GWB - Great Western Bancorp Inc. Announces Fiscal Year 2019 First Quarter Financial Results

Great Western Bancorp, Inc. (NYSE: GWB) today reported net income of $45.8 million, or $0.79 per diluted share, for the first quarter of fiscal year 2019, compared to net income of $42.3 million, or $0.72 per diluted share.

"We have seen good loan growth to start our fiscal year, combined with an improvement in asset quality metrics, a stable margin and strong expense control," said Ken Karels, Chief Executive Officer and Chairperson of the Board. "Also with the stock repurchases made during the quarter we have shown our commitment to proactively manage capital in the most effective manner to enhance shareholder returns while maintaining strong levels of capital. We continue to look at M&A opportunities, however pricing remains elevated in our view."

Net Interest Income and Net Interest Margin²

Net interest income was $106.4 million for the quarter, an increase of $2.7 million, or 2.6%. The increase resulted from higher loan interest income, driven by 1.4% growth in average loans outstanding, combined with a higher yield on loans and investments, partially offset by higher interest expense associated with the cost of deposits.

Net interest margin was 3.81% and 3.79%, respectively, for the quarters ended December 31, 2018 and September 30, 2018. Adjusted net interest margin¹, which adjusts for the realized gain (loss) on interest rate swaps, was 3.81% and 3.77%, respectively, for the same periods. The higher margins were primarily driven by the yield on loans, which increased 14 basis points to 5.17%, and increased yield on the investment portfolio, which increased 27 basis points to 2.44%, partially offset by the cost of deposits, which increased 13 basis points to 0.95%.

Total loans outstanding were $9.77 billion as of December 31, 2018, an increase of $351.6 million, or 3.7%, for the quarter. The majority of the growth for the quarter occurred in the commercial real estate ("CRE") category of the portfolio, which grew by $281.0 million, mainly across the non-owner occupied and multifamily residential segments, and a rise of $52.0 million in the agriculture category of the portfolio, of which approximately $30.0 million reflects the seasonal draws that are expected to be repaid in the second quarter of 2019.

Total deposits grew to $10.11 billion as of December 31, 2018, an increase of $379.7 million, or 3.9%, for the quarter. Noninterest-bearing deposits were $1.88 billion, a 2.0% increase for the quarter, and interest-bearing deposits were $8.23 billion, a 4.3% increase for the quarter. FHLB and other borrowings increased by $135.0 million, or 49.1%, for the quarter.

Provision for Loan and Lease Losses and Asset Quality

Provision for loan and lease losses was $5.2 million for the quarter, an increase of $0.2 million. Net charge-offs for the quarter were $3.6 million, or 0.15% of average total loans on an annualized basis, with the majority of net charge-offs concentrated in the agriculture and commercial non real estate segments of the loan portfolio. The ratio of allowance for loan and lease losses ("ALLL") to total loans remained stable at 0.68% as of December 31, 2018.

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

Included within total loans are approximately $845.3 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 $6.8 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 0.17% of total loans.

At December 31, 2018, asset quality metrics improved compared to the prior quarter. Loans graded "Watch" decreased $21.7 million, or 6.3%, for the quarter while loans graded "Substandard" decreased $0.1 million, or 0.1%, for the quarter. Nonaccrual loans were $138.9 million as of December 31, 2018, representing a decrease of $4.3 million for the quarter. Total other repossessed property balances were $22.2 million as of December 31, 2018, a decrease of $0.9 million, or 3.7%, during the quarter.

Total credit-related charges increased compared to the previous and comparable quarters. A summary of total credit-related charges incurred during the current, prior and comparable quarters is presented below:

Noninterest Income

Noninterest income was $16.7 million, a decrease of $2.5 million, or 13.2%, for the quarter. The decrease was due to a $0.5 million loss on sale of securities during the current quarter combined with a $1.5 million decrease in service charges and other fees. The decrease in service charges and other fees was predominately due to the impact of adopting the revenue recognition accounting standard during the current quarter, which resulted in netting $1.4 million of credit and debit card network expenses against related interchange income. Also included within noninterest income is the net effect of the change in fair value loans for which the Company has elected the fair value option and the net gain (loss), realized and unrealized, of the related derivatives which generated a $0.4 million favorable change over the prior quarter.

Noninterest Expense

Total noninterest expense was $57.1 million, a decrease of $2.4 million, or 4.1%, for the quarter. The majority of the decrease was driven by a $2.0 million decrease in professional fees, due to reduced consulting costs and FDIC assessment fees in the current quarter, partially offset by a $1.1 million increase in salaries and employee benefits, driven primarily by items related to fiscal year-end including vesting of share-based awards, incentive compensation and related payroll taxes. In addition, data processing and communication expense decreased by $1.4 million due to the impact of adopting the revenue recognition accounting standard as discussed in noninterest income above.

