Great Western Bancorp's (GWB) CEO Ken Karels on Q2 2016 Results - Earnings Call Transcript

| About: Great Western (GWB)

Great Western Bancorp (NYSE:GWB)

Q1 2016 Earnings Conference Call

April 28, 2016 8:30 a.m. ET

Executives

Ann Nachtigal - Marketing Consultant

Ken Karels - President and CEO

Peter Chapman - CFO

Steve Ulenberg - Chief Risk Officer

Analysts

Dave Rochester - Deutsche Bank

Preeti Dixit - JPMorgan

Erik Zwick - Stephens Inc.

Ebrahim Poonawala - BofA Merrill Lynch

Tim O'Brien - Sandler O'Neill & Partners

Russell Guenther - Macquarie Research

Damon DelMonte - Keefe, Bruyette & Woods

Operator

Good morning, and welcome to the Second Quarter Fiscal Year 2016 Earnings Announcement and Conference Call.

[Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Ann Nachtigal. Please go ahead.

Ann Nachtigal

Thank you, Adam. Good morning, everyone. Joining us this morning on Great Western Bancorp's second-quarter fiscal year 2016 earnings announcement conference call is Ken Karels, President and Chief Executive Officer; Peter Chapman, Chief Financial Officer; and Steve Ulenberg, Chief Risk Officer.

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 uncertainty 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 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.

We have also included important disclosures about our upcoming acquisition with HF Financial Corp. We recommend that all listeners especially HF Financial Corp. shareholders review those disclosures.

With that said, let me turn it over to Great Western Bancorp's President and Chief Executive Officer, Ken Karels.

Ken Karels

Thank you, Ann, and good morning, everyone. Great Western Bancorp's second quarter showed great success as our numbers reflect. Second-quarter net income increased 56% to $30.7 million or $0.55 per fully diluted share compared to $19.7 million or $0.34 per fully diluted share for the same quarter last year. The main factors behind our strong numbers: steady margins, good year-over-year loan and deposit growth, improved asset quality, great expense control and reduced OREO expense.

As we stated in January, underlying loan growth was mostly overshadowed by pay-downs in the ag loan portfolio related to some customer's tax planning activities. Loans are up more than 3% compared to September 30, 2015, and a quarter percent for the quarter. Mid to high single-digit loan growth is still forecast for the year.

We also saw modest deposit growth during the quarter as business and consumer deposit growth was partially offset by a seasonal decline in public funds deposit balances. Revenue growth and a reduction in noninterest expense continues to drive our highly competitive efficiency ratio of 45.5%.

Now let's take a closer look at the highlights for the second quarter. As you can see from the current slide, we continue to execute on strategy. As reported earlier this morning, our second-quarter net income was $30.7 million or $0.55 per fully diluted share bringing fiscal year-to-date net income to $61.1 million or $1.10 per fully diluted share. Net interest margin and adjusted net interest margin were 3.99% and 3.75% respectively, each slight increases over the prior quarter.

Loans graded substandard decreased compared to December 31, 2015 and net charge-offs during the quarter were only $1.8 million or 0.10% of average loans on an annualized basis. As I mentioned, the efficiency ratio for the quarter remained strong at 45.5% compared to 51.7% for the same quarter of fiscal year 2015. This was driven by an 8.9% increase in total revenue and a 4.3% reduction in tangible noninterest expense. Provisions for loan losses were down substantially year-over-year as Steve will soon explain.

Total loans grew $27.1 million during the quarter and we continue to feel confident that we can deliver mid to high single-digit loan growth for the full-year. Deposits grew $50.1 million or 0.7% during the quarter contributing to a growth of $325.7 million or 4.4% compared to September 30, 2015.

We also made significant progress during the quarter with two of our key customer facing initiatives, Great Western e-banking and our treasury banking suite. We have started rolling these important platforms out to our customers in the last two weeks and initial feedback has been very positive.

Additionally, as we disclosed earlier this morning, our Company Board of Directors declared a dividend of $0.14 per common share.

