Glacier Bancorp, Inc. (GBCI) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Glacier Bancorp’s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct the question-and-answer session and instructions will be given at that time. [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. Please go ahead.

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 for 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 Cañon 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 and what is continuing to be a very challenging operating environment for banks. In July, we announced the acquisition of Cañon 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’re very excited about the opportunities Cañon presents and what will now be our largest market. In addition, we’re 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 schedule the closing of the Cañon transaction for October 31st. 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 is definitely some lumpiness on a quarterly basis depending upon when those credits hit. The second quarter has 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. Deposit 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 build-up 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 pay-downs and pay-off were also much higher than normal and mask some of what could have 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 have been talking about and hoping will 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 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 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 light increases to non-performing 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 the non-performing assets. However, we didn’t make the progress we hoped for this quarter. And although there is still interest in a couple of our larger distress credits, so far we have not been able to bring these details to a final resolution. As a result, I doubt that we 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 decrease significant 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 loan 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 banks continue to do a very good job working and controlling their past due loan. 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 non-performing loans was 224% in the current quarter that compares to 187% in last year’s third quarter. In the most recent quarter we provisioned $826,000 compared to $282,000 in 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 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 our interest rate start to move up, we believe our net interest margin will remain range bound with a slight biased downward. With that said, I wish I was more optimistic that interest rates will indeed move up any time 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 consist of this deposit time 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 the 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 the 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 thrift. Hopefully preparing and implementing thrift 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 out way the benefits from lower operating expenses. Comparing the third quarter, the last year’s third quarter compensation and benefits comprised the majority of the increase in operating expenses, the addition of First National Bank of 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’re right where we thought we would be from an earnings perspective. We’re excited to close the Cañon National transaction next week and start the integration process. Our core consolidation project for CCP is right on schedule and the staff of all of our banks have been working very hard to complete this important task. In addition, we’ve also begun the design work for the Dodd-Frank Act Stress Test or D-FAS, 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 D-FAS and is scheduled for completion by the end of 2016. We continue to deliver greater loan growth and what was originally projected and low cost organic deposit growth has been at historic levels. Fee income so far this year is well above planned 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 in 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. And those are my formal remarks for the third quarter and we’ll certainly open the lines up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Clark from Piper Jaffray.

Hey, good morning guys.

Hi, Matthew

Maybe just first on maybe energy and any -- are you seeing anything any kind of slowdown as it relates to the drop in oil prices, whether it’d be coming out from Canada in housing or just want to get an update on that front?

That’s great question, Matthew. And obviously any impact we would see would be on second derivative basis, because we’re just not the latest energy boom that was experienced in Western, [indiscernible] 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 slowdown and the drop in natural gas prices down in Southwest Wyoming, but obviously that’s been something that we work through years ago. I think there is still some service work that we’re seeing a slowdown in, again we’re not a big -- we don’t have a lot of service excuse me, we don’t have a lot of service work business either, but we certainly are hearing anecdotally that there is a slowdown in that area. Your question though regarding Canada is and more interesting one because it’s still difficult and we haven’t seen a lot of numbers yet Matthew come out of Canada. Certainly we know that there has been a slowdown out 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 perhaps still yet to be determined is to how great it is. Still see a lot of Canadian cars down here on any given weekend. Whether or not they’re spending the same level of dollars I am hearing again anecdotally that that’s probably not the case. So -- but overall, from an energy perspective no I don’t think that it’s moving the needle one way or another for us. Barry do you have 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 work over rigs some [indiscernible] some construction but nothing direct. So we feel pretty comfortable that the impact is going to be minimal with this.

Okay. And then on loan growth into the fourth quarter, I know things tend to slowdown 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 it from falling off as much as you might in the past?

Yeah I mean I think that volumes are still staying relatively good let Barry comment he sees it every week. So he lives and breathes it. But I look at the lot of numbers coming out of production reports now and they still seem to be decent. Now I think the wild card again this quarter is going to be payoffs and paydowns. I mean 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 buyers so we’ll benefit a little bit, but not anything like what we had outstanding. Now is that the only one this quarter or there are going to be others like we had in the third quarter where there were a number large credits that paid off. That’s going to be Matthew I think the wild card for us. Still I think loan production is still for this of the year we’ve had an incredible fall so far. I mean weather wise has not hampered anything in this region of the country. So does that whole 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’d 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 market. So if that winter is mild, if that is winter isn’t like isn’t harsh as normal we could fair much, much better. So Barry what are you seeing I mean as far as we are almost a month into the quarter a three weeks into the quarter.

