Great Western Bancorp, Inc.
Q4 2016 Earnings Call Transcript

Published: 27 Oct 2016

[Operator:]

Good day, and welcome to the Great Western Bancorp’s, Inc., Fourth Quarter Fiscal Year 2016 Earnings Announcement and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Ann Nachtigal, Corporate Communications. Please go ahead.

[Ann Nachtigal:]

Thank you, Nicole, and good morning, everyone. Joining us this morning on Great Western Bancorp’s fourth quarter and year-end fiscal year 2016 earnings announcement is Ken Karels, President and Chief Executive Officer; Peter Chapman, Chief Financial Officer; Steve Ulenberg, Chief Risk Officer; and David Hinderaker, Head of Investor Relations. Before we get started, I would like to remind you that today’s presentation may contain forward-looking statements that are subject to certain risks and uncertainties that could cause the company’s actual future results to materially differ from those discussed. Please refer to the forward-looking statement disclosures contained in the presentation, we have made available on our website, as well as our periodic SEC filings for a full discussion of the company’s risk factors. Additionally, today we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding Great Western’s results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. With that said, let me turn it over now to Great Western Bancorp’s President and Chief Executive Officer, Ken Karels. Ken?

[Ken Karels:]

Thank you, Ann, and good morning, everyone. We are pleased to share with you our fourth quarter and full fiscal year earnings. These financial results reflect our strong commitment to delivering on our strategy. We are quite pleased with our results for the most recent quarter and our fiscal year. Our most recent financial results reflect a substantial year-over-year growth and double-digit increase in net income, adjusted net income, earnings per share, and tangible book value per share. I am proud of our team's ability to deliver strong financial results, while successfully completing our first acquisition since becoming a public company. Our Board has also made some important decisions about capital management that we’re excited to share, including an increase in our quarterly dividend and approval of a share repurchase plan. Let’s take a closer look now at the highlights for the fourth quarter and full year fiscal 2016. As you can see from the current slide, we remained focused on executing on strategy. As reported earlier this morning, our fourth quarter net income was $33.8 million, or $0.50 per fully diluted share. Adjusted net income, which excludes the effect of the one-time acquisition expenses related to the HF Financial Corp., acquisition was $35.5 million, or $0.60 per diluted share. Net income for the full year was a $121.3 million. This represents an increase of 11.2% over last year fiscal year. Adjusted net income was $131 million, an increase of 20.1% over the same period. We continue set our self apart from our competitors with industry-leading efficiency ratio of 48.5% for the quarter and 49.6% for the fiscal year. It’s important to point out that each of these numbers would be even lower, if one-time acquisition expenses were excluded. Our Board of Directors has authorized an increase in quarterly dividend per common share to $0.17. This reflects a 21.4% increase of our most recent dividend. Also, the Board authorized an open share repurchase program of a $100 million. We believe these actions reflect our commitment to actively managing capital and overall shareholder return. Asset quality remained stable, with net charge-offs as a percentage of loans of 12 basis points for the fiscal year 2016. Total loans grew $76 million or 0.9% during the quarter. This brings non-acquired loan growth to $494 million, or 6.7% for the full year. Deposits grew $125 million or 1.5% during the quarter and brings non-acquired deposit growth of $355 million, or 4.8% for the fiscal year. Our Chief Financial Officer Peter Chapman, will now go through the presentation with greater details on the numbers. Pete?

[Peter Chapman:]

