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Edited Transcript of GWB earnings conference call or presentation 25-Oct-18 12:30pm GMT

Q4 2018 Great Western Bancorp Inc Earnings Call

Sioux Falls Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Great Western Bancorp Inc earnings conference call or presentation Thursday, October 25, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ann Nachtigal

Great Western Bancorp, Inc. - Director of Corporate Communications

* Douglas R. Bass

Great Western Bancorp, Inc. - President & COO

* Kenneth James Karels

Great Western Bancorp, Inc. - Chairman & 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

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

* 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 morning, and welcome to the Great Western Bancorp Fourth Quarter and Full Year Fiscal Year 2018 Earnings Announcement Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ann Nachtigal. Please go ahead.

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Ann Nachtigal, Great Western Bancorp, Inc. - Director of Corporate Communications [2]

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

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 uncertainty 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 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, let me turn it over now to Great Western Bancorp's Chairman and Chief Executive Officer, Ken Karels. Ken?

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

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Good morning, and thank you for joining the call. Net income for the quarter was strong at $42.3 million or $0.72 per share, an increase of 13%. Adjusted net interest margin declined slightly to 3.77% as we focused on deposit growth this past year. Loan originations remained solid, but prepayments of loans accelerated, resulting in an increase of 0.4% for the quarter and 5% for the year.

Our efficiency ratio remained strong at 48.1% for the quarter, but was elevated slightly due to some OREO expense. Profitability was exceptional, with our return in tangible common equity at 15.7%. Now for more insight on our fourth quarter financial results, I'd like to turn the call over 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. Thanks for joining us. Looking to revenue, net interest income was $126.9 million for the quarter, which was in line with the prior quarter, and net interest margin for the quarter was 3.79% and our adjusted net interest margin, 3.77%. Adjusted net interest margin declined 17 basis points quarter-over-quarter, with 7 basis points of this attributable to a $2 million reduction in purchase loan interest and 4 basis points from elevated interest reversals from loans moving to nonaccrual status. We do not expect these items to reoccur next quarter.

Outside of these two items, the remaining 6-basis-point decline was driven by a 12-basis-point increase in the cost of deposits, partly offset by a 5-basis-point increase in loan yield. A lower increase in LIBOR compared to the prior quarter also contributed to a 1-basis-point decline. We'd expect margins to stabilize in the following quarter.

Net interest income for the quarter was [$98.3 million], a 2% increase over the prior quarter. The increase was driven by stronger service charge income through an increase in commercial credit card volumes and seasonally higher NSF income, an increase in wealth management income, and seasonally stronger mortgage revenue. These increases were offset by a decline in swap sales revenue and also a $0.9 million nonrecurring gain on a share sale in the prior quarter as well.

Net interest expenses were $59.6 million for the quarter, which is an increase of $1.7 million from the June quarter. The movement was driven by a $2.5 million increase in REO expense, mainly attributable to one large parcel coming into REO for the quarter. We would expect REO expense to be more in the $700,000 to $800,000 range moving forward quarterly based on what we have currently.

Outside of this item, expenses were well-controlled, with salaries and employee benefits down $1.4 million due to a $500,000 decrease in consulting fees and also healthcare claims from the prior quarter. Also, data processing costs declined by $0.6 million due to a benefit on a contract closeout during the quarter. These items were partly offset by a $1 million increase in professional fees which was driven by a one-time amount of $0.6 million which were not reoccurring, and the $0.3 million increase in consulting costs which were elevated during this current quarter.

Finally, we moved to a fully phased-in federal tax rate in the December quarter and would expect that to move our effective tax rate down to approximately 23% in the following quarter. I'll now pass over to Doug Bass for more comments on the balance sheet.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [5]

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Thanks, Pete, and good morning, everyone. During the September quarter, we saw good origination activity, however several scheduled closings moved into October. Pipelines remain healthy across all metro markets, reflecting a split of 60% in commercial real estate and 40% in the commercial and industrial sector. Growth was most robust in the commercial real estate category, with Colorado, Arizona, and Nebraska supplying the growth. Commercial non-real estate loans declined by $51 million as a result of 2 large paydowns through the quarter.