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 to everybody. As Ken said, we are very pleased with our second-quarter results. As we look at our revenue slide, you can see net interest income was $88.1 million for the second quarter of fiscal 2016, an increase of $5.9 million or 7.2% compared to the same quarter in fiscal 2015. The increase was mainly due to higher loan interest income driven by a 7.3% growth in average loans outstanding combined with a steady loan margin.

Net interest margin was 3.99% for the quarter ended March 31, 2016, up 1 basis point compared to the last quarter and climbing 10 basis points to 3.89% in the same quarter last year. The adjusted NIM for the quarter was 3.75%, up 2 basis points compared to the 3.73% last quarter. Importantly, loan yields remained stable at 4.85% for the third consecutive quarter. Asset mix has also had a favorable impact on margin as we continue to grow higher yielding loan balances.

Overall cost of deposits increased by 2 basis points compared to the most recent quarter and we expect that this will gradually continue to increase over time.

Noninterest income was $9 million for the quarter ended March, 31, 2016, an increase of $2.1 million or 29.7% compared to the second quarter of last year. Included within noninterest income are the changes in the fair value of certain loans which the Company has elected to fair value option and the net gain or loss of the related derivatives used to manage the intra-freight risk on these loans.

On a net basis, these two components of noninterest income accounted for an increase of $1.6 million compared to the same quarter in fiscal year 2015, primarily driven by the difference in the change in the fair value related to the credit risk between these two periods.

Service charges and other fees increased by $1.4 million compared to the same period in the prior fiscal year. Shortly after the end of the calendar year 2015, we received regulatory approval to revert to higher interchange rates as a result of maintaining consolidated total assets under $10 billion as of December 31, 2015.

We had previously been subject to capped interchange rates as a result of consolidating total assets with other US assets held by our former foreign parent company. Management estimates the impact of this change was approximately $1.2 million in the current quarter and will be $6 million to $7 million on an annual basis through June 30, 2017.

Now looking at the slide on the expenses, provision and earnings. We see total noninterest expense was $44.9 million for the quarter ended March 31, 2016, a decrease of $3.6 million or 7.4% compared to the same quarter last year. The decrease was primarily driven by a $2.4 million decrease in net OREO costs and a $1.6 million reduction in amortization of intangible assets. Although these two items comprise the majority of the period over period decrease, we are also very happy with our broader expense control efforts.

Despite hiring a few key individuals to meet the enhanced requirements of operating as a public company and continuing to build out our DFAS compliance program, noninterest expenses excluding OREO and amortization of intangibles are up only marginally compared to the same quarter in fiscal 2015. Included within noninterest expense during the quarter was approximately $0.5 million of transaction costs related to the pending acquisition of Home Federal Financial Corp.

We continue to maintain our peer leading performance with an efficiency ratio of 45.5% for the quarter compared to 51.7% for the same quarter in the prior year.

As we look now at our balance sheet slide, we see that total deposits grew by $50.1 million during the quarter and by $325.7 million or 4.4% compared to September 30, 2015. Both business and consumer deposit balances grew during the quarter partially offset by a reduction in public fund deposits. FHLB and other borrowings were reduced by $81 million or 18% as a result of deposit growth during the quarter and a reduction in the balance of cash due from other banks.

As you can see from our results, total assets remained below the $10 billion mark at March 31, 2016. Tier 1 and total capital ratios were 11.1% and 12.4% respectively as of March 31, 2016 compared to 10.9% and 12.2% as of December 31, 2015. The TCE to tangible assets ratio was at 8.7% at March 31, 2016 compared to 8.3% at December 31, 2015.

The Tier 1 leverage ratio was 9.5% as of March 31, 2016 and 9.4% as of December 31, 2015. All regulatory capital ratios remain above regulatory minimums to be considered well-capitalized.

In summary, we feel these results underpin exceptional performance metrics with a return on tangible common equity of 16% year to date and efficiency ratio of 45.3% over the same time horizon being peer leading.

We will now turn over to our Chief Risk Officer, Steve Ulenberg, who will take us through the loan and asset quality trends seen through the quarter. Steve?

