Great Western Bancorp's (GWB) CEO Ken Karels on Q3 2016 Results - Earnings Call Transcript

| About: Great Western (GWB)

Great Western Bancorp (NYSE:GWB)

Q3 2016 Earnings Conference Call

July 28, 2016 08:30 AM ET

Executives

Ann Nachtigal - Corporate Communications

Ken Karels - President & CEO

Peter Chapman - EVP & CFO

Steve Ulenberg - EVP & Chief Risk Officer

David Hinderaker - IR

Analysts

David Rochester - Deutsche Bank

Steven Alexopoulos - JPMorgan

Jon Arfstrom - RBC Capital Markets

Erik Zwick - Stephens Inc.

Damon DelMonte - KBW

Tim O'Brien - Sandler O'Neill & Partners

Operator

Good morning and welcome to the Great Western Bancorp’s Third Quarter Fiscal Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Great Western Bancorp’s Corporate Communications, Ann Nachtigal.

Ann Nachtigal

Thank you, Zelda, and good morning, everyone. Joining us this morning on Great Western Bancorp’s third quarter fiscal year 2016 earnings announcement conference call 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, we would like to turn it over now to Great Western Bancorp’s President and Chief Executive Officer, Ken Karels.

Ken Karels

Thank you, Ann, and good morning, everyone. We have good reason to be upbeat as we report Great Western Bancorp’s third quarter earnings today. We finalized the acquisition of Home Federal during the third quarter and we are very happy with the system conversion and integration of Home Federal’s outstanding employees and customers.

We are eager to build new relationships, living out our mission of making life great by taking outstanding care of our customers and creating long-term relationships. Our earnings for the quarter were strong and we continue to deliver good growth in our organic loan portfolio. We’re excited about the overall positive direction of our business and we believe we remain well-positioned to deliver consistent industry leading results for the foreseeable future.

Let’s take a closer look now at the highlights for the third quarter of fiscal 2016. As you can see from the current slide, we continue to execute on strategy. As reported earlier this morning, our third quarter net income was $26.4 million, or $0.46 per fully diluted share. Importantly, net income was reduced by $12.2 million of non-recurring acquisition expense, which impacted EPS by $0.13. Our adjusted net income was $33.9 million, or $0.59 per share.

We finalized our acquisition of Home Federal, closing on May 16, and adding assets with an acquired value of $1.1 billion. With the addition of 23 new branches and a new presence in North Dakota and Minnesota, Great Western Bank is proud to now serve customers in nine states with over 170 branches. This was our first acquisition since 2012 and I am pleased to report that our integration and conversion teams performed very well.

Tangible book value per share was $15.15 on June 30, 2016. This compared to $14.58 at last quarter, prior to the Home Federal acquisition. We will achieve tangible book value earn back quicker than originally anticipated.

Financial matrix related to Home Federal acquisition are tracking favorably compared to announced targets. We have seen a significant portion of expected cost synergies already achieved. In fact, we are seeing cost savings sooner than anticipated. Net interest margin and adjusted net interest margin were 3.95% and 3.74%, respectively. Pete will elaborate on the NIM, but we are very pleased with this outcome.

Fiscal year-to-date net charge-offs as a percentage of average loans were 8 basis points versus 17 basis points for the same time last year. Total loans grew $1.05 billion, or 13.9% during the quarter, which included $864 million of loans acquired from Home Federal. Excluding the acquired loans, loans have increased $418 million, or 5.7%, compared to September 30, 2015.

Additionally, as we disclosed this morning, our company Board of Directors declared a dividend of $0.14 per common share payable on August 24, 2016, to stockholders of record as of close of business of August 12, 2016.

Our Chief Financial Officer, Peter Chapman, will now go through the presentation with greater detail on the numbers.