Thank you, Ken, and good morning, everybody. As Ken said, we're very pleased with our fourth quarter and full year results. As we look at our revenue slide, you can see net interest income was $100 million for the fourth quarter of fiscal 2016, the increase of $13 million, or 15% compared to the same quarter in fiscal 2015. This increase was mainly due to the higher loan interest income driven by a 19% growth in average loans outstanding between the periods. This was partially offset by a nine-basis point decrease in the yield and the loan portfolio. Net interest margin was 3.92% for the quarter ended 30 September 2016, six basis points lower compared to the same quarter in the prior fiscal year. The adjusted net interest margin for the quarter was 3.73%, up one basis point compared to the same quarter last year. This was primarily driven by the lower hedging costs on the long-term fixed rate loan portfolio as a result of increases in short-term LIBOR rates. Loan yields decreased three basis points to 4.74% compared to the June 2016 quarter, on all except purchase credit impaired loans. Non-interest income was $15.8 million for the quarter ended September 30, 2016, an increase of $6.8 million, or 74.6% compared to the fourth quarter of last year. Non-interest income from product and service fees meanwhile increased by $5.1 million over the same period. Within net increase service charges number fees increased by $2.9 million driving the majority of the increase. Primarily due to higher debit card interchange income resulting from recapturing the Durbin related income. We estimate the impact of this change was approximately $2.6 million in the current quarter and I want to remind everybody that the higher rates would affect for us through June 30, 2017. Additionally, mortgage banking income and wealth management income increased by $1.5 million and $500,000 respectively. Looking out the slide on expenses provision and earnings, we see total non-interest expense was $57.3 million for the quarter-ended September 30, an increase of $12.5 million or 27.9% compared to the same quarter last year. The increase was primarily driven by a $2.7 million in one-time HF acquisition costs for the quarter, and we believe these are now substantially complete and have been incurred. A $5.4 million increase in salaries and benefits and a $900,000 increase in professional fees both driven primarily by the integration of HF's operations into the consolidated business. And also finally, net OREO cost increased by $0.9 million for the quarter. The efficiency ratio was 48.5% for the quarter compared to the 45.8% for the same quarter last year and 49.6% for fiscal 2016, compared to 48% for fiscal year 2015. But the quarter and full year ratios for fiscal 2016 were negatively impacted by one time acquisition expenses, that remain very strong despite this headwind. And improved upon comparative periods excluding these costs. Now with the HF integration largely complete the incremental increase in the ongoing expense base excluding integration cost is approximately $6.5 million per quarter with cost synergies being released well within targets included with the transaction announcement. Provision for income taxes for the four quarter ended September 30, 2016 were $17.9 million. This reflects an effective tax rate of 34.6% of income before taxes compared to an effective tax rate of 29.6% for the comparable quarter of fiscal 2015, which was abnormally low. As we look now to balance sheet slide, we see the total loan growth during the quarter was $75.7 million or 0.9% bringing fiscal year-to-date growth to 1.36 billion or 18.5% compared to September 30, 2015. This loan growth includes $863 million of loans acquired from HF in the third quarter of 2016. Excluding the acquired loans fiscal year-to-date loan growth was $493.7 million or 6.7% well within our mid to high single digit target for FY '16. Total deposits grew by $124.6 million during the quarter, contributing to growth of 16.5% compared to September 30, 2015. Included in this deposit growth is $863 million from HF Financial. Excluding the deposits acquired the fiscal year-to-date growth was $354.6 million or 4.8%. Compared to the prior quarter FHLB and other borrowings were reduced by $42 million or 4.6% as a result of deposit growth exceeding loan growth through the quarter. Tier 1 and total capital ratios were 11.1% and 12.2% respectively as of September 30, 2016, compared to 10.9% and 12% respectively as of last quarter. The tier 1 leverage ratio was 0.5% as of September 30, '16 and 10% as of June 30, 2016. All regulatory capital ratios also remain well above minimums to be considered well capitalized. Now let's turn over to our Chief Risk Officer, Steve Ulenberg, who will take us through line and asset quality trends seen through the quarter.

