Oct 25, 2013
Executives
Michael J. Blodnick - Chief Executive Officer, President, Director, Member of Risk Oversight Committee and Member of Compliance Committee Barry Johnston
Analysts
Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Brad J.
Milsaps - Sandler O'Neill + Partners, L.P., Research Division Joe Morford - RBC Capital Markets, LLC, Research Division Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division Jeffrey Rulis - D.A.
Davidson & Co., Research Division Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Glacier Bancorp Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Mick Blodnick. Mick, your line is now open.
Michael J. Blodnick
Welcome, and thank you for joining us today. With me this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Barry Johnston, our Chief Credit Administrator; and Angela Dose, our Principal Accounting Officer.
Last night, we reported earnings for the third quarter of 2013. Net income for the quarter was $25,600,000, an increase of 32% compared to the $19,400,000 earned in last year's quarter.
Diluted earnings per share for the quarter were $0.35, that compares to $0.27 in the prior year's quarter, a 30% increase. On July 31, we closed the North Cascades Bancshares Inc.
transaction and are excited to have North Cascades Bank as part of the company. As with First State Bank of Wheatland, we believe both these franchises will bring great things to Glacier Bancorp in the future.
During the quarter, the company incurred $335,000 in onetime, non-recurring acquisition expenses. In addition, we recorded a loss on the sale of investments of $403,000.
This total of $738,000 in expenses was the extent of our onetime non-recurring items recorded during the quarter. We earned a return on assets for the quarter of 1.27% and a return on tangible equity of 12.85%, as our performance ratios continue to improve, as they have each quarter so far in 2013.
Looking back on the third quarter, just about everything we track or score moved in a positive direction. It was another strong quarter, operationally, that produced increased earnings, improved performance metrics, solid balance sheet growth, a much higher net interest margin and better credit quality.
Loan growth once again surprised to the upside, as we produced organically the largest increase in over 5 years. The last 2 quarters we have generated a 12% annualized increase in our loan portfolio, excluding the 2 bank acquisitions.
If we include the 2 new banks, our loans are up 18% since the first of the year. In the near term, we don't expect to replicate this level of growth as we enter into what normally is a slower period for generating loans.
Nevertheless, the last 2 quarters' loan production has been excellent and far exceeded our projections for this year. Although we believe loan growth was likely to slow down in the fourth quarter, the pipeline still has some decent volume that should allow us to maintain some of the momentum we've built in the first 9 months of the year.
Top line revenue growth, primarily our net interest income, increased dramatically on both a linked and prior-year-quarter basis. The significant increase in interest income during the quarter was especially encouraging, as premium amortization once again decreased and the growth in loans for the past 2 quarters, especially commercial loans, both helped to increase interest income from the prior quarter by 12%.
Credit quality continued to trend in the right direction, as delinquencies, although slightly higher than the previous quarter, remained at a low level. Non-performing assets and OREO expense also decreased from the previous quarter.
During the quarter, we added another quality bank, with a very talented group of individuals and directors, to Glacier Bancorp. North Cascades Bank became our 13th bank division, and as with First State Bank last quarter, we've already begun the integration process of incorporating them into our company.
As always, with any acquisition, some noise was created in both our balance sheet and income numbers. For some of the more significant factors of the financials, I have removed the impact of both new banks' additions in order to give a clearer picture of our performance without the impact of the new banks.
As I stated previously, for the second quarter in a row, we've produced terrific loan growth that exceeded our expectations. Our goal for the year was to hopefully increase the size of our loan portfolio by 2%.
Through the first 9 months of this year, loans have grown by 6%, excluding the loan portfolios we acquired from the 2 new banks. In the third quarter, loans grew by $112 million or 12% annualized, again, excluding the addition of North Cascades Bank.
Most of the gains in loans during the quarter came from commercial real estate and commercial and industrial loans. In addition, most of the increase in construction lending also came from the commercial area.
Another positive during the quarter was the stabilization in residential construction lending, where for the first time in over 5 years, we saw an increase of 9% for the quarter to $79 million. We hope this will be the first of many quarters that this category moves higher.
With the addition of North Cascades Bank, our ag portfolio also grew an additional 19%, up to $284 million and has nearly doubled in size since the first of the year. With the growth we experienced in ag and commercial and industrial loans this year, we've done a nice job of diversifying our loan portfolio away from our reliance on real estate.
The growth in loans also allowed us to significantly slow down security purchases, especially CMOs, and notably shrink the overall size of the investment portfolio by $402 million during the quarter. The few dollars of securities we did purchase were in municipals and corporate bonds.
