Good day, and welcome to the Great Western Bancorp Fourth Quarter and Full Fiscal Year 2020 Earnings Announcement and Call. All participants will be in a 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 like now to turn the conference over to Seth Artz, Head of Investor Relations. Please go ahead.

Thank you, and good morning. Taking us through our presentation this morning, we have Mark Borrecco, President and Chief Executive Officer; Peter Chapman, Chief Financial Officer; and Steve Yose, Chief Credit Officer. Also, here with us to support our Q&A session after our prepared remarks, we have Doug Bass, our Chief Operating Officer; and Karlyn Knieriem, our Chief Risk Officer. As usual, we have a prepared presentation for today’s earnings review, which is available for webcast on our – and on our website at greatwesternbank.com. Before getting started, we would like to remind you that today’s presentation may contain forward-looking statements that are subject to certain risks and uncertainty that could cause the company’s actual future results to materially differ from those discussed. This is especially true in the current environment with continued uncertainty stemming from the COVID-19 pandemic. Please refer to the forward-looking statement disclosures contained in the earnings materials on the website, along with periodic SEC filings for a full outline of the company’s risk factors. Additionally, any non-GAAP financial measures discussed in the conference call 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. I would now like to turn the conference over to Great Western Bancorp’s President and Chief Executive Officer, Mark Borrecco. Mark, please go ahead.

Good morning, Seth. Thank you, and thank you, everyone, for joining us. I hope that you, your family, your co-workers are doing well and are staying healthy. Before we discuss results for the quarter, I would like to take a moment and acknowledge that this will be our last call with Doug Bass, our Chief Operating Officer, who recently announced he will be retiring at the end of December. We are grateful for Doug’s 11 years with the Bank and his many contributions. I also appreciate his support as I’ve transitioned into the company over the past seven months. Doug, thank you for all that you have done for Great Western and we wish you all the best in your retirement. A quick update on our markets and operating environment. All of our branches are essentially reopened and we are following CDC guidelines and internal protocol, including temporary closure and cleaning for branches when we become aware of a close contact. We remain cautiously optimistic about our footprint. While COVID cases are on the rise, our tracking continues to indicate market activity is faring better than the majority of other U.S. markets. Now for an update on our key initiatives and developments from the quarter on Slide 2. We’ve talked about bolstering our credit risk management. Our external loan review completed by Protiviti resulted in minimal nonmaterial findings. As a reminder, the scope for this review included 99% of loans over $5 million in our high-risk segments, along with other smaller credits to ensure that they are accurately risk-rated and underwritten to appropriate standards. I’m very pleased with the outcome. Steve will provide additional comments later in the presentation, but for me the key takeaways are less than 1% of the loans reviewed had a downgrade from past to criticized. We now have a level of assurance that our credit team, along with our first-line bankers, are appropriately leveraging our new risk-rating system. In addition, we have been diligently managing our COVID-related deferrals. At the peak, loan deferrals for Great Western Bank were just over 17.7% of total loans, excluding PPP. As of October 22, 2020, our loans on deferral has declined to 1.98% of total loans, excluding PPP. To improve ongoing credit monitoring, we have decided to outsource our loan review function to a third-party. This new relationship will elevate the level of independent review and improve our ability to have early detection of any material credit issues. Conservative and measured actions. Our previous conservative decisions have contributed to our improving capital ratios, which Pete will discuss later on. Loan loss reserves provide a healthy coverage of 2.02% of total loans, excluding PPP, and Pete will share our day one estimates for our CECL adoption later on. We did not fill positions and we reduced FTE, resulting in an ongoing cost savings of $4 million a year. NIM contracted only 7 basis points for the quarter. In addition, we paid off $205 million of our FHLB borrowings to improve our balance sheet and earnings profile moving forward. Organizationally, we continue to fill a number of important senior roles. We announced last quarter the importance of improving our treasury management, client experience and performance. We are delighted to have hired Amy Johnson to lead this enhanced function. Amy comes to Great Western with over 20 years of experience with a large financial institution in the Midwest, where she led multi-region treasury management and sales teams. We implemented a centralized facilities function and hired a new Head of Facilities. We are currently doing a thorough review of all of our branch and office locations. Small business center of excellence. As we discussed previously, historically, we have originated and decisioned all commercial credits, regardless of size, using the same process. To support our key initiative to reinvent our small business segment, we have selected Fundation as our third-party loan origination provider. We expect to launch our pilot by March 1 of 2021. I’m appreciative at how the team has come together to support our modified agenda. I’m also pleased about our ability to attract high caliber new employees during this period of volatility. We are clearly making progress on the credit front, and I’m excited about what lies ahead for us in 2021. Now for a review of our financial results, I will turn the call over to our Chief Financial Officer, Pete Chapman. Pete?