Peter Chapman

Thanks, Ken, and good morning, everybody. As Ken said, we are very pleased with our third quarter results and the successful acquisition of Home Federal. As we look at our revenue slide, you can see net interest income was $93.6 million for the third quarter of fiscal 2016, an increase of $7.3 million, or 8.5%, compared to the same quarter in fiscal 2015.

The increase was primarily due to an 8.8% increase in average interest earning assets between the two periods, which included both organic and inorganic growth. Net interest margin was 3.95% for the quarter ended June 30, 2016, and stable compared to the same quarter of last fiscal year. The adjusted NIM for the quarter was 3.74%, up 4 basis points compared to the same quarter last year, primarily due to an asset mix change towards more loans.

We have also begun to see some benefit from increasing LIBOR rates that lower the net cost of our portfolio of interest-rate swaps through the quarter. Loan yields were 11 basis points lower in the current quarter compared to the same quarter last year and 6 points lower than the March 2016 quarter.

Non-interest income was $9.1 million for the quarter ended June 30, 2016, a decrease of just under $1 million or 9.1%, compared to the third quarter of last year. This was primarily driven by $2.7 million of credit-related charges relating to loans carried at fair value. Non-interest income from product and service fees meanwhile increased by $1.4 million.

Within that increase, service charges and other fees increased by $2.7 million, driving the majority of the increase, primarily due to higher debit card interchange income resulting from recapturing Durbin-related income. We estimate that the impact of this change was approximately $2.4 million in the current quarter. I want to remind everybody that this higher interchange income is effective for us through to June 30, 2017.

Looking now at the slide on expenses, provision, and earnings, we see total non-interest expense was $61.2 million for the quarter ended June 30, 2016, an increase of $14.8 million, or 31.9%, compared to the same quarter last year. The increase was primarily driven by $12.2 million of one-time Home Federal acquisition costs, which are nonrecurring, and also $1.7 million increase in salaries and benefits, due in part to employees joining our company from Home Federal.

The efficiency ratio is 58.8% for the quarter compared to 46.4% in the same quarter last year and 50% through the first nine months of FY16. The elevated efficiency ratio for the quarter can be attributed almost entirely to the one-time acquisition costs. Excluding these, the efficiency ratio would have been approximately 47% for the quarter, which demonstrates our success in integrating Home Federal and realizing cost synergies.

Also included within the quarter is a nonrecurring favorable tax item of $3.7 million related to the reversal of deferred tax liability from an acquisition in 2008. This artificially lowers the effective tax rate for the quarter and we do not expect similar items in future periods.

As we now look at our balance sheet, we can see total loans grew by 13.9% through the quarter and are up 17.5% compared to September 30, 2015. This loan growth includes $364 million of loans acquired from Home Federal. Excluding these, fiscal year-to-date loan growth was still a healthy $418 million or 5.7%.

Total deposits grew by $767 million during the quarter, contributing to growth of 14.8% compared to September 30, 2015. Included in the deposit growth is $867 million acquired from Home Federal. Excluding the deposits acquired, fiscal year-to-date deposit growth was $226 million or 3.1%, compared to September 30th.

Tier 1 and total capital ratios were 10.9% and 12%, respectively, compared to 11.1% and 12.4% as of last quarter end. The tangible common equity to tangible assets ratio was 8.3% as of June 30 compared to 8.7% in the prior quarter. Tier 1 leverage ratio was 10% as of June 30, 2016, and 9.5% as of March 31, 2016. All regulatory capital ratios remain well above regulatory minimums to be considered well-capitalized.

As Ken noted, we are very pleased with the integration of Home Federal. It was a result of a great deal of hard work by many in the team. The majority of integration costs have been incurred in the June quarter and while not all integration is complete, with five locations due to close in the September quarter, cost synergies are tracking favorably to the targets communicated.

Also, timing of realizing synergies is expected to be in the current fiscal year. This will assist in funding some of the compliance related costs of us going over $10 billion. Also, as a result of the HF acquisition, additional goodwill of $40.6 million was recognized in the third quarter of this fiscal year, the current quarter.

