Great Western Bancorp, Inc.
Q4 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Good morning, and welcome to the Great Western Bancorp Fourth Quarter and Full Year Fiscal 2015 Earnings Announcement and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cheryl Olson, Head of Marketing. Please go ahead.

[Cheryl Olson:]

Thank you, Laura, and good morning, everyone. Joining us this morning on Great Western Bancorp’s fourth quarter fiscal year 2015 earnings announcement conference call are Ken Karels, President and Chief Executive Officer; Peter Chapman, Chief Financial Officer; Steve Ulenberg, Chief Risk Officer; and David Hinderaker, Head of Investor Relations and M&A. Before we begin, please note that some comments today 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, we have made available on our website, as well as our SEC filings for a full discussion of the Company’s risk factors. Additionally, today we’ll be discussing certain non-GAAP financial measures on this conference call. References to non-GAPP 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. Now, I'll turn the call over to Great Western Bancorp’s President and Chief Executive Officer, Ken Karels.

[Ken Karels:]

Thank you, Cheryl, and welcome to our conference call to discuss our financial results. We have good news to share with you this morning. Great Western Bancorp’s fourth quarter fiscal year 2015 was in one word exceptional. We finished the year strong. We had solid earnings and loan growth. Quite an accomplishment given the continued low interest rate environment, our efficiency continues to be a huge competitive advantage for us, while many in the industry are finding it challenging to keep costs down. We continue to lead the way in controlling expense. Our full year efficiency ratios stood at just 48% for fiscal year 2015. We’re also proud to say that consistent with our prudent approach to risk management. We improved asset quality, finishing both the quarter and the year on a high note. Now let’s take a closer look at our financial highlights for the fourth quarter. Our fourth quarter net income was $33.8 million or $0.60 per share, bringing net income for the fiscal year 2015 to a $109.1 million or $1.90 per share. Net interest margin and adjusted net interest margin each increased from the last quarter to 3.98% and 3.72% respectively. Net charge-offs during the quarter were minimal at $0.4 million or 0.2% of average loans on an annualized basis. The efficiency ratio for the quarter was 45.8% driven mainly by decrease in tangible non-interest expense. Total loans grew $80 million during the quarter or $537.7 million or 7.9%. With core loans growing 9.2% for fiscal year 2015. Asset quality also improved. With low charge-offs, reduced watch loans and a continued reduction at OREO during the quarter. As we look at the full-year, we have many accomplishments to be proud of. We delivered year-over-year revenue and net income growth despite challenging interest rate environment. We successfully completed NABs divestiture of a 100% of their stake in GWB. We maintained our long history of successfully managing our cost base even with incremental public company cost. We executed a private placement of $35 million of subordinated notes, repaid all outstanding borrowings due to NAB and repurchased $60 million of common stock from NAB in conjunction with the final secondary offering of NAB shares of GWB during the quarter. And we managed all this financial success in the midst of taking the company public. Additionally, as we disclosed it this morning, our Board of Directors declared a dividend of $0.14 per common share payable on November 30, 2015 to owners of record as the close of business on November 13, 2015. This reflects an increase of $0.02 per common share or 16.7% compared to past dividends. Our board of directors approved this dividend increase as a result of our strong capital position and we’ll look to return capital to stockholders when it makes sense. We are proud of this accomplishment and pleased to be able to grow stockholder value. Now let’s hear from our Chief Financial Officer, Peter Chapman on greater details of the numbers for the quarter. Pete?

[Peter Chapman:]