Thanks, Mark, and good morning, everybody. Looking at Slide 3, you’ll see we had a number of significant items included within net income this quarter. Net income was $11 million, an increase from $5.5 million in the prior quarter and earnings before taxes, provision and fair value credit charges that do not flow through the provision were $52 million for the quarter. During the quarter, the payoffs with FHLB borrowing, which had a cost of 2.75% resulted in a $7.6 million prepayment cost through expenses, which was offset with a $7.9 million realized gain from the sale of securities through non-interest income. This is forecasted to pick up $2 million in pre-tax earnings in fiscal 2021. Also, within non-interest income, you can see, we realized certain credit-related charges related to the loan portfolio accounted to fair value, which totaled $31 million. Including an $8 million charge from the sale of the classified healthcare loan, a $4.2 million charge for credit mark and a break fee for credit moves to substandard and also a $12.5 million loss history adjustment to increase the credit mark on the fair value loan portfolio. Finally, other expense items realized in the quarter included $2 million expense related to the completion of an FDIC loss-sharing agreement we entered into in 2010. Additionally, we recognized a write-down of $4 million on an OREO asset and also incurred approximately $1.8 million in costs related to severance and consulting costs. Also, on Slide 3, you can see, we provided comparative this year’s results as there were some unique and significant items through the year. Credit-related charges include $71 million cost related to the impact from COVID-19 in the March quarter and certain other reserve items. Non-interest expenses included measured actions taken in the past three quarters, which further improved the Bank’s position. And despite lower interest rates for much of the fiscal year, net revenue generation showed resilience through the fiscal year. Now, looking closer at revenue on Slide 4. Net interest income was $108 million, which was flat with the prior quarter. And adjusted NIM, as Mark has mentioned, only contracted 7 basis points to 3.4%. Interest expense decreased $2.7 million, including a 9 basis point decrease in deposit yields to 28 basis points as we’re successful in further reducing high-cost deposits. Interest income also decreased by $3 million due to a decrease in securities and loan yields given the environment. Looking at Slide 5, our loan portfolio yield continues to be supported by $4.6 billion of fixed rate loans, yielding 4.4%, $2 billion of loans that have reached inflows averaging 4.45% and $1 billion in variable loans that repriced beyond 90 days that are currently yielding 4.51%. Together, these items make up more than 80% of our loan balance, excluding the PPP loans. Also, within net interest income was a combination of tripe – Payment Protection Program interest and fee income for the quarter of $6.2 million. Remaining PPP fee income to be recognized just over $60 million over the life of the program. Now looking at Slide 6, total non-interest income resulted in a net loss of $4 million for the quarter. Excluding the unique items related to the fair value loan accounting and securities gain, underlying non-interest income was $17.2 million for the quarter, up from $14.1 million in the prior quarter. We saw a rebound in deposit transaction activity, which contributed to a $1.7 million increase in service charges. Mortgage revenue was very strong at $3.8 million, up 56% from the prior quarter, as our origination activity and processing teams were really effective in supporting the strong demand in originations, both by the low interest rate environment and also seasonal demand in the Midwest. Wealth management revenue was $2.9 million, up slightly from the prior quarter and full-year income for that business increased 32%, or $2.9 million from the prior, which was a great result. Non-interest expenses were elevated this quarter at $75 million. And adjusting for the non-recurring items I outlined earlier on Slide 3, underlying expenses were approximately $62 million for the quarter. This compares to $67 million of total expenses in the prior quarter, which also included about $6 million in non-recurring items. Loan loss provision expense was $16.9 million, a decrease of $4.8 million from the prior quarter. The provision this quarter was largely a net result of new specific provisions on newly classified loans identified during the quarter, which Steve will touch on later, along with a portion that related to current period charge-offs, which increased their loss history. Moving to Slide 8, we can see that loan loss reserves, excluding PPP loans, increased to 1.6% from 1.54% in the prior quarter. In addition, we have a $30.5 million credit mark, that is 4.66% of our $655 million portfolio of long-term loans accounted as fair value, and we also have an $11.6 million mark provided on our $315 million of acquired loans. Collectively, these represent total credit coverage of 2.02%, excluding our PPA loans. Importantly, we moved from the incurred loss method to the adoption of CECL as of 1 October, the beginning of our new fiscal year in 2021. We’re finalizing a day one impact as it stands, we estimate a 70% to 90% increase in our reserve with a total coverage ratio estimated at somewhere between 3.1% and 3.5% on the adoption of CECL. This is an increase from our prior estimate and generally reflects an overlay of expected loss assumptions on the exposures we have to industry such as accommodation that may be more impacted by COVID as this pandemic continues. On Slide 9, we see current capital ratios well in excess of internal thresholds, which are about regulatory levels also. Total capital increased 4 basis points to 13.3%, Tier 1 capital increased 5 basis points to 11.8% and common equity Tier 1 increased to 11%. A tangible common equity ratio also improved to 9.2% and 9.70% excluding the impact of those PPP loans. Tangible book value per share also improved to $21.03, up from $20.52 in the prior year. We continue to believe it’s prudent to preserve capital in the current environment. And consequently, we played a dividend of $0.01 per share for the quarter ended September 30, 2020. Now, looking at deposits. Deposits decreased slightly to $11 billion, while average balances were actually up $206 million in the prior quarter. Balances from PPP proceeds and consumer stimulus receipts in the prior quarter largely remain intact as customers are showing a tendency to preserve liquidity. We’ve been successful in improving our mix with a reduction in the average time deposits of $60 million and also an increase in non-interest-bearing deposits of $158 million during the quarter. Looking at loans. Loans at the end of the period were $10.1 billion, which includes $727 or PPP loans. End-of-period balances were down $240 million, while the average balances were relatively flat with the prior quarter. The decline in the loan balance was driven by an exit of large commercial non-real estate facility and also some progress in deleveraging some non-preferred sectors within agriculture and an acceleration of paydowns in commercial and also consumer HELOC balances during the quarter. With that, I’ll now hand over to our Chief Credit Officer, Steve Yose, to provide an update on credit initiatives, asset quality metrics and key segments of that portfolio. So over to your, Steve.

