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Great Western Bancorp (NYSE:GWB)
Q1 2020 Earnings Call
Jan 28, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to Great Western Bancorp's first-quarter fiscal-year 2020 earnings conference call. [Operator instructions] Joining the call this morning are Ken Karels, chairperson, president, and chief executive officer; Doug Bass, chief operating officer; Peter Chapman, chief financial officer; Karlyn Knieriem, chief risk officer; and Seth Artz, head of investor relations. Before getting started, Great Western 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 on the company's website, as well as their periodic SEC filings for a full discussion of the company's risk factors.

Additionally, today, certain non-GAAP financial measures will be discussed 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.

Please note this event is being recorded. I would now like to turn the conference over to Great Western Bancorp's chairperson, president and chief executive officer, Ken Karels. Ken, please go ahead.

Ken Karels -- Chairperson, President, and Chief Executive Officer

OK. Good morning, and thank you for joining the call. With this quarter marking the beginning of our fiscal year, I'd like to point out a few highlights. Net income of $43 million has remained very solid.

We were successful in our strategic management of deposit interest cost, which decreased in the quarter by 20 basis points, and we will continue to manage this going forward. Strong expense control resulted in an efficiency ratio at 46.2% for the quarter. None of our share buyback authorization was executed during the quarter, but we will continue to look at this as we generate capital in excess of what is required to fund organic growth due to our strong returns. Now for more insight on our financial results, I'd like to turn the call over to our chief financial officer, Peter Chapman.

Pete?

Peter Chapman -- Chief Financial Officer

Thank you, Ken, and good morning, everybody. Looking firstly to revenue, interest income was $132 million for the quarter, which decreased because of a $2 million reversal of interest on exposures that will move to nonaccrual during the quarter and also a decline in lending balances, which Doug will touch upon more in a minute for everybody. Our net interest margin and our adjusted net interest margin were 3.68% and 3.65% respectively, for the quarter, with the adjusted net interest margin down four basis points quarter over quarter, with a seven basis point impact from the interest reversal on loans moved to nonaccrual. In addition, a reduction in loan yields, lowered NIM by 17 basis points, but this was offset by a reduction in total deposit cost of 20 basis points and a slight improvement in the investment portfolio yield of over two basis points.

We'll continue to proactively manage deposit costs in the mid rates to get down in January, but we expect underlying NIM to contract a few basis points per quarter in the current rate environment, in line with prior guidance, particularly as we're seeing loan yields continue to compress as competition for good credit relationships remains very strong. Noninterest income increased by $0.7 million for the quarter to $15.7 million, mainly due to an increase in wealth management income through the closing of the Colorado acquisition at the start of the current quarter. Noninterest expenses were $57 million for the quarter, an increase of $1.7 million. Salaries and benefits increased by $2.8 million due to lower variable compensation in the prior quarter.

In addition to general salary expense increases and stock vestings in the current quarter. Also, our professional fees increased by $0.4 million due to lower FDIC expense in the prior quarter. These were offset with reductions in data processing and communication expenses by $0.8 million due to lower customer mailings in the current quarter and higher annual maintenance expenses in the prior quarter. While we continue to be diligent with our expenses.

We expect an increase in the following quarters due to annual salary merit increases effective in the March quarter, investment in new lending resources to grow the business and credit and risk management investment to continue to enhance management, monitoring and analytics of the loan portfolio. Accordingly, we expect spend to be more in the $59 million to $60 million range going forward. For more now on loan and deposit growth, I'll turn the call over to our chief operating officer, Doug Bass. Over to you, Doug.

Doug Bass -- Chief Operating Officer

Thanks, Pete, and good morning, everyone. At the end of the December '19 quarter-end, loans were $9.6 billion, which is a decline of $81 million from the prior quarter. During the quarter, commercial real estate loans decreased slightly as advances in construction and development and multifamily residential were offset with declines in nonowner-occupied and owner-occupied. During the quarter, we experienced $106.5 million in credits that refinanced with other financial institutions at pricing that did not meet our return targets.

Commercial non-real estate loans were down $43.5 million. This was mostly centered in our mortgage warehouse portfolio that ended the quarter down by $26 million due to the underlying transaction and disbursement activity. Additionally, the undrawn percentage of operating lines of credit increased approximately 1% over the last two quarters. This reflects a balanced decline of approximately $25 million.

