Glacier Bancorp, Inc. (GBCI) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Glacier Bancorp’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call maybe recorded. I would now like to introduce your host for today's conference Mick Blodnick. 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; Don Chery, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; Angela Dose, our Principal Accounting Officer; and Don McCarthy, our Controller. Yesterday, we reported earnings for the fourth quarter and full year of 2015. For the quarter, we earned net income of $29.5 million. That was an increase of 5% compared to the $28.1 million earned in last year's quarter. We produced diluted earnings per share for the quarter of $0.39 compared to the $0.37 in the prior year's quarter, also an increase of 5%. Earnings for the year were an all-time record $116.1 million, an increase of 3% over the prior year and diluted earnings per share were $1.54 that was an increase of 2% over the previous year. The quarter's results included $658,000 of one-time acquisition and conversion related expenses, primarily from the Cañon National Bank transaction as well as a few trailing expenses from the Community Bank acquisition. Overall, it was another solid quarter and year for our Company. We're very pleased with the performance our Bank Divisions achieved and collectively, we exceeded a number of our goals in what has and continues to be a very challenging operating environment. Our return on average assets for the quarter was a very respective of 1.32%. We were also happy with return on tangible equity of 12.51% we delivered this quarter. For the year, we generated return on average assets of 1.36% and return on tangible equity of 12.71%. Both performance ratios were consistent with what have produced over the past couple of years. Before I get into more detail regarding the balance sheet and the income statement, here are a few highlights from the recent quarter. In July of last year, we announced the acquisition of Cañon Bank Corporation and its wholly-owned subsidiary Cañon National Bank. With assets of just over $250 million, this marked our initial entry onto the front range of Colorado. On October 31, 2015, we closed the Cañon transaction and are currently working on the integration and platform conversion scheduled for early second quarter. With the addition of Cañon we eclipsed $9 billion in total assets, and ended the year at $9.1 billion. Now that we’ve closed on the Cañon transaction and have had an early glimpse of the possibilities they bring, we’re excited for 2016 with this latest addition. During the quarter, we announced and paid our 123 consecutive quarterly dividends and also declared a $0.30 special dividend that was paid on January 21st of this year. We’re very proud of our long history of returning back to our shareholders a portion of our earnings in the form of dividend. Although this can never be guaranteed, my track-record has been one of the best in the industry. Taxes were considerably lower this quarter compared to the prior quarter due both to existing and a newly originated new market tax credit that was booked in the fourth quarter. As I’ve stated in the past, these new market tax credits caused some lumpiness in our tax line, depending upon the size of the credit and when it was generated. In the recent quarter, our tax expense decreased by $964,000 or 10% and was a little over $500,000 lower than the same quarter last year or 6%. We continue to search out buyable new market tax credits and feel after almost seven years that we have built the expertise internally to handle these often complex transactions. Deposit growth, excluding the addition of Cañon once again this quarter experienced its traditional fourth quarter slowdown now that the tourist season is over. And although on a linked quarter basis, our non-interest bearing deposits were down 2%. We still had terrific organic growth of 10% over the prior year quarter in this all important funding category. We also had another record year in the number of non-interest and interest bearing checking accounts we opened. As I’ve stated numerous times in the past, all our banks spend a great deal of time and resources to continue to organically grow our DDA base and have had great success in the past. 2015 was a continuation of that good work. Anytime we can generate positive loan growth in the fourth quarter of the year we’ll take it again this year Mother Nature was kind to us and allowed construction projects to continue longer into the winter than normal. We still experienced our customary paydown of agricultural operating lines, but still had a strong enough pipeline of loans to put us in the plus column for the quarter. Organically, we grew loans in the quarter by 43 million or 4% annualized a good number for this time of year. Including Cañon our loan portfolio grew by 202 million or 4% in the quarter. Actual loan production in the fourth quarter was the highest volume of loans generated in the entire year, and exceeded the record established the previous quarter. However, the significant paydowns to our A portfolio, which was expected somewhat offset what otherwise was a very good quarter for loan growth. Organic loan growth in 2015 registered 8% an excellent number for us and well above our expectations of 6% for the year. If we include the addition of Community and Cañon National banks loans grew by $591 million or 13% last year. Once again we have the best quarters ever in loan production. Unfortunately, paydowns and payoffs were also much higher than normal and masked some of what could have been a much stronger quarter for all. Commercial real estate loans accounted for much of the loan growth in actual dollars. Although, we were very pleased with the increases this past year in the areas of C&I loans, multifamily loans and residential construction lending. It was especially encouraging to see the continued growth in our residential construction portfolio, something we have worked hard to increase. If the housing market continues to gain momentum we should see improved demand in a number of our markets from both new homes and apartments in 2016. As we begin the New Year, I'm also encouraged by the level of loan activity we're seeing, so