Thank you, Pete. As Mark has repeatedly said, improving our asset quality is the primary focus. And I would like to give you an update on the progress made in the quarter, along with reviewing key asset quality results. Looking at Slide 12, we’ve outlined key initiatives sticking within the framework of timely and accurate risk ratings, focused risk-based credit decisioning and more specialized credit administration. As Mark noted earlier, last quarter we said we were proceeding with an independent review conducted by a third-party of critical areas within our loan portfolio, and I’m pleased to share that it was completed by the September target. As previously noted, less than 1% of the loans reviewed required a downgrade from past to criticized. Those have been corrected. And at this stage, the exercise helps to provide a level of assurance on the state of our portfolio as we take steps to improve asset quality. We’ve been discussing our new risk rating system for a few quarters now, but it is now fully integrated as of October 1, following what was a thorough development and training exercise. The added granularity of the scale and the addition of a Special Mention in between Watch and substandard, combined with Moody’s Analytics modeling, is helping us identify more effective early warning indicators, so we can better prioritize our actions and manage the portfolio. As an example, we use the model to rescore the hotel portfolio with COVID conditions, which allowed us to risk rate with greater objectivity. We continue taking steps to help us become more risk-focused and create a more unified credit risk culture as an organization. Our new and enhanced credit policy went into effect August 1, as – and is providing a risk-focused approval process that requires further approval elevation for higher-risk or specialized industries, a risk-based hold limit that leverages the new risk rating system and focused on more accountable credit decisioning process. The key to driving the culture is having the right leadership, and I’m very happy to now have my senior team fully in place. We have hired an experienced real estate appraisal manager, Tom Mueller, [ph] in September

