Great Western Bancorp, Inc. (GWB) CEO Ken Karels on Q4 2018 Results - Earnings Call Transcript

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About: Great Western Bancorp (GWB)
by: SA Transcripts

Great Western Bancorp, Inc. (NYSE:GWB) Q4 2018 Earnings Conference Call October 25, 2018 8:30 AM ET

Executives

Ann Nachtigal - Corporate Communications

Ken Karels - Chairman and Chief Executive Officer

Doug Bass - President and Chief Operating Officer

Peter Chapman - Chief Financial Officer

Michael Gough - Chief Credit Officer

Analysts

Jon Arfstrom - RBC Capital Markets

Damon DelMonte - KBW

Steven Alexopoulos - JPMorgan

Dave Rochester - Deutsche Bank

Ebrahim Poonawala - Bank of America

Tim O'Brien - Sandler O'Neill and Partners

Jeff Rulis - D.A. Davidson

Nathan Race - Piper Jaffray

Terry McEvoy - Stephens

Operator

Good morning and welcome to the Great Western Bancorp Fourth Quarter and Full Year Fiscal Year 2018 Earnings Announcement 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 this event is being recorded.

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

Ann Nachtigal

Thank you, Phil. Good morning, everyone. Joining us this morning on Great Western Bancorp's fourth quarter and full year fiscal year 2018 conference call are Ken Karels, Chairman and Chief Executive Officer; Doug Bass, President and Chief Operating Officer; Peter Chapman, Chief Financial Officer; Karlyn Knieriem, Chief Risk Officer; and Michael Gough, our Chief Credit Officer.

Before we get started, I'd 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 Web site 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, let me turn it over now to Great Western Bancorp's Chairman and Chief Executive Officer, Ken Karels. Ken?

Ken Karels

Good morning and thank you for joining the call.

Net income for the quarter was strong at $42.3 million or $0.72 per share, an increase of 13%. Adjusted net interest margin declined slightly to 3.77% as we focus on deposit growth this past year. Loan originations remain solid, but prepayments of loans accelerated resulting in an increase of 0.4% for the quarter and 5% for the year.

Our efficiency ratio remains strong at 48.1% for the quarter, but was elevated slightly due to some OREO expense. Profitability was exceptional with our return on tangible common equity at 15.7%.

Now for more insight on our fourth quarter financial results, I'd like to turn the call over to our Chief Financial Officer, Peter Chapman. Pete?

Peter Chapman

Thanks Ken. And good morning everybody. Thanks for joining us.

Looking to revenue, net interest income was $126.9 million for the quarter which was in line with the prior quarter. And net interest margin for the quarter was 3.79% and our adjusted net interest margin 3.77%. Adjusted net interest margin declined 17 basis points quarter-over-quarter with 7 basis points of this attributable to a $2 million reduction in purchase loan interest and 4 basis points from elevated interest reversals from loans moving to non-accrual status, we would not expect these items reoccur next quarter.

Outside of these two items, the remaining 6 basis point decline was driven by a 12 basis point increase in the cost of deposits partly offset by a 5 basis point increase in loan yield. A lower increase in LIBOR compared to prior quarter also contributed to a 1 basis point decline, we would expect margins to stabilize in the following quarter.

Non-interest income for the quarter was $19.3 million, a 2% increase over the prior quarter. The increase was driven by stronger service charge income through an increase in commercial credit card volumes and seasonally higher NSF income and increase in wealth management income and seasonally stronger mortgage revenue. These increases were offset by a decline in swap sales revenue and also a $0.9 million non-recurring gain on a share sale in the prior quarter as well.

Non-interest expenses were $59.6 million for the quarter, which is an increase of $1.7 million from the June quarter. The move was driven by a $2.5 million increase in OREO expense mainly attributable to one large parcel coming into OREO for the quarter. We would expect OREO expense to be more in the $700,000 to $800,000 range moving forward, quarterly based on what we have currently. Outside of this item expenses were well controlled with sole reasoning employ benefits down $1.4 million due to a $500,000 decrease in consulting fees and also healthcare claims from the prior quarter.

Also data processing costs declined by $0.6 million due to a benefit on a contract close up during the quarter. These items were partly offset by $1 million increase in professional fees which was driven by a onetime amount of $0.6 million, which were not reoccurring and the $0.3 million increase in consulting costs which were elevated during this current quarter.

