UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MarchDecember 31, 2020
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from x to x
Commission File Number 001-36688
Great Western Bancorp, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 47-1308512 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
| | |
225 South Main Avenue | | 57104 |
Sioux Falls, | South Dakota | |
(Address of principal executive offices) | | (Zip Code) |
(605) 334-2548
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | GWB | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ | Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of 4/27/20,1/28/2021, the number of shares of the registrant’s Common Stock outstanding was 55,013,928.55,105,304.
GREAT WESTERN BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
EXPLANATORY NOTE
Except as otherwise stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to:
•"we," "our," "us" and "Company" refers to Great Western Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries;
•"Bank" refers to Great Western Bank, a South Dakota banking corporation;
•"NAB" refers to National Australia Bank Limited, an Australian public company that was our ultimate parent company prior to our initial public offering in October 2014 and, until July 31, 2015, was our principal stockholder;
•our "states" refers to the nine states (Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) in which we currently conduct our business;
•our "footprint" refers to the geographic markets within our states in which we currently conduct our business;
•"ALLLACL" refers to allowance for loan and leasecredit losses;
•"ASC" refers to Accounting Standards Codification;
•"ASC 310-30 loans" or "purchased credit impaired loans" refers to certain loans that had deteriorated credit quality at acquisition;
•"ASU" refers to Accounting Standards Update;
•"Capital Rules" or "Basel III" refers to the Basel Committee’s December 2010 final capital framework for strengthening international capital standards;
•"CARES Act" refers to The Coronavirus Aid, Relief, and Economic Security Act;
•"CECL" refers to the current expected credit loss model in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;Instruments, and subsequent related ASUs;
•"COVID-19" or "COVID-19 pandemic" refers to the Coronavirus Disease 2019;
•"CRE" refers to commercial real estate;
•"Exchange Act" refers to the Securities Exchange Act of 1934;
•"FASB" refers to the Financial Accounting Standards Board;
•"FDIC" refers to the Federal Deposit Insurance Corporation;
•"FHLB" refers to the Federal Home Loan Bank;
•"FRB" or "Federal Reserve" refers to the Board of Governors of the Federal Reserve System;
•"FTE" refers to fully-tax equivalent;
•"GAAP" or "U.S. GAAP" refers to U.S. generally accepted accounting principles;
•"HELOC" refers to home equity lines of credit;
•"HF Financial" refers to HF Financial Corporation;
•"IRS" refers to the Internal Revenue Service;
•"LIBOR" refers to London Interbank Offered Rate, and is a benchmark interest rate index for various adjustable rate products;
•"NYSE" refers to the New York Stock Exchange;
•"PPP" refers to Small Business Administration Paycheck Protection Program;
•"RPA" refers to a risk participation agreement;
•"Sarbanes-Oxley Act" refers to the Sarbanes-Oxley Act of 2002;
•"SBA" refers to Small Business Administration;
•"SEC" refers to the Securities and Exchange Commission;
•"Securities Act" refers to the Securities Act of 1933;
•"Tax Reform Act" refers to the Tax Cuts and Jobs Act of 2017; and
•"TDR" refer to a troubled debt restructuring.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. 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. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" or "Part II, Item 1A. Risk Factors" of this Report or the following:
•the severity, magnitude and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, as well as responses to the pandemic by the government, business and consumers, on our operations and personnel, commercial activity and demand across our business and our customers' business;
•the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect our liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values and further increase our allowance for credit losses;
•current and future economic and market conditions in the United States generally or in our states in particular, including the rate of growth and employment levels;
•estimates of fair value of certain of the Company's assets and liabilities, which could change in value significantly from period to period;
•the impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of the COVID-19 outbreak;pandemic;
•our ability to anticipate interest rate changes and manage interest rate risk;
•uncertainty about the discontinued use of the London Inter Bank Offered Rate and transition to an alternative rate;
•our ability to achieve loan and deposit growth;
•the relative strength or weakness of the commercial, agricultural and real estate markets where our borrowers are located, including without limitation related asset and market prices;
•declines in asset prices and the market prices for agricultural products or changes in governmental support programs for the agricultural sector;
•our ability to effectively execute our strategic plan and manage our growth;
•our ability to successfully manage our credit risk and the sufficiency of our allowance for loan and lease loss;credit losses;
•our ability to develop and effectively use the quantitative models we rely upon in our business;
•possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including the potential negative effects of imposed and proposed tariffs and retaliatory tariffs on products that our customers may import or export, including among others, agricultural products;
•our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
•operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruption and fraud risks;
•fluctuations in the values of our assets and liabilities and off-balance sheet exposures;
•unanticipated changes in our liquidity position, including but not limited to changes in our access to sources of liquidity and capital to address our liquidity needs;
•possible impairment of our goodwill and other intangible assets, or any adjustment of the valuation of our deferred tax assets;
•the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters, social instability and changes in governmental policies;
•the effects of adverse weather conditions, particularly on our agricultural borrowers;
•the impact of, and changes in applicable laws, regulations and accounting standards, policies and interpretations, including the impact of the Tax Reform Act;
•increases in our FDIC insurance premiums, or the collection of special assessments by the FDIC;
•legal, compliance and reputational risks, including litigation and regulatory risks;
•our ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith;
•our ability to attract and retain senior management experienced in the banking and financial services industries;
•our inability to receive dividends from our Bank and to service debt, pay dividends to our common stockholders and satisfy obligations as they become due;
•expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
•our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act to maintain an effective system of internal control over financial reporting; and
•other risks and uncertainties inherent to our business, including those discussed under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020.
The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made or to reflect the occurrence of unanticipated events.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
GREAT WESTERN BANCORP, INC.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
| | | (Unaudited) | | | (Unaudited) | |
| | March 31, 2020 | | September 30, 2019 | | December 31, 2020 | | September 30, 2020 |
Assets | Assets | | | | Assets | | | |
Cash and due from banks | Cash and due from banks | $ | 171,219 | | | $ | 201,487 | | Cash and due from banks | $ | 228,050 | | | $ | 150,085 | |
Interest-bearing bank deposits | Interest-bearing bank deposits | 176,267 | | | 41,987 | | Interest-bearing bank deposits | 833,746 | | | 282,802 | |
Cash and cash equivalents | Cash and cash equivalents | 347,486 | | | 243,474 | | Cash and cash equivalents | 1,061,796 | | | 432,887 | |
Securities available for sale | Securities available for sale | 1,990,027 | | | 1,783,208 | | Securities available for sale | 2,059,615 | | | 1,774,626 | |
Loans, net of unearned discounts and deferred fees, including $29,691 and $31,891 of loans covered by a FDIC loss share agreement at March 31, 2020 and September 30, 2019, respectively; $792,117 and $812,991 of loans at fair value under the fair value option at March 31, 2020 and September 30, 2019, respectively; and $4,342 and $7,351 of loans held for sale at March 31, 2020 and September 30, 2019, respectively | 9,693,295 | | | 9,706,763 | | |
Allowance for loan and lease losses | (135,950) | | | (70,774) | | |
Loans, net of unearned discounts and deferred fees, including $611,588 and $655,185 of loans at fair value under the fair value option at December 31, 2020 and September 30, 2020, respectively; and $11,638 and $12,371 of loans held for sale at December 31, 2020 and September 30, 2020, respectively | | Loans, net of unearned discounts and deferred fees, including $611,588 and $655,185 of loans at fair value under the fair value option at December 31, 2020 and September 30, 2020, respectively; and $11,638 and $12,371 of loans held for sale at December 31, 2020 and September 30, 2020, respectively | 9,517,876 | | | 10,076,142 | |
Allowance for credit losses ¹ | | Allowance for credit losses ¹ | (308,794) | | | (149,887) | |
Net loans | Net loans | 9,557,345 | | | 9,635,989 | | Net loans | 9,209,082 | | | 9,926,255 | |
Premises and equipment, including $706 and $2,757 of property held for sale at March 31, 2020 and September 30, 2019, respectively | 120,653 | | | 120,645 | | |
Premises and equipment, including $600 of property held for sale at both December 31, 2020 and September 30, 2020 | | Premises and equipment, including $600 of property held for sale at both December 31, 2020 and September 30, 2020 | 119,362 | | | 119,054 | |
Accrued interest receivable | Accrued interest receivable | 49,358 | | | 58,699 | | Accrued interest receivable | 47,598 | | | 54,658 | |
Other repossessed property, including $0 of property covered by a FDIC loss share agreement at both March 31, 2020 and September 30, 2019 | 27,289 | | | 36,764 | | |
Goodwill | — | | | 739,023 | | |
Other repossessed property | | Other repossessed property | 18,086 | | | 20,034 | |
| Cash surrender value of life insurance policies | Cash surrender value of life insurance policies | 31,231 | | | 30,796 | | Cash surrender value of life insurance policies | 31,873 | | | 31,658 | |
Net deferred tax assets | Net deferred tax assets | 48,084 | | | 7,286 | | Net deferred tax assets | 91,704 | | | 47,709 | |
Other assets | Other assets | 216,335 | | | 132,417 | | Other assets | 175,267 | | | 197,558 | |
Total assets | Total assets | $ | 12,387,808 | | | $ | 12,788,301 | | Total assets | $ | 12,814,383 | | | $ | 12,604,439 | |
Liabilities and stockholders’ equity | Liabilities and stockholders’ equity | | | | Liabilities and stockholders’ equity | | | |
Noninterest-bearing | Noninterest-bearing | $ | 1,973,629 | | | $ | 1,956,025 | | Noninterest-bearing | $ | 2,858,455 | | | $ | 2,586,743 | |
Interest-bearing | Interest-bearing | 8,205,486 | | | 8,344,314 | | Interest-bearing | 8,514,863 | | | 8,422,036 | |
Total deposits | Total deposits | 10,179,115 | | | 10,300,339 | | Total deposits | 11,373,318 | | | 11,008,779 | |
Securities sold under agreements to repurchase | Securities sold under agreements to repurchase | 64,809 | | | 68,992 | | Securities sold under agreements to repurchase | 80,355 | | | 65,506 | |
FHLB advances and other borrowings | FHLB advances and other borrowings | 800,000 | | | 340,000 | | FHLB advances and other borrowings | 120,000 | | | 195,000 | |
Subordinated debentures and subordinated notes payable | Subordinated debentures and subordinated notes payable | 108,740 | | | 108,636 | | Subordinated debentures and subordinated notes payable | 108,866 | | | 108,832 | |
Accrued expenses and other liabilities | Accrued expenses and other liabilities | 81,680 | | | 70,085 | | Accrued expenses and other liabilities | 63,343 | | | 63,389 | |
Total liabilities | Total liabilities | 11,234,344 | | | 10,888,052 | | Total liabilities | 11,745,882 | | | 11,441,506 | |
Stockholders’ equity | Stockholders’ equity | | | | Stockholders’ equity | | | |
Common stock, $0.01 par value, authorized 500,000,000 shares; 55,013,928 shares issued and outstanding at March 31, 2020 and 56,283,659 shares issued and outstanding at September 30, 2019 | 550 | | | 563 | | |
Common stock, $0.01 par value, authorized 500,000,000 shares; 55,105,105 shares issued and outstanding at December 31, 2020 and 55,014,189 shares issued and outstanding at September 30, 2020 | | Common stock, $0.01 par value, authorized 500,000,000 shares; 55,105,105 shares issued and outstanding at December 31, 2020 and 55,014,189 shares issued and outstanding at September 30, 2020 | 550 | | | 550 | |
Additional paid-in capital | Additional paid-in capital | 1,190,381 | | | 1,228,714 | | Additional paid-in capital | 1,184,281 | | | 1,183,647 | |
Retained earnings | Retained earnings | (73,705) | | | 657,475 | | Retained earnings | (148,769) | | | (57,169) | |
Accumulated other comprehensive income | Accumulated other comprehensive income | 36,238 | | | 13,497 | | Accumulated other comprehensive income | 32,439 | | | 35,905 | |
Total stockholders' equity | Total stockholders' equity | 1,153,464 | | | 1,900,249 | | Total stockholders' equity | 1,068,501 | | | 1,162,933 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 12,387,808 | | | $ | 12,788,301 | | Total liabilities and stockholders' equity | $ | 12,814,383 | | | $ | 12,604,439 | |
1 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model. | | 1 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model. |
See accompanying notes.
GREAT WESTERN BANCORP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
| | | Three Months Ended March 31, | | | Six months ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
Interest income | Interest income | | | | | | | | Interest income | | | | |
Loans | Loans | $ | 113,356 | | | $ | 123,432 | | | $ | 232,787 | | | $ | 245,763 | | Loans | $ | 107,323 | | | $ | 119,431 | | |
Investment securities | Investment securities | 11,329 | | | 9,957 | | | 22,827 | | | 19,145 | | Investment securities | 8,119 | | | 11,498 | | |
Federal funds sold and other | Federal funds sold and other | 558 | | | 497 | | | 1,166 | | | 1,039 | | Federal funds sold and other | 155 | | | 608 | | |
Total interest income | Total interest income | 125,243 | | | 133,886 | | | 256,780 | | | 265,947 | | Total interest income | 115,597 | | | 131,537 | | |
Interest expense | Interest expense | | Interest expense | | |
Deposits | Deposits | 18,867 | | | 27,098 | | | 40,807 | | | 50,892 | | Deposits | 5,992 | | | 21,940 | | |
FHLB advances and other borrowings | FHLB advances and other borrowings | 3,155 | | | 1,923 | | | 6,268 | | | 3,926 | | FHLB advances and other borrowings | 880 | | | 3,113 | | |
Subordinated debentures and subordinated notes payable | Subordinated debentures and subordinated notes payable | 1,238 | | | 1,390 | | | 2,549 | | | 2,760 | | Subordinated debentures and subordinated notes payable | 817 | | | 1,311 | | |
Total interest expense | Total interest expense | 23,260 | | | 30,411 | | | 49,624 | | | 57,578 | | Total interest expense | 7,689 | | | 26,364 | | |
Net interest income | Net interest income | 101,983 | | | 103,475 | | | 207,156 | | | 208,369 | | Net interest income | 107,908 | | | 105,173 | | |
Provision for loan and lease losses | 71,795 | | | 7,673 | | | 79,898 | | | 12,888 | | |
Net interest income after provision for loan and lease losses | 30,188 | | | 95,802 | | | 127,258 | | | 195,481 | | |
Provision for credit losses ¹ | | Provision for credit losses ¹ | 11,899 | | | 8,103 | | |
Net interest income after provision for credit losses | | Net interest income after provision for credit losses | 96,009 | | | 97,070 | | |
Noninterest income | Noninterest income | | Noninterest income | | |
Service charges and other fees | Service charges and other fees | 9,188 | | | 10,209 | | | 20,597 | | | 21,897 | | Service charges and other fees | 9,624 | | | 11,409 | | |
Wealth management fees | Wealth management fees | 3,122 | | | 2,117 | | | 6,086 | | | 4,358 | | Wealth management fees | 3,029 | | | 2,964 | | |
Mortgage banking income, net | Mortgage banking income, net | 1,145 | | | 991 | | | 2,757 | | | 2,311 | | Mortgage banking income, net | 4,090 | | | 1,612 | | |
Net loss on sale of securities | — | | | — | | | — | | | (513) | | |
Net increase in fair value of loans at fair value | 35,541 | | | 14,018 | | | 20,608 | | | 33,234 | | |
Net realized and unrealized loss on derivatives | (50,214) | | | (11,032) | | | (36,698) | | | (29,348) | | |
Net gain on sale of securities and other assets | | Net gain on sale of securities and other assets | 248 | | | 0 | | |
Derivative interest expense | | Derivative interest expense | (3,393) | | | (890) | | |
Change in fair value of FVO loans and related derivatives | | Change in fair value of FVO loans and related derivatives | (1,672) | | | (2,124) | | |
Other derivative income | | Other derivative income | 898 | | | 1,597 | | |
Other | Other | 1,135 | | | 1,920 | | | 2,300 | | | 3,004 | | Other | 1,324 | | | 1,165 | | |
Total noninterest (loss) income | (83) | | | 18,223 | | | 15,650 | | | 34,943 | | |
Total noninterest income | | Total noninterest income | 14,148 | | | 15,733 | | |
Noninterest expense | Noninterest expense | | | | | | | | Noninterest expense | | | | |
Salaries and employee benefits | Salaries and employee benefits | 37,312 | | | 34,537 | | | 73,217 | | | 69,307 | | Salaries and employee benefits | 37,554 | | | 35,905 | | |
Data processing and communication | Data processing and communication | 6,123 | | | 5,964 | | | 11,896 | | | 11,242 | | Data processing and communication | 6,226 | | | 5,773 | | |
Occupancy and equipment | Occupancy and equipment | 5,597 | | | 5,539 | | | 10,690 | | | 10,665 | | Occupancy and equipment | 5,213 | | | 5,093 | | |
Professional fees | Professional fees | 5,263 | | | 3,970 | | | 9,027 | | | 7,258 | | Professional fees | 3,915 | | | 3,764 | | |
Advertising | Advertising | 958 | | | 1,216 | | | 1,823 | | | 2,154 | | Advertising | 556 | | | 865 | | |
Net loss on repossessed property and other related expenses | Net loss on repossessed property and other related expenses | 5,691 | | | 404 | | | 6,033 | | | 3,467 | | Net loss on repossessed property and other related expenses | 345 | | | 342 | | |
Goodwill and intangible assets impairment | 742,352 | | | — | | | 742,352 | | | — | | |
| | Other | Other | 5,157 | | | 4,950 | | | 10,345 | | | 9,593 | | Other | 3,640 | | | 5,188 | | |
Total noninterest expense | Total noninterest expense | 808,453 | | | 56,580 | | | 865,383 | | | 113,686 | | Total noninterest expense | 57,449 | | | 56,930 | | |
(Loss) income before income taxes | (778,348) | | | 57,445 | | | (722,475) | | | 116,738 | | |
(Benefit from) provision for income taxes | (37,730) | | | 12,934 | | | (25,131) | | | 26,441 | | |
Net (loss) income | $ | (740,618) | | | $ | 44,511 | | | $ | (697,344) | | | $ | 90,297 | | |
Income before income taxes | | Income before income taxes | 52,708 | | | 55,873 | | |
Provision for income taxes | | Provision for income taxes | 11,389 | | | 12,599 | | |
Net income | | Net income | $ | 41,319 | | | $ | 43,274 | | |
Basic earnings per common share | Basic earnings per common share | | | | | | | | Basic earnings per common share | | | | |
Weighted average common shares outstanding | Weighted average common shares outstanding | 55,906,002 | | | 56,994,817 | | | 56,141,816 | | | 57,484,838 | | Weighted average common shares outstanding | 55,119,909 | | | 56,377,631 | | |
Basic earnings per share | Basic earnings per share | $ | (13.25) | | | $ | 0.78 | | | $ | (12.42) | | | $ | 1.57 | | Basic earnings per share | $ | 0.75 | | | $ | 0.77 | | |
Diluted earnings per common share | Diluted earnings per common share | | Diluted earnings per common share | | |
Weighted average diluted common shares outstanding | Weighted average diluted common shares outstanding | 55,906,002 | | | 57,074,674 | | | 56,141,816 | | | 57,556,984 | | Weighted average diluted common shares outstanding | 55,247,343 | | | 56,457,967 | | |
Diluted earnings per share | Diluted earnings per share | $ | (13.25) | | | $ | 0.78 | | | $ | (12.42) | | | $ | 1.57 | | Diluted earnings per share | $ | 0.75 | | | $ | 0.77 | | |
Dividends per share | Dividends per share | | Dividends per share | | |
Dividends paid | Dividends paid | $ | 16,769 | | | $ | 14,235 | | | $ | 33,654 | | | $ | 28,771 | | Dividends paid | $ | 550 | | | $ | 16,885 | | |
Dividends per share | Dividends per share | $ | 0.30 | | | $ | 0.25 | | | $ | 0.60 | | | $ | 0.50 | | Dividends per share | $ | 0.01 | | | $ | 0.30 | | |
1 For the three months ended December 31, 2020, this line includes a $(0.1) million (reversal of) provision for unfunded commitments reserve. For the three months ended December 31, 2019, provision for unfunded commitments reserve of $0.2 million was recorded in other noninterest expense in the consolidated income statement. | | 1 For the three months ended December 31, 2020, this line includes a $(0.1) million (reversal of) provision for unfunded commitments reserve. For the three months ended December 31, 2019, provision for unfunded commitments reserve of $0.2 million was recorded in other noninterest expense in the consolidated income statement. | |
See accompanying notes.
GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Six months ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Net (loss) income | $ | (740,618) | | | $ | 44,511 | | | $ | (697,344) | | | $ | 90,297 | |
Other comprehensive income, net of tax | | | | | | | |
Securities available for sale: | | | | | | | |
Net unrealized holding gain arising during the period | 38,341 | | | 11,523 | | | 30,181 | | | 30,192 | |
Reclassification adjustment for net loss realized in net income | — | | | — | | | — | | | 513 | |
Income tax expense | (9,450) | | | (2,839) | | | (7,440) | | | (7,568) | |
Net change in unrealized gain on securities available for sale | 28,891 | | | 8,684 | | | 22,741 | | | 23,137 | |
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Comprehensive (loss) income | $ | (711,727) | | | $ | 53,195 | | | $ | (674,603) | | | $ | 113,434 | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
Net income | $ | 41,319 | | | $ | 43,274 | | | | | |
Other comprehensive loss, net of tax | | | | | | | |
Securities available for sale: | | | | | | | |
Net unrealized holding loss arising during the period | (4,352) | | | (8,160) | | | | | |
Reclassification adjustment for net gain realized in net income | (248) | | | 0 | | | | | |
Income tax benefit | 1,134 | | | 2,010 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other comprehensive loss, net of tax | (3,466) | | | (6,150) | | | | | |
Comprehensive income | $ | 37,853 | | | $ | 37,124 | | | | | |
|
See accompanying notes.
GREAT WESTERN BANCORP, INC.