and Travis Rodock joined us in a critical role as Senior Ag Credit Officer, to support our modified ag business line. While these key strategies have given us lift in focus, I’m even more pleased as a new Chief Credit Officer, where we have made significant steps in improving the credit risk culture of the organization, as most management experts will say, including the late Peter Drucker, culture almost always trumps strategy. I have been very pleased at how our frontline and other employees have embraced our changes and our strategies to provide a significant cultural shift. Our commercial workout team continue to build momentum in the quarter. We have added resources and skill set to bolster that team, which is starting to drive deleveraging and other tangible workout resolutions with customers. We completed the sale of a large non-accrual loan in a clean and efficient manner, which helped us get perspective on the market and the viability going forward. We’re being deliberate and strategic and our actions with credit risk management. Some improvements you will see immediately and some will evolve over time. What we are doing fits with the overall strategy Mark touched on earlier, and I’m looking forward to them, in fact, they will have on this organization and on asset quality. As we turn to Slide 13, I have some further details on the third-party loan review. The total loans reviewed this quarter were $5.4 billion, which included $4 billion that went through the external review. The reviews covered 10 different segments, including the hotel portfolio. As I noted earlier, just five relationships worth $42 million in commitments, were downgraded from past to criticize, representing less than 1% of the loans reviewed. No non-accrual or charge-off recommendations came from the reviews. Mark touched on deferrals earlier and you will see our levels have subsided to just under 2% of total loans, excluding PPP. Looking at the top segments, deferrals linked to hotels were $167 million, which was 14% of the hotel portfolio loans. Arts, entertainment and recreation reduced to $12 million and make up 10% of that portfolio. Our balance is in a good spot and we’re going to remain diligent in this effort as progress through the coming months with COVID uncertainty. On Slide 14, we have our asset quality metrics. Net charge-offs for the year were 0.40% of average total loans, or $39 million, which includes $15 million for this recent quarter. Loans graded substandard or worse increased to $770 million and non-accrual loans increased to $325 million. The substandard increase was largely related to two larger ag relationships that have not been able to rebound and the number of hotel relationships for approximately $60 million that were downgraded through our risk rating assessment, offset with the sale of a healthcare facility and a charged-off dairy relationship. The increase to non-accruals relates to two large ag relationships associated with the dairy industry, who have not been able to improve their financial position. Watch loans were $983 million for the quarter, an increase of $506 million as a result of $230 million in the hotel and resort space, $109 million in healthcare and $75 million in other CRE relationships moving to Watch in the ongoing rating system – in the outgoing rating system, reflecting the current operating environment. The Watch category will be changed for the December 2020 quarter as the lowest level of past category, with the remainder replaced with a Special Mention category to better align to peers. You’ll see on Slide 14, we have a summary showing the rating of our loan portfolio under the new risk rating system, which formally began October 1. Out of our current legacy Watch portfolio, we have $503 million rated as Special Mention in the new system, along with $770 million as substandard and worse. While the metrics moved unfavorably again this quarter, I’m actually encouraged that how diligent we have been in using our new credit policy to identify early indicators and conclude accurate and timely risk ratings. Looking closer at the loan portfolio, I’m generally comfortable with the diversification we have. However, there are a few key segments that I want to make sure we are managing effectively. On Slide 15, we have key information about our hotel portfolio, which is obviously being impacted by the COVID pandemic. The concentration well within our footprint and most of the non-footprint projects are linked to any footprint customers who are seasoned at developing projects. The concentration is well diversified across 130 different cities, with most and small to mid-sized locations at 86% carry a franchise flag. The biggest change this quarter is reflected in our risk rating migration, following substantial reviews and rescoring in the quarter. Substandard loans in this sector rose from $26 million to $88 million; Special Mention rose to $175 million, as we adopted the new risk rating system; a $910 million remained as past rated. The diversity of our ag portfolio remains a key characteristic of the book. From a grain perspective, the USDA reported harvest is progressing very well in the national average of 60%. And our main footprint, South Dakota and Iowa, are tracking better at 64% and 65%, respectively, and Nebraska is very close to 58%. Soybean harvest is also progressing well with a national average of 75%. South Dakota, Iowa and Nebraska are all far ahead of this pace ranging from 90% to 92%. Milk prices have subsided somewhat from very high levels in the summer, as the September Class III milk price averaged $16.43, with forward levels at or above this level. We continue to monitor the healthcare portfolio as there are mixed signals as to what is happening from an industry perspective. The few problem loans we have had with healthcare-related loans have been situational and not linked to any broad COVID issues. There is balance in the portfolio across senior care, assisted-living and retirement communities, skilled nursing, hospitals and other healthcare services and social assistance. We have about 45 relationships in senior housing, 45 in skilled nursing and 32 in hospitals, which make it more manageable to engage with customers and identify early indicators. That wraps up my commentary – that wraps up my credit commentary. And I’ll now turn it back to Mark.

