Great Western Bancorp Inc (NYSE:GWB)

Q2 2017 Results Earnings Conference Call

April 27, 2017 08:30 AM ET

Executives

Cheryl Olson – Head of Marketing

Ken Karels – Chairman, President and Chief Executive Officer

Peter Chapman – Chief Financial Officer

Steve Ulenberg – Chief Risk Officer

Doug Bass – Regional President

David Hinderaker – Head of Investor Relations

Analysts

Steven Alexopoulos – J. P. Morgan

Dave Rochester – Deutsche Bank

Geoffrey Loos – D. A. Davidson

Nathan Race – Piper Jaffray

Jon Arfstrom – RBC Capital Markets

Steve Moss – FBR Capital Markets

Erik Zwick – Stephens Inc

Damon DelMonte – KBW

Tim O’Brien – Sandler O’Neill

Operator

Good morning. And welcome to the Great Western Bancorp Second Quarter Fiscal Year 2017 Earnings Announcement and 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 Cheryl Olson, Head of Marketing. Please go ahead.

Cheryl Olson

Thank you, Anita and good morning everyone. Joining us this morning on Great Western Bancorp’s second quarter fiscal year 2017 conference call are, Ken Karels, Chairman, President and Chief Executive Officer; Peter Chapman, Chief Financial Officer; Steve Ulenberg, Chief Risk Officer; Doug Bass, Regional President; 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 Web site, as well as our periodic SEC filings for a full discussion of the Company’s risk factors.

Additionally, today we’ll 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, let me turn it over to Great Western Bancorp’s Chairman, President and Chief Executive Officer, Ken Karels.

Ken Karels

Thank you, Cheryl, and good morning, everyone. We have good reason to be pleased with our most recent financial results. Key takeaway for the second quarter include, our net income grew 15% to $35.2 million compared to the same period last year. We increased our quarterly dividend to $0.20 per share or 18%, which is supported by our strong earnings and capital ratios. We are pleased with our net interest margin expansion compared to December quarter, which Pete will discuss in more detail. We made significant progress on a number of our troubled AG loan relationships. This resulted in slower loan growth this quarter. However, we remain confident in our full year growth expectations. And we had outstanding deposit growth this quarter of $385 million.

I would like to take a minute to introduce Doug Bass. Doug is one of our regional president, is responsible for our banking operations in five states, our wealth management business and certain corporate functions. Doug will be joining us to provide more color on our balance sheet growth and outlook in a few minutes. But first for greater details on our second quarter financial results, I would like to turn the call over to our Chief Financial Officer, Peter Chapman. Pete.

Peter Chapman

Thank you, Ken and good morning everybody. As we look at our revenue slide, you can see net interest income was $99.6 million for the second quarter of fiscal 2017, a 13% increase compared to the same quarter in fiscal 2016. Average balance of loans outstanding was nearly 16% higher than the comparable period driving this increase.

Net interest margin for the quarter was 3.98%, an increase of 9 basis points compared to the most recent quarter ended 31 December 2016. More importantly, the adjusted NIM, which is the measure we manage to, increased 12 basis points over the same period to 3.83%. We clearly benefited from the fed rate hike in December as our all-in loan yield increased by 7 basis points quarter-over-quarter, reflecting our customer rates moving higher on adjustable and variable rate loans, which represented approximately 60% of our loan portfolio.

The cost of our interest rate swaps related to the hedging of the interest rate risk on our $1 billion portfolio of loans carried fair value also moved below. Our adjusted NIM also benefited from a change in asset mix as cash and low yielding assets balances made up a much small proportion of our interest earning assets compared to the December quarter.

Our cost of deposits increased by 3 basis points over the same period, and we expect further NIM expansion in the coming quarter in light of the March rate hike, but we do not expect it to be as pronounced to this quarter.

Non-interest income for the quarter was $13.8 million, increased to 54% compared to the same period last year. Our service charge and fee income increased by $1.6 million, which is primarily driven by higher debit interchange income. And as I’ve already mentioned, the cost of our interest rate swaps declined by $1.3 million. Those sales were not increasing wealth management income, which was $800,000 higher. I want to remind everybody that in June — the June 2017 quarter is the last quarter we’ll benefit from the high debit interchange rates as a result of crossing $10 billion asset threshold. We expect this impact to be $2 million to $2.5 million per quarter, going forward.