[Steve Ulenberg:]

Thanks very much Pete. Turning our attention now to the slide on asset quality, as Pete mentioned loan growth for the fiscal year 2016 was $1.36 billion or 18.5%. This included $864 million of acquired loans. The net organic loan growth for the fiscal year was $494 million or 6.7%. The net loan growth during the quarter was primarily driven by $97 million of commercial real estate loan growth and $67 million of agricultural loan growth, partially offset by $70 million reduction in commercial non-real estate loans. Provision for loan losses was $5.1 million for the quarter ended September 30, 2016, compared to $1.6 million in the same quarter last year. Provision for loan losses for the fiscal year 2016 was $16.9 million, which compares with $19 million for the 2015 fiscal year. Net charge-offs for the quarter were $4.7 million or 0.21% of average total loans, on an annualized basis. And this compares to $0.4 million or 0.02% for the same time period in fiscal 2015. Net charge-offs for the fiscal year 2016 came in at $9.5 million. This compares with $9.4 million for the 2015 fiscal year. The ratio of A triple loans to total loans was 0.74% at September 30, 2016, and this was marginally down from 0.75% at June 30, 2016. The balance of the A triple loan increased from $64.2 million to $64.6 million over the same period. Included within total loans are approximately $1.13 billion of loans, which management have linked to the fair value auction. These loans are excluded from the A triple O process, but management has estimated that approximately $7.4 million of the fair value adjustment for these loans relates to [indiscernible], translating to an additional 0.09% of total loans. The total remaining purchase discount on all acquired loans at September 30, 2016 equates to an additional 0.46% of total loans. Loans graded watch was $328 million at September 30, 2016, a decrease of $68 million or 17.2% compared to June 30, 2016. Loans graded substandard were $242 million, an increase of $4 million or 1.7% over the same period. The reduction in loans graded watch was primarily driven by a number of commercial real estate loans moving to past status and the downgrade of one larger C&I exposure that is heavily dependent on the agricultural industry. With the agricultural loan segment, - within the agricultural loan segment individual loan relationships were both upgraded and downgraded during the quarter, but overall levels of watch and substandard loans improved slightly. Non-accrual loans were $126.4 million as of September 30, 2016 with $4.1 million of the balance covered by FDIC loss sharing arrangements. Total non-accrual loans increased by $18.2 million during the quarter and increased by $58 million compared to the same quarter last year. The increase in non-accrual loans during the quarter was primarily driven by the C&I line that was downgraded to substandard and placed on non-accrual. Total OREO balances were $10.3 million as of September 30, 2016. This was a decrease of $1.4 million or 12% compared to the prior quarter and the decrease of $5.6 million or 35% over the 2016 fiscal year. We expect the 2016 and 2017 operating results to be strained for many of our grain producers as previously discussed. But we continue to manage these actively to ensure the best possible outcomes and we remain comfortable with our overall exposure to this industry. We're also monitoring recent declines in beef and hog prices and analyzing any potential impact to our customers that may be affected if prices continued to fall from current levels or remain low for a longer period of time. So, we're able to put required action plans in place in a timely manner. We continue to support and we're closely with our Ag customers as needed particularly our grain growth through the annual growing, harvesting and sales cycle with ongoing monitoring of the most recent growers, consistent with the plans and expectations, as previously flagged. With that, let's turn the call back Ken for some closing remarks.

[Ken Karels:]

Okay, thank you, Steve. We continue to be very excited about the future of this company. Our fiscal year 2016 results are strong, and while we understand, there will be challenges in the coming year, we will face those obstacles as opportunities to grow, as we have always done. As we highlight our financial numbers this morning, we also think it's important to highlight company culture at Great Western Bank. With the national spotlight now on incentive pay, we saw an opportunity to look inside and make sure our business practices are aligned with our mission. We did a full review of our retail business practices to ensure we're selling the products that are right for our customers. We believe we have the right people in place to live with our mission to making life great and to put the customer first. We believe it's critical to make sure our customers, employees, and stockholders know they can trust us to do the right thing. I am confident, we have the right people in place to do so. This ends our presentation. And with that, we're happy to take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Steven Alexopoulos of JPMorgan. Please go ahead.

[Steven Alexopoulos:]

Hey good morning, everybody.

[Ken Karels:]

Good morning, Steve.

[Steven Alexopoulos:]

I wanted to start in the business outlook section of the release. Can you give more color on the comments about focusing on profitable relationships, the remaining compliant with internal and external concentration limits?