Agricultural balances decreased $28 million during the quarter, with the decrease primarily driven by the exited relationships with a higher risk profile, which is a trend we anticipate over the upcoming quarters as operators secure suitable financing alternatives. Our de novo office strategy continues to be a key contributor to our growth and expansion. And for the quarter, the aggregate growth of those portfolios were 4% annualized. We have successfully opened 11 offices over the last few years, three of which are currently in the loan production office stage.

Currently, we have leadership and teams in place for two new locations with timing dependent on reaching internal targets. Nine new commercial bankers have been hired in various existing markets during quarter fiscal one. Consistent with prior guidance, we will spend fiscal-year 2020 rebalancing the risk profile in all sectors of our loan book, particularly those in the agricultural sector. Our priority of improving asset quality is expected to result in exits that will impede loan growth, which we have seen traces of already.

This will continue over the next few quarters, and our expectation is still for loan growth to be in the low single-digit range for 2020. Deposits declined $212 million to $10.1 million during the quarter, primarily related to a reduction in brokered deposits of $214.8 million as those costs have become less competitive. Within the rest of the portfolio, noninterest-bearing deposits showed good growth, particularly in the consumer book, offset with a $127 million decrease in non-brokered time deposits. Management of deposit costs have resulted in a 20 basis point decrease during the quarter due to the increased mix of noninterest-bearing, coupled with a decrease of 25 basis points in interest-bearing costs from reduced rates on money market and offering rates on time deposits.

We have moved deposit rates down again in January, and we'll continue to move our rates down commensurate with declining loan rates to maintain a targeted net interest margin. I'll now turn the call over to our chief risk officer, Karlyn Knieriem, who also oversees our loan review function to provide updates on our asset quality strategy. Karlyn?

Karlyn Knieriem -- Chief Risk Officer

Thanks, Doug. For the quarter, net charge-offs of $6.1 million were 25 basis points on an annualized basis, which is a decline from 31 basis points in the prior quarter. Of this amount, $4.5 million was attributable to a few ag relationships with the remaining $1.6 million spread across a number of smaller non-ag relationships. Total credit-related charges at $12.6 million were $8.4 million higher than the prior quarter, driven mainly by $6.1 million of more normalized provision expenses and $2 million from reversed interest income on loans moved to nonaccrual in the period.

Nonaccrual loans as a percent of total loans were 1.62%, up from 1.1% the prior quarter and a modest increase from historic levels primarily related to a small number of agricultural loans identified as we continue to work through the higher risk credit. Our allowance for loan loss to loans increased three basis points in the quarter to 76 basis points. And our comprehensive credit coverage, which includes credit-related fair value adjustments on our long-term portfolio and purchased accounting marks was 94 basis points. Looking at our loan classifications, our loans rated substandard, increased $168 million to $640 million due to a $67 million net increase related to a small number of ag loans, primarily in dairy and one in the swine sector and $101 million increase in non-ag loans, particularly with a few relationships in health services.

Watch loans increased slightly to $416 million related to additional monitoring of a small number of relationships. As an update to the asset quality of the dairy portfolio at the end of the quarter, we had $230 million rated as substandard and $63 million rated as Watch. Fundamentals for the sector continued to improve. And in general, quarter 2 and quarter 3 financials validated the anticipated improvement in profitability, supported by a lift in milk prices.

We are regularly gathering financial information as it becomes available, so we can update our views on not only the operational performance, but also the overall financial health of each relationship. In recent quarters, we have discussed our broader focus on overall asset quality, and we are making good progress on those initiatives. One key change we will make relates to loan classifications and ratings as we have an in-flight project that will give a more granular view of our loan ratings and asset quality in general in coming quarters. Among other things, will be the implementation of a special mention rating category as part of a criticized loan framework that does not exist in our current rating scale, but typically is used by other institutions and falls between Watch and substandard.

By implementing our new scale, we will better align with the criticized and classified ratings and metrics seen in the industry, while also allowing us to be more efficient in managing our credits and relationships and complementing our adoption of CECL later in the year. While this project is not yet complete, all things being equal, we would expect this to move a number of relationships from substandard to special mention when implemented and bring down the level of substandard loans based on the current portfolio. With that, let's turn the call back to Ken for some closing remarks.