Consolidated Statements of Stockholders' Equity (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income (Loss) | | Common Stock Par Value | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance, January 1, 2019 | | | $ | 568 | | | $ | 1,244,232 | | | $ | 584,264 | | | $ | (17,056) | | | $ | 1,812,008 | |
Net income | $ | 44,511 | | | — | | | — | | | 44,511 | | | — | | | 44,511 | |
Other comprehensive income, net of tax | 8,684 | | | — | | | — | | | — | | | 8,684 | | | 8,684 | |
Total comprehensive income | $ | 53,195 | | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation, net of tax | | | 1 | | | 1,425 | | | — | | | — | | | 1,426 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends: | | | | | | | | | | | |
Common stock, $0.25 per share | | | — | | | — | | | (14,235) | | | — | | | (14,235) | |
Balance, March 31, 2019 | | | $ | 569 | | | $ | 1,245,657 | | | $ | 614,540 | | | $ | (8,372) | | | $ | 1,852,394 | |
| | | | | | | | | | | |
Balance, January 1, 2020 | | | $ | 563 | | | $ | 1,229,077 | | | $ | 683,682 | | | $ | 7,347 | | | $ | 1,920,669 | |
Net (loss) | $ | (740,618) | | | — | | | — | | | (740,618) | | | — | | | (740,618) | |
Other comprehensive income, net of tax | 28,891 | | | — | | | — | | | — | | | 28,891 | | | 28,891 | |
Total comprehensive (loss) | $ | (711,727) | | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation, net of tax | | | 1 | | | 1,273 | | | — | | | — | | | 1,274 | |
| | | | | | | | | | | |
Repurchase common stock | | | (14) | | | (39,969) | | | — | | | — | | | (39,983) | |
Cash dividends: | | | | | | | | | | | |
Common stock, $0.30 per share | | | — | | | — | | | (16,769) | | | — | | | (16,769) | |
Balance, March 31, 2020 | | | $ | 550 | | | $ | 1,190,381 | | | $ | (73,705) | | | $ | 36,238 | | | $ | 1,153,464 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income (Loss) | | Common Stock Par Value | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total |
Balance, October 1, 2019 | | | $ | 563 | | | $ | 1,228,714 | | | $ | 657,475 | | | $ | 13,497 | | | $ | 1,900,249 | |
Net income | $ | 43,274 | | | — | | | — | | | 43,274 | | | — | | | 43,274 | |
Other comprehensive (loss), net of tax | (6,150) | | | — | | | — | | | — | | | (6,150) | | | (6,150) | |
Total comprehensive income | $ | 37,124 | | | | | | | | | | | |
Cumulative effect adjustment related to ASU adoption ¹ | | | — | | | — | | | (182) | | | — | | | (182) | |
Stock-based compensation, net of tax | | | — | | | 363 | | | — | | | — | | | 363 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends: | | | | | | | | | | | |
Common stock, $0.30 per share | | | — | | | — | | | (16,885) | | | — | | | (16,885) | |
Balance, December 31, 2019 | | | $ | 563 | | | $ | 1,229,077 | | | $ | 683,682 | | | $ | 7,347 | | | $ | 1,920,669 | |
| | | | | | | | | | | |
Balance, October 1, 2020 | | | $ | 550 | | | $ | 1,183,647 | | | $ | (57,169) | | | $ | 35,905 | | | $ | 1,162,933 | |
Net income | $ | 41,319 | | | — | | | — | | | 41,319 | | | — | | | 41,319 | |
Other comprehensive (loss), net of tax | (3,466) | | | — | | | — | | | — | | | (3,466) | | | (3,466) | |
Total comprehensive income | $ | 37,853 | | | | | | | | | | | |
Cumulative effect adjustment related to ASU adoption ² | | | — | | | — | | | (132,919) | | | — | | | (132,919) | |
Stock-based compensation, net of tax | | | — | | | 1,184 | | | — | | | — | | | 1,184 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash dividends: | | | | | | | | | | | |
Common stock, $0.01 per share | | | — | | | (550) | | | — | | | — | | | (550) | |
Balance, December 31, 2020 | | | $ | 550 | | | $ | 1,184,281 | | | $ | (148,769) | | | $ | 32,439 | | | $ | 1,068,501 | |
¹ Cumulative effect adjustment related to the Company's adoption of ASU 2016-02 and subsequent related ASUs on October 1, 2019. |
2 Cumulative effect adjustment related to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020. For additional information, see Note 2, "New Accounting Pronouncements". |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income (Loss) | | Common Stock Par Value | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance, October 1, 2018 | | | $ | 589 | | | $ | 1,318,457 | | | $ | 553,014 | | | $ | (31,509) | | | $ | 1,840,551 | |
Net income | $ | 90,297 | | | — | | | — | | | 90,297 | | | — | | | 90,297 | |
Other comprehensive income, net of tax | 23,137 | | | — | | | — | | | — | | | 23,137 | | | 23,137 | |
Total comprehensive income | $ | 113,434 | | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation, net of tax | | | 1 | | | 1,838 | | | — | | | — | | | 1,839 | |
| | | | | | | | | | | |
Repurchase common stock | | | (21) | | | (74,638) | | | — | | | — | | | (74,659) | |
Cash dividends: | | | | | | | | | | | |
Common stock, $0.50 per share | | | — | | | — | | | (28,771) | | | — | | | (28,771) | |
Balance, March 31, 2019 | | | $ | 569 | | | $ | 1,245,657 | | | $ | 614,540 | | | $ | (8,372) | | | $ | 1,852,394 | |
| | | | | | | | | | | |
Balance, October 1, 2019 | | | $ | 563 | | | $ | 1,228,714 | | | $ | 657,475 | | | $ | 13,497 | | | $ | 1,900,249 | |
Net (loss) | $ | (697,344) | | | — | | | — | | | (697,344) | | | — | | | (697,344) | |
Other comprehensive income, net of tax | 22,741 | | | — | | | — | | | — | | | 22,741 | | | 22,741 | |
Total comprehensive (loss) | $ | (674,603) | | | | | | | | | | | |
Cumulative effect adjustment related to ASU adoption ¹ | | | — | | | — | | | (182) | | | — | | | (182) | |
Stock-based compensation, net of tax | | | 1 | | | 1,636 | | | — | | | — | | | 1,637 | |
| | | | | | | | | | | |
Repurchase of common stock | | | (14) | | | (39,969) | | | — | | | — | | | (39,983) | |
Cash dividends: | | | | | | | | | | | |
Common stock, $0.60 per share | | | — | | | — | | | (33,654) | | | — | | | (33,654) | |
Balance, March 31, 2020 | | | $ | 550 | | | $ | 1,190,381 | | | $ | (73,705) | | | $ | 36,238 | | | $ | 1,153,464 | |
¹ Related to the Company's adoption of ASU 2016-02 and subsequent related ASUs on October 1, 2019. See Note 2, "New Accounting Pronouncements," for additional information. | | | | | | | | | | | |
| | | | | | | | | | | |
GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
| | | Six Months Ended March 31, | | | Three Months Ended December 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Operating activities | Operating activities | | | | Operating activities | | | |
Net (loss) income | $ | (697,344) | | | $ | 90,297 | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
Net income | | Net income | $ | 41,319 | | | $ | 43,274 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 8,373 | | | 5,916 | | Depreciation and amortization | 4,778 | | | 3,947 | |
Amortization of FDIC indemnification asset | Amortization of FDIC indemnification asset | 641 | | | 853 | | Amortization of FDIC indemnification asset | 0 | | | 251 | |
Net loss on sale of securities and other assets | 4,716 | | | 2,974 | | |
Net gain on sale of other assets | | Net gain on sale of other assets | (605) | | | 0 | |
| Net gain on sale of loans | Net gain on sale of loans | (3,148) | | | (2,724) | | Net gain on sale of loans | (4,330) | | | (1,814) | |
Provision for loan and lease losses | 79,898 | | | 12,888 | | |
Goodwill and intangible assets impairment | 742,352 | | | — | | |
Provision for credit losses ¹ | | Provision for credit losses ¹ | 11,899 | | | 8,103 | |
| Provision for loan servicing rights loss | Provision for loan servicing rights loss | 7 | | | — | | Provision for loan servicing rights loss | 0 | | | 1 | |
Stock-based compensation | Stock-based compensation | 1,637 | | | 1,839 | | Stock-based compensation | 1,184 | | | 363 | |
Originations of residential real estate loans held for sale | Originations of residential real estate loans held for sale | (172,370) | | | (98,875) | | Originations of residential real estate loans held for sale | (132,118) | | | (105,185) | |
Proceeds from sales of residential real estate loans held for sale | Proceeds from sales of residential real estate loans held for sale | 178,527 | | | 103,407 | | Proceeds from sales of residential real estate loans held for sale | 137,182 | | | 108,816 | |
Proceeds from sale of other assets | | Proceeds from sale of other assets | 348 | | | 0 | |
Net deferred income taxes | Net deferred income taxes | (48,238) | | | 688 | | Net deferred income taxes | 11 | | | (6,626) | |
Changes in: | Changes in: | | Changes in: | |
Accrued interest receivable | Accrued interest receivable | 9,341 | | | 2,727 | | Accrued interest receivable | 7,060 | | | 3,722 | |
Other assets | Other assets | (66,709) | | | 22,116 | | Other assets | 21,358 | | | (71) | |
Accrued interest payable and other liabilities | Accrued interest payable and other liabilities | 12,890 | | | (27,768) | | Accrued interest payable and other liabilities | 510 | | | 23,674 | |
Net cash provided by operating activities | Net cash provided by operating activities | 50,573 | | | 114,338 | | Net cash provided by operating activities | 88,596 | | | 78,455 | |
Investing activities | Investing activities | | | | Investing activities | | | |
Purchase of securities available for sale | Purchase of securities available for sale | (413,887) | | | (541,872) | | Purchase of securities available for sale | (487,816) | | | (247,934) | |
Proceeds from sales of securities available for sale | Proceeds from sales of securities available for sale | — | | | 97,212 | | Proceeds from sales of securities available for sale | 0 | | | 0 | |
Proceeds from maturities of securities available for sale | Proceeds from maturities of securities available for sale | 234,077 | | | 94,926 | | Proceeds from maturities of securities available for sale | 195,585 | | | 117,333 | |
Net increase in loans | (11,939) | | | (383,665) | | |
(Payment) recovery of covered losses from FDIC indemnification claims | (43) | | | 43 | | |
Net decrease in loans | | Net decrease in loans | 528,843 | | | 65,253 | |
Payment of covered losses from FDIC indemnification claims | | Payment of covered losses from FDIC indemnification claims | 0 | | | (4) | |
Purchase of premises and equipment | Purchase of premises and equipment | (3,861) | | | (5,953) | | Purchase of premises and equipment | (2,110) | | | (2,033) | |
Proceeds from sale of premises and equipment | — | | | 299 | | |
| Proceeds from sale of repossessed property | Proceeds from sale of repossessed property | 12,368 | | | 6,593 | | Proceeds from sale of repossessed property | 2,313 | | | 4,569 | |
Purchase of FHLB stock | Purchase of FHLB stock | (110,637) | | | (46,948) | | Purchase of FHLB stock | (10) | | | (29,687) | |
Proceeds from redemption of FHLB stock | Proceeds from redemption of FHLB stock | 92,350 | | | 47,030 | | Proceeds from redemption of FHLB stock | 127 | | | 20,342 | |
Net cash paid in business acquisition | Net cash paid in business acquisition | (4,711) | | | — | | Net cash paid in business acquisition | 0 | | | (4,711) | |
Net cash used in investing activities | (206,283) | | | (732,335) | | |
Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | 236,932 | | | (76,872) | |
Financing activities | Financing activities | | | | Financing activities | | | |
Net (decrease) increase in deposits | (121,163) | | | 734,966 | | |
Net decrease in securities sold under agreements to repurchase and other short-term borrowings | (4,183) | | | (28,370) | | |
Net increase (decrease) in deposits | | Net increase (decrease) in deposits | 364,561 | | | (211,780) | |
Net increase (decrease) in securities sold under agreements to repurchase and other short-term borrowings | | Net increase (decrease) in securities sold under agreements to repurchase and other short-term borrowings | 14,849 | | | (2,703) | |
Proceeds from FHLB advances and other long-term borrowings | Proceeds from FHLB advances and other long-term borrowings | 650,000 | | | 465,000 | | Proceeds from FHLB advances and other long-term borrowings | 0 | | | 250,000 | |
Repayments on FHLB advances and other long-term borrowings | Repayments on FHLB advances and other long-term borrowings | (190,000) | | | (465,000) | | Repayments on FHLB advances and other long-term borrowings | (75,000) | | | (15,000) | |
Common stock repurchased | (39,983) | | | (74,659) | | |
| Taxes paid related to net share settlement of equity awards | Taxes paid related to net share settlement of equity awards | (1,295) | | | (1,227) | | Taxes paid related to net share settlement of equity awards | (479) | | | (1,268) | |
Dividends paid | Dividends paid | (33,654) | | | (28,771) | | Dividends paid | (550) | | | (16,885) | |
Net cash provided by financing activities | Net cash provided by financing activities | 259,722 | | | 601,939 | | Net cash provided by financing activities | 303,381 | | | 2,364 | |
Net increase (decrease) in cash and cash equivalents | 104,012 | | | (16,058) | | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | 628,909 | | | 3,947 | |
Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | 243,474 | | | 298,696 | | Cash and cash equivalents, beginning of period | 432,887 | | | 243,474 | |
Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | 347,486 | | | $ | 282,638 | | Cash and cash equivalents, end of period | $ | 1,061,796 | | | $ | 247,421 | |
Supplemental disclosure of cash flow information | Supplemental disclosure of cash flow information | | | | Supplemental disclosure of cash flow information | | | |
Cash payments for interest | Cash payments for interest | $ | 56,613 | | | $ | 52,551 | | Cash payments for interest | $ | 8,741 | | | $ | 26,959 | |
Cash payments for income taxes | $ | 17,194 | | | $ | 19,113 | | |
Cash (receipts from) payments for income taxes | | Cash (receipts from) payments for income taxes | $ | (47) | | | $ | 232 | |
Supplemental disclosure of noncash investing and financing activities | Supplemental disclosure of noncash investing and financing activities | | | | Supplemental disclosure of noncash investing and financing activities | | | |
Loans transferred to repossessed properties | Loans transferred to repossessed properties | $ | (7,507) | | | $ | (17,919) | | Loans transferred to repossessed properties | $ | 0 | | | $ | (7,295) | |
1 For the three months ended December 31, 2020, this line includes a $0.1 million (reversal of) provision for unfunded commitments reserve. | | 1 For the three months ended December 31, 2020, this line includes a $0.1 million (reversal of) provision for unfunded commitments reserve. |
See accompanying notes.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. Nature of Operations and Summary of Significant Policies
Nature of Operations
The Company is a bank holding company organized under the laws of Delaware and is listed on the NYSE under the symbol "GWB"."GWB." The primary business of the Company is ownership of its wholly-owned subsidiary, Great Western Bank. The Bank is a full-service regional bank focused on relationship-based business and agri-business banking in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Substantially all of the Company's income is generated from banking operations. The Company and the Bank are subject to the regulation of certain federal and/or state agencies and undergo periodic examinations by those regulatory authorities. Substantially all of the Company’s income is generated from banking operations.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with U.S. GAAP and reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature.
Certain previously reported amounts have been reclassified to conform to the current presentation.
The unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2019,2020, which includes a description of significant accounting policies. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year or any other period.
The accompanying unaudited consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Changes in Significant Accounting Policies
Pursuant to the Company's adoption of ASU 2016-02 and subsequent related ASUs2016-13, as amended, as of October 1, 2019,2020, the Company updated its accounting policypolicies related to leases.securities, loans and allowance for credit losses. See Note 12"Note 2. New Accounting Standards" for additional information on the adoption of the standard. See "Note 3. Securities Available for Sale" and "Note 4. Loans and Allowance for Credit Losses" for new disclosures and additional policy information related to the Company's leases. information.
There were no other significant changes to the Company's accounting policies from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 20192020 that could have a material effect on the Company's consolidated financial statements.
Subsequent EventsSecurities
Purchases and sales of securities are recognized on a trade date basis. The cost of securities sold is based on the specific identification method. The Company has evaluated all eventsclassifies securities upon purchase in one of three categories: trading, held to maturity, or transactions that occurred through the dateavailable for sale. Debt securities held for resale are classified as trading. Debt securities for which the Company issued these financial statements. Other than those described below, there were no material events or transactions that would require recognitionhas the ability and positive intent to hold until maturity are classified as held to maturity. All other securities are classified as available for sale as they may be sold prior to maturity in response to changes in the consolidated financial statementsCompany’s interest rate risk profile, funding needs, demand for collateralized deposits by public entities or disclosure in the notes to the consolidated financial statements.other reasons. Interest and dividends, including amortization of premiums and accretion of discounts, are recognized as interest income when earned.
In April 2020, the Company offered loans to customers thatTrading securities are guaranteed by the SBA under its PPP authorized under the CARES Act. The Company has provided approximately $600.0 million in loans to customers under this program. The Bank also received approvalstated at fair value. Realized and unrealized gains and losses from the FRB to access the PPP Liquidity Facility to fund PPP loans if needed.
On April 30, 2020, the Boardsales and fair value adjustments of Directors of the Company declared a dividend of $0.15 per common share payable on May 29, 2020 to stockholders of record as of close of business on May 15, 2020. With the many uncertainties of the COVID-19 pandemic, including the full impacts on the future financial results and operations of the Company, the Board of Directors determined a reduction to its regular quarterly dividend will help strengthen the Company's balance sheet and liquidity in light of the uncertainty surrounding the COVID-19 pandemic.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
2. New Accounting Standards
Accounting Standards Adopted in Fiscal Year 2020
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amended the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 was effective for the Company on October 1, 2019. For the periods presented, the Company did not designate any derivative financial instruments as formal hedging relationships, and therefore, did not utilize hedge accounting. As such, ASU 2017-12 did not impact the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessees recognize the assets and liabilities arising from leases on the balance sheet and disclose key information about leasing arrangements. Lesseestrading securities are required to recognize an obligation for future lease payments measured on a discounted basis and a related right-of-use asset. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, Revenue from Contracts with Customers. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which made technical corrections and improvements to the previous ASU issued, including a modified retrospective transition method that allows entities to apply the standard as of the adoption date. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which allowed lessors to exclude sales tax from consideration of the contract through a policy election and clarified treatment of certain lessor costs and variable payments for contracts with lease and nonlease components. The Company adopted this guidance beginning October 1, 2019 using the modified retrospective transition method and all practical expedients available other than the use of hindsight with respect to determining the lease term and assessing impairment of its right-of-use assets. As of the date of adoption, the Company's right-of-use assets and lease liabilities recordedincluded in other assets and accrued expenses and other liabilitiesnoninterest income on the consolidated balance sheets were $19.9 million and $20.9 million, respectively, arising from operating leasesstatements of income.
Available for sale securities are stated at fair value. For available for sale debt securities in whichan unrealized loss position, management first evaluates whether (1) the Company has the intent to sell a security; or (2) it is more-likely-than-not that the lessee. The Company also recognized a cumulative effect adjustment of $0.2 million as a result of remeasuring a pre-existing lease impairment as of the date of adoption. These ASUs did not have a material impact on the timing of expense or income recognition in the Company's consolidated statements of income.
Accounting Standards Not Yet Adopted in Fiscal Year 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes in the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclosesell the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13security before recovery of its amortized cost basis. If either criteria is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Entities are also allowed to elect to early adoptmet, the eliminated or modified disclosure requirements and delay adoptionentire amount of the new disclosure requirements until after their effective date. As ASU 2018-13 only revises disclosure requirements, the Company does not believe this ASU will have a material impact onunrealized loss is recognized in the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which addresses timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires institutions to measure all expected credit losses related to financial assets measured at amortized costsincome statement with an expected loss model based on historical experience, current conditions and reasonable and supportable forecasts relevant to affect the collectability of the financial assets, which is referred to as the current expected credit loss model. ASU 2016-13 requires enhanced disclosures, including qualitative and quantitative requirements, to help understand significant estimates and judgments used in estimating credit losses, as well as provide additional information about the amounts recorded in the financial statements. From November 2018 through February 2020, the FASB issued ASUs which made technical corrections and improvementsa corresponding adjustment to the previous ASU issued (ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments, Credit Losses; ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; and ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842)). The ASUs require the use of the modified retrospective approach for adoption. These ASUs will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted after December 15, 2018. The Company continues to make progress on its implementation plan including continuing to work through finalizing processes, controls and an independent model validation and we are on track to adopt as required on October 1, 2020. The Company is currentlysecurity's amortized cost basis.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
evaluatingIf neither criteria is met, the potential impact onCompany evaluates whether the consolidated financial statements; however, sincedecline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the magnitudeextent to which fair value is less than amortized cost, any changes to the rating of the anticipated changesecurity by a rating agency, and adverse conditions specifically related to the security, among other factors. Furthermore, securities issued by the U.S. Government or a U.S. Government sponsored enterprise which carry the explicit or implicit guarantee of the U.S. Government are considered "risk-free" and therefore no credit losses are assumed on those securities. If the assessment indicates a credit loss exists, the amortized cost basis is compared to the present value of cash flows expected to be collected from the security; if it is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the allowance for credit losses will be impacted by economic conditions and trendsare recorded as a provision for (reversal of) credit losses in the Company’s portfolio atconsolidated income statement. If the time of adoption,assessment indicates a credit loss does not exist, the quantitative impact cannot yet be reasonably estimated.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-upchange in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU will be effective for fiscal years,is recorded as unrealized gains and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption to havelosses, net of related taxes, and is included in stockholders’ equity as a material impact on the consolidated financial statements.component of accumulated other comprehensive income (loss).
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for a limited time period to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in ASU 2020-04Equity securities are elective for entities with contracts, including derivative contracts, that reference LIBOR or some other reference rate that are expected to be discontinued. For the Company's cash flow hedges, ASU 2020-04 allows: (i) an entity to change the reference rate without having to designate the hedging relationship; (ii) for cash flow hedges in which the designated hedged risk is LIBOR, allows an entity to assert that it remains probable that the hedged forecasted transaction will occur; and (iii) allows an entity to change the designated method used to assess hedge effectiveness and simplifies or temporarily suspends the assessment of hedge effectiveness for hedging relationships. ASU 2020-04 must be applied prospectively and was effective immediately upon issuance and remains effective through December 31, 2022. The Company is currently evaluating the impact that adopting this new accounting standard will have on the consolidated financial statements.
3. Securities Available for Sale
The amortized cost and approximatecarried at fair value, of investmentswith changes in securities, all of which are classified as available for sale according to management’s intent, are summarized as follows.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (dollars in thousands) | | | | | | |
As of March 31, 2020 | | | | | | | |
U.S. Treasury securities | $ | 69,629 | | | $ | 954 | | | $ | — | | | $ | 70,583 | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | 566,747 | | | 11,340 | | | (733) | | | 577,354 | |
Federal Home Loan Mortgage Corporation | 556,535 | | | 15,747 | | | (731) | | | 571,551 | |
Federal National Mortgage Association | 386,996 | | | 15,337 | | | (27) | | | 402,306 | |
Small Business Assistance Program | 300,498 | | | 5,725 | | | (42) | | | 306,181 | |
States and political subdivision securities | 60,511 | | | 517 | | | (27) | | | 61,001 | |
Other | 1,006 | | | 45 | | | — | | | 1,051 | |
Total | $ | 1,941,922 | | | $ | 49,665 | | | $ | (1,560) | | | $ | 1,990,027 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (dollars in thousands) | | | | | | |
As of September 30, 2019 | | | | | | | |
U.S. Treasury securities | $ | 94,178 | | | $ | 599 | | | $ | (32) | | | $ | 94,745 | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | 501,139 | | | 3,374 | | | (3,027) | | | 501,486 | |
Federal Home Loan Mortgage Corporation | 463,974 | | | 8,840 | | | (770) | | | 472,044 | |
Federal National Mortgage Association | 322,340 | | | 5,409 | | | (398) | | | 327,351 | |
Small Business Assistance Program | 316,502 | | | 3,674 | | | (154) | | | 320,022 | |
States and political subdivision securities | 66,145 | | | 494 | | | (116) | | | 66,523 | |
Other | 1,006 | | | 31 | | | — | | | 1,037 | |
Total | $ | 1,765,284 | | | $ | 22,421 | | | $ | (4,497) | | | $ | 1,783,208 | |
The amortized cost and approximate fair value of debt securities available for sale as of March 31, 2020 and September 30, 2019, by contractual maturity, are shown below. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without penalty.
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | September 30, 2019 | |
| Amortized Cost | Estimated Fair Value | | Amortized Cost | Estimated Fair Value |
| (dollars in thousands) | | | | |
Due in one year or less | $ | 82,615 | | $ | 83,577 | | | $ | 58,377 | | $ | 58,343 | |
Due after one year through five years | 35,858 | | 36,102 | | | 89,836 | | 90,601 | |
Due after five years through ten years | 11,667 | | 11,905 | | | 12,110 | | 12,324 | |
Due after ten years | — | | — | | | — | | — | |
| 130,140 | | 131,584 | | | 160,323 | | 161,268 | |
Mortgage-backed securities | 1,810,776 | | 1,857,392 | | | 1,603,955 | | 1,620,903 | |
Securities without contractual maturities | 1,006 | | 1,051 | | | 1,006 | | 1,037 | |
Total | $ | 1,941,922 | | $ | 1,990,027 | | | $ | 1,765,284 | | $ | 1,783,208 | |
Proceeds from sales of securities available for sale were $0.0 million for both the three and six months ended March 31, 2020. Proceeds from the sales of securities available for sale were $0.0 million and $97.2 million for the three and six months ended March 31, 2019, respectively. NaN gross gains (pre-tax) were realized on the sales for the three and six months ended March 31, 2020 and 2019, using the specific identification method. Nominal gross losses (pre-tax) were realized on the sales for the three months ended March 31, 2020 and 2019, and nominal and $0.5 million gross losses (pre-tax) were realized on the sales for the six months ended March 31, 2020 and 2019, respectively, using the specific identification method. The Company recognized 0 other-than-temporary impairment for the three and six months ended March 31, 2020 and 2019.
Securities with an estimated fair value of approximately $918.8 million and $863.9 million at March 31, 2020 and September 30, 2019, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required by contractual obligation or law. The counterparties do not have the right to sell or pledge the securities the Company has pledged as collateral.
As detailed in the following tables, certain investments in debt securities, which are approximately 12% and 36% of the Company’s investment portfolio at estimated fair value at March 31, 2020 and September 30, 2019, respectively, are reported in the consolidated financial statements of income. Equity securities without readily determinable fair values are carried at an amount less than their amortized cost. Based on evaluation of available evidence, including recentcost, minus impairment, if any, plus or minus changes resulting from observable price changes in market interest rates, credit rating information, implicitorderly transactions for the identical or explicit government guarantees,similar investment.
Loans
Originated Loans
Loans that management has the intent and information obtained from regulatory filings, management believesability to hold for the declines in fair value of these securitiesforeseeable future, or until maturity or pay-off, are temporary. As the Company does not intend to sell the securities and it is not more-likely-than-not the Company will be required to sell the securities before the recovery of theirreported at amortized cost basis, which may be maturity, the Company does not consider the securities to be other-than-temporarily impaired at March 31, 2020 or September 30, 2019.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company’s gross unrealized losses(i.e., outstanding principal balance, adjusted for charge-offs and approximate fair value in investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | | 12 months or more | | | Total | |
| Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses |
| (dollars in thousands) | | | | | | | |
As of March 31, 2020 | | | | | | | | |
U.S. Treasury securities | $ | — | | $ | — | | | $ | — | | $ | — | | | $ | — | | $ | — | |
Mortgage-backed securities | 30,374 | | (189) | | | 207,955 | | (1,344) | | | 238,329 | | (1,533) | |
States and political subdivision securities | — | | — | | | 9,242 | | (27) | | | 9,242 | | (27) | |
Other | — | | — | | | — | | — | | | — | | — | |
Total | $ | 30,374 | | $ | (189) | | | $ | 217,197 | | $ | (1,371) | | | $ | 247,571 | | $ | (1,560) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | | 12 months or more | | | Total | |
| Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses |
| (dollars in thousands) | | | | | | | |
As of September 30, 2019 | | | | | | | | |
U.S. Treasury securities | $ | — | | $ | — | | | $ | 44,729 | | $ | (32) | | | $ | 44,729 | | $ | (32) | |
Mortgage-backed securities | 94,612 | | (205) | | | 474,979 | | (4,144) | | | 569,591 | | (4,349) | |
States and political subdivision securities | — | | — | | | 23,693 | | (116) | | | 23,693 | | (116) | |
Other | — | | — | | | — | | — | | | — | | — | |
Total | $ | 94,612 | | $ | (205) | | | $ | 543,401 | | $ | (4,292) | | | $ | 638,013 | | $ | (4,497) | |
As of March 31, 2020 and September 30, 2019, the Company had 58 and 169 securities, respectively, in an unrealized loss position.
4. Loans
The following table presents the composition of loans as of March 31, 2020 and September 30, 2019.
| | | | | | | | | | | |
| March 31, 2020 | | September 30, 2019 |
| (dollars in thousands) | | |
Commercial real estate | $ | 5,222,819 | | | $ | 5,092,410 | |
Agriculture | 1,881,792 | | | 2,008,644 | |
Commercial non-real estate | 1,699,197 | | | 1,719,956 | |
Residential real estate | 820,759 | | | 812,208 | |
Consumer | 52,640 | | | 51,925 | |
Other | 39,908 | | | 47,541 | |
Ending balance | 9,717,115 | | | 9,732,684 | |
Less: Unamortized discount on acquired loans | (10,468) | | | (13,655) | |
Unearned net deferred fees and costs and loans in process | (13,352) | | | (12,266) | |
Total | $ | 9,693,295 | | | $ | 9,706,763 | |
The loan segments above include loans covered by a FDIC non-commercial loss sharing agreement totaling $29.7 million and $31.9 million as of March 31, 2020 and September 30, 2019, respectively, residential real estate loans held for sale totaling $4.3 million and $7.4 million at March 31, 2020 and September 30, 2019, respectively, and $792.1 million and $813.0 million of loans accounted for at fair value at March 31, 2020 and September 30, 2019, respectively.
Unearned netany unamortized deferred fees and costs totaled $13.7 million and $13.9 million as of March 31, 2020 and September 30, 2019, respectively. Loans in process represent loans that have been funded as of the balance sheet dates butor costs). Other fees not classified intoassociated with originating a loan category and loan payments receivedare recognized as of the balance sheet dates that have not been applied to individual loan accounts. Loans in process totaled $(0.4) million and $(1.6) million at March 31, 2020 and September 30, 2019, respectively.
Loans guaranteed by agencies of the U.S. government totaled $146.2 million and $154.2 million at March 31, 2020 and September 30, 2019, respectively.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Principal balances of residential real estate loans sold totaled $68.4 million and $46.8 million for the three months ended March 31, 2020 and 2019, respectively, and $175.4 million and $100.7 million for the six months ended March 31, 2020 and 2019, respectively.
Nonaccrualfee income when earned.
Interest income on loans is accrued daily on the outstanding balances. A loan is placed on nonaccrual status when management believes, after considering collection efforts and other factors, the borrowers'borrower's condition is such that collection of interest is doubtful, which is generally 90 days past due. When loans are placed on nonaccrual status, accrual of interest is discontinued and interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.
For loans held for sale, loan fees charged or received on origination, net of certain direct loan origination costs, are recognized in income when the related loan is sold. For loans held for investment, loan fees, net of certain direct loan origination costs, are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The following table presentsCompany is generally amortizing these amounts over the contractual lives of the loans. Commitment fees are recognized as income when received.
The Company makes commercial, agricultural, residential real estate, consumer and other loans to customers primarily in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower. Collateral held varies but includes accounts receivable, marketable securities, inventory, equipment and real estate. Personal guarantees of the borrower or related parties and government guarantees are also obtained for some loans, which reduces the Company’s nonaccrualrisk of loss.
Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value. Loans held for sale include fixed rate single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans are carried at March 31, 2020cost and September 30, 2019, excluding ASC 310-30sold within 45 days. These loans are sold with the mortgage servicing rights released. Under limited circumstances, buyers may have recourse to return a purchased loan to the Company. Recourse conditions may include early payment default, breach of representation or warranties, or documentation deficiencies.
