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Edited Transcript of GWB earnings conference call or presentation 26-Jul-18 12:30pm GMT

Q3 2018 Great Western Bancorp Inc Earnings Call

Sioux Falls Aug 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Great Western Bancorp Inc earnings conference call or presentation Thursday, July 26, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ann Nachtigal

* Douglas R. Bass

Great Western Bancorp, Inc. - EVP

* Kenneth James Karels

Great Western Bancorp, Inc. - Chairman, President & CEO

* Michael Gough

Great Western Bank - EVP of Credit

* Peter Chapman

Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer

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Conference Call Participants

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* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

* David Patrick Rochester

Deutsche Bank AG, Research Division - Equity Research Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Nathan James Race

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* Steven A. Alexopoulos

JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks

* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good day, and welcome to the Great Western Bancorp Inc. Third Quarter Fiscal Year 2018 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Ann Nachtigal of Corporate Communications. Please go ahead.

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Ann Nachtigal, [2]

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Thank you, Allison, and good morning, everyone. Joining us this morning on Great Western Bancorp's Third Quarter Fiscal Year 2018 Conference Call are Ken Karels, Chairman, President and Chief Executive Officer; Peter Chapman, Chief Financial Officer; Karlyn Knieriem, Chief Risk Officer; Michael Gough, Chief Credit Officer; and Doug Bass, Regional President.

Before we get started, I'd like to remind you that today's presentation may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the company's actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosures contained in the presentation that we have made available on our website as well as our periodic SEC filings for a full discussion of the company's risk factors.

Additionally today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding Great Western's results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation.

With that said, let me turn it over now to our Chairman, President and Chief Executive Officer, Ken Karels. Ken?

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [3]

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Thank you, Ann, and good morning, everyone. We thank you for joining us. I'd also like to welcome our recently appointed Chief Risk Officer, Karlyn Knieriem, to the call for the first time. Welcome, Karlyn.

Our performance for the quarter was outstanding and I have a number of highlights to call out. Net income was strong at $45.9 million or $0.78 per share, an increase of 30% from last year. Loan originations remained solid during the quarter, although growth was a little slower with loans increasing 0.4%, which Doug will expand upon further.

Our efficiency ratio remained peer leading at 45.8% for the quarter and profitability was exceptional with our return on tangible common equity at 17.7%.

In addition, we continue and invest in our business with a number of new offices planned over the coming quarters. More on that in a moment. Now for more insight on our first quarter financial results, I'd like to turn the call to our Chief Financial Officer, Peter Chapman. Pete?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [4]

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Thanks, Ken, and good morning, everybody. Looking to revenue, net interest income was $106.4 million for the quarter, an increase of $4.2 million or 4%, primarily driven by loan interest income resulting from loan growth and higher yields on loans, partially offset by higher interest expense related to deposits.

Our net interest margin was 3.97% for the quarter and our adjusted net interest margin was 3.94%. Adjusted NIM increased by 8 basis points quarter-over-quarter as a result of higher asset yield, mainly driven by 62% of our loan portfolio being floating or adjustable, offset by the rising cost of interest-bearing deposits and borrowings.

Also within this increase, 3 basis points was attributable to accretion income through loan accounting.

Noninterest income for the quarter was $18.9 million, a modest increase compared to the March quarter, but excluding a $2.6 million contract initiation fee in the March quarter, the increase was $2.8 million or 17%.

Of this amount, $1.3 million was driven by lower credit charges included in the change in fair value in loans. The company has elected to record at fair value in the current quarter a $0.6 million increase in service charges and other fees related to interchange income and service charges, and also a $0.9 million one-time gain on the sale of some shares.

Finally, noninterest expenses were $57.9 million for the quarter. This is a decrease of $1.3 million or an increase of $1 million or 1.7%, excluding a $2.3 million contract breakage amount in the March quarter. The increase in expenses was driven by a $1.5 million increase in salaries and benefits, included within which is a one-time employee related consulting fee and a $0.4 million increase in healthcare costs due to adverse claims experienced during the quarter and a $0.3 million increase in pension costs, offset by a decrease in OREO costs of $0.7 million for the quarter.

Tier 1 and total capital ratios increased to 11.8% and 12.8% respectively, and tangible common equity to tangible assets also increased to 9.5% as a result of our strong return on equity-generating capital in excess of what is required to fund organic.

Finally, our board has approved a $0.25 per share dividend payable on August 10, 2018.