[Ken Karels:]

Yeah, I think - Ken here, two things. Number one is there has been some spotlight as far as regulators on 100%, 300% limits for commercial real estate, we're well with under those by the way. But it's given us some opportunity to increase pricing in that segment which we think it's important. The C&I segment, which has been shrinking as an industry and I think last quarter it went down. And it also went down for us, we think there is net opportunities for us to be more competitive in the C&I space and grow that segment, which has been one of our key strategies is to keep the balanced book. So, we think that will actually help us with both of those.

[Steven Alexopoulos:]

Okay. Why because it says here that you might be tempering loan growth slightly, why would that be tempering loan growth?

[Ken Karels:]

Well, we've - by slightly if we end up with higher pricing on some of the commercial real estate will temper some of that growth.

[Steven Alexopoulos:]

Okay, on the C&I side. Okay.

[Ken Karels:]

No, on the commercial real estate side.

[Peter Chapman:]

We are saying mid-to-high single-digits, we certainly don’t want to suggest that we think we are going to be a 10% loan growth for annualized perspective, so if you're around the 6% to 7% and sort of more in the mid-range as well.

[Steven Alexopoulos:]

All right. Okay, thanks. And may be shifting gears, so regarding the C&I loan that was downgraded this quarter that was reliant on the Ag industry. Could you tell us how large is that credit, where the specific reserves and which industry in Ag is the most exposed?

[Ken Karels:]

$18 million to $20 million I think was the credit size.

[Peter Chapman:]

It looks it was steady, it’s around about $18 million and it’s really exposed to the grain side of the business. It was a line that we hit already rate that sub standardly managed by line work out groups, so not a surprise there in terms of need some more retention and it’s just moving through the that work out process.

[Ken Karels:]

In the essence of probably it wasn’t affected by the grain industry, it was really as sometimes happens mismanagement by the borrower, over extension by the borrower and some other types of things that could happened to any C&I business. Even though it was related to the Ag industry that wasn’t the cause of the problem for this customer.

[Steven Alexopoulos:]

Okay. Are you guys seeing other pressure in the C&I portfolio, I mean I don't know if you consider this one off in terms of those C&I borrowers that do have more exposure to Ag?

[Ken Karels:]

No. Actually, the C&I portfolio has been performing quite well and really have seen that business sector do quite well, part of our pay downs actually have been coming from businesses doing well and being brought up by larger companies. So, we've had a number of C&I customers that can actually sold their businesses and paid us off.

[Peter Chapman:]

But if you look at the asset quality metrics for C&!, everything is pretty proportionate to this year of the balance sheet, so nothing standing out there.

[Steven Alexopoulos:]

And may be just one final question staying with credit, regarding the price decline in beef and hog prices, can you give us a sense how much pressure you are seeing at this point on the portfolio and you're starting to take action already at this stage to mitigate potential losses?

[Ken Karels:]

Look, we are not seeing a lot of pressure on the portfolio, we have tried to keep ahead of the game and we are monitoring our customers, we are reviewing the portfolio. Most of the customers have still got reasonable liquidity and reasonably low leverage, but we're just continuing to be vigilant. Especially, we don’t have much on the hog side of it, $100 million total. Yeah and so it's not much on the hog, on the beef side of it, that’s a cycle that happens quite off and we've been through it. It’s a two-year cycle versus a longer cycle for the grain piece of it, and in essence, the ones that are actually seeing out cattle already passed the worst of that is now they are buying cheaper cabs [ph] and lower feed cost. So, don’t see a lot of stress there and don’t anticipate a lot of stress, lot of experience borrowers have gone through these cycles before.

[Steven Alexopoulos:]

Okay. Great. Thanks for all the color.

[Operator:]

Our next question comes from Dave Rochester of Deutsche Bank. Please go ahead.

[David Rochester:]

Hey, good morning, guys. I thought I just want to make sure I understood, so you're still thinking you're going to get that 6% to 7% of loan growth over the next year, is that right?