Fair value of loans held for sale is determined based on prevailing market prices for loans with similar characteristics, sale contract prices, or, for certain portfolios, discounted cash flow analysis. Declines in fair value below cost (and subsequent recoveries) are recognized in net gain on sale of loans. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Gains or losses on sales are recognized upon delivery and included in net gain on sale of loans.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Loans at Fair Value Under the Fair Value Option ("FVO loans")
The Company has elected to measure certain long-term loans and written loan commitments at fair value to assist in managing interest rate risk for longer-term loans. Fair value loans are fixed-rate loans having original maturities of 5 years or greater than 90 days past due(typically between 5 and still accruing15 years) to our business and agri-business banking customers to assist them in facilitating their risk management strategies. The fair value option was elected upon the origination or acquisition of these loans and written loan commitments. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon closing.
The Company has also entered into interest rate derivative contracts to convert these long term fixed rate loans to variable rates. These contracts do not quality for hedge accounting and instead these interest rate derivative instruments are recognized as other assets or other liabilities on the consolidated balance sheets and measured at fair value, with changes in fair value reported in change in fair value of March 31, 2020FVO loans and September 30, 2019, were $2.3 millionrelated derivatives on the consolidated statements of income. Since each fixed rate loan is paired with an offsetting derivative contract, the impact to net income is minimized. When determined necessary, a credit mark is applied against the valuation of the asset that reflects the borrower's credit worthiness. Changes in the credit mark are included in change in fair value of FVO loans and $11.2 million, respectively.
| | | | | | | | | | | |
| March 31, 2020 | | September 30, 2019 |
| (dollars in thousands) | | |
Nonaccrual loans | | | |
Commercial real estate | $ | 41,541 | | | $ | 14,973 | |
Agriculture | 143,198 | | | 77,880 | |
Commercial non-real estate | 21,334 | | | 9,502 | |
Residential real estate | 4,437 | | | 2,661 | |
Consumer | 97 | | | 74 | |
Total | $ | 210,607 | | | $ | 105,090 | |
related derivatives on the consolidated statements of income.Credit Quality InformationRisk Management
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for all credit exposures. The strategy also emphasizes diversification on a geographic, industry, loan class type, and customer level; regular credit examinations; and management reviews of loans exhibiting deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. Loan decisions are documented with respect to the borrower’s business, purpose of the loan, evaluation of the repayment sources, and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale.
The Company assigns all non-consumer loans a credit quality risk rating. TheseThe Company implemented a more granular risk rating methodology as of October 1, 2020. See the table below for a summary of credit quality risk ratings are Pass, Watch, Substandard, Doubtful and Loss. Loans with a Pass and Watch rating represent those loans not classifiedat December 31, 2020. For information on the Company’s rating scale as problem credits, withcredit quality risk ratings in effect before October 1, 2020, see "1. Nature of Operations and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
| | | | | |
Credit Quality Risk Rating Effective After October 1, 2020 | Credit Quality Indicators |
Pass | Commercial loans within this category are not adversely rated, current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low likelihood of loss related to loans in this category. |
Special Mention | Commercial loans within this category have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse classification. |
Substandard | Commercial loans within this category are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans in this category are assigned a workout loan officer to closely monitor the relationship. |
Doubtful | Commercial loans within this category are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. |
Revolving lines of credit rated Substandard or Doubtful require a Watch rating being monitoredhigher level of approval and updated at least quarterly by management. Substandard loans are those where a well-defined weakness has been identified thatreviewed quarterly. Advances are allowed to support the continued operating needs of the borrower for their operation and may put full collection of contractual debt at risk. Doubtful loans are those where a well-defined weakness has been identifiedinclude, but not limited to, working capital needs to support inventory, accounts receivable, payroll, tax payments, utilities and a loss of contractual debt is probable. Substandard and doubtful loans are monitored and updated monthly. other needs to operate the business.
All non-consumer loan risk ratings are monitored by management and updated as deemed appropriate. The Company generally does not risk rate residential real estate or consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Alternatively, delinquencies are monitored and standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.
The following table presents the composition of the loan portfolio by internally assigned grade as of March 31, 2020 and September 30, 2019. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value with changes in fair value reported in earnings of $792.1 million at March 31, 2020 and $813.0 million at September 30, 2019.
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As of March 31, 2020 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate ¹ | | Consumer ¹ | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | |
Pass | $ | 4,478,193 | | | $ | 1,157,671 | | | $ | 1,431,706 | | | $ | 776,696 | | | $ | 51,657 | | | $ | 39,908 | | | $ | 7,935,831 | |
Watchlist | 104,941 | | | 229,606 | | | 28,859 | | | 986 | | | 728 | | | — | | | 365,120 | |
Substandard | 132,937 | | | 345,674 | | | 92,849 | | | 10,694 | | | 122 | | | — | | | 582,276 | |
Doubtful | 51 | | | 1,437 | | | 99 | | | 16 | | | 4 | | | — | | | 1,607 | |
Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ending balance | 4,716,122 | | | 1,734,388 | | | 1,553,513 | | | 788,392 | | | 52,511 | | | 39,908 | | | 8,884,834 | |
Loans covered by a FDIC loss sharing agreement | — | | | — | | | — | | | 29,691 | | | — | | | — | | | 29,691 | |
Total | $ | 4,716,122 | | | $ | 1,734,388 | | | $ | 1,553,513 | | | $ | 818,083 | | | $ | 52,511 | | | $ | 39,908 | | | $ | 8,914,525 | |
1 The Company generally does not risk rate residential real estate or consumer loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans. | | | | | | | | | | | | | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate ¹ | | Consumer ¹ | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Credit Risk Profile by Internally Assigned Grade | | | | | | | | | | | | | |
Grade: | | | | | | | | | | | | | |
Pass | $ | 4,433,530 | | | $ | 1,346,436 | | | $ | 1,424,357 | | | $ | 763,797 | | | $ | 50,796 | | | $ | 47,541 | | | $ | 8,066,457 | |
Watchlist | 85,256 | | | 179,965 | | | 103,514 | | | 6,297 | | | 755 | | | — | | | 375,787 | |
Substandard | 54,242 | | | 322,327 | | | 42,048 | | | 6,863 | | | 205 | | | — | | | 425,685 | |
Doubtful | 56 | | | 5,811 | | | 296 | | | 55 | | | 2 | | | — | | | 6,220 | |
Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Ending balance | 4,573,084 | | | 1,854,539 | | | 1,570,215 | | | 777,012 | | | 51,758 | | | 47,541 | | | 8,874,149 | |
Loans covered by a FDIC loss sharing agreement | — | | | — | | | — | | | 31,891 | | | — | | | — | | | 31,891 | |
Total | $ | 4,573,084 | | | $ | 1,854,539 | | | $ | 1,570,215 | | | $ | 808,903 | | | $ | 51,758 | | | $ | 47,541 | | | $ | 8,906,040 | |
1 The Company generally does not risk rate residential real estate or consumer loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans. | | | | | | | | | | | | | |
Past Due Loans
The following table presents the Company’s past due loans at March 31, 2020 and September 30, 2019. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value with changes in fair value reported in earnings of $792.1 million at March 31, 2020 and $813.0 million at September 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater Past Due | | Total Past Due | | Current | | Total Financing Receivables |
| (dollars in thousands) | | | | | | | | | | |
As of March 31, 2020 | | | | | | | | | | | |
Commercial real estate | $ | 25,351 | | | $ | 4,056 | | | $ | 13,752 | | | $ | 43,159 | | | $ | 4,672,963 | | | $ | 4,716,122 | |
Agriculture | 30,196 | | | 10,160 | | | 60,176 | | | 100,532 | | | 1,633,856 | | | 1,734,388 | |
Commercial non-real estate | 2,538 | | | 956 | | | 20,497 | | | 23,991 | | | 1,529,522 | | | 1,553,513 | |
Residential real estate | 3,702 | | | 252 | | | 2,550 | | | 6,504 | | | 781,888 | | | 788,392 | |
Consumer | 42 | | | 5 | | | 29 | | | 76 | | | 52,435 | | | 52,511 | |
Other | — | | | — | | | — | | | — | | | 39,908 | | | 39,908 | |
Ending balance | 61,829 | | | 15,429 | | | 97,004 | | | 174,262 | | | 8,710,572 | | | 8,884,834 | |
Loans covered by a FDIC loss sharing agreement | 1,201 | | | 319 | | | 757 | | | 2,277 | | | 27,414 | | | 29,691 | |
Total | $ | 63,030 | | | $ | 15,748 | | | $ | 97,761 | | | $ | 176,539 | | | $ | 8,737,986 | | | $ | 8,914,525 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or Greater Past Due | | Total Past Due | | Current | | Total Financing Receivables |
| (dollars in thousands) | | | | | | | | | | |
As of September 30, 2019 | | | | | | | | | | | |
Commercial real estate | $ | 3,587 | | | $ | 570 | | | $ | 2,475 | | | $ | 6,632 | | | $ | 4,566,452 | | | $ | 4,573,084 | |
Agriculture | 13,411 | | | 1,267 | | | 33,089 | | | 47,767 | | | 1,806,772 | | | 1,854,539 | |
Commercial non-real estate | 3,932 | | | 120 | | | 4,424 | | | 8,476 | | | 1,561,739 | | | 1,570,215 | |
Residential real estate | 311 | | | 676 | | | 939 | | | 1,926 | | | 775,086 | | | 777,012 | |
Consumer | 61 | | | 110 | | | 7 | | | 178 | | | 51,580 | | | 51,758 | |
Other | — | | | — | | | — | | | — | | | 47,541 | | | 47,541 | |
Ending balance | 21,302 | | | 2,743 | | | 40,934 | | | 64,979 | | | 8,809,170 | | | 8,874,149 | |
Loans covered by a FDIC loss sharing agreement | 536 | | | 410 | | | 331 | | | 1,277 | | | 30,614 | | | 31,891 | |
Total | $ | 21,838 | | | $ | 3,153 | | | $ | 41,265 | | | $ | 66,256 | | | $ | 8,839,784 | | | $ | 8,906,040 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Impaired Loans
The following table presents the Company’s impaired loans. This table excludes purchased credit impaired loans and loans measured at fair value with changes in fair value reported in earnings of $792.1 million at March 31, 2020 and $813.0 million at September 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | September 30, 2019 | | |
| Recorded Investment | Unpaid Principal Balance | Related Allowance | | Recorded Investment | Unpaid Principal Balance | Related Allowance |
| (dollars in thousands) | | | | | | |
Impaired loans: | | | | | | | |
With an allowance recorded: | | | | | | | |
Commercial real estate | $ | 60,619 | | $ | 61,828 | | $ | 7,020 | | | $ | 26,003 | | $ | 26,297 | | $ | 4,159 | |
Agriculture | 35,013 | | 36,267 | | 8,136 | | | 98,392 | | 104,350 | | 8,234 | |
Commercial non-real estate | 34,227 | | 37,737 | | 8,601 | | | 21,331 | | 21,777 | | 6,062 | |
Residential real estate | 5,426 | | 5,923 | | 2,115 | | | 3,829 | | 4,311 | | 1,795 | |
Consumer | 125 | | 133 | | 36 | | | 207 | | 214 | | 97 | |
Total impaired loans with an allowance recorded | 135,410 | | 141,888 | | 25,908 | | | 149,762 | | 156,949 | | 20,347 | |
With no allowance recorded: | | | | | | | |
Commercial real estate | 72,060 | | 110,873 | | — | | | 28,272 | | 66,631 | | — | |
Agriculture | 312,866 | | 331,126 | | — | | | 231,087 | | 255,308 | | — | |
Commercial non-real estate | 59,250 | | 67,488 | | — | | | 21,579 | | 31,414 | | — | |
Residential real estate | 5,475 | | 7,870 | | — | | | 3,290 | | 5,454 | | — | |
Consumer | 2 | | 110 | | — | | | 1 | | 108 | | — | |
Total impaired loans with no allowance recorded | 449,653 | | 517,467 | | — | | | 284,229 | | 358,915 | | — | |
Total impaired loans | $ | 585,063 | | $ | 659,355 | | $ | 25,908 | | | $ | 433,991 | | $ | 515,864 | | $ | 20,347 | |
The following table presents the average recorded investment on impaired loans and interest income recognized on impaired loans for the three and six months ended March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | Six Months Ended March 31, | | | | |
| 2020 | | | 2019 | | | 2020 | | | 2019 | |
| Average Recorded Investment | Interest Income Recognized While on Impaired Status | | Average Recorded Investment | Interest Income Recognized While on Impaired Status | | Average Recorded Investment | Interest Income Recognized While on Impaired Status | | Average Recorded Investment | Interest Income Recognized While on Impaired Status |
| (dollars in thousands) | | | | | | | | | | |
Commercial real estate | $ | 112,623 | | $ | 1,287 | | | $ | 34,475 | | $ | 345 | | | $ | 93,174 | | $ | 3,666 | | | $ | 36,616 | | $ | 697 | |
Agriculture | 369,598 | | 4,784 | | | 151,021 | | 2,203 | | | 356,225 | | 13,301 | | | 146,423 | | 3,202 | |
Commercial non-real estate | 97,672 | | 1,531 | | | 22,556 | | 312 | | | 79,418 | | 4,401 | | | 22,731 | | 678 | |
Residential real estate | 10,904 | | 127 | | | 6,724 | | 93 | | | 9,642 | | 393 | | | 6,711 | | 182 | |
Consumer | 139 | | 3 | | | 237 | | 6 | | | 162 | | 4 | | | 212 | | 11 | |
Total | $ | 590,936 | | $ | 7,732 | | | $ | 215,013 | | $ | 2,959 | | | $ | 538,621 | | $ | 21,765 | | | $ | 212,693 | | $ | 4,770 | |
Valuation adjustment reductions made to repossessed properties totaled $4.8 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. Valuation adjustment reductions made to repossessed properties totaled $4.8 million and $2.0 million for the six months ended March 31, 2020 and 2019, respectively. The adjustments are included in net loss on repossessed property and other related expenses in noninterest expense.
Troubled Debt Restructurings
Included in certain loan categoriesLoans modified under troubled debt restructurings involve granting a concession to a borrower who is experiencing financial difficulty. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection, which generally would not otherwise be considered. The Company's TDRs include performing and nonperforming TDRs, which consist of loans that continue to accrue interest at the loan's original interest rate when the Company expects to collect the remaining principal and interest on the loan, and nonaccrual TDRs, which include loans that are in a nonaccrual status and are no longer accruing interest, as the Company does not expect to collect the full amount of principal and interest owed from the borrower on these loans. At the time of modification (except for loans on nonaccrual status), a TDR is classified as nonperforming TDR until a six-month payment history of principal and interest payments, in accordance with the terms of the loan modification, is sustained, at which time the loan is moved to a performing status (performing TDR). If the Company does not expect to collect all principal and interest on the loan, the modified loan is classified as a nonaccrual TDR. All TDRs are accounted for as impaired loans and are TDRs that were classified as impaired. These TDRs do not include purchased credit impaired loans. When the Company grants concessions to borrowers such as reduced interest rates or extensions of loan periods that would not be considered other than because of borrowers’ financial difficulties, the modification is considered a TDR. Specific reserves included in the analysis of the allowance for credit losses. A TDR that has been renewed for a borrower who is no longer experiencing financial difficulty and which yields a market rate of interest at the time of a renewal is no longer considered a TDR.
In March 2020, a statement was issued by our banking regulators titled "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan and lease losses for TDRs were $6.9 million and $10.3 million at March 31, 2020 and September 30, 2019, respectively. There were $0.1 million and $0.2 million of commitments to lend additional funds to borrowers whose loans were modified inmodification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until December 31, 2020. In December 2020, the Economic Aid to Hard Hit Small Businesses, Non-Profits, and Ventures Act was enacted, which extended the TDR provisions of March 31,the CARES Act to January 1, 2022. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
Allowance for Credit Losses ("ACL")
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, which uses the current expected credit loss model ("CECL") to determine the allowance for credit losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and the net investments in leases recognized by a lessor in accordance with Topic 842 on leases. The CECL methodology requires recognition of lifetime expected credit losses that takes into consideration all relevant information, including historical losses, current conditions and reasonable and supportable forecasts of future operating conditions.
Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an individual basis ("individual reserve"). The reserve related to these loans is using the collateral available to repay the loan, most typically the liquidation value of the collateral (less selling costs, if applicable). The Company has chosen to continue to include small, less complex loans within the collective reserve for loans on nonaccrual or with TDR status.
Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). Loans are aggregated into pools (or segments) based on similar risk characteristics including borrower type, collateral, type and expected credit loss patterns. The historical loss experience of the pool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan segment is applied to each loan within the segment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in loss expectations relative to the historical loss rates. These models have been implemented in accordance with the Company's Model Risk Management Policy. Additionally, using its new risk rating system, the Company evaluates if the current credit quality of the portfolio materially differs from the one observed over the historical loss period and applies adjustments to the allowance accordingly. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans servicing practices and changes in underwriting criteria.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period.
The following table describes the Company’s 8 loan portfolio pools, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses.
| | | | | | | | | | | | | | |
Loan Segment | Composition | Collateral | Primary Source of Repayment | Key Risk Characteristics |
Construction and development 1 | Commercial and residential construction loans | Secured by commercial and residential real estate | Cash flows | Industry and geography of borrower's business, purpose of the loan, repayment sources, borrower's capacity and financial performance, loan covenants, guarantees and nature of pledged collateral |
Owner-occupied CRE | Small and middle market businesses | Secured by commercial real estate |
Non-owner-occupied CRE |
Multifamily residential real estate |
Agriculture | Agri-business operating and real estate loans | Secured by operating assets, agricultural real estate, and guarantees of owners | Cash flows | Geography of the borrower's operations, commodity type and prices and weather patterns, purpose of the loan, repayment sources, borrower's debt capacity and financial performance, loan covenants, guarantees and nature of pledged collateral |
Commercial non-real estate | Small and middle market businesses and loans made to public sector | Secured by business assets and guarantees of owners | Cash flows | Industry and geography of the borrower's business, purpose of the loan, repayment sources, borrower's debt capacity and financial performance, loan covenants, guarantees and nature of pledged collateral |
Residential real estate | Residential mortgages and home equity loans and lines | Secured by residential real estate | Borrower's income | Borrower's capacity and willingness to repay, unemployment rates and other economic factors, and customer repayment history |
Consumer and other | Consumer loans and all other loan relationships that do not fit within categories above, including consumer and commercial credit cards and consumer deposit account overdrafts | Secured by automobiles, unsecured |
1 Residential real estate construction loans are included in the construction and development segment until construction is completed, after which the loan is moved to the residential real estate loan segment. |
Changes to the allowance for credit losses are made by charges to the provision for credit losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans deemed to be uncollectible are charged off against the allowance for credit losses. Recoveries of amounts previously charged-off are credited to the allowance for credit losses.
Unfunded Commitments and Unfunded Commitments Reserve
Unfunded residential mortgage loan commitments entered into in connection with mortgage loans to be held for sale are considered derivatives and are recorded at fair value and included in accrued expenses and other liabilities on the consolidated balance sheets with changes in fair value recorded in other interest income in the consolidated statements of income. All other unfunded loan commitments are generally related to providing credit facilities to customers and are not considered derivatives.
The unfunded commitments reserve ("unfunded reserve") presents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. An unfunded reserve is not recognized for commitments unconditionally cancellable by the Company, which includes credit cards, warehouse lines of credit and other revolving lines which are deemed to be unconditionally cancellable and is recorded in accrued expenses and other liabilities on the consolidated balance sheet. Changes to the unfunded reserve are recognized in provision for credit losses in the consolidated statements of income. The unfunded reserve is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). Loss rates are estimated by utilizing the same loss rates calculated for the collective reserve of the allowance for credit losses. The Company's change in unfunded commitments reserve from the incurred loss methodology to the current expected credit loss methodology was immaterial as of the date of adoption and therefore no provision was recognized.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Accrued Interest Receivable
Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, the Company has elected the following:
•Accrued interest receivable balances are presented separately within the consolidated balance sheets,
•Accrued interest receivable balances are excluded from amortized cost of financing receivables and related disclosure requirements, and
•Uncollectible accrued interest receivable is written off by reversing interest income, generally upon becoming 90 days past due.
Accordingly, we do not recognize an allowance for credit losses on accrued interest receivable.
Subsequent Events
The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. Other than those described below, there were no material events or transactions that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
On January 27, 2021, the Board of Directors of the Company declared a dividend of $0.01 per common share payable on February 26, 2021 to stockholders of record as of close of business on February 12, 2021.
2. New Accounting Standards
Accounting Standards Adopted in Fiscal Year 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which address recording of estimated lifetime credit losses on loans, including funded and unfunded commitments, and other financial instruments held by financial institutions and other organizations. ASU 2016-13, as amended, requires institutions to measure all expected credit losses related to financial assets measured at amortized cost with an expected loss model based on historical experience, current conditions and reasonable and supportable forecasts relevant to affect the collectability of the financial assets, which is referred to as the CECL model. ASU 2016-13, as amended, requires enhanced disclosures, including qualitative and quantitative requirements, to help understand significant estimates and judgments used in estimating credit losses, as well as provide additional information about the amounts recorded in the financial statements.
The measurement of expected losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit and other similar instruments). In addition, CECL requires debt securities available for sale with an unrealized loss to be recognized as allowance for credit loss rather than as a write-down of the securities amortized cost basis when management intends to sell or believes that it is not more-likely-than-not that they will be required to sell the securities prior to recovery of the securities amortized cost to be recognized as allowance for credit loss rather than as a write-down of the securities amortized cost basis . The CECL standard does not apply to the loan portfolio accounted for using the fair value option.
The Company identified 8 loan portfolio segments for which a model has been established to estimate credit losses. The historical data sets of these segments were identified, populated and validated. Each segment contains loans which have similar risk characteristics. Not unlike the incurred loss model, each segment is split into loans that are individually assessed and those that are collectively assessed.
The Company adopted the standard on October 1, 2020, and September 30, 2019, respectively.applied the standard's provisions under the modified retrospective approach. Upon adoption of the standard, the Company recorded a $177.3 million increase to the ACL, of which $1.5 million related to the transfer of discounts on previously acquired loans and $175.8 million related to changes from the incurred loss model to the CECL model, which resulted in a cumulative effect adjustment decrease of $132.9 million (after-tax) to retained earnings. The tax effect resulted in a $42.9 million increase in deferred tax assets. In addition, the Company has elected the 5 year CECL transition for regulatory capital ratios, resulting in an add-back of $129.5 million to common equity tier 1 capital as of December 31, 2020.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the composition of loans and allowance by portfolio segment as of September 30, 2020, as adjusted at September 30, 2020 and October 1, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reported Balance September 30, 2020 | | Reclassifications ¹ | | Unamortized Discounts, Unearned Net Deferred Fees and Net Loans in Process Included in Amortized Cost ² | | Adjusted Balance September 30, 2020 | | Adoption of ASU 2016-13, as amended ³ | | Adjusted Balance October 1, 2020 |
| (dollars in thousands) |
Loans: | | | | | | | | | | | |
Construction and development | n/a ⁴ | | $ | 512,539 | | | $ | (2,895) | | | $ | 509,644 | | | $ | 0 | | | $ | 509,644 | |
Owner-occupied CRE | n/a ⁴ | | 1,420,061 | | | (2,667) | | | 1,417,394 | | | 36 | | | 1,417,430 | |
Non-owner-occupied CRE | n/a ⁴ | | 2,902,612 | | | (8,232) | | | 2,894,380 | | | 1,497 | | | 2,895,877 | |
Multifamily residential real estate | n/a ⁴ | | 536,828 | | | (2,845) | | | 533,983 | | | (8) | | | 533,975 | |
Total commercial real estate | 5,274,941 | | | (5,274,941) | | | 0 | | | 0 | | | 0 | | | 0 | |
Agriculture | 1,724,350 | | | 0 | | | (1,654) | | | 1,722,696 | | | 55 | | | 1,722,751 | |
Commercial non-real estate | 2,181,656 | | | 0 | | | (16,618) | | | 2,165,038 | | | (85) | | | 2,164,953 | |
Residential real estate | 830,102 | | | (97,099) | | | (2,191) | | | 730,812 | | | 23 | | | 730,835 | |
Consumer and other | 0 | | | 100,553 | | | 1,642 | | | 102,195 | | | (20) | | | 102,175 | |
Consumer | 63,206 | | | (63,206) | | | 0 | | | 0 | | | 0 | | | 0 | |
Other | 37,347 | | | (37,347) | | | 0 | | | 0 | | | 0 | | | 0 | |
Ending balance | 10,111,602 | | | 0 | | | (35,460) | | | 10,076,142 | | | 1,498 | | | 10,077,640 | |
Less: Unamortized discount on acquired loans | (8,215) | | | 0 | | | 8,215 | | | 0 | | | 0 | | | 0 | |
Unearned net deferred fees and costs and net loans in process | (27,245) | | | 0 | | | 27,245 | | | 0 | | | 0 | | | 0 | |
Total | $ | 10,076,142 | | | $ | — | | | $ | — | | | $ | 10,076,142 | | | $ | 1,498 | | | $ | 10,077,640 | |
| | | | | | | | | | | |
Allowance: | | | | | | | | | | | |
Construction and development | n/a ⁴ | | $ | (7,012) | | | $ | 0 | | | $ | (7,012) | | | $ | (11,963) | | | $ | (18,975) | |
Owner-occupied CRE | n/a ⁴ | | (20,530) | | | 0 | | | (20,530) | | | (4,298) | | | (24,828) | |
Non-owner-occupied CRE | n/a ⁴ | | (50,965) | | | 0 | | | (50,965) | | | (98,986) | | | (149,951) | |
Multifamily residential real estate | n/a ⁴ | | (6,726) | | | 0 | | | (6,726) | | | (2,681) | | | (9,407) | |
Total commercial real estate | (84,496) | | | 84,496 | | | — | | | — | | | — | | | — | |
Agriculture | (27,018) | | | 0 | | | 0 | | | (27,018) | | | (24,360) | | | (51,378) | |
Commercial non-real estate | (27,599) | | | 0 | | | 0 | | | (27,599) | | | (32,938) | | | (60,537) | |
Residential real estate | (8,202) | | | 737 | | | 0 | | | (7,465) | | | (2,595) | | | (10,060) | |
Consumer and other | (2,572) | | | 0 | | | 0 | | | (2,572) | | | 532 | | | (2,040) | |
Total | $ | (149,887) | | | $ | 0 | | | $ | 0 | | | $ | (149,887) | | | $ | (177,289) | | | $ | (327,176) | |
1 Reclassifications made from reported loan and related allowance segments to align with the eight loan portfolio segments established for adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, to estimate credit losses. |
2 Unamortized discount on acquired loans, unearned net deferred fees and costs and net loans in process to related were assigned to appropriate loan portfolio segment to present loan categories at amortized cost. |
3 Discounts on previously acquired loans and Day 1 impact of adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, were transferred to allowance for credit losses as a part of CECL adoption. |
4 Balance for this segment is included in total commercial real estate for September 30, 2020. |
The Company did not record an allowance for available for sale or held to maturity securities upon adoption as the investment portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S. Government for which expected credit loss is zero.
