GWB
#Thank you, <UNK>, and good morning, everyone.
Thank you for taking the time to join us this morning to discuss our financial results.
We are very pleased with the earnings and growth in our business this quarter.
A few of the underlying highlights are: Net income was $40.5 million or $0.69 per share.
This is an increase of 15% from last year.
Loan growth remains strong, with loans increasing $173 million or 7.7% on an annualized basis.
Our efficiency ratio remains strong at 48.6%, or 47.8% if you exclude an accounting gross up that Pete <UNK> will expand upon in a moment.
And finally, we increased our quarterly dividend to $0.25 per share.
This increase of 25% reflects Great Western Bank's ability to generate excess capital due to our strong returns.
Now for more insight on our first quarter financial results, I'd like to turn the call over to our Chief Financial Officer, <UNK> <UNK>.
Pete.
Thank you, Ken, and good morning, everybody.
As Ken mentioned, within our income statement for the quarter, there is a gross-up of noninterest income and noninterest expense by $2.3 million that largely offsets.
This is due to a contract termination cost and offsetting sign-on bonus from a vendor change.
This has no real impact upon net income but does gross up our efficiency ratio by approximately 1% for the quarter.
Now moving to revenue.
Net interest income was $102.2 million for the quarter, which is comparable to the prior quarter, driven primarily by loan interest income resulting from loan growth, partially offset by higher interest expense related to deposits and borrowings and a lower day count in the March 2018 quarter.
Our net interest margin was 3.92% for the quarter, and our adjusted net interest margin was 3.86%.
The adjusted NIM increased by 6 basis points quarter-over-quarter as a result of higher asset yields mainly driven by the fact that 62% of our loan portfolio is floating or adjustable, which was partially offset by the rising cost of interest-bearing deposits and borrowings.
Noninterest income for the quarter was $18.7 million, a 12% increase compared to the December 2017 quarter, which was driven by a $2.3 million contract signing bonus.
Excluding this amount, noninterest income declined by $400,000, which was as a result of service charges and mortgage income being seasonally softer in the March quarter, offset by higher swap fee revenue and wealth management income.
Finally, noninterest expenses were $59.1 million for the quarter, or $56.8 million excluding the $2.3 million contract breakage gross up within data processing and communication costs.
This is an increase of $2 million for the quarter.
The increase in expenses was driven by an $800,000 increase in salaries and benefits, included within which was a one-time bonus of $300,000 as a result of our living wage announcements last quarter; increased OREO costs of $800,000 and increased occupancy costs of $400,000 due to seasonal property taxes and maintenance and the costs associated with new branch premises.
We expect our expense run rate to be broadly in line with this quarter, with the view that OREO expenses should be lower in the following quarter.
And also salary expense will not include the $300,000 in one-time bonuses.
All regulatory capital ratios remain comfortably above the well-capitalized limits, with Tier 1 and total capital ratios at 11.5% and 12.5% respectively, and tangible common equity to tangible assets increasing to 9.3%.
I'd now like to turn it over to Doug <UNK>, our Regional President, to discuss balance sheet activity.
Doug.
Thanks, Pete, and good morning, everyone.
We are happy to report a third consecutive quarter of strong loan growth.
Loan balances increased $173 million compared to December 31 and the annualized growth rate of nearly 8%.
Growth was most robust in construction, land development and construction non-real estate segments of the portfolio.
As we flagged in our December '17 quarterly earnings call, unfunded construction lines were $375 million higher than 12 months prior.
So growth in construction and development was expected during this March quarter.
We expect continued growth in this segment in the coming quarters, despite some finished projects refinancing into the secondary market.
The commercial non-real estate and owner-occupied real estate portfolio grew by $95 million or 4% for the quarter, which reflects our desire and focus to pursue diverse and balanced growth across our portfolio.
Commercial and industrial growth represented 55% of this quarter's loan growth.
Geographically, growth was distributed across our footprint, with good growth in Arizona, South Dakota, Iowa, Kansas and Missouri, reflecting the benefit of our broad geographic footprint.
Deposit growth during the quarter was approximately $360 million on a net basis.
The inflow was split between an inflow in consumer and business.
This brings our year-to-date deposit growth to 4.6%.
Our loan to deposit ratio of 99% remains well within our targeted range.
Let's turn the call over now to our to our Chief Credit Officer, <UNK> <UNK>, who will take us through asset quality developments.
<UNK>.
Thank you, Doug.
Turning our attention now to the slide on asset quality.
Provision for loan losses was $4.9 million for the quarter, a slight increase compared to the previous quarter.