[Ken Karels:]

I think we're mid-single-digit loan growth is really what we're targeting for so.

[David Rochester:]

Okay, got it. And just back on credit, it was really good to see that Ag watch substandard down a little bit and it sound like you feel comfortable with the offsets and the price declines you see on that side, but would you happen to have any stats on the protein side of the business similar to the ones that you gave earlier this year for the grains, just to get a sense for how conservative you guys are being on the underwriting side there?

[Ken Karels:]

I don't think we have anything we share today we probably have that, I don’t think we're ready to share.

[David Rochester:]

Okay. And then switching to the M&A environment, if you can just talk about what you are seeing in terms of conversation level out there and if you can just remind us what you are looking for on that front that'd be great.

[Ken Karels:]

Yeah. Obviously continue to have conversation with potential targets on it. I think there is still a difference between pricing and some of the issues, we are very conscious to make sure it’s accretive to our existing shareholders before we pull the trigger on any deal. So, there is some where the price expectations are higher than what we think. There is some where their banks are just not ready position to sell yet, so a few of that are in the marketplace with high concentrations of commercial real estate, fairly loaned out on liquidity. Not an interest in that, but generally we're still looking within our footprint as far as acquisitions, you know that kind of give us the ability to continue to grow as a business bank in both the C&I and commercial real estate and Ag having the institution with high liquidity or excess deposits would be a plus. But I would say, activity levels probably slower than what they have been for the last couple of quarters as far as potentials.

[David Rochester:]

Okay. And then just switching the margin real quick, Pete if you've got - if you like the share on the margin for next quarter that'll be great. And if you can just talk about the decline in the securities yield this quarter, what caused that and if you expect that to actually trend up going forward as you guys remix that?

[Peter Chapman:]

Sure, thanks, Dave. Look in terms of loan margin what’s coming on front book is pretty consistent with prior quarter, so, I think we have said that sort of one to two-point decline is something wouldn’t be surprised with. Obviously, we have had LIBOR help us for the quarter, I think there has been some changes in cash management fund that have helped that with some more demand in LIBOR. So, I think the outlook today is lend pricing, we're saying it's pretty consistent so look out to say that slight decrease in margin the one to two points on the overall would, but I’ll still to, I mean on the securities yield just for investment grades are pretty low. We have long-term rates down for the quarter and we did reinvest a little more through the quarter, which caused a little drop so, and look that will just be dependent on the market, I think that.

[David Rochester:]

Okay. Great, thank you guys.

[Operator:]

Our next question comes from Jon Arfstrom of RBC Capital. Please go ahead.

[Jon Arfstrom:]

Thanks, good morning.

[Ken Karels:]

Good morning, Jon.

[Jon Arfstrom:]

Pete, as long as you're front in center, can you walk through a little bit on the expense outlook, I think you said the $6 million a quarter is in the run rate, are you signaling you have all the expense saves out from HF for do you still feel there is more to come just trying to get a feel for what you are expecting on expenses?

[Peter Chapman:]

So, that's 6.5 up, Dave - sorry Jon, on the ongoing run rate and yes, we do feel we have most in that, we'll certainly look to get a little bit more Jon, but I think that 6.5 up from HF is about where it is. I mean through the quarter, we're a little elevated just end of fiscal year for us here is probably 0.5 million to also in just sort of type things are in compensation that was a little bit high this quarter, but outside of that I think it was a pretty clean quarter jump from an expense price perspective.

[Jon Arfstrom:]

Okay. Good. That helps. Back on credits already go back again, but any update on the larger credit or I guess relationship from last quarter that weren't nonperforming, is that progressing?

[Peter Chapman:]

Look, it's progressing, we are just actively managing that as you know larger A credit is not a one or two-month cycle. So, we're basically supporting the operation and really just working through that over the longer-term and believe we're appropriately provision there. So, nothing adds to that.