We adopted the CECL standard using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On October 1, 2020, the Company determined $1.5 million of existing discounts on PCD loans was related to credit factors and was reclassified to the ACL. The remaining noncredit discount of $6.7 million was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the remaining life of the loans. For additional information, see "Note 1. Nature of Operations and Summary of Significant Policies", "Note 3. Securities Available for Sale", and "Note 4. Loans and Allowance for Credit Losses."
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Accounting Standards Not Yet Adopted in Fiscal Year 2021
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes in the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Entities are also allowed to elect to early adopt the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until after their effective date. As ASU 2018-13 only revises disclosure requirements, the Company does not believe this ASU will have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2019-12 on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323 and Topic 815, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not expect adoption to have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for a limited time period to ease the potential burden in accounting for reference rate reform on financial reporting. The amendments in ASU 2020-04 are elective for entities with contracts, including derivative contracts, that reference LIBOR or some other reference rate that are expected to be discontinued. For the Company's cash flow hedges, ASU 2020-04 allows: (i) an entity to change the reference rate without having to designate the hedging relationship; (ii) for cash flow hedges in which the designated hedged risk is LIBOR, allows an entity to assert that it remains probable that the hedged forecasted transaction will occur; and (iii) allows an entity to change the designated method used to assess hedge effectiveness and simplifies or temporarily suspends the assessment of hedge effectiveness for hedging relationships. ASU 2020-04 must be applied prospectively and was effective immediately upon issuance and remains effective through December 31, 2022. The Company is currently evaluating the impact that adopting this new accounting standard will have on the consolidated financial statements.
3. Securities Available for Sale
The amortized cost and approximate fair value of investments in securities, all of which are classified as available for sale according to management’s intent, are summarized as follows.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (dollars in thousands) |
As of December 31, 2020 | | | | | | | |
U.S. Treasury securities | $ | 24,991 | | | $ | 23 | | | $ | 0 | | | $ | 25,014 | |
U.S. Agency securities | 24,975 | | | 0 | | | (272) | | | 24,703 | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | 424,756 | | | 10,220 | | | (102) | | | 434,874 | |
Federal Home Loan Mortgage Corporation | 769,254 | | | 17,187 | | | (65) | | | 786,376 | |
Federal National Mortgage Association | 455,651 | | | 7,301 | | | (206) | | | 462,746 | |
Small Business Assistance Program | 264,798 | | | 7,829 | | | (192) | | | 272,435 | |
States and political subdivision securities | 51,120 | | | 1,297 | | | 0 | | | 52,417 | |
Other | 1,006 | | | 44 | | | 0 | | | 1,050 | |
Total | $ | 2,016,551 | | | $ | 43,901 | | | $ | (837) | | | $ | 2,059,615 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| (dollars in thousands) |
As of September 30, 2020 | | | | | | | |
U.S. Treasury securities | $ | 49,924 | | | $ | 228 | | | $ | 0 | | | $ | 50,152 | |
U.S. Agency securities | 24,974 | | | 86 | | | 0 | | | 25,060 | |
Mortgage-backed securities: | | | | | | | |
Government National Mortgage Association | 485,689 | | | 11,481 | | | (43) | | | 497,127 | |
Federal Home Loan Mortgage Corporation | 578,650 | | | 18,919 | | | (9) | | | 597,560 | |
Federal National Mortgage Association | 287,842 | | | 7,788 | | | (16) | | | 295,614 | |
Small Business Assistance Program | 244,653 | | | 7,884 | | | (58) | | | 252,479 | |
States and political subdivision securities | 54,224 | | | 1,356 | | | 0 | | | 55,580 | |
Other | 1,006 | | | 48 | | | 0 | | | 1,054 | |
Total | $ | 1,726,962 | | | $ | 47,790 | | | $ | (126) | | | $ | 1,774,626 | |
The amortized cost and approximate fair value of debt securities available for sale as of December 31, 2020 and September 30, 2020, by contractual maturity, are shown below. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without penalty.
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| Amortized Cost | Estimated Fair Value | | Amortized Cost | Estimated Fair Value |
| (dollars in thousands) |
Due in one year or less | $ | 42,973 | | $ | 43,103 | | | $ | 67,131 | | $ | 67,456 | |
Due after one year through five years | 48,047 | | 48,499 | | | 51,779 | | 52,694 | |
Due after five years through ten years | 10,066 | | 10,532 | | | 10,212 | | 10,642 | |
Due after ten years | 0 | | 0 | | | 0 | | 0 | |
| 101,086 | | 102,134 | | | 129,122 | | 130,792 | |
Mortgage-backed securities | 1,914,459 | | 1,956,431 | | | 1,596,834 | | 1,642,780 | |
Securities without contractual maturities | 1,006 | | 1,050 | | | 1,006 | | 1,054 | |
Total | $ | 2,016,551 | | $ | 2,059,615 | | | $ | 1,726,962 | | $ | 1,774,626 | |
There were 0 sales of securities available for sale for both the three months ended December 31, 2020 and 2019 and as such there were 0 proceeds from the sales of securities available for sale for same periods. NaN gross gains (pre-tax) were realized on the sales for each of the three months ended December 31, 2020 and 2019, using the specific identification method. NaN gross losses (pre-tax) were realized on the sales for each of the three months ended December 31, 2020 and 2019, using the specific identification method.
Securities with an estimated fair value of approximately $1.07 billion and $1.10 billion at December 31, 2020 and September 30, 2020, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required by contractual obligation or law. The counterparties do not have the right to sell or pledge the securities the Company has pledged as collateral.
As detailed in the following tables, certain investments in debt securities, which are approximately 9% and 6% of the Company’s investment portfolio at estimated fair value at December 31, 2020 and September 30, 2020, respectively, are reported in the consolidated financial statements at an amount less than their amortized cost. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, implicit or explicit government guarantees, and information obtained from regulatory filings, management believes the declines in fair value of these securities are not the result of credit losses at December 31, 2020, and therefore, an allowance for credit losses was 0t recorded. Prior to the adoption of ASU 2016-13, as amended, the Company recognized 0 other-than-temporary impairment for the three months ended December 31, 2019.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company’s gross unrealized losses and approximate fair value in investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses |
| (dollars in thousands) |
As of December 31, 2020 | | | | | | | | |
| | | | | | | | |
U.S. Agency securities | $ | 24,703 | | $ | (272) | | | $ | 0 | | $ | 0 | | | $ | 24,703 | | $ | (272) | |
Mortgage-backed securities | 146,799 | | (553) | | | 8,388 | | (12) | | | 155,187 | | (565) | |
| | | | | | | | |
| | | | | | | | |
Total | $ | 171,502 | | $ | (825) | | | $ | 8,388 | | $ | (12) | | | $ | 179,890 | | $ | (837) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or more | | Total |
| Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses | | Estimated Fair Value | Unrealized Losses |
| (dollars in thousands) |
As of September 30, 2020 | | | | | | | | |
| | | | | | | | |
U.S. Agency securities | $ | 0 | | $ | 0 | | | $ | 0 | | $ | 0 | | | $ | 0 | | $ | 0 | |
Mortgage-backed securities | 71,547 | | (103) | | | 27,897 | | (23) | | | 99,444 | | (126) | |
| | | | | | | | |
| | | | | | | | |
Total | $ | 71,547 | | $ | (103) | | | $ | 27,897 | | $ | (23) | | | $ | 99,444 | | $ | (126) | |
As of December 31, 2020 and September 30, 2020, the Company had 22 and 18 securities, respectively, in an unrealized loss position.
4. Loans and Allowance for Credit Losses
The following table presents the composition of loans at amortized cost as of December 31, 2020 and September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| Total Loans | Less: Fair Value Option Loans | Less: Guaranteed Loans ¹ | Loans at Amortized Cost | | Total Loans ² | Less: Fair Value Option Loans | Less: Guaranteed Loans ¹ | Loans at Amortized Cost |
| (dollars in thousands) |
Construction and development | $ | 482,462 | | $ | 0 | | $ | 0 | | $ | 482,462 | | | $ | 509,644 | | $ | 0 | | $ | 0 | | $ | 509,644 | |
Owner-occupied CRE | 1,411,558 | | 107,541 | | 47,808 | | 1,256,209 | | | 1,417,394 | | 109,097 | | 48,468 | | 1,259,829 | |
Non-owner-occupied CRE | 2,660,682 | | 260,916 | | 27,168 | | 2,372,598 | | | 2,894,380 | | 283,266 | | 27,402 | | 2,583,712 | |
Multifamily residential real estate | 476,159 | | 3,045 | | 0 | | 473,114 | | | 533,983 | | 3,847 | | 0 | | 530,136 | |
Total commercial real estate | 5,030,861 | | 371,502 | | 74,976 | | 4,584,383 | | | 5,355,401 | | 396,210 | | 75,870 | | 4,883,321 | |
Agriculture | 1,635,952 | | 115,925 | | 39,426 | | 1,480,601 | | | 1,722,696 | | 129,041 | | 42,353 | | 1,551,302 | |
Commercial non-real estate | 2,054,478 | | 124,161 | | 715,163 | | 1,215,154 | | | 2,165,038 | | 129,934 | | 744,371 | | 1,290,733 | |
Residential real estate ³ | 708,086 | | 0 | | 294 | | 707,792 | | | 730,812 | | 0 | | 290 | | 730,522 | |
Consumer and other ⁴ | 88,499 | | 0 | | 0 | | 88,499 | | | 102,195 | | 0 | 0 | | 102,195 | |
Total | $ | 9,517,876 | | $ | 611,588 | | $ | 829,859 | | $ | 8,076,429 | | | $ | 10,076,142 | | $ | 655,185 | | $ | 862,884 | | $ | 8,558,073 | |
1 Includes loans guaranteed by agencies of the U.S. government. |
2 As a part of the adoption of CECL, loan segments are presented based on amortized cost, which includes unpaid principal balance, unamortized discount on acquired loans, and unearned net deferred fees and costs. For additional information on September 30, 2020 loan segment balances, see Note 2. |
3 Includes residential real estate loans held for sale of $11.6 million and $12.4 million at December 31, 2020 and September 30, 2020, respectively, recorded at the lower of cost or fair value.. |
4 Other loans primarily include consumer and commercial credit cards, customer deposit account overdrafts and loans in process. |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company’s past due and nonaccrual loans at amortized cost as of December 31, 2020. This table excludes loans measured at fair value under the fair value option of $611.6 million at December 31, 2020. Loans greater than 90 days past due and still accruing interest as of December 31, 2020 were nominal.
| | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2020 | Current or Less Than 30 Days Past Due | | 30-89 Days Past Due | | | | Nonaccrual | | Total |
| (dollars in thousands) |
Construction and development | $ | 468,025 | | | $ | 180 | | | | | $ | 14,257 | | | $ | 482,462 | |
Owner-occupied CRE | 1,286,830 | | | 411 | | | | | 16,776 | | | 1,304,017 | |
Non-owner-occupied CRE | 2,346,904 | | | 16,097 | | | | | 36,765 | | | 2,399,766 | |
Multifamily residential real estate | 472,675 | | | 439 | | | | | 0 | | | 473,114 | |
Total commercial real estate | 4,574,434 | | | 17,127 | | | | | 67,798 | | | 4,659,359 | |
Agriculture | 1,322,075 | | | 12,319 | | | | | 185,633 | | | 1,520,027 | |
Commercial non-real estate | 1,909,610 | | | 3,210 | | | | | 17,497 | | | 1,930,317 | |
Residential real estate | 698,146 | | | 3,166 | | | | | 6,774 | | | 708,086 | |
Consumer and other | 88,228 | | | 152 | | | | | 70 | | | 88,450 | |
Total | $ | 8,592,493 | | | $ | 35,974 | | | | | $ | 277,772 | | | $ | 8,906,239 | |
The following table presents the Company’s past due loans at September 30, 2020. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value under the fair value option of $655.2 million at September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Current or Less Than 30 Days Past Due | | 30-89 Days Past Due | | Nonaccrual | | Total |
| (dollars in thousands) |
As of September 30, 2020 | | | | | | | |
Commercial real estate | $ | 4,790,963 | | | $ | 8,894 | | | $ | 73,146 | | | $ | 4,873,003 | |
Agriculture | 1,317,377 | | | 60,020 | | | 217,642 | | | 1,595,039 | |
Commercial non-real estate | 2,021,308 | | | 3,512 | | | 26,843 | | | 2,051,663 | |
Residential real estate | 821,154 | | | 2,459 | | | 4,441 | | | 828,054 | |
Consumer and other | 100,319 | | | 45 | | | 74 | | | 100,438 | |
Ending balance | $ | 9,051,121 | | | $ | 74,930 | | | $ | 322,146 | | | $ | 9,448,197 | |
The following table provides additional information on nonaccrual loans for the three months ended December 31, 2020. There were 0 loans greater than 90 days past due and still accruing interest as of September 30, 2020.
| | | | | | | | | | | | | | | | | |
Three Months Ended December 31, 2020 | Nonaccrual September 30, 2020 | Nonaccrual December 31, 2020 | Nonaccrual Loans with No Related ACL | Interest Income Recognized on Nonaccrual Loans | Accrued Interest Written Off on Nonaccrual Loans |
| (dollars in thousands) | |
Construction and development | n/a ¹ | $ | 14,257 | | $ | 0 | | $ | 0 | | $ | 110 | |
Owner-occupied CRE | n/a ¹ | 16,776 | | 8,036 | | 0 | | 13 | |
Non-owner-occupied CRE | n/a ¹ | 36,765 | | 11,686 | | 0 | | 1,717 | |
Multifamily residential real estate | n/a ¹ | 0 | | 0 | | 0 | | 0 | |
Total commercial real estate | $ | 73,146 | | 67,798 | | 19,722 | | 0 | | 1,840 | |
Agriculture | 217,642 | | 185,633 | | 154,508 | | 0 | | 382 | |
Commercial non-real estate | 26,843 | | 17,497 | | 7,711 | | 0 | | 2 | |
Residential real estate | 4,441 | | 6,774 | | 0 | | 0 | | 25 | |
Consumer and other | 74 | | 70 | | 0 | | 0 | | 1 | |
Total | $ | 322,146 | | $ | 277,772 | | $ | 181,941 | | $ | 0 | | $ | 2,250 | |
1 Balance for this segment is included in total commercial real estate for September 30, 2020. | |
This table presents the loans based on credit quality, loan segment and year of origination at amortized cost and excludes loans measured at fair value under the fair value option of $611.6 million at December 31, 2020.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term loans | | | |
| Fiscal Year to Date | Fiscal Year | | | |
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior to 2017 | Revolving Loans | Revolving Loans Converted to Term Loans | Total |
| (dollars in thousands) |
Construction and development | | | | | | | | | |
Pass | $ | 86,339 | | $ | 160,884 | | $ | 108,053 | | $ | 30,830 | | $ | 2,570 | | $ | 824 | | $ | 63,584 | | $ | 0 | | $ | 453,084 | |
Special Mention | 3,686 | | 0 | | 200 | | 0 | | 0 | | 0 | | 0 | | 0 | | 3,886 | |
Substandard | 11,322 | | 33 | | 0 | | 12,746 | | 0 | | 0 | | 1,364 | | 0 | | 25,465 | |
Doubtful | 0 | | 0 | | 27 | | 0 | | 0 | | 0 | | 0 | | 0 | | 27 | |
Total construction and development | $ | 101,347 | | $ | 160,917 | | $ | 108,280 | | $ | 43,576 | | $ | 2,570 | | $ | 824 | | $ | 64,948 | | $ | 0 | | $ | 482,462 | |
Owner-occupied CRE | | | | | | | | | |
Pass | $ | 104,322 | | $ | 372,920 | | $ | 227,194 | | $ | 117,287 | | $ | 164,280 | | $ | 185,366 | | $ | 51,397 | | $ | 59 | | $ | 1,222,825 | |
Special Mention | 465 | | 1,853 | | 2,170 | | 6,651 | | 8,481 | | 8,032 | | 332 | | 0 | | 27,984 | |
Substandard | 4,358 | | 4,609 | | 4,643 | | 18,257 | | 11,704 | | 6,447 | | 0 | | 0 | | 50,018 | |
Doubtful | 0 | | 0 | | 3,190 | | 0 | | 0 | | 0 | | 0 | | 0 | | 3,190 | |
Total owner-occupied CRE | $ | 109,145 | | $ | 379,382 | | $ | 237,197 | | $ | 142,195 | | $ | 184,465 | | $ | 199,845 | | $ | 51,729 | | $ | 59 | | $ | 1,304,017 | |
Non-owner-occupied CRE | | | | | | | | | |
Pass | $ | 161,105 | | $ | 423,025 | | $ | 360,220 | | $ | 348,757 | | $ | 382,487 | | $ | 334,667 | | $ | 44,898 | | $ | 0 | | $ | 2,055,159 | |
Special Mention | 18,991 | | 1,555 | | 35,322 | | 77,164 | | 15,448 | | 16,874 | | 0 | | 0 | | 165,354 | |
Substandard | 14,418 | | 64,261 | | 15,527 | | 41,830 | | 0 | | 7,758 | | 35,459 | | 0 | | 179,253 | |
Doubtful | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total non-owner-occupied CRE | $ | 194,514 | | $ | 488,841 | | $ | 411,069 | | $ | 467,751 | | $ | 397,935 | | $ | 359,299 | | $ | 80,357 | | $ | 0 | | $ | 2,399,766 | |
Multifamily residential real estate | | | | | | | | | |
Pass | $ | 72,043 | | $ | 100,793 | | $ | 102,328 | | $ | 71,541 | | $ | 16,889 | | $ | 56,216 | | $ | 248 | | $ | 0 | | $ | 420,058 | |
Special Mention | 256 | | 0 | | 2,629 | | 20,686 | | 46 | | 107 | | 21,200 | | 0 | | 44,924 | |
Substandard | 0 | | 7,311 | | 0 | | 0 | | 487 | | 334 | | 0 | | 0 | | 8,132 | |
Doubtful | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total multifamily residential real estate | $ | 72,299 | | $ | 108,104 | | $ | 104,957 | | $ | 92,227 | | $ | 17,422 | | $ | 56,657 | | $ | 21,448 | | $ | 0 | | $ | 473,114 | |
Total commercial real estate | | | | | | | | | |
Pass | $ | 423,809 | | $ | 1,057,622 | | $ | 797,795 | | $ | 568,415 | | $ | 566,226 | | $ | 577,073 | | $ | 160,127 | | $ | 59 | | $ | 4,151,126 | |
Special Mention | 23,398 | | 3,408 | | 40,321 | | 104,501 | | 23,975 | | 25,013 | | 21,532 | | 0 | | 242,148 | |
Substandard | 30,098 | | 76,214 | | 20,170 | | 72,833 | | 12,191 | | 14,539 | | 36,823 | | 0 | | 262,868 | |
Doubtful | 0 | | 0 | | 3,217 | | 0 | | 0 | | 0 | | 0 | | 0 | | 3,217 | |
Total commercial real estate | $ | 477,305 | | $ | 1,137,244 | | $ | 861,503 | | $ | 745,749 | | $ | 602,392 | | $ | 616,625 | | $ | 218,482 | | $ | 59 | | $ | 4,659,359 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Term loans | | | |
| Fiscal Year to Date | Fiscal Year | | | |
| 2021 | 2020 | 2019 | 2018 | 2017 | Prior to 2017 | Revolving Loans | Revolving Loans Converted to Term Loans | Total |
| (dollars in thousands) |
Agriculture | | | | | | | | | |
Pass | $ | 56,160 | | $ | 222,029 | | $ | 105,591 | | $ | 85,249 | | $ | 82,726 | | $ | 62,253 | | $ | 460,060 | | $ | 0 | | $ | 1,074,068 | |
Special Mention | 21,040 | | 29,166 | | 7,402 | | 13,400 | | 23,817 | | 4,511 | | 49,451 | | 0 | | 148,787 | |
Substandard | 11,412 | | 36,842 | | 15,034 | | 41,653 | | 39,723 | | 8,121 | | 114,838 | | 0 | | 267,623 | |
Doubtful | 1,595 | | 49 | | 754 | | 22,230 | | 1,446 | | 0 | | 3,475 | | 0 | | 29,549 | |
Total agriculture | $ | 90,207 | | $ | 288,086 | | $ | 128,781 | | $ | 162,532 | | $ | 147,712 | | $ | 74,885 | | $ | 627,824 | | $ | 0 | | $ | 1,520,027 | |
Commercial non-real estate | | | | | | | | | |
Pass | $ | 28,084 | | $ | 827,457 | | $ | 195,666 | | $ | 63,526 | | $ | 52,661 | | $ | 43,956 | | $ | 573,735 | | $ | 8 | | $ | 1,785,093 | |
Special Mention | 6,500 | | 21,521 | | 2,812 | | 1,714 | | 2,576 | | 864 | | 19,391 | | 0 | | 55,378 | |
Substandard | 7,950 | | 20,120 | | 12,992 | | 4,561 | | 255 | | 1,395 | | 32,619 | | 0 | | 79,892 | |
Doubtful | 0 | | 390 | | 52 | | 84 | | 0 | | 4,269 | | 5,159 | | 0 | | 9,954 | |
Total commercial non-real estate | $ | 42,534 | | $ | 869,488 | | $ | 211,522 | | $ | 69,885 | | $ | 55,492 | | $ | 50,484 | | $ | 630,904 | | $ | 8 | | $ | 1,930,317 | |
Residential real estate ¹ | | | | | | | | | |
Pass | $ | 48,697 | | $ | 213,698 | | $ | 86,203 | | $ | 52,442 | | $ | 31,231 | | $ | 119,770 | | $ | 138,017 | | $ | 282 | | $ | 690,340 | |
Special Mention | 297 | | 825 | | 341 | | 303 | | 304 | | 998 | | 220 | | 0 | | 3,288 | |
Substandard | 279 | | 1,545 | | 2,828 | | 1,363 | | 421 | | 6,083 | | 1,937 | | 0 | | 14,456 | |
Doubtful | 0 | | 0 | | 0 | | 0 | | 0 | | 2 | | 0 | | 0 | | 2 | |
Total residential real estate | $ | 49,273 | | $ | 216,068 | | $ | 89,372 | | $ | 54,108 | | $ | 31,956 | | $ | 126,853 | | $ | 140,174 | | $ | 282 | | $ | 708,086 | |
Consumer and other ¹ | | | | | | | | | |
Pass | $ | 31,451 | | $ | 22,536 | | $ | 16,856 | | $ | 2,898 | | $ | 1,220 | | $ | 1,370 | | $ | 12,058 | | $ | 0 | | $ | 88,389 | |
Special Mention | 9 | | 0 | | 0 | | 0 | | 0 | | 12 | | 3 | | 0 | | 24 | |
Substandard | 6 | | 6 | | 18 | | 2 | | 10 | | 8 | | 35 | | 0 | | 85 | |
Doubtful | 0 | | 0 | | 0 | | 1 | | 0 | | 0 | | 0 | | 0 | | 1 | |
Total consumer and other | $ | 31,466 | | $ | 22,542 | | $ | 16,874 | | $ | 2,901 | | $ | 1,230 | | $ | 1,390 | | $ | 12,096 | | $ | 0 | | $ | 88,499 | |
Total loans | | | | | | | | | |
Pass | $ | 588,201 | | $ | 2,343,342 | | $ | 1,202,111 | | $ | 772,530 | | $ | 734,064 | | $ | 804,422 | | $ | 1,343,997 | | $ | 349 | | $ | 7,789,016 | |
Special Mention | 51,244 | | 54,920 | | 50,876 | | 119,918 | | 50,672 | | 31,398 | | 90,597 | | 0 | | 449,625 | |
Substandard | 49,745 | | 134,727 | | 51,042 | | 120,412 | | 52,600 | | 30,146 | | 186,252 | | 0 | | 624,924 | |
Doubtful | 1,595 | | 439 | | 4,023 | | 22,315 | | 1,446 | | 4,271 | | 8,634 | | 0 | | 42,723 | |
Total loans | $ | 690,785 | | $ | 2,533,428 | | $ | 1,308,052 | | $ | 1,035,175 | | $ | 838,782 | | $ | 870,237 | | $ | 1,629,480 | | $ | 349 | | $ | 8,906,288 | |
1 The Company generally does not risk rate residential real estate or consumer and other loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer and other loans. |
The following table presents the composition of the loan portfolio by internally assigned grade as of September 30, 2020. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value under the fair value option of $655.2 million at September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2020 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate ¹ | | Consumer and Other ¹ | | Total |
| (dollars in thousands) |
Credit Risk Profile by Internally Assigned Grade | | | | | | | | | | | |
Grade: | | | | | | | | | | | |
Pass | $ | 4,062,814 | | | $ | 968,875 | | | $ | 1,851,323 | | | $ | 806,436 | | | $ | 99,632 | | | $ | 7,789,080 | |
Watchlist | 577,399 | | | 265,714 | | | 94,401 | | | 6,972 | | | 709 | | | 945,195 | |
Substandard | 229,467 | | | 348,910 | | | 94,316 | | | 13,173 | | | 93 | | | 685,959 | |
Doubtful | 3,323 | | | 11,540 | | | 11,623 | | | 1,473 | | | 4 | | | 27,963 | |
Loss | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Ending balance | 4,873,003 | | | 1,595,039 | | | 2,051,663 | | | 828,054 | | | 100,438 | | | 9,448,197 | |
1 The Company generally does not risk rate residential real estate or consumer and other loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer and other loans. |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Additional disclosures previously required by ASC Topic 310 related to the Company's September 30, 2020 balances and activity for the quarter ended December 31, 2019 are included as follows:
The following table presents the Company’s impaired loans at September 30, 2020. This table excludes purchased credit impaired loans and loans measured at fair value under the fair value option.
| | | | | | | | | | | |
| September 30, 2020 |
| Recorded Investment | Unpaid Principal Balance | Related Allowance for Credit Losses |
Impaired loans: | (dollars in thousands) |
With an allowance for credit losses recorded: | | | |
Commercial real estate | $ | 111,121 | | $ | 114,034 | | $ | 25,087 | |
Agriculture | 53,052 | | 55,145 | | 8,151 | |
Commercial non-real estate | 39,821 | | 47,571 | | 7,822 | |
Residential real estate | 5,670 | | 6,314 | | 1,903 | |
Consumer and other | 98 | | 109 | | 30 | |
Total impaired loans with an allowance for credit losses recorded | 209,762 | | 223,173 | | 42,993 | |
With no allowance for credit losses recorded: | | | |
Commercial real estate | 121,380 | | 161,211 | | — | |
Agriculture | 308,734 | | 332,272 | | — | |
Commercial non-real estate | 66,542 | | 75,365 | | — | |
Residential real estate | 6,543 | | 8,818 | | — | |
Consumer and other | 0 | | 108 | | — | |
Total impaired loans with no allowance for credit losses recorded | 503,199 | | 577,774 | | — | |
Total impaired loans | $ | 712,961 | | $ | 800,947 | | $ | 42,993 | |
The following table presents the average recorded valueinvestment on impaired loans and interest income recognized on impaired loans for the three months ended December 31, 2019.
| | | | | | | | |
| Three Months Ended December 31, 2019 |
| Average Recorded Investment | Interest Income Recognized While on Impaired Status |
| (dollars in thousands) |
Commercial real estate | $ | 73,422 | | $ | 2,379 | |
Agriculture | 360,397 | | 8,517 | |
Commercial non-real estate | 72,389 | | 2,870 | |
Residential real estate | 9,013 | | 266 | |
Consumer | 179 | | 1 | |
Total | $ | 515,400 | | $ | 14,033 | |
The Company did not acquire any loans during the three months ended December 31, 2020. Prior to October 1, 2020, the Company accounted for acquired impaired loans in accordance with ASC 310-30. The following is a summary of changes in the accretable difference for all loans accounted for under ASC 310-30 during the three months ended December 31, 2019.
| | | | | |
| Three Months Ended December 31, 2019 |
| (dollars in thousands) |
Balance, beginning of period | $ | 26,047 | |
Accretion | (1,940) | |
Reclassification (to) from nonaccretable difference | (2,977) | |
Balance, end of period | $ | 21,130 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Troubled Debt Restructurings
Included in certain loan categories in the impaired loans are TDRs that were classified as impaired. Loans are designated as TDRs when the borrower is experiencing financial difficulty, and the Company agrees to concessions that are both significant and outside of market terms. Individual reserves included in the allowance for credit losses for TDRs were $8.5 million and $11.0 million at December 31, 2020 and September 30, 2020, respectively. There were 0 commitments to lend additional funds to borrowers whose loans were modified in a TDR at both December 31, 2020 and September 30, 2020.