One of our goals at the beginning of the year was to reposition our balance sheet and reduce our dependence on the investment portfolio. I think we've done a good job so far in this area, as investments, in the latest quarter end, made up 41% of our assets versus 47% in last year's third quarter.
Our goal is to further decrease securities as a percent of assets and, over time, move that percentage to a more normal historic range of between 20% and 30% of assets. However, as refinanced volume has slowed dramatically, we won't see the same level of decline in the CMO portfolio in the near term that we saw this past quarter.
Non-interest bearing deposits increased by $85 million or 7% during the quarter, once again, excluding the addition of North Cascades Bank. We not only had terrific growth in the balances of these accounts, but the number of new checking account relationships also exceeded our expectations during the quarter.
All of our banks put a lot of hard work and effort into generating and maintaining these core account relationships, and that effort shows up in these results. In addition, as we analyze the growth in our non-interest income the past couple of quarters, much of the credit could be directly attributed to the great number -- the greater number of transaction accounts we have generated and the fee income that they produced.
Excluding the impact of North Cascades Bank and wholesale deposits, interest-bearing deposits decreased $81 million or 2%. The decrease was primarily due to a reduction in retail CDs, as the current interest rate environment has made it more difficult to maintain these balances, and we continue to see a shift into other more liquid types of accounts.
Credit quality metrics this quarter were mixed compared to the prior quarter, as we saw a further improvement in non-performing assets and OREO expense, but a slight uptick in delinquencies and net charge-offs, although non-performing assets decreased again this quarter to $125 million. We will probably not achieve the goal we established for ourselves at the beginning of the year of reducing our non-performing assets below $100 million by year end.
NPAs are now down to 1.56% of assets, and although we saw a further reduction in NPAs during the quarter, the pace of decline has definitely slowed. Nevertheless, we continue to work these credits hard and believe that we will continue to lower the dollar amount of NPAs the next couple of quarters.
Net charge-offs nearly doubled from the previous quarter, however, remained at a very manageable level of 13 basis points through 9 months of 2013. At this current pace, we should end the year far below the amount we thought we would charge off and, at the same time, have recovered a greater amount of past charge-offs than what we expected so far this year.
Through September, total charge-offs this year were $9 million, with recoveries of $3.8 million, leaving net charge-offs at $5.2 million for the first 9 months of the year. Other real estate owned expense, which does tend to fluctuate, nonetheless, this past quarter was one of the lowest levels recorded by us since the credit crisis began.
OREO expense decreased by $1.9 million in the quarter to $1 million. And year-to-date, we've expensed a total of $4.9 million, compared to $15.4 million in the same period last year, or a reduction of 68%.
A stronger real estate market has limited the charges and expenses required to move some of the bank-owned properties this year, and as values continue to improve, we're seeing greater interest in many of these projects and properties. Hopefully, this trend will continue, since we still have $37 million of OREO to dispose of.
Early-stage delinquencies ended the quarter at $26.4 million, that's up from $22.1 million the prior quarter. Most of the increase in delinquencies came from the legacy banks, since both of the new banks have very few delinquent loans.
I think our delinquencies are now at their normal historical range and don't expect noticeable improvement from these levels. However, as we enter the winter months, it would not be surprising to see delinquencies rise the next 2 quarters, as seasonal workers and weather factors slow employment and usually cause past dues to increase.
Our allowance for loan and lease loss ended the quarter at 3.27%, a reduction from the prior quarter's 3.56%. The acquisition of the 2 new banks the past 2 quarters has resulted in a 33 basis point reduction in the ALLL due to the accounting treatment which does not allow the loan loss reserves from these banks to be carried forward after the transactions were closed.
In the most recent quarter, we provisioned $1.9 million, slightly less than our net charge-offs of $2 million this quarter. This compares to a loan-loss provision of $1.1 million the prior quarter and $2.7 million in the prior year quarter.
If credit quality trends continue to improve, we should see loan-loss provisions remain at these lower levels through the rest of 2013 and into 2014. This quarter, we saw substantial improvement to our net interest margin.
For the quarter, our net interest margin increased 26 basis points from 3.30% the prior quarter to 3.56% in the most recent quarter. This was the third consecutive increase to the margin, driven primarily by a shift in earning assets away from securities and into higher yielding loans and a reduction in premium amortization, which has given us significant boost to the yield on our investment portfolio.
After declining by $1.9 million in the first quarter, we saw premium amortization drop an additional $3 million in the second quarter and $3.2 million in the third quarter. With refinanced volumes slowing significantly during the latter quarter, we would expect a corresponding decrease in premium amortization to take place this next quarter.