I'd now like to turn over the call to Doug Bass, our Regional President, to discuss balance sheet activity. Doug?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [5]

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Thanks, Pete, and good morning, everyone. During the June quarter, we saw continued strong loan originations, but more muted balance sheet growth due to accelerated payoffs with loan balances increasing $41.5 million or 0.4%, but a still-healthy, annualized growth rate of 6.1%. The slower spot balance sheet growth was mainly attributable to $70 million in credits going to syndication in secondary markets we chose not to participate in due to risk appetite along with the paydown of some Watch-rated credit.

Growth was most robust in the nonowner-occupied and owner-occupied categories, with Arizona and Colorado driving this growth during the quarter.

Also, as we look forward, we are confident in future loan growth due to unfunded construction loans, which have increased from prior quarter, along with applications to open new loan production offices in Cedar Rapids, Iowa; Wichita, Kansas; and Yuma, Arizona. New branch office applications have also been approved for Cedar Falls, Iowa; North Scottsdale, Arizona. All offices will be business banking hubs. 10 new lenders have already been hired for the offices, which will open between August and December of this year.

Deposit growth during the quarter was approximately $200 million. The growth was split between an inflow in corporate interest-bearing accounts, which accounted for 75% of the growth, and also broker deposits, which we were finding more cost-effective than federal home loan bank funding. This was offset by a seasonal decline in consumer deposit balances.

This brings our year-to-date deposit growth to 6.8%. Our loan-to-deposit ratio of 97% remains well within our targeted range.

Let's turn the call over now to our Chief Credit Officer, Michael Gough, who will take us through asset quality developments. Michael?

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Michael Gough, Great Western Bank - EVP of Credit [6]

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Thank you, Doug. Overall, we were satisfied with asset quality during the quarter, with most metrics improving or remaining relatively stable. Turning our attention now to the slide on asset quality.

Provision for loan losses was $3.5 million for the quarter, a $1.4 million decrease compared to the previous quarter. Net charge-offs for the quarter were $4 million or 17 basis points of average loans on an annualized basis, which is consistent with the prior quarter. Our allowance for loan and lease losses as a percentage of total loans was down 1 basis point to 69 basis points.

Our comprehensive credit coverage, which includes credit related fair value adjustments on our long term loan portfolio and purchase accounting marks, remains sound at 98 basis points of total loans. Compared to March 31, we saw a decline in Watch credits of $19 million to $276 million, partially offset by a $17 million increase in substandard credits to $268 million, while nonaccrual loans declined by $4 million to $127 million.

OREO balances also declined 39% to approximately $10 million. We've now completed all of our ag reviews, which would typically be completed during this review renewal cycle, which included all Watch and [worse-rated] credits during the same period. Consistent with my comments in the March 18 quarterly call in general, farmers' performance in 2017 was in line with our expectations and our previous earnings calls, with upgrades modestly outpacing downgrades.

We continue to actively monitor the discussion around trade tariffs, with specific focus on soybeans and how that may impact our customers, but at this stage, we do not have significant concerns around potential impact on farmer profitability for the 2018 year.

Prior to the recent drop in soybean prices, our borrowers had around 45% of their production forward hedged at higher levels, which provides some downside protection. As always, we will continue to closely monitor developments and potential impacts upon profitability.

With that, let's turn the call back to Ken for some closing remarks.

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [7]

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Okay. Thank you, Michael. We were very pleased with the performance of GWB and our momentum leading into the final quarter of our fiscal year. We once again have good loan pipelines and we're optimistic for the September quarter to achieve mid to high single-digit loan growth. While deposit competition is strong and costs definitely rising, we feel the investments in cash management and the changes to our banker incentive program a number of years ago have us well-positioned to continue to grow deposits as we have shown this year. Our business model has proven very effective in providing superior returns, with a return on tangible equity consistently above 15% and our efficiency ratio in the mid-40s, both superior to our peers.

Thank you for your continued interest in Great Western Bank, and we're now happy to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Ebrahim Poonawala from Bank of America Merrill Lynch.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [2]

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Just first question, I guess, Pete or Ken, in terms of capital with the TC, you're at 9.5%. Any thoughts -- I mean, I know we're always looking for potential M&A opportunities, but is there -- how are those discussions going and are there any other thoughts around capital deployment? Are you okay building capital if you don't find the right opportunities?