Steve Ulenberg

Thanks very much, Pete. Turning our attention now to the slide on asset quality, we see loan growth for the quarter ended March 31, 2016 was $27.1 million or 0.4% bringing fiscal year-to-date growth to $232.6 million or 3.2%.

The net growth during the quarter was primarily driven by $116 million of growth in commercial real estate loans and that was partially offset by a $69.3 million decline in agricultural loans. This was entirely consistent with management's expectations at the end of the first fiscal quarter that certain ag re-borrowers would repay lines of credit used for tax planning purposes at calendar year end.

Commercial real estate loan growth during the quarter was distributed across the non-owner-occupied, owner-occupied and construction and development sub-segments and represents a diverse range of projects with a continued focus on limiting exposure to land development and other projects that are speculative in nature.

Provision for loan losses was $2.6 million for the quarter ended March 31, 2016 compared to $9.7 million in the same quarter last year. Net charge-offs for the quarter were $1.8 million, a significant reduction compared to net charge-offs of $9.1 million in the same quarter of fiscal 2015. The ratio of ALLL to total loans was 0.82% at March 31, 2016. That was up from 0.78% at September 30, 2015 and 0.74% at the same time last year.

During the second quarter of 2016, the specific reserve portion of the ALLL increased due to credit deterioration in a small number of relationships while the general portion of the ALLL decreased due to the continued lowering of historical net charge-off rates. Loans graded substandard ended the quarter at $222.2 million, a decrease of $7.7 million compared to December 31, 2015.

Loans on watch status were $333.6 million at March 31, 2016. That was an increase of $35 million or 11.7% compared to the December 31, 2015 quarter. This was driven by increase in the agricultural and commercial real estate segments. The increase in agricultural watch loans was due in large part to annual renewals completed through the quarter which is a normal seasonal increase for the segment and also reflects the lower grain price impacts. Nevertheless, our watch loan balances were $50.9 million or 13.2% lower than the same quarter in fiscal year 2015.

At March 31, 2016, nonaccrual loans were $55 million with $4.4 million of the balance covered by FDIC loss sharing agreements. Total nonaccrual loans increased by $0.6 million for the quarter and decreased by $19.3 million compared to the same quarter in fiscal year 2015. Total OREO balances were $12.2 million as of March 31, 2016, a decrease of $3.3 million or 21.3% compared to the prior quarter and a decrease of $31.4 million or 72% compared to the same time last year.

I am also very happy to report that we have completed a significant portion of our annual renewals for our grain producing customers and we have also completed a detailed review of this portion of the loan portfolio. During this exercise, we reviewed 83% of the $684 million of loans we have outstanding to grain producers as of March 31, 2016, and we have identified the weaker exposures in loans that require more intensive management with 26% of our grain loans being assessed as either watch or substandard.

We found that the loans in the sample had an average loan to value of 40% and nearly 100% of borrowers showed loan to values less than 70%. Further, over 70% of our borrowers reported leverage ratios that has dipped to assets lower than 40% which is an exceptionally low level of leverage for any asset class.

While profitability among producers in the segment is under stress, the overall leverage and collateral coverage of our portfolio continues to give us comfort around long-term performance of this portfolio.

With that, let's turn the call back to Ken for some closing remarks.

Ken Karels

Okay, thank you, Steve. We are once again very happy with our quarterly results. Credit quality outcomes have improved and we are very proud of our history of low losses. As always, we will remain watchful over the portfolio.

Our second quarter profitability continues to reflect a proven business strategy focused on profitable lending growth and embedded expense control. We are excited about the outlook for the remainder of the year.

We are drawing closer to finalizing our merger with Home Federal in May with the stockholder vote scheduled for May 10. We also expect to complete the core system conversion in June. Upon completion of the transaction, Great Western Bank is projected to grow by 12% to $11.3 billion in total assets and will serve 127 communities in nine states. We are eager to expand our mission of making life great for our customers, communities and our stockholders.

This ends our presentation and with that, we would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

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

Dave Rochester - Deutsche Bank

Hey, good morning, guys. Nice quarter.