Thanks, Steve. Improving our asset quality remains a major focus for us. And with Steve’s support and guidance and with a thorough third-party review of our loan portfolio complete, we continue to make progress on addressing our credit quality issues and derisking the balance sheet. Our NIM continues to hold up well in this low rate environment. And as we begin our new fiscal year, I’m excited about how our small business and other initiatives will accelerate our performance going forward. Operator, with that, let’s now move to the question-and-answer section.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Yes, thanks. Good morning.

Good morning, Jeff.

Good morning.

First question on the expenses. Peter, it’s – in terms of the – look, I guess, it starts with the – what would you deem is the core balance in the quarter, given all the puts and takes, as well as kind of projecting what you think that path is with if we bake in some of these – the severance and the things that kind of the cost savings, the LPO and the reduction in employees, what does that drive that going forward?

In my comments, Jeff, I said about $62 million was – which was a big underlying sort of run rate expenses for the quarter. And I think there was a slight uptick from there is pretty good for the next quarter. We’ve got some cost saves that was baked in, obviously, but we’ll use that to fund some growth. Mark mentioned the initiatives we’ve got around the small business piece, which will be a good one for us and some other infrastructure we want to invest in. But we should be able to maintain sort of around there, if not just up a little bit from there, Jeff.

Okay. So the – just to clarify, the expected annual cost savings on the FTE reduction that’s already baked into that $62 million, or that takes place over the course of the next quarter, I’m not following, sorry about that?

Yes, yes, it is. Yep. So we’re talking about $62 million to $63 million, $64 million for next quarter is sort of where forecast is, Jeff, for next quarter.

Got it. Okay. Thank you.

No problem

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

Hi, thanks. Good morning. I guess, just my first question, the commentary on the external loan review, minimal nonmaterial findings is kind of the bullet point right on the first slide there. And I guess, just as an outsider, I just look at substandard loans up and some of the noise within the hedging or the fair value marks and some of the other credit metrics moving in the kind of in the wrong direction to be blunt. I’m just trying to get a sense of what’s behind the nonmaterial, kind of pleased with the findings versus maybe some of the trends, again, as an outsider of that, that we’re looking at this morning?

Well, I guess, from my perspective, we, as I mentioned, are talking about our focus on ag or risk rating. So as a credit and frontline, we focus very closely on looking at the portfolio. So the outside review was really to confirm, as if we’re looking at those correctly and if we are really to look under the hood to make sure we’re comfortable with our risk ratings, which it indicated that we are. But the increase in risk ratings is driven primarily from us, as I mentioned, rescoring our portfolio. If you look at the bulk of the impact at risk rating changes, especially in the Watch and Special Mention and to a degree and substandard is really driven by our hospitality section, which is very natural when you consider the size of our hospitality portfolio. So what really drove our asset quality change was really what I mentioned, the cultural change, as well as the way we’re looking at trying to be very conservative and how we’re reviewing the hospitality sector and not driven, and that’s why we emphasize that by any third-party review. The third-party review confirmed, I believe, that we are doing the right things, but it did not drive our asset quality changes.

Thanks. I appreciate that. And then, Mark, maybe as a follow-up from just a strategic perspective, you closed the loan production office, hired some individuals, rolled out kind of SBA. Where are you in kind of the structure of the bank and making changes? Do you think that’s largely behind the company? Or are there more to come?

I would say that most of it is behind the company. I would say that the one area, as I mentioned at the beginning of the call with Doug’s announcement of his retirement, the one area that I’m going to get much closer to is really our first-line, our commercial, retail, treasury, wealth, mortgage, ag business lines. And so for the next six months, those business lines will report directly to me and they’ll give me a chance to better acquaint myself with those individuals, understand our market, our opportunities, and then decide what is the appropriate organizational structure for the bank moving forward. So I think in other areas, we’re in a really good spot. The one area that we’ll continue to focus on will be that first-line or our business lines as Doug retires and then that businesses or those businesses report to me for the roughly six months for me to better understand.

That’s great. Thank you both. I appreciate it.

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

Good morning, everyone.

Good morning.