Ken Karels -- Chairperson, President, and Chief Executive Officer

OK. Thank you, Karlyn. I am pleased with how we've begun the year as our consistency and expense and margin management resulted in good earnings, reflected in our strong return on tangible common equity of 15% and return on assets of over 1.3%. Now is the right time to reposition our loan portfolio and make enhancements that will both improve our current asset quality and enable us to achieve future growth.

We will now open up the call for questions.

Questions & Answers:


Operator

[Operator instructions] The first question today comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Doug Bass -- Chief Operating Officer

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Yes, really just a credit-related question. On the commentary on the dairy side. So, if that was sort of the the impetus for the increase in substandard loans, did you true that up with the commentary on how you're feeling more positive on dairy? Kind of what's flushing through there? And maybe if you could touch on kind of workout time lines of what was added? And then kind of into the renewal points of do we expect to see when the dairy book is then annual reviewed, kind of the exit point of that, that would be helpful. Thanks.

Doug Bass -- Chief Operating Officer

OK, Jeff, let me -- this is Doug. Let me take that question for you. First off, on the substandard increase, it was due to a one-time event that should be corrected on that relationship in the month of February. It was not an earnings or cash flow-related downgrade.

That item should be corrected here. Relative to comments, I think, that were made last quarter, we talked about roughly $1.55 cash flow with Class 3 milk prices in the low 16s. What we are seeing today would be debt service coverage from that up to 2.0 times for debt coverage. And that's reflected in Class 3 milk prices that are averaging in the low 17s today.

Probably also to note is many of the producers are using their opportunity to lock in revenue insurance through the USDA program, which allows them to lock in current prices out for 18 months. Many of our producers are using that program. Relative to renewal time lines and risk rating time lines, we have looked at these credits on a rolling four-quarter basis. Many of the operations started turning the quarter in Q2.

Virtually all had very profitable results in Q3. As we're gathering information, Q4 results for fiscal year-end 12/31/19 will usually start coming in toward the end of March, April and early May, so the renewal season for this book of business would typically be in the April, May time frame. We anticipate, based on trends of the last two quarters and recent milk prices and locked in prices through the revenue protection program and favorable production levels that a number of these relationships will be considered for risk rating improvements at the renewal period, that will probably be in the April through May time frame.

Jeff Rulis -- D.A. Davidson -- Analyst

What was the size of the onetime add that you expect to be corrected in February?

Doug Bass -- Chief Operating Officer

Well, the substandard credit results from 9/30 to September went up $35 million. So, it was embedded within that number.

Jeff Rulis -- D.A. Davidson -- Analyst

OK. And I'm sorry, the last one was just on charge-off visibility, this was sort of the lowest quarter, I guess, on net in the last few quarters. Fiscal '19 was obviously a bigger charge-off quarter. Any visibility on fiscal '20 charge-off activity? Something less than '19 or -- something more than '18? Any broad thoughts on where we are in the cycle on charge-offs?

Peter Chapman -- Chief Financial Officer

Yes. Just Jeff, forward, I suppose, if you look over the average of last -- the average of the last four that June 1, we'd hope is an anomaly in there. So, look, I think somewhere in that 25 to 30, 25 to 35 point range. I think it's a safe boundary to think about it in.

Jeff Rulis -- D.A. Davidson -- Analyst

OK. Thanks.

Operator

The next question comes from Andrew Liesch with Piper Sandler. Please go ahead.

Andrew Liesch -- Piper Sandler -- Analyst

Hey, guys, good morning.

Doug Bass -- Chief Operating Officer

Good morning.

Andrew Liesch -- Piper Sandler -- Analyst

Just wanted to touch on the securities book in the quarter and on the increase in borrowings. Just kind of curious, what was really driving some of the movement there? Was that the additional borrowing just to offset some of the deposit outflows in the brokered accounts. Then what was the -- what was causing the build in the securities book? And how should we look at that as a size going forward?

Peter Chapman -- Chief Financial Officer

Yes, sure. It was sort of a mix change, Andrew, between the brokered CDs and FHLB. We just look at both of those interchangeably. And whatever is the -- if we can save a few points going one way or the other, we'll certainly continue to look to do it.

There's a little bit more build in the current quarter. We had some good deposit inflow. I'd say it's sort of flattish to a modest sort of low single-digit increase for the rest of the year, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

OK, great. Thank you. I'll step back in the queue.

Operator

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

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning, guys.