Thank you, Ken. Welcome everyone who has joined us this morning. And thank you very much for your time. We are pleased with our fourth quarter results. Net interest income for the fourth quarter of 2015 increased by $2.7 million, or 3% compared to the same quarter in fiscal 2014. The increase was driven by a higher line interest income attributable to loan growth and lower deposit interest expense. This was partially offset by a small decline in interest income from the investment portfolio. Net interest margin was 3.98% for the quarter ended September 30, 2015, gaining three basis points from the last quarters NIM of 3.95%. The adjusted NIM for the quarter was 3.72% up two basis points compared to 3.70% in the June 2015 quarter. The increase this quarter was driven by loan growth contributing to a favorable asset mix. The fiscal year net interest margin is down 12 basis points from last year due to lower asset yields. We’ve been able to offset this reduction by decreasing cost of deposits by five basis points over the year. Adjusted net interest margin was 3.68% compared to 3.79% for the fiscal year ended September 30, 2014. As rates remain low, we continue to see pressure on margins as we look ahead to the coming year. Non-interest income was $9 million for the quarter ended September 30, an increase of $0.5 million or 6% compared to the fourth quarter of fiscal 2014. Included within the non-interest income are the changes in the fair value of certain loans through which the company has elected the fair value option and the net gain or loss realized and unrealized of the related derivatives used to manage the interest rate risk on these loans. On a net basis, these two components of non-interest income accounted for the increase of $0.5 million. Deposits service charges and other fees declined by $200,000, or 2%, compared to the same quarter in fiscal year 2014, driven by a reduction in net consumer overdraft and non-sufficient funds revenue, partially offset by increased fee income related to the commercial deposit accounts. Sales of investment securities generated net gains of $300,000 during the quarter. The results for the quarter show our continued focus and ability to deliver peer leading efficiency. Total non-interest expense was $44.8 million for the quarter ended September 30, 2015 a decrease of $3.5 million or 7% compared to the same quarter on fiscal year 2014. A decrease in non-interest expense was driven by $2.2 million reduction in other non-interest expense, which relates to the difference in cost related to branch closures, or gain or loss on sale of branch locations. The $2.1 million reduction in a scheduled amortization of intangible assets and $0.5 million reduction in net OREO costs. These were partially offset by $1.3 million increase in salaries and employee benefits, driven by incremental rolls hired over the course of the fiscal year. To support growth and increase public company costs and higher health insurance costs. And also a $1 million increase in professional fees, largely attributable to the timing of costs incurred, relating to the company’s initial public offering in 2014. The efficiency ratio was 45.8% for the quarter compared to 49% for the same quarter of fiscal year 2014. And was 48% for the fiscal year of 2015 compared to 50.4% for the fiscal 2014. We remain confident, we can continue to invest in shaping the company’s size, grow our business and maintain our peer leading efficiency. Total deposits grew by $29.4 million during the quarter to end up $334.9 million or 4.7% for this fiscal year 2015. Deposit growth was focused primarily within interest bearing one-time accounts, we saw a continued decline in time deposits. We’ve talked previously about the focus on attracting business deposits in our investment in cash management. This has been a great success through FDA with business deposits increasing $367 million or 21%. The carrying value of the investment portfolio declined by $83.1 million during the quarter as a result of security sales and normal principle payments received where the net proceeds increase cash balances allowing for small reduction in our outstanding FHLB borrowings. The average cost of deposits for the quarter was 30 basis points down five basis points compared to the same quarter in fiscal 2014, and down one basis point compared to the June 2015 quarter. Tier 1 capital ratio was 10.9% and 12.1% respectively as of September 30, 2015. Compared to a 11.5% and 12.5% respectively as of June 30, with a small decline as a result of the $60 million share buyback completed during the quarter, at $22.50 per share. The common equity Tier 1 capital ratio was 10.1% as of September 30, 2015. The Tier 1 leverage ratio was 9.1% as of September 30, 2015. All regulatory capital ratios remain above regulatory minimums to be considered well capitalized. Our tax rate was lower during the quarter, as a result of clearing up one-off $1.7 million deferred tax positions through the quarter and is not expected to be re-occurring. Excluding this adjustment, the effective tax rate was 33.5% for the full year, our Chief Rick Officer, Steve Ulenberg will now talk to loan and asset quality trends seen through the quarter. Steve?

[Steve Ulenberg:]

