Q3 2019 Earnings Call
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Okay.
Of course college call would you like to join.
The great Western Bancorp earnings call.
Your name.
[noise], Brian Healy.
So your last name.
H E L E y.
In your company.
Era eight era.
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He Ira.
Yes.
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Thank you all join you in and the call is being recorded.
Thank you.
Since that we have been monitoring for a number of quarters, which we will now move to the workout process.
Charge offs were $17.5 million for the quarter of this $8 million was attributable to one C and one kettle relationship where we believe customer fraud was involved with the remaining charge off amount 6 million related to cattle and $3 million related to green relationships that have been troubled them under close monitoring for a number of periods that were moving to resolution.
For our AG related watch and substandard balances as well as charge offs you will see that we have provided more breakout across the portfolio on slide eight of the earnings release deck. This shows that while substandard balances have risen this quarter due to dairy other parts of the portfolio are stable or improved across most metrics apart from the charge offs taken on the beef portfolio. This quarter to put these behind us when we look at overall credit related charges for the quarter. These are elevated due to downgrades in charge offs I just discussed the required provision for loan losses was $26 million to ensure that we have the appropriate levels of general and specific provisions credit related adjustments on loans and derivatives held at fair value were $5.5 million per quarter.
With respect to key asset quality ratios net charge offs to loans were 72 basis points for the June quarter, and 37 basis points for the fiscal year to date through to Thirtyth of June 2018, our allowance for loan and lease losses as a percentage of total loans is 77 basis points at June 30, 19, an increase of seven basis points from the prior quarter and our comprehensive credit coverage, which includes credit related fair value adjustments on our long term portfolio and purchase accounting marks also increased to 1.02% with that let's turn the call back to Ken for some closing remarks.
Okay. Thanks, Thank you Michael while we were disappointed with the asset quality movements. This quarter. We are pleased with our loan growth and asset quality throughout the portfolio outside the dairy. We're also pleased that we've been able to manage the cost of our funding and continue to manage our expense base. We will now open up the call for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jon Arfstrom of RBC capital markets. John . Please proceed.
Yes. Thank you.
Morning, guys.
Obviously, we'll start with credit and I guess.
Michael some of the comments you made about.
In dairy mending, a bit and not seen any other signs of weakness.
It is the basic message here. This is very rear view mirror.
Looking for things that May have happened of late last year, and you're not seeing any new problems emerge.
Or is there is that the wrong way to think about this.
Very good question I actually think that's the right way to look at as we noted in the presentation.
In our key markets, where we have dairy milk prices have already shown improvement this year and it's.
We certainly don't expect to see a repeat of this quarter in that sector of our loan book.
HM Okay.
And the basic provision message is that we can see the provision come back down to where it was historically and this.
Likelihood of the sub standard balances ended up and peas or charge offs at this point the way you see it as fairly well.
I would think in the coming quarters, we're going to see.
Provisioning.
And.
Grades you get back to.
The prior four quarter average not including the quarter ended June Thirtyth.
Okay.
And then I guess the other bigger picture question, then is kind of asked it before but in any other signs of weakness in the other parts of the portfolio AG related or non AG related these things seem pretty specific to what you're doing but just bigger picture you've seen any of the weakness.
Right now the answer would be no.
It's really been dairy and cattle sector.
Where we've seen the issues.
We have discussed already this morning, there are plenty of other sectors that we always pay attention to.
That can be moved by the overall economy, but nothing near.
To that.
Extreme right now is what I'd say.
Okay, all right. Thanks, Okay. Okay.
Yep. Thank you.
Thank you.
Our next question comes from Jeff Rulis of D.A. Davidson, Jeff. Please proceed.
Thanks, Good morning.
Hey, Joe it's at that.
Just tackle the that's kind of the market margin front.
Didn't hear you guys talk about kind of expectations, there and I think there was some.