Net charge-offs for the quarter were $3.8 million or 17 basis points of average loans on an annualized basis, which is lower than the prior quarter and also the lowest quarterly net charge-off rate since fiscal year '16.
Our allowance for loan and lease losses as a percentage of total loans was stable at 70 basis points.
Our comprehensive credit coverage, which includes credit-related fair value adjustments on our long-term loan portfolio and purchase accounting marks, remains sound at 103 basis points of total loans.
Compared to December 31, '17, we saw modest increases in Watch and Substandard credits of $7 million and $4 million respectively, which were more than offset by a $16 million decrease in nonaccrual loans.
We're pleased to inform you that we've completed 91.4% of all ag reviews, which would typically be completed during this review renewal cycle; and 86.6% of all Watch and worse rated credits during the same period.
In addition, we have completed 19.2% of all grain producer annual reviews, which would typically be completed during this review renewal cycle; and 88.5% of all Watch or worse rated credits during the same period.
In general, farmers performance in 2017 was in line with our expectations and our previous earning calls, with upgrades modestly outpacing downgrades.
We continue to actively monitor the discussion around trade tariffs, with specific focus on soybeans and how that may impact our customers.
But at this stage, we do not have concerns around potential impact on the loan portfolio.
If we look at soybean future prices as of yesterday, these are still higher than 12 months ago, and many of our customers have forward-contracted part of this year's production.
The downward trend on milk prices we have discussed the last few quarters has reversed, with a slight improvement in milk prices during the quarter.
With that, let's turn the call back to Ken for some closing remarks.
Thank you, <UNK>.
We achieved solid results for the quarter.
Loan growth was strong, considering this quarter's growth is historically flat.
Our returns were exceptional, which 1.4% ROA and a 16% return on tangible equity.
Asset quality remains stable and very much in line with our expectations.
We are optimistic that the impact of the tax and regulatory reform will continue to have a positive impact on our customers and our own business.
Additionally, we remain confident we will see mid- to high-single-digit loan growth going forward.
Thank you for your continued interest in GWB.
And we're now happy to open up the call for questions.
Well, I think it's not going to affect either earnings or growth on it.
<UNK>, maybe a few points you want to make just on the tariff itself.
But I think, as <UNK> stated earlier, we have very little concern regarding it.
Happy to do so, Ken.
So far, what's been recorded is exactly, you said, it's a lot of talk, it's a lot of discussion, it's posturing so far.
Other thing that we really look at is China imports about 63% of the world's soybean production or 97 million tons a year.
The 3 biggest producers are the U.S., Brazil and Argentina.
And Argentina right now is in pretty significant drought.
The market for soybeans so far indicates not a lot of concern there.
I think the market was up again yesterday.
And as mentioned in the presentation, the market is up from where it was a year ago.
What we do think could happen is see a possible, call it, a distribution realignment, if you would.
We've already seen Europe, Indonesia; believe that there's further demands in none other than China out there to take up that production, if China did indeed back off.
On top of that, production costs dropping about 6% to 9% a year on both corn and beans.
And in our footprint, our producers don't have to just do soybeans.
They could plant corn if they chose to.
So it's something we are very much watching and aware of.
But as Ken said, don't expect significant at all effects on our loan books at all.
And I think the other thing ---+ Doug, maybe you want to talk about that ---+ but a lot of our producers are forward contracting this year's production.
So Doug.
Yes, I think when you look at the grain book and realize, <UNK>, that's mostly in the Midwest, you've got opportunities that most are forward contracting or locking in positions through the mercantile exchange.
Additionally, I think it's important to note, as you ask about, growth.
And very little of our pipeline and very little of our growth would be focusing around the Midwest ag production.
So we see insignificant to no headwind from growth impacts of any Midwest agricultural commodity concerns.
Well, I think we probably, <UNK>, want to stick kind of with that full mid- to high-single loan growth for the year.
What we saw this last quarter typically was flat to down quarter, so we were quite happy to see the growth that we had this quarter.
And I think would help propel growth for us for the rest of the year.
So typically this next quarter isn't as strong as our last fiscal quarter on it.
But I think we're pretty confident there will be substantially higher loan growth than we have in the past year.
Maybe a follow-up on Pete, with the discussion on the expense side.
Just kind of the guide there that expecting some lower expenses.
Also assume the noise on the contract break expense, that also goes away.
Correct.
And then, on the margin, just wanted to kind of lean into the ---+ I don't know if the interest rate swap cost decline, if you do that, sort of one-time in nature.