The following table presents the amortized cost of the Company’s TDR balances as of MarchDecember 31, 2020 and recorded value of TDR balances as of September 30, 2019.2020.
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | September 30, 2019 | |
| Accruing | Nonaccrual | | Accruing | Nonaccrual |
| (dollars in thousands) | | | | |
Commercial real estate | $ | 19,843 | | $ | 3,088 | | | $ | 17,145 | | $ | 904 | |
Agriculture | 11,838 | | 20,357 | | | 22,929 | | 24,762 | |
Commercial non-real estate | 9,402 | | 4,465 | | | 4,398 | | 4,257 | |
Residential real estate | 294 | | 92 | | | 263 | | 102 | |
Consumer | 5 | | 40 | | | 107 | | 48 | |
Total | $ | 41,382 | | $ | 28,042 | | | $ | 44,842 | | $ | 30,073 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| Accruing | Nonaccrual | | Accruing | Nonaccrual |
| (dollars in thousands) |
Construction and development | $ | 1,364 | | $ | 27 | | | n/a ¹ | n/a ¹ |
Owner-occupied CRE | 5,590 | | 0 | | | n/a ¹ | n/a ¹ |
Non-owner-occupied CRE | 12,203 | | 11,637 | | | n/a ¹ | n/a ¹ |
Multifamily residential real estate | 0 | | 0 | | | n/a ¹ | n/a ¹ |
Total commercial real estate | 19,157 | | 11,664 | | | $ | 23,215 | | $ | 11,913 | |
Agriculture | 3,356 | | 35,736 | | | 2,976 | | 45,971 | |
Commercial non real estate | 8,304 | | 5,096 | | | 8,734 | | 4,803 | |
Real estate | 269 | | 69 | | | 277 | | 74 | |
Consumer and other | 2 | | 27 | | | 3 | | 31 | |
Total | $ | 31,088 | | $ | 52,592 | | | $ | 35,205 | | $ | 62,792 | |
1 Balance for this segment is included in total commercial real estate for September 30, 2020. |
TDRs are generally restructured through either a rate modification, term extension, payment modification or due to a bankruptcy. The following table presents a summary of all accruing loans restructured in TDRs for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | 2019 |
| | | Recorded Investment | | | | Recorded Investment | | | | Recorded Investment | | | | Recorded Investment | | | | Recorded Investment | | | Recorded Investment |
| | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification |
| | (dollars in thousands) | | | (dollars in thousands) |
Commercial real estate | 1 | | $ | 2,879 | | $ | 2,879 | | | — | | $ | — | | $ | — | | | 1 | | $ | 2,879 | | $ | 2,879 | | | — | | $ | — | | $ | — | | |
Construction and development | | Construction and development | 0 | | $ | 0 | | $ | 0 | | | n/a ¹ |
Owner-occupied CRE | | Owner-occupied CRE | 0 | | 0 | | 0 | | | n/a ¹ |
Non-owner-occupied CRE | | Non-owner-occupied CRE | 1 | | 10,640 | | 10,640 | | | n/a ¹ |
Multifamily residential real estate | | Multifamily residential real estate | 0 | | 0 | | 0 | | | n/a ¹ |
Total commercial real estate | | Total commercial real estate | 1 | | 10,640 | | 10,640 | | | 0 | | 0 | | 0 | |
Agriculture | Agriculture | 2 | | 993 | | 993 | | | — | | — | | — | | | 2 | | 993 | | 993 | | | — | | — | | — | | Agriculture | 1 | | 700 | | 700 | | | 0 | | 0 | | 0 | |
Commercial non-real estate | Commercial non-real estate | 2 | | 3,952 | | 3,952 | | | — | | — | | — | | | 4 | | 5,096 | | 5,096 | | | — | | — | | — | | Commercial non-real estate | 0 | | 0 | | 0 | | | 2 | | 1,144 | | 1,444 | |
Residential real estate | Residential real estate | 1 | | 50 | | 50 | | | — | | — | | — | | | 1 | | 50 | | 50 | | | — | | — | | — | | Residential real estate | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | |
Consumer | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | | 1 | | 89 | | 89 | | |
Consumer and other | | Consumer and other | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | |
Total accruing | Total accruing | 6 | | $ | 7,874 | | $ | 7,874 | | | — | | $ | — | | $ | — | | | 8 | | $ | 9,018 | | $ | 9,018 | | | 1 | | $ | 89 | | $ | 89 | | Total accruing | 2 | | $ | 11,340 | | $ | 11,340 | | | 2 | | $ | 1,144 | | $ | 1,444 | |
Change in recorded investment due to principal paydown at time of modification | Change in recorded investment due to principal paydown at time of modification | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | Change in recorded investment due to principal paydown at time of modification | 0 | | $ | 0 | | $ | 0 | | | 0 | | $ | 0 | | $ | 0 | |
Change in recorded investment due to chargeoffs at time of modification | Change in recorded investment due to chargeoffs at time of modification | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | Change in recorded investment due to chargeoffs at time of modification | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | |
1 Balance for this segment is included in total commercial real estate for September 30, 2020. | | 1 Balance for this segment is included in total commercial real estate for September 30, 2020. |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents a summary of all nonaccruing loans restructured in TDRs for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | Six Months Ended March 31, | | | | | | |
| 2020 | | | | 2019 | | | | 2020 | | | | 2019 | | |
| | Recorded Investment | | | | Recorded Investment | | | | Recorded Investment | | | | Recorded Investment | |
| Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification |
| (dollars in thousands) | | | | | | | | | | | | | | |
Commercial real estate | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | 1 | | $ | 2,216 | | $ | 2,216 | | | — | | $ | — | | $ | — | |
Agriculture | — | | — | | — | | | — | | — | | — | | | 10 | | 1,455 | | 1,455 | | | — | | — | | — | |
Commercial non-real estate | — | | — | | — | | | — | | — | | — | | | 2 | | 830 | | 830 | | | — | | — | | — | |
Residential real estate | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | | — | | — | | — | |
Consumer | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | | — | | — | | — | |
Total nonaccruing | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | 13 | | $ | 4,501 | | $ | 4,501 | | | — | | $ | — | | $ | — | |
Change in recorded investment due to principal paydown at time of modification | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | |
Change in recorded investment due to chargeoffs at time of modification | — | | — | | — | | | — | | — | | — | | | — | | — | | — | | | — | | — | | — | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, |
| 2020 | | 2019 |
| | Recorded Investment | | | Recorded Investment |
| Number | Pre-Modification | Post-Modification | | Number | Pre-Modification | Post-Modification |
| (dollars in thousands) |
Construction and development | 0 | | $ | 0 | | $ | 0 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Owner-occupied CRE | 0 | | 0 | | 0 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Non-owner-occupied CRE | 0 | | 0 | | 0 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Multifamily residential real estate | 0 | | 0 | | 0 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Total commercial real estate | 0 | | 0 | | 0 | | | 1 | | 2,216 | | 2,216 | |
Agriculture | 3 | | 2,776 | | 2,776 | | | 10 | | 1,455 | | 1,455 | |
Commercial non-real estate | 1 | | 748 | | 748 | | | 2 | | 830 | | 830 | |
Residential real estate | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | |
Consumer and other | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | |
Total nonaccruing | 4 | | $ | 3,524 | | $ | 3,524 | | | 13 | | $ | 4,501 | | $ | 4,501 | |
Change in recorded investment due to principal paydown at time of modification | 0 | | $ | 0 | | $ | 0 | | | 0 | | $ | 0 | | $ | 0 | |
Change in recorded investment due to chargeoffs at time of modification | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | |
1 Balance for this segment is included in total commercial real estate for September 30, 2020. |
The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default or a charge-off for the three and six months ended MarchDecember 31, 2020 and 2019, respectively.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | 2019 | |
| | Number of Loans | Recorded Investment | | Number of Loans | Recorded Investment | | Number of Loans | Recorded Investment | | Number of Loans | Recorded Investment | | Number of Loans | Recorded Investment | | Number of Loans | Recorded Investment | |
| | (dollars in thousands) | | | (dollars in thousands) |
Commercial real estate | — | | $ | — | | | — | | $ | — | | | — | | $ | — | | | — | | $ | — | | |
Construction and development | | Construction and development | 0 | | $ | 0 | | | n/a ¹ | |
Owner-occupied CRE | | Owner-occupied CRE | 0 | | 0 | | | n/a ¹ | |
Non-owner-occupied CRE | | Non-owner-occupied CRE | 0 | | 0 | | | n/a ¹ | |
Multifamily residential real estate | | Multifamily residential real estate | 0 | | 0 | | | n/a ¹ | |
Total commercial real estate | | Total commercial real estate | 0 | | 0 | | | 0 | | $ | 0 | | |
Agriculture | Agriculture | 17 | | 2,106 | | | — | | — | | | 19 | | 11,180 | | | — | | — | | Agriculture | 0 | | 0 | | | 19 | | 14,347 | | |
Commercial non-real estate | Commercial non-real estate | — | | — | | | — | | — | | | 1 | | 2,834 | | | — | | — | | Commercial non-real estate | 3 | | 653 | | | 1 | | 2,834 | | |
Residential real estate | Residential real estate | — | | — | | | — | | — | | | — | | — | | | — | | — | | Residential real estate | 0 | | 0 | | | 0 | | 0 | | |
Consumer | — | | — | | | — | | — | | | — | | — | | | — | | — | | |
Consumer and other | | Consumer and other | 0 | | 0 | | | 0 | | 0 | | |
Total | Total | 17 | | $ | 2,106 | | | — | | $ | — | | | 20 | | $ | 14,014 | | | — | | $ | — | | Total | 3 | | $ | 653 | | | 20 | | $ | 17,181 | | |
1 Balance for this segment is included in total commercial real estate for September 30, 2020. | | 1 Balance for this segment is included in total commercial real estate for September 30, 2020. | |
For purposes of the table above, a loan is considered to be in payment default once it is 90 days or more contractually past due under the modified terms. The table includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date. There were $0.3 million and $0.0 million forDuring the three months ended MarchDecember 31, 2020 and 2019, respectively, and $0.3 million and $0.0 million for the six months ended March 31, 2020 and 2019, respectively, ofthere were 0 loans removed from TDR status as they were restructured at market terms and are performing.
5. Allowance for Loan and Lease Losses
The allowance for loan and lease losses under the incurred loss model is determined based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The Company considers the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. In addition, consideration is given to concentration risks associated with the various loan portfolios, current economic conditions and other environmental factors that might impact the portfolio. The Company also considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry, or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions under an incurred loss model and macroeconomic factors, such as changes in unemployment rates, gross domestic product, and consumer bankruptcy filings.
Changes to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans that are 90 days or more past due are put on nonaccrual status unless a repayment is eminent. Loans deemed to be uncollectible are charged off against the allowance for loan and lease losses. Recoveries of amounts previously charged-off are credited to the allowance for loan and lease losses.
The allowance for loan and lease losses consist of reserves for probable losses that have been identified related to specific borrowing relationships that are individually evaluated for impairment ("specific reserve"), as well as probable losses inherent in the loan portfolio that are not specifically identified ("collective reserve").
The specific reserve relates to impaired loans. A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. Specific reserves are determined on a loan-by-loan basis based on management’s best estimate of the Company's exposure, given the current payment status of the loan, the present value of expected payments, and the value of any underlying collateral. Impaired loans also include loans modified in TDRs. Generally, the impairment related to troubled debt restructurings is measured based on the fair value of the collateral, less cost to sell, or the present value of expected payments relative to the unpaid principal balance. If the impaired loan is identified as collateral dependent, then the fair value of the collateral method of measuring the amount of the impairment is utilized. This method requires obtaining an independent appraisal of the collateral and reducing the appraised value by applying a discount factor to the appraised value, if necessary, and including costs to sell.
Management’s estimate for collective reserves reflects losses incurred in the loan portfolio as of the consolidated balance sheet reporting date. Incurred loss estimates primarily are based on historical loss experience and portfolio mix. Incurred loss estimates may be adjusted for qualitative factors such as current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and/or significant policy and underwriting changes, which may not be reflected in the historical loss experience.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables presentAllowance for Credit Losses ("ACL")
As previously mentioned in Note 2. New Accounting Standards, the Company’sCompany adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which resulted in a significant change to the Company's methodology for estimating the ACL. As a result of this adoption, the Company recorded a $177.3 million increase to the allowance for loan and lease losses roll forward for the three and six months ended March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2020 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate | | Consumer | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Beginning balance, January 1, 2020 | $ | 17,462 | | | $ | 32,029 | | | $ | 17,389 | | | $ | 4,620 | | | $ | 288 | | | $ | 993 | | | $ | 72,781 | |
Charge-offs | (1,417) | | | (4,522) | | | (3,577) | | | (118) | | | (25) | | | (707) | | | (10,366) | |
Recoveries | 114 | | | 1,305 | | | 59 | | | 147 | | | 28 | | | 87 | | | 1,740 | |
Provision | 48,285 | | | 714 | | | 17,895 | | | 3,602 | | | 465 | | | 738 | | | 71,699 | |
(Improvement) impairment of ASC 310-30 loans | (30) | | | — | | | — | | | 105 | | | 21 | | | — | | | 96 | |
Ending balance, March 31, 2020 | $ | 64,414 | | | $ | 29,526 | | | $ | 31,766 | | | $ | 8,356 | | | $ | 777 | | | $ | 1,111 | | | $ | 135,950 | |
as a cumulative-effect adjustment on October 1, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2019 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate | | Consumer | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Beginning balance, January 1, 2019 | $ | 16,348 | | | $ | 31,785 | | | $ | 12,093 | | | $ | 4,611 | | | $ | 430 | | | $ | 926 | | | $ | 66,193 | |
Charge-offs | (75) | | | (5,767) | | | (110) | | | (310) | | | (85) | | | (249) | | | (6,596) | |
Recoveries | 162 | | | 199 | | | 104 | | | 125 | | | 44 | | | 99 | | | 733 | |
Provision | (855) | | | 7,508 | | | 962 | | | (344) | | | (15) | | | 150 | | | 7,406 | |
Impairment of ASC 310-30 loans | 23 | | | — | | | — | | | 244 | | | — | | | — | | | 267 | |
Ending balance, March 31, 2019 | $ | 15,603 | | | $ | 33,725 | | | $ | 13,049 | | | $ | 4,326 | | | $ | 374 | | | $ | 926 | | | $ | 68,003 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended March 31, 2020 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate | | Consumer | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Beginning balance, October 1, 2019 | $ | 16,827 | | | $ | 30,819 | | | $ | 17,567 | | | $ | 4,095 | | | $ | 427 | | | $ | 1,039 | | | $ | 70,774 | |
Charge-offs | (1,454) | | | (9,128) | | | (5,059) | | | (287) | | | (45) | | | (1,060) | | | (17,033) | |
Recoveries | 234 | | | 1,408 | | | 172 | | | 312 | | | 48 | | | 137 | | | 2,311 | |
Provision | 48,857 | | | 6,692 | | | 19,086 | | | 3,794 | | | 326 | | | 995 | | | 79,750 | |
(Improvement) impairment of ASC 310-30 loans | (50) | | | (265) | | | — | | | 442 | | | 21 | | | — | | | 148 | |
Ending balance, March 31, 2020 | $ | 64,414 | | | $ | 29,526 | | | $ | 31,766 | | | $ | 8,356 | | | $ | 777 | | | $ | 1,111 | | | $ | 135,950 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended iMarch 31, 2019 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate | | Consumer | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Beginning balance, October 1, 2018 | $ | 16,777 | | | $ | 28,121 | | | $ | 13,610 | | | $ | 4,749 | | | $ | 257 | | | $ | 1,026 | | | $ | 64,540 | |
Charge-offs | (946) | | | (7,028) | | | (1,471) | | | (642) | | | (334) | | | (394) | | | (10,815) | |
Recoveries | 259 | | | 357 | | | 228 | | | 287 | | | 128 | | | 131 | | | 1,390 | |
Provision | (68) | | | 12,275 | | | 682 | | | (369) | | | 323 | | | 163 | | | 13,006 | |
(Improvement) impairment of ASC 310-30 loans | (419) | | | — | | | — | | | 301 | | | — | | | — | | | (118) | |
Ending balance, March 31, 2019 | $ | 15,603 | | | $ | 33,725 | | | $ | 13,049 | | | $ | 4,326 | | | $ | 374 | | | $ | 926 | | | $ | 68,003 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide details regardingpresents ACL activity by loan portfolio segment for the three months ended December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended December 31, 2020 | Adjusted balance September 30, 2020 ¹ | | Adoption of ASU 2016-13, as amended | | Adjusted beginning balance, October 1, 2020 | | Charge-offs | | Recoveries | | (Reversal of) provision for credit losses on loans | | Ending balance, December 31, 2020 |
| (dollars in thousands) |
Construction and development | $ | 7,012 | | | $ | 11,963 | | | $ | 18,975 | | | $ | (27) | | | $ | 268 | | | $ | (502) | | | $ | 18,714 | |
Owner-occupied CRE | 20,530 | | | 4,298 | | | 24,828 | | | 0 | | | 0 | | | 258 | | | 25,086 | |
Non-owner-occupied CRE | 50,965 | | | 98,986 | | | 149,951 | | | (28,269) | | | 61 | | | (992) | | | 120,751 | |
Multifamily residential real estate | 6,726 | | | 2,681 | | | 9,407 | | | 0 | | | 0 | | | 366 | | | 9,773 | |
Total commercial real estate | 85,233 | | | 117,928 | | | 203,161 | | | (28,296) | | | 329 | | | (870) | | | 174,324 | |
Agriculture | 27,018 | | | 24,360 | | | 51,378 | | | (2,144) | | | 1,734 | | | (3,989) | | | 46,979 | |
Commercial non-real estate | 27,599 | | | 32,938 | | | 60,537 | | | (2,043) | | | 245 | | | 17,216 | | | 75,955 | |
Residential real estate | 7,465 | | | 2,595 | | | 10,060 | | | (96) | | | 32 | | | (324) | | | 9,672 | |
Consumer and other | 2,572 | | | (532) | | | 2,040 | | | (232) | | | 113 | | | (57) | | | 1,864 | |
Total | $ | 149,887 | | | $ | 177,289 | | | $ | 327,176 | | | $ | (32,811) | | | $ | 2,453 | | | $ | 11,976 | | | $ | 308,794 | |
1 At September 30, 2020, the allowance balances were reclassified to align with the eight loan portfolio segments established for adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs. For additional information, see Note 2. |
The allowance for loanunfunded commitments was $2.3 million and lease losses and balance by type of allowance as of March$2.4 million at December 31, 2020 and September 30, 2019. These tables are presented net of unamortized discount on acquired loans and excludes loans of $792.1 million measured at fair value, loans held for sale of $4.3 million, and guaranteed loans of $138.0 million for March 31, 2020, and loans measured at fair value of $813.0 million, loans held for sale of $7.4 million, and guaranteed loans of $145.9 million for September 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of March 31, 2020 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate | | Consumer | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Allowance for loan and lease losses | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 7,020 | | | $ | 8,136 | | | $ | 8,601 | | | $ | 2,115 | | | $ | 36 | | | $ | — | | | $ | 25,908 | |
Collectively evaluated for impairment | | 57,285 | | | 21,390 | | | 23,136 | | | 5,747 | | | 720 | | | 1,111 | | | 109,389 | |
ASC 310-30 loans | | 109 | | | — | | | 29 | | | 494 | | | 21 | | | — | | | 653 | |
Total allowance | | $ | 64,414 | | | $ | 29,526 | | | $ | 31,766 | | | $ | 8,356 | | | $ | 777 | | | $ | 1,111 | | | $ | 135,950 | |
Financing Receivables | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 132,679 | | | $ | 347,879 | | | $ | 93,477 | | | $ | 10,901 | | | $ | 127 | | | $ | — | | | $ | 585,063 | |
Collectively evaluated for impairment | 4,486,167 | | | 1,365,625 | | | 1,415,903 | | | 774,083 | | | 52,001 | | | 39,908 | | | 8,133,687 | |
ASC 310-30 loans | 21,611 | | | 2,970 | | | 178 | | | 28,263 | | | 383 | | | — | | | 53,405 | |
Loans Outstanding | | $ | 4,640,457 | | | $ | 1,716,474 | | | $ | 1,509,558 | | | $ | 813,247 | | | $ | 52,511 | | | $ | 39,908 | | | $ | 8,772,155 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2019 | Commercial Real Estate | | Agriculture | | Commercial Non-Real Estate | | Residential Real Estate | | Consumer | | Other | | Total |
| (dollars in thousands) | | | | | | | | | | | | |
Allowance for loan and lease losses | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 4,159 | | | $ | 8,234 | | | $ | 6,062 | | | $ | 1,795 | | | $ | 97 | | | $ | — | | | $ | 20,347 | |
Collectively evaluated for impairment | 12,509 | | | 22,320 | | | 11,476 | | | 2,188 | | | 330 | | | 1,039 | | | 49,862 | |
ASC 310-30 loans | 159 | | | 265 | | | 29 | | | 112 | | | — | | | — | | | 565 | |
Total allowance | | $ | 16,827 | | | $ | 30,819 | | | $ | 17,567 | | | $ | 4,095 | | | $ | 427 | | | $ | 1,039 | | | $ | 70,774 | |
Financing Receivables | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 54,275 | | | $ | 329,479 | | | $ | 42,910 | | | $ | 7,119 | | | $ | 208 | | | $ | — | | | $ | 433,991 | |
Collectively evaluated for impairment | 4,418,611 | | | 1,501,164 | | | 1,480,949 | | | 763,645 | | | 51,112 | | | 47,541 | | | 8,263,022 | |
ASC 310-30 loans | 22,124 | | | 2,756 | | | 221 | | | 30,280 | | | 438 | | | — | | | 55,819 | |
Loans Outstanding | | $ | 4,495,010 | | | $ | 1,833,399 | | | $ | 1,524,080 | | | $ | 801,044 | | | $ | 51,758 | | | $ | 47,541 | | | $ | 8,752,832 | |
For acquired loans not accounted for under ASC 310-30 (purchased non-impaired), the Company utilizes specific and collective reserve calculation methods similar to originated loans. The required ALLL for these loans is included in the individually evaluated for impairment bucket of the ALLL if the loan is rated substandard or worse, and in the collectively evaluated for impairment bucket for pass rated loans.
The Company maintains an ALLL for acquired loans accounted for under ASC 310-30 as a result of impairment to loan pools arising from the periodic re-valuation of these loans. Any impairment in the individual pool is generally recognized in the current period as provision for loan and lease losses. Any improvement in the estimated cash flows, is generally not recognized immediately, but is instead reflected as an adjustment to the related loan pools yield on a prospective basis once any previously recorded impairment has been recaptured.
The ALLL for ASC 310-30 loans totaled $0.7 million and $0.6 million at March 31, 2020 and September 30, 2019, respectively. For both the three and six months ended March 31, 2020, loan pools accounted for under ASC 310-30 had a net impairment of provision of $0.1 million. For the three and six months ended March 31, 2019, loan pools accounted for under ASC 310-30 had a net impairment of $0.3 million and a net reversal of provision of $0.1 million, respectively.
The reserve for unfunded loan commitments was $1.1 million and $0.5 million at March 31, 2020 and September 30, 2019, respectively, and is recorded in accrued expenses and other liabilities on the consolidated balance sheets.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
6. Accounting The (reversal of) provision for Certain Loans Acquired with Deteriorated Credit Quality
In June 2010 and May 2016, the Company acquired certain loans in the TierOne Bank and HF Financial transactions, respectively, that had deteriorated credit quality known as ASC 310-30 loans or purchased credit impaired loans. Several factors were considered when evaluating whether a loanunfunded commitments was considered a purchased credit impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information and updated loan-to-values. Further, these purchased credit impaired loans had differences between contractual amounts owed and cash flows expected to be collected, that were at least in part, due to credit quality. U.S. GAAP allows purchasers to aggregate purchased credit impaired loans acquired in the same fiscal quarter in one or more pools, provided that the loans have common risk characteristics. A pool is then accounted$0.1 million for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
Loan pools are periodically reassessed to determine expected cash flows. In determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller, homogeneous loans are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans are fixed or variable rate loans. Prepayments may be assumed on large individual loans that consider similar prepayment factors listed above for smaller homogeneous loans.
The re-assessment of purchased credit impaired loans resulted in the following changes in the accretable yield during the three and six months ended MarchDecember 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Six Months Ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (dollars in thousands) | | | | | | |
Balance, beginning of period | $ | 21,130 | | | $ | 35,493 | | | $ | 26,047 | | | $ | 34,973 | |
Accretion | (1,753) | | | (2,188) | | | (3,693) | | | (4,343) | |
Reclassification (to) from nonaccretable difference | (37) | | | 375 | | | (3,014) | | | 3,050 | |
Balance, end of period | $ | 19,340 | | | $ | 33,680 | | | $ | 19,340 | | | $ | 33,680 | |
The reclassifications (to) from nonaccretable difference notedis included in provision for credit losses in the table above represent instances where specific poolsconsolidated statements of loans are expected to perform better overincome. The provision for unfunded commitments was $0.2 million for the remaining livesthree months ended December 31, 2019 and is included in other noninterest expense in the consolidated statements of the loans than expected at the prior re-assessment date.income.