Sought on on rate cuts. So I just wanted to kind of see what your outlook on margin and also kind of if you get out why just the underlying assumptions on what you think on the level of rate cuts that we'll get kind of yield curve type.
Views that'd be great. Thanks.
Yeah, Jeff I will certainly look when people went up.
So I guess, all things being equal he your margin guidance and in reality was Ah I guess the results were a bit better than that if we just increase.
By that level of kind of the new base. This quarter and then expectations thereafter, I mean, the only thing that changed is perhaps between last quarter and now is is the rate cut.
Probability or show you know I guess, Pete could you just engage a little bit more with how maybe the view beyond just the next quarter or has changed on margin or or or maybe you're saying that that has not.
Hi, This is Josh I think you looking at exactly the right. Yes. So you know aside from a little high but.
We continue to to for it to work through as we guided last quarter. You know now we're in a downright environment has got to get to a point, where when spreads start to expand and hopefully that can help us there as well, but we haven't seen that as yet, but you are thinking about the problem.
Turning to have any other questions.
As a reminder, when asking questions please limit to one.
Our next question comes from Ebrahim Poonawala of Bank of America Securities Abraham. Please proceed.
Good morning, guys.
Good morning.
Oh Im sorry, if I missed this but.
Appreciate if you can just talk tool.
In terms of the loss content on these loans Glenday goal substandard are delinquent just if we can address how to think about.
Potential losses, when the loan goes bad.
In the capital and the daily portfolios and the collateral that you have and how we could think about the loan to value on these loans that would be extremely helpful.
Yes, Abraham Duck your relative to provisioning expense last quarter. It was with the increased and substandard credit categories of dairy as we've mentioned and called out there was very minimal provision expense.
Again that relates back to an overall leverage component.
That is all overall lower in the AG sector and reflective of that in that area as well.
So it does this mean that the increase in criticized should not translate into material losses or provisioning as we go forward is that a fair takeaway.
Yes, hi, Thanks couple of fronts on that again based on the collateral base. The overall leverage of the operations being again lower than commercial lending categories, and then secondly, as Michael mentioned, when we look at that trajectory and year to date 19 results of milk prices and futures prices, we see positive activities positive cash flows and profitability.
In 19, and continuing that way in the near term.
And would you say the close to us.
Speaking out in terms of because I think last quarter. You mentioned you went to 97% of the green portfolio, you've gone through the Daddy Cabby portfolio now.
The financials for you should we assume that given where things are you fully caught up with the loan book and we should see substandard criticize loans if anything.
Flatten out or decline from here.
Yes, we have received all 2018 information and in some sectors interim results.
Given given protein prices grain prices commodity prices growing conditions trajectory of.
Commodity values, yes.
Got it and just last question on that is how much of this becomes a headwind to loan growth as we think about potential for some of these two runoff like if you could provide any of this.
Want to fight that in terms of is it a 100 $200 million of these loans that you would like to get off the balance sheet over time.
Both cnine and across commercial real estate and across all geographic functions.
We continue to be able to support declines in the AG sector with increases in other areas. So yes, it will be a headwind but with other.
That's helpful and one last and speed in terms of your comments on margin I think your previous guidance was two to three basis points down per quarter. You think that's kind of the right way to think about it even with the fed rate cuts am I hearing you correctly.
Yes look I think we still see a little bit of pressure in the needs him ebrahim, but as I said, we're trying to work through those deposit costs. So we did a little better this quarter than we.
We forecast last quarter, we'll just keep trying to work as much as we can.
Understood. Thanks for taking my questions.
Our next question comes from Damon Delmonte of KBW.
Hey, good morning, guys.
Quick question on the and.
Composition of the loan portfolio, what percentage is floating versus fixed.
Phew.
If you go to our.
Slide.
On the.
Our investor pack that gives it seems as though it's the same one that we've had historically CEP 40.
Sense is genuinely flooding and then we've got some it's adjustable over and over and above that.
Yes, thats exactly right.