Doug Bass -- Chief Operating Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

I guess this is the first question. Taking a step back on credit, it sounds like you don't expect just a peak -- the charge of guidance you gave for the year, doesn't sound like you expect big losses despite the migration that we've seen. So, the P&L impact, when we think about provisioning should be relatively modest as you move some of these credits. So, is that a safe assumption?

Peter Chapman -- Chief Financial Officer

Look, I think sort of run rate on where we are in the current quarter, Ebrahim, it was maybe a couple of million dollars above what previously guided once you sort of throw the interest accrual in there as well. But we'd hope sort of a quarter like this looks to be a more normalized quarter from an overall expense perspective. There could be a little bit of lumpiness quarter on quarter as we do go through some of these larger ones with charge-offs and the like, but sort of over a three- or four-quarter cycle, we'd hope it settles down to around these levels.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

And I guess the bigger picture is just because of all the moving pieces on ag portfolio, and you talked about higher risk portfolio a few times. Like can you quantify what you view as higher risk of your total loan book? And you've talked about some runoff, which is included in your low single-digit loan growth guidance. I'm just trying to get a sense of what do we expect on substandard loans, on Watch list loans as we move forward in 2020? Do we continue to see inflow or do we start seeing an improvement? But that's kind of the biggest driver of how, from an investor standpoint, folks are looking at your stock. And I'm just trying to get a sense of should we be prepared to see worsening in those metrics or an improvement?

Doug Bass -- Chief Operating Officer

Yes, Ebrahim, this is Doug. Let me talk versus maybe into the next quarter or the following. Let me talk over a several-quarter horizon. When we look at the trajectory as I mentioned earlier, of the dairy book.

We see a number of upgrades that are happening there over the next two fiscal quarters. And then when we take a look at a couple of the other large downgrades that happened in the hog industry that we called out in the PowerPoint that you've seen, those two operations have also seen more favorable results as tariff impacts early in calendar '19. So, we see some rebounding there. Grain prices for much of the Midwest are at breakeven levels when we look at corn and soybeans, Catalent hogs.

And again, more of the operations are probably going to show positive results. So, it's really difficult to project a quarter-to-quarter number. But over the horizon of the next few quarters, we plan to see improvements in those metrics.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And anything outside of the ag book where you have concerns? So, you mentioned some of these C&I loans where you've seen one-off migration issues? Anything that's concerning from a geography standpoint or an asset class? You mentioned healthcare earlier. So just wondering if there's something there that could become an issue.

Karlyn Knieriem -- Chief Risk Officer

This is Karlyn. We are conducting monthly segment reviews as part of our risk management practices, and we just recently did conduct a healthcare deep dive actually and did not downgrade any pass rated credits from that review. And as far as some other emerging areas, we think that at this point, we've been through the majority of our higher risk portfolios and are now migrating down to smaller credits for further review. Geography, nothing is really sticking out that way.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And just on a separate topic, if I can sneak one more in, in terms of capital return, you mentioned in your strategic priority for the year, looking at acquisitions. Ken, if you can just talk to us in terms of buybacks versus M&A, how you're thinking about both those? And if there's any update on the CEO search?

Ken Karels -- Chairperson, President, and Chief Executive Officer

Yes, yes. I think you got three questions in there, Ebrahim. That was really good. So, first, yes, definitely, we will continue to look at acquisitions.

And without going into much detail, always have something active on it too. There's some opportunities maybe for some deposit only acquisitions that may happen. And we still have strong returns, generate a lot of capital, we, as other banks are seeing lower loan growth and so we will be looking at doing stock buybacks here at the opportunist times, that will continue. Both of those, I think, can be done with the capital that we generate on it, too.

On the CEO search, the board is very involved and quite far along with the CEO search. Without going into too much detail, obviously, the board will have to make some final decisions, but we would hope to have an announcement here in the next few months regarding the CEO succession on it, too. So that is moving very fast and appropriate.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my questions.

Ken Karels -- Chairperson, President, and Chief Executive Officer

Thanks.

Operator

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

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning. A couple of follow-ups. Just bigger picture on ag again.

Just based on your comments, Doug, I don't want to put words in your mouth. But I think you're saying that your ag portfolio is stabilizing to potentially improving. Is that fair?