Looking on the slide on expenses, provision and earnings, non-interest expense was $53.9 million for the quarter, which was 20% higher than the same quarter last year. Majority of the increase came through salaries and the employee benefits line. We have 13% more full time equivalent employees this quarter than we did a year ago, which includes the employees of joint GWB through the Home Federal acquisition, employees we’ve added to growth and regulatory compliance.

We’ve also seen an increase in the cost of employee benefits, most notably the cost of health insurance. We also saw $1 million increase in data processing related to recent technology investments, and $900,000 increase in professionals fees related to consulting and regulatory projects and investments in brand security. Despite the increase in non-interest expense, we again delivered the strong efficiency ratio of 47%. We’re confident we continue to manage to an efficiency ratio in the mid to high 40s and do not expect significant expense increases to come through in the near future.

Our effective tax rate for the quarter was 34.1%, which is consistent with our expectations for an effective rate in the absence of material one off items. All regulatory capital ratios increased compared to December 31 with Tier 1 and total capital ratios at 11.6% and 12.7%, respectively. The increase in quarterly dividend to $0.20 per share reflects our ability to generate strong levels of capital with this fiscal year-to-date return on tangible common equity of 15.9% and also reflects our intent to prudently and actively manage capital.

I’d now like to turn over the call to Doug Bass to discuss our balance sheet activity for the quarter.

Doug Bass

Thanks, Steve and greetings to everyone on the call. As many of you are aware, many farmers across the U.S. and specifically grain producers in the Midwest where we operate experienced their third or fourth consecutive challenging year in 2016. We have also seen stress in the cattle markets over the last couple of years. As a result, we have spent considerable time and resources managing those loan relationships that are under the most stress. During the quarter, our agricultural loan portfolio showed a net decline of $92 million, which accounted for more than the overall portfolio change during the quarter.

Some of this migration was seasonal in nature and some was the result of existing relationships that were no longer a good fit, which will benefit the Bank in the long-term. It is also very important to note that many of our stronger customers generated very favorable results in ’16 and show favorable projections for the 17 growing season. Those customers that are disciplined conservative producers will be GWB customers for many years to come. We did generate approximately $46 million of growth in our C&I portfolio during the quarter, which brings growth in that portfolio positive for the fiscal year. Most importantly, we are seeing our loan pipelines build, primarily in the C&I and owner occupied commercial real estate segments. This increase incurs in our second and third fiscal quarters with the receipt of prior fiscal year end information. We’re still comfortable that we will generate mid-single-digit loan growth for the fiscal year based on existing pipelines and activity across our nine states.

On the other side of the balance sheet, we had significant core deposit growth. Despite our overall cost of deposits only increasing by 3 basis points compared to the December ’16 quarter, our deposits grew by 385 million, which was distributed across interest bearing and non-interest bearing and across business and consumer accounts and across all the geography. Non-interest bearing balances grew by almost 4% during the quarter. These deposits provide a strong source of cost effective funding to support loan growth projected in the second half of the fiscal year; although, we do expect a seasonal decline in deposits in the June and September quarters.

Let’s turn the call over now to our Chief Risk Officer, Steve Ulenberg who’ll take us through the asset quality developments. Steve?

Steve Ulenberg

Thank you, Doug and good morning everyone. Turning our attention now to the asset quality slide, provision for loan losses was $4 million for the quarter, $1.4 million higher than the same quarter last year, but $3 million lower than for the immediately preceding quarter December 31, 2016.

We provided $5.1 million related to originated loans, which was partially offset by $1.1 million recruitment of the provision related to acquired loans, which has been performing better than expected at acquisition. This recruitment was partially offset by required increase in our FDIC clawback liability and acceleration of amortization of indemnification assets; so the overall impact to new to come through in the quarter was minor.

Net charge-offs for the quarter totaled $8.1 million or 38 basis points of average loans, annualizing their quarterly figure. The majority of the net charge-offs related to Ag loans and also these loans had specific reserves in place as a result of being previously identified as problem relationships. Our ALLL, as a percentage of total loans, declined to 72 basis points. That was down 4 basis points from December 31, 2016 and was a result of these net charge-offs.

Our comprehensive credit coverage, which includes credit related fee value adjustments on our long term portfolio and purchase accounting marks remained sound at 121 basis points of total loans. Overall, asset quality remained stable with loans graded Watch and Substandard moving by relatively small amounts with Watch decreasing by 3% and Substandard increasing by 6% compared to December 31, 2016, also non-accrual loans increased by only 3% over the same period.