Finally, we moved to a fully phased in federal tax rate in the December quarter and would expect that to move our effective tax rate down to approximately 23% in the following quarter.

I will now pass over to Doug Bass for more comments on the balance sheet.

Doug Bass

Thanks, Pete, and good morning everyone.

During the September quarter, we saw a good origination activity. However, several scheduled closings moved into October. Pipelines remain healthy across all metro markets reflecting a split of 60% in commercial real estate and 40% in commercial and industrial sector. Growth was most robust in the commercial real estate category with Colorado, Arizona and Nebraska supplying the growth.

Commercial non-real estate loans declined by $51 million as a result of two large pay downs through the quarter. Good progress continues to be made by the new loan production offices in Cedar Rapids, Iowa, Wichita, Kansas, and Yuma, Arizona, which are now open and fully operational. We have commercial bankers in each office and they are looking to hire further in each of those markets.

New branch offices opened in Cedar Falls, Iowa in August with North Scottsdale, Arizona opening in December of this year. We have lenders already in place at these locations. As we look forward into fiscal year '19, we are projecting loan growth to again be in the mid-single digit range. We feel all the pieces are in place for execution of this plan due to new offices being opened. We have hired 10 new commercial bankers over the last few months in key metro markets all of which are onboard and producing.

Our current pipelines are well, as well as loan closings and loan growth in the early stages of the first quarter are indicative of that expectation.

Deposit growth during the quarter was approximately $150 million or 1.5%. Growth in non-interest bearing accounts of 2.4% indicate growth in C&I and operating relationships. The growth was split evenly between the $49 million increase in non-interest bearing deposits with the remainder in other business deposit categories offset by public fund and seasonal consumer outflows.

We have seen stronger inflows into non-time maturity accounts as customers look to maintain flexibility with their cash with the expectation that rates will continue to rise. We have continued to utilize broker deposits as they have been most cost effective than Federal Home Loan Bank funding, but have not materially added to balances during the quarter.

Let's turn the call over now to our Chief Credit Officer. Michael Gough, who will take us through asset quality developments. Michael?

Michael Gough

Thank you, Doug.

Overall we are satisfied with asset quality during the quarter, although we have seen a slight decline in metrics for the movement of a small number of credits. Net charge offs for the quarter were $5.2 million or 22 basis points of average loans on an annualized basis still at a very manageable level. And also we know charge offs for the 2018 year were 18 basis points well down from 26 basis points in 2017. Our allowance for loan and least losses as a percentage of total loans was 69 basis points with coverage consistent with the June 2018 quarter.

Our comprehensive credit coverage which includes credit related fair value adjustments on our long-term loan portfolio and purchase accounting marks remain sound at 96 basis points of total loans. Compared to the June 30 quarter, we saw an increase in watch credits of $67 million to $343 million due to the downgrade of a small number of dairy and cattle loans.

We have previously discussed the fact that milk prices have been depressed for a number of quarters, which has led us to monitoring these credits more closely. But at this stage we do not see the potential for material charge-offs within this portfolio. Substandard credits declined by $15.4 million for the quarter with the property moving to OREO, which increased by $12.9 million.

We've now cycled through the normal renewal routine associated with 2018 operating needs for ag producers including all watch and worse-rated credits at present and consistent with prior comments in past earnings calls. We are expecting 2018 results to be similar to 2017 for more green operations. Given the current state of market prices, higher yields and related budget projections. We continue to actively monitor the discussion around trade tariffs, but at this point in time, we do not have significant concerns around potential impact on farmer profitability for 2018.

Prior to the recent drop in soybean prices, our borrowers had around 45% of their production forward hedged at higher levels, which provides some downside protection. As always, we will continue to closely monitor developments and potential impacts upon profitability.

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

Ken Karels

Thank you, Michael.

We are very pleased with performance from Great Western Bank this past year with earnings per share increasing 9% and adjusted earnings per share increasing 17.9%. Since our listing as a public company in 2014, our tangible book value per share has increased 11% on a compounded basis compared to only 5% for our peer group.

Deposit costs will rise for all banks with our strong core deposit base, we expect our margin to stabilize. We continue to manage our efficiency ratio and believe that our current efficiency ratio is sustainable.