Thanks very much Pete. From a risk standpoint, Great Western, we have all worked very hard to deliver a very solid fourth quarter performance. GWB is performing – achieving great loan growth and momentum in maintaining asset quality. That being said we’ve maintained our prudent approach to risk management. Loan growth for the quarter ended September 30, 2015 was $80 million, on loan growth for the full fiscal year to $537.7 million, that was an increase of 7.9% over the year and core loan growth was 9.2%. Loan growth was strongest in commercial real estate, which grew up 12% and agriculture which grew at 11%. While commercial non-real estate or C&I loans grew at 3%, impacted by a small number of payoffs received during the final quarter of the fiscal year. Commercial real estate loan growth was driven primarily by renewed demand for commercial real estate investment in the larger markets that the company serves, while our agricultural growth was predominantly within the protein sub-segment, and specifically beef and dairy producers. Overall, loan growth was focused on the commercial and agricultural segments of the portfolio, in line with our strategy. At September 30, 2015 non-performing loans were $68.3 million with $5.3 million of that covered by FDIC loss sharing arrangements. Total non-performing loans increased by $200,000 during the quarter but were down $10.6 million or 13% since September 30, 2014. OREO balances declined by $6.1 million or 28% over the quarter and stand at $15.9 million at September 30, 2015. This is a reduction of 68% since September 30, 2014 and is the lowest level in over five years. Loans on watch status were $310.4 million at September 30, 2015 a decrease of $11.9 million or 4% during the quarter. Watch loans are down by $74 million or 19% from the peak levels we saw over the year at March 31, 2015. And we continue to carefully manage and drive action plans around loans in this watch category. Crop conditions in the companies core grain lending portfolio South Dakota, Nebraska and Iowa appear strong with the United States Department of Agriculture reporting that the percentage of the corn and soybeans crops rated excellent, good or fair and our major growing regions was all well above 90%. Commodity prices borrower-specific conditions and borrowers’ financial management will all contribute to credit outcomes for the 2015 growing season for the companies agricultural borrowers. And the management beliefs that strong overall crop conditions should partially offset the impact of lower commodity prices. Now I would turn the call back to Ken, for some closing remarks.

[Ken Karels:]

Okay, thank you, Steve. We remain upbeat as we look ahead to 2016 and for good reason our loan pipeline is robust we expect to see mid to high single-digit loan growth for the coming year. We’re confident we can deliver solid growth year-over-year. However, we could expect seasonality or lumpiness to occur quarter-to-quarter. As we’ve said before, acquisitions have been a big part of our pass and we anticipate there will be a big part of the future. We continue to have conversations with several different banks and we expect to continue these conversations. Looking at acquisitions that are attractive, accretive and align to our strategy. Also, brands rationalization helps us to appropriately evaluate and manage expenses. We will take steps in 2016 to further optimize our footprint based upon a number of factors including where we want to be and where and how our customers want to do their banking. We want to invest in new branches and new markets including the reinvestment of the cost savings from these branch closures into new digital technology to further improve the customer experience and support the branch to the future. As demonstrated last year, we will prudently make these investments while keeping our eye on efficiencies. We believe we have the right team in place with the right formula to live – to win. We’re excited to work together on our shared mission of making life great by taking outstanding care of our customers, our communities and our owners. Now, we’re happy to answer any questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from David Rochester of Deutsche Bank.

[David Rochester:]

Hey, good morning, guys.

[Ken Karels:]

Good morning, Dave.

[David Rochester:]

So on the decline the watch loans this quarter, which was a great to see by the way, can you just talk about the flows as you saw within that bucket on the ag side, it sounds like, it given the [indiscernible] condition, color you gave that you might be feeling better about that credit in the portfolio.

[Ken Karels:]

Steve, go ahead.

[Steve Ulenberg:]

Yes. Yes, we’ve seen like leveling off in the watch loans coming out of the ag area. I think Dave, just to give a sense of the start of the year and watch loans are round about the level they we’re at the start of the year after that peak as I mentioned. I think the start of the year, we probably had about 40% of the watch loans were ag roughly 60% commercial real estate and C&I. End of the year dollars were about the same, but the mix that 60%, 40% switched around side. We’re not saying deterioration, we’re seeing accounts performing as expected but a number with the commodity process there we’re just keeping a close eye on

[David Rochester:]

Sure. That’s a good color, thanks. And then just curious how does the impact of the – that annuals resetting of the guaranteed price levels on the grain side, that happens in March every year impacts the credit ratings you guys do in that book?

[KenKarels:]

There is no doubt that we’ll be looking at a lower guarantee levels or lower floor for – with commodity prices being down on it and so what we’re seeing Dave is increased emphasis by the farm producer to lower cost, many of them are pushing cash rent down for example, of course fuel and fertilizer go down. But there will be continued pressure and as Steve said that’s why we continue to pay attention in that sector. Obviously strong yields this year will put them in on a better position for next year, starting the low prices.

[David Rochester:]

Sounds good. And then on expenses and the other expense line that was down a decent amount sequentially. Can you just talk about any potentially won’t be OREO gains that might be embedded in that, what might be a good quarter runrate going forward there?