The majority of Watch Substandard and non-accrual loans reside in our agriculture profile. And as we have discussed previously, these loans typically have a large a longer revenue cycle than comparable C&I businesses. This results in a longer work out period. We do not currently see signs of significant further deterioration in the agriculture profile nor do we see signs of deterioration in our other loan portfolio segments. But we continue to be vigilant and proactive in monitoring and managing our loan portfolio.

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

Ken Karels

Thank you, Steve. We remain hopeful that we will see some form of tax reform and regulatory relief, leading to robust economic growth, higher demand for credit and expanding margins. But as I said to you before, I believe very strongly and right about the things we can control. We will take good care of our customers, make sound credit decisions and control our cost. I believe we are continuing to do each of these things well, and the result to strong financial performance and attractive return for our stockholders.

Thank you again for your interest in Great Western Bank, and we’ll take your questions now.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Steven Alexopoulos with J. P. Morgan. Please go ahead.

Steven Alexopoulos

I wanted to start on the deposits. Could you give some color on the 5 basis point quarter-over-quarter increase in the now money market and savings deposits?

Ken Karels

Doug, do you want to go ahead and start with some of that upbeat?

Doug Bass

Just in that state, we’ve seen a little bit of an increase in deposits and geographies. So that’s just as a result of just the inflow of — into that category. But the end of the quarter, I think our spot deposit cost, all-in costs was about 40 points. So we’d expect some further increase in that line in the coming quarter from an average perspective as well.

Steven Alexopoulos

Is this a result do you guys run promotions responding to other banks running promotions?

Ken Karels

Yes little bit of that. Certainly, we want to competitive in that space, certainly not top of the market. So we wouldn’t say that we’re remaining committed just make sure we maintain good deposit base there.

Steven Alexopoulos

And then on the Ag loans that exited the bank, were these either on the Watch list or Substandard?

Ken Karels

Steve, go ahead.

Steve Ulenberg

Yes, I’ll identify that some time ago as the credits and the guys who have to work out process. And as I said, the charge-offs there will all against previously provided reviews, specifically for each of those lines, so no surprises there.

Steven Alexopoulos

And which…

Steve Ulenberg

It was predominantly grain with a little bit of beef.

Doug Bass

I think also, Steve, this is Doug. One other further item is of the $92 million decrease about one-third of it was seasonal decreases in past rated good relationships that we continued to do business with, the other two-thirds were exits of accounts that were previously listed under our Watch categories.

Steven Alexopoulos

And are you guys still looking to push some relationships out of the bankers that done at this point?

Ken Karels

I think as we take a look at the entire portfolio and the time of year we’re in, there are number of relationships that we’ll continue with some reductions in their overall debt structure to be able to meet cash flow and profitability target; so there will be some that will continue to go down and trend down throughout the year as they reduce debt levels simultaneously; with the seasonality, we’ll also continue to see increases throughout the grain and the production year in the past rated book as they draw up this quarter; so probably about a net zero changes as we look through the next remaining six months of the fiscal year.

Steven Alexopoulos

And then just a final one, the professional fees were up quite a bit quarter-over-quarter. I know Peter you mentioned a couple of items but you went pretty vast. Could you give color on what’s driving that and what should be a more normal level? Thanks.

Peter Chapman

There were some more similar things in there during the quarter just around some of the compliance things in that state. I expect those to drop off, that have gone over 10 billion and the FDIC charges are also drop through there, so they ticked up a little bit. So I’d expect this quarter to be more normal, if not down, a little bit going forward.

Ken Karels

Steve, some of those are the costs that we lag before as far as going over the $10 billion with some of the DFAST costs under the model risk management, some of the consumer financial protection we already missed or some of the professional fees that we’re incurring.

Steven Alexopoulos

But at $3.6 million you see that as the run rate going forward?

Doug Bass

That too maybe down a little bit, Steve, couple of hundred thousand down…

Operator

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

Dave Rochester

Just on the last question on the DFAST expense and then the run rate going forward. How much of your DFAST expenses are in the run rate at this point? How much more spending do you…

Doug Bass

Quite a bit of that, I think although I said that 2 million all-in for DFAST and we’re probably looking at about 17 and 18 for DFAST, Dave. And I think about 15 of that is in run rate 16 and maybe a couple of thousand that go, but significantly most of those are in run rate now.

Dave Rochester

And did I hear you correctly, you expect total expenses actually decline next quarter?