Now let’s 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, as Pete mentioned loan growth for the quarter ended June 30, 2016, was $1.05 billion or 13.9%, which included $863 million of acquired Home Federal loans. The net organic growth during the quarter of $185.4 million was primarily driven by $97 million of growth in C&I loans and $87.2 million of growth in commercial real estate loans.

Loans acquired in the Home Federal acquisition included $491.8 million of commercial real estate loans and ag lines accounted for $189.8 million. Provision for loan losses was $5.4 million for the quarter ended June 30, 2016, compared to $4.4 million in the same quarter last year.

Net charge-offs for the quarter were $3 million, or 0.15% of average total loans, on an annualized basis. This compares to $0.9 million, or 0.05%, for the same period in fiscal 2015.

The ratio of ALLL, our loss allowance to total loans was 0.75% at June 30, 2016, down from 0.82% at March 31, 2016. This was primarily due to the addition of loans acquired from Home Federal during the quarter without carrying over their ALLL. The balance of the ALLL increased from $61.9 million to $64.2 million over the same period.

Included within total loans are approximately $1.16 billion of loans for which management has elected the fair value option. These loans are excluded from the ALLL process, but management has estimated that approximately $8.1 million of the fair value adjustment for these loans relates to credit risk. This translates to an additional 0.09% of total loans.

Additionally, we assigned a net purchase discount of $28.5 million to the loans acquired in the Home Federal acquisition during the quarter. This was consistent with our due diligence expectations and equals approximately 3.2% coverage of the gross acquired loans. Total remaining purchase discount on all acquired loans equates to 0.5% of our total loan book.

Loans graded watch were $395.9 million at June 30, 2016, an increase of $62.3 million, or 18.7%, compared to March 31, 2016. Loans acquired in the Home Federal acquisition contributed $99.4 million of the increase in watch loans and $18.6 million of the increase in substandard loans. This means the net change, excluding Home Federal loans, was a reduction in both watch and substandard loans.

The levels of acquired loans in these categories are consistent with our expectations and considered in the purchase price paid for Home Federal and in the valuation of the acquired loans. Non-accrual loans were $108.2 million at the end of the third quarter with $4.2 million of the balance covered by FDIC loss-sharing arrangements. Total non-accrual loans increased by $53.2 million during the quarter and increased by $40.1 million compared to the same quarter last year.

The increase in non-accrual loans was primarily driven by the deterioration of a small number of lending relationships, the largest of which was a grain producer, which have been monitored and managed closely for a number of quarters, and we had already classified these as substandard loans. We continue to work and support our agri customers as needed, particularly our grain growers, through their annual growing, harvesting, and sales cycle with ongoing monitoring of the more stressed borrowers, consistent with the plans and expectations as we have previously flagged.

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

Ken Karels

I will, firstly, apologize for the sirens. And, no, our building is not on fire here. So thank you, Steve.

We have seen a lot of uncertainty in the market lately and low interest rates continue to be a challenge. Despite this we are once again very satisfied with our quarterly results. No matter the economic backdrop, we believe we can deliver solid results by sticking to what we know and what has worked for us in the past.

We remain committed to our proven business strategy. This includes growing relationships, delivering strong profitability, and growth driven by a highly efficient operating model, prudent risk management, and creating value for our stockholders. We continue to be very excited about the future of our expanded company and look forward to making life great for our customers across our footprint, including new relationships in North Dakota and Minnesota.

This ends our presentation and with that we are happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session[Operator Instructions] Our first question comes from David Rochester with Deutsche Bank. Please go ahead.

David Rochester

Hey, good morning, guys.

Ken Karels

Good morning, Dave.

David Rochester

Just a couple of housekeeping items first. The $2.7 million fair value adjustment in the release was an actual charge which boosted that hit in the net derivatives line. Is that right?