[KenKarels:]

Yes. The moment you’ll see Dave, is we actually has a credit in OREO expenses for the quarter. So you know obviously the balance is down, so we’re not expecting or piping for a – I mean a larger uptick in actual expense, but I wouldn’t expect in that recovery but beyond going forward is sort of that look forward postion.

[David Rochester:]

So the current run rates may be we see a little bit of increase in that going forward, and that is valid.

[KenKarels:]

Yes I think so, I think is more that OREO line the rest of the line items I think was a pretty clean quarter, they have nothing much else to collect, that’s material.

[David Rochester:]

Okay. And then just quickly on your loan growth guidance, it sounds like you’re still comfortable with mid-to-high single-digit. Can you just talk about how the loan pipeline works heading into the last quarter of the year, here where you see seeing strength and weakness and can you just talk about the strength you saw in CRE this quarter and in which segments that you saw that growth? Thanks.

[KenKarels:]

Yes, I would say first in the pipeline, we continue to see very strong pipelines in Colorado, Arizona and in Parts of the Mid-West. Although we’ll see some more pay down this quarter on the agri space than we had last year on it. So we – as we mentioned could see some lumpiness this quarter and could very well end up being a flat quarter for us, which is not untypical of the seasonality that we have on it. You will continue to see some good commercial real estates in some of the larger markets, some of the growth there and some of the suburbs of the larger markets where we specially do well in it. I mean, what was the other question? Go ahead, Steven.

[Steve Ulenberg:]

Look, David, exactly Ken, and I just add to that too. I mean, on the CRE side we’re seeing good demand hotels, multi-family, new [indiscernible] our main mature areas, we mentioned egg, we are growing, where we want to grow dairy and beef protein. I think the one that was little bit softer in growth in the last quarter with CNI, that’s not a untypical we’re just being selective about pricing and quality there, so there were a couple of areas there, which didn’t fit our risk appetite. And C&I – value for that typically is a subdue quarter seasonality, but we’re expecting overall growth as Ken indicated high single-digits for the year.

[David Rochester:]

All right. Great, thanks guys.

[Ken Karels:]

Thanks, Dave.

[Operator:]

And the next question is from Preeti Dixit of JP Morgan.

[Preeti Dixit:]

Hi, good morning everyone.

[Ken Karels:]

Good morning.

[Peter Chapman:]

Hi, Preeti.

[Preeti Dixit:]

The loan-to-deposit ratio carped up a little bit in the quarter. Any thoughts to whether you plan to slow the runoff [indiscernible] here any color on the deposit strategy heading into next year in the backdrop a bit to high single-digit loan growth, will be helpful?

[Ken Karels:]

Yes, good point. No, first all, we won’t slow the loan growth down. We are picking up momentum as Pete indicated in the business deposit sector. And most of our growth last year was business deposits. We’ve added some technology, which we’ll be introducing this quarter that can really challenge some of the larger players in the cash management business. So, we do think there is potential – some strong potential for continued growth in the business deposits for us. The fine deposits were kind of winding down the continued decline in that. It’s slowing down. It’s not completely done yet, but it’s slowing down. And then we are focusing on to retail deposits, the checking and money market savings and so forth on it. I think the good point though deposit acquisition will be a strategy for us going forward, but we do think we can be successful in that.

[Peter Chapman:]

And it’s trucking as we’d expect Preeti. We quote out the decline. Last quarter is seasonal and expected a flat quarter, this quarter, and we’re up about $30 million. And then we’d expect a deposit inflow in the coming quarter. And as Ken said, with that focus on business deposits, we think it will be fine to the year.

[Preeti Dixit:]

Okay, that’s really helpful. And then Pete as you think about the puts and takes of the adjusted margin. Is it fair to assume modest quarterly pressure ends from here?

[Peter Chapman:]

Look, I think so, I think it’s been pretty consistent over the year. If you look at line margin moved down five points for the quarter, for the three quarters to June, we were down on average six points a quarter. So it’s slight a little bit down, but you’re still seeing that pressure on line margin. So I would expect sort of a modest decline as we’re seeing track over the course of the year.

[Preeti Dixit:]

Okay, great. And then Steve, I know, you find some payoffs in the quarter. Can you quantify for us what the payoffs were compared to last quarter and any exits that may have impacted the loan growth this quarter?

