Great Western Bancorp, Inc.
Q3 2019 Earnings Call Transcript

Published: 24 Oct 2019

[Operator:]

Good morning and welcome to Great Western Bancorp's Fourth Quarter and Full Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]Joining the call this morning is Ken Karels, Chairperson, President and Chief Executive Officer; Doug Bass, Chief Operating Officer; Peter Chapman, Chief Financial Officer; Karlyn Knieriem, Chief Risk Officer; Michael Gough, Senior Vice President Credit; and Michael Doyle, Interim Chief Credit Officer.Before getting started, Great Western will like to remind you that today's presentation may contain forward-looking statements that are subject to certain risks and uncertainties that could cause Company's actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosures contained in the presentation on the company's website, as well as their periodic SEC filings for a full discussion of the company's risk factors.Additionally, today certain non-GAAP financial measures will be discussed 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. Please note that this event is being recorded.I would now like to turn the conference over to Great Western Bancorp's Chairperson, President, Chief Executive Officer, Ken Karels. Ken, please go ahead.

[Ken Karels:]

Okay. Good morning and thank you for joining the call.With this quarter marking the end of our fiscal year, I'd like to point out a few highlights. Net income of $50.3 million is significantly higher than last quarter, mainly due to lower credit related charges. We have been very proactive in managing our deposit interest costs with these declining during the quarter, and we will continue to aggressively work these down next year. Expense control remained strong with our efficiency ratio of 45.8% for the fiscal year.We have continued to execute share buybacks, with $20 million in repurchases executed during the quarter in authorization filed for 75 million more. And for the fiscal year, tangible book value per share has increased 10.5%.Now for more insight in our September quarter financial results, I'd like to turn the call over to our Chief Financial Officer, Peter Chapman. Pete?

[Peter Chapman:]

Thanks, Ken and good morning everybody.Looking to revenue, interest income was $139 million for the quarter, which was - a modest increase from the prior quarter. Our net interest margin and our adjusted net interest margin were 3.7% and 3.69% respectively for the quarter.The adjusted net interest margin was down 2 basis points quarter-over-quarter, primarily as a result of lower loan and investment portfolio yields, partially offset by a reduction in the total cost of deposits to 5 basis points. Continued tightening of interest rate by the Fed will pressure NIM. We will continue to proactively manage deposit costs, but would expect NIM to drift down 2 to 3 basis points per quarter in the current rate environment consistent with prior quarter comments.Non-interest income increased by $4.3 million for the quarter to $15 million of the increase $2.7 million was attributable to lower credit related charges $0.7 million attributable - to higher derivative swap income, $0.4 million of this increase was due to seasonally stronger mortgage income. The remainder of the increase was due to higher interchange and overdraft NSF fee income for the quarter.Looking forward, we also expect the acquisition of the Colorado trust business in October to add approximately $0.5 million a quarter in non-interest income. Non-interest expenses were $55.2 million for the quarter, a decline of $0.8 million. Salaries and benefits declined by $0.8 million mainly due to the lower variable compensation expense in the final quarter of our fiscal 2019.Data processing increased by $0.4 million due to a number of annual contracts being renewed in the September quarter and these were offset by a decline in professional fees of $0.5 million mainly due to a lower FDIC assessment during the quarter.While we continue to be diligent monitoring expenses, we do expect these to increase in the following quarter due to the absence of approximately $2 million in non-recurring benefits during the current quarter. The addition of the Colorado Trust business and project in investment spend to have the expense run rate more in the $58 million to $59 million range looking forward.For more now on loan and deposit growth, I'll turn it over to our Chief Operating Officer, Doug Bass. Doug?