[Ken Karels:]

I think generally the cropping conditions for this customer and others are better than we expected cash flows for most of our producers will be better than we thought at the beginning of 2016, we’re seeing some huge crops out there. And the other part is for especially the ones that were either watched or substandard, we had done a better job of locking in some earlier price increases back in May and June more than what would be typically do, so we're fairly optimistic that the - that how they did this year better than we thought the spring.

[Jon Arfstrom:]

Okay. That's good to hear. And then can just buyback appetite, is this something you want to get done early, is it a plan that you would like to exhaust sooner rather than later and maybe what’s the message with the buyback?

[Ken Karels:]

I think the message is will be opportunists, similar to what happen to the price stock market here at last May - February when it dipped so low, the $100 million is really a multi-year buyback, a number on it. So, we’ll be opportunist and take advantage of it, if it does happen.

[Jon Arfstrom:]

Okay. Good. Thank you.

[Operator:]

Our next question comes from Erik Zwick of Stephens Incorporated. Please go ahead.

[Erik Zwick:]

Good morning, guys.

[Peter Chapman:]

Good morning.

[Erik Zwick:]

Maybe a question for Pete or Steve, for the C&I credit that was downgraded this quarter, that was included, if I look at loan portfolio breakdown and the C&I portfolio and not the ag portfolio, is that correct.

[Peter Chapman:]

Right, yes.

[Erik Zwick:]

And then could you quantify how many other C&I credit relationships we have significant exposure to the ag industry.

[Peter Chapman:]

That portfolio was couple of hundred million, roughly.

[David Hinderaker:]

Yeah, this is - Erik this is Dave. We haven't updated that number recently, probably a year-ago we had talked to $300 million to $400 million. That's kind of divided between the volume based businesses of the elevators and fertilizer businesses and those types, as well as the implement dealers and Ken, can maybe comment on...

[Ken Karels:]

Yeah.

[Erik Zwick:]

General conditions of those.

[Ken Karels:]

Again, I would want to emphasize on this credit is really nothing to do with the Ag, it’s really some mismanagement and over extension by the borrower, so the volume base business that this customer was in is still doing well, it’s just some other things that he had done that got him in trouble.

[Erik Zwick:]

Understood. And switching to the loan growth in the quarter C&I loans were down this quarter, after several quarters growth and I guess not inconsistent what would see across the industry. Can you talk about may be what you saw from either borrower demand or pay downs in the quarter and it's not like thought that C&I loans could be an opportunity for growth going forward, so just the opportunities that you see there?

[Ken Karels:]

Yeah. I think, two things, we and the rest of the industry saw some reduction here this last quarter, some of them as we mentioned from the sale of their businesses to larger companies that we either had the cash or have the opportunity to finance on it too. And it is more competitive market, but when you look at pipelines, definitely pipelines are doing up more with C&I customers than what we have had in growth in the commercial real estate side of it, so that’s positive, definitely our emphasis is going to be more on the C&I business growing forward. So, we’re optimistic and we can continue to grow that segment.

[Erik Zwick:]

And last one, I know that branch in Scottsdale only be open in a few months, but any early read on how the things are going down there?

[Ken Karels:]

Yeah, no, I think it’s going to be good, I mean part of the - how we typically open branches to hire the staff first and then once they're successful given the facility to operate out of other than one of the nearby ones, so we’ve hired some good staff that have had some early success and we think that will be very successful for us in the future.

[Steve Ulenberg:]

And Steve here, I'll just get - just wasn't quick enough to jump at the end of getting C&I comments too, just to reinforce I mean it’s still a significant part of the book, it has 21% of our book, so it is a substantial portfolio already.

[Erik Zwick:]

Great. Thanks for taking my questions.

[Steve Ulenberg:]

Okay. Thank you.

[Operator:]

Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

[Ebrahim Poonawala:]

Good morning.

[Ken Karels:]

Morning, Ebrahim.

[Ebrahim Poonawala:]

Most of my question has been asked and so just one question around loan growth, Ken. Are you trying to sort of lower sort of the expectations around loan growth relative to how we’ve been thinking about it over the last few quarters, so maybe it would be helpful if you can just talk about in terms of outlook for your markets and better or not that takeaway is the right thing to think about what you’re trying to do?