hopefully that momentum can continue and allow us to again produce loan results similar to what we delivered this past year. During the quarter, our investment portfolio increased by 4% as we continued to deploy excess cash and adjusted the investment portfolio to account for the addition of Cañon. We feel good about where our cash position ended the quarter and we'll continue to actively manage that position to hopefully avoid build ups in the future. At the end of the quarter, investments as a percentage of total assets stood at 36%, unchanged from the prior quarter and up 1% from the prior year's quarter. During the quarter, the investment portfolio increased by $130 million, the majority of which was in short duration agency securities. We’ll continue to monitor our liquidity position and going forward continue to actively adjust our investment portfolio based on loan demand, deposit growth and future acquisitions. Credit quality improved in a number of key areas both sequentially and compared to last year's fourth quarter. Non-performing loans even with the addition of Cañon during the quarter declined by 6% and ended the year at 0.88% of assets versus 0.97% the prior quarter and 1.08% in the same quarter last year. In addition, we've sold a large OREO property already this quarter, so we expect our NPAs to reduce further in the upcoming quarter baring any unknown surprises. Our banks continue to work at lowering their non-performing assets and although some quarters the headway can be slow, we definitely did make progress this quarter. However, with that said, we did not achieve the goal we established at the beginning of the year to lower our NPAs below $70 million by the end of 2015. Even if we exclude the addition of Community and Cañon banks, we still fell a little short. Nevertheless, I remain optimistic we can achieve some further decreases to our NPA totals in 2016. In the current quarter, we had net charge-offs of 1.5 million compared to net charge-offs of $577,000 last quarter and 1.1 million in last year's fourth quarter. Historically, net charge-offs run higher in the fourth quarter as our banks attempt to clear off certain credits. For the year, total net charge-offs were 2.3 million or 5 basis points compared to 2.5 million in 2014 or 6 basis points. Once again, my hats off to our 13 banks for the job they did in this area in the past year. Our goal was to keep net charge-offs below 15 basis points and they clearly exceeded that goal. Early stage delinquencies were slightly above the prior quarter, but down significantly from the same quarter last year. For this time of year, delinquencies are very well contained. Our 30 day to 89 day pass through loans stood at 0.38% of loans at the end of the quarter versus 0.37% last quarter and down from 0.58% for the same quarter last year. Once again, I think the banks work hard and continue to do a very good job controlling their pass through loans. Our allowance for loan and lease loss ended the quarter at 2.55%, that's down from the prior quarter's 2.68% and 2.89% at December 31, 2014. The primary reason for the reduction was the fact that no allowance was carried over from the two acquisitions this past year. Our coverage ratio, a percentage of our loan loss reserve divided by non-performing loan increased this quarter to 244%. That compares to 224% last quarter and 209% at the end of 2014, definitely a positive trend. In the most recent quarter, we provisioned $411,000 compared to 826,000 at previous quarter and 191,000 in last year's fourth quarter. For the year, our provision for loan loss was 2.3 million and covered our net charge-offs one-to-one which was our plan this year. Both loan growth and credit quality trends will continue to dictate the amount of dollars allocated for the loan loss provision. However, we currently don’t see any significant change from the above range. Moving to the income statement, we crossed the $100 million mark in revenue for the first time ever, with top-line revenue of $100.5 million, an increase of 2% on a linked quarter basis and an 8% improvement from the same quarter last year. We had solid growth in the revenue line from net interest income which was up 2.9 million or 4% linked quarter. We also got a nice boost in interest income from the investment portfolio this quarter, which saw an increase of 6%. Compared to last year’s fourth quarter, net interest income increased $7.2 million or 10% as interest income increased 7 million driven primarily by an increase in commercial loans which accounted for 5.2 million of the gain. Interest expense was down slightly from the previous quarter and prior year period, primarily due to reductions in the cost of deposits and Federal Home Loan Bank advances. For the quarter, our net interest margin increased 6 basis points from 3.96 the prior quarter to 4.02% in the most recent quarter. This compares to a net interest margin of 3.92% in last year’s fourth quarter. The increase in the margin was due to a 4 basis point improvement in our investment portfolio and a 2 basis point reduction in our funding cost, which ended the quarter at 0.35%. Both purchase accounting adjustments and the yield on our loan portfolio added 1 basis point each to the net interest margin and were offset by a 2 basis point decrease from interest earned on non-accruals. In the current quarter purchase accounting adjustments contributed 7 basis points to the net interest margin versus 6 basis points in the previous quarter. Until interest rates starts to move up in a meaningful way, we believe our net interest margin will remain range bound. With that said, we were very pleased with the trend line this past quarter and especially how we have managed the net interest margin over the past year. During the quarter, the yield on our loan portfolio decreased by 2 basis points to 4.8% primarily due to the change in the mix of loans. We saw the same level of reduction in the previous quarter. The good news here is we didn’t see any acceleration in pressure to loan yields. Unfortunately, we have not yet reached the inflection point when it comes to turning the corner on higher loans yield. Non-interest income for the quarter was 24.5 million a decrease of 1.3 million or 5% from the previous quarter. The