Thank you for your continued interest in Great Western Bank. And we will now open up this call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom

Thanks. Good morning guys.

Ken Karels

Hey, good morning.

Jon Arfstrom

Let's just start with the margin, I guess Pete for you. Are you surprised at all by the margin this quarter? It sounds like you carved out the LIBORs a little bit, but just curious if you're satisfied with the margin performance? And then, also maybe give us some thoughts on if you think that that loan yield expansion and deposit cost increase can kind of reverse itself and stabilize the margin a bit?

Peter Chapman

Well, disappointing for the quarter Jon. As we've said, the couple of things in there. Obviously, the non-accrual write-off through the quarter was elevated. Light accounting is not a really a big dive mover for us. Usually it just ticks along. Unfortunately this quarter we had a $2 million decrease in that, which is not a huge number in the grand scheme of things for us, but obviously a big thing of margin. So those two items were disappointing.

And then, also as well through the quarter and we had a couple of bonds that that prepaid so we hadn't sort of elevated amortization on those Jon. So overall was a disappointing one. So I would expect investment -- yield on investments to increase significantly next quarter there and also without the non-accrual interest and with the line accounting being more normalized next quarter as far as we can see at the moment we'd expect margins to stabilize moving forward.

Jon Arfstrom

Okay. So you're thinking that 380 base is a good base with potential for some expansion from there?

Peter Chapman

We think that's a good base. Yes, we do. Obviously, we'll just keep having attract deposit costs and certainly not consigning on new line originations. We're seeing those in sort of the low to mid fives but obviously a little bit of compression there as well which is hitting a little bit as well.

Doug Bass

I think also Jon. This is Doug. Some of the fixed rate loan closings that happened in the quarter were some that had probably been in the pipeline for six months plus and as on a couple of situations we had locked in or agreed to some fixed rates. We're continuing to work through probably a back book of rate commitments that should continue to increase with the average -- weighted average new loan origination rate just continuing to track up every week and month.

Ken Karels

Anything else apart from the NIM side of things Jon, we can help you with.

Jon Arfstrom

No. I think that I am sure others have questions as well, but I'm just curious about just some of your longer term margin expectations. I mean you guys have fought the good fight here and it's not unusual to see this kind of compression, but longer term do you feel like you can hold this kind of margin range?

Peter Chapman

Yes. We do. There is a couple of things there obviously we think deposit costs are -- they are going up but that's been a similar progression over the last few quarters. Certainly we've been reinvesting in high yields on the investment portfolio side of things Jon as well and certainly on the one side of things we're looking at things we can do to get a little bit more there and also as well swap income was lower this quarter I'd expect that to be higher this quarter and going forward so that helps margin as well. So yes, we've done it.

Jon Arfstrom

Okay. All right. Thank you, guys.

Peter Chapman

Thank you.

Operator

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

Damon DelMonte

Hey, good morning guys. How's it going today?

Ken Karels

Good morning, Damon.

Damon DelMonte

Great. Just want to talk a little bit about expenses, I know you had the elevated OREO costs, I think you said that something around the $700,000, $800,000 level is reasonable. So if we back that out of this quarter is that a good run rate for us to go forward with or would you maybe see a bounce back in salary and benefits which were down this quarter?

Ken Karels

Yes. Next quarter maybe a little bit of an up tick, Damon, but our year-end merit items go through in the March quarter so not too much of an up tick, so if you back that -- if you back that expense from OREO, I think are at a pretty good base. There's a few sort of ins and outs there, but sort of, I'd say if you look at a base excluding the OREO, you're at about 57.5. We've said we'll sort of grow inflationary wise, so cool it sort of 3%, 4%, so that gets you sort of slightly over $58 million for sort of 58 in a quarter for the next quarter if you sort of just average that up.

Damon DelMonte

Okay, great. And then, I think you mentioned there was like a onetime expense on the data processing with the vendor or it maybe is recovery?

Ken Karels

Recovery. Yes. Just a benefit on a contract close out, so we had -- we had accrual, a quarter or two back Damon if you remember there and we just work through that and came out a little better than -- a little better than what we thought.

Damon DelMonte

Okay. That's all I had. I can go back into the queue. Thank you.