[Doug Bass:]

Thanks, Pete and good morning everyone.At the end of the September 2019 quarter end loans were $9.7 billion, which is a decline of $180 million from the prior quarter, which brings full year growth to $291 million or 3.1%. During the quarter we saw a decline in construction and development balances of $163 million. This was partially offset by $105 million increase in owner and non-owner occupied real estate balances.In addition, multi-family real estate balances declined by $49 million. The change in loan balances were driven by the decline in both construction and development and multi-family categories that totaled $212 million. This was a combination of projects being completed and stabilized more quickly than forecast and also the refinancing of existing projects to the secondary market, due to more favorable terms and lower interest rates.De novo offices opened in the last seven years continue to be a major contributor of growth for fiscal year 2019. Those offices contributed $113 million of loan growth over the prior fiscal year end. Our plans for 2020 are to continue to add both lenders and targeted existing markets as well as consider new locations when market leadership opportunities arise.Agricultural balances decreased $41 million during the quarter with a decrease, driven by the exit of relationships with a higher risk profile. We will continue to see this trend in upcoming quarters as operations self liquidate and secure financing with other institutions.During the course of fiscal 2020, we will continue to work on exiting loans in all categories with a higher risk profile. This will impact overall loan growth, however, we replacing the improvement of asset quality metrics as a higher priority than overall loan growth. As such, we would expect loan growth to be in the mid to low single-digit range for fiscal 2020.Deposits grew $64 million or 0.6% during the quarter we saw an increase of $71 million in business customer balances and $66 million in brokered and treasury funding as cost-effective alternatives to Federal Home Loan Bank, offset by $73 million of seasonal consumer outflows. This brings fiscal year-to-date deposit growth to $567 million or 5.8% over prior fiscal year end.We also saw the cost of our interest bearing deposits declined by seven basis points during the quarter and we'll continue to move our deposit rates commensurate with declining loan rates to maintain a targeted net interest margin.Let's turn the call over now to Senior Vice President of Credit, Michael Gough who will take us through asset quality developments. Michael?

[Michael Gough:]

Thanks Doug.For the quarter, we have seen more modest credit related charges in the June 2019 quarter with these being $4.2 million, down from $31.7 million in the prior quarter.Net charge-offs were $7.8 million for the quarter, which is down significantly from $17.5 million in the June 2019 quarter. Of this amount, $5 million was attributable to Ag relationships with the remaining $2.8 million spread across a number of smaller non-Ag relationships.Looking at our classifications, substandard loans have declined by $4 million through the quarter to $472 million with that category largely stable, and watch loans increased by $185 million to $406 million. Of this increase, $101 million is related to dairy credits, and the remaining $84 million was due to a small number of credits in the remainder of the portfolio, the largest of which was a health care facility. We will cover off the increase in watch dairy credits along with the dairy update momentarily.With respect to key asset quality ratios, net charge-offs to loans were 31 basis points for the September quarter, and 36 basis points for the fiscal year.Our allowance for loan and lease losses as a percentage of total loans is 73 basis points and our comprehensive credit coverage, which includes credit related fair value adjustments on our long-term portfolio and purchased accounting marks is 94 basis points.I'll now turn over the call to our Chief Risk Officer, Karlyn Knieriem, who also oversees our loan review function and has been involved in overseeing our dairy portfolio for comments on that segment. Karlyn?

[Karlyn Knieriem:]

Thanks Michael.Last quarter, we saw a number of downgrades based on December 31 financials. Since our last earnings call, we have received all March and the majority of June quarterly financials for the largest and most complex borrowers.From these financials, operating trends are improving and in most cases driven by increases in revenue and apparent cost control. However, we did downgrade a handful of dairy credits totaling $101 million in exposure during the quarter as a result of interim financial results. Milk prices continue to improve in the second quarter signaling improved profitability.We continue to monitor for opportunities to de-risk this portfolio through selective underwriting guidelines and liquidations. Some borrowers will exit and some will upgrade through the normal course of business.Overall, we feel with improved profitability in the June quarter and current milk prices we are comfortable with current levels of provisioning on this portfolio.With that let's turn the call back to Ken for some closing remarks.