This should set the stage for additional expansion of our net interest margin in the near term. In addition, if we can continue to grow our loan portfolio at a reasonable growth rate, this would also allow our margin to expand further.
During the quarter, the net interest margin benefited by 6 basis points as a result of the purchase accounting adjustments attributed to the 2 bank acquisitions. So as we begin the final quarter of the year, the net interest margin, hopefully, will be one ratio that continues to get better.
The yield on our loan portfolio increased for the first time since March of 2011. For the quarter, the yield on our loan portfolio averaged 5.06%, up 2 basis points from the prior quarter.
As we stated last quarter, our expectations were that the reduction in loan yields would continue but at a slower pace. We were pleased to see an actual increase in loan yields during the quarter and hope this trend continues.
Unfortunately, competition for good, quality loans remains intense, placing constant pressure on loan yields, and we don't expect that to change much in the foreseeable future. In addition to the higher loan yields, the margin also benefited from a 2 basis point decline in funding costs during the quarter.
At quarter-end, our cost on total paying liabilities was 41 basis points, compared to 43 basis points the prior quarter. If we stay in the current low-rate environment, which appears likely, we should see further small reductions in funding costs coming primarily from retail CDs and Federal Home Loan Bank borrowings.
One of the main highlights of the quarter was the significant improvement in net interest income. For the quarter, we generated net interest income of $69.5 million, that's an increase of $7.4 million or 12% from the previous quarter and an increase of $7.5 million from the prior year's quarter.
This was the second consecutive increase in our net interest income after 8 consecutive quarters of decreases. Once again, a combination of loan growth, better investment yields and lower funding costs all contributed to the vast improvement in net interest income.
A majority of the increase in interest income this quarter came from commercial loans, which gained $4.4 million, and investments, which were up $2.1 million. The growth in our commercial loan portfolio and the reduction in premium amortization were the key drivers for both of these asset categories producing greater interest income.
We don't expect this same heightened level of increase again this quarter, but do look for interest income to continue to move higher from here. Non-interest income increased by $651,000, on a linked-quarter basis, to $23.9 million and was down $100,000 from the same quarter last year.
Excluding the loss on the sale of investments, we had an increase of $1.3 million over the prior quarter and an increase of $300,000 in non-interest income over the year-ago quarter. Service charge and other fee income were up substantially, increasing by $2.1 million or 17% during the quarter, and more than offset the decrease in fees on sold loans or, otherwise, our mortgage origination fees, which declined by $451,000.
Although we did see a reduction in mortgage origination fees during the quarter, the bigger story I felt was the terrific job our banks did in diminishing the impact to our fee income by maintaining a significant portion of the fee income for mortgage originations. With the slowdown in refinanced volume this past quarter and to only drop $450,000 in fee income, I thought was exceptional.
As refinances have slowed, the percentage of purchases versus refinanced volume has completely flip-flopped since the first quarter. This past quarter, 64% of the dollar volume of mortgage originations came in the form of purchases, with refinances making up 36%.
In the first quarter of this year, the percentages were exactly the opposite, with refinances making up 64% and purchases 36%. Our banks continue to work very hard at capturing more and more of this purchase volume, and their success was evident in this past quarter.
Nevertheless, we still expect further decreases in mortgage origination income in future quarters, even if we successfully generate more purchase volume. The increase in service charge fee income was very encouraging and continues to demonstrate the value we receive from an expanding customer base.
In addition, the third quarter is traditionally our best quarter to generate service charge income, as we benefit from tourist visiting our markets, as well as more activity among our own customer base. We continue to do a good job of controlling our non-interest expenses.
Our expenses increased by $1.9 million from the prior quarter, but only $190,000 from the prior year quarter, with compensation and benefits as a result of the acquisitions accounting for all of the increase. The most recent quarter benefited from a decrease in OREO expense of $1.9 million, and $5.3 million when compared to the prior year quarter respectively.
Our efficiency ratio of 54% was an improvement from both last quarter's 56% ratio and last year's 55% efficiency ratio. Our bank divisions continue to focus on operating as efficiently as possible, and again this quarter, those efforts paid off.
In summary, with one quarter left in 2013, to date, we've been very pleased with what we have accomplished and hope to continue and keep this momentum going into 2014. We have now closed and are in the process of integrating our 2 new banks.
We believe both additions will make significant contributions to the future success of Glacier Bancorp. It was great to see another quarter of surprisingly strong loan production, and the pipeline for this time of year remains encouraging.
We think premium amortization could see further declines over the next couple of quarters, which would further enhance our net interest margin and interest revenues. Overall, it was a very good quarter and one that our people should be very proud of what they have been able to accomplish.
