Great Western Bancorp, Inc. Announces Earnings for Third Quarter Fiscal Year 2020

Great Western Bancorp, Inc. (NYSE: GWB) today reported net income of $5.4 million, or $0.10 per diluted share, for the third quarter of fiscal year 2020, compared to net loss of $740.6 million, or $13.25 per diluted share, for the second quarter of fiscal year 2020. Adjusted net income 1 which excludes the COVID-19 pandemic impact on goodwill, intangible assets and credit and other related charges, was $5.4 million, or $0.10 per diluted share, compared to $29.1 million, or $0.52 per diluted share.

"While the business environment remained challenging this quarter, we focused on meeting customer needs and continued to find ways to be more agile with our remote workforce," said Mark Borrecco, President and Chief Executive Officer. "Additionally, our new Chief Credit Officer has been essential in assessing our loan portfolio and developing a strategy to improve our credit performance. Finally, we generated core profits despite a significant credit charge, which further added to our stable capital position."

Impact and Response to COVID-19 Pandemic

Through this time of disruption we remain committed to keeping our employees safe and our bank running effectively to serve our customers. We have reopened 140 branches in the markets where COVID-19 cases have remained lower, only seven branches are fully closed, and a majority of our employees who can work outside of our offices are doing so. Social distancing, restrictions on in-person meetings and conferences, company travel restrictions and increased sanitary protocols all remain in place and are all intended to offer the best protection for our employees and customers and enhance our ability to provide our banking services. We are supporting our employees with paid time off, work from home flexibility, PTO cash out, volunteer time off, and a new focus for our internal Diversity & Inclusion Council. Finally, as of July 20, 2020 we are supporting our customers with PPP lending, having provided $724.4 million in loans to over 4,600 customers, improved engagement with customers in impacted segments, and a commitment to working with customers for solutions as we approach the end of the first round of payment deferrals.

Net Interest Income and Net Interest Margin2

Net interest income was $107.9 million, an increase of $4.4 million, or 4.2%. Interest income was lower by $5.4 million as a result of lower loan and securities yields while interest expense decreased $9.6 million, or 41.4%, due to deposit rate cuts and rate optimization through funding mix.

Net interest margin was 3.57% and 3.59% for the quarters ended June 30, 2020 and March 31, 2020, respectively. Adjusted net interest margin1, which adjusts for the realized gain (loss) on interest rate swaps, was 3.47% and 3.55%, respectively, for the same periods. Deposit yields decreased 38 basis points due to rate cuts and a significant increase in noninterest-bearing deposits from CARES Act related inflows, while securities and loan yields decreased 16 and 39 basis points, respectively, reflecting PPP loans yielding 3.11% and continued repricing tied to lower indices stemming from rate cuts in March.

Total loans outstanding were $10.31 billion as of June 30, 2020, an increase of $620.7 million, or 6.4%. The increase in loans during the quarter was mainly attributable to the commercial non-real estate segment of the portfolio, which increased $527.6 million, and the CRE segment, which increased $132.7 million, offset by a reduction in the agriculture segment of $66.7 million. The increase in the commercial non-real estate segment of the portfolio was attributable to $697.0 million in new PPP loans outstanding at June 30 and $57.7 million in mortgage warehouse lending, partially offset by approximately $227.1 million in paydowns. The increase in the CRE segment was due to diversified growth in multifamily, owner-occupied and non-owner-occupied loan types combined with advances on projects under construction, while the decrease in the agriculture segment was due to a $93.0 million net reduction from declines in dairy, beef cattle and other agriculture segments, partially offset by approximately $26.3 million in new PPP loans.

Total deposits were $11.15 billion as of June 30, 2020, an increase of $971.5 million, or 9.5%, due to $870.9 million in checking and savings deposits across both business and consumer accounts as a result of inflows from PPP proceeds and consumer stimulus receipts and $188.0 million in public and brokered deposits with favorable rates offset with a $87.4 million reduction in business and consumer time deposits.

1 This is a non-GAAP financial measure management believes is helpful to understanding trends in 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 $21.6 million, a decrease of $50.2 million, or 69.9%, as a result of significant reserve increases in the prior quarter due to economic environmental factors associated with the COVID-19 outbreak. The ALLL to total loans increased to 1.44% as of June 30, 2020 from 1.40% as of March 31, 2020.

Net charge-offs were $9.4 million, or 0.37% 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.

Included within total loans are approximately $735.4 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 $40.0 million of the fair value adjustment for these loans relates to credit risk, or 0.39% of total loans. Finally, total purchase discount remaining on all acquired loans equates to 0.09% of total loans.

Loans graded "Substandard" increased $70.8 million, or 11.3%, to $698.5 million. The increase in loans graded "Substandard" was primarily due to two senior care credits previously rated as watch that deteriorated further during the quarter. Nonaccrual loans were $274.5 million, representing an increase of $61.4 million, or 28.8%, driven largely by the deterioration of one of the senior care credits mentioned previously as well as a hotel credit previously rated as substandard. Total other repossessed property balances were $19.2 million, a decrease of $8.1 million, or 29.5%, due to the sale of two properties.

