GWB - Great Western Bancorp Inc. Announces 13% Increase in EPS in Fiscal Year 2019 Second Quarter Financial Results; Raises Dividend

Great Western Bancorp, Inc. (NYSE: GWB) today reported net income of $44.5 million, or $0.78 per diluted share, for the second quarter of fiscal year 2019, compared to net income of $45.8 million, or $0.79 per diluted share, for the first quarter of fiscal year 2019 and $40.5 million, or $0.69 per diluted share, for the second quarter of fiscal year 2018, a 13.0% increase.

"We are pleased with the progress we have made this quarter. Our earnings increased over the prior year, and our return on assets and equity remained strong," said Ken Karels, Chief Executive Officer and Chairperson of the Board. "In addition, asset quality metrics continue to trend in line with expectations during the quarter and our agriculture loan portfolio remaining steady."

Net Interest Income and Net Interest Margin²

Net interest income was $104.9 million for the quarter, a decrease of $1.5 million, or 1.4%. The decrease resulted from higher interest expense associated with the cost of deposits, partially offset by a higher yield on loans and investments.

Net interest margin was 3.75% and 3.81%, respectively, for the quarters ended March 31, 2019 and December 31, 2018. Adjusted net interest margin¹, which adjusts for the realized gain (loss) on interest rate swaps, was 3.76% and 3.81%, respectively, for the same periods. The lower margins were primarily driven by the cost of deposits, which increased 13 basis points to 1.08%, partially offset by the yield on loans, which increased 6 basis points to 5.23%, and the yield on the investment portfolio, which increased 8 basis points to 2.52%. In addition, an increase in balance sheet liquidity and reversal of interest income on nonaccrual loans reduced adjusted net interest margin¹ by 3 basis points during the quarter.

Total loans outstanding were $9.77 billion as of March 31, 2019, a marginal increase from the prior quarter, and growth of $355.0 million, or 3.8%, for fiscal year-to-date. During the quarter the commercial real estate ("CRE") category of the portfolio grew by $139.5 million, or 2.8%, mainly in the non-owner-occupied segment, partially offset by a reduction of $112.9 million, or 5.1%, in the agriculture category of the portfolio, which reflected the seasonal draws that were repaid in the second quarter of 2019 and one relationship moving into other repossessed property.

Total deposits grew to $10.47 billion as of March 31, 2019, an increase of $355.1 million, or 3.5%, for the quarter and $734.9 million, or 7.6%, for fiscal year-to-date. During the quarter, deposit inflows were driven by seasonal inflows. Interest-bearing deposits were $8.64 billion, a 5.0% increase for the quarter, and noninterest-bearing deposits were $1.82 billion, a 2.9% decrease for the quarter. FHLB and other borrowings decreased by $135.0 million, or 32.9%, for the quarter.

¹ This is a non-GAAP financial measure management believes is helpful to understanding trends in the business that may not be fully apparent based only on the most comparable GAAP financial measure. Further information on this financial measure and a reconciliation to the most comparable GAAP financial measure is provided at the end of this release.

² All references to net interest income and net interest margin are presented on a fully-tax equivalent basis unless otherwise noted.

Provision for Loan and Lease Losses and Asset Quality

Provision for loan and lease losses was $7.7 million for the quarter, an increase of $2.5 million. Net charge-offs for the quarter were $5.9 million, or 0.25% of average total loans on an annualized basis, with the majority of net charge-offs concentrated in the agriculture segment of the loan portfolio. The ratio of allowance for loan and lease losses ("ALLL") to total loans increased to 0.70% as of March 31, 2019 from 0.68% as of the prior quarter.

Included within total loans are approximately $835.8 million of loans for which management has elected the fair value option. These loans are excluded from the ALLL process, but management has estimated that approximately $6.4 million of the fair value adjustment for these loans relates to credit risk, or 0.07% of total loans. Finally, total purchase discount remaining on all acquired loans equates to 0.16% of total loans.

Nonaccrual loans were $121.6 million as of March 31, 2019, representing a decrease of $17.3 million for the quarter. Loans graded "Watch" decreased $20.5 million, or 6.4%, for the quarter, while loans graded "Substandard" increased $6.4 million, or 2.5%. Total other repossessed property balances were $32.5 million as of March 31, 2019, an increase of $10.2 million, or 46.0%, due to one relationship moving into other repossessed property during the quarter. In March and early April 2019 there were isolated areas of flooding reported within parts of the Midwest in which certain of our agricultural borrowers conduct their operations. We have reviewed loan exposures in these areas as part of our normal quarterly review process and at this time have not identified a material decline in asset quality or losses associated with these loans. We will continue to monitor our loans in these flood affected areas.