And those are the end of my formal remarks, so we'll open the lines up for questions.
Operator
[Operator Instructions] Our first question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey.
Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division
The margin, you said you think it can go up further in the next 1 to 2 quarters as premium amortization comes down, if you look out past fourth and first quarter, Mick, do you think that you can hold a relatively stable margin or will lending competition and loan repricing kind of take over and compress the margin a little bit?
Michael J. Blodnick
They could. That's very good analysis.
I think that we feel comfortable in the near-term, Jennifer, with some of the tailwinds coming from premium amortization still and, then again, some of the outside loan growth we've been able to generate. After that we still could, we still could see, even after moving into the second and third quarter, we could see, maybe, the margin stabilize or maybe even continue to move up a little bit.
You're not going to see the level and the size of movement we've seen these last couple of quarters, but that would be, basically, predicated on what kind of loan growth we would be seeing at that time, then moving into the middle part of 2014. And if loan growth was still fairly robust and we could continue to decrease the size of our investment portfolio, yes, I think that we could see a margin that would move up a little bit more.
But again, not at the kind of steps that we've seen the last 2 quarters.
Operator
Our next question comes from the line of Brad Milsaps of Sandler O'Neill.
Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division
Mick or Ron, just want to talk a little bit about the size of the balance sheet moving forward. Kind of get a sense of kind of what earning asset base you, guys, will think about over the next few quarters?
Obviously, I see the bond portfolio was down quite a bit from point-to-point. It looks like cash was up.
Just kind of curious what your plans are there? Trying to get a sense of kind of the moving pieces there and would -- Do you anticipate earning assets being higher, linked quarter or is this kind of in this range and maybe you get more margin expansion from a better mix?
Michael J. Blodnick
Yes, I think we're probably a little bit more range-bound. I don't see assets moving up significantly.
Think -- as we've been saying the last couple of quarters, we've kind of want to keep our powder dry in the hopes that next year, again, we can -- we're fortunate enough to do some additional M&A activity. And we just don't know if the loan volume that we're seeing, and we've seen the last couple of quarters, what that's -- if that's going to be with us again next year as we move into March, April, May.
If that's the case -- one thing for sure, Brad, is we're not going to see the reduction in securities, going forward, that we saw in the third quarter. And that's quite simply because, obviously, prepayments have slowed down significantly throughout this last quarter from what we were experiencing earlier in the year.
So CMO balances are not declining now at the rate they were back in even during the summer. So we're going to have more CMO balances remaining on the books, not removing them.
Depending upon the amount of loans coming on the books, that would be the driver. If loans really started and kept at a decent pace, we could see some incremental growth in the asset base because I don't believe you're going to see another $402 million or $403 million in reduction in securities for sure.
Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division
Okay, great, I appreciate the color there. And then just on expenses, I appreciate all the detail you gave.
I know the 2 banks you acquired being now within your market, cost saves aren't as evident but you always seem to get some. Would we expect to see some of those come through the fourth quarter maybe from the Wheatland deal and then North Cascades maybe in the first part of the year?
Michael J. Blodnick
No, I don't think you'll see them in the fourth quarter on Wheatland. I think it's going to be next year.
I mean, obviously, some of the big savings are when we actually do the data convergence and they're not slated until early second quarter with Wheatland and early fourth quarter, with North Cascades, of next year. So no, I wouldn't expect -- I mean, we're already getting some cost saves, but the major ones, Brad, I would say, are going to start to show themselves in 2014.
We won't get much, if any, in the fourth quarter.
Operator
The next question comes from the line of Joe Morford of RBC Capital Markets.
Joe Morford - RBC Capital Markets, LLC, Research Division
I just wanted to, I guess, follow-up on Jen's question on the margin, maybe just get a better sense of expectations in the near-term. Just what kind of magnitude of increase might we see the next quarter or 2, given that it's not just premium amortization and so on.
But you've got also the benefits, tailwinds you've got of reduced funding costs and perhaps stable to higher loan yields, improved earning asset mix? I mean, could it be like what we've seen the last couple quarters?
Michael J. Blodnick
I don't think so. I hate to put a figure to it, Joe.
We ended the quarter at $356 million. And as I said, 6 basis points of that was purchase accounting adjusting the discount accretion that flowed into the margin.
And there will definitely be more of that in the -- and we suspect there'll be more of that in the fourth quarter. But just to what magnitude, is it going to be another 5, 6 basis points?
Probably not, I think it'd be a little bit less than. So can we count on 2 or 3 basis points from the discount accretion?