Just want to focus on the margin here. It seems like there should be a benefit from the FHLB prepays and still some opportunities on the funding side as well. And I guess, it also kind of ties in with – is there a level that you expect the size of the balance sheet to be going forward in the side of the securities book overall, I guess, they’re kind of like the size of that? And then what are you seeing with perspective lower rate versus the ability to lower funding costs further? I mean, how should the margin and NII shake out from this 3.51% margin and $106 million of NII?

Yes. Look, it’ll be interesting in a couple of quarters. Around the balance sheet, I’ll say comment, so I’ll make it just excluding PPP. Obviously, depending on the timing of when relief comes through there, that could change the shape of the balance sheet pretty significantly. But certainly, here, we’re seeing good funding in this environment. Certainly, we’re not seeing as many loan opportunities. So if anything from a mix perspective, we may move more into securities and loans over the course of the period. But certainly, the focus for us is number one, just any more high-cost deposits that we have will continue to run those down to help with the funding costs. So there’s a little bit of room to move there, maybe move into a little bit more in securities. So from a mix perspective, we may see margin drift down a little bit more from where we are now, but we think it’s manageable just given where the loan portfolio is.

Okay. Gotcha. Are there any other higher-cost borrowing that you could prepay or is this still the last bit of it?

No, that was the main one from a borrowing perspective. So now, it’s just really just working through the – obviously, as time deposits roll through, we’ll continue to reprice those down. We’ve got some money market that we can move down a little bit as well. So more on the deposit side and the funding side now.

Okay. Thank you so much.

No problem.

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

Hey, thanks. Good morning, everyone.

Good morning.

Good morning.

Just back to credit, what’s the message you’re trying to send to us on credit? I understand the loan grading and all the changes that you’ve made. And I think you probably feel better prospectively in terms of you look at things. But do you see things as better, worse, stable? What’s the message you want to send to us on credit?

I would say, our core portfolio outside of hospitality, I would say, stable to improving as far as the outlook. As you look at agribusiness, all the indicators are positive. If you look at all of the commodity pricing over the next six months, most of the USDA and other reports show positive. So I would see hopeful improvement in our agribusiness space. From the Chief Credit Officer perspective, I do see uncertainty in our hospitality portfolio. That’s just an area we’re trying to focus, look at closely. We’re reviewing constantly. We’re trying to make sure that we have our arms around it. We’re trying to see what we can do to carefully reduce that portfolio. So strategically, going forward, our hope is to continue to be a strong community bank within our markets as market precise a small business. We want to grow there. We want to grow and be open for business in the commercial space. We are going to continue to focus on how we can derisk our portfolio in the hospitality and to a smaller degree in assisted care space, and that is really our focus. So I’m overly, in the long-term, optimistic about us from an asset quality perspective. But in the short-term, we have significant asset quality challenges within the hospitality space and we are just watching that, I would say, daily to see how we can continue to work through those challenging part of our portfolio.

Okay. Okay. And then the other thing that kind of, I think ironically is an issue in your numbers is the increase in non-performing loans each quarter. And I guess, it’s probably an impossible question, but do you have a gut feeling when you think the non-performing loans can start coming down? It sounds like you moved some this quarter and backfilled, but any thought you have on that would be very helpful?

Well, once again, the uncertainty I talked about gives me a little bit of pause. However, this month, we see some positive movement in non-accrual, so we’ll have to see how this quarter goes. But I’m hopeful that we’re a stable place, but we’re just watching that closely. We just – I just can’t say which way we’re going to go, but I’m hopeful at the moment.

Okay. And then if I can squeeze in one more on CECL, maybe it’s for you, Peter, you, Steve. But the message is day one step up in the low 3% range, you phase in the regulatory impact, that essentially caps at all is the message that the provision can start to come down because of that, because you’ve captured everything, or is there a different message you want to send them on the provision outlook? Thank you.

Look, it obviously depends on the timing of Steve’s comments around non-performing assets, Jon. But based on where we are now, obviously, CECL gives you the sort of the full look over the life of the portfolio. So if the environment stays as is and doesn’t worsen, that’s what we would hope. But obviously, we need to roll that forward 90 days to see what happens here over the next 90 days.

Yes. Okay. All right. Thanks for the help.

Thanks.

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

Hey, good morning, guys. I hope everybody is doing well today.

Good morning, Damon.