Ken Karels

Thanks Ken. Appreciate that

Operator

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

Steven Alexopoulos

Hey, good morning, everybody. Just to start on the NIM again. So regarding the outlook for the NIM to be relatively stable here. What's the assumption for the rise in deposit costs that underlies that?

Ken Karels

Pretty consistent with what we've seen Steve. We're not seeing an acceleration in that at this stage. Obviously, we've seen pressure in the last three or four quarters, but I think as you see that from what we have seen and as it's come through the numbers that's been a stable increase.

I think actually what do we see 37% beta really this last quarter. Steve, I think that the issue has been getting the loan beta up there and we're starting to see that happen. The other issue this last quarter of course is the LIBOR didn't increase as much as would normally increase. So we expect that to change around too.

Steven Alexopoulos

Right. So I mean deposit costs for the last two quarters at least were up this 12 to 13 basis point range. You think the loan beta can actually match that during 4Q?

Ken Karels

I don't think it can match it, but it surely can increase over what it has this last quarter.

Doug Bass

And also, I think deposit, I mean investment yield should increase as well Steve as well in this next quarter. Again, hit on an investment, yes, we have this a little bit and also back up plus yields are up to and also date counts one lower this quarter compared to next that would do.

Steven Alexopoulos

I mean just to follow up on Jon's question about sustainability of NIM over time, I mean with deposit costs going up this pace maybe for the next couple of quarters we'll see, and understand how your NIM could hold in stable as we look out over the next year, if you explain that?

Ken Karels

Yes. I think it's a couple of things, Steve, I think if you look at our portfolio 40% is variable with some adjustable on top of that. So I think we do have some benefit in the back pool. Certainly with LIBOR, if there's an increase in LIBOR that helps us certainly with swap sales, which go through net interest income that was depressed for the quarter. We would expect that to be slightly stronger each quarter going forward as well. And then certainly on the loan origination side, while we're seeing some pressure, would certainly hope that that spreads sort of start to stabilize there as well.

Steven Alexopoulos

Okay. And then, just finally of the $200 million of time deposit growth in the quarter on average, is that essentially this stage with new money or you're starting to see a migration of your current customers into that product? Thanks.

Ken Karels

Yes, a bit of both. So on the time deposit side, probably most of it is new money, I'd say a little bit of migration that's probably more on the consumer side, on the business side of things. People are still happy to leave it in money market and get the yield and keep the flexibility there.

Steven Alexopoulos

Okay, great. Thanks for taking my questions.

Operator

The next question comes from Dave Rochester with Deutsche Bank. Please go ahead.

Dave Rochester

Good morning guys. Sorry to belabor the NIM here, but just regarding the interest on acquired loans, were you saying that that you expect that reduction to reverse so that should bounce back this quarter and that's baked into your NIM assumption?

Ken Karels

No. I'd expect that to stabilize Dave, would increase a little bit, that could increase a little bit certainly maybe in the $300,000 to $400,000 range and maybe it could increase by a point also, but I wouldn't expect it to add 9 basis points for example.

Dave Rochester

Yes. I have got it. And then, what are you guys assuming for interest rates for your longer term view on the NIM going forward? How many more rate hikes? And then, where's the middle of the curve in your assumptions?

Ken Karels

I think we're pretty much what the market's considering here maybe one more this year two to three next year is what we are considering just what Bloomberg's going [that] [ph] to be honest.

Dave Rochester

Okay. And you mentioned the bonds of prepaid impacting the securities yield. What was the securities premium expense this quarter? And what are you assuming for next quarter for that?

Ken Karels

Look I don't have the -- I don't have the premium. I don't have the amortization, additional fee was a couple of hundred and probably a couple of hundred thousand. I don't have the basis point impact their days, but I would expect securities yields to increase some next quarter by probably 5 to 10 basis points, so you should see a decent bounce back there.

Dave Rochester

And it seems like that continues to be really low here. Were you seeing securities reinvestment rates and do you see a potential to move that yields meaningfully higher over time?

Ken Karels

Yes. We do. We're seeing reinvestment rates at well above 3 sort of 3.25, so, yes, we would expect that to move high [over time] [ph].

Dave Rochester

Great. Just one last one on credit if I can, you guys give a lot of color on the credit side. Really appreciate that given everything you said you sound fairly positive on the idea that losses to remain low and some of the segments you talked about, how are you guys thinking about the provision from here just given that backdrop.

