick. Just to dig into the expenses a little bit more. Pro forma for Canon, my back of the envelope says your run rate comes up to about $61 million per quarter. If we utilize that as a base, Mick, as you think through 2016 and moving CCP into the implementation phase, do you think the build off of that level is mid single digit or higher?

I don't have those numbers in front of me. We have been running those -- as I said in my remarks, if you look at operating expense, we are up 9% over the same time last year. That added two additions to the Company that were asset-wise probably about double what Canon is going to be bringing to the table this time around.

But then you've got all the other things like you just said: CCP, the early work on DFAST, and some of these. So, yes, I think a mid to high single digits would be something that -- I'm somewhat just speculating, Matthew. I'd have to really drill down. We haven't started the budgeting process for 2016 yet. I would certainly have a much better handle on that question come December, but if history tells us anything, yes. I would say probably high single-digits is what I'd probably -- you could guide to.

Okay, in terms of margin, it sounds like most of the rotation is done. Deposit inflows are still a wild card, but as you think through just the core dynamics of the margin, just kind of holding the balance sheet steady, where might the margins drop in your mind?

Well, we talked about that last week and our broad-based goal for 2016 is to have a margin of somewhere between 3.75% and 4%. That's kind of a wide swath, I understand and we certainly don't see any reason why we would ever approach the lower end of that range.

But, as I said, there's still a bias to -- we look at our brand-new loan production at the margin and that loan production is still coming in at lower yields than our legacy portfolio. So I mean we are not at an inflection point there where our new loans are at or above our legacy portfolio. They are still down below that.

So that continues to, just like this quarter, put a couple of basis point pressure on loan yields. Can we continue to grow deposits? Probably not at the level we did this quarter, but as we get more and more zero cost DDA accounts, that certainly helps offset some of that.

From a purchase accounting perspective, don't know. Don't expect that discount accretions in that are going to be at the same level with Canyon as they were in some of the other deals we've done here over the last three years, so don't think that that's going to make as much of an impact as what we've seen.

So I don't know, you look at where we were last year, we were at 3.99% in the third quarter. We are at 3.96%. My guess would be that if I went back to the 3.99%, purchase accounting adjustments played a bigger role back in that quarter than they did this quarter, so you can attribute it to did our core margin move all that much? Probably not. Maybe it even actually went up a little bit, but the purchase accounting adjustments are certainly less this quarter than they were four quarters ago is my guess. I haven't looked at that number, but my guess is it probably is.

So, overall, we have been very pleased at the stability of the margin, but there's still -- in this rate environment there still is that constant pressure, especially on loan yields.

I will just wrap up with a question on M&A. What are you seeing and what are you hearing, what's the chatter like, Mick?

Well, it was interesting. As many of you know, at the last call I said that it was kind of a steady -- nothing like we saw maybe 12 or 18 months ago when it seemed like deals were coming at us left and right. But then during the quarter, this third quarter, we started to experience that where a lot of things were being presented to us.

Now over the last couple of weeks I think that has kind of slowed down again, but with that said, there's been some, in our minds, some very interesting things presented. Whether they get done or not, don't know. We're closing Canon next Saturday, looking forward to having that entire bank join and be added to the Bank of the San Juans next year when we get the conversion in that done.

Couple of other things we're looking at are again really interesting, just can't speak, Matthew, as to whether we get them done or not. But I'd say that overall activity wise it's been pretty good; it really has been. And it has certainly been -- it's some of the transactions that really have some real appeal, rather than just probably not interested. Getting a lot of inquiries, but just really not interested in that.

Thank you very much.

Jacque Chimera, KBW.

Good morning. A question on the loan payoffs in the quarter. I know you mentioned you had the large land development. Was there any other unusual payoff activity that took place?

Let me clarify that, Jackie. The large land development is in this quarter.

Oh, it's in 4Q, okay.

In 4Q. The ones -- the large credits that paid off were not land development loans. They were operating businesses that got sold, and there was a couple of, like we said earlier, a couple of large ones. But that did not -- that quarter did not include the large land development loan; that's a fourth-quarter event.

Okay. So the payoffs in the current quarter, it wasn't a tick up in refinancing away to competitors; it was just ongoing healthy loans?

No, it was not. Both businesses, one of them a wealthy individual came and bought the business; didn't need financing at all to buy that one. Another one, a large company came and bought the company. They obviously don't finance with local banks; didn't need our services there either.

