Market Watch: Great Western

With hefty ag portfolio, Great Western keeps eye on growth.The USDA predicts that farm income nationally will fall by double digits in 2015, the result of lower grain prices. This could vex ag lenders. But Ken Karels, president and CEO of Great Western Bancorp Inc., believes that a balanced loan portfolio will smooth the way for what is the nation's eighth-largest agricultural lender. Further, the Sioux Falls, S.D.-based operator of Great Western Bank is not solely tied to agribusiness, as it has a sizeable portfolio of commercial and real estate loans. It also operates in metropolitan areas of the Midwest and Mountain states..Among publicly traded banks in NorthWestern Financial Review's coverage area, Great Western is both the newest and one of the older institutions. While the bank was founded way back in 1935 it has been publicly traded just since October 2014. At that time National Australia Bank, which had bought Great Western in 2008, sold a 27.6 percent stake in the holding company..That gave us an opportunity to speak with Karels, and ask him about ag lending and other business prospects in 2015. Here are his edited remarks:.Q: In your recent business outlook you mention that efficiency and expense control are top priorities for 2015. Can you cite any specific examples, either of past efforts or intended ones?. Karels: We are proud of our efficiency ratio, which at 50 percent is consistently superior to our peers. Our priorities have always included efficiency and expense control. Strategically, we have implemented processes for improvement such as Kaizen, which in Japanese means "change for the better." Adopted by GWB in 2011, Kaizen enhances continuous improvement in the enterprise culture, improves efficiencies, and encourages team members to share improvement ideas. In short, Kaizen makes us smarter, faster and takes the cost out of inefficiencies. Branch optimization is another way we maintain efficiency and expense control. We continually look for ways to optimize our branch network, which include opening, renovating and, where appropriate, closing branches. We have taken important steps since 2014 to further optimize our footprint, by rationalizing our branch network in Nebraska and South Dakota while opening new branches in Sioux City, Iowa and Greeley, Colo. Lastly, we maintain a simple operating model. We don't want to make business more complicated than necessary..Q: The percentage of ag loans in your portfolio has risen to 25.5 percent from 16.5 percent in 2010. Further, 37 percent of that portfolio is in grains. Is there any cause for concern/action given the steep decline in corn and bean prices? . Karels: We are seeing pressure and stress on the grain side of ag due to lower prices. This also causes stress on farm dealers and manufacturers. However, grain farmers have seen phenomenal profits the past several years. Because of low leverage, they can withstand this decline in prices for a period of time. Lower costs of production such as fuel and fertilizer expenses also will help. The benefit for us is we have a balanced portfolio. Our diversification in the ag market has and will serve us well. Thirty-eight percent is in grains (corn and soybeans) and 47 percent is protein (dairy and beef). Although lower grain prices have a negative effect on grain producers they benefit the dairy and cattle..Q: What would be a plan of action for "chasing prudent growth in the face of fading commodity prices," as was noted in your appearance on an investment panel in New York?. Karels: The ag sector has seen lower growth but the benefit of GWB is that we are also a strong commercial and industrial lending bank. We have markets in Arizona and Colorado which have seen tremendous growth which help offset slower ag markets in the Midwest. GWB is in small markets like Aberdeen, S.D., and Fort Dodge, Iowa, but in addition we are in big cities such as Kansas City, Omaha and Des Moines. We don't have to chase riskier growth; we can grow prudently..Q: One way to lessen dependence on ag loans is to do more business in non-ag areas. Any plans along that line? . Karels: We will grow in metropolitan areas and look to expand into new markets in our footprint which have great growth potential. We intend to capitalize on growth opportunities we believe exist in growing economies in, and adjacent to, our existing markets..Q: Do you plan to open a set number of branches per year? Would there be any concentration of them? .Karels: We have no set plans. We take a look at where the opportunity is and we hire talent first, then put in the office. We look within our footprint and look at gaps and adjoining states that have the same demographic and market opportunities. Our branch strategy is guided by our ability to recruit experienced relationship bankers in under-represented and new markets. These bankers expand our banking relationships in these markets prior to opening a branch, which increases our likelihood of expanding profitability..Q: Do you have any plan to grow assets to a certain size? . Karels: We have no set size standard. Size doesn't matter; growth matters. Acquisitions are a big part of our past and they will be a big part of our future. But you can't be successful with growth through acquisitions alone. It's important also to have organic growth. We think there are opportunities in our footprint. Our management team has extensive experience and a successful track record in evaluating, executing and integrating attractive acquisitions. We have successfully completed eight acquisitions since 2006, including our 2010 FDIC-assisted acquisition of TierOne Bank, which represented approximately $2.5 billion in acquired assets. We will continue to consider acquisitions that are consistent with our business strategy and financial model as opportunities arise..Q: Any final thoughts?.Karels: Banking is in a transformational period right now. Cost is a big part of it. Efficiency and cost control will be more important than ever for banks to be successful. Acquisitions will also play a key role. On the retail side of things, the challenge for (us and) all banks will be changing technologies and increasing regulatory burdens. It will take a massive scale to afford the costs to compete at the retail level. This is where you will see more and more consolidations in banking because of the prohibitive regulatory costs. .Great Western Bank stands ready to handle this transformation. We have the size to be able to absorb the costs, yet our highly efficient business model allows us to move quickly and be nimble when others cannot because of their size. It is our niche as a "big bank, small bank" that will serve us well during this time of change.