Doug Bass -- Chief Operating Officer

Yes, I think that's a fair comment, Jon. I mean, from one quarter to the next, we're gathering a lot of 12/31 information here over the next few months. So, the reflection and improvements will probably be over the next couple of quarters in that result. But yes, I think commodity prices and dairy have improved, and we've seen that in the last half of '19 results, and we charge bimonthly milk checks, and we can see that result in the fourth quarter continuing to move up.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. And then as long as you have the mic, some of the loan growth activity you rattled through a few items. And I think you said that $106 million in payoffs, another $26 million in warehouse, $28 million in ag. You talked about the offset to that where are you seeing the growth potential that offsets some of those headwinds?

Doug Bass -- Chief Operating Officer

I think first off, on the warehouse lending piece, the $26 million. That was really a seasonal piece. All those relationships are still here, and the balances have already starting to come back, although there's obviously seasonality to it in the spring as it picks up. That is also a segment that we're seeing increased opportunity and demand in, and we feel very comfortable with the risk profile of our warehouse lending book.

That's a segment we'll continue to see increases in. We also will continue to see some headwinds, as I mentioned, on the ag side as we look to find alternative financing options for some of the higher profile risk credits. On the opportunity side, we talked about the new markets. We have a 4% annualized growth going.

We've got two new ones, we're looking at. We also have a couple others that are in the infancy stages that are probably latter in 2020 and '21 that are being discussed. So, a number of initiatives internally to take a look at to try to augment and offset the headwinds of some ag portfolio declines, which have been over the last few quarters.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Right. Thanks for the help.

Operator

The next question comes from David Long with Raymond James. Please go ahead.

David Long -- Raymond James -- Analyst

Good morning, everyone.

Doug Bass -- Chief Operating Officer

Good morning.

David Long -- Raymond James -- Analyst

The substandard loans that were into the non-ag, I think you said it was the healthcare services-related. Any additional color you can provide on those? Were there anything in common among the credits that we should be aware of?

Ken Karels -- Chairperson, President, and Chief Executive Officer

I think, as Karlyn mentioned, David, nothing geography that would be consistent. What we are seeing are senior housing projects that are in a slower absorption, slower lease-up than originally planned. And when those don't meet original assumptions. We moved them down in a risk rating mode.

The fortunate pieces, all of those have been supported by a guarantor and ownership and continue to see improved performance. But it's really just in that healthcare piece. And then as Karlyn mentioned, we went through the segment report in January, given the elevated downgrades in that sector and resulted in feeling good about the entire rest of the book with no further downgrades.

David Long -- Raymond James -- Analyst

Got it. Good. And then as it relates to your deposit cost, a very good quarter there. If everything kind of moves as you planned.

What kind of improvement in deposit costs can we look at for the next couple of quarters?

Peter Chapman -- Chief Financial Officer

Look, probably a little bit more modest than what you've seen this quarter. But as we said, we've moved the money market and CD rates down in January to sort of move toward that in line guidance with NIM. So, the unknown is on the loan side of things, but we'd hope to manage NIM within sort of that few basis point downward movement over the next couple of quarters.

David Long -- Raymond James -- Analyst

OK, great. Thanks, guys.

Peter Chapman -- Chief Financial Officer

Thank you.

Operator

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

Damon DelMonte -- KBW -- Analyst

Hey, good morning, guys. First question. Just wondering, Peter, can you give a little color on your outlook for fee income as we go into 2020?

Peter Chapman -- Chief Financial Officer

Yes. Certainly, I'd expect to see a modest increase, sort of I think we usually, typically talk about low single-digit range in there, Damon. Having the Colorado Trust acquisition come onboard this quarter. That was nice to see and come in line with what we thought that would do.

So, outside of that, I'd expect a modest increase. This next quarter is usually a little soft on that service charge line just seasonally, we find that service fee income's a little lower, and also, you've got a lower day count this quarter as well. That makes it a little lower.

Damon DelMonte -- KBW -- Analyst

Got it. OK. And then with respect to land values for ag-based loans, what have been the trends on real estate values?

Doug Bass -- Chief Operating Officer

The Federal Reserve of Kansas City put out a report here recently that talked about a very modest 1% increase in the state of Iowa, and we had sort of similar plus or minus 2% or 3% across. So, I think while certainly, the ag economy continues to have its challenges, we've seen land values hold up relatively well. And there continue to be buyers, investors that are interested. Most sales come at private treaty as well, which I think is also an indication of the positive support.

Damon DelMonte -- KBW -- Analyst

OK. That's all that I had. Thank you.