Unidentified Company Representative

Thanks, Dave.

Dave Rochester - Deutsche Bank

On the ag portfolio, just wanted to confirm, you guys generally, you get these statements once a year, you've gotten I guess most of them at this point, you reviewed most of them. Would there be any reason as we go through the rest of this calendar year that you would see any additional deterioration in that grains portfolio?

Ken Karels

Ken, I'll go first here. I would say no, Dave. I mean, really what we look at them as grain farmers, it is an annual review. We'll monitor them, we'll monitor how much they have marketed from a grain standpoint, how they marketed last year's crop on it too.

But we are really quite happy with the results and it is good to finally show the market some of the numbers. As Steve mentioned when you have 60% equity in this asset class, only 40% leveraged when the actual LTV is only 40% what other asset class do you have that well collateralized and that low leverage on it. So we have said for a long time that we think this is one of the safest asset class to lend in and so it is good we are showing some numbers to the investors to prove why we think it is safe and why it will prove out I think in the long-term.

Dave Rochester - Deutsche Bank

Okay, great. And then I guess just on the rest of the ag portfolio, anything that you guys are concerned about or looking at there on the beef side or I guess proteins whether it is dairy or beef?

Steve Ulenberg

No material concerns, Dave. Obviously we monitor it and most of our ag customers; we give either monthly or quarterly reporting so we just keep a close eye. But nothing else is raising its head at the moment.

Ken Karels

Yeah, in general I think the proteins still is benefiting from the lower grain prices on it. You will see the cycles more often in dairy and hogs, but definitely from a standpoint of the profitability and strength of that sector, we feel pretty good about it.

Dave Rochester - Deutsche Bank

I know the guaranteed prices on the grains were reset a month and change ago all of them being reset lower. And I guess as you go through your credit analysis you are factoring that into the underwriting in your credit grades?

Steve Ulenberg

Exactly, Dave. We are also making sure that our customers have got solid marketing plans and locking in prices where that is advantageous.

Ken Karels

Dave, we have seen just a recent uptick in soybean prices for example and a number of our producers took advantage of that and locked in some of 2016 crop and so that was a big plus.

Dave Rochester - Deutsche Bank

Great. And then just one last one on the margin. Just trying to get your sense for the trend that we should see from here? And also just a quick question on the quarter with the loan yield down just a little bit, just wondering what drove that given that you've got some variable rate loans that reprice higher with the rate hike?

Peter Chapman

Sure, David. Just margin wise obviously there is a bit of uncertainty of what the Fed will do but probably not much change really to what guidance we have given in the past. Sort of overall that net, that bottom line yield was flat quarter on quarter so it probably got a little bit of help from the rate rise that helped maintain that margin through the quarter. So as we have said, Dave, I think if rates remain low, if it ticks down a point or two a quarter, then we wouldn't be surprised with that. But no sort of concerns at that this stage with significant drop-off.

Dave Rochester - Deutsche Bank

Great. All right, thanks guys.

Unidentified Company Representative

Sure. Thanks, Dave.

Operator

Our next question comes from Preeti Dixit of JPMorgan. Please go ahead.

Preeti Dixit - JPMorgan

Good morning, everyone.

Unidentified Company Representative

Good morning.

Preeti Dixit - JPMorgan

Steve, to start with, could you quantify what the seasonal ag pay-downs you saw in the quarter were? And if we look back at the last fiscal year, I guess you guys saw a little over $100 million of loan growth in the ag book specifically in the back half of the year. How should we think about potential for growth in this book for the balance of the year given the trends you are seeing?

Peter Chapman

On a net basis, a lot of the drop off was the seasonal pay-downs in that ag portfolio for the quarter. So probably slightly less than last year but materially about the same amount. So I think that is pretty consistent with the prior year. Last year I think we grew at 5.8%, I think it was a full-year number, probably a little lower than that this year but we will still see some growth. There's still some good opportunity on the dairy and the beef side.