reduction in gain on sale of loans primarily mortgage origination fee income which was down 18% accounted for the majority of the decline. Unless we have strong refinancings volume during this time of the year, the fourth quarter typically is the slower time for mortgage originations, especially purchases. In addition, in October the industry implemented what is known as TRID or the truth and lending at real estate settlement procedures act integrated disclosure. And although our entire mortgage staff did a fabulous job of integrating the new rule. I am sure it did have some impact on mortgage volumes in the quarter. With mortgage rates remaining very attractive, we don’t expect to see a significant drop off in volume this winter. A number of our banks continue to add mortgage producers which should also help increase our mortgage originations. Service charge income of $15 million was up slightly over the prior quarter, which I thought was outstanding given this time of year and the fact that historically we see a sizeable slowdown in this revenue category. As we continue to add more customers and relationships at all of our banks, we continue to benefit from greater fee income from these accounts. Overall, we did post a 2% increase in non-interest income over the same quarter last year. Service charge income contributed nicely and was up over 7% compared to last year’s quarter and was consistent with the growth we’ve experienced in our overall customer base. In addition, our mortgage income was up over 11% from last year’s fourth quarter even with the TRID implementation. It will be interesting to see if mortgage volumes bounce back this quarter. Mortgage rates again are still attractive and are certainly not an impediment. So hopefully with TRID behind us now, mortgage bonds will improve going forward. On that subject, in the recent quarter, 66% of our production was purchase transaction and 34% were refinances. For the year, just ended, 69% of our volume was purchases versus 31% refinances. Non-interest expense increased by 5%, compared to the previous quarter and increased 12% from the same quarter last year. Compensation expense accounted for the majority of the increase, both for the quarter and compared to the year ago period. Aside from compensation, the new market tax credit expense accounted for a large portion of the increase linked quarter and was also higher than last year’s quarter due to the additional new market tax credit put on in December. Again, the benefit to our tax line because of the increased number of new market tax credits this quarter far outweighed the additional operating expenses. Comparing the current quarter to last year's fourth quarter, compensation and benefits rose for the most part due to the acquisition of Community and Cañon banks. Incentive compensation, profit sharing and medical insurance expense all contributed to the increase from the prior period. However, an ever increasing regulatory and compliance burden has also required us to add staff continuously throughout the year in certain areas as well. Our efficiency ratio for the quarter was 56.5% versus 54.3%, an increase of 2% from the prior quarter and also up from 55% in last year's fourth quarter, although this quarter's efficiency ratio was much higher than where we want to see it. There were a couple of one-time and greater expense in a few other areas that should normalize or go away in the future. With that said, we will have the expense of our core consolidation project and the development of our new Gold Bank beta platform that will add additional costs during the year. We certainly think these expenses are manageable and believe that project will add a great deal of shareholder value in the future in the form of productivity and streamlined functions once the project is complete, which is still unscheduled for mid fourth quarter 2016. For the year, our efficiency ratio finished up at 55% compared to 54% for 2014 and was definitely above our goal for the year of 53%. However, none of the expense associated with CCP was ever a part of the calculation when we set our goals and projections for this past year. Once the project is complete, we certainly expect it to have a positive impact on our efficiency and move our numbers back to the low 50s. In summary, it was another very good quarter and year for Glacier Bancorp and our 13 individual bank divisions. During the year, we were fortunate to add two new banks and over 100 talented bankers. We continued a multiyear string of record profits and some of the best performance metrics among publicly traded banks. Our loan growth exceeded expectation and we had another terrific year of generating non-interest bearing transaction accounts. Our asset quality continued to improve as did our net interest margin and our capital ratios remained well above peers. Non-interest income was up nicely from the prior year, however, so was our non-interest expense. Something we will be tackling this year. We've a couple of major initiatives in the works, the primary one being our core consolidation project. CCP, we believe holds great promise for making us far more streamlined, productive and capable of providing even better service to our customers. The project is really beginning to ramp-up and if we stay on-plan, which we are currently, it should wrap-up in the fourth quarter of this year. So although, we don’t expect to see substantial benefits or savings in 2016, we do believe in subsequent years it will definitely show its value. Our CEO transition from me to Randy continues to go very well. We specifically mapped out a little longer period to make sure we get everything covered prior to my retirement at the end of December. Randy has had all 13 bank presidents reporting to him the past six months and recently added additional operating and administrative functions to his set of responsibilities. By July 1st, we plan to have all responsibilities transitioned to Randy. Overall, we are very proud of our accomplishments this year. And I'm even more proud of the performance of all of our banks and their staff who once again produced terrific results this year for our Company. And those ends my formal remarks and we'll certainly open up the lines for questions, questions?