Doug Bass

Thanks for the question Dave. First of all, I think your summary is exactly right. We think we know what the problems are, what the exposures are and we've called out the provision accordingly. I would say my view is that I'm certainly not expecting any wild increases at this point in time.

Ken Karels

Yes. I would agree with that. I think we're pretty -- you can look pretty much at this year and kind of look at next year being pretty steadier there.

Dave Rochester

Okay. Great. Thanks guys.

Operator

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala

Good morning guys. So one, then follow up question on the margin just want to make sure I have done light base. So we've reported 377. Do we expect the 4 basis points to come back with 381 as a starting point? And then swap fees and everything else that you discussed is that the way to think about it?

Ken Karels

The 4 basis points being the interest reversal Ebrahim.

Ebrahim Poonawala

Yes. I guess 381 is the right way to think about it or 377?

Ken Karels

We can't start at -- I would start at the 377, but certainly as we said earlier sort of stabilizing from around there, so 377 to the 380 range.

Ebrahim Poonawala

Okay. And that, and what was the swap fees contribution Pete this quarter?

Peter Chapman

Minimal, yes. Minimal Ebrahim as far as…

Ken Karels

It's down from normal.

Peter Chapman

Yes. Down from normal probably a basis point or two down from normal.

Ebrahim Poonawala

And you expect that to normalize next quarter in that 377…?

Peter Chapman

Yes. You look it's a lumpy business, but certainly pipeline closings looks better for this quarter than what it did in the past quarter. Yes.

Ebrahim Poonawala

Understood. Helpful. And just moving toward, are obviously building up capital quite nicely. You've previously talked about wanting to do M&A. I'm just wondering in terms of given the pullback in the stock, if you can remind us number one, if you have any appetite to buy back your stock at current levels and does the deposit pricing environment make you also little more active in terms of looking at acquiring a bank?

Ken Karels

Yes. Ken, I will answer this here too. So we have authority roughly around $94 million of stock buyback and definitely we'll look into the market although we can't telegraph that. But have authority, have bought, we will continue to look especially with the stock price pullback that we've seen that's something that's obviously much more attractive in order to do. On the acquisition side of it, there's a lot of activity going on. Yes, we're pretty cautious. As I mentioned at the last call your pricing was high with the pullback now that we've seen in bank stock price not sure whether seller expectations have pulled back any two. So I would say we're going to be cautious as we look at that.

Very interested in obviously deposit only opportunities where there's some brand sales that's something we would very, very aggressively take a look at if we had the opportunity to do that.

Ebrahim Poonawala

Got it. And quickly remind, is there a targeted capital ratio, is it on TCE, risk base, 81 that, we should think about where you want to manage them in?

Ken Karels

Yes, sure. TCE is drifting higher than we needed to be Abraham. If an acquisition opportunity came up, we'd certainly be comfortable moving that down into the 7s.

Ebrahim Poonawala

Understood. All right. Thanks for taking my questions.

Operator

Okay. The next question comes from Tim O'Brien with Sandler O'Neill and Partners. Please go ahead.

Tim O'Brien

Thanks guys. Just one question on credit the downgrades to non-accrual this quarter. What were they, what kind of loans were they? Can you give a little color on those?

Doug Bass

Largest one for the quarter was a cattle operation that is the majority of where it was. This has been an identified problem credit for some time. We think we're taking it the conservative and the appropriate route on that one. There are a lot of factors in place in that operation and it's somewhat complex and not as simple as just buying and selling cattle, but that's where most of it came from. The other one that accounted for about a fourth of the increase, I believe was an ag land deal in one of the geographies.

Tim O'Brien

All right. Thanks a lot.

Operator

Your next question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis

Thanks. Good morning. Few of my questions have been answered, but I guess there was a sizable drop in kind of the goodwill or intangible sequentially. Was there something advertising that that was lumpy in the quarter that run rate seem like that lowered quite a bit linked quarter?

Ken Karels

We're checking the numbers worth kind of shaking our head whether it did drop. So…

Peter Chapman

Yes. Amortization, do you mean, Jeff. It's sort of gone from 4.20 to just under 4…

Jeff Rulis

If you sort of gather up goodwill and intangibles that number was a bit lower than kind of the run rate, I suppose, you can double check it. But I guess the question is nothing on your end.