[Steve Ulenberg:]

Preeti, as mentioned, C&I was slightly down on that – in the last quarter, and they had a couple of good quarters. Growth in C&I probably taking through around the same rate 11%, 12% annualized as saw in ag and CRE but then last quarter, I think fair to say a small number of paydowns and most of those were either exposures that didn’t really fit our risk appetite or where the returns we’re making out hurdles and a level of seasonality, so some of those with good customers that that will drawback down over the next 12 months.

[Preeti Dixit:]

Okay. Okay, got it. And then one last one from me, where there any reserve releases like sub – and any sub categories impacting that provision expenses this quarter? And two, how should we think about provision from here?

[Ken Karels:]

Nothing, nothing, significant from a release perspective [indiscernible], no, obviously a lower quarter, this quarter. So probably a little on the low side from – just keeping the fact we had no charge-offs, significance which would be great to continue, but we’re probably a little on the low end for the quarter, but, sort of on a full year basis, if you sort of look at that that something we’re pretty comfortable with.

[Peter Chapman:]

I’d just add. Over the 12 months, the coverage, nevertheless, increased from 70 points to 78 points.

[Preeti Dixit:]

Great, great. Okay, thank you so much.

[Peter Chapman:]

Thank you.

[Ken Karels:]

Thanks

[Operator:]

And our next question is from John Armstrong of RBC Capital Markets.

[John Armstrong:]

Thanks. Good morning guys.

[Ken Karels:]

Good morning.

[John Armstrong:]

Just a few follow-ups here. Peter, you talked a little bit about the OREO number and Steven you just talked about the provisions been a little bit low. Is there anything else you guys would carve out, in terms of coming to – it was obviously a good quarter, but coming to what you think as an appropriate run rate?

[Peter Chapman:]

No, I look nothing is significant, but I think we will add, John, I think would touch on them. Provisioning was a little low, OREO was at pace and then we’ve got the intangible schedule, which runs-off a little again in the coming quarters, which we’ve got – 12 hours, but the amortization schedule that runs off. So, there is no changes to that. But other than those, probably not. It seems income was up a little bit seasonally on the non-interest expense income side, but not material numbers. So I think it’s a…

[John Armstrong:]

Okay, good. Just one of the thing that struck me in some of your comments, you’ve talked about the new technology for cash management. Is that being an impediment to your growth, is this something where knowledge your independent you’ll be adding a few things that you need to do and the growth trajectory can change, just help me to understand that a bit?

[Peter Chapman:]

Yes, I don’t think John has anything to do with me the independent, it was just we were seeing the opportunity to look at the higher-end business accounts that needed more sophistication and a better product to compete with some of the larger banks. So, we made that investment here over the last year. And so that the product will have all the features that some of big banks have with cash managements. So I think there is opportunity for us to do that and to continue to grow in that space. So that’s where the investment was made. We’ll continue to look at doing and making those investments that really aligned with our strategy like that.

[John Armstrong:]

Okay, also just you’ve got a few new board members, you’re now fully independent, I guess this is the first real quarter being fully independent. Give us an idea if anything changes and maybe your top couple of priorities can?

[Ken Karels:]

No, I think the biggest change is what I alluded to on the acquisition piece, John. And the fact that now with the currency, we have there is just strong desire for the board to take a look at acquisitions that are accretive and attractive and fit within our strategy, but we’ve got a great board. We’ve added some great individuals that have a lot of public company and governance experience. So this strategy on organic growth will continue as it has been. We’ve been very successful for that and they fully support that.

[John Armstrong:]

Okay and how active are the acquisition conversations can?

[Ken Karels:]

Well, I really want to – don’t want to go into detail, John on that. But we definitely are as I stated having conversations with a number of owners and we will continue those conversations and as you aware these acquisitions take some time. And – but we did want to fly into the market that don’t be surprised if we do and owns an acquisition, but nothing – nothing has been planned.

[John Armstrong:]

Okay, all right. Thank you very much.

[Operator:]

And our next question is from Erik Zwick of Stephens.

[Erik Zwick:]

Hi, good morning guys.

[Ken Karels:]

Hi, Eric. Good morning.

[Erik Zwick:]

With regard to the sales from the investment securities portfolio this quarter, could you just talk a little bit about may be what you saw in the market as an opportunities to sell some of those?