But in other words, it sounded like an encouraging hoping to outstrip earning asset yields, outstripping deposit costs.
Maybe just more margin discussion about how you see the adjusted going forward.
And then, maybe one last one on that.
The 3 properties added the OREO, any kind of additional detail there.
And the whole bucket of OREO, anything headed for a quick resolution.
<UNK>, you want to go ahead.
I'll be happy to.
With the additions to OREO, the only thing that I'd add ---+ and others certainly join in if you'd like ---+ those are the continuations of the workout strategy, where we got to the point where we got control and/or ownership of the properties, so nothing there was a surprise.
As for quick wins, if you will, in that book we've got a number of the properties in OREO under contract.
But in that space, I would not ever say that you're going to have 100% of them always come through to fruition.
You will have some of those fallout.
So all I can tell you is it's monitored extremely closely.
And we're having discussions on those at least every month, if not more frequently, on the larger [parcels].
So if I were to circle back to the workout strategy, then, could we see that additional nonperforming loss transition to that OREO bucket, as you'd expect for the balance of the year.
It's always a possibility.
Right now the best information that we have as to where we're going to go is I think you're going to see a run rate in that book at or lower than what we have now.
Yes, the $15 million is still very, very low considering the size of our bank, with $9 billion of loans.
So there's always going to be something in there as we work through deals on it, too.
But the good part is, with the economy where it is, we're seeing contracts and people looking and very interested in whatever property goes in there.
So it is moving fairly quickly.
Just a question on kind of the ag growth that you saw this quarter, or perhaps (inaudible).
Just curious how much maybe you see this typical seasonal tick in agro that you may typically see during the first quarter of the year, of the calendar year.
And then, just within that context, just curious kind of the uptick in ag net charge-offs that we saw this quarter because I think they were fairly low last quarter.
Was somewhat surprising as you guys went through the seasonal process.
Yes, <UNK>, this is Doug.
Let me take the first half of it, and then <UNK> will help us on some of the charge-off reconciliation.
On the growth side, we end up with some seasonal increases toward the end of the year.
With prepayments, we have some declines that start into play right after the first of the year in January.
And then, in the Midwest, we start seeing a number of the spring startup expenses that happen around March 1.
So the averages generally were not up, but a point in time was up slightly.
Most of that growth is going to be in the Southwest again.
Because the quality of the book, the growth in the book that we have in the Southwest, many of it being nontraditional commodity producers starting in a January-February time frame.
So a lot of that is increases in that segment of the book, not the Midwest necessarily.
On the charge-off side, number one, I absolutely understand where the question is coming from.
(inaudible) for agriculture, I think, was $783,000 or so that we had in charge-offs there.
I would only call out that it's a continuation of the strategies on individual premise.
And I don't think anybody on the call would expect that's going to be exactly even every quarter of the year.
But I would also add to it, while the observation on charge-offs is right, if you look at our classified loans, if you look specifically at the grain book, our classified grain loans dropped by about $13 million in the quarter, which we look at as a very positive development.
Of overall average USA, it's continuation of plans and the vast, vast ---+ over 90% of what we charged off had already been provided for.
So no real surprise.
And <UNK>, thanks for pointing that out.
Because I think it does show something that we've said for a long, long time, that charge-offs in the ag space is still relatively low, very, very low on it.
Even though that's ticked up a lot, that's still a small amount when you consider the size of our portfolio.
And so that shows why we're very bullish in that space and why we think long term that's a great space to be in.
Yes, if I look at the first 6 months of the year, Nate, year-on-year, ag charge-offs are only $3 million compared to $7.5 million last year.
So (inaudible) charge-off.
But it's going in the right direction, and it's still pretty low given the portfolio size.
And then, just kind of changing gears and thinking about loan price, and obviously, you had good adjusted loan yield expansion this quarter along with higher rates.
And I think you alluded to earlier in the call that you're seeing some firmer pricing on production as well.
So just curious on what you've seen from competitive aspect that's allowing you to get some firmer pricing, obviously within the context of what you're seeing with higher interest rates as well.
One thing where we continue to work through a lot of the fixed-rate book, which I think Pete called out earlier, is about a third of the loan book.
We've had, with the sudden increase in treasuries over the last few months, 10-year hitting a near-term high just recently.
A lot of the rates are locked in.
They close, 30, 60, 90 days later.
So as we continue to work through the back book of fixed-rate commitments, the new origination weighted average loan rate and the gross loan rate are going to continue to accelerate, especially more so on the fixed book with the treasury increases.