Beginning in the third quarter of 2020, we will no longer separate credit-related charges between those related or unrelated to the COVID-19 pandemic as it becomes more difficult to attribute losses caused or not caused by the pandemic the longer it continues. A summary of total credit-related charges incurred during the current and comparable nine month periods and current, previous and comparable quarters is presented below:

We continue to evaluate the impact of COVID-19 on our loan portfolio. Industries such as hotels & resorts, restaurants, oil & energy, retail malls, airlines and healthcare have experienced significant revenue loss due to COVID-19. Within our portfolio we have identified the following segments with elevated risk: hotels & resorts with $1.20 billion, or 11.6% of total loans, restaurants with $160.2 million, or 1.6% of total loans, arts and entertainment with $129.6 million, or 1.3% of total loans, senior care with $358.9 million, or 3.5% of total loans, and skilled nursing with $248.9 million, or 2.4% of total loans. Loan exposure in such other identified industries is either immaterial or has not shown general distress thus far. At this time it is difficult to determine ultimate impact upon our portfolio, but we are of the view the credit-related adjustments reflect the best estimate of incurred losses in our portfolio as of June 30, 2020.

Capital

Tier 1 and total capital ratios were 11.3% and 12.9%, respectively, as of June 30, 2020, compared to 11.3% and 12.9% as of March 31, 2020. The common equity tier 1 capital ratio and tier 1 leverage ratio were 10.6% and 9.3%, respectively, as of June 30, 2020, compared to 10.6% and 9.2% as of March 31, 2020. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized."

On July 29, 2020, the Company's Board of Directors declared a dividend of $0.01 per common share payable on August 27, 2020 to stockholders of record as of close of business on August 13, 2020. The aggregate dividend payment will be approximately $0.6 million. Given the continued uncertainty relating to the duration and potential impact of COVID-19, we believe this further reduced dividend is a prudent and proactive step at this time to help enhance and preserve our capital position if economic conditions continue to deteriorate.

Noninterest Income

Noninterest income was $(11.7) million, a decrease of $11.6 million. Included within noninterest income for the current quarter is $25.8 million in net losses related to the change in fair value of loans for which the Company has elected the fair value option within which was a credit charge of $21.9 million for one previously mentioned senior care facility and the net realized and unrealized gain (loss) of the related derivatives. Excluding these items, remaining noninterest income was $14.1 million for the quarter, compared to $14.6 million, a decrease of $0.5 million primarily related to a $1.5 million reduction in overdraft fees within service charges, offset with a $1.3 million increase in mortgage revenue related to a rise in origination and refinancing spurred on by falling interest rates.

Noninterest Expense

Total noninterest expense was $67.0 million for the quarter. This compares to $66.1 million of noninterest expense in the prior quarter excluding $742.4 million of goodwill and intangible asset impairments, resulting in an increase of $0.9 million, or 1.4%. The increase was driven by a one-time PTO payout offered to employees for $1.1 million, severance costs of $1.6 million, consulting costs of approximately $1.0 million and $2.2 million of reserve for unfunded loan commitments resulting from paydown activity on credit lines. All of these were offset with a $3.2 million decline in OREO related costs.

The efficiency ratio1 was 69.4% for the quarter and 63.5% for the prior quarter.

Provision for Income Taxes

The provision for income taxes for the quarter ended June 30, 2020 was $0.5 million, reflecting an effective tax rate of 8.1%, compared to a benefit from income taxes of $37.7 million for the prior quarter, or an effective tax rate of 4.8%. The change in the effective tax rate was due to a one-time adjustment as the combination of lower pre-tax earnings and static deductions are yielding a lower effective tax rate.

Business Outlook

"While circumstances have improved in certain cases, many individuals, families and businesses are still dealing with uncertainty and challenges of COVID-19," added Borrecco. "We feel the best approach is a cautious one, which means we will be judicious with our branch and office reopening plans. As for our customers and communities, we will continue to provide proactive support and find ways to help them navigate these uncertain times."

Conference Call

Great Western Bancorp, Inc. will host a conference call to discuss its financial results for the third quarter of fiscal year 2020 on Thursday, July 29, 2020 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 August 5, 2020. To access the replay, dial (877) 344-7529 (U.S.) and use conference ID 10145350 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, strategies for managing troubled loans, the impact on the business arising from the COVID-19 outbreak 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, Form 10-Q for the quarters ended June 30, 2020, March 31, 2020 and December 31, 2019 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.

Non-GAAP Financial Measures and Reconciliation

We rely on certain non-GAAP financial measures in making financial and operational decisions about our business. We believe that each of the non-GAAP financial 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 COVID-19 impact on credit and other related charges and the impairment of goodwill and certain intangible assets). 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 common 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 financial measures presented should be considered in context with our GAAP financial results included in this release.