Good progress continues to be made by the new loan production offices in Cedar Rapids, Iowa; Wichita, Kansas; and Yuma, Arizona, which are now open and fully operational. We have commercial bankers in each office and are looking to hire further in each of those markets. New branch offices opened in Cedar Falls, Iowa in August, with North Scottsdale, Arizona opening in December of this year. We have lenders already in place at these locations.

As we look forward into Fiscal Year 19, we are projecting loan growth to again be in the mid-single-digit range. We feel all the pieces are in place for execution of this plan due to new offices being opened. We have hired 10 new commercial bankers over the last few months in key metro markets, all of which are on board and producing. Our current pipelines are well, as well as loan closings and loan growth in the early stages of the first quarter, are indicative of that expectation.

Deposit growth during the quarter was approximately $150 million, or 1.5%. Growth in non-interest-bearing accounts of 2.4% indicate growth in C&I and operating relationships. The growth was split evenly between a $49 million increase in non-interest-bearing deposits with the remainder in other business deposit categories, offset by public fund and seasonal consumer outflows. We have seen stronger inflows into non-time maturity accounts as customers look to maintain flexibility with their cash with the expectation that rates will continue to rise. We have continued to utilize broker deposits, as they have been most cost-effective than federal home loan bank funding, but have not materially added to balances during the quarter.

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 are satisfied with asset quality during the quarter, although we have seen a slight decline in metrics through the movement of a small number of credits. Net charge-offs for the quarter were $5.2 million, or 22 basis points of average loans on an annualized basis, still at a very manageable level, and also we note charge-offs for the 2018 year were 18 basis points, well down from 26 basis points in 2017.

Our allowance for loan and lease losses as a percentage of total loans was 69 basis points, with coverage consistent with the June 2018 quarter. Our comprehensive credit coverage, which includes credit-related fair value adjustments on our long-term loan portfolio and purchase accounting marks remain sound at 96 basis points of total loans.

Compared to the June 30 quarter, we saw an increase in Watch credits of $67 million to $343 million due to the downgrade of a small number of dairy and cattle loans. We have previously discussed the fact that milk prices have been depressed for a number of quarters, which has led us to monitoring these credits more closely, but at this stage we do not see the potential for material charge-offs within this portfolio.

Substandard credits declined by $15.4 million for the quarter, with a property move into OREO which increased by $12.9 million. We've now cycled through the normal renewal routine associated with 2018 operating needs for our ag producers, including all Watch and [worse] related credits. At present, and consistent with prior comments in past earning calls, we are expecting 2018 results to be similar to 2017 for most grain operations, given the current state of market prices, higher yields, and related budget projections. We continue to actively monitor the discussion around trade tariffs, but at this point in time we do not have significant concerns around potential impact on farmer profitability for 2018.

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 & CEO [7]

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Okay, thank you, Michael. We are very pleased with performance for Great Western Bank this past year, with earnings-per-share increasing 9% and adjusted earnings-per-share increasing 17.9%. Since our listing as a public company in 2014, our tangible book value per share has increased 11% on a compounded basis, compared to only 5% for our peer group. Deposit costs will rise for all banks. With our strong core deposit base, we expect our margin to stabilize.

We continue to manage our efficiency ratio and believe that our current efficiency ratio is sustainable. Thank you for your continued interest in Great Western bank and we will now open up this call for questions.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions) First question comes from Jon Arfstrom with RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Let's just start with the margin, I guess, Pete, for you. You surprised at all by the margin this quarter? It sounds like you carved out the LIBOR issue a little bit, but just curious if you're satisfied with the margin performance. And then also maybe give us some thoughts on if you think that that loan yield expansion and deposit cost increase can kind of reverse itself and stabilize the margin a bit.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [3]