So we do expect positive on the third of the book that's fixed and continue to receive that, again, on the variable side as well with rate adjustments.
And then, if I could just sneak one last one in for Pete ---+ think in the past, you guys haven't disclosed the swap fees.
I noticed a decent jump this quarter.
So just curious if this is a line item that we can expect to repeat going forward, if this is more one-time in nature.
I wouldn't say one-time, it was a good quarter, Nate, this year.
I mean, this quarter was a stronger quarter than usual.
So maybe a little lower, maybe $0.5 million or so lower in future quarters.
But we're seeing good demand with, as Doug pointed out, increasing rates.
We sort of have seen some increased client demand for longer-term lock-in rates.
And I think we track a pipeline, <UNK>, on the loans that we're looking at or quoting in that book.
And I think again, because of the surge in rates, we are probably seeing an increasing pipeline.
We had a couple large closings in the quarter that helped that result.
But again, the pipeline continues to probably increase, just based on business sentiment and maximizing interest rate risk.
I think ---+ let me add one more thing on that, <UNK>.
I think the other thing we're seeing, and we're continuing to see every quarter, a continued lift in the pipeline and the new loan closings from the new offices we've started.
I know we've talked about those in the past.
We've had 9 new offices over the last 5 years.
And we continue to see increased traction from those locations in several states.
And I think part of the expense item Pete mentioned, we're also seeing the expense obviously leads the revenue by several months, but we're starting to catch up.
And we're seeing positive improvement there from cost versus revenue in the new offices we've started.
Yes, it's going to be predominantly in metro areas.
It's going to be a cross section of some multifamily, which we're very cautious of, depending on the market.
It's going to be a little bit of some industrial, very little office and, I would say, no retail.
So just to kind of follow up on the new markets that you've entered into recently, I think you mentioned 9 offices over the last 5 years.
Obviously, you guys noted the progress that's coming out of those.
Have you thought about additional markets to look to expand it to either during 2018 or into 2019.
And if so, whereabouts.
Yes, we did a multiyear plan early in '17 that we received support from the Board of Directors on that laid out a longer-term plan in '17-'18, '18-'19, and '19 and beyond.
And we're executing on that plan that started a little over a year ago.
As far as new markets, where we're headed, we have 3 applications that should be filed for new offices in 2 different states that are within our existing 9-state footprint.
Probably during this quarter, we're waiting for one piece of information in all 3 of those to finalize the regulatory filings.
Those would all be full-service offices that we do not currently have loan production offices in.
We additionally have 3 loan production offices that are in the queue, and we're working on hiring opportunities in those markets.
Some we've got offers out, some we're negotiating on, and some we're still sourcing the person that fits the culture.
But those are all plans that were laid in place in early '17, and progressing as planned with staff hiring before we incur overhead.
And I would say we're meeting to exceeding results in really all of the 9 we've opened, and preliminary stages of the ones that are in the queue.
And until we probably have formal filings out there, we've not in the past disclosed the exact location relative to that until we put the filings out, which should be near term.
And really, we have been successful with that.
That's what'd led our guidance to the mid- to high-single-digit loan growth.
It's helped us propel growth here from what we had last year.
So it's working very well.
And then, I guess, the credit trends have been very favorable the first 2 fiscal quarters for you guys this year.
Loan growth is continuing to chug along.
Just kind of wondering what your thoughts are on the provision for the last couple quarters of this fiscal year.
I think pretty much in line with where we have, right.
<UNK>, Pete, anything.
Pretty much in line.
Yes, certainly.
Tim, really for us, sort of around the 100% loan to deposit.
Certainly incremental funding more put towards loans over securities.
I would expect that to sort of ---+ in the following quarter, I'd expect that to be more flattish.
But certainly, we'd look to expand the loan book over the securities portfolio.
I think, while we've had a lot of colder, wetter, damper weather, when you think about the varieties and various options of maturities that farmers have, they may get in the fields a week or two later.
But honestly, current genetics don't impact yields, and there's a lot of heat that happens yet in the summer that catches it up very quickly.
So no impacts.
If we're sitting here at the next call, and we're still talking about wet, cold weather, might be a factor.
But at this time, it's a nonevent.
Forecast for the next few weeks is very strong during that; much warmer, too.
We actually got a lot of planting that's already started probably in the southern Midwest portions of our market already.
So we're looking at very modest impacts of a couple weeks, really, in only the northern portions of the Midwest.
Thank you for joining us.
Obviously, we're very proud of the strong quarter we had this last quarter and look very optimistic into the future here.
So thanks again for joining us.