Doug Bass

No, that was the professional fee line item, Dave. So when I look at total expenses, I think last quarter we said we’re probably $1 million to $1.5 million in expenses, there are a couple of guys in there last quarter. And if you add that back, that’s probably right where we are this quarter, so I’d expect expenses to be in a similar range next quarter.

Dave Rochester

And you mentioned your outlook on some of those Ag credits that you’re looking to shrink overtime, but then you mentioned some other asset as well. Just wondering, are you saying now that you don’t have much of a headwind in terms of growth in that portfolio going forward as soon as still see some reduction there?

Ken Karels

I think part of it that’s going to be two pronged; a part of it’s going to be the seasonality in Ag book will show some increases; on the other side, we’ll have some continued declines and some of the operations that are more stressed do need to reduce some debt levels. So I think as we forecast out through the remaining six months of the fiscal year, we’ll see the Ag portfolio remain fairly flat.

Dave Rochester

And then just last one back on the NIM, you talked about little bit of deposit pricing competition. I was wondering if you’ve seen a noticeable uptick post the March hike that might come into play in Q2?

Doug Bass

In deposits, Dave?

Dave Rochester

In deposit pricing competition, yes.

Doug Bass

Look, in market, there is always a couple of things special, I wouldn’t say wholesale competition changes, Dave. But as I said, the spot cost of that deposit was around 40 points at the end of the quarter, which drove the 3 point increase overall. So I would expect there to be some modest pressure this quarter continuing on that trajectory.

Dave Rochester

And at this point, it sounds like you’re talking about more modest expansion in the range of maybe a couple of basis points?

Doug Bass

Yes, I would say so, Dave. If you look at that, the expansion we got quite a bit though just holding lower cash balance this quarter. So that was much lower quarter-on-quarter and we probably had — got much for in to go lower on that, so get the mix benefit next quarter.

Operator

The next question comes from Geoffrey Loos with D. A. Davidson. Please go ahead.

Geoffrey Loos

Yes, a question on deposit side, just getting a little more detail. The period end balances were up quite a bit more than maybe the averages suggest. Was there a late surge in deposits and then secondarily if there was, is the deposit success continued into April?

Ken Karels

No absolutely it was in the latter part of quarter. In the latter part of the quarter, we get some to corporate deposits and public fund deposits. And as Doug mentioned, we expect those to rollout, while they do rollout early in this quarter. And also you’ve got a lot of tax payments that roll out as well. So seasonally we expect deposits to be down this quarter, down a little bit to reflect the next quarter and then they tend to build over the next two quarters notwithstanding obviously our focus on deposit raise, particularly with our business customers.

Geoffrey Loos

And then I guess back to the commentary about — it was really widespread across the footprint. Any detail on anything, in particular that portions of the footprint that were maybe notable that you’d point out that seen good success on the deposit side?

Ken Karels

I would say no I think as Doug mentioned, it was pretty much across to geography, and I think the efforts we put into business deposit growth and balanced score cards with our business banker and going after deposits is starting to pay off some of the investments we’ve made in technology there, is definitely starting to pay off. So as we mentioned, we’ll see some seasonal decline here this third quarter, fourth quarter but real happy with where we’re going with deposit growth.

Geoffrey Loos

And then last one, just on the net charge offs being a little elevated. Is there any visibility on perhaps future charge off levels in coming quarter? And then I guess how that relates to the provision?

Steve Ulenberg

Look we certainly won’t be giving guidance. But I think I would point out that whilst the quarter charges were higher than annualized, that quarter 38 basis points if you look at the last 12 months, the charge-off rates 24 basis points. So that would be more in line with where our expectations would be. Obviously, these things move around a little bit quarter-by-quarter just based on where the impaired loans in their lifecycle.

Geoffrey Loos

This is a little elementary. But I guess if net charge-offs were to come down and loan growth pick-up, provisioning levels in this range frankly to be expected?

Steve Ulenberg

Look, that’s they comment and we would see. We have a slightly lower quarter for provisioning as you see that was the plus, but probably a little bit lower than what we see our normal run rate. But we’re in the ballpark, we were being for last six months and what we’d see the ongoing provisioning rate to be.

Operator

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

Nathan Race

Question on the criticized Ag loan balances, I believe they were 19% of the Ag book last quarter. I was just curious if you have that number for the current quarter?

Peter Chapman

Ag is 24%, but the book is up [multiple speakers]. Look, it’s in the 50% to 60% range, Ag is about a quarter of the book and it’s about 55%, 60% of the criticized loans. And that’s being pretty stable over the last 12 to 18 months.