Peter Chapman

Correct. That’s right, David.

David Rochester

So that’s more of a one-off adjustment that you wouldn't expect to carry forward, correct?

Peter Chapman

No, that’s credit related charge, Dave, so that is just like a provision charge on the regular loan portfolio. So it could be again next quarter.

Ken Karels

A little higher this quarter than usual, correct.

David Rochester

Okay. And NTAs are all included in the substandard bucket, right? So even though nonaccruals were up this quarter that migration didn’t reduce the substandard bucket in the way you guys reported? They’re still all included in the substandard bucket, which is actually down $3 million ex the deal?

Ken Karels

That’s correct. Actually it was a migration from that to nonaccrual, so that’s correct.

David Rochester

Okay. And was the ag credit that migrated that you mentioned the result of your reviewing an annual statement that came in this quarter as opposed to last quarter?

Steve Ulenberg

Look, Steve here, Dave. No, look it’s more just it was already substandard, as I mentioned. We’ve got it under intensive management with our specialized assets group and it’s really just ongoing developments in that particular credit and our ongoing monitoring there.

David Rochester

Okay, great. Just switching to the deal that you had mentioned, you already realized the expected cost saves there. Can you just talk about how much you’ve achieved already and how much is left?

Steve Ulenberg

Sure, Dave. It’s only early days, so it’s only been integrated for six weeks so it’s a little early to talk absolute numbers. But we disclosed originally it was going to be 70% this fiscal year, 30% next fiscal year for cost saves.

As I said, we will get probably 100% of those or as close to 100% this year. And then on that 40% still too early to be definitive on a number, but we will be improved on that one. We just got the five branches to close and a couple of other roles rolling off during this current quarter so we will probably be a bit more definitive in the September quarter results.

David Rochester

Okay. Then just switching to NIM real quick, if I back out the interest income reversals which are related to that increase in NPAs, I get NIM expansion, which it looks like it came from a higher loan yield. Was that increase in the loan yield ex that reversal due to the deal and reflecting increased accretion or was it something else?

Steve Ulenberg

Pretty much that, Dave. If you look at the loan accounting for the quarter as a result of the HF deal it was about $1.7 million, $1.8 million of accretion, which almost entirely offsets that interest reversal is the way I would look at it. So they pretty much net each other out.

David Rochester

But that net accretion is going to be I guess continuing going forward, right?

Peter Chapman

Yes, it is. It was a little higher, though. That $1.8 million is probably closer to $1.1 million, $1.2 million in a regular quarter. We had a couple of loans pay off in the quarter that had a mark against them, so that accretion was a little higher this quarter.

David Rochester

Great. All right. Thanks, guys.

Ken Karels

Thanks, Dave.

Operator

The next question comes from Steven Alexopoulos with JPMorgan. Please go ahead.

Steven Alexopoulos

Hey, good morning, everybody.

Ken Karels

Hey, Steve.

Steven Alexopoulos

I wanted to start on credit. Could you give more color on the loans that moved into nonaccrual? I know you cited the one grain credit. Maybe talk about what are the reserves on these, the timing for resolution also?

Steve Ulenberg

Look, Steve Ulenberg here. Happy to give some flavor for that. If you look at the quarter we had a $54 million increase in nonaccruals. $10 million of that came from the Home Federal acquisition. So if you look at the balance probably around 80% of that was one credit.

As I mentioned, that’s a large - that's a grain operation, one was under intensive management. And we obviously monitor with market prices of commodities, with market prices of other assets, and just make sure we are managing that on a real-time basis. So that was the predominant mover in nonaccrual.

The rest, I would say is more business as usual, just a little bit in the ag space, a little bit in the C&I space, but what I would say very much business as usual. So we haven’t seen any wider deterioration or impact on the book there. We don’t think there is any indication here of any wider deterioration in the book just those individual items and that one large account there.

Steven Alexopoulos

Are you disclosing the specific reserve that you have on that credit?

