Great Western Bancorp, Inc. Announces Earnings for Fourth Quarter & Full Fiscal Year 2020

Great Western Bancorp, Inc. (NYSE: GWB) today reported net income of $11.1 million, or $0.20 per diluted share, for the fourth quarter of fiscal year 2020, compared to net income of $5.4 million, or $0.10 per diluted share, for the third quarter of fiscal year 2020. Net loss for fiscal year 2020 was $680.8 million, or $12.24 per diluted share. Adjusted net income 2 which excludes the COVID-19 pandemic impact on goodwill, certain intangible assets and credit and other related charges, was $88.9 million, or $1.60 per diluted share, compared to net income of $167.4 million, or $2.92 per diluted share for fiscal year 2019.

"This quarter's results bring to a close what has been a challenging fiscal year," said Mark Borrecco, President and Chief Executive Officer. "Our underlying earnings were again offset with increased credit charges and costs from strategic actions to improve the position of the bank. This includes the closure of our Wichita LPO, a reduction of FTEs to align with current market conditions, payoff of $205.0 million in FHLB borrowings to right-size the balance sheet and improve future earnings, and a commitment to a new platform to support our small business initiative. Asset quality continues to be our primary focus resulting in higher frequency monitoring and proactive issue identification. We used a third party to complete a supplemental review of critical areas of the loan portfolio this quarter, confirming the risk ratings of our portfolio. As a result of the actions we have taken, including the dividend reductions, we saw an improvement of our capital ratios as we remain above well-capitalized regulatory limits."

"The COVID-19 pandemic is still running its course, and the uncertainty of its continued impact on the economy and on families and individuals is not something we are taking lightly. As we work through these difficult times, we continue to seek to make conservative decisions as we pivot and optimize our resources in this time of disruption. I continue to be proud of the contributions made by our employees as we maintain our focus on serving our customers and supporting our communities."

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 all of our branches and are continuing shut down protocols according to CDC guidelines when we become aware of a possible close contact scenario, 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 and paid time for volunteering. Finally, we supported the Paycheck Protection Program, having provided $727.3 million in loans to over 4,800 customers, improved engagement with customers in impacted segments, and remained committed to working with customers for solutions as we transition through loan deferral expirations and new requests.

Net Interest Income and Net Interest Margin 1

Net interest income was $107.5 million for the quarter, a decrease of $0.3 million, or 0.3%, from the prior quarter. Interest income was lower by $3.0 million as a result of decreases in loan interest of $1.8 million and securities interest of $1.2 million, primarily as a result of repricing in a lower rate environment. The decrease in interest income was offset with a $2.7 million reduction in interest expense as a result of a $2.2 million decrease in deposit interest due to lower rates on interest-bearing deposits combined with time deposit runoff, and a $0.5 million decrease in interest as a result of a reduction in higher interest borrowings.

Net interest margin was 3.51% for the quarter, a decrease of 6 basis points from the prior quarter. Adjusted net interest margin 2, which adjusts for the realized gain (loss) on interest rate swaps, was 3.40% for the quarter, a decrease of 7 basis points from the prior quarter. Net interest margin declined a net 16 basis points as yields on the securities and loan portfolios decreased 27 and 12 basis points, respectively, due to renewing volumes impacted by a lower repricing environment, combined with a benefit from PPP loan income and lower nonaccrual interest reversals. Offsetting that impact was a 7 basis point lift from a 24% decrease in deposit yields by 9 basis points from lower offering rates and improved mix. In addition, there was a 2 basis point lift from reduced borrowings, including the nominal yield impact resulting from the payoff of $205 million in higher interest FHLB borrowings offset with a reduction in securities and cash late in the quarter.

Noninterest Income

Noninterest income items resulted in a $4.0 million loss for the quarter, compared to a loss of $11.7 million for the prior quarter. Service charges and other fee income increased $1.7 million with a rebound in transaction activity, mortgage banking income increased $1.4 million on stronger origination demand, and wealth management revenue remained flat compared to the prior quarter.

As part of the reduction in higher interest FHLB borrowings, a $7.6 million prepayment charge was recognized in other noninterest expense, which was offset with a sale in investment securities which resulted in a $7.9 million realized gain.

Noninterest income items related to loans carried at fair value this quarter include an $8.0 million charge for a classified loan sold in September, $4.3 million charge for credit risk and swap break fees for a loan moved to substandard, and a $12.5 million charge for credit risk on the remaining fair value portfolio based on updated default risk assumptions. In addition, the interest rate cost on total swap derivatives for the quarter was $3.5 million, compared to $3.0 million for the prior quarter.

Noninterest Expense

Total noninterest expense was $74.9 million for the quarter, an increase of $7.9 million from the prior quarter. This quarter included a $7.6 million expense related to the early payment of FHLB borrowings, $2.0 million expense related to the completion of the FDIC loss-sharing agreement, which ended June 4, 2020, and net credit related charges of $3.4 million related to OREO and unfunded commitment reserves, along with approximately $1.8 million in severances, closure costs for the Wichita LPO and consulting costs.