The following table provides purchased credit impaired loans at Marchpresents ACL activity by loan portfolio segment for the three months ended December 31, 2020 and September 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | September 30, 2019 | | |
| Outstanding Balance ¹ | Recorded Investment ² | Carrying Value ³ | | Outstanding Balance ¹ | Recorded Investment ² | Carrying Value ³ |
| (dollars in thousands) | | | | | | |
Commercial real estate | $ | 88,443 | | $ | 21,611 | | $ | 21,502 | | | $ | 90,295 | | $ | 22,124 | | $ | 21,965 | |
Agriculture | 4,259 | | 2,970 | | 2,970 | | | 4,462 | | 2,756 | | 2,491 | |
Commercial non-real estate | 7,072 | | 178 | | 149 | | | 7,190 | | 221 | | 192 | |
Residential real estate | 32,947 | | 28,263 | | 27,769 | | | 35,413 | | 30,280 | | 30,168 | |
Consumer | 441 | | 383 | | 362 | | | 493 | | 438 | | 438 | |
Total lending | $ | 133,162 | | $ | 53,405 | | $ | 52,752 | | | $ | 137,853 | | $ | 55,819 | | $ | 55,254 | |
1 Represents the legal balance of ASC 310-30 loans. | | | | | | | |
2 Represents the book balance of ASC 310-30 loans. | | | | | | | |
3 Represents the book balance of ASC 310-30 loans net of the related allowance for loan and lease losses. | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended December 31, 2019 | Beginning balance, October 1, 2019 | | Charge-offs | | Recoveries | | Provision for credit losses on loans | | Impairment (improvement) of ASC 310-30 loans | | Ending balance, December 31, 2019 |
| (dollars in thousands) |
Commercial real estate | $ | 16,827 | | | $ | (37) | | | $ | 120 | | | $ | 572 | | | $ | (20) | | | $ | 17,462 | |
Agriculture | 30,819 | | | (4,606) | | | 103 | | | 5,978 | | | (265) | | | 32,029 | |
Commercial non-real estate | 17,567 | | | (1,481) | | | 112 | | | 1,191 | | | 0 | | | 17,389 | |
Residential real estate | 4,095 | | | (169) | | | 164 | | | 192 | | | 338 | | | 4,620 | |
Consumer and other | 1,466 | | | (373) | | | 71 | | | 117 | | | 0 | | | 1,281 | |
Total | $ | 70,774 | | | $ | (6,666) | | | $ | 570 | | | $ | 8,050 | | | $ | 53 | | | $ | 72,781 | |
7. FDIC Indemnification Asset
Under the terms of the purchase and assumption agreement with the FDIC with regard to the TierOne Bank acquisition, the Company is reimbursed for a portion of the losses incurred on covered assets under the non-commercial loss share agreement. As covered assets are resolved, whether through repayment, short sale of the underlying collateral, the foreclosure on or sale of collateral, or the sale or charge-off of loans or other repossessed property, any differences between the carrying value of the covered assets versus the payments received during the resolution process that are reimbursable by the FDIC are recognized as reductions in the FDIC indemnification asset. Any gains or losses realized from the resolution of covered assets reduce or increase, respectively, the amount recoverable from the FDIC.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table represents a summary of the activity related to the FDIC indemnification asset for the three and six months ended March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Six Months Ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (dollars in thousands) | | | | | | |
Balance, beginning of period | $ | 832 | | | $ | 1,950 | | | $ | 1,079 | | | $ | 2,502 | |
Amortization | (390) | | | (360) | | | (641) | | | (853) | |
Changes in expected reimbursements from FDIC for changes in expected credit losses | — | | | (13) | | | — | | | (13) | |
Changes in reimbursable expenses | — | | | (16) | | | — | | | (41) | |
Payments (reimbursements) of covered losses to (from) the FDIC | 39 | | | (9) | | | 43 | | | (43) | |
Balance, end of period | $ | 481 | | | $ | 1,552 | | | $ | 481 | | | $ | 1,552 | |
The loss claims filed are subject to review, approval, and annual audits by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreement which ends June 4, 2020.
8.5. Derivative Financial Instruments
The Company uses interest rate swaps and interest rate caps/floors to manage its interest rate risk and market risk in accommodating the needs of its customers. Interest rate swaps include both traditional interest rate swaps and interest rate swaps which can be canceled by the customer on specified dates at no cost, typically referred to as swaptions. The Company recognizes all derivatives on the consolidated balance sheet at fair value in either other assets or accrued expenses and other liabilities as appropriate.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by the Company as of MarchDecember 31, 2020 and September 30, 2019.2020.
| | | March 31, 2020 | | | September 30, 2019 | | | December 31, 2020 | | September 30, 2020 |
| | Notional Amount | Gross Asset Fair Value | Gross Liability Fair Value | | Notional Amount | Gross Asset Fair Value | Gross Liability Fair Value | | Notional Amount | Gross Asset Fair Value | Gross Liability Fair Value | | Notional Amount | Gross Asset Fair Value | Gross Liability Fair Value |
| | (dollars in thousands) | | | (dollars in thousands) |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | |
Interest rate swaps | | |
Interest rate swaps - FVO loan portfolio | | Interest rate swaps - FVO loan portfolio | |
Financial institution counterparties | | Financial institution counterparties | $ | 562,359 | | $ | 0 | | $ | (54,568) | | | $ | 592,241 | | $ | 0 | | $ | (62,587) | |
| Interest rate swaps - Other | | Interest rate swaps - Other | |
Financial institution counterparties | Financial institution counterparties | $ | 1,279,918 | | $ | — | | $ | (68,412) | | | $ | 1,259,765 | | $ | 35 | | $ | (38,755) | | Financial institution counterparties | 708,872 | | 0 | | (1,516) | | | 641,189 | | 0 | | (1,672) | |
Customer counterparties | Customer counterparties | 574,453 | | 83,802 | | — | | | 499,643 | | 48,652 | | — | | Customer counterparties | 708,872 | | 74,495 | | 0 | | | 641,189 | | 83,533 | | 0 | |
Interest rate caps | Interest rate caps | | Interest rate caps | |
Financial institution counterparties | Financial institution counterparties | 3,438 | | 4 | | — | | | 100 | | 2 | | — | | Financial institution counterparties | 26,538 | | 2 | | 0 | | | 20,538 | | 2 | | 0 | |
Customer counterparties | Customer counterparties | 3,438 | | — | | (4) | | | 100 | | — | | (2) | | Customer counterparties | 26,538 | | 0 | | (2) | | | 20,538 | | 0 | | (2) | |
Risk participation agreements | Risk participation agreements | 78,194 | | — | | (593) | | | 56,833 | | — | | (58) | | Risk participation agreements | 82,111 | | 0 | | (22) | | | 80,681 | | 0 | | (32) | |
Mortgage loan commitments | Mortgage loan commitments | 170,012 | | 636 | | — | | | 56,665 | | — | | (11) | | Mortgage loan commitments | 79,738 | | 322 | | 0 | | | 92,278 | | 0 | | (96) | |
Mortgage loan forward sale contracts | Mortgage loan forward sale contracts | 166,683 | | — | | (636) | | | 61,872 | | 11 | | — | | Mortgage loan forward sale contracts | 80,441 | | 0 | | (322) | | | 94,084 | | 96 | | 0 | |
Total | Total | $ | 2,276,136 | | $ | 84,442 | | $ | (69,645) | | | $ | 1,934,978 | | $ | 48,700 | | $ | (38,826) | | Total | $ | 2,275,469 | | $ | 74,819 | | $ | (56,430) | | | $ | 2,182,738 | | $ | 83,631 | | $ | (64,389) | |
Netting of Derivatives
The Company records the derivatives on a net basis when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. When bilateral netting agreements or similar agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract by counterparty basis.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide information on the Company's netting adjustments as of MarchDecember 31, 2020 and September 30, 2019.2020.
| | | Gross Fair Value | | Fair Value Offset Amount | | Cash Collateral | | Net Amount Presented on the Consolidated Balance Sheet | | Gross Fair Value | | Fair Value Offset Amount | | Cash Collateral | | Net Amount Presented on the Consolidated Balance Sheet |
| | (dollars in thousands) | | | (dollars in thousands) |
As of March 31, 2020 | | |
As of December 31, 2020 | | As of December 31, 2020 | |
Total Derivative Assets | Total Derivative Assets | $ | 84,442 | | | $ | (6,922) | | | $ | 21,203 | | | $ | 98,723 | | Total Derivative Assets | $ | 74,819 | | | $ | (4,321) | | | $ | 17,763 | | | $ | 88,261 | |
Total Derivative Liabilities ¹ | Total Derivative Liabilities ¹ | (69,645) | | | 6,922 | | | 62,083 | | | (640) | | Total Derivative Liabilities ¹ | (56,430) | | | 4,321 | | | 51,785 | | | (324) | |
| 1 There was an additional $23.6 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at March 31, 2020 and is included in other assets in the consolidated balance sheets. | | |
1 There was an additional $25.1 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at December 31, 2020 and is included in other assets in the consolidated balance sheets. | | 1 There was an additional $25.1 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at December 31, 2020 and is included in other assets in the consolidated balance sheets. |
| | | Gross Fair Value | | Fair Value Offset Amount | | Cash Collateral | | Net Amount Presented on the Consolidated Balance Sheet | | Gross Fair Value | | Fair Value Offset Amount | | Cash Collateral | | Net Amount Presented on the Consolidated Balance Sheet |
| | (dollars in thousands) | | | (dollars in thousands) |
As of September 30, 2019 | | |
As of September 30, 2020 | | As of September 30, 2020 | |
Total Derivative Assets | Total Derivative Assets | $ | 48,700 | | | $ | (2,445) | | | $ | 12,279 | | | $ | 58,534 | | Total Derivative Assets | $ | 83,631 | | | $ | (5,263) | | | $ | 20,012 | | | $ | 98,380 | |
Total Derivative Liabilities ¹ | Total Derivative Liabilities ¹ | (38,826) | | | 2,445 | | | 36,368 | | | (13) | | Total Derivative Liabilities ¹ | (64,389) | | | 5,263 | | | 59,028 | | | (98) | |
1 There was an additional $18.3 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at September 30, 2019 and is included in other assets in the consolidated balance sheets. | | |
1 There was an additional $22.9 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at September 30, 2020 and is included in other assets in the consolidated balance sheets. | | 1 There was an additional $22.9 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at September 30, 2020 and is included in other assets in the consolidated balance sheets. |
As with any financial instrument, derivative financial instruments have inherent risk including adverse changes in interest rates. The Company’s exposure to derivative credit risk is defined as the possibility of sustaining a loss due to the failure of the counterparty to perform in accordance with the terms of the contract. Credit risks associated with interest rate swaps are similar to those relating to traditional on-balance sheet financial instruments. The Company manages interest rate swap credit risk with the same standards and procedures applied to its commercial lending activities.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Credit-risk-related contingent features
The Company has agreements with its derivative counterparties that contain a provision where if the Company or the derivative counterparty fails to maintain its status as a well/adequately capitalized institution, then the other party has the right to terminate the derivative positions and the Company or the derivative counterparty would be required to settle its obligations under the agreements. The Company has minimum collateral pledging thresholds with its Swap Dealers and Futures Clearing Merchant.
In 2018, theThe Company enteredenters into RPAs with some of its derivative counterparties to assume the credit exposure related to interest rate derivative contracts. The Company's loan customer enters into an interest rate swap directly with a derivative counterparty and the Company agrees through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer.
The effect of derivatives on the consolidated statements of income for the three and six months ended MarchDecember 31, 2020 and 2019 was as follows.
| | | Amount of Loss Recognized in Consolidated Statements of Income | | | Amount of (Loss) Gain Recognized in Consolidated Statements of Income |
| | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | Location of Loss Recognized in Consolidated Statements of Income | 2020 | | 2019 | | 2020 | | 2019 | | Location of (Loss) Gain Recognized in Consolidated Statements of Income | 2020 | | 2019 | |
| | | (dollars in thousands) | | | | | | | | (dollars in thousands) | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | | |
Interest rate swaps - FVO loan portfolio | | Interest rate swaps - FVO loan portfolio | Derivative interest expense | $ | (3,393) | | | $ | (890) | | |
Interest rate swaps - FVO loan portfolio | | Interest rate swaps - FVO loan portfolio | Change in fair value of FVO loans and related derivatives | 8,570 | | | 12,809 | | |
Interest rate swaps and other derivatives | Interest rate swaps and other derivatives | Net realized and unrealized loss on derivatives | $ | (50,214) | | | $ | (11,032) | | | $ | (36,698) | | | $ | (29,348) | | Interest rate swaps and other derivatives | Other derivative income | 898 | | | 1,597 | | |
Mortgage loan commitments | Mortgage loan commitments | Net realized and unrealized loss on derivatives | 620 | | | 9 | | | 648 | | | 21 | | Mortgage loan commitments | Other derivative income | (418) | | | 28 | | |
Mortgage loan forward sale contracts | Mortgage loan forward sale contracts | Net realized and unrealized loss on derivatives | (620) | | | (9) | | | (648) | | | (21) | | Mortgage loan forward sale contracts | Other derivative income | 418 | | | (28) | | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
9.6. The Fair Value Option for Certain Loans
The Company has elected to measure certain long-term loans at fair value to assist in managing the interest rate risk for longer-term loans. This fair value option was elected upon the origination of these loans. Interest income is recognized in the same manner as interest on non-fair value loans.
See Note 1814 for additional disclosures regarding the fair value of the fair value option loans.
Long-term loans for which the fair value option has been elected had a net favorable difference between the aggregate fair value and the aggregate unpaid loan principal balance and written loan commitment amount of approximately $57.5$31.6 million at MarchDecember 31, 2020 and a net favorable difference of approximately $34.2$37.3 million at September 30, 2019.2020. The total unpaid principal balance of these long-term loans was approximately $734.6$580.0 million and $778.8$617.9 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively. The fair value of these loans is included in total loans in the consolidated balance sheets and are grouped with commercial real estate, agricultural and commercial non-real estate loans in Note 4. As of MarchDecember 31, 2020 and September 30, 2019,2020, there were loans with a fair value of $9.1$14.6 million and $16.5$21.7 million, respectively, which were greater than 90 days past due or in nonaccrual status with an unpaid principal balance of $12.1$14.6 million and $17.8$26.2 million, respectively.
Changes in fair value for items for which the fair value option has been elected were an increasea decrease in fair value of $35.5$10.2 million and $20.6$14.9 million for the three and six months ended MarchDecember 31, 2020 respectively, and an increase in fair value of $14.0 million and $33.2 million for the three and six months ended MarchDecember 31, 2019, respectively. These changes in fair value are reported net of the related derivative activity in noninterest income (loss)change in fair value of FVO loans and related derivatives within the consolidated statements of income.
For long-term loans, $10.5$1.5 million and $12.7$2.1 million for the three and six months ended MarchDecember 31, 2020 respectively, and $0.4 million and $0.8 million for the three and six months ended MarchDecember 31, 2019, respectively, of the total change in fair value is attributable to changes in specific credit risk. The gains or losses attributable to changes in instrument-specific credit risk were determined based on an assessment of existing market conditions and credit quality of the underlying loan for the specific portfolio of loans.
10. Goodwill
The following table presents the Company's carrying amount of goodwill as of March 31, 2020 and September 30, 2019.
| | | | | | | | | | | |
| March 31, 2020 | | September 30, 2019 |
| (dollars in thousands) | | |
Balance, beginning of period | $ | 739,023 | | | $ | 739,023 | |
Goodwill acquired during the period | 1,539 | | | — | |
Goodwill impairment during the period | (740,562) | | | — | |
Balance, end of period | $ | — | | | $ | 739,023 | |
In accordance with ASC 350-20, the Company conducts a goodwill impairment test at least annually, or more frequently as events occur or circumstances change that would more-likely-than-not reduce the fair value below its carrying amount. In the second quarter of fiscal year 2020, the onset of the COVID-19 pandemic prompted the Company to assess qualitative and quantitative factors to determine whether it was more-likely-than-not the fair value of the Company was less than the carrying amount.
The Company assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company's common stock and other relevant facts. The Company performed both a market capitalization approach and a discounted cash flow approach to determine the fair value of the Company. As a result of the analysis, the Company recognized a goodwill impairment charge of $740.6 million for both the three and six months ended March 31, 2020. NaN goodwill impairment charge was recognized for the three and six months ended March 31, 2019.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
11.7. Core Deposits and Other Intangibles
The following table presents a summary of intangible assets subject to amortization as of MarchDecember 31, 2020 and September 30, 2019.2020.
| | | Core Deposit Intangible | | Brand Intangible | | Customer Relationships Intangible | | Other Intangible | | Total | | Core Deposit Intangible | | | Customer Relationships Intangible | | Other Intangible | | Total |
| | (dollars in thousands) | | | (dollars in thousands) |
As of March 31, 2020 | | |
As of December 31, 2020 | | As of December 31, 2020 | | | |
Gross carrying amount | Gross carrying amount | $ | 7,339 | | | $ | — | | | $ | 3,172 | | | $ | 538 | | | $ | 11,049 | | Gross carrying amount | $ | 7,339 | | | | $ | 3,172 | | | $ | 538 | | | $ | 11,049 | |
Accumulated amortization | Accumulated amortization | (3,933) | | | — | | | (122) | | | (291) | | | (4,346) | | Accumulated amortization | (4,499) | | | | (305) | | | (341) | | | (5,145) | |
Net intangible assets | Net intangible assets | $ | 3,406 | | | $ | — | | | $ | 3,050 | | | $ | 247 | | | $ | 6,703 | | Net intangible assets | $ | 2,840 | | | | $ | 2,867 | | | $ | 197 | | | $ | 5,904 | |
As of September 30, 2019 | | | | | | | | | | |
As of September 30, 2020 | | As of September 30, 2020 | | | | | | | | |
Gross carrying amount | Gross carrying amount | $ | 7,339 | | | $ | 8,464 | | | $ | — | | | $ | 538 | | | $ | 16,341 | | Gross carrying amount | $ | 7,339 | | | | $ | 3,172 | | | $ | 538 | | | $ | 11,049 | |
Accumulated amortization | Accumulated amortization | (3,518) | | | (6,392) | | | — | | | (257) | | | (10,167) | | Accumulated amortization | (4,316) | | | | (244) | | | (325) | | | (4,885) | |
Net intangible assets | Net intangible assets | $ | 3,821 | | | $ | 2,072 | | | $ | — | | | $ | 281 | | | $ | 6,174 | | Net intangible assets | $ | 3,023 | | | | $ | 2,928 | | | $ | 213 | | | $ | 6,164 | |
Amortization expense of intangible assets were $0.4$0.3 million and $0.9$0.4 million for the three and six months ended MarchDecember 31, 2020 respectively, and $0.4 million and $0.8 million for the three and six months ended MarchDecember 31, 2019, respectively.
In the second quarter of fiscal year 2020, the onset of the COVID-19 pandemic prompted the Company to assess its intangible assets for impairment. The Company believed the brand intangible asset was closely aligned with the goodwill of the Company, which was determined to be impaired as of March 31, 2020. As a result, the Company recognized an intangible asset impairment of $1.8 million for both the three and six months ended March 31, 2020. NaN intangible asset impairment charge was recognized for the three and six months ended March 31, 2019.
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in subsequent fiscal years is as follows.
| Fiscal year | Fiscal year | | Amount | Fiscal year | Amount |
| | (dollars in thousands) | | (dollars in thousands) |
Remaining in 2020 | $ | 538 | | |
2021 | 1,014 | | |
Remaining in 2021 | | Remaining in 2021 | $ | 754 | |
2022 | 2022 | 929 | | 2022 | 929 | |
2023 | 2023 | 831 | | 2023 | 831 | |
2024 | 2024 | 742 | | 2024 | 742 | |
2025 and thereafter | 2,649 | | |
2025 | | 2025 | 683 | |
2026 and thereafter | | 2026 and thereafter | 1,965 | |
Total | Total | $ | 6,703 | | Total | $ | 5,904 | |
12.8. Leases
ASC Topic 842, Leases ("ASC 842"), became effective for the Company on October 1, 2019. ASC 842 requires a lease, whether classified as an operating lease or a financing lease, be accounted for as a right-of-use asset ("ROU asset") with a related lease liability recorded at the present value of the lease payments. The ROU asset represents the Company's right to use an underlying asset for the lease term and is included in other assets on the Company's consolidated balance sheets. The lease liability represents the Company's obligation to make lease payments and is included in accrued expenses and other liabilities on the Company's consolidated balance sheets. The cost of the lease is recognized on a straight-line basis over the lease term as lease expense. As permitted by ASC 842, the Company elected not to reassess (i) whether any expired or existing contracts are leases or contain leases, (ii) the lease classification of any expired or existing leases, and (iii) the initial direct costs for existing leases.
Subsequent to the adoption of ASC 842, the Company assesses contracts at inception to determine whether the contract is a lease or contains an embedded lease. A ROU asset and lease liability is recorded on the consolidated balance sheet for all leases except those with an original lease term of twelve months or less. Most of these leases include one or more renewal options, and certain leases also include lessee termination options. As these renewal options are not generally considered reasonably certain of exercise, they are not included in the lease term.
The Company leases certain branch and corporate offices, land and ATM facilities through operating leases with terms typically ranging from 1 to 15 years, with the longest term having a lease expiration of March 31, 2034. The Company has no significant financing leases as of MarchDecember 31, 2020.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table summarizes the ROU asset and lease liability as of MarchDecember 31, 2020 and September 30, 2020.
| | | | | | | | |
| | March 31, 2020 |
| | (dollars in thousands) |
ROU asset | | $ | 23,143 | |
Total lease liability | | 24,036 | |
Weighted average remaining lease term | | 6.7 years |
Weighted average discount rate ¹ | | 1.98 | % |
1 The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in the lease is not disclosed.
| | |
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| (dollars in thousands) |
ROU asset | $ | 21,264 | | | $ | 22,709 | |
Total lease liability | 22,586 | | | 24,114 | |
Weighted average remaining lease term | 6.21 years | | 6.29 years |
Weighted average discount rate ¹ | 1.82 | % | | 1.83 | % |
1 The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in the lease is not disclosed. | | |
Total lease expense incurred by the Company was $1.9 million and $3.6$1.7 million for both the three and six months ended MarchDecember 31, 2020 respectively,and 2019, principally made up of contractual lease payments for operating leases.
As of MarchDecember 31, 2020 and September 30, 2020, the Company had 0 operating leases that had not yet commenced.
The following table presents supplemental cash flow information related to leases for the three and six months ended MarchDecember 31, 2020:2020 and 2019:
| | | | | | | | | | | | | Three Months Ended December 31, | |
| | Three Months Ended March 31, 2020 | | Six Months Ended March 31, 2020 | | 2020 | | 2019 | |
| | (dollars in thousands) | | | (dollars in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows paid for operating leases | Operating cash flows paid for operating leases | $ | 1,416 | | | $ | 2,826 | | Operating cash flows paid for operating leases | $ | 1,482 | | | $ | 1,410 | | |
Right-of-use assets obtained in exchange for lease liabilities: | Right-of-use assets obtained in exchange for lease liabilities: | | | Right-of-use assets obtained in exchange for lease liabilities: | | |
Operating leases | Operating leases | $ | 5,007 | | | $ | 5,631 | | Operating leases | $ | 987 | | | $ | 624 | | |
The following table presents a maturity analysis of the Company's operating lease liability as of MarchDecember 31, 2020.
| Fiscal year | Fiscal year | | Amount | Fiscal year | Amount |
| | (dollars in thousands) | | (dollars in thousands) |
Remaining in 2020 | $ | 2,832 | | |
2021 | 4,741 | | |
Remaining in 2021 | | Remaining in 2021 | $ | 4,383 | |
2022 | 2022 | 4,049 | | 2022 | 4,701 | |
2023 | 2023 | 3,580 | | 2023 | 4,149 | |
2024 | 2024 | 3,072 | | 2024 | 3,410 | |
2025 and thereafter | 7,500 | | |
2025 | | 2025 | 2,469 | |
2026 and thereafter | | 2026 and thereafter | 5,395 | |
Total undiscounted lease payments | Total undiscounted lease payments | 25,774 | | Total undiscounted lease payments | 24,507 | |
Less: Amounts representing interest | Less: Amounts representing interest | (1,738) | | Less: Amounts representing interest | (1,921) | |
Lease liability | Lease liability | $ | 24,036 | | Lease liability | $ | 22,586 | |
13.9. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase generally mature overnight following the transaction date. Securities underlying the agreements had an amortized cost of approximately $81.4$93.6 million and $94.7$82.6 million and fair value of approximately $83.0$95.8 million and $94.4$84.7 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively. In most cases, in alignment with the repurchase agreements in place with customers, the Company over-collateralizes the agreements at 102% of total funds borrowed to protect the purchaser from changes in market value. Additionally, the Company utilizes held-in-custody procedures to ensure the securities sold under repurchase agreements are unencumbered.
The following tables present the gross obligation by the class of collateral pledged and the remaining contractual maturity of the agreements at MarchDecember 31, 2020 and September 30, 2019.2020.
| | | March 31, 2020 | | | December 31, 2020 |
| | Remaining Contractual Maturity of the Agreements | | | Remaining Contractual Maturity of the Agreements |
| | Overnight and Continuous | | Up to 30 Days | | 30-90 Days | | Greater than 90 Days | | Total | | Overnight and Continuous | | Up to 30 Days | | 30-90 Days | | Greater than 90 Days | | Total |
| | (dollars in thousands) | | | (dollars in thousands) |
Repurchase agreements | Repurchase agreements | | Repurchase agreements | |
| Mortgage-backed securities | Mortgage-backed securities | $ | 64,809 | | | $ | — | | | $ | — | | | $ | — | | | $ | 64,809 | | Mortgage-backed securities | $ | 80,355 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 80,355 | |
Total repurchase agreements | Total repurchase agreements | $ | 64,809 | | | $ | — | | | $ | — | | | $ | — | | | $ | 64,809 | | Total repurchase agreements | $ | 80,355 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 80,355 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | September 30, 2019 | | | September 30, 2020 |
| | Remaining Contractual Maturity of the Agreements | | | Remaining Contractual Maturity of the Agreements |
| | Overnight and Continuous | | Up to 30 Days | | 30-90 Days | | Greater than 90 Days | | Total | | Overnight and Continuous | | Up to 30 Days | | 30-90 Days | | Greater than 90 Days | | Total |
| | (dollars in thousands) | | | (dollars in thousands) |
Repurchase agreements | Repurchase agreements | | Repurchase agreements | |
| Mortgage-backed securities | Mortgage-backed securities | $ | 68,992 | | | $ | — | | | $ | — | | | $ | — | | | $ | 68,992 | | Mortgage-backed securities | $ | 65,506 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 65,506 | |
Total repurchase agreements | Total repurchase agreements | $ | 68,992 | | | $ | — | | | $ | — | | | $ | — | | | $ | 68,992 | | Total repurchase agreements | $ | 65,506 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 65,506 | |
14.10. FHLB Advances and Other Borrowings
FHLB advances and other borrowings consist of the following at MarchDecember 31, 2020 and September 30, 2019.2020.
| | | March 31, 2020 | | September 30, 2019 | | December 31, 2020 | | September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
Short-term borrowings: | Short-term borrowings: | | Short-term borrowings: | |
Notes payable to FHLB, interest rates from 0.37% to 0.74%, maturing in April 2020 and May 2020 | $ | 400,000 | | | $ | — | | |
FHLB fed funds advance, interest rate of 0.35%, matured in April 2020 | 75,000 | | | 15,000 | | |
Fed funds purchased, matured in October 2020 | | Fed funds purchased, matured in October 2020 | $ | 0 | | | $ | 75,000 | |
| Long-term borrowings: | Long-term borrowings: | | Long-term borrowings: | |
Notes payable to FHLB, interest rates from 2.36% to 3.66% and maturity dates from March 2021 to September 2024 collateralized by real estate loans, with various call dates at the option of the FHLB | 325,000 | | | 325,000 | | |
Notes payable to FHLB, interest rates from 2.76% to 2.88% and maturity dates from September 2022 to September 2024 collateralized by real estate loans | | Notes payable to FHLB, interest rates from 2.76% to 2.88% and maturity dates from September 2022 to September 2024 collateralized by real estate loans | 120,000 | | | 120,000 | |
Total | Total | $ | 800,000 | | | $ | 340,000 | | Total | $ | 120,000 | | | $ | 195,000 | |
As of MarchDecember 31, 2020 and September 30, 2019,2020, the Company had a borrowing capacity of $1.23 billion$943.5 million and $1.44 billion,$947.7 million, respectively, with the FRB Discount Window. Principal balances of loans pledged to FRB Discount Window to collateralize the borrowing totaled $1.48$1.11 billion at MarchDecember 31, 2020 and $1.72$1.17 billion at September 30, 2019.2020. The Company has secured this line for contingency funding.