Steve Ulenberg

The pay-downs principally dairy, they were $70 million in that first quarter but if you look over the year as Pete says, we have had solid ag growth and it is really nicely split between grain and protein reflecting the balance on our book.

Preeti Dixit - JPMorgan

Okay, that is helpful. And then I guess the C&I growth has been tracking a little light. Can you talk about what trends you are seeing with your commercial borrowers and what the pipeline looks like there here relative to where we were last year and maybe last quarter?

Ken Karels

Couple of things here too. We did have some substantial classifieds that did get paid off. We've got a number of borrowers that have either sold their businesses and I think we are seeing that nationwide whether age, demographic, etc., they are selling the businesses. We saw some of that this last quarter. I would say the C&I pipeline is fairly healthy, probably not as strong as it has been in other years and so I think we will continue to see growth probably led though more from commercial real estate over the next few quarters than the C&I business.

Steve Ulenberg

And maybe just if I can add on the commercial real estate, the growth was over 80% of that is in non-owner-occupied completed and operating developments and probably 15% is construction which in industries that we are comfortable with and are showing good demand.

Preeti Dixit - JPMorgan

Okay, that is helpful. Pete, just the other income in seed seemed a little light this quarter. Is there anything unusual there and should we expect that to trend back to a more normal level?

Peter Chapman

Yeah, we would. So we've obviously called out Durbin [ph], which you can take into account, Preeti. Wealth management was a little light year on year but we have restructured that business significantly over the last couple of years. So we feel that has bottomed out. And then also in this part of the world, the mortgage business over the winter months that slows right down over here so you should expect to see that pick up a little in the spring and the summer as well.

Preeti Dixit - JPMorgan

Okay, I will step out for now. Thank you.

Operator

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

Erik Zwick - Stephens Inc.

Good morning guys.

Unidentified Company Representative

Good morning.

Erik Zwick - Stephens Inc.

Thanks. Maybe just first a follow-up on Preeti's question about pipelines that you gave some good commentary on the loan segments there. But maybe from a geographic perspective, are there any particular areas that are showing strength where you would expect to see the majority of growth in the rest of 2016?

Ken Karels

Good question. Yes, definitely seeing bigger pipelines in our Arizona and Colorado markets and a little lighter pipelines in Iowa and South Dakota and Nebraska. It is definitely going to see outsized growth in the Western markets that we have which it is good to have that diversity for our organization. A number of years back the Midwest kind of led the growth and now we are seeing it out West.

Steve Ulenberg

Having said that though, all markets are still growing so it is just that the Arizona and Colorado markets are growing a little stronger. Nebraska has also been a good one for the first half of the year and there has been some good wins down there also.

Erik Zwick - Stephens Inc.

Thanks. And then I think as a part of your normal course of business you evaluate your branches in terms of ones that are more profitable and less profitable and also areas for new branches. Any updates on any closings or scheduled openings for the rest of the year?

Ken Karels

Yes, we definitely will have closed a few more, obviously with the Home Federal one, we will be closing not only some of theirs but some of our branches, I think a total of five total is what we are closing there. We are opening some new branches, we are in the process of opening one in Scottsdale, Arizona. We are in the process of opening one in Waterloo, Iowa and we will continue to look at markets within our footprint or filling in holes of our footprint where we can hire good bankers and then open the office. So I think there is continued opportunity for us to do that.

Erik Zwick - Stephens Inc.

Great, thanks. That is it for me.

Operator

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

Ebrahim Poonawala - BofA Merrill Lynch

Good morning, guys. Ebrahim here.

Unidentified Company Representative

Hey, Ebrahim.

Unidentified Company Representative

Good morning.

Ebrahim Poonawala - BofA Merrill Lynch

Just had a quick question, Peter. Sorry if I missed it. In terms of the adjusted margin was 3.75% this quarter, how should we think about sort if rates don't do anything, you close the acquisition, how do we think about the adjusted margin relative to where we were in 1Q?

Peter Chapman

In the absence of anything significant from an interest rate perspective, I would say sort of flat to down a point or so a quarter excluding any accretion accounting or anything like that from a loan accounting perspective.