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That was disappointing for the quarter, as we said. There's a couple of things in there. Obviously the nonaccrual right off through the quarter was elevated. Load accounting is not really a big dial-mover for us usually. It just ticks along. Unfortunately, this quarter, we had a $2 million decrease in that, which is not a huge number in the grand scheme of things for us, but obviously a big thing on margin. So those two items were disappointing. And then also, as well, through the quarter we had a couple of funds that prepaid, so we had sort of elevated amortization on those. So, overall, it was a disappointing one. So I would expect yield on investments to increase significantly next quarter there, and also without the nonaccrual interest and with the loan accounting being more normalized next quarter as far as we can see at the moment, we'd expect margin to stabilize moving forward.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. So you're thinking that 380 base is a good base with potential for some expansion from there?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [5]

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Yes, we think that's a good base. Yep, we do. Obviously, we'll just keep having to track deposit costs, and certainly Doug can chime in on new line originations. We're seeing those in sort of the low-to-mid 5s, but obviously a little bit of compression there as well, which is hurting a little bit as well.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [6]

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I think also, some of the fixed-rate loan closings that happened in the quarter were some that had probably been in the pipeline for 6 months plus, and as on a couple situations we had locked in or agreed to some fixed rates, we're continuing to work through probably a back book of rate commitments that should continue to increase, with the average weighted average new loan origination rate just continuing to track up every week and month.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [7]

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Anything else apart from the NIM side of things we can help you with?

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [8]

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I'm sure others will have questions as well, but I'm just curious about just some of your longer-term margin expectations. I mean, you guys have fought the good fight here, and it's not unusual to see this kind of compression. But longer-term, do you feel like you can hold this kind of margin range?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [9]

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Yes, we do. There's a couple things there. Obviously, we think deposit costs are -- they are going up, but that's been a similar progression over the last few quarters. Certainly, we've been reinvesting in high yields on the investment portfolio side of things as well, and certainly on the loan side of things we're looking at things we can do to get a little bit more there. And also, as well, swap income was lower this quarter. I'd expect that to be higher this quarter and going forward, so that helps margin as well. So, yes, we do.

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Operator [10]

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The next question comes from Damon DelMonte with KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [11]

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Just wanted to talk a little bit about expenses. I know you had the elevated OREO cost. I think you'd said that something around the $700,000 to $800,000 level is reasonable. So if we back that out of this quarter, is that a good run rate for us to go forward with, or would you maybe see a bounce-back in salary and benefits which were down this quarter?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [12]

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Yes, next quarter, maybe a little bit of an uptick, but our year-end merit items go through in the March quarter, so not too much of an uptick. So if you back that expense out from REO, I think you are at a pretty good base. There's a few sort of ins and outs there, but sort of I'd say if you look at a base excluding the REO, you're at about 57.5. We have said we'll sort of grow inflationary-wise, so call it sort of 3%, 4%, so that gets you sort of slightly over 58 million, for around sort of about 58.25 for the next quarter if you sort of just average that up.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [13]

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Okay, great. And then I think you mentioned there was like a one-time expense on data processing with a vendor? Or maybe it was a recovery?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [14]

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Recovery. Yes, just a benefit on a contract closeout. So we had accrual a quarter or two back, if you remember there, and we just worked through that and came out a little better than what we thought.

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Operator [15]

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The next question comes from Steven Alexopoulos with JPMorgan.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [16]

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Just to start on the NIM again, so regarding the outlook for the NIM to be relatively stable here, what's the assumption for the rising deposit cost that underlies that?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [17]

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Pretty consistent with what we have seen. We're not seeing any acceleration in that at this stage. Obviously, we've seen pressure in it the last 3 or 4 quarters, but I think as you see that, from what we've seen and as it's come through the numbers, it's been a stable increase.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [18]

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I think -- what did we see? A 37% beta, really, this last quarter. I think the issue has been getting the loan beta up there, and we're starting to see that happen. The other issue this last quarter, of course, is LIBOR didn't increase as much as would normally increase, so we expect that to change around too.

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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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Right. So, I mean, deposit cost for the last 2 quarters at least were up to this 12% to 13% basis point range. Do you think the loan data can actually match that during 4Q?