Yeah I don’t see anything outstanding, we definitely are going to have the home runs we had in the first and second quarter. So that’s especially given the seasonally, we have a lot of operating lines out there the contractors that are seasonal based some agricultural credits of course support this is traditionally the fourth quarter is a time where we see some paydowns on those lines. And of course single family construction they can’t build houses when it’s -- when you have snow on the ground, it is pretty hard to come out of the ground. So that will be kind to key,, I am just hoping that we have something similar to this quarter or a little better, but I don’t see anything beyond that.

And if we do end up having -- if we can even duplicate third quarter’s net income, which was almost exactly what we did in the fourth quarter of last year I think our 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 closure 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.

Yeah and having a large land development loan payoff just isn’t going to help.

That’s not going to help, no. And that’s what that was it was a large land development.

Can you quantify the production in the quarter and elevated payoffs or pay-down?

Yeah, we had loan production of $454 million and the loan payoff number was $300 million I’ve got it right here, the loan payoff number was $485 million and the quarter before that was that production number Matthew of $545 million was an all-time record for us the quarter before was previous record we did $502 million. But unfortunately payoffs in the second quarter were $382 million and payoffs in the third quarter were $485,000 or $485 million. So, you can that absent $15 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 can see right there where the numbers were I mean payoffs were just way higher.

Okay, I will step back. Thanks.

Thank you. And our next question is from the line of Jeff Rulis from D. A. Davidson.

Thanks. Good morning, Mick.

Hi, Jeff.

On the mortgage outlook I guess I would like to get your thoughts on in ‘16 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 got lines in the water, maybe just comment on what you think for mortgage for ‘16?

That’s interesting you asked 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 have asked me I would have felt that our third quarter mortgage origination volume would have 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 six states and just tended in my estimation it tended the lead to a higher number. Once 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 was down about 8%. Now, if there is 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 what we was -- 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 at. So I mean I sat back and I thought wow that’s going to be interesting that they’re exactly where we ended up. So now that gets back to your question, so if Mortgage Bankers Association is looking at a 9% to 10% drop next year, well, I would be hard to argue that we are going to differ… we are going to be too different from that. I keep thinking that home building for sure home housing starts are finally starting to gain some traction. I mean you got first time home buyers, you got the millennials, you got some of these people that we keep reading about who you got high ramps, you got some of these motivations for these groups to maybe start to reconsider renting versus home ownership. I’ve got two kids myself that are thinking about that as we speak. So I don’t know, I mean, 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?

Yeah, 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. Appreciate it.

Not as we stand 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 that part of that decision. I guess as you look out, is any part of that decision also monitoring kind of the rate world and thinking that if we’re 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 in any part of the decision?

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 redeployed that amortization, because we were still 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 of the -- 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 have extended some of these investment 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 deploy.

Okay, thank you.

It would 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 buildup in cash. And a lot of that had to do with deposit growth. Now you heard my comment earlier this morning that normally the third quarter is high water mark for deposits. Tourists start to move away and lot of things, deposits and cash gets absorbed the pay down lines in that coming into the end of the year, but that was not the case last year, last year we had a huge build up in cash. Now I don’t know, are we going to see replication of what took place last year or we’re going to move back to the historical norms, we don’t know yet. So we’re going to be cracking 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 wait until mid-first quarter to deploy it. We’re monitoring our cash position everyday now and going to try to stay and get ahead of the power curve.

Okay, appreciate it thank you.

You bet.

Thank you. And our next question comes from the line of Joe Morford from RBC Capital. Sir, your line is open.

Thanks good morning.

Hi, Joe.

Hey, I guess question on the core consolidation projects, it sounds like the work there is on track. So first conversion still scheduled for the first quarter and is there any change to the thoughts as to how much of 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’re plugging away. As far as the cost, really no change there from what we’ve guided to most of the costs are going to come in ‘16 as we’ve said previously. And I don’t see any real change in the dollar amount. Now again how much of those cost next year get capitalized I can’t speak to that yet Joe. So we’ll have to take that as those costs hit. But not really much in the way of anything new or different based on scheduled cost or timing.

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

No, in fact Randy is leading team and he has been there done it before he is leading the team to that process. And some of that design work Joe is been started already. So we’re kind of right now at the – I’d say still the early stages of deciding exactly who is going to do what, how we’re going do it, where 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 D-FAS and our final ability to deliver on that stress test. But we’re 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. And again remember, there are some opportunities even when cross $10 billion you got to stay over $10 billion for four consecutive quarters, do we crossover 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 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 that Mick.