Ebrahim Poonawala - BofA Merrill Lynch

Got it. And just a separate question on expenses, it says slightly on the lower side I think the comp expenses too. What is the outlook on expense quote if you can remind of that and is there anything from a seasonal standpoint that impacted comp expenses this quarter?

Peter Chapman

Yes, you tend to still get a little bit of carryover with people taking carryover vacation time in this quarter so maybe a little light. But seasonally it was probably a little light last year as well. Going forward, no real big surprises that we are seeing on the expense side. Previously we have called out that run rate uplift of the DFAS piece and we have sort of always thought that was around $2 million annualized. We are going to re-forecast and re-budget of that. We think it will be about $1.6 million in the second half is the uplift for the DFAS related expenses but outside of that, nothing we are seeing out of the normal course.

Ebrahim Poonawala - BofA Merrill Lynch

Understood and if I may a last one for Ken. You talked about C&I pipelines looking a little lighter than they have been in the recent past. Is there anything cyclical going on there or do you expect that to be transitory and probably pick up as the year moves on?

Ken Karels

I think as I mentioned here, we have seen some pay-downs from some businesses being sold that has kind of muted some of the normal growth we have had. So whether that continues or not, the pipelines are still strong but it needs to recover the pay-down too on it.

Peter Chapman

So we have got a bit of feedback as well from the field that there have been some banks that have grown commercial real estate even more strongly than we have and they may be chasing C&I business pretty hard from a pricing perspective to balance out the portfolio. So it is probably a bit of competition there as well.

Ebrahim Poonawala - BofA Merrill Lynch

That is helpful color. Thank you for taking my questions.

Unidentified Company Representative

Thank you.

Operator

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

Tim O'Brien - Sandler O'Neill & Partners

Good morning.

Unidentified Company Representative

Good morning, Tim.

Tim O'Brien - Sandler O'Neill & Partners

So, Peter, a question to you. Can you talk a little bit more, I think you mentioned outlook for deposit pricing. Are you seeing competition pick up at all on the deposit gathering front?

Peter Chapman

Not significantly. It is probably more tied to the runoff of the portfolio, Tim. So obviously we have had quite a number of high price cities run off over the last couple of years so just as that runoff slows down as well, that is helping drive the average a little bit.

Tim O'Brien - Sandler O'Neill & Partners

And then can you remind us your update expected M&A costs accrued in the second quarter in the calendar year second quarter? What do you think that number is going to come in at ballpark?

Peter Chapman

No real changes to what we called out in our disclosure in November. Tim, when we announced the transaction around Home Federal, maybe a little lower than that from a call out but no significant changes there.

Tim O'Brien - Sandler O'Neill & Partners

Thanks a lot.

Operator

Our next question comes from Russell Guenther of Macquarie. Please go ahead.

Russell Guenther - Macquarie Research

Hey, good morning, guys.

Unidentified Company Representative

Hey, Russell.

Russell Guenther - Macquarie Research

Just a general credit question. So I believe at the beginning of the year you guys expressed comfort with a loan-loss provision around last year's levels which was $19 million. So given how we are tracking year to date and the ag portfolio review coming in as you guys expected pretty much a nonevent, do you have an updated view on how we should think about provision expense in the back half of the year given that re-commitment to mid to high single-digit loan growth?

Ken Karels

Yes, I think generally I would say that that guidance are lower definitely as we did the ag grain review and we are happy with the results that we saw with that. The uptick now in soybean prices definitely feel very, very strong on the grain side of it. And the rest of the portfolio is tracking very, very strong too so fairly optimistic as far as credit quality for the year and that should be reflected in lower provisions.

Russell Guenther - Macquarie Research

Great, and just a quick loan growth follow-up. You guys have provided a lot of color, I appreciate it. You mentioned Arizona and Colorado as geographically driving the growth and that CRE is the overall mix. Is that the case in Arizona and Colorado as well, is that primarily CRE weighted or what loan buckets are doing well there?