[Ken Karels:]

Yeah. Just asking David kind of where the - where our analyst are at with loan growth, we’re still comfortable with that mid-single-digit loan growth on it, we’ll go down a percent or half a percent on it, is that possible? Yes, that’s possible on it, but it’s not going to be material on it, I still think, you can factor in mid-single-digit loan growth.

[Ebrahim Poonawala:]

And just a follow-up, the health - from a market standpoint where are we seeing sort of the strongest demand coming through as we look into fourth quarter into 2017?

[Ken Karels:]

It is really true all the markets, I mean, obviously, there is only Colorado had been our biggest growth opening up an office in Scottsdale, we will definitely add to the growth numbers there, but even in South Dakota Sioux Falls pipelines are pretty strong right now. So, economy is really doing quite well. I think back on the C&I space here, when we talk to our C&I customers about investment and expansion, two issues affect them one is the regulations and the uncertainty of the elections, so that will be obviously be cleared up here shortly. And then the second part, especially in the Midwest there is just a shortage of workers and that is - that will be an issue that will continue as we go forward.

[Ebrahim Poonawala:]

Right. Thank you very much. That’s all I had.

[Ken Karels:]

Thank you.

[Operator:]

Our next question comes from Damon DelMonte of KBW. Please go ahead.

[Damon DelMonte:]

Hey, good morning, guys. Most of my questions have been answered but just curious you guys have historically been known to kind of actively manage your branch structure and look for efficiencies for branches that are not performing to standard. Any plans to the consolidated branches in the upcoming calendar year of 2017 or even conversely any plans to they know about anywhere?

[Peter Chapman:]

Yeah, again you're right we always continue to look at that and we will. And I think it's more one offs both opening and closing of branches. What we are starting to do though is just even the staffing levels, the people that are in these branches are taking a hard look at that and we're able to squeeze some marginal cost out of each of the existing branches by doing that. I've got a location in mind Damon so probably back half of the year we'll probably - there is any branch as long as it goes well for the staff that we may look to open a facility as well.

[Damon DelMonte:]

Got you, okay. And then just a question on fee income. I mean the mortgage banking was pretty strong this quarter, how does the pipeline look heading into the last quarter of the calendar quarter.

[Peter Chapman:]

It looks good, but seasonally slow in this part of the world. So, a lot of the volume gets pushed out by the end of that September quarter. October looks to be a pretty good month, November, December pretty soft though, just leave that things cooling down out here.

[Damon DelMonte:]

All right, that's all I had. Thank you very much.

[Peter Chapman:]

Thank you.

[Operator:]

Our next question comes from Tim O'Brien of Sandler O'Neill. Please go ahead.

[Tim O'Brien:]

Good morning. Question for you, Ken, can you talk a little bit about as far as protein credit review and management and monitoring of that part of your business. Is there a cycle or a season of that like there is in the grain production at all? How do you monitor that and how regular does the loan get tested and considered from a watch pass standpoint?

[Ken Karels:]

Yeah, two segments are biggest is really dairy and the beef side of it, so I'll address both of those. On the dairy side of it, it was really is quarterly, I mean this is a monthly cash flow, actually weekly cash flow where they're selling milk and bringing that in. And that's - so it's monitored quarterly, we will move or change any credits based upon that. And that segment is performing very, very well and most of those credits that we have in the dairy side of it are located in the Arizona market where there is milk quotas and integration with cheese plants et cetera on to it. So, that the biggest part of our protein very, very strong. The beef side of it is more of a cycle that we look at on - there is for the larger ones, there is monthly borrowing basis, so, we’re watching and monitoring that monthly. So, we'll trigger any concerns that come up basic on a monthly basis. So, probably short answer much quicker than you see in the grain side just because of the monitoring that we have and the ability to do that.

[Tim O'Brien:]

So, no seasonal kind of driven uptake and watch list for that segment probably that's going to happen. It's kind of the rolling review is that what you're saying?