Okay, that would raise it a little bit. Clearly, we've got $112 million of additional organic loans on the books that even if you averaged during the last quarter, that would be -- we had $60 million all quarter, a little less $55 million all quarter long.
We'll have that much more earning assets in the fourth quarter. That's going to help, because those are at much higher yields than the security portfolio.
But one of the things that we saw pretty significant reduction -- I think premium amortization, and I know you said, Joe, excluding -- somewhat excluding that, but I think that is going to be one of the drivers in the fourth quarter. I mean, because we saw what was taking place during the quarter and we were tracking July, August, September.
And obviously, those numbers got better in the tail end of the quarter than they did at the beginning. So we would expect that momentum from premium amortization to carry it through into the fourth quarter.
But I also think that we're not going to see this huge reduction in security volume, as I said to Brad earlier, that we saw last quarter. So I think that securities and their lower yields are going to probably stay closer to the level.
I mean, we will see some reduction but I'm just telling you that the cash flow coming off the CMO portfolio the last couple of months has dropped dramatically. I mean, you remember, all of your remember, earlier in the year, we were running at a pace of little over $200 million in cash flow every month.
And I'm just here to say it in the most recent quarter -- I mean, the last couple of months, that was less than half of that dollar amount of cash flow, so -- and still slowing down. So I don't think we're going to be reducing the investment portfolio and, obviously, those yields, although the yields are much better now too, because we're not experiencing that kind of premium amortization.
I mean, our investment portfolio -- the yields on that investment portfolio have gone up nicely in this last quarter. And we would expect that trend to at least stabilize and at least not drop anymore going forward.
But the bottom line is, putting a number -- I hate to put a number on the margin. I mean, we can hope that we could add another 10 basis points, 5 basis points to the margin.
I think we probably could do 5. Can we do 10 again?
I don't know. Hopefully, we can have this conversation 3 months from now and we'll surprise everybody but, right now, I would not want to go out there and say that you're going to see another 15, 20, 25 basis points increase to the margin, because I'm just not sure it's there.
Joe Morford - RBC Capital Markets, LLC, Research Division
Okay. Yes, that makes sense and a lot of good color there.
I appreciate that. My other question is just on M&A and kind of your current expectations there.
I mean, we've seen a flurry of activity lately, a little further west of you in Pacific Northwest. And just kind of curious what the kind of pace and tone of conversations in your primary markets have been?
And how optimistic are you on that front?
Michael J. Blodnick
Well, as I mentioned last quarter, I think we're not limited by the opportunities, we're more limited by our capacity. And right now, we want to do a good job of integrating both First State Bank and North Cascades, and we're in the process of doing that right now, and that's going very well but there's a lot of work to do.
There's lots of interest. And again, I don't think, and many of you know this, that we're not looking for that marquee transformational kind of deal, that's not who we are and that's not what we do.
But there's been a lot of, in our minds, strategic possibilities that those discussions are taking place. And I would hope that, next year, we could have the same kind of success we had this year with First State Bank and North Cascades.
And I think that the banks that we'd be looking at would still be probably in that same asset range. Again, I don't want to disappoint someone that we're out there about ready to announce a $1 billion or $2 billion bank deal because that's just not us and that's not who we are and that's not in the cards, I don't believe.
Operator
Our next question comes from the line of Brett Rabatin with Sterne Agee.
Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division
Wanted to go to mortgage banking and just the decline was pretty minimal. And I was just hoping to get a little more color around the originations this quarter, again on sale, if you have it, and then just sort of thinking about the production you got in 3Q versus 2Q?
And how you guys were able to keep that at a pretty high level despite the refi-ed econ.
Michael J. Blodnick
Okay. As far as -- I don't know if I've got some of those right in front of me.
We have a little over $7 million in mortgage origination fee income for the quarter. And as I said earlier, that was down about $450,000 from the prior quarter so we still generated a little over $7 million.
And that compares to $8.7 million in the year-ago quarter. When I break out the dollar volume of originations, in the most recent quarter we had right at about $286 million in mortgage originations.
And that compared to about $292 million the prior quarter. Again, the makeup of -- take the prior quarter, that $292 million, there was $161 million in purchases and $130 million in refi, that was a 55-45 purchase refi split the quarter before.
As I said earlier in my remarks, purchases were 64% of the $286 million this quarter or we had $183 million in purchase volume and only $103 million in refinanced volume. I would suspect that those -- I believe, not only because we're entering a slower time of the year, Brett, but I think, with the uptick in rates, even though I know they backed off a little bit, we could see those purchase refi numbers move a little bit, maybe we'd see a little bit of a surge in refis this quarter.