[Ken Karels:]

Yes, it was really – just if you look at that portfolio, Erik, we were about 90% Ginnie Mae's is probably going back 12, 15 months ago and we’re being gradually just moving that more towards a balance mix of securities. So just for the quarter, there was a couple in there that with – [indiscernible] rights was a good opportunity, get out of a couple that that we thought was a good time to and reinvest. So it was just an opportunistic one not a sort of a key strategy that are expect to see a lot of it in the coming quarters, unless it’s just an opportunistic times in the market.

[Erik Zwick:]

And with regard to M&A and the balance sheet you’re just below $10 billion in assets today. Could you remind us a little bit maybe your target size for acquisition opportunities and maybe where you would like to take the size of the balance sheet going forward?

[Ken Karels:]

Yes, there’s no set size of the balance sheet as we’ve stated before the [indiscernible] effects already in our balance sheet and in our numbers and we’ve got the DFAST, capital stress testing, which organically we’re going to be over here, next year through second quarter next year anyway. But the acquisition size, we’re typically looking from that $0.5 billion to roughly $3 billion in size into markets that are at or join the most of our Midwestern markets in really the type of markets that we feel, we can compete strong in and understand is the target institutions that we’re looking at.

[Erik Zwick:]

And one last question, I appreciate the commentary added in the press release regarding the USDA crop ratings in your markets. Where are we investing in your markets in terms of progressing to the harvest season? And can you provide any numbers around the percentage of your grain borrowers that use crop insurance or hedge their portfolios?

[Ken Karels:]

Steve, you want to go ahead.

[Steve Ulenberg:]

Yes, in terms of guys that use grain insurance it would be there at or about we’ll try to be 90% plus of the produces and so they’re pretty well over about themselves as best. And as I mentioned and terms of the conditions over the crop and the completion that’s in a pretty good states or at our coal markets in the Midwest here. I think soybeans pretty much completely done, your corn is probably in that 60% done, 80% done and should finish up. Conditions are pretty good to finish up here in the next few weeks, I think, it would be done.

[Ken Karels:]

And crossing [indiscernible] corn and soy that’s been relatively stable and sort of fluctuate in the fairly narrow been [indiscernible] last two or three months, so that gives us summer insurance as well.

[Erik Zwick:]

Great, thank you. I appreciate all the color.

[Ken Karels:]

Thanks.

[Operator:]

And the next question will come from Damon DelMonte of KBW.

[Damon DelMonte:]

Hey good morning, guys. How are you doing? My first question…

[Ken Karels:]

Great, how are you doing?

[Damon DelMonte:]

Great, good morning. My first question relates to the margin, Peter, I know you said you speckle a little bit of pressure in the coming quarters. Does that reflect the full impacts from the sub debt offering?

[Peter Chapman:]

Probably there is a tiny bit together we quitted that in August, so we probably missed a month – we probably missed a month of interest there, that you’ll see come through next quarter. I don’t – that won’t be a dip margin though, so that wouldn’t around to a basis points, not really the commentary in margin where it would just so that we continue. As I said sort of the margin comparison has slowed a little bit over the quarter, but it still there. So it’s right to around hopefully that gives us some relief, but the need to, and I think 25 basis points is going to cause this a huge difference in the quarter ahead.

[Damon DelMonte:]

Okay, great. And then just to kind of circle back on expenses. So the way you answer the questions before, I’m taking that something in the close to $45 million quarterly ranges is it fair run rate for operating expenses.

[Peter Chapman:]

Yes, look at always, if it is seasonality in that area in terms of we do have some project spend and we can mention digital and also with the DFAST cost which will start to flood throughout the course of next year. So it’s been a lumpiness quarter-on-quarter, and we look at the OREO in there as well, which month that number around. But as I called out and I’m sort apart from the OREO, which I wouldn’t expect to be a negative. So that would push expenses out other than that it’s a reasonably clean quarter.

[Damon DelMonte:]

Okay, and then just lastly around 33% effective tax rate, is there still hope?

[Peter Chapman:]

Yes I think I’ve called out 33.5% for the full year, if you back out that 1.7 [ph].

[Damon DelMonte:]

Okay, all right. Great, that’s all I had. Thanks.

[Peter Chapman:]

Okay, thank you.

[Operator:]

And the next question comes from Russell Gunther of Macquarie.

[Russell Gunther:]

Hi, good morning guys.

[Ken Karels:]

Good morning, Russell.