Steve Ulenberg

No, no, we don’t.

Steven Alexopoulos

But no other pockets of pressure that you are seeing in the book, more broadly?

Steve Ulenberg

No, none that we haven’t identified before just in terms of the normal ag trends. There we’re keeping a very close eye on, but nothing, no change from previous quarter.

Ken Karels

Ken here. Really on the ag side of it really we are seeing good moisture, good crops. We saw an uptick in prices early on. Now they came down, but many of our grain producers took advantage and presold some 2016’s crop and also we’re able to market 2015 at a higher price. So we are optimistic that the cash flows look better than we first thought last fall or early spring here.

Steven Alexopoulos

Good. On loan growth for a minute, the organic loan growth was particularly strong in the quarter. Could you give some color just really focusing on the organic growth, what drove it this quarter?

Steve Ulenberg

Steve here. I’m happy to kick off and others will jump in. Look for the quarter if you - obviously the Home Federal acquisition stepped up growth in most segments, even if you backed that out we had good growth in - really spread across C&I and commercial real estate and a small amount in ag as you’d expect. And the C&I growth we are seeing is from a couple of regions of Iowa - both Iowa and Arizona, Colorado we saw some reasonable organic growth there.

A little bit in the commercial real estate obviously we are being very selective on opportunities there, but some good opportunities we’re still seeing, particularly in that Arizona, Colorado market.

Peter Chapman

Steve, there is probably a couple things. One in this part of the world spring/summer is a pretty strong from a construction perspective, so there was a lot of lines on the books that we expected to draw down.

Secondly, on the C&I we were just down with our Iowa team this week and on the C&I side originations have been pretty good, but we just had a couple of large customers that, for them unfortunately have sold their businesses. So that suppressed growth a little bit in that space.

Ken Karels

Yes, I also want to - Arizona continues to be a good spot for us. We are going to be opening a new branch here next week in Scottsdale. And as we mentioned, with the Home Federal acquisition both in North Dakota and Minnesota we are seeing some opportunities. Lot of banks there too, but when you look at the $5-million-plus opportunities, there is a lot less competitors. And so we now are a new competitor in that space that the market is looking forward to and I think we’ll have some great success they are to.

Steven Alexopoulos

That’s very helpful. Just one final one talking about strong loan growth, the loan-to-deposit ratio is now just over 100%. Can you talk to us and help us think about your funding plan on the deposit side? Should we expect incremental NIM pressure now?

Ken Karels

Well, yeah deposits growth is a big focus for us. Last year a lot of our deposit growth was on the commercial side, actually 100% of it was commercial side of it too. So we continue to advance our treasury banking suite products and go after that market, and there's an opportunity for us to.

But we will continue to focus on growing deposits. And some of it we see in the pressure from increased deposit costs, may see a little bit of that. Obviously with the lower interest rate here recently, some of that pressure has gone away, but I think more of the pressure on NIM will be this lower interest rate for longer, the flattening of the curve, et cetera. Pete, you can probably elaborate on that more.

Peter Chapman

There is a little bit with seasonal this quarter, Steve, so we had a bit of public fund money run out towards the end of the quarter, which we saw in the same quarter last year as well. But, look there is a bit of competition there for deposits, but as Ken said, given the right outlook, probably less talk of significant increase in cost there at this stage.

Steven Alexopoulos

Great, thanks for all the color.

Steve Ulenberg

No problems.

Operator

The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom

Thanks, good morning.

Ken Karels

Good morning, Jon.

Jon Arfstrom

Couple of things here. Pete, do you have the expense impact, excluding the merger charges, for Home Federal for the quarter?

Peter Chapman

Yeah, for the quarter underlying just under $2 million for the quarter, Jon.

Jon Arfstrom

Okay. So that’s close to that $1.7 million that you laid out.

Peter Chapman

Exactly, about $1.8 million.