The expense run rate going forward.
Yes look I think it's still be weve previous God statement came in a little lower on the healthcare the healthcare one and we had lower claims than we had.
Healthcare claim reserve just updated assumptions this quarter, which I wouldn't expect to happen next quarter it sort of that.
Okay, Great I will step out thank you.
Our next question comes from Tim O'brien thing O'neill and partners. Please proceed.
Thank you.
Just a follow on David's.
Questions about floating fixed are you guys.
Do you have active floors on your.
Incorporating those into new covenants on new production, what's the how are you using those to.
If at all to.
In preparation for rate cuts.
Yes, Tim this is Doug bass.
Yes to your question, we have rate floors, typically and all variable weather prime or LIBOR based we also would insert floors on resets of loans that are just to current treasury.
And.
Our.
Some of those active floors right now or.
No I would say today on the variable side that rates will need to come down to activate on some of the term resets with the treasury curve. Some of those may have been impacted.
Alright, Thanks, a lot.
Our next question comes from Gene Lee JP Morgan. Please proceed.
Hi, good morning.
Yes.
So could you just give us a little more color on the credit issues like how many borrowers Brian ball for each credit issue identified each and like beef cattle dairy cnine, maybe size along reserves for each and whether these are truly one I'm sorry.
A little bit more systemic.
Yes, we don't usually give that information out specifically by borrowers that type of size on it I think we generally talked and most of the increase is on the dairy piece of it.
I think as Doug pointed out before.
We are pretty well secured with all these credits so very little specific reserve needed in these credits on it.
But they won't get into specific sites.
Credit wise size, they may be vary from five to 40 million roughly.
And is the largest.
Not to charge offs for the quarter Janet on the on the beef cattle side of things were talking at less than a handful of land on that so I would say systemic principal ordered.
Okay and on the on the men side.
Good to see the deposit costs only rose this quarter is it fair to say that June quarter, Mark The peak and we should start seeing a decline on a quarter over quarter basis going forward.
I would hope so im certainly if the fed the fed decrease here next week denim, we've got a strategy in place to Doug said that roll it pretty quickly after that but I would hope that would that would assist in that.
Okay, and just last one site I know, you're not giving specific guidance on them, but just directionally for every 25 bips rate cuts by the fed like how much would that impact your NIM.
Well it depends on loan spreads so I won't go into sort of specific guidance on that.
We'll just have to see headlines for its plant there and how much people.
People want to try to protect that.
I think we did a good job this last quarter, just managing that and managing interest rates costs down or the interest deposit costs down.
Our beta was higher as rates went up I think we were ahead of the curve.
With that a lot of other banks in leasing rates anticipating more increases.
That gives us some flexibility in deposit rates to pull some leverage there to maintain margin.
All right that's it for me thanks for taking my question.
Thanks very much.
Our next question comes from Nathan race of Piper Jaffray.
Nathan Please proceed.
Hey, guys good morning.
Hi, good morning.
Going back to your last question Pete I, just wonder if you could just help us kind of think about the trajectory of core loan yields for the September quarter.
If I look back at the loan yield expansion following fed rate hikes. There was maybe an average of 70 basis points is it just as simple as maybe just taking the inverse of that thinking about the core loan yield trajectory here in fiscal Fourq you.
Yeah, Thats, probably a little high and probably it's about five will probably about five or six night on that one but you'd be thinking about throttling, yes.
Okay, Great and then if I could just ask the question on credit quality I am just curious just given that.
Handful of these issues in the quarter were related to fraud, just curious if anything's changed from a monitoring or credit review process in the wake of these issues.
This is Michael I'll take first crack at that question.
It's a very good one of the short answer is yes, we think we've done some things internally already.
To bolster our processes and we're looking at some other enhancements as well.
Especially because of the fraud.
Okay I appreciate guys taking the questions.
Okay. Thank you.
This concludes our question and answer session.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
Thank you.
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