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [20]

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I'm not sure it can match it, but it surely can increase over what it has this last quarter.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [21]

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And also, I think investment yield should increase as well in this next quarter.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [22]

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We did get hit on an investment amortization. And also in backup, plus yields were up too.

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

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And also [day] counts one lower this quarter compared to next, so that should help.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [24]

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Okay. I mean, but just to follow up on Jon's question about sustainability of NIM over time, I mean with deposit costs going up this pace maybe for the next couple of quarters -- we'll see -- I don't understand how your NIM could hold in stable as we look out over the next year. Could you explain that?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [25]

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Yes, I think there's a couple things. I think if you look at our portfolio, 40% is variable with some adjustable on top of that, so I think we do have some benefit in the back book. Certainly, with LIBOR, if there's an increase in LIBOR, that helps us. Certainly, with swap sales, which go through net interest income, that was depressed for the quarter. We do expect that to be slightly stronger each quarter going forward as well. And then certainly on the loan origination side, while we're seeing some pressure, we'd certainly hope that spread sort of starts to stabilize there as well.

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Steven A. Alexopoulos, JP Morgan Chase & Co, Research Division - MD and Head of Mid-Cap and Small-Cap Banks [26]

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Okay. And then just finally, of the $200 million of time deposit growth you've got in the quarter on average, is that essentially at this stage all new money, or are you starting to see a migration of your current customers into that product?

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

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Yes, a bit of both. So on the time deposit side, probably most of it is new money, I'd say, but a little bit of migration. That's probably more on the consumer side. On the business side of things, people are still happy to leave it in money market and get the yield and keep the flexibility there.

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Operator [28]

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The next question comes from Dave Rochester with Deutsche Bank.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [29]

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Sorry to belabor the NIM here, but just regarding the interest on acquired loans, were you saying that you expect that reduction to reverse so that should bounce back this quarter and that's baked into your NIM assumption?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [30]

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No, I'd expect that to stabilize. It could increase a little bit, certainly maybe in the $300,000 to $400,000 range, so maybe it could increase by a point or so, but I wouldn't expect it to add 9 basis points, for example.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [31]

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Yep, got it. And then what are you guys assuming for interest rates for your longer-term view on the NIM going forward? How many more rate hikes, and then where's the middle of the curve in your assumptions?

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [32]

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You know, I think we're pretty much what the market's considering here, maybe 1 more this year, 2 to 3 next year is what we're considering.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [33]

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Yes. Just a lot of (inaudible) to be honest.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [34]

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Okay. And you mentioned the bonds, the prepaid impacting the securities yield. What was the securities premium am expense this quarter and what are you assuming for next quarter for that?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [35]

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Yes, look, I don't have the premium -- I don't have the amortization --

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [36]

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Just the additional, Pete, was a couple hundred.

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [37]

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Yes, probably a couple hundred thousand. I don't have the basis point impact there, but I would expect securities yields to increase some next quarter by probably 5 to 10 basis points, so you should see a decent bounce-back there.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [38]

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Yes, and it seems like that continues to be really low here. Where are you seeing securities reinvestment rates and do you see a potential to move that yield meaningfully higher over time?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [39]

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Yes, we do. We're seeing reinvestment rates at well about 3, sort of 3.25. So, yes, we would expect that to move higher.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [40]

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Great. Just one last one on credit, if I can. You guys gave a lot of credit on the color side. Really appreciate that. Given everything you said, you sound fairly positive on the idea that losses to remain low in some of the segments you talked about. How are you guys thinking about the provision from here, just given that backdrop?

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Michael Gough, Great Western Bank - EVP of Credit [41]

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Thanks for the question, Dave. First of all, I think your summary is exactly right. We think we know what the problems are, what the exposures are, and we've caught out the provision accordingly. I would say, my view, steady. I'm certainly not expecting any wild increases at this point in time.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [42]

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Yes, I would agree with that. I think we're pretty -- you can look pretty much at this year and kind of look at next year being pretty steady to that.