Nathan Race

And then in terms of the portfolio in Wisconsin, do you have any exposure that would potentially be impacted by the ongoing; just piece of Canada.

Peter Chapman

I think the Canada came in and out there, but I think if you said your exposure Wisconsin, we have none. Most of our dairy exposure is in Arizona, majority of our 90% of our dairy [multiple speakers].

Operator

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

Jon Arfstrom

Couple of questions on loan growth, give us an idea of how the drivers of how you’re — the overall loan growth. Where you expect the growth to occur? I think we all understand some of the pressures in Ag, but help us understand a little weaker quarter and then holding the growth guidance that you’d laid out there.

Doug Bass

When we take a look at the first six months and we take a look at the non-Ag sectors, they grew at a rate of about 2.6%. So then when we move forward, taking a look at a flat Ag book for the remaining part of the fiscal year, we couple that in with our pipelines which we track out by geography. And loans anticipated to be closed within a certain timeframe, we still feel very comfortable with the mid-single digit indication based on the activity, and it’s spread evenly pretty much across most of the geography. And again most of the activity is going to be outside of the Ag sector. I think we’re seeing probably 50% to 60% of that in C&I and in owner occupied real estate and the balance in other real estate segments.

Jon Arfstrom

Give us I think most of us on the call understand Denver and Arizona, but since you work out of them. Maybe give us an idea of your bigger markets in the Upper Midwest like Sioux Falls, Des Moines and Omaha. How are they doing? What kind of growth do you expect out of those markets?

Ken Karels

I think when we — actually I oversee the Colorado and Arizona state, so I’ve got — can attack that one first on the Arizona and Colorado side. We had some pretty significant growth in the first six months of the year, and I think certainly with the economic factors, the Ag factor as well are really positive in those states. So we are seeing continued growth in Ag predominantly in Colorado and Arizona. So that will add positively to the piece. But all sectors really in those two states are growing and we’ll probably continue to grow at upper single to low double digit rates.

And when you look at communities in the Midwest, more of the midsized metro communities, we’re seeing considerable opportunity in both C&I sector owner occupied real estate being very cautious on the non owner occupied sector; but selectively, working with existing customers on some of their expansion plans. In the Sioux Falls, Omaha, Des Moines markets, Kansas City markets, as well where we have significant pipeline and activity and a lot of 10 years bankers that are creating good activity for us.

Jon Arfstrom

Then maybe Ken or Pete, just one more on the capital priorities; appreciate the dividend increase, but maybe talk a little bit about message you’re sending with that. And if anything has changed in terms of how you think about your capital allocation?

Ken Karels

Obviously, we generate a lot of capital and a lot of access capital. And so as we approved here last quarter some stock buyback with the appreciation in our price and make sense to do that. So we’ve always promised to not hoard or have a lot of extra capital. So obviously the dividend payback and increase make sense. Our dividend payout ratio is still substantially lower than our peers, and especially considering the high generation of capital that we do. So basically the message, if any, we’re sending is that we’ll maintain our capital at an appropriate level and provide it back to our investors when we think it’s appropriate.

Operator

The next question comes from Steve Moss with FBR. Please go ahead.

Steve Moss

Most of my questions have been asked, I just was wondering if you could give a little color around expectations for mortgage banking and heading into seasonally strong period here. What you’re expecting there?

Ken Karels

Yes, mortgage isn’t a big revenue source for us we really take care of our existing customers. So us with others, we’ll see the refinance come down some, but it isn’t a big needle mover for us. I mean obviously we’ll project lower volumes than you would have seen a year ago with higher interest rates, but again, an immaterial effect on our bottom line.

Peter Chapman

And just seasonally, June quarter heading into the September quarter here for us, there is a lot of activity as you saw this quarters just with weather; so probably little lower than last year with the lower refi into those last three quarters of the year.

Steve Moss

And then my second question, just wondering with regard to growth in C&I here. Were there any particular industries that were strong, any incremental color you could get there?

Doug Bass

Sure Steve this is Doug. I think we are seeing opportunities, both in some manufacturing and distribution. We’ve seen some acquisition opportunity where we have customers that are making acquisitions. We’ve also seen see some growth into new regional markets within the Midwest area as far as existing customer base. We’re also seeing some opportunity of companies that have outgrown their community bank, or we’re consolidating opportunities between multi-bank relationships. And again a lot of that’s happening more so through the metro markets of Omaha, Sioux Falls, Des Moines, Kansas City, Denver, Phoenix, and I think really a number of different sectors.