Jon Arfstrom

Okay. Then how about fees? Do you have that as well?

Peter Chapman

I think it’s around $3 million I’d say, Jon. $300,000? Sorry, $300,000, Jon.

Jon Arfstrom

Okay, so really immaterial. Okay, good. Ken in terms of the time to digest Home Federal, I know it’s relatively early, but it seems like things are going very, very well. How much time do you think you need to fully digest this acquisition?

Ken Karels

Jon it’s pretty much fully digested already. Really as I mentioned, quite happy with what our integration acquisition team did from the relationship and frontline sales force fully integrated within the bank. We are able to retain a lot of the key staff that we wanted to retain, and under our leadership and their leadership it is performing pretty well. So really, as we discussed here internally it went much quicker than we thought the integration. Again, not having done an acquisition for four years, we are really happy with how the team performed.

Jon Arfstrom

Okay. And what does that mean for your future appetite? I know it was an in-market deal and seemed to really make a lot of sense, but how are you thinking now in terms of are you ready to strike again?

Ken Karels

Well, we are continuing to look at acquisition targets and have discussions with some. It really is getting the buy and ask price more aligned here, especially with lower interest rates longer. So definitely kicking the tires, definitely looking and whether - nothing pending by any means on it, but we will definitely be looking at acquisitions that make sense for us.

Jon Arfstrom

Okay, good. And then just one question on loan pricing competition. I know there is a lot happening in the margin, but one of the disclosures was yields down 6 basis points on loans. I’m just wondering if you can maybe talk through the pricing competition or did that just have to do with the acquisition?

Ken Karels

I can let Pete talk on that. Just competition wise, C&I space is very competitive; seeing some pressures there. Ag space obviously less competition, less pressure on it. Opportunities in the commercial real estate space from a pricing standpoint, especially in the space that we deal with on it too. But overall I think slight pressure on it and I think, as Pete has said in the past, with rates where they are at we will probably see 1 or 2 basis points downward tick on margin as we go forward if rates continue where they are at.

Peter Chapman

Look, a little bit of Home Federal in there, Jon, but it was only six weeks for the quarter so probably not that material. Really just the competition in the loan book rolling through the margin, Jon. It’s a pretty similar decline to what we are seeing quarter on quarter for the last few quarters is all.

Jon Arfstrom

Okay. All right, thanks for the help.

Ken Karels

Thanks.

Operator

The next question comes from Erik Zwick with Stephens, Inc. Please go ahead.

Erik Zwick

Good morning, guys.

Ken Karels

Good morning.

Erik Zwick

At the end of the last quarter, your restructured loans ended at just under $94 million and were increasing for a couple quarters in a row. Can you update us on where that balance stood at the end of the June quarter and kind of what you’ve been seeing as that has built over the past few quarters?

Ken Karels

Yeah, I think we’re looking through that right now here.

Steve Ulenberg

Jon, are you talking about the nonaccrual loans?

Erik Zwick

That restructured loans, TDRs?

Peter Chapman

Yeah, that’s in the Q so we haven’t released that yet, Erik, so we will release that as part of the Q. If it was a material move or if we thought it was something that we were concerned about, we would’ve put it in the earnings release. It’s fair to say that.

Erik Zwick

On the last conference call you kind of updated your guidance for the loan-loss provision to come in below the fiscal ‘15 level. That still stands today kind of given what we saw in the increase in the nonaccrual loans this quarter?

Ken Karels

Yeah, I think, first of all, we had the tax advantage or the $3.67 million tax advantage, so some of the increase this quarter was obviously topping off that reserve here. So, Peter, Steve, any color on that?

Steve Ulenberg

I think overall quality is still pretty good. If you look at charge-offs year-to-date at 8 basis points compared to 2015 in the prior period. I think overall asset quality is still in pretty good shape, notwithstanding charges being a little higher this quarter, Erik. So certainly in the next quarter I don’t think we see anything concerning based on where we sit now.