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Operator [43]

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The next question comes from Ebrahim Poonawala with Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [44]

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So, one follow-up question on the margin. Just want to make sure I have the right base. So we reported 377. Do we expect the 4 basis points to come back, so 381 as a starting point? And then swap fees and everything else that you discussed, is that the way to think about it?

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

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The 4 basis points being the interest reversal?

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [46]

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Yep. Like is 381 the right way to think about it or 377?

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

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Look, I would start at the 377, but certainly, as we said earlier, on sort of stabilizing from around there, so the 377 to the 380 range.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [48]

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Okay, and what would the swap fees contribution be this quarter?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [49]

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Minimal. Yes, minimal. Sort of down from normal. Probably a basis point or 2 down from normal.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [50]

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And do you expect that to normalize next quarter in that 377 to 380 range?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [51]

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We would hope so, yes. Yes, look, it's a lumpy business, but certainly pipeline closings looks better for this quarter than what it did in the past quarter. Yep.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [52]

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Understood. Helpful. And just moving to -- we are obviously building up capital quite nicely. You previously talked about wanting to do M&A. I'm just wondering, in terms of given the pullback in the stock, if you can remind us in terms of, one, if you have any appetite to buy back your stock at current levels? And does the deposit pricing environment make you also a little more active in terms of looking at acquiring a bank?

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Kenneth James Karels, Great Western Bancorp, Inc. - Chairman & CEO [53]

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Yes, Ken here, I'll answer this here too. So we have authority yet for roughly around $94 million of stock buyback, and definitely we'll look into the market, although we can't telegraph that. But have authority, have bought, we will continue to look , especially with the stock price pullback that we've seen. That's something that's obviously much more attractive now to do. On the acquisition side of it, you know, there's a lot of activity going on, yet we're pretty cautious. And as I mentioned at the last call here, pricing was high. You know, with the pullback now that we've seen in bank stock price, not sure whether seller expectations have pulled back any yet too. So I would say we're going to be cautious as we look at that. Very interested in, obviously, deposit-only opportunities, whether it's in branch sales. That's something we would very aggressively take a look at if we had the opportunity to do that.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [54]

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I've got it. And could you remind if, is there a targeted capital ratio either around TCE, risk-based, or CET1 that we should think about where you want to manage the bank?

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [55]

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Yes, sure. TCE is drifting higher than we need it to be. If an acquisition opportunity came up, we'd certainly be comfortable moving that down into 7s.

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Operator [56]

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The next question comes from Tim O'Brien with Sandler O'Neill and Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [57]

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Thanks, guys. Just one question. On credit, the downgrades to nonaccrual this quarter, what kind of loans were they? Can you give a little color on those?

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Michael Gough, Great Western Bank - EVP of Credit [58]

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The largest one for the quarter was a cattle operation. That is the majority of where it was. This had been an identified problem credit for some time. We think we're taking the conservative and the appropriate route on that one. There are a lot of factors in place in that operation and it's somewhat complex and not as simple as just buying and selling cattle, but that's where most of it came from. The other one that accounted for about a fourth of the increase, I believe, was an ag land deal in one of the geographies.

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Operator [59]

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The next question comes from Jeff Rulis with D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [60]

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A few of my questions have been answered, but I guess there was a sizable drop in kind of the goodwill or intangible sequentially. Was there something amortizing that was lumpy? That run rate seemed like that lowered quite a bit by quarter.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [61]

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I think we're checking the numbers. We're kind of shaking our head whether it did drop, so --

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Peter Chapman, Great Western Bancorp, Inc. - Executive VP, CFO & Principal Accounting Officer [62]

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Yes. Amortization, do you mean it's sort of gone from 420 to just under 4, so it's dropped by --

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [63]

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No, I just see the debt, if you sort of gather up goodwill and intangibles, that number was a bit lower than kind of the run rate, I suppose. I could double-check it, but I guess the question, there's nothing on your end --

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

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Nothing out of the usual.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [65]

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No, nothing out of the usual. Yes, we can check and get back to you on that, but nothing out of the usual.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [66]

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All right. And then maybe just a follow-up on the OREO, then. The detail there on that property, what kind of type and expectation on I guess sharing that or moving it out, expectations there.