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [3]

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Yes, we've -- we continue to look at M&A activity. And obviously, it's gotten very expensive and recently, we've been outbid on a number of them and actually felt pretty good about it. In our calculations, you get the prices they're selling for, it's very low EPS accretion if you take out the funny accounting, the building goodwill and accreting back the income into the financial statement, and we quite honestly aren't going to play those games. So I would say, right now, M&A activity, especially in the strong Class A markets, are very, very pricey, and so we will be very disciplined on the pricing and wait for the opportunities that make sense and that can add value to our existing shareholders on it. So we are building up capital. Obviously, we raised the dividend. We'll take -- continue to look at share buybacks on it, too. We will look at maybe some deposit-only opportunities and other things that make more sense for us to do it and -- but the intention is not to build up capital over a long period of time. So we definitely will be good stewards of capital and return that to our shareholders if we build up too much capital.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [4]

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And just tied to that, Ken, can you remind us like what's the capital ratio that you think the bank should be operating at from a [TCE] standpoint?

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [5]

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Pete, go ahead.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [6]

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Look, I think, post acquisition, when -- if you look back to [home fed] rule, Ebrahim, we -- [TCE] moved down to low 8s, it might have been just on 8%, Ebrahim, which we're very comfortable with just with our return profile. As you've seen, that was only 2 years ago and we've brought up a 1.5%, So certainly fills an acquisition, we'd be comfortable getting it into the low 8s.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [7]

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Understood. And just, I guess, moving to Ag lending. I'm sorry if I missed it in your slides, but what's the size of the Ag book at the end of the quarter and what should outlook for growth for the Ag book as well as what's the sense of the health of the farm economy, just in terms of everything else that you see locally within the Ag exposed markets?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [8]

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Yes, the dollar value, Ebrahim, it was flat quarter on quarter. We had just [done the] $2.2 million -- so it was -- $2.2 billion, sorry, it moved up by only $1 million for the quarter.

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [9]

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You want to talk on the health of the Ag, maybe?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [10]

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Yes. Maybe, Ebrahim, to the sort of the last half of your question, I don't know that we see that increasing or changing materially based on new origination activity. Pipelines are obviously very modest in the Ag sector. I would not see Ag as a percent of the total book increasing, and depending on commercial loan growth, it will potentially be declining based on the time of year, some seasonal increases for crop inputs, but very modest.

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [11]

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I would say we're fairly optimistic. We're seeing some pretty good crops, probably some record crops in most of the area that we have. So as Michael mentioned in his comments, what, 45% of the soybeans and grains have already been priced above the drop in price, so in our opinion, more of the drop in price has been for bigger yields expected in the country. So gross for a lot of our producers will be pretty good this year.

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Operator [12]

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Our next question will come from Steven Alexopoulos of JPMorgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [13]

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I wanted to start on the loan side. You guys had decent growth in commercial real estate in the quarter. We've had quite a few banks talking about the CRE lending market getting much worse and a lot of banks talking about competition from nonbanks. What are you guys seeing in your markets for the deals you're interested in?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [14]

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Well, I think the segments that we're looking at, we're seeing some draws on the construction book that's coming up. Those are typically loans that are going to flow through and go to the secondary market, those that are in the multifamily sector. The other commercial real estate growth we've seen, very modest and industrial and virtually no retail, a little bit of office. I would say, generally, we're watching closely, certain markets, as to certain segments in certain markets. Multifamily in Denver is an example on rental rates required per square foot. Our high inventories are growing. So I would agree with you, Steven. If you take a look at certain segments in certain markets, we are cautiously watching those and making very prudent credit decisions in those sectors.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [15]

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So you are seeing competition worsen in your markets, too?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [16]

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I would say we're seeing continued easing of credit requirements. Pricing has gone up. Spreads have come down modestly, relative to indexes. Credit standards have probably been the piece that we've chosen not to chase. And I think that's part of the spot balance decline that we called out, a 0.4% here in the quarter. It was because we did have some large commercial real estate projects. We chose not to match alternatives on due to some healthy lending terms from others.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [17]

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Okay. And then on the C&I, which was flattish, I hear you on some of the payoffs. But is uncertainty around these tariffs on agriculture impacting business confidence in your markets?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [18]

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I would say not on the C&I sector, no.