As of MarchDecember 31, 2020 and September 30, 2019,2020, based on its collateral pledged, the additional borrowing capacity of the Company with the FHLB was $1.46$1.99 billion and $1.80$2.03 billion, respectively.
Principal balances of loans pledged to the FHLB to collateralize notes payable totaled $4.11$3.93 billion and $4.20$4.07 billion at MarchDecember 31, 2020 and September 30, 2019,2020, respectively. The Company purchased letters of credit from the FHLB to pledge as collateral on public deposits. The amount outstanding was $0.0 million and $170.0$75.0 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively. The Company had additional letters of credit from the FHLB of $14.5$10.2 million and $14.9$14.6 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively, for other purposes.
As of MarchDecember 31, 2020, FHLB advances and other borrowings are due or callable (whichever is earlier) in subsequent fiscal years as follows.
| Fiscal year | Fiscal year | | Amount | Fiscal year | Amount |
| | (dollars in thousands) | | (dollars in thousands) |
Remaining in 2020 | $ | 475,000 | | |
2021 | 120,000 | | |
Remaining in 2021 | | Remaining in 2021 | $ | 0 | |
2022 | 2022 | 60,000 | | 2022 | 30,000 | |
2023 | 2023 | 85,000 | | 2023 | 30,000 | |
2024 | 2024 | 60,000 | | 2024 | 60,000 | |
2025 and thereafter | — | | |
2025 | | 2025 | 0 | |
2026 and thereafter | | 2026 and thereafter | 0 | |
Total | Total | $ | 800,000 | | Total | $ | 120,000 | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
15.11. Subordinated Debentures and Subordinated Notes Payable
Junior Subordinated Deferrable Interest Debentures
The Company has 7 trusts which were created or assumed as part of prior acquisitions that as of MarchDecember 31, 2020 have 73,400 shares in the aggregate issued and outstanding, $1,000 par value, of Company Obligated Mandatorily Redeemable Preferred Securities ("Preferred Securities"). These 7 trusts were established and exist for the sole purpose of issuing Preferred Securities and investing the proceeds in junior subordinated deferrable interest debentures ("Debentures") issued by the Company. The Debentures constitute the sole assets of the 7 trusts. The Preferred Securities provide for cumulative cash distributions calculated at a rate based on three monththree-month LIBOR plus a range from 1.48% to 3.35% adjusted quarterly. The Company may, at one or more times, defer interest payments on the Debentures for up to 20 consecutive quarters following suspension of dividends on all capital stock, but not beyond the respective maturity date. At the end of any deferral period, all accumulated and unpaid interest must be paid. The Debentures have redemption dates ranging from January 7, 2033 to October 1, 2037; however, the Company has the option to shorten the respective maturity date for all 7 Preferred Securities as the initial call option date has passed. Holders of the Preferred Securities have no voting rights. The Preferred Securities are unsecured and rank junior in priority of the payment to all of the Company's indebtedness and senior to the Company's common and preferred stock. The trusts’ ability to pay amounts due on the Preferred Securities is solely dependent upon the Company making payment on the related Debentures. The Company’s obligation under the Debentures and relevant trust agreements constitute a full, irrevocable, and unconditional guarantee on a subordinated basis by it of the obligations of the trusts under the Preferred Securities.
For regulatory purposes, the Debentures qualify as elements of capital. As of MarchDecember 31, 2020 and September 30, 2019,2020, Debentures, net of fair value adjustment, of $73.8$73.9 million and $73.7$73.8 million, respectively, were eligible for treatment as Tier 1 capital.
Relating to the trusts, the Company held as assets $2.5 million in common shares at MarchDecember 31, 2020 and September 30, 2019,2020, which are included in other assets on the consolidated balance sheets.
Subordinated Notes Payable
In 2015, the Company issued $35.0 million of 4.875% fixed-to-floating rate subordinated notes that mature on August 15, 2025 through a private placement. The notes, which qualifywhose eligibility as Tier 2 capital under Capital Ruleswas reduced by 20% beginning in effect at March 31,the quarter ended September 30, 2020, have an interest rate of 4.875% per annum, payable semi-annually on each February 15 and August 15, which commenced on February 15, 2016 until August 15, 2020, or the date of earlier redemption, and then from August 15, 2020 to the stated maturity date or earlier redemption, the notes will bear interest at a rate per annum equal to three monththree-month LIBOR for the related interest period plus 3.15%, payable quarterly on each November 15, February 15, April 15 and August 15. The notes are subordinated in right of payment to all of the Company's senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Company's subsidiary bank. The Company may elect to redeem the notes (subject to regulatory approval), in whole or in part, on any early redemption date which is any interest payment date on or after August 15, 2020 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the notes cannot be accelerated except upon certain events of bankruptcy, insolvency or reorganization. Unamortized debt issuance costs related to these notes, which are included in Subordinated Debentures and Subordinated Notes Payable, were negligible and $0.1 million at March 31, 2020 and September 30, 2019, respectively. Proceeds from the private placement of subordinated notes repaid outstanding subordinated debt.
Subordinated debentures and subordinated notes payable are summarized as follows.
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| Amount Outstanding | Common Shares Held in Other Assets | | Amount Outstanding | Common Shares Held in Other Assets |
| (dollars in thousands) |
Junior subordinated debentures payable to non-consolidated trusts | | | | | |
GW Statutory Trust IV, variable rate of 2.85%, plus 3 month LIBOR | $ | 23,093 | | $ | 693 | | | $ | 23,093 | | $ | 693 | |
GW Statutory Trust VI, variable rate of 1.48%, plus 3 month LIBOR | 30,928 | | 928 | | | 30,928 | | 928 | |
SSB Trust II, variable rate of 1.85%, plus 3 month LIBOR | 2,062 | | 62 | | | 2,062 | | 62 | |
HF Capital Trust III, variable rate of 3.35%, plus 3 month LIBOR | 5,155 | | 155 | | | 5,155 | | 155 | |
HF Capital Trust IV, variable rate of 3.10%, plus 3 month LIBOR | 7,217 | | 217 | | | 7,217 | | 217 | |
HF Capital Trust V, variable rate of 1.83%, plus 3 month LIBOR | 5,310 | | 310 | | | 5,310 | | 310 | |
HF Capital Trust VI, variable rate of 1.65%, plus 3 month LIBOR | 2,155 | | 155 | | | 2,155 | | 155 | |
Total junior subordinated debentures payable | 75,920 | | $ | 2,520 | | | 75,920 | | $ | 2,520 | |
Less: fair value adjustment ¹ | (2,054) | | | | (2,088) | | |
Total junior subordinated debentures payable, net of fair value adjustment | 73,866 | | | | 73,832 | | |
Subordinated notes payable | | | | | |
Fixed to floating rate effective August 2020, 3.150% plus 3 month LIBOR | 35,000 | | | | 35,000 | | |
| | | | | |
| | | | | |
Total subordinated debentures and subordinated notes payable | $ | 108,866 | | | | $ | 108,832 | | |
1 Adjustment reflects the fair value adjustments related to the junior subordinated deferrable interest debentures assumed as part of the HF Financial acquisition. |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Subordinated debentures and subordinated notes payable are summarized as follows.
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | September 30, 2019 | |
| Amount Outstanding | Common Shares Held in Other Assets | | Amount Outstanding | Common Shares Held in Other Assets |
| (dollars in thousands) | | | | |
Junior subordinated debentures payable to non-consolidated trusts | | | | | |
GW Statutory Trust IV, variable rate of 2.85%, plus 3 month LIBOR | $ | 23,093 | | $ | 693 | | | $ | 23,093 | | $ | 693 | |
GW Statutory Trust VI, variable rate of 1.48%, plus 3 month LIBOR | 30,928 | | 928 | | | 30,928 | | 928 | |
SSB Trust II, variable rate of 1.85%, plus 3 month LIBOR | 2,062 | | 62 | | | 2,062 | | 62 | |
HF Capital Trust III, variable rate of 3.35%, plus 3 month LIBOR | 5,155 | | 155 | | | 5,155 | | 155 | |
HF Capital Trust IV, variable rate of 3.10%, plus 3 month LIBOR | 7,217 | | 217 | | | 7,217 | | 217 | |
HF Capital Trust V, variable rate of 1.83%, plus 3 month LIBOR | 5,310 | | 310 | | | 5,310 | | 310 | |
HF Capital Trust VI, variable rate of 1.65%, plus 3 month LIBOR | 2,155 | | 155 | | | 2,155 | | 155 | |
Total junior subordinated debentures payable | 75,920 | | $ | 2,520 | | | 75,920 | | $ | 2,520 | |
Less: fair value adjustment ¹ | (2,155) | | | | (2,223) | | |
Total junior subordinated debentures payable, net of fair value adjustment | 73,765 | | | | 73,697 | | |
Subordinated notes payable | | | | | |
Fixed to floating rate, 4.875% per annum | 35,000 | | | | 35,000 | | |
Less: unamortized debt issuance costs | (25) | | | | (61) | | |
Total subordinated notes payable | 34,975 | | | | 34,939 | | |
Total subordinated debentures and subordinated notes payable | $ | 108,740 | | | | $ | 108,636 | | |
1 Adjustment reflects the fair value adjustments related to the junior subordinated deferrable interest debentures assumed as part of the HF Financial acquisition. | | | | | |
16.12. Profit Sharing Plan
The Company participates in a multiple employer 401(k) profit sharing plan ("401(k) Plan"). All employees are eligible to participate, beginning with the first day of the month coincident with or immediately following the completion of one year of service and having reached the age of 21. In addition to employee contributions, the Company may contribute discretionary amounts for eligible participants. Contribution rates for participating employees must be equal. The Company contributed $1.6$1.9 million and $3.3$1.7 million to the 401(k) Plan for the three and six months ended MarchDecember 31, 2020 respectively, and $1.1 million and $2.9 million for the three and six months ended MarchDecember 31, 2019, respectively.
17.13. Stock-Based Compensation
On September 26, 2014, the Board of Directors adopted, and on October 10, 2014, NAB, at that time the Company's controlling shareholder, approved the Great Western Bancorp, Inc. 2014 Omnibus Incentive Compensation Plan ("2014 Plan"), the Great Western Bancorp, Inc. 2014 Non-Employee Director Plan ("2014 Director Plan"), and the Great Western Bancorp, Inc. Executive Incentive Compensation Plan ("Bonus Plan"), collectively ("the Plans"), which provide for the issuance of restricted share units and performance based share units to certain officers, employees and directors of the Company. On February 22, 2018, the Company's stockholders approved amendments to the 2014 Plan and the 2014 Director Plan to increase the number of shares available for future grants under the Plans. The Plans were primarily established to enhance the Company’s ability to attract, retain and motivate employees. The Company’s Board of Directors, the Compensation Committee of the Board of Directors ("Compensation Committee"), or executive management upon delegation of the Compensation Committee has exclusive authority to select the employees and others, including directors, to receive the awards and to establish the terms and conditions of each award made pursuant to the Company’s stock-based compensation plans.
Stock units issued under the Company’s restricted and performance based stock plans may not be sold or otherwise transferred until the vesting period has been met and, if applicable, performance objectives have been obtained. During the vesting periods, participants do not have voting rights and dividends are accumulated until the time upon which the award vests. Upon specified events, as defined in the Plans, stock unit awards that have not vested and/or performance hurdles that have not been met will be forfeited.
Based on the substantive terms of each award, restricted and performance-based awards are classified as equity awards and accounted for under the treasury stock method. The fair value of equity-classified awards is based on the market price of the stock on the measurement date and is amortized as compensation expense on a straight-line basis over the vesting or performance period.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Stock compensation is recognized based on the number of awards expected to vest using actual forfeiture amounts. For performance-based stock awards, an estimate is made of the number of shares expected to vest as a result of actual performance against the performance targets to determine the amount of compensation expense to be recognized. The estimate is reevaluated quarterly and total compensation expense is adjusted for any change in the current period. Stock-based compensation expense is included in salaries and employee benefits expense in the consolidated statements of income. Stock compensation expense was $1.3 million and $2.9$1.4 million for the three and six months ended MarchDecember 31, 2020 respectively, and $1.4 million and $3.1$1.6 million for the three and six months ended MarchDecember 31, 2019, respectively.2019. Related income tax benefits recognized were $0.3 million for the three months ended December 31, 2020 and $0.7$0.4 million for the three and six months ended MarchDecember 31, 2020, respectively and $0.4 million and $0.8 million for the three and six months ended March 31, 2019, respectively.2019.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following is a summary of the Plans’ restricted share and performance-based stock award activity as of MarchDecember 31, 2020 and September 30, 2019.2020. The number of performance shares granted in the following table are reflected at the amount of achievement of the pre-established targets.
| | | March 31, 2020 | | | September 30, 2019 | | | December 31, 2020 | | September 30, 2020 |
| | Common Shares | Weighted-Average Grant Date Fair Value | | Common Shares | Weighted-Average Grant Date Fair Value | | Common Shares | Weighted-Average Grant Date Fair Value | | Common Shares | Weighted-Average Grant Date Fair Value |
Restricted Shares | Restricted Shares | | | | Restricted Shares | | | |
Restricted shares, beginning of fiscal year | Restricted shares, beginning of fiscal year | 190,805 | | $ | 37.20 | | | 163,287 | | $ | 37.86 | | Restricted shares, beginning of fiscal year | 249,180 | | $ | 32.89 | | | 190,805 | | $ | 37.20 | |
Granted | Granted | 134,185 | | 32.34 | | | 106,753 | | 37.27 | | Granted | 152,028 | | 17.30 | | | 147,282 | | 30.68 | |
Vested | Vested | (83,909) | | 38.61 | | | (76,210) | | 38.64 | | Vested | (79,093) | | 36.28 | | | (84,316) | | 38.60 | |
Forfeited | Forfeited | (3,109) | | 36.61 | | | (3,025) | | 38.67 | | Forfeited | (2,017) | | 28.89 | | | (4,591) | | 36.18 | |
Canceled | Canceled | — | | — | | | — | | — | | Canceled | 0 | | 0 | | | 0 | | 0 | |
Restricted shares, end of period | Restricted shares, end of period | 237,972 | | $ | 33.97 | | | 190,805 | | $ | 37.20 | | Restricted shares, end of period | 320,098 | | $ | 24.67 | | | 249,180 | | $ | 32.89 | |
| Vested, but not issuable at end of period | Vested, but not issuable at end of period | 62,992 | | $ | 33.98 | | | 50,770 | | $ | 33.88 | | Vested, but not issuable at end of period | 87,324 | | $ | 29.32 | | | 62,992 | | $ | 33.98 | |
| Performance Shares | Performance Shares | | Performance Shares | |
Performance shares, beginning of fiscal year | Performance shares, beginning of fiscal year | 173,332 | | $ | 38.50 | | | 175,196 | | $ | 36.29 | | Performance shares, beginning of fiscal year | 175,740 | | $ | 33.56 | | | 173,332 | | $ | 38.50 | |
Granted | Granted | (48,753) | | (49.22) | | | 60,583 | | 32.77 | | Granted | 115,885 | | 17.26 | | | 62,278 | | 40.15 | |
Vested | Vested | (54,861) | | 39.43 | | | (59,937) | | 30.79 | | Vested | (25,452) | | 41.07 | | | (54,861) | | 39.43 | |
Forfeited | Forfeited | (3,732) | | 38.14 | | | (2,510) | | 39.25 | | Forfeited | (11,904) | | 39.04 | | | (5,009) | | 37.90 | |
Canceled | Canceled | — | | — | | | — | | — | | Canceled | 0 | | 0 | | | 0 | | 0 | |
Performance shares, end of period | Performance shares, end of period | 65,986 | | $ | 34.61 | | | 173,332 | | $ | 38.50 | | Performance shares, end of period | 254,269 | | $ | 25.12 | | | 175,740 | | $ | 33.56 | |
| Vested, but not issuable at end of period | Vested, but not issuable at end of period | 5,612 | | $ | 18.00 | | | 5,612 | | $ | 18.00 | | Vested, but not issuable at end of period | 5,612 | | $ | 18.00 | | | 5,612 | | $ | 18.00 | |
As of MarchDecember 31, 2020, there was $7.7$9.7 million of unrecognized compensation cost related to non-vested restricted stock awards expected to be recognized over a period of 2.72.8 years. The fair value of the vested, but not issued stock awards was $1.4$1.9 million and $1.9$0.9 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively.
18.14. Fair Value Measurements
The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes the following three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities;
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Level 1 inputs are considered to be the most transparent and reliable and Level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although in some instances, third party price indications may be available, limited trading activity can challenge the observability of these quotations.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Securities Available for Sale
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and classified as Level 2 securities. Level 2 securities include mortgage-backed, states and political subdivisions, and other securities. Where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Level 3 securities were immaterial at MarchDecember 31, 2020 and September 30, 2019.2020.
Interest Rate Swaps and Loans
Interest rate swaps are valued by the Company's Swap Dealers using cash flow valuation techniques with observable market data inputs. The fair value of loans accounted for under the fair value option represents the net carrying value of the loan, plus the equal and opposite amount of the value of the swap needed to offset the interest rate risk and an adjustment for credit risk based on the Company's assessment of existing market conditions for the specific portfolio of loans. This is used due to the strict prepayment penalties put in the loan terms to cover the cost of exiting the interest rate swap of the loans in the case of early prepayment or termination. The adjustment for credit risk on loans accounted for under the fair value option is not significant to the overall fair value of the loans. The fair values estimated by the Company's Swap Dealers use interest rates that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The Company has entered into Collateral Agreements with its Swap Dealers and Futures Clearing Merchant which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted. The Company regularly enters into interest rate lock commitments on mortgage loans to be held for sale with corresponding forward sales contracts related to these interest rate lock commitments, the fair values of which are calculated by applying observable market values from Fannie Mae TBA pricing to each interest rate lock commitment and forward sales contract, therefore, are classified within Level 2 of the valuation hierarchy. The Company also has back-to-back swaps with loan customers, with corresponding swaps with an outside third party in exact offsetting terms.
Loan Servicing Rights
Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts (Level 3), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against market data (Level 3).
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at MarchDecember 31, 2020 and September 30, 2019.2020.
| | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | (dollars in thousands) | | | (dollars in thousands) |
As of March 31, 2020 | | |
As of December 31, 2020 | | As of December 31, 2020 | |
U.S. Treasury securities | U.S. Treasury securities | $ | 70,583 | | | $ | 70,583 | | | $ | — | | | $ | — | | U.S. Treasury securities | $ | 25,014 | | | $ | 25,014 | | | $ | 0 | | | $ | 0 | |
U.S. Agency securities | | U.S. Agency securities | 24,703 | | | 24,703 | | | 0 | | | 0 | |
Mortgage-backed securities | Mortgage-backed securities | 1,857,392 | | | — | | | 1,857,392 | | | — | | Mortgage-backed securities | 1,956,431 | | | 0 | | | 1,956,431 | | | 0 | |
States and political subdivision securities | States and political subdivision securities | 61,001 | | | — | | | 57,015 | | | 3,986 | | States and political subdivision securities | 52,417 | | | 0 | | | 48,751 | | | 3,666 | |
Other | Other | 1,051 | | | — | | | 1,051 | | | — | | Other | 1,050 | | | 0 | | | 1,050 | | | 0 | |
Total securities available for sale | Total securities available for sale | $ | 1,990,027 | | | $ | 70,583 | | | $ | 1,915,458 | | | $ | 3,986 | | Total securities available for sale | $ | 2,059,615 | | | $ | 49,717 | | | $ | 2,006,232 | | | $ | 3,666 | |
Derivatives-assets | Derivatives-assets | $ | 98,723 | | | $ | — | | | $ | 98,723 | | | $ | — | | Derivatives-assets | $ | 88,261 | | | $ | 0 | | | $ | 88,261 | | | $ | 0 | |
Derivatives-liabilities | Derivatives-liabilities | 640 | | | — | | | 640 | | | — | | Derivatives-liabilities | 324 | | | 0 | | | 324 | | | 0 | |
Fair value loans | Fair value loans | 792,117 | | | — | | | 792,117 | | | — | | Fair value loans | 611,588 | | | 0 | | | 611,588 | | | 0 | |
Loan servicing rights | Loan servicing rights | 1,863 | | | — | | | — | | | 1,863 | | Loan servicing rights | 1,063 | | | 0 | | | 0 | | | 1,063 | |
As of September 30, 2019 | | |
U.S. Treasury securities | $ | 94,745 | | | $ | 94,745 | | | $ | — | | | $ | — | | |
Mortgage-backed securities | 1,620,903 | | | — | | | 1,620,903 | | | — | | |
States and political subdivision securities | 66,523 | | | — | | | 62,403 | | | 4,120 | | |
Other | 1,037 | | | — | | | 1,037 | | | — | | |
Total securities available for sale | $ | 1,783,208 | | | $ | 94,745 | | | $ | 1,684,343 | | | $ | 4,120 | | |
Derivatives-assets | $ | 58,534 | | | $ | — | | | $ | 58,534 | | | $ | — | | |
Derivatives-liabilities | 13 | | | — | | | 13 | | | — | | |
Fair value loans | 812,991 | | | — | | | 812,991 | | | — | | |
Loan servicing rights | 2,255 | | | — | | | — | | | 2,255 | | |
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (dollars in thousands) |
As of September 30, 2020 | | | | | | | |
U.S. Treasury securities | $ | 50,152 | | | $ | 50,152 | | | $ | 0 | | | $ | 0 | |
U.S. Agency securities | 25,060 | | | 25,060 | | | 0 | | | 0 | |
Mortgage-backed securities | 1,642,780 | | | 0 | | | 1,642,780 | | | 0 | |
States and political subdivision securities | 55,580 | | | 0 | | | 51,783 | | | 3,797 | |
Other | 1,054 | | | 0 | | | 1,054 | | | 0 | |
Total securities available for sale | $ | 1,774,626 | | | $ | 75,212 | | | $ | 1,695,617 | | | $ | 3,797 | |
Derivatives-assets | $ | 98,380 | | | $ | 0 | | | $ | 98,380 | | | $ | 0 | |
Derivatives-liabilities | 98 | | | 0 | | | 98 | | | 0 | |
Fair value loans | 655,185 | | | 0 | | | 655,185 | | | 0 | |
Loan servicing rights | 1,303 | | | 0 | | | 0 | | | 1,303 | |
The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands) | | | | | | | (dollars in thousands) |
Other securities available for sale | Other securities available for sale | | Other securities available for sale | | |
Balance, beginning of period | Balance, beginning of period | $ | 3,986 | | | $ | 961 | | | $ | 4,120 | | | $ | 970 | | Balance, beginning of period | $ | 3,797 | | | $ | 4,120 | | |
Additions | Additions | — | | | 350 | | | — | | | 350 | | Additions | 0 | | | 0 | | |
Principal paydown | Principal paydown | — | | | — | | | (134) | | | (9) | | Principal paydown | (131) | | | (134) | | |
| Balance, end of period | Balance, end of period | $ | 3,986 | | | $ | 1,311 | | | $ | 3,986 | | | $ | 1,311 | | Balance, end of period | $ | 3,666 | | | $ | 3,986 | | |
| Loan servicing rights | Loan servicing rights | | Loan servicing rights | | |
Balance, beginning of period | Balance, beginning of period | $ | 2,054 | | | $ | 2,862 | | | $ | 2,255 | | | $ | 3,087 | | Balance, beginning of period | $ | 1,303 | | | $ | 2,255 | | |
| Realized and unrealized loss ¹ | Realized and unrealized loss ¹ | (191) | | | (188) | | | (392) | | | (413) | | Realized and unrealized loss ¹ | (240) | | | (201) | | |
Balance, end of period | Balance, end of period | $ | 1,863 | | | $ | 2,674 | | | $ | 1,863 | | | $ | 2,674 | | Balance, end of period | $ | 1,063 | | | $ | 2,054 | | |
| 1 Realized and unrealized loss related to loan servicing rights are reported as a component of mortgage banking income, net on the consolidated statements of income. | 1 Realized and unrealized loss related to loan servicing rights are reported as a component of mortgage banking income, net on the consolidated statements of income. | | 1 Realized and unrealized loss related to loan servicing rights are reported as a component of mortgage banking income, net on the consolidated statements of income. |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Other Repossessed Property
Other repossessed property consists of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other repossessed assets. Other repossessed property is recorded initially at fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further to fair value less selling costs, reflecting a valuation allowance. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of the impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor, if necessary, to the appraised value and including costs to sell. Because many of these inputs are not observable, the measurements are classified as Level 3.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Mortgage Loans Held for Sale
Fair value of mortgage loans held for sale is based on either quoted prices for the same or similar loans, or values obtained from third parties, or are estimated for portfolios of loans with similar financial characteristics and are therefore considered a Level 2 valuation.
Property Held for Sale
This real estate property is carried in premises and equipment as property held for sale at fair value based upon the transactional price if available, or the appraised value of the property.