So, yes, in the case of the two that readily come to mind -- there could have been some smaller ones, but two of the large ones that we saw, Jackie, last quarter it wasn't a matter of somebody refinanced them away from us. That was not the case. We didn't -- to be quite honest I can't really remember us, Barry, losing many credits at all from that perspective in the third quarter, as far as somebody stealing a credit away from us.

There probably is a couple small ones maybe, but nothing that reached -- nothing, Jackie, that reached my desk or anything like that. Barry, you got anything?

I didn't see anything either, Mick, so pretty fortunate there. Now we had to reprice a couple loans to keep them, but we didn't lose anything.

And even this one in the fourth quarter, Jackie, is one that we're still going to do the deal. They just don't need the same amount of money that we had outstanding.

Okay, that's really helpful. Thank you.

My next question, I know you have the deal closing next week. Do you have the conversion scheduled for that yet?

We do. We are going to be converting Canon in April.

Okay, so most cost savings -- you should have a good run rate in 3Q then?

Yes, yes.

Okay.

By third quarter of next year we should. And we're going to just hold off; Canon is going to become part of Bank of the San Juans, but we're not going to -- until conversion in April we're not going to really change names or anything like that. We've gotten all the approval to kind of keep things as it is for the next six months. And then once we go through the formal conversion, we will at that time convert all the collateral materials, name and everything like that, to Bank of the San Juans.

Then just lastly, I wondered if you could give an update on what the fire impact was in your markets and if that impacted operations at all.

The worst fire impact was certainly in north-central Washington, again for the second year in a row. I'd like to say it wasn't the case, but there was certainly houses lost in that region. There was a couple of large operations, food producers, that lost some buildings that were pretty devastating. But everything, obviously everything is insured; everything is going to be rebuilt.

From our perspective we certainly haven't seen -- knock on wood -- we haven't really seen anything that has impacted us dramatically. I think just the economy in those areas had to deal with a month of some horrific fires. Again, your heart goes out for some of the people that lost homes and probably things were much more devastating on an individual basis.

It doesn't appear as though the fire -- even though it was more acres burned this year than last, I think the location of the fires this year that swept through a few of the communities in 2014 reeked more havoc than it did this year.

Obviously where we are headquartered in Lake Chelan, it got close that Friday, August 15, 16, whatever the day was. Man, I mean it was right there at the edge of the city, but they kept it out of Lake Chelan and so I think, for the most part, there was certainly some second homes and permanent homes up and down, especially the south shore of the lake, that were lost. But it could've been a lot worse considering just how absolutely dry it was.

The other part about that whole part of the country is the fires just don't really tend to have a major impact on the orchards. They may scorch some trees at the edges of the orchards, but those are all irrigated and they've got tons of water that they could put and poured to those. The good news is that any of the -- most of the growers really just don't lose much and haven't lost much the last two years.

Okay, thank you for the update, Mick. That's very helpful, I appreciate it.

Jennifer Demba, SunTrust.

Thank you, good morning. A question back on M&A. Mick, any interest in larger transactions now that you are at least coming close to the $10 billion asset mark?

You know, as I've said before, Jennifer, it's not so much that we wouldn't look at -- and I guess larger is relative. Larger from the $200 million to $300 million that we've been doing I guess could mean $500 million or $1 billion or --. I don't know exactly where you would quantify larger for us, because we have been in this specific asset range over the last three years. And the last five deals have been anywhere between $200 million and $350 million, so we've been in a tight range.

Would we look at deals larger? Certainly. Unfortunately, there's just not a lot of really large deals, but there's definitely banks that are $500 million, $1 billion, $1.2 billion; certainly in those ranges. And, yes, we would look at those if the opportunities presented themselves.

However, with that said, it just seems like there's still a tremendous amount of stress and pressure on smaller community banks. And for what we have been seeing that seems to be the asset range where there appears to be the most interest in partnering with us. If we look at our six states, we still have just under 350 financial institutions in the six states we operate within, but a large, large majority, Jennifer, are banks in that $100 million, $200 million, $300 million, $400 million asset range. You just don't have a lot of banks in this region of the country that are $1 billion, $2 billion, $3 billion in asset size.

As you've heard me say many times, we play the hand we are dealt and in our region of the country it just tends to be these smaller banks. But that would not preclude us from looking at something larger. And you're right; at $9 billion or soon to be $9 billion, we could certainly do $1 billion or $1.5 billion acquisition. It wouldn't -- from a percentage basis, it certainly wouldn't be out of character. It would be out of character, because we haven't done it, but it certainly wouldn't be out of the realm of possibility. We could certainly do that.

I think it's going to be a function of who is interested. Seems like right now it's more the smaller banks that have an interest in partnering with us, but we will look at any interest that another bank would show.