The efficiency ratio¹ was 46.1% for the quarter, a decrease from 48.1%.

Provision for Income Taxes

The provision for income taxes for the quarter ended December 31, 2018 was $13.5 million, reflecting an effective tax rate of 22.8%, compared to an effective tax rate of 25.4% for the prior quarter. The reduction was a result of the Company moving to a fully phased in statutory federal tax rate of 21% in the current quarter versus the blended statutory federal tax rate of 24.5% used in the prior quarter.

Capital

Tier 1 and total capital ratios were 11.1% and 12.1%, respectively, as of December 31, 2018, compared to 12.0% and 13.0%. The common equity tier 1 capital ratio and tier 1 leverage ratio were 10.4% and 10.1%, respectively, as of December 31, 2018 compared to 11.3% and 10.7%. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized."

During the quarter, $74.6 million was deployed to repurchase and retire approximately 2.1 million shares of the Company's common stock under the repurchase program authorized by the Board of Directors at an average price of $35.94.

On January 24, 2019, the Company’s Board of Directors declared a dividend of $0.25 per common share payable on February 22, 2019 to stockholders of record as of close of business on February 8, 2019. The aggregate dividend payment will be approximately $14.2 million.

Business Outlook

"We are very pleased with our strong start to our fiscal year," added Karels. "During 2019, we expect good loan and deposit growth, but at a lower growth rate, and for our net interest margin to stabilize. We will continue to focus on asset quality, expense management and our objectives of increasing our franchise and shareholder value."

Conference Call

Great Western Bancorp, Inc. will host a conference call to discuss its financial results for the first quarter of fiscal year 2019 on Thursday, January 24, 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 February 7, 2019. To access the replay, dial (877) 344-7529 (U.S.) and use conference ID 10127333. International callers should dial (412) 317-0088 and enter the same conference ID number.

Annual Stockholder Meeting

The Company's Board of Directors has set the Great Western Bancorp, Inc. Annual Stockholder Meeting for Thursday, February 21, 2019. The meeting will commence at 9:00 a.m. Mountain Standard Time, at the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch, 7500 East Doubletree Ranch Road, Scottsdale, Arizona. The record date for determination of stockholders entitled to notice of, and to vote at, the Annual Stockholder Meeting was December 28, 2018.

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 fiscal year ended September 30, 2018. 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.

Non-GAAP Measures and Reconciliation

We rely on certain non-GAAP measures in making financial and operational decisions about our business. We believe that each of the non-GAAP measures presented is helpful in highlighting trends in our business, financial condition and results of operations which might not otherwise be apparent when relying solely on our financial results calculated in accordance with U.S. GAAP. We disclose net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. We believe this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

In particular, we evaluate our profitability and performance based on our adjusted net income, adjusted earnings per common share, tangible net income and return on average tangible common equity. Our adjusted net income and adjusted earnings per common share exclude the after-tax effect of items with a significant impact to net income that we do not believe to be recurring in nature, (e.g., one-time acquisition expenses as well as the effect of revaluation of deferred taxes). Our tangible net income and return on average tangible common equity exclude the effects of amortization expense relating to intangible assets and related tax effects from the acquisition of us by National Australia Bank Limited ("NAB") and our acquisitions of other institutions. We believe these measures help highlight trends associated with our financial condition and results of operations by providing net income and return information excluding significant nonrecurring items (for adjusted net income and adjusted earnings per share) and based on our cash payments and receipts during the applicable period (for tangible net income and return on average tangible common equity).

We also evaluate our profitability and performance based on our adjusted net interest income, adjusted net interest margin, adjusted interest income on non-ASC 310-30 loans and adjusted yield on non-ASC 310-30 loans. We adjust each of these four measures to include the current realized gain (loss) of derivatives we use to manage interest rate risk on certain of our loans, which we believe economically offsets the interest income earned on the loans. Similarly, we evaluate our operational efficiency based on our efficiency ratio, which excludes the effect of amortization of core deposit and other intangibles (a non-cash expense item) and includes the tax benefit associated with our tax-advantaged loans.

We evaluate our financial condition based on the ratio of our tangible common equity to our tangible assets and the ratio of our tangible common equity to common shares outstanding. Our calculation of this ratio excludes the effect of our goodwill and other intangible assets. We believe this measure is helpful in highlighting the common equity component of our capital and because of its focus by federal bank regulators when reviewing the health and strength of financial institutions in recent years and when considering regulatory approvals for certain actions, including capital actions. We also believe the ratio of our tangible common equity to common shares outstanding is helpful in understanding our stockholders’ relative ownership position as we undertake various actions to issue and retire common shares outstanding.

Reconciliations for each of these non-GAAP financial measures to the closest GAAP financial measures are included in the tables below. Each of the non-GAAP measures presented should be considered in context with our GAAP financial results included in this release.

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