But I still think that the $286 million of volume is going to be down, I just can't tell you how much. But once again, we were, as I said earlier, we were absolutely pleased because I've been -- I look at what's happening nationally and the numbers and the fall-off in volumes.
And for us to only witness about $6 million, $7 million reduction in overall originations, I thought that was excellent. Again, not expecting us to be able to necessarily hold that in the fourth quarter or even the first quarter of the year, and it's going to be hard to say why again.
Is it interest rate driven? Is it the fact that we're going to enter winter and things will slow down, not as many people are building, they're not as apt to be looking to buy a second home in that?
But bottom line, our banks, I thought they did a great job on the purchase side, and that's something we've been definitely stressing with them, is we've got to capture more and more and more of the purchase market. And I think they stepped up and did a fabulous job of doing that this last quarter.
Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division
Yes, impressive. I assume you've gained some market share there.
The other thing I guess, I was curious about was just thinking about loan growth that you experienced this year versus kind of your prior earlier guidance of -- thinking about 2% growth. Could you maybe talk about just what's changed relative to earlier in the year?
What played out that it ended up being better-than-expected? Is it the economies in your local markets?
Have you added some lenders that have helped your new product lines, CRE, why -- or what have you that really aided your growth?
Michael J. Blodnick
I'd come back to -- and there's a couple of reasons, Brett, I think, and I'll let Barry comment on -- he's very close to it, and so I'll let him comment also. But I think there's 2 things that I'd like to comment on.
Number one, the economies in our markets are good. I mean, they are really good.
I said it last quarter, I said it the quarter before, we love operating in the Rocky Mountains. I think that even though we can sit here and complain about competition, and we got competition, I'm still not so sure that it's to the level that you'd see in some other sectors or other parts of the country.
The economy has been really sound. I mean, we've got a lot of good things going for us and have had all of these years.
So I think that has definitely benefited. I mean, tourism for one.
I mean, we had an incredible year throughout the -- almost every one of the markets and all the states that we operate in, and as you know, they're all very dependent -- not dependent, but tourism is a big, big part of what we do. And while we couldn't ask for better attendance numbers at the park, just the traffic and volume that's been throughout this part of the country, it was excellent.
So I mean, the economy definitely had something to do with it. The improvement in tourism, the number of people that were coming to the Rockies for vacations, that was up significantly.
But I also really believe that the reorganization that we did last May, in May of 2012, that took all of the back-office regulatory and compliance burden off of those banks and allowed those bank presidents and those Chief Credit Officers and those senior lenders and all the way down through the line lenders, far more time to go out there and generate loans. That's where I really feel we have benefited dramatically, and that was a major reason as to why we've been able to produce the kind of numbers we've produced.
And I've heard this time and time again from our bank presidents that they didn't recognize and realize how much time was being spent on the regulatory and compliance side until a lot of that went away. And then they were able to get back out there, and so many of our presidents and our Chief Credit Officers, I mean they are great at developing new business.
I mean, some of them are just excellent at getting out in their markets, getting out on the street and being able to get deals done. And I think that's been a big, big part of why we have been able to far exceed our expectations and our projections that we laid out for ourselves earlier in the year.
Barry, you got any other comment?
Barry Johnston
Yes. The other side of it is, too, I think that's a big part of it.
But there's too -- there's an inlet and an outlet as far as loan totals. One of the things that we have demonstrated in our credit metrics, we just started having to pay off some problem loans, the charge-offs, the transfers, the OREO that we've been having the last 3 or 4 years, and pretty much that's come to a slow drift, if you will, and so that's helped the balance sheet quite a bit.
The other side of it is we haven't offered any new products per se, but we have taken a look at some of the existing ones, as far as pricing and terms. And we've started this year, I think, being a little more aggressive than we have traditionally.
We've looked at some funding options on the other side to minimize some interest rate risk that go up a little longer on the curves on some of those products. So between those 3 or 4 different events, our loan totals have went up.
Now will we expect to see it this, probably, the fourth quarter? Probably not, it's traditionally has been a pretty slow time for us historically, the first quarter of next year is the same thing.
But we anticipate we're going to keep something reasonable. I don't think we're going to see any loan totals decline this coming quarter but if we can maintain the status quo, I think we'll feel pretty good about it.
Operator
Our next question comes from line of Jeff Rulis of D.A. Davidson.
Jeffrey Rulis - D.A. Davidson & Co., Research Division
Mick, on the service charges, you mentioned some -- making some internal deposit processing changes. I guess, maybe just provide kind of what that was.
And good growth this quarter would lead to additional growth going forward?