[Operator Instructions] Our first question comes from the line of Joe Morford from RBC Capital. Your line is now open.

I guess first I wanted to see if you could just kind of give us an update on what impact if any the flowing committee and the colony and the exchange for the dollar is having on your markets there and just kind of business activity level in general?

Yes. Good question Joe. It's definitely having an impact. Anecdotally you can definitely see far fewer Canadians. Now remember let me start up by saying it only really affects one bank out of the 13 but it is our largest bank. And there is no doubt that we have seen a marked reduction in both traffic and activity coming out of our neighbours to the north. So, with the exchange rate now below $0.70 it certainly is going to slow those individuals from coming down. I think I’ve also heard from a number of the main street realtors they’re just not seeing the same level of activity coming from Canada. Again that’s certainly understandable. But yes it definitely is having the impact Joe.

And that would just be just kind of slower business activity it's not something that we think we might show up in terms of credit problems or anything like that? Is that right?

No it's really main street business activities. You can just see it on the ski hill you can see it on mainstream you can see it at the hotels and the restaurants, on weekends. They’re just not coming down nowhere in the same numbers that they have the last five, six, seven years. So, until we get an exchange rate usually something at or above 85, that usually has been the benchmark we’ve used to really cause them to really come down in numbers. But certainly when you’re back down in the 60s like we currently are it's definitely going to impact the number of Canadians coming down here to shop and to recreate.

And then I guess the other question I has was just and maybe I missed this in your comments but if you could just talk about your loan growth expectations for this year, and with that just kind of an update on what you’re seeing in the competitive environment in terms of pricing and underwriting terms?

As you know, Joe, last year, our goal of 6% we did a couple of percentage points better than that in ’15. Late last year we decided even before we got the final numbers, not even knowing where the final numbers would be. We tapped our expectations for 2016 down a little bit to 5%. And we did that primarily because I think Barry is always talking about and our Chief Credit Officers from throughout our organization, starting to see a little frothiness especially on the underwriting side and we made it very-very clear to all 13 of the bank presidents that certainly we hope we will grow by 5% next year and that is our goal. If we can do better than that, okay great. But what we’re going to focus on is making sure that the quality is there and if we don’t grow by 5% next year but we can feel very-very good about all the loans we got booked that will be our right too. But we didn’t want to push on a string next year when it came to ginning up the loan growth too much, because I think we just felt that would have sent the wrong message. We want quality over quantity and we’re getting a little -- this credit cycle is getting a little long in the tooth now. So maybe it's time for us to pull back on the range just a little bit and make sure that we’re booking good loans rather than more of them. And our memory is still very-very vivid from 2009, ’10, and ’11, and we just want to avoid if at all possible those same mistakes again. So we’re not going to be -- again the goal Joe was a little bit less than it was last year. But as I said in my formal comments I think the activity level especially this time the year is pretty good. But we’ll see if that continues. I mean that’s something that as we enter the busier time of the year for us which as you know is always that second and third quarter, we’ll see it this year, it accelerates a little bit more or just stays at the same pace. But as we enter January-February, volumes have been pretty descent, they haven’t been a runway but they’ve been pretty good. Barry, do you want to add anything more to that?

Yes. You have to look at some of our markets too I mean our Wyoming markets are primarily for the most part will be dependent upon agricultural industries. We’ve seen a significant decrease in commodity prices primarily hard grains and cattle prices for the last six months. So given that we don’t see any much increased production there. And then of course ultimately impact of the oil and gas industry while we have almost minimal direct exposure there, it's going to be the secondary exposure of what that does to our marketplaces, and of course that’s going to impact not only volume owned but Eastern Montana and Southern Colorado, so given those two industries are headed the wrong direction right now. We just decided to stay conservative as Mick mentioned, we're compromised on rates to an existing customer or to a new great relationship that we want to solicit. We've seen some competitor pressures out there as far as terms loan to values, waivers of guarantee and we have pretty much just decided that we didn’t want to go back through another credit cycle where we have to fight those issues rarely compromised on underwriting rather than pricing. So we want to stay conservative. We want such good quality of loans. As Randy and I were talking this morning, I went through four credit cycles and I don’t plan on to going through another one, so we're staying conservative with this strip out.