So just kind of a follow-up on credit. I think, you guys had mentioned that you had sold a larger loan in the secondary market and it worked out favorably. What are your thoughts on trying to take a big step forward and derisk the portfolio with the hospitality loans that, that are giving you guys some issues? Is there any thought about trying to do a bulk sale?

We are looking at every opportunity in our hospitality portfolio. This is – the other thing we’ve learned is, with the uncertainty with the hotel, you can also maximize your losses if you’re not careful, if you do a bulk sale. If you look at our hospitality space, we do not have a large level of non-accrual or non-performing loans. We do not have a large level of specific allocations. So we are definitely looking at all options within our hospitality space and we have looked at places here and there, but we have not seen a bulk sale to be in our best interest at the moment from the – just the view of the market.

Got it. Okay, thanks. And if I could just squeeze in one more on just kind of the outlook for loan growth, it was down 9% this quarter. Do you expect it to kind of trend lower? But what kind of case of a quarterly decline could we think about for the loans? Thank you.

A lot depends on how we go with the derisking that Steve just talked about, Damon. So certainly, if that works through, I would still expect to see a slight contraction here for the next quarter just based on sort of current outlook.

Okay. Thank you very much.

Thanks.

Our next question comes from Janet Lee with JPMorgan. Please go ahead.

Good morning.

Good morning.

My first question just following up on hospitality and Moody’s rescore, besides the risk rating adjustment by the third-party, do you guys perceive any change in – changes in the rest on that portfolio on a fundamental level versus what you saw in the second quarter?

Well, if you notice our big increases and it wasn’t driven by the third-party, it was driven by internally by our own frontline and second-line review, it wasn’t really driven by the third-party. We have them look at it to confirm. But we did have a higher level, taking prudent measures in Special Mention and Watch category. And it really just – and we feel good about our footprint in the hospitality space compared to probably peers and other markets you could be in. On the other hand, just the COVID uncertainty makes that difficult for me to answer, I would anticipate higher levels of classified loans over time to a degree. And we recognize that in our CECL calculations and in the way we look at the allowance for loan losses and our ACL going forward. But we are, I would say, taking measured steps. But there is uncertainty, as I said earlier, in the hospitality space. So we don’t see any significant changes from what we’ve – what we focused in on. That’s why we move those to Special Mention and to Watch. But we are, like I said earlier, we’re just looking at that. I would say, every day monitoring it monthly, monitoring it daily, it’s just one of those things we’ll have to work through and really COVID impacts our portfolio more than anything else.

And last quarter, you pointed to the expected improvement in asset quality metrics in the ag portfolio. Is this still the case? And the migration we saw in the dairy and some other ag portfolio in the quarter, would you describe this as like one-off split?

I would say, yes, what you saw in the ag space is one-off, it was a couple of relationships that had already been recognized as classified or substandard loans that ended up moving to non-accrual, the renewed cases. We have been careful on how quickly we upgraded our portfolios. We want to recognize that we’ve had two or three quarters of consistent cash flows. So our hope is that, those stay consistent. We’ll see improvement there, but we’re just taking prudent steps on how we’re looking at that. But yes, we don’t see any, like I say, deterioration in our portfolio to a significant degree of going into this quarter and the next quarter.

If you don’t mind if I can squeeze in just one more. The fair value mark on loans, obviously, that line item is very volatile and hard to predict this quarter. That included about $12 million charge for credit risk on the portfolio based on the updated default risk assumptions. Is this fair to assume that as credit risks rise, there will be increased losses coming from this line item just like provision, except that it flows through the non-interest income on the P&L, the other side of the P&L? Or how should I think about the driver of that going forward?

Yes, good question. So there’s a couple of things that impacted that this quarter. One was about an $8 million charge on the disposal of that healthcare portfolio, Janet. So, we’d hope unless we’re exiting other loans at a significant discount that’s elevated. And then also that credit charge we mentioned in relation to sort of lost history, I’d see that as a significant step up for this quarter that I wouldn’t expect to see next quarter as well. So that was a significant adjustment that we made this quarter that I wouldn’t expect something of that magnitude next quarter, for example.

Okay. All right. Thank you.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Borrecco, CEO, for any closing remarks.

Okay. Thank you, operator. Thank you all for joining us today. Again, if you have any follow-up questions, please feel free to reach out. Make sure you stay safe and have a great day. Thank you so much.

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