Michael J. Blodnick
Well, we -- as we look at the numbers in service charges, yes, I think that as we add more and more customers -- and again, they'll slow down a little bit like everything else, Jeff. We won't open and we won't create as many new relationships in the fourth and first quarter as we did these last 2 quarters.
But we're -- right now, we're in the process, in fact, today is the first big day from North Cascades Bank, and they are now on high-performance checking. Early indications from Scott Anderson, our President, is that it's really, really doing well over there.
We expect, when a new bank like that brings on high-performance checking, that they're going to do very well over the first couple of years and we don't see any reason why North Cascades won't actually help our numbers through the fourth quarter. Probably be larger than they otherwise would have been.
So we got that going for us. Now some of the banks did change some of their pricing and some of their handling of things like overdrafts and how they handle overdrafts and how willing they are to overdraw an account.
Some of these things, we've been trying to standardize the banks to kind of do it all the same way. And I think, in that standardization, we saw a nice uptick in fee income for the quarter, and that's what I think we were alluding to in the press release.
But outside of that, that third quarter where it's such a busy tourism, I mean, our ATM volume and our income off of ATM is just always much higher in the third quarter, that will definitely slow down. Our interchange fee income, much greater as people tend to spend money.
Now interchanges, an interesting one, though, Jeff, because as we enter the holidays, that is one where we expect to see that at least stay at that level, maybe even increase slightly, as people prepare themselves for Thanksgiving and Christmas and New Year. So interchange fee income, maybe, could even be a little bit higher or at least not decline much from where we saw in the third quarter.
But it's really all about driving more and more relationships, and the banks have done a fantastic job of increasing their customer accounts. Even the banks that have been on HPC for, going on, 20 years, we're still seeing, this year, good increases, even though they have a significant percentage of market share right now.
So I think what North Cascades -- coming on today and starting their program, I think that's going to take us through the fourth quarter nicely. First State Bank in Southeast Wyoming, they've been on the program a little bit longer but they're still relatively new to the program, I think they can still produce some good additions.
And then the legacy 11 banks continue to work very, very hard. And some of the legacy banks, some of those original 11 that have been on the system, I'm amazed at some of the volumes coming out of Pocatello and Idaho Falls and Citizens Community Bank.
Mountain West Bank in Coeur d'Alene is another one that has posted some significant increases coming out of Boise and the Panhandle of Idaho. So even some of the existing banks have posted some really good numbers.
So that's what it's going to be all about, is can we continue to grow the customer base at the level we have? And I think there are some things out there that even if we see a little slow down here at the end of the year, I still think we're going to be growing that base.
Operator
Our next question comes from the line of Jacque Chimera of KBW.
Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division
I'm wondering if you could touch a little bit on NPAs. I know, obviously, you continue to see improvements, but we only got the bottom line and the quarter figure on NPLs and that looked pretty steady.
What's been going on as far as inflows, outflows, transfers, OREOs, things like that?
Michael J. Blodnick
We actually did have -- there's been a couple of -- and there was one larger credit that flowed into NPLs this quarter, that figure was a little over $3 million or right at about $3 million. Now that's a credit that was no big surprise or anything, but it finally did move into a non-performing status.
That, obviously, hurt our numbers a little bit, but -- and that was really one of the few. And we've had a couple, though, each quarter, Jackie, that tend to move in.
And then you've got to not only cover that addition but try to sell or move other NPLs off the book so that you'd see a net reduction. Barry and myself were talking about this yesterday.
I think, even though the fourth quarter -- well, last year's fourth quarter was excellent. I think that the fourth quarter, historically, hasn't been, necessarily, a great quarter for us to reduce NPLs.
I think we're starting to feel a little bit better. There's a few things that are on the table right now that if those get done this quarter, we could -- we're not going to -- I'm not trying to tell you we're going to see some $20 million or $30 million reduction in NPLs, that's not in the cards.
But with a little bit of luck, we think we could go from, maybe, $125 million down to $115 million. If we got below that, it would really be a surprise and that would be the -- one of the larger credits or OREO properties that we didn't expect to get done.
It did get done. But I would say that we're going to see continued improvement in that area.
Our goal definitely for next year will be to cross below $100 million. But it does get -- in some respects, it gets a little tougher, as I said last quarter, because some of the properties in OREO that we own, they're unique, they're are single utility.
It's going to take the right buyer. Some of the NPLs, though, I think that we could see, Barry, some more curing in a few of those next year, and that's our hope, obviously.
But we got all the low-lying fruit got taken care of in 2011 and 2012, and there's no doubt about it. Even though we got an improving real estate market, maybe as -- an economy that is improving, at least in our region of the country, it's still some NPLs and some distressed properties that now they're a little bit tougher to fix.