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

So, a related question, but drilling down a little more into the construction segment alone, I guess that growth continued I guess unabated. I guess your thoughts on -- do you feel like your markets are undersupplied and that activity is justified? Or more specific to -- you talked about some frothiness but maybe on the construction alone and your expected growth in ’16?

Jeff, that's another very good question. I mean I don’t necessarily see the frothiness on the residential construction piece, but you're right, in some of our markets supply is pretty tight. And we just had all of our bank presidents in this week. They all gave their assessments and their projections and what's going on in all of their markets and there were a few -- not a lot, but there was a couple of the bank presidents that their markets certainly could use more inventory. I don’t want you to think that across six states and across 13 banks that that's the case because it's not, but I don’t hear any -- and I did not earlier this week Jeff hear anything about we're still way over supplied or there is a bubble forming on the residential side. I didn’t hear that at all. We made a little progress this last quarter for the second quarter in a row on the residential construction side. You've heard me say this for over a year now, maybe two years that that residential construction piece of our business I think we allowed it to really fall off way further than what we had hoped it would. We've had a couple of quarters now where we're starting to build it back up. We certainly think there is more room there for a company our size to add more, but I'll tell you with that said, it's difficult too because you want to hit your way in to the right builders. We think we got some very good builders that we stayed with during the downturn and we're still with and they're doing just fine right now. But you want to be very selective on any new because we're starting to see some of them come back into the market like we did back in '04 and '05 and we just got to be careful. Our growth as I said earlier percentage wise, our growth in resi construction was the best of any of the loan category. Of course, percentage wise it was great to coming off of a loan base, but at about 125 million, I've said this over a year ago that we feel very comfortable if we had a $175 million of resi construction. Are we going to get there anytime soon? I don’t think so, but I do like the trend line that we're seeing on the resi construction line.

Okay. And maybe…

Barry, you got anything else to add, excuse me Jeff. Barry, you got anything to add.

Well, you look at the numbers are pretty sold in spec which is generally our higher risk product to moved very little bit and in line with the rest of our portfolio at 6%. Actually, where we've really been focusing and fortunate it's been in custom and owner occupied so these are going to end users construction properties rather than on the spec side, so we're pleased with that growth in what is generally considered to be more credit free or credit risk product.

And even some of our good builders are doing a good amount of custom building too Jeff, so that's -- in a perfect world, that's exactly what you would like to see.

Okay. And my other question -- thanks for that. Just on the -- I wanted to revisit the ag portfolio. I know the last few deals have kind of augmented that expertise. But I wanted to check in. And as Barry said, you've seen some declines in some of your markets. But is that segment still a focus on your wish list of either looking for acquisitions or growing that portfolio actively? Where does it sit on the I guess priority list?

We certainly would. I mean we are about 8%, 9% of our overall entire loan portfolio is made up of Ag real estate and Ag production lines. We would certainly Barry and myself talked about this, we would not have a lot of the issues growing that a little bit more. Certainly, commodity prices as Barry just mentioned have come off, grain prices are not what they were three years ago, cattle prices were not where they were six months ago. But the one thing is that you got to remember is that we have had about four or five years where these farmers and ranchers have had excellent-excellent years; yields have been great, prices have been great and I think we just got to prepare ourselves for what is just a cycle. There is probably going to be a couple of years now where they are not going to probably do as we’re going to ask to carry over some lines in that, something we just haven’t done much over the last four or five years. But I think the thing that we have talked about internally more than anything is just in the last three or four years as have acquired a couple of additional exclusively I guess you would say ag banks I am so happy with amount of not divestiture but I mean I am so pleased at how different each and every one of these banks are. We’ve got true core growers. We got orchardist in the north central portion of Washington. We got larger cattle operations down in southeast Wyoming. Most of our Montana’s Ag banks are more grain and beat producers. So as we look at how diversified we are across our Ag portfolio I’ll tell you we’ve really-really like the portfolio that we filled and I think that in and of itself is going to be a real plus for us if these commodity prices do indeed stay down a little bit longer than maybe what we expected.