[Ken Karels:]

Okay, thank you, Karlyn.I am pleased overall with our year. We maintain a strong return on tangible common equity of 15.3% and a return on assets of over 1.3%, while we've had some issues to work through in the dairy and cattle portfolios, we have managed our expense base well and have grown the loan portfolio in a competitive environment.As Doug noted, we are working through some of the substandard relationships in the portfolio, which will lower our loan growth during 2020. But we feel in this environment, improving our asset quality is more important than stretching for loan growth. We will now open up the call for questions.

[Operator:]

[Operator Instructions] And the first question will come from Jeff Rulis of DA Davidson. Please go ahead, sir.

[Jeff Rulis:]

Question on the - it's really credit related and I guess the first part is kind of interested in the harvest and what you're hearing from farmers, you had a late planting season with wet weather and seems some I guess snow in the quarter so that's part A and then the second piece is the dairy book and maybe a follow-up for Karlyn - it's just, we've seen those prices recover, and yet, I think the adjustment on the 630 numbers was due to bottoming of prices then and we saw that adjustment, but prices have come up, I guess - is it a factor of kind of getting financials updated and maybe just walk through a little more on the dairy side as well. Thanks.

[Peter Chapman:]

Doug, go ahead and talk green probably first here.

[Doug Bass:]

Yes, let me, Jeff let me hit the harvest question first. I think there were pockets throughout our footprint that had delayed planting or preventative planning in some cases. And we've had generally favorable heat days in the summer that have progressed the crop in a vast majority of cases. Our harvest is commenced at varying levels throughout the geography. I think generally speaking, those with preventative plant.We've done some pre-emptive cash flow analysis and consider a vast majority of the operations to still be able to be on track and with current grain prices, yield expectations. We see many operations meeting fiscal year 2019 budget plans due to yields and revenue and they've done a continue to do an improved job on cost control. So neutral to positive results based on geography.

[Ken Karels:]

And then on the dairy - Karlyn and then go head Jeff.

[Jeff Rulis:]

One follow-up on the - and then any weather-related impact latencies I’ve heard some more negative things on snow?

[Doug Bass:]

Yes, the snow it absolutely didn't affect our trade area, it was really probably - north part of South Dakota most that's melted already - and in their full production. It's delayed harvest some, but that's coming off pretty quick right now and forecast for the next couple of weeks look pretty good. So I would say no, other than delayed harvest from a weather standpoint and majority of Iowa was moving pretty good.

[Karlyn Knieriem:]

Yes Iowa, Missouri and Nebraska are very good. And I think the capacity operators to pull the crops out are much quicker than they used to over the years, harvest will progress very quickly as Ken mentioned over the next couple of weeks. And I think to see favorable results.

[Jeff Rulis:]

Great.

[Ken Karels:]

And then the dairy here.

[Doug Bass:]

Yes, I'll start here Jeff, maybe on the dairy piece and Karlyn jump in. We've gone through and done a weighted average debt service coverage ratio on the entire portfolio and to give a couple of numbers for Q4 2018, that number was negative 0.53. Those results as they came in, reflected in a majority of the downgrades with trailing quarters prior to that, also in similar areas as we then trended to first quarter of 2019.The average return for the portfolio was a 0.74 debt coverage and then as we've hit quarter two of 2019 that average return is 155 on a debt service coverage. So as you indicated, the recovery in milk price, which has gone from the mid fourteens up to the mid sixteen's and trending higher, especially with component pricing that a lot of the dairy has benefit from which takes it to 18 to 21.We're seeing Q3 and forward-looking to be positive, reflective of really what we saw in the Q2 results. The other piece that's out there that is positive is because prices have increased, this is produced opportunities and then under the USDA revenue guarantee program for a number of the operators to lock-in in excess of 90% of production and for up to 18 months at above breakeven and above positive cash flow thresholds. So the increasing prices are producing options alternatives to prevent against any near-term declines in milk price as well.So then, as we take a look at the portfolio and dairy problem loans that are in the slide deck represent about 57% or $318 million of the total problem loan book. As we have dissected that we have about 19% of that book that are self-liquidating. We've got about 51% that are in process of refinancing and we have about 30% of that, that we anticipate being upgraded. All of those will take over the next two to three fiscal quarters.So we would anticipate by some time, mid 2020 that the majority of those results are worked through some of them will happen sooner than later.