The efficiency ratio1 was 72.1% for the quarter, compared to 69.4% for the prior quarter.

Provision for Loan and Lease Losses and Asset Quality

The ALLL to total loans increased to 1.49% as of September 30, 2020 from 1.44% as of June 30, 2020, an increase of 5 basis points from the prior quarter. Excluding PPP loans the ratio was 1.60%. Provision for loan and lease losses was $16.9 million, a decrease of $4.8 million, with the quarterly provision related to increased specific reserves on a number of loans moved to substandard in the quarter. Net charge-offs were $15.1 million, or 0.59% of average total loans (annualized) for the quarter, up $5.7 million and 22 basis points from the prior quarter, respectively. Charge-offs were related to a dairy facility, a health care facility and various other loans charged off in the quarter.

Included within total loans are approximately $655.2 million of loans with maturities greater than 5 years that use derivatives to manage a fixed rate structure for the customer and for which management has elected the fair value accounting option. These loans are excluded from the ALLL process, but management has estimated that approximately $30.5 million of the fair value adjustment for these loans relates to credit risk, or 0.30% of total loans. In addition, total purchase discount remaining on all acquired loans equates to 0.08% of total loans.

Loans graded "Substandard" or worse were $769.5 million for the quarter, an increase of $66.7 million from the prior quarter. The increase was primarily due to the downgrade of a dairy relationship, a number of hotel loans and various other commercial and agriculture loans that deteriorated in the quarter, partially offset with the sale of a health care facility loan in September. Nonaccrual loans were $324.9 million for the quarter, or 3.22% of total loans, an increase of $50.5 million from the prior quarter, or 2.66% of total loans. The increase was largely due to one dairy relationship. Watch loans were $982.8 million for the quarter, an increase of $505.7 million. The increase was primarily a result of $230.0 million in hotels & resorts, $109.0 million in healthcare and $75.0 million in other CRE relationships moving to Watch, reflecting the current operating environment. The Watch category will be retired for the December 2020 quarter and replaced with the Special Mention category to better align to peers. Total other repossessed property balances were $20.0 million for the quarter, an increase of $0.8 million from the prior quarter.

Beginning with the third fiscal quarter of 2020, we ceased separating credit-related charges between those related or unrelated to the COVID-19 pandemic as it has become more difficult to attribute losses caused or not caused by the pandemic as it continues. A summary of total credit-related charges incurred during the current and comparable twelve 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 $1.21 billion, or 12.0% of total loans, restaurants with $156.5 million, or 1.6% of total loans, arts and entertainment with $130.3 million, or 1.3% of total loans, senior care with $330.7 million, or 3.3% of total loans, and skilled nursing with $250.9 million, or 2.5% of total loans, for a total exposure of $2.07 billion, or 20.7% of total loans. Loan exposure in such other identified industries is either immaterial or has not shown general distress thus far. Loan deferrals related to COVID-19 relief have declined from 17.7% of loans excluding PPP in the prior quarter to 2.0% this quarter. 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 September 30, 2020.

Loans and Deposits

Total loans outstanding were $10.08 billion as of September 30, 2020, a decrease of $0.24 billion from the prior quarter. The decrease in loans during the quarter was mainly attributable to the agriculture segment of the portfolio, which decreased $0.09 billion, the CRE segment, which decreased $0.08 billion, and the commercial non-real estate segment, which decreased $0.05 billion. The decline in the loan balances was driven by the exit of a large commercial non-real estate facility, progress in deleveraging of agriculture and commercial problem loans in workout, an acceleration of paydowns in commercial and consumer HELOC balances and a decrease in new volume originations due to softer demand.

Total deposits were $11.01 billion as of September 30, 2020, a decrease of $0.14 billion from the prior quarter, due to a continued decrease in time deposits by $0.10 billion and a decrease of $0.09 billion for brokered funds and public deposits, offset with a net increase in checking and savings balances of $0.05 billion.

Capital

Tier 1 and total capital ratios were 11.8% and 13.3%, respectively, as of September 30, 2020, compared to 11.3% and 12.9% as of June 30, 2020. The common equity tier 1 capital ratio and tier 1 leverage ratio were 11.0% and 9.4%, respectively, as of September 30, 2020, compared to 10.6% and 9.3% as of June 30, 2020. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized" and above internal thresholds, which are in excess of regulatory minimums.

On October 28, 2020, the Company's Board of Directors declared a dividend of $0.01 per common share payable on November 27, 2020 to stockholders of record as of close of business on November 12, 2020. The aggregate dividend payment will be approximately $0.6 million.

Provision for Income Taxes

The benefit from income taxes for the quarter ended September 30, 2020 was $0.9 million, compared to a provision for income taxes of $0.5 million for the prior quarter, reflecting an adjustment to the expected tax liability due to lower taxable income realized in the fiscal year.

Conference Call

Great Western Bancorp, Inc. will host a conference call to discuss its financial results for the fourth quarter of fiscal year 2020 on Wednesday, October 28, 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 November 11, 2020. To access the replay, dial (877) 344-7529 (U.S.) and use conference ID 10149074 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 pandemic 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.