A good share of the C&I sector that we're involved with is going to be light to heavy manufacturing, distribution, a lot of construction, road building, supply-related, which most of those sectors are all still very strong in most of the geography that we're dealing in. So really insignificant impacts of tariffs to most of that sector that we're involved in.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [19]

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And then one final question on the funding strategy. The loan-to-deposit ratio came down pretty nicely in the quarter. What are your thoughts here with such strong growth in CDs? It looks like on your website, you're still running pretty aggressive promotions.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [20]

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Yes, we have, Steve, certainly I think in the last quarter or so, we've seen more CD specials from peers. So we are doing a little bit of matching there just to maintain funding. We're also running a money market special, which we have found has been pretty competitive. But from a beta perspective, we certainly haven't had to price set up one-to-one. So that's still running a beta that we think is reasonable. And then just during the current quarter, as Doug Bass mentioned, we did probably about a $65 million in additional brokered CDs, we've just found through the quarter they're probably -- they were running 15 to 20 points inside of FHLB, so we just found that more cost-effective.

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Operator [21]

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Our next question will come from Jeff Rulis of D. A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [22]

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A question on the -- just on the loan growth guidance. You're kind of sticking to that mid to high single-digit for the full year. That's a pretty wide range going with one quarter left, I guess, if we're thinking 5% to 9% for the full year, that implies for fiscal Q4 of 5% to 17% annualized. So any -- a little more color on refining that at all?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [23]

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I would just say the start of this quarter has been very good already. We had good growth to start the quarter on. I think -- and we have got, as Doug mentioned, we've got good pipelines that look forward on it too. The unknown part of it and why the big range is just if we see any additional unexpected pay downs to the previous question, just on competition from other sources and lack -- or weakening of underwriting that happens that we agree not to match on it. So we're leaving a little room -- wiggle room in there just from unexpected pay downs.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

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Sure. Can the, I guess, the first month, how have pay downs been?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [25]

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I think what we've seen post quarter end are certainly positive results and origination volume has exceeded pay off volume by a reasonable, acceptable margin. I think the year-to-date number, Jeff, annualizing that is going to be pretty close.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

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And maybe, Pete, on the margin, I guess if you look at the adjusted at 3.94%, you're showing some core margin strength. But if you back out that, maybe the 3 basis points that's a little onetime-ish. Kind of thoughts on that core direction, relative to that 3.94%?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [27]

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Yes, that's still pretty strong. I think in the last quarter I called out we'd expect a few basis point increase. So a more modest, somewhat we've seen on a core perspective. Certainly, we'd expect to see a little more margin expansion, loan repricing, as Doug said. Spreads have come in, but loan pricing has come up and also we've got the back book and deposit costs. Although as Steve mentioned, we are running some specials there that's lagged -- lagged loans. So look, I'd still expect to see some modest expansion in the next quarter.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [28]

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Net of the 3 basis point benefit?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [29]

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Yes, exactly. So I wouldn't expect to see a 5 bps increase, but I certainly expect to see some benefit, yes.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [30]

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Fair enough. And then last one on the expense side. Some onetimers in the comp line, any thoughts on fiscal fourth quarter, kind of flat to down if those do go away or are there are some seasonal upticks in the next quarter?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [31]

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I wouldn't say seasonal, but as I said, there's about $400,000 there in a consulting fee that will come out. Healthcare costs have been running pretty good for the year. I'd hope that $400,000 comes out again this quarter as well, Jeff. So outside of those, I'd expect a modest uptick once you take those out. As Doug mentioned, we've been hiring a number of bankers, so we have been putting some good people on board. So I would say a modest uptick next quarter.

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Operator [32]

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Our next question will come from Nathan Race of Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [33]

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I look at Slide 11 of the investor presentation. It looks like Ag charge-offs were up again sequentially. So just curious if you're seeing that trend persist thus far in the third quarter of the calendar year, or if you think you've gone through a lot of the heavy lifting on the workout front that maybe Ag charge-offs come down [to something] over the next few quarters or so?

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Michael Gough, Great Western Bank - EVP of Credit [34]

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This is Michael, appreciate the question. Overall, most of the charge-offs last quarter had been previously reserved for [on identified] problem loans. Are there still other problem loans left in an Ag? Absolutely, yes. The timing from we take the charge-offs is really a case-by-case situation. Some of that's going to depend on how this year comes in and if we and the borrowers think it's worth it to continue or if it's possibly time to unwind things. But again, those are case-by-case situation. Vast majority, over 99% I think of the Ag charge-offs, all previously reserved for by Great Western.