Thank you.

(Operator Instructions) Tim Coffey, FIG Partners.

Thanks. Morning, Mick. You have had a great job -- done a great job of reducing the land-related nonaccruals the past four quarters. I've heard the comments you've made already about what you are seeing going forward, but do you see any kind of opportunity to bring that down even more?

You're right; we did comment that it's going to come down in the fourth quarter, more than likely. Simply because there is one large credit out there that is going to go away.

I don't know; we are certainly still I guess the best way I'd describe it is we are still hesitant get back into that market. Now I could probably, Tim, make a case that in a few markets around our six to eight footprint that the inventory of developed lots is down to where they are struggling to find lots for builders. Bozeman proper would be a good example of that.

We're starting to hear the builders in that Coeur d'Alene market and in Boise proper -- now I'm not talking about 10 miles out, Tim, or anything like that, but in some of these confined closer-in markets that that inventory has been absorbed. But then you go to other markets like right up here is Kalispell; we certainly have not come close to absorbing all of the lots that are available.

So it's kind of right now a market-by-market phenomenon. I don't see a lot, Barry, of -- we know the one. I'm not sure if we're going to see any other large paydowns in the land development area, none that I'm aware of, Tim, right now. Certainly I think every quarter that goes by we are still continuing to sell lots in some of these projects.

And some of the projects we own them. We are making a little bit of progress quarter by quarter by selling some of our own OREO inventory. Are you aware, Barry, of anything else that would move that land development number one way or another?

We just have the one thing in the Missoula market that would be a restructure of a low-quality asset that might move about $3 million, $3.5 million. If we do anything new, it's usually an existing relationship that has fared fairly well that they might be completing a later phase of an existing project. I don't see us entertaining any new requests, especially in a soft market.

Maybe something in one of the more robust markets, but probably wouldn't be taking the actual development as collateral. In a lot of cases there's some developers that have outside assets that we'd probably use this collateral versus some kind of block development or spec land play. But for the most part I think our totals probably definitely will go down because we have a large payoff coming and probably will have some just lot sales in the existing developments that we do have and then we'll have some payoffs from some low-quality assets that we are carrying.

So I guess bottom line, Tim, is I wouldn't think that that number is going to move up anytime soon. Probably not going to move down materially after this one transaction is done.

Okay. All right, that's helpful. Thank you. Then you did make some comments about the desire to hold down expenses this next quarter. Do you have anything specific in mind?

No, we just -- it's just going to be continuing to work with each of the 13 bank presidents to make any kind of headway on the operating expense side that we can. Sometimes -- it's getting a little tougher and tougher. It seems like every quarter there's some new regulatory initiative, some new compliance initiative, some kind of risk management initiative that has to be taken care of. And this stuff, it doesn't generate much in the way of revenue but it's certainly generates some expenses.

I don't know what the answer to that piece is. I think all of our banks do a nice job of trying to hold down the expenses that they absolutely control, but you just find, Tim, that more and more these days there's expenses that you just have to allocate dollars and resources to in order to stay compliant.

Okay. Again, so I'm clear on this one; do you expect any kind of significant unusual impact to performance due to either the onset of winter or just the seasonal slowdown in tourism?

No, I think that our fee income, which has been very strong especially on the service fee side, that will go down. I mean it always does in the fourth and first quarter. We've said this for years that our two best quarters for fee income coming off of the deposit and the customer side of the business is always stronger in those second and third quarters. So, yes, we should and we expect to see some slowdown there.

If we have winter we will see a slowdown in mortgage originations, too. So non-interest income will be one where it may not be quite as frothy as what we've seen over the last couple of quarters.

From a net interest income perspective, I wouldn't think that we would see anything measurable. Can we continue to grow our loan portfolio? That will certainly help. We probably will again more actively manage that investment portfolio and make sure that we don't see any kind of build up in cash. So that could kind of help going forward.

But aside from that, I don't see anything major that's going to move the needle one way or another.

Okay, that was it for me. Appreciate them. Thanks for the help.

Thank you. That concludes our question-and-answer session for today. I would like to turn the conference back over to management for any closing comments.

Well, thank you all very much for joining us today and make sure you all have a great weekend. We'll look forward to again putting the fourth quarter together for this company and hoping -- like I said, our intent is to finish strong. We are excited we've got Canon coming on. I think it's going to be a great addition to the Company.

Again, as Barry said, let's hope that if we don't see a harsh winter this year we can keep the loan pipeline moving at an above-average pace. With that, thank you all for joining us this morning and again have a great weekend. Bye now.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.