You bet, Joe.

Thank you. And our next question comes from the line of Matthew Forgotson from Sandler O'Neill.

Hi, good morning Mick.

Hi, Matthew.

So just to dig into the expenses a little bit more, if pro forma for Cañon my back of the envelop says your run rate comes up to that $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 and we’ve been running a little -- as I said in my remarks if you look at the operating expense we’re up 9% over the same time last year, that added two additions to the company that were asset wise probably about double what Cañon 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 D-FAS and some of these. So yeah, I mean I think a mid to high single-digits would be something that I’m somewhat just speculating Matthew I mean, I’d have to really drill down we haven’t started the budgeting process for ‘16 yet it certainly have a much better handle on that question come December. But if the history tells us anything yes, I’d say probably high single-digits is what you -- what probably you could guide to.

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

Well we talked about that last week and our broad-based goal for ‘16 is to have a margin of somewhere between 3.75% and 4% now that’s kind of a wide swap, 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 -- I mean 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’re not at an inflection point there where our new loans are at or above our legacy portfolio they’re still down below that. So that continues to just like this quarter put a couple of basis points pressure on loan yields. Can we continue to grow deposits probably not at the level we did this quarter. But I mean as we get more and more zero cost DDA account 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 Cañon 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, I mean you look at where we were last year we were at 3.99% in the third quarter, we’re 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 I mean we’ve been very pleased at the stability of the margin, but there is still in this rate environment there is still is that constant pressure especially on loan yield.

Okay. And I will just wrap-up with a question on M&A, what are you seeing and what you hear and what’s the chatter like Mick?

It was interesting, as many we know at the last call I said that it was kind of a steady nothing like we saw maybe 12 or 18 months when it seeing like deals were coming out of left to 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’s kind of slow down again, but with that said there has been some in our mind some very interesting things presented whether they get done or not don’t know. We are closing Cañon next Saturday, looking forward to having that entire bank joined be added to the bank of San Juan next year when we get the conversion in that done. Couple of things we are 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. As certainly been and if some of the transaction that really have some real appeal rather than just probably not interested getting a lot of enquiries but just really not interested in that.

Thank you very much.

You bet.

Thank you. And our next question is from the line of Jacquelynne Chimera from KBW.

Hi, good morning Mick. Mick Blodnick Hi, Jacky.

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 Jacky, the large land development is in this quarter.

Oh it’s in 4Q, okay.

In 4Q, the once that the large credits are paid off were not land development loans, they were operating business that got sold. So and there was a couple of like we said earlier couple of large ones. But 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 a way to competitors it was just ongoing healthy loan?

No, it was not. The -- both business is one of them wealthy individual came bought the business didn’t need financing at all we lost that one, another one large company came and bought the company they obviously don’t finance with local banks, didn’t need our services there either. So yeah, in the case of two readily come to mind there could have been some smaller ones the two of the large ones that we saw Jacky last quarter, it wasn’t a matter of somebody refinanced away from us that was not the case. We isn’t -- to be quite honest I can’t really remember us Barry loosing many credits at all from that perspective in the third quarter, I mean as far as somebody stealing a credit away from us I mean there probably is a couple of small ones maybe, but nothing that reached -- nothing Jacky that reached my desk or anything like that. Barry you got anything?

I didn’t see anything either Mick so.

Yeah.

So we are fortunate there now we have reprised a couple loans to keep them, but we didn’t lose anything.

Yeah, so and even this one in the fourth quarter Jacky is one that we are still going to do the deal they just don’t need the same amount of money that we had outstanding.

Okay, really helpful. Thank you. And my next question would be, I know you have the deal closing next week do you have the conversion scheduled for that yet?

We do we're going to be converting Cañon in April.

Okay so more cost saving, you should have a good run rate in 3Q then?

Yes. By third quarter of next year we should and we’re going to just hold off, I mean that in Cañon is going to become part of Bank of the San Juan, 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 approvals to kind a keep things as it is for the next six months. And then once we go through the form of conversion we will at that time convert all the collateral materials' name and everything like that to the Bank of San Juan.