Our next question comes from the line of Jennifer Demba from SunTrust. Your line is now open.

A question on premium amortization, can you give us those levels for third quarter and fourth quarter and then maybe what you think you could be expecting here in the first quarter with rates below 2% again?

As far as premium amortization, well, I can certainly if you’ve got on the investment portfolio I am not sure it's been such a small number, so we really did even trap I got to be honest with you Jennifer, we’ve stopped tracking it because it really have fallen way-way off. I can tell you that the difference between the third and fourth quarter was negligible and it really-really is unlike 2012 as you well know where it was a marquee event for us that year then subsequently in ’13 and ’14 we have this significant reduction. Premium amortization on the investment portfolio is just about a non-starter. So I could certainly get you those numbers I do not have those numbers handy Jennifer simply because it's just a very-very small number. Now, with that said, if rates are moving back down, could we see a little bit more because we certainly know over the last three or four weeks that the refinance volume has kicked back up. That’s true. But over the last three years, we have really restructured our investment portfolio to where we are nowhere near as susceptible to that type of premium amortization Jennifer that we were going into the 2011 early 2012 refinance boom. So, even if we would, and I don’t necessarily think we’re going to, but even if we would see another refinance increase over what we’ve seen maybe the last 12 months or so, it's just not going to have the impact to our earnings stream that it did back in 2012.

One additional question if I can. Could you give us an idea of what the average yield is on the bond you've been buying recently?

On the bond portfolio recently I’d say that it's little different but we’ve been heavily focusing on shorter duration agencies and Ron you’re closer to it than I am what about 2%?

Yes, little bit just 205 is what we’ve been charging in and I’d say that’s about where it's been averaging on the front end. And that’s markedly better than what we were picking up purchasing I should say in the third quarter as the expectation of front end of the curve would lift we got the benefit of that ahead of the FOMC's announcement.

And that was also Jennifer that was also the reason why we got a little bit of bump as I mentioned in my formal comments about 4 basis points this quarter over last on the investment portfolio.

On the M&A topic, can you kind of give us an idea of what you're seeing in your pipeline? Is it larger than it was six months ago, about the same?

I'd say it's about the same. There's certainly some interesting things anecdotally just from what we're kind of hearing the word on the street that activity level is very-very good right now. But I thought our activity level was pretty good six months ago and I don’t necessarily think that it's changed dramatically, but Jen there's finally a phase to be looking at right now. Some of it certainly is more interesting and appealing than some other things, but for a variety of reasons, but yes, there's still lots to keep us busy looking.

Thank you. Our next question comes from the line of Jacque Chimera from KBW. Your line is now open.

Just to touch on the securities again briefly, I want to make sure I am understanding it properly. Since what you added was on average 2.05, but the yield rates on the taxable investments went to 2.23 from 2.07. Did you just have lower yielding securities that ran off in the quarter, was that part of it?

That was part of it. We also had some floating rate SBAs that got -- the quarter before that had huge prepayments that skewered us pretty good and those prepayments slowed down dramatically and as soon as they slowed down, the yield kicked back up also, so there was a number of things going on there Jacky that held back yield kick back up.

So that's a fairly sustainable yield then for the portfolio assuming we don’t get a massive change in rates?

Yes, yes, I mean I think that really the third quarter SBA phenomenon was somewhat unique. That was the first time we'd seen that. Don’t necessarily expect to see that again. I can't guarantee it, but I think there were more on the sustainable path now that won't be worry in the third quarter.

And how much the -- if my math is right, the Missoula, you had another piece of the slop that came in starting in December. How much of an impact did that have on funding cost in the quarter?

Well, it was fairly negligible because it came in at the very end, but as you know and I think that we talked about this a little bit in the press release, we also had a knock out advance with the federal home loan bank that was that's paying -- we have been paying a rate of nearly 3.5% on that knock out. Little bit less dollars on the knock out, it was 75 million versus the notional slop which was 100 million, they both came on -- they came on late in the quarter, but next year, take this first quarter now Jacky, you'll have them both the four quarter and there is actually a slight benefit to us by the reduction in that knock out versus the addition of the notional slop. Even though the slop was a little bit larger that came on at just under 2.5%, so over this next year, there's just a slight benefit. But broad intention purpose is Jacky they kind of offset one another.

Thank you. Our next question will be coming from the line of Matthew Forgotson from Sandler O'Neill. Your line is now open.

Just looking for a little color on expenses Mick, it sounds like we're going to have to be kind of follow your lead a little bit through '16, but I guess in two parts, the first is relative to this quarter's run-rate. I know we're backing out to 600,000 or so of merger expense. What else should we be stripping out from that run-rate as we move into the first quarter of the year and try and conceptualize the base?