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [35]

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I think it points out something, Nathan, when you take a look at the charge-off in this sector after so many years of [quota recession and Ag grain] to be still that low, it speaks to why we're in this sector and why it's such a good sector to be in.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [36]

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Understood. And then just staying on the credit front for a second. Any additional color on the 7% increase that we saw in substandard loans in the quarter?

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [37]

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Really, that was probably a migration from the Watch. You saw the Watch drop, what, $20 million or so. So a lot of that was just migration. A number of those got paid off or improved. Some of them are -- obviously are going to move into the classified section.

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Operator [38]

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Our next question will come from Jon Arfstrom of RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [39]

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You guys talk a little bit more about expectations from the new offices and give us an idea of what it takes in terms of potential loan balances to open a new office?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [40]

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Yes, Jon, this is Doug. Historically, in the 11 new offices that we've opened over the last few years, we'll typically hit that $20 million to $30 million range within 12 to 18 months. We will usually target moving from LPO to branch at that point unless we have -- in a couple of cases, we've had some very other compelling reasons as to momentum pipeline, number of lenders and activity that have said we feel very good about it. We're seeing deposit opportunities and we're moving quicker. I think Cedar Rapids, Iowa was one of those that we're moving quicker on. North Phoenix, just because of the experience we've had there, we're also moving quicker. We've sort of bypassed the LPO stage on North Phoenix and went right to full-service branch, given the experience we'd had on the other Scottsdale location, which is about 11 miles away. So generally, we're also hitting probably about a 1% ROA in year 3 and then possibly accretive to ROA, ROE probably somewhere around year 4 and 5.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [41]

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Okay. And either you or Ken, one of the quotes in the release is continued success in recruiting new talent. Can you talk a little bit about that? And in the absence of M&A, is this maybe the next best use of using some of your capital, is opening more offices and hiring more people? Is that possible?

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [42]

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Yes, absolutely, Jon. And I think, certainly, Pete mentioned earlier about the organic growth relative to capital creation. And from a year ago, we're up about 8 or 9 -- 8.5% as far as banker numbers, revenue producer numbers and a good share of those come in new markets that we've added in the last year. And when we look forward, we probably see 8% to 10% increase in bankers as we go forward into FY '19. We look at that probably to create a good share, 1/3 to 1/2 of expected loan growth in new year. And historically, that has proven to be the case. New bankers, new hires, new markets have historically added a [significant component] to historical loan growth. Relative to recruitment, many of the bankers we're seeing are in the more senior-level range. That's what we target in our new markets, are people in the 10- to 15-plus range. A couple of the leaders we've hired in a couple of the new markets are probably approaching 20 to 25 years banking experience in the market we're starting in. That's a key for us as we take a look at what's the successful model been of the previous 11 offices and as we head into the new ones we highlighted here in the release. A lot of the background has been from regional and large national banks, are going to be predominantly the best fit as we go forward in these metro markets with the right kind of hires.

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [43]

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And Jon, you're absolutely right. As far as the M&A with the pricing getting so expensive, this is an alternative that we're going to increase and expand on. So we've -- we did 1 or 2 in the past, now we're 4 or 5, maybe more, per year as far as de novos. So we'll continue to look at that and we have identified other markets that we can continue to do this for. So this would be a big alternative for us for growth versus M&A.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [44]

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Pete, anything to think of -- think about on expenses with this?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [45]

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Look, I think you pull out the consulting fees for the $400,000. I think healthcare, hopefully we can pull that out as well. So once you back those 2 out, I'd expect a modest increase, a 1% or less increase on the remainder of the expense base for the next quarter, Jon.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [46]

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Anything longer-term here with these branches, though? Manageable?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [47]

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Look, we think it's manageable. I think if you look at -- it probably doesn't come through at your level. If we look at the $10 billion investment over the last 3 years, Jon, we've probably been running at a 15% to 20% increase in support areas around sort of risk and finance and credit and building up capability there. So as we've gone through the $10 billion, they will increase more modestly and then the growth in expenses will come from more frontline. And that support investment is how we're thinking about it internally.

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman, President & CEO [48]

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And we are, through attrition, cutting staff at our legacy branches to help offset some of these costs too, so.

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [49]

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Jon, to the comment on maybe -- at least the salary cost side on people, I think probably the net -- the increase in banker numbers at new offices is probably half made up by reallocation of resources coming out of other locations as we see slower growth or attrition opportunities, consolidation opportunities.