Peter Chapman

Nothing out of the usual. Yes. We can check and get back to you Jeff on that. But, nothing as usual.

Jeff Rulis

All right. And then, maybe just a follow-up on that OREO, then the detail there on that property, what kind of type and expectation on, I guess sharing that or moving it out expectations there?

Michael Gough

Type of proof. This is Michael. Thanks for the question. The type of property that it is a hotel and convention center expectation as with all of our OREO which we've had for a number of years is that once we get control of it, which is the stage we're at now make sure we get the legal process in place, so we can get it moved in this particular instance, we've had a couple of owners more concerned with pursuing legal action against each other. We said that's where your priorities are. That's fine. Put a receiver in place. We've got control. We'll get the property. We'll get it sold. Our history with OREO is we do not hold it hoping that we're going to see an upturn. We don't speculate. We know what we're good at and that's being a bank, so when we had OREO or other assets back, we look to get control and get moved as soon as we can and the larger property because I think we're still we have less than 25 parcels total in OREO. This one obviously is sizable, but that is our culture and historically how we've approached disposition of OREO.

Jeff Rulis

Okay. Thanks.

Operator

Okay. The next question comes from Nathan Race with Piper Jaffray. Please go ahead.

Nathan Race

Hey guys. Good morning. Just a question on loan growth, Doug just curious to get your thoughts on kind of what you're seeing on pay offs at this point in the quarter and kind of what gives you the confidence that we can get to that maybe 4% to 6% loan growth in the next year. Based on what you're seeing in terms of line utilization with commercial customers and so forth?

Doug Bass

Sure, Nathan. I think on the -- first off, and the first part of your question on payoffs, we had a couple large C&I that had some partial sales and some declines that had very sizable payoffs about $51 million. Secondly, we also had a couple large real estate projects which have been the case in the last couple of quarters that have come to a stabilization point and sought permanent financing and I think with the increasing long-term rates albeit a little more flattened as of recent, they are trying to lock in long-term rates, so we're seeing a lot of the construction stabilization projects try to push quicker into long-term markets.

And then, relative to sort of the new origination side, pipelines are very consistent when we track totals on a quarter-to-quarter basis closing activity in the near term based on what we've experienced here in the first three and a half weeks of October has been very good sort of ties into a couple of comments relative to NIM and the pipeline component that ties in to swap income.

We've probably got a half dozen material transactions scheduled for the closing that will have both loan volume and NIM implications with the swap income as well so. And then, I think to the banker number and the new offices. When you start the new offices, it's four to six months for people to get up and running, get going, create activity, create some closings. I think we've got closings for two of the offices that are going to happen for the first closing. They've been on board about four months and some material closings here in October and November, for two of those offices, which will be their first closing. So I think there's several reasons why we feel confident here in the near-term based on the activities.

Nathan Race

Got it. That's great color. Thanks Doug. So it sounds like payoffs based on what you're seeing so far in the calendar year fourth quarter or somewhat coming down a bit?

Doug Bass

Yes. I mean that's the anticipation at the moment. I do caution that a lot of the large real estate projects that we've been involved doing on a construction standpoint are performing very well to assumptions. And I think it's borrower desire and expectation to get those into the long-term fixed rate per markets as quick as possible. We don't have scheduled anticipated payoffs in Q4 at the moment, but projects are tracking well and that can always happen.

Nathan Race

Got it. I appreciate the color. Thank you.

Operator

The next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy

Thanks. Good morning. Just a just a follow-up on the new loan production offices, are there specific targets you have in mind in terms of growth? And are the expenses for this initiative coming in line with expectations and maybe built into that that $58 million dollar number that was discussed earlier?

Doug Bass

On the expense side, yes. Those were all brought in and typically the expenses lead the revenue by four to six months just given ramp-up and some modest occupancy. And then, salary expense and then relative to production expense it varies by office based on number of lenders, but expectations are probably in the $15 million to $20 million production range per banker per market. So when we talk about the 10 net new bankers eight of which are in new markets, the other two are in Denver. We do anticipate some good traction coming from those new markets that we'd opened in the last four to six months.

Terry McEvoy

Thank you very much.

Operator

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.