Well, as always, don’t use the fourth quarter as a great proxy Matt for a forward run-rate because as usual, in the fourth quarter, we true up a lot of accounts. I mean we certainly were accruing from all year, but this year profit sharing was better than what we had expected it to be. So we had to true that up. We certainly have MLOs and some of our mortgage lenders had a very good last quarter even though the origination fee income was down, we true up some of those expenses too. And then I think just overall, just the bonus forget profit sharing, I think just some of our bonus accruals we had some the banks did very-very well across the board. We had a great year and we had to adjust some of those accruals also. Those are all on the comp side… I would say that there is a fair amount of overtime, there is a fair amount of work fees done on CCP. But CCP as far as some of the expenses, some of the hard coded conversion expenses in that, we’re going to see more of that in 2016. So, I am just warning everybody right now that yes it's a great project, it's going very-very well Don Chery and Marcia Johnson and Mark MacMillan I mean the group that working on CCP is doing a terrific job along with representatives from every one of our banks. We’re going to kick over the First Bank our largest bank Glacier Bank on February 27th they’ll be moving to the new Gold Bank. And then after that for the better part of three consecutive quarters we’re going to have the rest of the 12 banks converted over to the new Gold Bank; in addition to converting Cañon National into Bank of the San Juan and on the Jack Henry’s Gold and our new Gold Bank also. So certainly there is a lot of work to do at the same time we are implementing some additional new technology within the banks. We’re replacing all of our debit cards with smart cards this year. That in and of itself just by moving to the new smartcards not bad I don’t what the benefit in the form of reduced fraud and that’s going to be going forward. But I do know that just replacing that huge base of customers with a chip card it's going to be about $900,000 next year. So, that’s not chunk change so we’ve got some of those expenses that are going to be impacting us. On the flip side of that when it comes to efficiency, when it comes to operating expenses we’ve got a few new market tax credits that are winding down next year. So, we will not be seeing that expense but we also will be seeing the tax benefit either. But if you’re just laser focused on efficiency, obviously the tax line doesn’t come into the efficiency calculation but all those new market tax credit expenses do; so, an apples and oranges comparison on some of that stuff. So you’re going to have to bear with us as we try to -- as we go through quarter-to-quarter we cite for through some of that stuff and try to make it a little clear for you. But I think that the forward run rate now in January we should see some reductions in our expenses. But I don’t want to minimize the CCP the card reissuance and some of those are onetime events in ’16 that could keep that efficiency ratio elevated, higher than what we certainly historically have delivered.

Just ask the same question just a little bit differently to wrap my head around it, if you did 235,000 say NIE in 2015. Is it still reasonable to expect high single-digit growth year-on-year in expenses?

High year-on-year total, I guess our goal is to have that the mid single-digits when you say higher. You’re talking like 9%?

Sure…

I mean I guess it's hard to say, I don’t want to be locked down on this because I still am not certain just what CCP is going to end up, we know with some of the hard cost all we just certainly don’t know a lot of the staff cost there and we don’t believe that this year that again as I said in my formal remarks it's some of the really productivity and efficiencies that will be gained will necessarily be gained this year. I think it's 2017, it's going to somewhat of 2017 phenomenon. But we’re plugging 5%-6% growth and that’s what we’re budgeting for next year. So, hopefully our goal Matt is to start to either with some of -- because we in our budgeting process we’ve tried to the best of our knowledge and to the best of our ability factor in some of the CCP cost, the cost of reissuance and some of these things. And we’re move mid single-digits for ’16. So I think you would have 5% to 6% range you’re going to be tracking closer to what our expectations are.

Okay. And then lastly just Mick can you remind us what the securities portfolio duration is currently?

The duration is just little over about 3.5 years, little over 3 years duration on the investment portfolio.

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

Maybe just to follow-up on the expense commentary, the first quarter here, you're going to have an extra month of Cañon. And I just want to make sure that we are, you know, your guidance for the full year of, say, 5%, 6%, whether or not that also includes that extra month of Cañon in the full run rate here?

It does Matthew. We obviously, since we closed in October, when we were doing all of our budgeting in November and early December, we were trying to capture the full impact of Cañon for the entire year of '16, so to the best of our knowledge, we've got it -- to the best of our ability, we've got it embedded in those numbers.

Okay, great. And then just turning to the loan portfolio, I'm curious what the weighted average rate on new production in the quarter was. It looks like your core loan yield, excluding purchase accounting, was down only 3 basis points here to 4.68%. Just curious what the new stuff is going on right now?