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Operator [50]

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Our next question will come from Dave Rochester of Deutsche Bank.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [51]

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Just back on the NIM, you guys had a nice mix shift away from borrowings this quarter with the deposit growth that you had. Are you shooting to drive those down further? Are there maturities coming up that you can replace with deposits? Any thoughts there?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [52]

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We'll continue to look at it, Dave. As I said, we probably put on net about $70 million in brokered CDs, which is part of the borrowing decrease because there's been a little bit of a NIM pick up. So certainly, we'll just look at whatever the most cost-effective is, absolutely.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [53]

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And then just big picture on the NIM, I know you mentioned a little bit more NIM expansion next quarter. Is that off of the adjusted NIM or the reported NIM? I want to make sure I had that right.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [54]

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Yes, good question, Dave. Whenever we talk about NIM internally, we talk about adjusted NIM.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [55]

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Adjusted, yes, okay. So it's off that adjusted, you're not backing anything like accretion or anything else out of that. It's just on the adjusted NIM?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [56]

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Yes, that's right.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [57]

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Perfect. And on expenses, I guess, just bigger picture, appreciated the puts and takes there going forward, how are you thinking about maybe annualized expense growth over the next fiscal year? Just to get a sense for -- with all the expansion that you're talking about, where that could ultimately come out.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [58]

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Yes, sort of still within that inflationary range. We're still within that sort of 4%-ish range, Doug. 3% to 4% we think is manageable. As Doug and Ken mentioned, there's a bit of a remix of looking at taking advantage of some attrition in slower growth areas and reinvesting in higher growth. And as I mentioned, the compliance spend certainly is still going to be there, but maybe a more modest increase than what we've seen over the last 2 years. So we think we can balance it out in that respect.

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Operator [59]

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Our next question will come from Tim O'Brien of Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [60]

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Just one follow-up on the criticized loans, the classified loans. Michael, do you happen to know what proportion of those are tied to your Ag business?

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Michael Gough, Great Western Bank - EVP of Credit [61]

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Of our total classifieds, I believe I can tell you exactly how much of them are. If we look at total classifieds, roughly $161 million of them are Ag related.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [62]

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And what's the total classifieds?

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Michael Gough, Great Western Bank - EVP of Credit [63]

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About $286 million.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [64]

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About 60%, which has been pretty consistent with how they've been running for a number of quarters, Tim.

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Operator [65]

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Our next question will come from Damon DelMonte with KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [66]

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Most of my questions have been asked and answered, but, Pete, just wondering if can give a little perspective on the provision coming up here in the next quarter and as we go into fiscal 2019?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [67]

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Yes, sure. Well, we're certainly not looking to build provision, Damon. I think it's come off a point this quarter, so I think that almost rounded up to being flat with last quarter. So we're pretty comfortable with the current level of provisioning. I think charge-offs have settled down into sort of that mid- to high-teens area, or I don't think we're seeing anything coming down the chute that would materially move sort of provision coverage or charge-offs. Michael, but -- if you'd like to add something.

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Michael Gough, Great Western Bank - EVP of Credit [68]

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There will always be migration to and from the Watch risk rating, to and from sub, but I don't see any needle movers at the present time.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [69]

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So something consistent with what you've seen in the current quarter, pretty consistent provisioning coverage, and we're not seeing anything -- any surprises as we sit here today in sort of charge-offs for the next quarter.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [70]

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Got it, okay. And then just one other one, I think you guys had mentioned you had a pretty strong pipeline of completed commercial construction projects that are -- we'll hopefully be funding in the next quarter. So how big is that? And what are you expecting for drawdowns on that over the next few quarters?

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Douglas R. Bass, Great Western Bancorp, Inc. - EVP [71]

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The unfunded I think we called out last quarter were in $735 million range. That's -- continues to increase modestly from last quarter, not probably the increase we saw from January. We continue to see the draws come in probably on a straight line over the 18- to 24-month range. New originations and pipeline at the moment continue to backfill to keep the unfunded portion very similar or increasing to what we've seen in the past.

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Operator [72]

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Ladies and gentlemen, having no further questions, this will conclude our question-and-answer session and conclude the Great Western Bancorp's Inc. Third Quarter Fiscal Year 2018 Earnings Conference Call and Webcast. We thank you for attending today's presentation. You may now disconnect your lines.