So you got any thoughts?
Barry Johnston
Yes. What happened in the quarter, we started NPLs about $89.8 million and we charged off a little over about $3.1 million and then we transferred $3.2 million into OREO, so that was about $6.2 million that went out.
But we had an increase of about $4.9 million, of which $3 million of that was in one relationship. So we're -- we nibbled a little way at it, it was not as much as we'd like, but it's still moving in the right direction.
Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division
And the -- just the improvement in the economy and home value, do you think that will keep change-offs low for the next couple of quarters, barring some unforeseen circumstance?
Michael J. Blodnick
Yes, I really do. I think we actually hit the charge-offs pretty hard this quarter.
I think we're coming into our safety and soundness exam. We wanted to make sure that everything that should have been charged off was absolutely charged off at the end of the quarter before we went through the exam.
And that was a little bit higher. Like I said, it was double what we saw in the second quarter.
But I think the banks really tried to clear the decks a little bit when it comes to charge-offs. What's really been -- and this could continue for quite some -- not -- well, quite some time, I think, Jackie, and that is -- and we charged off a lot of loans in 2010, '11 and '12.
And I think the banks did a good job of making sure that at some point in time, we were going to get some of that money back. And this year, so far, $3.8 million in recoveries is pretty good, and I think that we're going to see, or I think we've got the ability to get more of that in future quarters, as far as recoveries.
So I'm feeling pretty good about net charge-offs. As we said, we've charged off 13 basis points through the first 9 months.
Our goal was to try to get net charge-offs under 50 basis points. I guarantee it, we're going to be there.
Can we stay under 20 basis points? There's a good shot that we could do that this year.
Operator
And our last question comes from the line of Daniel Cardenas of Raymond James.
Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division
Just a quick housekeeping. What was the TDR balance for this quarter?
Michael J. Blodnick
Barry, TDR is what?
Barry Johnston
TDRs...
Michael J. Blodnick
Accruing or not accruing?
Barry Johnston
Well, I can -- total...
Michael J. Blodnick
We got both.
Barry Johnston
Yes. Total was $127,767,000 and of that, $40,917,000 was non-accrual and $86,850,000 was accrual.
Michael J. Blodnick
And of the accruing side, Dan, that was up about $6.4 million from the prior quarter. And I think, Barry, you said majority of that was just the addition of the...
Barry Johnston
New banks.
Michael J. Blodnick
New banks, yes.
Barry Johnston
The non-accrual actually dropped from $45.4 million down to the $40.9 million, so that was positive. We had about a $4 million-plus decline.
Michael J. Blodnick
In non-accrual TDRs.
Barry Johnston
Non-accrual TDRs.
Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division
Good, good. And then just kind of going back to the margin for a quick second.
Are you seeing any competitive pressures starting to emerge on the deposit side of the equation?
Michael J. Blodnick
Not yet, really, haven't seen anyone going out there and trying to capture longer-term funding at all, Dan. And definitely, on the short end of the curve, no, we really haven't seen much pressure.
Obviously, the credit unions are always going to be tough competition on the deposit side. And some of our markets and some of our banks experienced much tougher competition from the credit unions than others, that seems to be a market-by-market phenomenon.
But I haven't seen recently, Dan, where they've gone out and done something different than their past practices over the last couple of years.
Daniel E. Cardenas - Raymond James & Associates, Inc., Research Division
And one last question. In terms of the average life of your loan portfolio, is that pretty stable, say, over the past year or are we seeing extension?
Michael J. Blodnick
No. No, that's been pretty stable.
It's kind of interesting that even on the commercial side and on some of these ag and commercial and industrial loans that we've booked, those are -- for the most part, those are shorter-term credits. So we haven't seen a great deal of extension.
As we do our asset liability modeling every quarter, that hasn't been much of an issue.
Operator
And I'm showing no further questions at this time. I'd like to turn the call back over to management for any further remarks.
Michael J. Blodnick
Okay. Well, thank you, all, for joining us this morning.
Once again, it was a very nice quarter, I think, from just about every perspective. I thought our banks and our management team here at the holding company did some really nice things.
We certainly want to continue this momentum through the end of this year and into 2014. Like I said earlier, I like the economy, I like some of the things we're seeing in the Rocky Mountain region that we operate within.
So hopefully, this economy will continue to stay robust and we can benefit from that growth and that strength. So with that, thank you, all, for joining us this morning, and have a great weekend.
Bye now.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.
You may all disconnect. Have a great day, everyone.