Ken Karels

I think more general there, we are definitely having some opportunities for C&I growth especially in Arizona and some into Colorado and so definitely probably more weighted and balanced in those two states.

Steve Ulenberg

I would just add to that. They got mix with ag opportunities. We are seeing C&I and tourism hotel so some good opportunities there and some pent-up demand from sort of two, three years back where not a heck of a lot was being developed so we still see pretty good balance coming out of there.

Peter Chapman

They actually had -- just looking, we have actually had growth in the commercial non-real estate in Arizona and Colorado compared to it being flat and a little down across the rest of the portfolio.

Russell Guenther - Macquarie Research

Okay, great. That is super helpful and then last question from me, you guys, I appreciate the update on DFAS spend. Can you just give us a sense for what that $1.6 million is going to be driven by? I know you mentioned some related hires that is in this quarter's run rate so what is that going to come from as we go forward?

Peter Chapman

Yes, a few hires, some consulting costs where we are partnering with a firm that has been through it with over 20 DFAS banks to guide us through it to make sure we run through that. Some model builds that are credit modeling that cost a lot of money and then model validation as well is the other one that costs a significant amount of money as well. So they are probably the main four buckets that will come through.

Russell Guenther - Macquarie Research

Okay, great. Just one last one modeling purposes, do you guys have a sense for the tax rate going forward?

Peter Chapman

Yes, this quarter was a little high, Russell, so I think if you look at the average of the last couple of quarters, that is closer to the full-year number.

Russell Guenther - Macquarie Research

Great, thank you so much.

Operator

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

Damon DelMonte - Keefe, Bruyette & Woods

Hey good morning guys. How are you doing today?

Unidentified Company Representative

Very good. Good morning.

Damon DelMonte - Keefe, Bruyette & Woods

Good. Most of my questions have been answered but just kind of from a modeling perspective, Peter, as we look at the impact of the deal closing of the third quarter, is the $48 million to $49 million range a decent level for noninterest expense next quarter?

Peter Chapman

Yes, look, probably haven't given that specific guidance around it, Damon. A couple of things I would say is this quarter was maybe a touch light personnel wise but not that significant. And then as we have said around the cost take-out side of things from Home Federal, we will take about 40% out of their overall cost base and we expect about 70% beyond this fiscal year. So I think if you phase that in sort of split between this current quarter coming up and the following quarter you will get pretty close to what the run rate is expected.

Damon DelMonte - Keefe, Bruyette & Woods

That is helpful. And then you guys gave good color on your expectation for loan growth this year. Your loan to deposit ratio is right around almost at 100%. What are your expectations for deposit growth this year? Do you think you can keep pace with loan growth to keep that loan to deposit ratio below 100%?

Ken Karels

Yes, we think we can. Last year we had some great deposit growth on the road of our treasury banking suite. We think we will be very competitive in the marketplace definitely focused on growing business deposits. Last year we grew about $350 million in deposits. So it is a great opportunity for us to grow on the business side of it to. So and a definite focus for us and that is how we are compensating our business bankers too is how we grow the loans but grow the deposits and we have had some very good success with that.

Damon DelMonte - Keefe, Bruyette & Woods

Okay, great. Thank you. That is all that I had. Like I said everything else had been answered. Good quarter.

Operator

This does conclude 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. Thanks for taking part of the call here. Obviously very proud of a quarter that we had and very optimistic about the future. You take a look at the asset growth history we have and what we are projecting to do, how well we can control expenses and how that is embedded in this organization, we are very proud of. There isn't too many organizations that generate the excess capital that we do with a 16% ROE and so there is plenty of capital we can generate for not only the acquisitions such as the Home Federal but for additionally the dividends that we pay.

I think the credit quality as we mentioned here, we are very proud of that, definitely improving and very comfortable with where we are at and understand the ag grain side of it very, very strong. And as Steve pointed out, very low leverage and high coverage ratios should make us very, very comfortable in that space. So again, thank you for taking part of this call and appreciate it.

Operator

Thank you. The conference has now concluded and thank you for attending today's presentation. You may now disconnect.

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