Erik Zwick

Great, thank you. Thanks for taking my questions.

Ken Karels

Thank you.

Operator

The next question comes from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte

Hey, good morning, guys. Pretty much most of my questions have been asked and answered, but - and I apologize if this was also asked. As we look at the core expense base going forward, Pete, can we expect just a modest amount of growth from here? Obviously, having already factored in additional expense for DFAST and other regulatory issues as you guys go over the $10 billion threshold?

Peter Chapman

Yes, I would still work on that modest increase from here rather than a significant step change at any point in time, Damon. We said the DFAST spend would be sort of towards the back-half of this fiscal year, which is how it’s working, and into next year as well. So no changes to what was previously discussed there.

Damon DelMonte

Okay. And then as far as the effective tax rate goes, any change to that?

Peter Chapman

No, obviously lower through the quarter, but I think full-year is sort of that 34.5% to 34.8%, somewhere in that range there I would have thought.

Damon DelMonte

Okay, perfect. That’s all that I had. Thank you.

Operator

[Operator Instructions] Our next question comes from Tim O'Brien with Sandler O'Neill. Please go ahead.

Tim O'Brien

Good morning, guys. Just a question for Peter. Hey Peter, given the narrative on success in integration and absorption and the update on accretion earn-back, can you also give us a little update on second-half calendar year 3Q, 4Q deal-related costs? Is there an update there? Are we going to see higher sooner here in the third quarter of the calendar year for that and then much smaller piece in the fourth quarter?

Peter Chapman

Yeah, exactly that, Tim. So with that that $13 million year-to-date, $12.2 million for the quarter, that’s the bulk of it. We’ve got five branches we are closing in the current quarter, so there will be some cost yields that are coming through with those. One is a longer-term lease that might cost us a bit if we didn't have the sublease in that one, Tim.

But outside of that, probably not as much. So then those five branches closing and a couple of other minor roles, then most of the integration or all the integration will be done. So when we hit September 30, that will be a good run rate for going forward.

Tim O'Brien

Any chance I can coax a range of what the cost number might come in at here in this current quarter?

Peter Chapman

Look, I’d say $2 million to $3 million, Tim. Maybe $2 million to $4 million.

Tim O'Brien

Great, that’s helpful. Then the grain credit that you guys downgraded this quarter, so 80% of the $44 million less the HFFC $10 million in nonaccruals, that’s the number I get at. Is that loan kicked to your workout group? Is it in workout or is there a chance - are you still able to work with the borrower on it?

Steve Ulenberg

Steve here, Tim. Look, the answer is yes to all of those. It is in our specialized workout group, but, no it’s certainly a going-concern operation. We’re working cooperatively with the customer and we believe it’s a very viable business, so we are just working through the cycle with them to support and hopefully see them improve.

Tim O'Brien

And then one last question. Peter, can you give a little color on the performance of your hedges this quarter that impacted fee income relative to what you’d like to see; give a sense of that?

Peter Chapman

So as I said, LIBOR came up a little through the quarter. That helped us. Dave is here. Dave, I think you’ve got the number on how much it helped us through the quarter.

David Hinderaker

Yes, quarter on quarter, Tim, it was about $300,000 better and it’s about $600,000 compared to the December quarter, which is really when we started to see that LIBOR move. So we were in the sort of $5.5 million of drag compared to more like $5 million flat in this quarter.

Tim O'Brien

Thanks a lot, guys.

Peter Chapman

Hey, thank you.

Operator

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

Ken Karels

Thank you, everyone, for calling in this morning. Obviously a great quarter with great results. Home Federal has turned out to be a great acquisition for us that got integrated and converted quicker than we thought.

We’ve got good pipelines. Obviously, our great expense control that leads to a highly efficient operating model is quite a competitive advantage to have in this low interest rate environment. So thank you again for your time this morning.

Operator

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

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