Operator

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

Erik Zwick

First maybe given the strong C&I growth in the quarter. What is line utilization stand today and how does that compare to last quarter?

Ken Karels

Doug, do you want to go ahead and — had not we provided much of that in the past, do we?

Doug Bass

We haven’t Erik, but I don’t think it changed material in terms of activity in relation to some of that C&I space, so I don’t think it’s moved materially as much into the quarter.

Ken Karels

And maybe up significantly a few basis points, but not much of an impact, Erik.

Erik Zwick

And then maybe switching to the Ag portfolio, can you talk about your efforts to work with stressed borrowers whose relationships you electing to maintain. Just if you’ve restructured any loans during the quarter and would we expect to see an increase in occurring TDRs when you file your 10-Q?

Peter Chapman

Look, I think it’s a pretty steady picture. As I said really the loans we chose also in the last quarter, Ag loans, they were identified some time ago well provided. We would see sort of minimal volatility in those numbers in the Ag side.

Doug Bass

TDRs will come up. When the two comes, Erik, but was I think was pretty robust, so it’s not a big part of our portfolio but you will see a little uptick there.

Erik Zwick

And then finally maybe just thinking about M&A a little bit. Can you provide any update on your thoughts today and maybe the volume of discussions you’re having and seller expectations today?

KenKarels

Definitely having discussion with potential sellers. I would say seller expectations still elevated some cases beyond realized real estate values on it too, but differently having the conversations; I think public company, we’re starting to the larger 30% plus premium start come down, but maybe not to a level that dictates an action by us. So definitely having the conversions, still quite not there between the bid ask ratio.

Operator

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

Damon DelMonte

Most of my questions have been answered, but just a couple detailed ones. Peter, did you say that the timing of the Durbin amendment impact you guys happens this coming quarter, or is it the following quarter?

Peter Chapman

This is the last quarter we get it a go the month and so the July month is the last quarter we get it…

Ken Karels

….by this quarter. So the next quarter, we still have the benefit of it not until our fourth fiscal quarter…

Peter Chapman

I think the quarter is when it drops away…

Damon DelMonte

Then good tax rate going forward this quarter the level is good, or [multiple speakers]?

Ken Karels

Yes, that’s what we said, sort of around the 34 range Damon is the 1x sort of any one-off…

Damon DelMonte

And then just my final question, and I apologies if you’ve covered this. But the residential mortgage portfolio this quarter was down about 15% linked quarter annualized, anything specific to the quarter with decline?

Peter Chapman

No, I think part of that. We took on a number with Home Federal when we did that acquisition, so some of that will wash out over the integration part of it. It’s never been a big part of our portfolio. We sell off everything on secondary market that’s fixed. So we’ve had continually shrinkage in that portfolio and we’ve continued to see some run off in that portfolio.

Operator

Next question comes from Tim O’Brien with Sandler O’Neill. Please go ahead.

TimO’Brien

One more follow-on for Peter on that, the Durbin guidance with regard to interchange fees, the $2 million to $2.5 million number, that’s annualized, right?

Peter Chapman

Yes, per quarter…

Tim O’Brien

Yes, that’s per quarter?

Peter Chapman

Yes, that’s correct.

Tim O’Brien

And then another question is, do you happen to have regulatory concentration ratios at quarter end here for CRE and for constructions? I know construction has been meaningful, but just as a baseline to have…

Peter Chapman

Substantially, it’s still substantially below the 100%, 300%…

Unidentified Company Representative

226 and 45, Tim…

Tim O’Brien

Last question, I know that your branch total was 178 quarter end in the press release branching planned expansion, consolidations; any outlook here for the next quarter or two, update?

Peter Chapman

No, not a lot, as far as consolidation of branches, we’re pretty much through that. We continue to look at that and if it makes sense, we do it. But most of the branches we have are quite profitable and we’ll continue maintaining that level. Always looking at new branch opportunities, maybe some opportunity to accelerate that, but nothing planned in the next quarter or two.

Operator

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

Ken Karels

Again, thank you for joining us today. Obviously, we, as many banks lower loan growth this quarter but are confident that we will see additional loan growth over the next two quarters. As we mentioned earlier, the expense increase, obviously, as we are prepare and get ready for over $10 billion, I think it’s pretty well ingrained in our run rate now. So look forward to a good second half of the year for us. And appreciate you taking the call today.

Operator

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

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