Yes, we're riding that 440 range, 440, 442 ranges so there's still a little pressure coming from the new production versus the legacy portfolio and that's probably another reason, not just the mix of our loan portfolio. Sometimes that's actually helping us offset some of that pressure, but we got one bump in rates, certainly from some -- it's just not a big-big part of our loan portfolio goal that is fully adjusting. So certainly some of the Ag credits in that do some of the HELOCs in that too, but we're still not there Matthew where we're -- and that's why I said, we haven’t reached that inflection point where we have now every quarter and every month we're booking loans above the legacy yield, getting a little bit closer and if rates will move up a little bit more and we could see a little bit more pronounced improvement in new production yield that would certainly help. But we're still a little ways away, so there is that pressure still Matthew.

And then…

And excuse me, we've seen in the last two quarters, we've lost 2 basis points to loan yields both in the third quarter and the fourth quarter.

Yes, okay. And then just back on the lower commodity price discussion, just can you talk about whether or not you're seeing any migration at all within any of your markets that might be touching lower commodity prices?

Well, certainly grain prices are down. I mean that's going to touch some of our Ag banks and not just our bank, but it tends to have an impact in some of those rural farm in a community. As I said, I feel reasonably good and I think if you talk to some of our presidents who are running those Ag banks, I think they feel reasonably good about the fact that we are coming off of a number of very-very good years, so there is more staying power than obviously there would've been if that was not the case. But the cattle prices as Barry said they've come down, but I'll tell you, I think right now, cattle prices are still the third highest year ever or in the last I can't tell you 30 years, 40 years, 50 years so I mean cattle, certainly not what it was last year, but I think we all recognize that last year's levels are probably not going to stick around all that long. Still on the cattle side, those are very good numbers and I believe that if you talk to most of those individuals and they knew that that level could stay there for the next three years or four years, they'd be very happy with that. Grains are little different story. Go ahead.

Yes, and the other thing on grains is two of the biggest input prices are fuel, fuel and fertilizer and of course fertilizer is a controlling based product, so we anticipate we're just not going to see the profitability of our grains producers this coming year given what the price changes for the past year, year and a half. So still they aren’t going to get us hurt as bad as they normally would just because the input prices are going to be coming down.

But I think a couple of our bank presidents who are very-very good at this stuff. They said that total production cost for grains were probably going to be closer to 5, price is not 5, so it could just be this year that not a lot of grain get sold. But it's also interesting that we saw a graph over the last 12 months and it's even though grain prices were low about this time last year, they're low right now, there was a point in time this last 12 months where they were much higher, so certainly farmers had an opportunity to contract those prices much above where they are right now, some of them I am sure probably did, maybe others did. I also think that the dollar is having some impact. I mean when you’re talking about some of these grains and some of these commodities that are getting exported certainly the strong dollar is not helping us there either. So, there some pressures there, but I didn’t hear anything from our four presidents who are very-very good at what they do. I didn’t hear major-major concerns but maybe if this continues for a couple more years that pressure might build.

Okay, but you haven't seen it translate to an increase in criticized classified. That trend is still declining, I assume. You guys obviously also have a very healthy reserve still that you're growing into. But I just wanted to double check there too?

We anticipate next year given the commodity prices there is a potential for some increase in criticized classifieds but this past year no we didn’t see anything outside of few small producers just through the normal course of business either because of yield this year or has a rain issues. But no I think if we have any change in credit quality we’ll be able to show up late this year early next year is what would be my guess. But then again that’s all subject to change in commodity prices. So, as we well know they will change.

As one of our presidents who follows us all the time said hey El Niño could have negative effect on Russia and by some chance Russia’s weak harvest gets impacted then you can throw all the service stuff out the window because things could change dramatically. You never know about this stuff. So, we’ll have to just see where these prices go.

Thank you. At this time, I am not showing any further questions. I would now like to turn the call back over to Mr. Blodnick for any closing remarks.

Thank you all for joining us this morning. And again, I can’t thank our staff, and our people, enough for the job that they did in 2015. It was truly incredible. This is as I said earlier this is not an easy operating environment. And yet we made so much progress in so many areas and we continue to just have top of peer performance. So, we’re going to do everything in our power to make sure we continue with that level of performance. Again we’ve got some major initiatives and some major projects that we’re going to be tackling in 2016. But we’ve got the talent we’ve got the people that take those on. So, it was a very good year. And again, we’re going to work very-very hard to make sure we find ways to replicate that in 2016. With that, I hope everyone has a great weekend and we’ll talk later. Bye now.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.