[Ken Karels:]

I would say so, Steve any...

[Steve Ulenberg:]

Yes, I think that's exactly right.

[Tim O'Brien:]

And then with the growing season, the grain production season mostly behind us qualitatively is the credit uncertainty due to pricing out of the market. Do you have a much better view now and more certainty about how things are going to shake out as far as potential downgrade your loss for grain producers given where we are in the season than you did three months ago?

[Steve Ulenberg:]

We'll start seeing that here in the next quarter or two on the grain as we go through the renewals they get the harvest the full yields what they've marketed, where they're selling at. So typically, we'll see that here this present quarter and then first quarter of 2017.

[Peter Chapman:]

Yeah I think exactly Ken. If you look at the harvesting I think in Iowa, there are around sort of 50 to 75 complete and corn, grain harvesting now, that [ph] already move up the country just with the longer season up here. So, I will get a better idea of the next quarter just really how that's coming up, but I mean overall USDA is still forecasting record crops both corn, beans, and wheat this season. But over the next quarter as we get through those results and we're doing the annual reviews, we'll get an updated handle on that across the portfolio. We are seeing though there is - they are continuing to get their cost down, cash rents are coming down, land use are dropping slightly, our machinery and specially use values are dropping some, so definitely the input cost are coming down which makes the breakeven easier to do.

[Tim O'Brien:]

And then last question on the C&I loan that got down greater this quarter, just one more on that. What kind of realization is behind that load if any or global support or guarantees can you characterize that?

[Ken Karels:]

Too much specific it is secured both long-term assets, real estate and inventory receivables et cetera rate, both typical we should see in the C&I loan but we do have some real estate also. And...

[Tim O'Brien:]

Great, thanks for answering my question.

[Ken Karels:]

Hey, thank you, Tim.

[Operator:]

[Operator instructions]. Our next question comes from Nathan Race of Piper Jaffray. Please go ahead.

[Nathan Race:]

Hey guys, good morning.

[Ken Karels:]

Good morning, Nathan.

[Nathan Race:]

Lot of my questions has been answered, but just a question on deposit growth and pricing it looks like deposit cost ticked up a little bit in the quarter, just curious what the strategy is to grow deposits up here and if you are seeing any potential deposit attrition on the horizon in light of some of the stress [ph] and your Ag customers are encountering?

[Ken Karels:]

Yeah, no, I wouldn’t say we see anything especially in the Ag side from attrition or any part of that and we’ve had good loan growth, deposit growth has lagged somewhat the loan growth on it. Our emphasis for the last of couple of years has been on business deposits, we have been quite successful. We continue to add business development offers to go after that segment, we’ve improved our technology, or treasury banking suite to be more competitive with the larger players. I think what the reason stumbled one large competitor right now some of the doors we have been knocking on over the last number of years are getting answered. I think there is some opportunities for us to be successful in that space on it. We’re also have improved our technology on our retail banking especially the mobile banking, we’ll be continuing to improve the technology and focusing on - I’ll call the digital branch to acquire deposits on it too. So, something we are focusing more on than we have in the past, and we have had some success we think we continue to have - continue to have success there.

[Peter Chapman:]

And to your Ag point. The Ag deposits on a huge swing factor in the overall deposit base as well. So, I wouldn’t be too concerned about that.

[Nathan Race:]

Okay, great. And then just lastly, can you give us the portfolios that drove the charge-offs this quarter?

[Ken Karels:]

Portfolios that drove it was...

[Peter Chapman:]

Ag I think it’s pretty well 50-50.

[Nathan Race:]

Okay, great. Thank you.

[Ken Karels:]

Thank you.

[Operator:]

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 for taking the time this morning here. As I mentioned earlier, we're very happy with the results we’ve had this last fiscal year, the integration of home federal, the growth that we’ve had this past year. Optimistic as we look into next year and the ability for us to continue to perform. So again, thank you for taking the time this morning.

[Operator:]

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