Total credit-related charges increased compared to the comparable quarter and the first six months of fiscal year 2018 and decreased compared to the previous quarter . A summary of total credit-related charges incurred during the current and comparable six month periods and current, prior and comparable quarters is presented below:

Noninterest Income

Noninterest income was $18.2 million, an increase of $1.5 million, or 9.0%, for the quarter. Included within noninterest income is the net change in fair value of loans for which the Company has elected the fair value option and the net realized and unrealized gain (loss) of the related derivatives which generated a $2.1 million favorable change over the prior quarter. This was partially offset by a $1.5 million decrease in service charges and other fees. The decrease in service charges and other fees was predominately due to a decrease in net overdraft and non-sufficient funds fee income.

Noninterest Expense

Total noninterest expense was $56.6 million, a decrease of $0.5 million, or 0.9%, for the quarter. The majority of the decrease was driven by a $2.7 million decrease in net loss on repossessed property and other related expenses, partially offset by an increase of $0.7 million in data processing and communication expense and an increase of $0.7 million in professional fees.

The efficiency ratio¹ was 45.6% for the quarter, a decrease from 46.1%.

Provision for Income Taxes

The provision for income taxes for the quarter ended March 31, 2019 was $12.9 million, reflecting an effective tax rate of 22.5%, compared to an effective tax rate of 22.8%.

Capital

Tier 1 and total capital ratios were 11.4% and 12.4%, respectively, as of March 31, 2019, compared to 11.1% and 12.1%. The common equity tier 1 capital ratio and tier 1 leverage ratio were 10.7% and 10.2%, respectively, as of March 31, 2019 compared to 10.4% and 10.1%. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized."

On April 25, 2019, the Company’s Board of Directors declared a dividend of $0.30 per common share payable on May 24, 2019 to stockholders of record as of close of business on May 10, 2019. This represents an increase of 20% compared to the most recent quarterly dividend of $0.25 per common share. The aggregate dividend payment will be approximately $17.1 million.

Business Outlook

"We are positive about the second half of our fiscal year and remain confident that loan pipelines support our full year forecast of mid single digit loan growth," added Karels. "The current yield curve provides some challenge to new loan pricing, but we will continue to balance this with pursuing quality credits with strong underwriting criteria and managing our cost of deposits."

Conference Call

Great Western Bancorp, Inc. will host a conference call to discuss its financial results for the second quarter of fiscal year 2019 on Thursday, April 25, 2019 at 7:30 AM (CT). The call can be accessed by dialing (855) 238-8837 approximately 10 minutes prior to the start time. Please ask to be joined into the Great Western Bancorp, Inc. (GWB) call. International callers should dial (412) 542-4114. The call will also be broadcast live over the Internet and can be accessed in the Investor Relations section of Great Western’s website at www.greatwesternbank.com. A replay will be available beginning one hour following the conference call and ending on May 9, 2019. To access the replay, dial (877) 344-7529 (U.S.) and use conference ID 10130047. International callers should dial (412) 317-0088 and enter the same conference ID number.

About Great Western Bancorp, Inc.

Great Western Bancorp, Inc. is the holding company for Great Western Bank, a full-service regional bank focused on relationship-based business and agribusiness banking. Great Western Bank offers small and mid-sized businesses a focused suite of financial products and a range of deposit and loan products to retail customers through several channels, including the branch network, online banking system, mobile banking applications and customer care centers. The bank services its customers through more than 170 branches in nine states: Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. To learn more about Great Western Bank visit www.greatwesternbank.com.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements about Great Western Bancorp, Inc.’s expectations, beliefs, plans, strategies, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “views,” “intends” and similar words or phrases. In particular, the statements included in this press release concerning Great Western Bancorp, Inc.’s expected performance and strategy, the outlook for its agricultural lending segment and the interest rate environment are not historical facts and are forward-looking. Accordingly, the forward-looking statements in this press release are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed. All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed in the sections titled “Item 1A. Risk Factors” and "Cautionary Note Regarding Forward-Looking Statements" in Great Western Bancorp, Inc.’s Annual Report on Form 10-K for the most recently ended fiscal year, and in other periodic filings with the Securities and Exchange Commission. Further, any forward-looking statement speaks only as of the date on which it is made, and Great Western Bancorp, Inc. undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

¹ This is a non-GAAP financial measure management believes is helpful to interpreting our financial results. See the tables at the end of this document for the calculation of the measure and reconciliation to the most comparable GAAP measure.

² Annualized for all partial-year periods.

¹ Other loans primarily include consumer and commercial credit cards, customer deposit account overdrafts, and lease receivables.

¹ Annualized for all partial-year periods.

² Interest income includes $0.4 million and $0.6 million for the second quarter of fiscal years 2019 and 2018, respectively, resulting from accretion of purchase accounting discount associated with acquired loans.