[Russell Gunther:]

My, first question is a follow-up on Damon. Peter, could you just quantify what the OREO benefit was this quarter, any expense line that drove other down.

[Peter Chapman:]

Yes, I think it was a $1.65 million [ph] benefit and was there something else and there as well.

[Ken Karels:]

Russell, the other thing that we should point is, you’ll see in a footnote that we have sort of reclassified the income statement and the expenses to put all OREO in one line rather than in the – some of it buried in the other line, as we had previously. And some feedback from you and some of your peers, as well as our board. So all of the OREO is now in one line and that showing $165,000 dollar benefit for quarter. So that’s sort of the third last one on the income statement in the earnings release.

[Russell Gunther:]

Okay, so modest, I appreciate it. And then just as we look out into next year, you mentioned expectations for spending around DFAST, but also branch rationalization along with some technology upgrades. How are you thinking about what may fall to the bottom-line as we look for kind of full-year expenses in 2016? Are there branch rationalizations that can absorb any increase spend and therefore we could see some improvement borrowing quarter-on-quarter seasonality or would you expect any saves to kind of be gobbled up by any – by some franchise investment?

[Ken Karels:]

I really think yes, some of the branch rationalization piece will be reinvesting. And I would say the majority of that back and there’s some new branches that we’re looking at, new markets that we’re looking at going into. And as I mentioned kind of the digital experience to branches in the future we’ll be investing some money, including the dollars and the cash management. Pete, any other color on that?

[Peter Chapman:]

Not agree with that and then I’ll say, the DFAST cost with code effect, a couple of million dollars – $2 million, were there about annualized, Russell and we haven’t seen a lot of debt flow through EBIT, sort of there is an annualized number, we’d still expect that to be around the marketplace also, and something that’s sort of within forecast already, so other than that I think it’s pretty, we can absorb the lot of that uplift through that, the closures were done this year, in the year ahead.

[Russell Gunther:]

Okay, and then just the DFAST expense, did you just, did you mention that the some of that is already in the run rate, or is the $2 million annualized incremental from this quarter?

[Ken Karels:]

Yes, there’s probably $0.5 million already in run rate half to three quarters as a $1 million in run rate, and then the $2 million annualized incremental but as I said that’s an annualized number, I wouldn’t expect to all that to roll through FY 2016 that would probably start in FY 2016 and then probably FY 2017 by the time, that fully annualize it into expense.

[Russell Gunther:]

Great, okay, thanks very much guys. That’s all I have.

[Operator:]

And our next is from Tim OBrien of Sandler ONeill.

[Tim OBrien:]

Good morning.

[Ken Karels:]

Good morning, Tim.

[Tim OBrien:]

Hi, Ken you alluded to this, did you say there might be some plans had a few branches next year or in the coming fiscal year two?

[Ken Karels:]

Yes, Tim. We would be – we are looking at a couple of markets particularly in Iowa and probably one in Nebraska that we adding markets, any branches. Some of these markets as we’ve said in the past, we hired the lenders first and we’ve done that, now we’re looking for locations for few branches. So we will continue to do that, that’s been a good, that’s helped our growth, helping us to grow, will also maintain our margin, it’s really helped.

[Tim OBrien:]

So to be handful?

[Ken Karels:]

Yes, I would say handful.

[Tim OBrien:]

And then, another question for you, could you give a little bit of color as far as your outlook from the protein side of your business for the coming fiscal year as well, how is that shaping up and do you see an opportunity to gain market share there?

[Ken Karels:]

Well, we have this last year, I think there is going to be starting to be some pressure on some of the prices on the protein, but with commodity or input cost down, that you continue to do quite well. We’ve had phenomenal last two years in both dairy and cattle which is the larger portion of our protein. So we do see some potential future growth in those two sectors, and opportunities for us, we understand those sectors very, very well and we see some opportunities in some of the markets that we are in.

[Tim OBrien:]

Great, thanks for answering my questions.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Ken Karels for any closing remarks.

[Ken Karels:]

Thank you. Obviously we’re very proud of the last year that we had the first year as a public company and very optimistic as we look into 2016, I think the bank is well positioned if we continue to have lower interest rates for a longer, which looks like we feel with our competitive advantage on efficiency that we can continue to outperform our peers and continue to have strong growth. So thank you for taking the time.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may disconnect.