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Michael Gough, Great Western Bank - EVP of Credit [67]

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The type of property that it is is a hotel and convention center. Expectation, as with all of our OREO, which we've had for a number of years is that once we get control of it, which is the stage we're at now, make sure we get the legal process in place so that we can get it moved. In this particular instance, we had a couple of owners more concerned with pursuing legal action against each other. We said, that's where your priorities are, that's fine. Put a receiver in place, we've got control, we'll get the property, we'll get it sold. Our history with OREO is we do not hold it hoping that we're going to see an upturn. We don't speculate. We know what we're good at and that's being a bank, so when we get OREO or other assets back, we look to get control and get them moved as soon as we can. And the larger property, because I think still we have less than 25 parcels total in OREO, this one obviously is sizable, but that is our culture and historically how we've approached disposition of OREO.

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Operator [68]

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The next question comes from Nathan Race with Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [69]

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Just a question on loan growth. Doug, just curious to get your thoughts on kind of what you're seeing on payoffs at this point in the quarter and kind of what gives you the comfort that we can get to that in maybe 4% to 6% loan growth in the next year just kind of based on what you're seeing in terms of line utilization with commercial customers and so forth.

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [70]

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I think, first off, on the first part of your question on payoffs, we had a couple large C&I that had some partial sales and some declines that had very sizable payoffs, about $51 million. Secondly, we also had a couple large real estate projects which have been the case in the last couple quarters that have come to a stabilization point and sought permanent financing. And I think with the increasing long-term rates, albeit a little more flattened as of recent, they're trying to lock in long-term rates so we're seeing a lot of the construction stabilization projects try to push quicker into long-term markets. And then relative to sort of the new origination side, pipelines are very consistent when we track totals on a quarter-to-quarter basis. Closing activity in the near term, based on what we've experienced here in the first 3.5 weeks of October, has been very good. Sort of ties into a couple comments relative to NIM and the pipeline component that ties into swap income. We've probably got a half-dozen material transactions scheduled for the closing that will have both loan volume and NIM implications with the swap income as well. And then I think, to the banker number and the new offices, when you start the new offices, you know, it's 4 to 6 months for people to get up and running, get going, create activity, create some closings. I think we've got closings for 2 of the offices that are going to happen for their first closing. They've been on board about 4 months, and some material closings here in October and November for 2 of those offices, which will be their first closing. So I think there's several reasons why we feel confident here in the near term based on the activities.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [71]

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Yes, that's great color. Thanks, Doug. So it sounds like payoffs, based on what you're seeing so far under the calendar year fourth quarter are somewhat coming down a bit?

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [72]

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Yes. I mean, that's the anticipation at the moment. I do caution that a lot of the large real estate projects that we've been involved in on a construction standpoint are performing very well to assumptions, and I think it's borrower desire and expectation to get those into the long-term fixed rate perm markets as quick as possible. We don't have scheduled anticipated payoffs in Q4 at the moment, but projects are tracking well and that can always happen.

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Operator [73]

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The next question comes from Terry McAvoy with Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [74]

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Just to follow up on the new loan production offices, are there specific targets you have in mind in terms of growth, and are the expenses for this initiative coming in line with expectations, and maybe built into that, that $50 million number that was discussed earlier?

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Douglas R. Bass, Great Western Bancorp, Inc. - President & COO [75]

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On the expense side, yes, those are all brought in. And typically, you know, the expenses lead the revenue by 4 to 6 months, just given ramp-up and some modest occupancy and then salary expense. And then relative to production expense, you know, it varies by office based on number of lenders, but expectations are probably in the $15 million to $20 million production range per bank or per market. So when we talk about the 10 net new bankers, 8 of which are in new markets, the other 2 are in Denver, we do anticipate some good traction coming from those new markets that we'd opened in the last 4 to 6 months.

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Operator [76]

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Okay. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.