[Jeff Rulis:]

Okay so.

[Doug Bass:]

I think generally speaking, as you mentioned Jeff, favorable terms, favorable milk prices and favorable financial results.

[Ken Karels:]

And Doug, maybe just on those that have liquidated already, we're seeing - full payoff for us and no loss obviously.

[Karlyn Knieriem:]

Yes, we probably had 8 or 9 dairies all be self liquidate in the last six to nine months and there is significant demand for the herds. And in cases of quota options in several states, those have also come at very favorable prices and there has been no loss on any other self-liquidations, and several of them have turned into depositors.

[Operator:]

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

[Jon Arfstrom:]

You touch on the other watchlist trends as well in terms of what drove that, and I know maybe resolution is the wrong term, but kind of your expectations for - that category?

[Michael Gough:]

The other watchlist trends, Doug just really covered the dairy piece the increases in the watch credits and the other - the non-dairy segments of watch. We still look at our book in the other segments compared to peers. The credit metrics we compare very, very favorably. So I don't think we can point to any large or single common factor among those.I think just normal migration of those other credits, dairy I think totally agree with Doug's comments on the timeline with the prices. We just need to get a number of quarters under our borrowers belt, so we cannot justify getting better ratings on those.

[Jon Arfstrom:]

So the $84 million that you signaled you're not saying there's anything systemic there it's just more granular nature. I guess is the term?

[Michael Gough:]

I’ll agree, it's really just a handful of credits in different industries.

[Doug Bass:]

The only common threat on any Jon, is going to be healthcare as we've seen some challenging reimbursement rates on reduced Medicare and Medicaid reimbursement levels. And I think a lot of those operations are in process of adjusting cost and delivery structures to match updated reimbursement rates that have come out from varying states.

[Jon Arfstrom:]

And maybe Ken or Michael Gough, just it seems like you have maybe a little bit more aggressive attack in the next fiscal year on credit. And I guess if we look ahead to 12 months from now, what kind of goals, do you have for working down the non-performers and some of the substandard balances. I'm just curious, what would be acceptable to you?

[Ken Karels:]

Well, we haven't really published - quarter of those numbers Jon, but as we said in our comments here. We are aggressively putting those - pushing to get those down. Doug went through the $318 million of dairy credits and I think there is a very good chance that in two or three quarters from now, most of that will work out either payoffs or self-liquidating or as he mentioned with debt coverage ratio now of 255 in the second quarter and holding the third quarter and looking favorable with them able to contract milk pricing.We would expect upgrade many of those. So, we really do see this dairy portfolio improving over, but it's going to take a few quarters. We use a rolling four quarter average on it so until they wipe out some of those, especially in the fourth quarter of last year. It's going to take a few quarters to get to where they have a rolling four quarter positive debt coverage ratio on to. But it looks pretty positive right now.And I think the forecast for milk price and what they're doing - lock-in gets this more comfort on that part of the portfolio. I would say and Mike, you can talk on this to - on the rest of the portfolio, we're definitely are beefing up our problem working out area with staffing and aggressively getting those work down. Mike, you want to comment…

[Michael Gough:]

No hear I that, we are adding resources to the workout unit selectively some in Ag some general - generalists in that area just to address any of the non-Ag or non-dairy credits that we're seeing coming in. I'm trying to bring a skill set to that I think we will be very effective. In terms of the act of identification in the portfolio of risk, we have put in - there were already process before I got here in place to do so.And I'm just reviewing those to see if there is anything further that we can do to be as proactive as possible and ensuring that we're on top of the portfolio as a whole, not just Ag dairy, but just the whole portfolio. So, that's - we will continue to try to tweak that and improve that as we go forward.