And 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

Not, I mean the worst fire impact was certainly was in North Central Washington again for the second year in a row. Yeah there I’d like to say it wasn’t the case, but there were certainly houses lost in that region. There was a couple of large operations through producers that lost buildings that were pretty devastating, but everything, obviously everything is ensured everything is going to be rebuilt in that. But 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 have to deal with a month of some horrific fires and again heart goes out for some of the people that lost homes. And probably things were much more devastating on an individual basis. Doesn’t appear as though the fire, even though 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, reaped more havoc than it did this year. Obviously we’re headquartered in Lake Chelan. I mean it got closed that Friday August 15th, 16th 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 were certainly some second homes and permitted homes up and down especially the South shore of the Lake that were lost, but it could have been a lot worse considering just how absolutely dry it was. But the other part of 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 orchids, but those are all irrigated and they’ve got tons of water that they can put and pour to those. And 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.

You bet, Jacky.

Thank you. And our next question comes from the line of Jennifer Demba from Suntrust.

Thank you, good morning.

Hi, Jennifer.

Question back on M&A, Mick any interesting larger transactions now that you’re at least coming close to the $10 billion asset mark?

Well as I’ve said before Jennifer it’s not so much that we wouldn’t look at and I guess larger is relative. I mean 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’ve been in this specific asset range over the last three years and the last five deals have been anywhere between $200 million to $350 million. So we’ve been in the tight range. When we look at deals larger certainly, unfortunately there is just not a lot of really large deals. But there is definitely banks that are $500 million, $1 billion, $1.2 billion, certainly those ranges and yes we would look at those if the opportunities presented themselves. However, with that said it just seems like there is still a tremendous amount of stress and pressure on smaller community banks and for what we’ve been seeing that seems to be the asset range where there appears to be the most interest in partners with us. And 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 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. So as you’ve heard me say many times we play the hand we’re dealt in our region of the country just tends to be the smaller banks. But that would not preclude us from looking at something larger and you are right I mean at $9 million or soon to be $9 billion we could certainly do a $1 billion or a $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 since we haven't done, but it certainly wouldn’t be out of the round of possibility, we can certainly do that. So I think it’s going to be a function of who is interested. Seems like right now it’s more of the smaller banks that have an interest in partnering with us. But we’ll look at any interest that another bank would show.

Thank you.

You bet.

Thank you. [Operator Instructions] Our next question comes from the line Time Coffey from FIG Partners.

Thanks. Good morning, Mick.

Good morning, Tim.

You have had done a great job of reducing the land related non-accruals the past four quarter, I have heard the comments you 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’re certainly still I guess very -- the best way to describing is we’re still hesitant to get back into that market. Now I could probably Tim make a case that in a few markets around our six state footprint that the inventory of developed lots is down to where they are struggling to find lots for builders. I mean, Bozeman proper would be a good example of that. We are starting to hear that builders in that Coeur-D-Alene market and in Boise, proper [ph]. I'm not talking about 10 miles out Tim or anything like that. But in some of these confined closer in the markets that inventory has been absorbed. But then you go to other markets like 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 of -- I mean we know the one, I’m not sure if we are going to see any other large pay downs in the land development area, none that I am 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 that we own them, we’re making a little bit of progress quarter-by-quarter by selling some of our own OREO inventory, but 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 request especially in a soft market maybe something in one of the more robust markets that probably wouldn’t be taking the actual development that’s collateral in a lot of cases there are some developers that have outside assets that wouldn’t probably use this collateral versus some kind of lot development or spec land play. But for the most part I think our total [indiscernible] definitely will go down because we have a large payoff coming and probably we’ll have some just lot sales in the existing developments that we do have and then we’ll have some payoffs in some low quality assets that we’re gearing [ph].

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 that’s helpful, thank you. And then you did make some comments about the desire to hold on expenses this next quarter do you have anything specific in mind?

No, I mean 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 I mean 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 the stuff it doesn’t generate much in the way of revenue, but it certainly generate some expenses. And 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 of these days there’s expenses that you just have to allocate dollars and resources to in order to stay compliant.

Okay. And then just again so I am clear on this, do you expect any kind of significant unusual impact to performance due to the onside of winter or just the seasonal slowdown in tourism?

No I mean 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, I mean we’ve said this for years that our two best quarters for fee income coming off of the deposits and the customer side of the business is always stronger in those second and third quarter. So yes we should and we expect to see some slowdown there. We have winter we’ll 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 buildup 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 from me, appreciate it. Thanks for the help.

Thank you, Tim.

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

Okay. Well thank you all very much for joining us today. And make sure you all have a great weekend. And 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’re excited we got Cañon coming on, I think it’s going to be a great addition to the company. And again as Barry said, let’s hope if we don’t see a harsh winter this year we can keep the loan pipeline moving at an above average pace. So 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.