Doug Bass -- Chief Operating Officer

Thank you.

Operator

Next question comes from Janet Lee with J.P. Morgan. Please go ahead.

Janet Lee -- J.P. Morgan -- Analyst

Good morning. I want to go back to the healthcare services credit you planned out as part of the increase in substandard loans this quarter. Just want to clarify, is this the same healthcare facility credit you called out last quarter in the watch loan category that has migrated into substandard loans? And can you quantify the size of this problem health credit you have on your book?

Doug Bass -- Chief Operating Officer

Janet, yes, it is. It's the one we mentioned that went into watch last quarter, and we put that into substandard. And that's correct. And it's well within ranges of a lot of the portfolio, and we don't probably get into quoting an individual portfolio size of specific credits.

Janet Lee -- J.P. Morgan -- Analyst

OK, that's helpful. And on your comment last quarter, I think it was roughly around $318 million of total problem dairy credits, including substandard and Watch loans. I think you mentioned about 30% of these were expected to be upgraded, and about 20% of these going through self-liquidation. Can you just give us the update on the status?

Doug Bass -- Chief Operating Officer

Sure. I think if you look from September to December, the aggregate of watch and some standard went down about $25 million in the dairy book. And I think your percentages are continually be very close. We've made some estimates that are going to be right within those same ranges of combination of paydowns or upgrades that are roughly in the 40% to 50% of the current outstanding book.

So, we continue to see that improvement, and that's consistent.

Janet Lee -- J.P. Morgan -- Analyst

Great. And lastly, just on loan growth, your low single-digit guidance. Can you just talk about like what are going to be the key drivers of the loan growth that are going to offset the decline in ag-related portfolio?

Doug Bass -- Chief Operating Officer

Sure. Well, I think we talked about the new offices. There's some other initiatives that we have implemented here over the last few months in a couple of other sectors in our metro markets relative to some owner-occupied commercial real estate promotions that sort of tie into treasury management, and operating lines of credit. We've also been working on some multifamily options and also some pieces that are in some of our larger markets in some specialty areas that we're considering as well.

So primarily centered in commercial and C&I lending areas in our metro markets, Janet.

Operator

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

Terry McEvoy -- Stephens Inc. -- Analyst

Thanks. Good morning. Just a couple of questions on expenses. Last quarter, was there any impact on the expense line from the trust assets in Colorado? And then in the press release, you mentioned the recruiting expenses.

Was that connected to the CEO search? Or was that related to the build-out of the commercial lending teams that you've discussed in the past?

Peter Chapman -- Chief Financial Officer

Yes. More the going backwards, the recruiting expenses more on the CEO search. So, definitely, that was effective there. And then on the expense side of things, there was the trust in there for the full quarter this quarter in May, Terry.

And I think when we spoke about it last quarter, I think it was $300,000 to $400,000 in expenses, I said a quarter were embedded in there as a result of that acquisition.

Terry McEvoy -- Stephens Inc. -- Analyst

OK. And then just one last question just on credit. You took the $26 million provision three quarters ago. And I'm just looking at substandard loans up, call it, 35%.

And what I'm hearing today is that reserve-to-loan ratio, which is relatively flat from when you took that larger provision, you still feel comfortable with that provision looking out over the next four quarters based on improving trends in dairy, breakeven in grain and some of the other kind of positives you've run through as it relates to the healthier loan portfolio?

Karlyn Knieriem -- Chief Risk Officer

Yes, this is Karlyn. I would say that's correct. As I mentioned, we've conducted some pretty deep dives into many of these segments, and we feel comfortable with our provisioning at this point in time at the portfolio.

Terry McEvoy -- Stephens Inc. -- Analyst

That's it. Thank you.

Karlyn Knieriem -- Chief Risk Officer

Thank you.

Operator

[Operator signoff]

Duration: 36 minutes

Call participants:

Ken Karels -- Chairperson, President, and Chief Executive Officer

Peter Chapman -- Chief Financial Officer

Doug Bass -- Chief Operating Officer

Karlyn Knieriem -- Chief Risk Officer

Jeff Rulis -- D.A. Davidson -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

David Long -- Raymond James -- Analyst

Damon DelMonte -- KBW -- Analyst

Janet Lee -- J.P. Morgan -- Analyst

Terry McEvoy -- Stephens Inc. -- Analyst

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