[Jon Arfstrom:]

And then Ken just a last follow-up here. The growth rate commentary in terms of loan growth rate, you're really not saying, you're seeing a slowdown in activity in your markets or any kind of material slowdown. It's just more of this addressing some of the credits that you may not be as comfortable with - that's the really the factor in the growth rate?

[Ken Karels:]

Absolutely, Jon as Doug mentioned there's approximately a little over $200 million of dairy that's either going to self liquidate or refinance elsewhere. And so that's a headwind for us in that will affect growth rate for this next year.

[Operator:]

The next question will come from Nathan Race of Piper Jaffray. Please go ahead.

[Nathan Race:]

Doug just on the dairy portfolio, but just curious, what we can expect a potential loss content and within that context just curious to what extent you have FSA guarantees on some of those credits?

[Doug Bass:]

Yes, Nath, Doug. There are not FSA guarantees because most of the operations are larger by definition. They don't really fit under the FSA guarantee programs relative to loss I think as I mentioned a few minutes ago, the 8 or 9 dairies that have all self-liquidated, have already have paid us off and many are sitting as depositors today, the majority of those are - I guess all of those were probably the smaller, more efficient, less financially viable operations and they also fluctuated without impact.

[Nathan Race:]

And Pete just going back to the expense guidance, I was scribbling down as you're going through that. But could you kind of just run through, your expectations for FY '20?

[Peter Chapman:]

Yes sure. Increase in run rate to sort of $58 million to $59 million range as I mentioned on the call is probably a couple of million in one-offs in this quarter, we've added the Colorado Trust Group in very early this quarter, so that adds about 300,000 a quarter and expenses, and then on top of that, we know we've got some hires coming through as Kenneth mentioned around credit and a bit of investment spend, so sort of that $58 million - $59 million range.

[Nathan Race:]

And then it sounds like, if I could ask one more on the healthcare book. I was just curious with the size of that and just any other color around the healthcare credit that present in issue during FY 4Q?

[Peter Chapman:]

Yes, look, I think quite of that number specifically the healthcare book, it's not an outsized one relative to the loan portfolio and Doug, I think you could probably comment more on overall quality in that one?

[Doug Bass:]

Yes, I think what we saw - was a couple of isolated cases where the states have reduced reimbursement rates and the healthcare facilities are working to adjust delivery cost models. That's really nothing new. We've had a couple that happened two or three years ago in other states and it takes some period of time to work through delivery cost models to meet and match new reimbursement levels and we have downgraded a couple, as they start to do that process until they reach results that are back to traditional which in both cases, we anticipate that will do.

[Operator:]

The next question will come from Terry McEvoy of Stephens. Please go ahead.

[Terry McEvoy:]

Pete, a question for you, you said 2 to 3 basis points per quarter of NIM compression. I was wondering if that takes into account a potential rate cut next week. And if you could just talk about additional opportunities to lower deposit costs over the next quarter?

[Peter Chapman:]

Yes, it does Terry. We are anticipating a rate cut and we feel comfortable with that guidance being consistent for the moment just as we do work those deposit costs down obviously that gets to a point where you run out of room on that, but just given we - our beta was probably a little higher on the way up. And we feel we've still got some opportunity on the way down.So looking ahead to this quarter, we hope we can continue to manage that and certainly we'll just raise that expectations post then over the next quarter once we see had a positive behavior happens at this point, we have been pretty aggressive with not only decreased when the right decrease has come through with also decreased mid quarter and we haven't seen significant deposit run off. So we feel there is a little bit more room to go there.

[Terry McEvoy:]

And then just as a follow-up is outsiders, we really can just track the CME Class III milk prices on a daily basis. And I'm wondering is there a certain price point where your comfort level on not seeing incremental provisioning or charge-off on dairy potentially changes. I know you talked about farmers proactively managing expenses and liquidity in the portfolio, but I'm just trying to get a sense as an outsider how we can better monitor potentially that portfolio.

[Doug Bass:]

Yes, Terry, this is Doug for second quarter 2018, the Class III milk price was in the low-16s for an average and our portfolio produced an average debt service coverage ratio of 1.55.In addition to the published Class III price, there are a number of formula based on the state in the co-op that add blend components to it and component premiums that take it up anywhere from another $1 to $3 above that, but I think if you take a look at Q2 and think low-16s and 155, that's a fairly good correlation.

[Operator:]

The next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

[Ebrahim Poonawala:]

Just have a couple of follow-up questions, one in terms of credit appreciate that you are being proactive in identifying issues when we think about the outlook for watch loans sounds like the Ag numbers should start coming down given the resolution on the dairy front over the next few quarters. What should we anticipate in terms of the non-Ag book, do you expect watch loans to keep drifting higher or do you think this is - we played a little bit of a catch up this year where all else equal, that number should kind of flat over from here?

[Doug Bass:]

Ebrahim, this is Doug. I think one number that we've looked at -- it's very positive is our asset quality. Our non-Ag asset quality metrics to peer, which is at or slightly below. And I think everything we're seeing now, we're not seeing industry concentration of problems that come up. We're not seeing geography concentration.It's a diversified challenge when they come up, which tells us there aren't any strong signals today to upcoming problems geographically or industry-wide, we had a couple off on the health care, we talked about, but I don't think that's a material impact that we've seen over the entire geography.

[Peter Chapman:]

So I don't see material changes based on everything we know today.

[Ebrahim Poonawala:]

And I guess just following up on the margin feed, so get the guidance for next quarter. If we get a couple more rate cuts, is that 2 to 3 basis points, the right way to think about what the incremental hit to the margin would be, given sort of what you talked about on the deposit side or could it be - could it pick up if we get more than one rate cuts for the next few quarters?

[Peter Chapman:]

Look, I think it's pretty hard to look that far ahead. Ebrahim at the moment we'd hope so, we're still going to - deposits pretty hard, but certainly we'll just have to see what happens on the loan front as well. Certainly we're seeing on the loan front with spreads over index if that keeps coming in, that could put a little bit of more additional pressure on margin Ebrahim, but doing all we can to help preserve that.

[Ebrahim Poonawala:]

And just one last question if I may for Ken, if you could remind us in terms of capital deployment buybacks and if there are any sort of bank M&A opportunities in the near-term that you would entertain, would appreciate any update on that.

[Ken Karels:]

Yes. Yes, yes and yes Ebrahim we obviously, as we talked about did share buybacks as last quarter, we saw quite opportunity for us to do that. We authorized another $75 million, the bank still earns very - lot of money with lower growth rates going to be excess capital.So we are looking, as we always do on some acquisitions especially if there is some deposit rich - low deposit cost, rich type of acquisitions we can do, and so if that happens, that would be our first choice to use excess capital, if that doesn't happen, we definitely will be back in the share buyback over the next year.

[Operator:]

The next question will come from Tim O'Brien of Sandler O'Neill and Partners. Please go ahead.

[Tim O'Brien:]

A quick follow-up for Pete on operating expenses. So the total one times that $58 million to $59 million that you guys indicated you expect started in the fourth quarter, how much in one times is included in that and are there seasonal factors as well, given the start of the new fiscal year?

[Peter Chapman:]

No that's run rate. There is no real one-offs in that number, Tim, I'd expect that to be run rate and mainly in calendar Q1. So for the March quarter, that's when our year end merits kick up. So we may see a modest increase, when that comes through as well, that's certainly a manageable increase.

[Tim O'Brien:]

And then beyond that with the start of the new fiscal year strategic planning, do you guys have any thoughts on opening de novo branches or something this year in the New Year, or maybe doing some rationalization initiatives?

[Doug Bass:]

Tim, Doug, on to both of your questions on the rationalization, we go through that process on an annualized basis and take a look at opportunities for improvement in efficiency and staffing metrics. So yes, we do that and have - we'll continue to do that on an annual basis. Relative to new offices, we have a couple on the drawing board.We have staff that are in play that have already been working for us for about six to nine months on one office. We're not ready to announce specifically on any location yet. And we have a couple of other recruitment efforts on new locations in existing states that we're looking at as well.

[Operator:]

The next question will come from Damon DelMonte of KBW. Please go ahead.

[Damon DelMonte:]

My question probably directed towards Pete and this one. Could you help us think about provision expense a little bit - with the work off of the dairy and other Ag related loans, problem loans kind of impacting your overall outlook for growth. How should we think about the provision going forward?

[Peter Chapman:]

Yes, it's a good question Damon obviously we're a bit live this quarter. But certainly, I think in the past, we've sort of ran around the sort of $7 million to $9 million a quarter in credit related charges. So look I think that's a good starting point to think about provisioning.

[Damon DelMonte:]

And then should I squeeze one more in here. Just on fee income if you look at the non-swap related impacts, you're probably like around somewhere 16.5 million this quarter. How do you see that projecting out as we go through fiscal 2020?

[Peter Chapman:]

Yes look, I think that's a pretty good average. And then as I mentioned about $0.5 million a quarter up as a result of the Colorado Trust acquisition. We integrated that on the first day of this quarter. So there was no benefit of that in this current quarter, but you will see the full benefit next quarter, Damon.

[Operator:]

The next question will come from Janet Lee of JPMorgan. Please go ahead.

[Janet Lee:]

I want to ask first question about non-dairy Ag portfolio. So during the quarter, several companies, some of your peers with Ag exposure put in to broad based market stress in the Ag sector. Some of that tied to like trade war talk adversely impacting the beef and grain, fruits and vegetables. So are you hearing anything from your clients of this issue?

[Ken Karels:]

Janet we heard - about half of your question here for some reason. Can you just repeat it?

[Janet Lee:]

Oh yes sure, this is better?

[Ken Karels:]

Yes.

[Janet Lee:]

So my question is on non-dairy Ag portfolio. So during the third quarter, several companies, some of your peers with Ag exposure pointed to broader - broad-based market stress in the Ag portfolio. Some of that was tied to trade war talk adversely impacting some fruits and vegetables, beef and grain. Wanted to see if you're hearing anything of this issue from your farmers?

[Doug Bass:]

Janet, this is Doug. Really relative to the non-dairy, it would be no. We just actually saw a report on some of the vegetable operations. A couple of weeks ago out of our Southwest markets that we're all very, very favorable relative to contracts that were - production that will happen here through the winter months. So that was all very positive on the vegetable front relative to sort of Midwest grain, again most of grain prices and yields are going to correlate to, at or above 19 budget projections.And do not anticipate any material negatives coming out based on harvest expectations and prices that have been locked in. And - there have been tariffs payments that have come out and I think those will receive starting in October, which has been an added bonus on the flip side, to a lot of the operations.

[Janet Lee:]

Right, that's helpful. And just to clarify on your NIM guidance, on your NIM guidance which pointed to a decline of 2 bps to 3 bps per quarter. Given the move in average Fed funds rate, which is likely to be much bigger in 4Q versus 3Q. I mean that's in terms of calendar year - like those are 2 bps to 3 bps decline quarter apply to 4Q or is it more of the guidance beyond 4Q after the expected rate cut in October?

[Peter Chapman:]

We expect that rate cut in this quarter. So that's guidance for the current quarter. Janet. After that, we'll just have to look at how and deposit competition is going and how far down we can work that in subsequent quarters.

[Operator:]

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