The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at MarchDecember 31, 2020 and September 30, 2019.2020.
| | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | (dollars in thousands) | | | (dollars in thousands) |
As of March 31, 2020 | | |
As of December 31, 2020 | | As of December 31, 2020 | |
Other repossessed property | Other repossessed property | $ | 21,486 | | | $ | — | | | $ | — | | | $ | 21,486 | | Other repossessed property | $ | 8,594 | | | $ | 0 | | | $ | 0 | | | $ | 8,594 | |
Impaired loans | Impaired loans | 559,155 | | | — | | | — | | | 559,155 | | Impaired loans | 275,334 | | | 0 | | | 0 | | | 275,334 | |
Mortgage loans held for sale, at lower of cost or fair value | Mortgage loans held for sale, at lower of cost or fair value | 4,342 | | | — | | | 4,342 | | | — | | Mortgage loans held for sale, at lower of cost or fair value | 11,638 | | | 0 | | | 11,638 | | | 0 | |
Property held for sale | Property held for sale | 706 | | | — | | | — | | | 706 | | Property held for sale | 600 | | | 0 | | | 0 | | | 600 | |
As of September 30, 2019 | | |
As of September 30, 2020 | | As of September 30, 2020 | |
Other repossessed property | Other repossessed property | $ | 34,721 | | | $ | — | | | $ | — | | | $ | 34,721 | | Other repossessed property | $ | 17,991 | | | $ | 0 | | | $ | 0 | | | $ | 17,991 | |
Impaired loans | Impaired loans | 413,644 | | | — | | | — | | | 413,644 | | Impaired loans | 669,968 | | | 0 | | | 0 | | | 669,968 | |
Mortgage loans held for sale, at lower of cost or fair value | Mortgage loans held for sale, at lower of cost or fair value | 7,351 | | | — | | | 7,351 | | | — | | Mortgage loans held for sale, at lower of cost or fair value | 12,371 | | | 0 | | | 12,371 | | | 0 | |
Property held for sale | Property held for sale | 2,757 | | | — | | | — | | | 2,757 | | Property held for sale | 600 | | | 0 | | | 0 | | | 600 | |
The valuation techniques and significant unobservable inputs used to measure Level 3 fair value measurements at MarchDecember 31, 2020 were as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Assets / (Liabilities) at MarchDecember 31, 2020 | | Valuation Technique(s) | | Unobservable Input | | Range | | Weighted Average |
| (dollars in thousands) | | | | | | | | |
Other repossessed property | $ | 21,4868,594 | | | Appraisal value | | PropertyCollateral specific adjustment | | N/A | | N/A |
Impaired loans | 559,155275,334 | | | Appraisal value | | PropertyCollateral specific adjustment | | N/A | | N/A |
Property held for sale | 706600 | | | Appraisal value | | PropertyCollateral specific adjustment | | N/A | | N/A |
Disclosures about Fair Value of Financial Instruments
Significant assets and liabilities that are not considered financial instruments are accounted for at amortized cost and include premises and equipment, deferred income taxes, goodwill, and core deposit and other intangibles. Additionally, in accordance with the disclosure guideline, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded. Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Fair values for on-balance sheet instruments as of MarchDecember 31, 2020 and September 30, 20192020 are as follows.
| | | March 31, 2020 | | | September 30, 2019 | | | December 31, 2020 | | September 30, 2020 |
| | Level in Fair Value Hierarchy | | Carrying Amount | Fair Value | | Carrying Amount | Fair Value | | Level in Fair Value Hierarchy | | Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
| | | | (dollars in thousands) | | | | | (dollars in thousands) |
Assets | Assets | | Assets | |
Cash and cash equivalents | Cash and cash equivalents | Level 1 | | $ | 347,486 | | $ | 347,486 | | | $ | 243,474 | | $ | 243,474 | | Cash and cash equivalents | Level 1 | | $ | 1,061,796 | | $ | 1,061,796 | | | $ | 432,887 | | $ | 432,887 | |
Loans, net, excluding fair valued loans, loans held for sale and impaired loans ¹ | Loans, net, excluding fair valued loans, loans held for sale and impaired loans ¹ | Level 3 | | 8,337,681 | | 8,498,042 | | | 8,472,777 | | 8,533,612 | | Loans, net, excluding fair valued loans, loans held for sale and impaired loans ¹ | Level 3 | | 8,619,316 | | 8,623,172 | | | 8,738,617 | | 8,768,314 | |
Liabilities | Liabilities | | Liabilities | |
Time deposits | Time deposits | Level 2 | | 1,528,234 | | 1,532,200 | | | 2,095,676 | | 2,101,239 | | Time deposits | Level 2 | | 1,078,580 | | 1,082,378 | | | 1,282,978 | | 1,287,814 | |
FHLB advances and other borrowings | FHLB advances and other borrowings | Level 2 | | 800,000 | | 818,669 | | | 340,000 | | 351,517 | | FHLB advances and other borrowings | Level 2 | | 120,000 | | 129,077 | | | 195,000 | | 204,715 | |
Securities sold under repurchase agreements | Securities sold under repurchase agreements | Level 2 | | 64,809 | | 64,809 | | | 68,992 | | 68,992 | | Securities sold under repurchase agreements | Level 2 | | 80,355 | | 80,355 | | | 65,506 | | 65,506 | |
Subordinated debentures and subordinated notes payable | Subordinated debentures and subordinated notes payable | Level 2 | | 108,740 | | 97,268 | | | 108,636 | | 101,164 | | Subordinated debentures and subordinated notes payable | Level 2 | | 108,866 | | 93,213 | | | 108,832 | | 96,424 | |
1 Includes $13.7 million and $13.9 million of net deferred loan fees at March 31, 2020 and September 30, 2019, respectively, of which carrying value approximates fair value. | | |
1 Includes $29.2 million and $29.0 million of net deferred loan fees at December 31, 2020 and September 30, 2020, respectively, of which carrying value approximates fair value. | | 1 Includes $29.2 million and $29.0 million of net deferred loan fees at December 31, 2020 and September 30, 2020, respectively, of which carrying value approximates fair value. |
19.15. Earnings per Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding determined for the basic earnings per share calculation plus the dilutive effect of stock compensation using the treasury stock method.
The following information was used in the computation of basic and diluted earnings per share (EPS) for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands, except per share data) | | | (dollars in thousands, except per share data) |
Net income | Net income | $ | (740,618) | | | $ | 44,511 | | | $ | (697,344) | | | $ | 90,297 | | Net income | $ | 41,319 | | | $ | 43,274 | | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | 55,906,002 | | | 56,994,817 | | | 56,141,816 | | | 57,484,838 | | Weighted average common shares outstanding | 55,119,909 | | | 56,377,631 | | |
Dilutive effect of stock based compensation | Dilutive effect of stock based compensation | — | | | 79,857 | | | — | | | 72,146 | | Dilutive effect of stock based compensation | 127,434 | | | 80,336 | | |
Weighted average common shares outstanding for diluted earnings per share calculation | Weighted average common shares outstanding for diluted earnings per share calculation | 55,906,002 | | | 57,074,674 | | | 56,141,816 | | | 57,556,984 | | Weighted average common shares outstanding for diluted earnings per share calculation | 55,247,343 | | | 56,457,967 | | |
| Basic earnings per share | Basic earnings per share | $ | (13.25) | | | $ | 0.78 | | | $ | (12.42) | | | $ | 1.57 | | Basic earnings per share | $ | 0.75 | | | $ | 0.77 | | |
Diluted earnings per share | Diluted earnings per share | $ | (13.25) | | | $ | 0.78 | | | $ | (12.42) | | | $ | 1.57 | | Diluted earnings per share | $ | 0.75 | | | $ | 0.77 | | |
The Company had 5,037115,160 and 0 shares of unvested performance stock as of MarchDecember 31, 2020 and 2019, respectively, which were not included in the computation of diluted earnings per common share because performance conditions for vesting had not been met. The Company had 63,076169,539 and 67,97166,155 shares of anti-dilutive stock awards outstanding as of MarchDecember 31, 2020 and 2019, respectively.
20.
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
16. Revenue Recognition
The Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, Revenue from Contracts with Customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company's revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP and discussed elsewhere within Item 8. Financial Statements and Supplementary Data, "Note 1. Nature of Operations and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020. Descriptions of the Company's revenue-generating activities that are within the scope of ASC Topic 606, which are presented in the consolidated income statements as components of noninterest income, are as follows:
GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Service charges and fees on deposit accounts. Service charges on deposit accounts are earned for account maintenance and overdraft, wire and treasury management services. Revenue is recognized at the time the services are performed and is included in service charges and other fees within noninterest income on the consolidated statements of income.
Interchange and merchant services income. Interchange and merchant services income are earned from credit and debit card payment processing through card association networks, merchant services and other card related services. Fees for these services are primarily based on interchange rates set by the networks and transaction volumes and are recognized as transactions are processed and settled with networks on behalf of card holders. These fees are presented net of direct expenses, including reward costs, associated with credit and debit card interchange income in service charges and other fees which are included in noninterest income on the consolidated statements of income.
Wealth management and trust fee income. Wealth management and trust fees are earned for asset management, custody and recordkeeping, investment advisory and administrative services. Revenue is recognized as the services are performed. Brokerage charges are recorded as a net reduction in wealth management fees which are included in noninterest income on the consolidated statements of income.
Other noninterest income. Other noninterest income primarily includes such items as letter of credit fees, gains on sale of loans held for sale and servicing fees, none of which are subject to the requirements of ASC Topic 606.
The following table presents total noninterest income segregated between contracts with customers within the scope of ASC Topic 606 and those within the scope of other GAAP Topics. The following additionally presents revenues from customers that are included within noninterest income.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands) | | | | | | | (dollars in thousands) | |
Noninterest income | Noninterest income | | Noninterest income | | |
Service charges and other fees | Service charges and other fees | $ | 9,188 | | | $ | 10,209 | | | $ | 20,597 | | | $ | 21,897 | | Service charges and other fees | $ | 9,624 | | | $ | 11,409 | | |
Wealth management fees | Wealth management fees | 3,122 | | | 2,117 | | | 6,086 | | | 4,358 | | Wealth management fees | 3,029 | | | 2,964 | | |
Other | Other | 664 | | | 1,118 | | | 1,332 | | | 1,700 | | Other | 848 | | | 668 | | |
Noninterest income from contracts with customers within the scope of ASC Topic 606 | Noninterest income from contracts with customers within the scope of ASC Topic 606 | 12,974 | | | 13,444 | | | 28,015 | | | 27,955 | | Noninterest income from contracts with customers within the scope of ASC Topic 606 | 13,501 | | | 15,041 | | |
Noninterest income within the scope of other GAAP Topics ¹ | Noninterest income within the scope of other GAAP Topics ¹ | (13,057) | | | 4,779 | | | (12,365) | | | 6,988 | | Noninterest income within the scope of other GAAP Topics ¹ | 647 | | | 692 | | |
Total noninterest income | Total noninterest income | $ | (83) | | | $ | 18,223 | | | $ | 15,650 | | | $ | 34,943 | | Total noninterest income | $ | 14,148 | | | $ | 15,733 | | |
1 The Company presents out of scope noninterest income for the purpose of reconciling noninterest income amounts within the scope of ASC Topic 606 to noninterest income amounts presented on the Company's consolidated statements of income. | 1 The Company presents out of scope noninterest income for the purpose of reconciling noninterest income amounts within the scope of ASC Topic 606 to noninterest income amounts presented on the Company's consolidated statements of income. | | | | | | 1 The Company presents out of scope noninterest income for the purpose of reconciling noninterest income amounts within the scope of ASC Topic 606 to noninterest income amounts presented on the Company's consolidated statements of income. | |
21. Acquisition Activity
Effective October 1, 2019, the Company purchased and assumed the management of $306.0 million of trust assets managed in Colorado from Independent Bank, a wholly owned subsidiary of Independent Bank Group, Inc., for $4.7 million. The Company accounted for the purchase under the acquisition method in accordance with ASC Topic 805, Business Combinations. Accordingly, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of acquisition. The following table summarizes the consideration paid and the allocation of the purchase price to net assets as of the acquisition date.
| | | | | |
| Amount |
| (dollars in thousands) |
Total consideration paid | $4,711 |
Customer relationship intangible | $3,172 |
Goodwill | $1,539 |
The foregoing purchase price allocation on the acquisition is considered final and no subsequent adjustments to the purchase price allocation are expected. Goodwill related to this acquisition was not deductible for tax purposes. See Note 10 for additional disclosure regarding goodwill. The customer relationship intangible is being amortized over an estimated useful life of 13 years. See Note 11 for additional disclosure regarding intangible assets.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The historical consolidated financial data discussed below reflects our historical results of operations and financial condition and should be read in conjunction with our financial statements and related notes thereto presented elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019,2020, previously filed with the SEC. In addition to historical financial data, this discussion includes certain forward-looking statements regarding events and trends that may affect our future results. Such statements are subject to risks and uncertainties that could cause our actual results to differ materially. See "Cautionary Note Regarding Forward-Looking Statements." For a more complete discussion of the factors that could affect our future results, see "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q and "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020.
Any discrepancies included in this filing between totals and the sums of percentages and dollar amounts presented, or between rounded dollar amounts, are due to rounding.
Unless otherwise noted, references to "the current period" or "the current quarter" refer to the fiscal quarter ended MarchDecember 31, 2020 and references to "the comparable period" or "the comparable quarter" refer to the fiscal quarter ended MarchDecember 31, 2019.
Tax Equivalent Presentation
All references to net interest income, net interest margin, interest income on non-ASC 310-30 loans, yield on non-ASC 310-30 loans and the related non-GAAP adjusted financial measure of each item are presented on a FTE basis unless otherwise noted.
Overview
We are a full-service regional bank holding company focused on relationship-based business and agri-business banking. We serve our customers through 175 branches in attractive markets in nine states: Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota.
Our Bank was established more than 80 years ago and we have achieved strong market positions by developing and maintaining extensive local relationships in the communities we serve. By leveragingWe serve our business and agri-business focus, presencecustomers through 175 branches in attractive markets highly efficient operating modelin Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and robust approach to risk management, we have achieved significant and profitable growth—both organically and through disciplined acquisitions.South Dakota. We provide financial results based on a fiscal year ending September 30 as a single reportable segment.
The principal sources of our revenues and cash flows are: (i) interest and fees earned on loans made or held by our Bank; (ii) interest on fixed income investments held by our Bank; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at our Bank; (v) gain on the sale of loans held for sale (vi) gains on sales of securities; and (vii) merchant and card fees. Our principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing and communication costs primarily associated with maintaining our Bank's loan and deposit functions; (iv) occupancy expenses for maintaining our Bank's facilities; (v) professional fees, including FDIC insurance assessments; (vi) business development; and (vii) other real estate owned expenses. The largest component contributing to our net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposit accounts and other borrowings). One of management's principal functions is to manage the spread between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
Impact and Response to COVID-19 Pandemic
We conduct business in nine states, including Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Many of these states have placed or are considering placing significant restrictions on companiesbusinesses and individuals in March 2020 as a result of the COVID-19 pandemic. While many of these initial restrictions have been lifted, the recent surge of infections in some of these states raises the possibility that certain restrictions could re-imposed or extended to contain further spread. As a financial institution, we are considered an essential business and therefore continue to operate on a modified basis to comply with governmental restrictions and public health authority guidelines. Our bank lobbies are closed to the general public, although business is still being transacted through drive-up facilities, online, telephone or by appointment. Although we believe these arrangements will
We remain in effect until the restrictions are lifted by governmental authorities, we continue to operate and maintain our customer relationships. The health and safety offocused on keeping our employees safe and our Bank running effectively to serve our customers. We are managing branch access and occupancy levels in relation to cases and close contact scenarios, encouraging remote work and supporting our employees with paid time off and following CDC guidelines for those working in the office. For our customers, is a major concernwe are supporting PPP, having provided $727.3 million in loans to our managementover 4,800 customers and every effort is being madenow having processed $27.8 million of loans through the forgiveness pathway. We are prepared to have employees work from home or, if working from oneprovide additional PPP lending as part of our locations is required,the recently enacted Economic Aid to maintain appropriate social distancingHard Hit Small Businesses, Non-Profits, and observe other health precautions.Ventures Act.
Through this time of disruption we have remained open for business supporting our customers while implementing our business continuity plan to mitigate the risks of the spread of COVID-19 to our employees and customers. As of April 24th, we have more than 750 employees working remotely from home with those still in the office appropriately spaced, 97% of our branches open with limited access, increased functionality of ATM, online banking and mobile channels, and processed 2,300 applications approved for Paycheck Protection Program loans totaling over $600.0 million. We have also taken such other actions as social distancing, restrictions on in-person meetings and conferences, Company travel restrictions and increased sanitary protocols. We believe these actions offer the best protection for our employees and customers, an enhance our ability to continue providing our banking services.
Financial results this quarter included several items linked to the impact of the COVID-19 pandemic. Most significantly, we recognized an impairment included in noninterest expense of $742.4 million, of which $622.4 million stemmed from goodwill related to the acquisition of Great Western Bank in 2008 by National Australia Bank, $118.2 million from goodwill related to subsequent acquisitions and $1.8 million from certain intangible assets, which were considered impaired given the market and valuation disruption during the quarter. The expense was offset in part by a related benefit from income taxes of $29.3 million.
In addition, the COVID-19 impacts included $73.8 million in several credit and other related charges for loan and other real estate reserves, including a $59.7 million charge for general allowance increases in provision expense under the incurred loss model, $7.1 million and $3.3 million of charges for fair value credit risk and derivative reserves in noninterest income, respectively, a $3.3 million write down on an OREO hotel property negatively impacted by COVID-19 pandemic travel restrictions, and $0.4 million of charges for the reserve on unfunded commitments in noninterest expenses. All of these pretax expenses are offset in part by a related benefit from income taxes of $17.2 million. See "—Non-GAAP Financial Measures" section in this document for further discussion of the above items. Our management believes additional increases in credit and other related charges could occur if the effects of the COVID-19 restrictions continue to negatively impact the loan portfolio.
Furthermore, the onset and continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our Companybusiness and itscontinuation of operations, including the following:
•Market interest rates have declined significantly and these reductions, especially if prolonged, could adversely affect our net interest income, net interest margin and earnings;
•We anticipatehave experienced and/or anticipated a potential slowdown in demand for our products and services, including the demand for traditional loans, although we believe the decline will likely be offset, in whole or in part, due to the new volume of PPP loans under the CARES Act and other governmental programs established in response to the pandemic;
•The inability of our customers to meet their loan commitments and could resultWe have experienced and/or anticipated an increase in increased risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, resultingall of which may result in additional credit charges and other losses toin our Company;loan portfolio;
•TheVolatility in economic forecasts caused by the COVID-19 pandemic restrictions have created significant volatility and disruptioncreate wider uncertainty in the financial markets, and these conditions may require us to recognize an elevated leveloutlook for future net charge off activity resulting in the potential for changing levels of other than temporary impairments on investment securitiesreserves in our portfolio as issues of these securities are negatively impacted by the economic slowdown. allowance for credit losses;
•Declines in fair value of investment securities in our portfolio could also reduce the unrealized gains reported as part of our consolidated comprehensive income (loss); and
•We andIn meeting our Bank are required to comply with minimum capital and leverage requirements. Our capital strategy is primarilyobjective to maintain our capital levels and liquidity position through the COVID-19 pandemic, and our Board of Directors has reduced, and could determine furtherto altogether forego payment of future reductions or foregoing dividends in order to maintain and/or strengthen our capital and liquidity position.
Highlights for the Three and Six Months Ended MarchDecember 31, 2020
Tier 1 capital, total capital and Tier 1 leverage ratios were 11.3%, 12.9% and 9.2%, respectively, at March 31, 2020,Net income was $41.3 million, or $0.75 per diluted share, for the first quarter of fiscal year 2021, compared to 11.7%, 12.7% and 10.1%, respectively, at September 30, 2019. In addition, our Common Equity Tier 1net income of $43.3 million, or $0.77 per diluted share, for the same period in fiscal year 2020, a decrease of $2.0 million. The decline in net income in the current quarter was primarily due to a $1.6 million decrease in noninterest income mainly due to changes in the fair value of loans combined with a $1.1 million decrease in net interest income after provision for credit losses. Our efficiency ratio was 10.6%46.2% for both the first quarter of fiscal year 2021 and 11.0% at March 31, 2020 and September 30, 2019, respectively. Our tangible common equity to tangible assets ratio was 9.3% at March 31, 2020 and 9.6% at September 30, 2019. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized".2020. For more information on our tangible common equity to tangible assetsefficiency ratio, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
During the second quarter of fiscal year 2020, $40.0 million was deployed to repurchase and retire approximately 1.4 million shares of Company's common stock under the repurchase program authorized by the Board of Directors at an average price of $29.45. These purchases occurred prior to the onset of the COVID-19 pandemic. In early March 2020, the Company determined to indefinitely suspend additional buybacks within its remaining authorization to support the Federal Reserve Board in actions taken to moderate the impact of COVID-19 by maintaining strong capital levels and liquidity to support customers and other stakeholders.
With the many uncertainties of the COVID-19 pandemic, including the full impacts on the future financial results and operations of the Company, the Board of Directors has determined to reduce its regular quarterly dividend for the quarter ending March 31, 2020 to $0.15 per common share. The reduced dividend will help strengthen the Company's balance sheet and liquidity in light of the uncertainty surrounding the COVID-19 pandemic. The dividend will be payable on May 29, 2020 to stockholders of record as of close of business on May 15, 2020. The aggregate dividend payment will be approximately $8.3 million. The Board of Directors will continue to evaluate the impacts of the COVID-19 pandemic and the appropriateness of declaring future dividends throughout the year.
Net loss was $740.6 million, or $(13.25) per diluted share, for the second quarter of fiscal year 2020, compared to net income of $44.5 million, or $0.78 per diluted share, for the same period in fiscal year 2019, a decrease of $785.1 million. Adjusted net income which excludes the COVID-19 pandemic impact on goodwill, certain intangible assets and credit and other related charges, was $29.1 million, or $0.52 per diluted share, compared to $44.5 million, or $0.78 per diluted share. The decline in adjusted net income in the current quarter was due to lower net interest income primarily attributable to a decline in loan and securities yields were outpaced by a decline in deposit and funding yields, particularly in March 2020 following the Federal Reserve's emergency rate cutting of 150 basis points. Our efficiency ratio was 63.5% and 45.6% for the second quarter of fiscal year 2020 and 2019, respectively. For more information on our adjusted net income and efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" section.
Net interest margin, which measures our ability to maintain interest rates on interest earning assets above those of interest bearing liabilities, was 3.59%3.63%, 3.68%3.51% and 3.75%3.68%, respectively, for the three months ended MarchDecember 31, 2020, December 31, 2019September 30, 2020 and MarchDecember 31, 2019. Adjusted net interest margin, which reflects the realized gain (loss)derivative interest expense on interest rate swaps, was 3.55%3.52%, 3.65%3.40% and 3.76%3.65%, respectively, for the same periods. We believe our adjusted net interest margin is more representative of our underlying performance and is the measure we use internally to evaluate our results. Net interest margin and adjusted net interest margin decreased by 165 and 2113 basis points, respectively, compared to the same quarter in fiscal year 2019.2020. Net interest margin decreased between the two periods primarily due to securities and loan yields, which decreased 23 and 3949 basis points respectively, reflecting the impact of repricing following the emergency rate cuts discussed previously, partially offset by a 3365 basis point decrease in the cost of deposits to 0.75%0.21%. A $1.7$2.5 million increase in the current quarter of the cost of interest rate swaps compared to the same period in fiscal year 20192020 is the primary driver of the more pronounced decrease in adjusted net interest margin compared to the decrease in net interest margin. For more information on our adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
Total loans were $9.69$9.52 billion at MarchDecember 31, 2020 compared to $9.71$10.08 billion at September 30, 2019,2020, a decrease of $13.5$558.3 million, or 0.1%5.5%. The decline in loans during the periodreduction was mainly attributable todriven by sales of $208.8 million in hotel loans, a reductionnumber of payoffs in nonaccrual and classified loans, an increase in paydowns across the commercial, agriculture segmentand consumer portfolios, and processing of $126.9$27.8 million of PPP loan forgiveness.
Deposits were $11.37 billion at December 31, 2020, an increase of $364.5 million, or 6.3%3.3%, largelycompared to $11.01 billion at September 30, 2020, due to a seasonal$438.5 million increase in checking and savings deposits across both business and consumer accounts offset with a $67.9 million reduction in business and consumer time deposits and a $6.1 million decrease relatedin public and brokered deposits. FHLB advances and other borrowings decreased by $75.0 million due to customer tax planning andmatured borrowings during the period.
At December 31, 2020, nonaccrual loans were $292.4 million, a decrease of $32.6 million compared to September 30, 2020, driven by a number of relationships refinanced elsewhere, a reductionpayoffs causing agriculture loans to decline by $24.7 million and non-agriculture loans to decrease by $7.9 million. Classified loans, which include nonaccrual loans, were $716.9 million as of $20.8 million, or 1.2%, in the commercial non-real estate segment of the portfolio due to disbursement transaction timing within our mortgage warehouse lending, offset by an increase of $130.4 million, or 2.6%, in CRE attributable to growth from construction drawdowns and new relationships across the footprint.
Deposits were $10.18 billion at MarchDecember 31, 2020, a decrease of $121.2$52.6 million or 1.2%, compared to $10.30 billion atfrom $769.5 million as of September 30, 2019, due2020, driven by a reduction in the use of brokered deposits offset by an increase in business deposits. Interest-bearing deposits were $8.21 billion, a 1.7% decrease, and noninterest-bearing deposits were $1.97 billion, a 0.9% increase. FHLB and other borrowings increased by $460.0 million, or 135.3%, as a result of more favorable rates during the quarter.
At March 31, 2020, nonaccrual loans, including ASC 310-30 loans, were $213.1 million, an increase of $105.9 million, or 98.8%, compared to September 30, 2019, related primarily to a small number of upgraded agriculture relationships, a number of payoffs and sales in healthcare and agriculture industries as they progress through the workout process. Loans graded "Watch" were $420.3 million, an increase of $14.7 million, or 3.6%, compared to September 30, 2019 while loans graded "Substandard" were $627.7 million, an increase of $155.2 million, or 32.9%, over the same period. The increase in loans graded "Substandard" was primarily due to downgrades in theboth agriculture and agriculture-related commercial non-real estate segments,non-agriculture loans, partially offset with a small number of downgradesapproximately $54.0 million in the commercial non-real estate segment.new hotel downgrades. Total other repossessed property balances were $27.3$18.1 million as of MarchDecember 31, 2020, a decrease of $9.5$1.9 million, or 25.8%9.7%, compared to September 30, 2019.2020.
The balance of the ACL increased to $308.8 million at December 31, 2020 from $149.9 million at September 30, 2020. The increase was driven by the adoption of CECL on October 1, 2020, where we recognized a Day 1 increase in the ACL of $177.3 million, which was partially offset by the net impact from provisioning and charge-offs during the quarter. Provision for loan and leasecredit losses was $71.8$11.9 million for the secondfirst quarter of fiscal year 2020,2021, compared to $7.7$8.1 million for the same period of fiscal year 2019,2020, an increase of $64.1$3.8 million due to incurred loss resulting frombetween the COVID-19 pandemic. This increase did not contemplate the potential impact of CECL implementation, which is effective for the Company October 1, 2020.periods. Net charge-offs for the secondfirst quarter of fiscal year 20202021 were $8.6$30.4 million, or 0.36%1.22% of average total loans on an annualized basis, compared to net charge-offs of $5.9$6.1 million, or 0.25% of average total loans on an annualized basis for the comparable period in fiscal year 2019, with2020. The increase was driven by $25.6 million of discount on the majoritysales of net charge-offs concentrated in the agriculture segment of the loan portfolio. The ratio of ALLL tocertain hotel loans.
Tier 1 capital, total loans was 1.40%capital and Tier 1 leverage ratios were 12.7%, 14.3% and 9.7%, respectively, at MarchDecember 31, 2020, compared to 0.73%11.8%, 13.3% and 9.4%, respectively, at September 30, 2019. The balance of the ALLL increased to $136.0 million2020. In addition, our Common Equity Tier 1 ratio was 12.0% and 11.0% at MarchDecember 31, 2020 from $70.8 millionand September 30, 2020, respectively. Our tangible common equity to tangible assets ratio was 8.3% at December 31, 2020 and 9.2% at September 30, 2019.2020. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized". For more information on our tangible common equity to tangible assets ratio, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
Key Factors Affecting Our Business and Financial Performance
As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019,2020, our financial performance is impacted by a number of external factors outside our control, as well as our ability to execute on the key components of our strategy for continued success and future growth. There have been no material changes to these factors or key components of our strategy except as otherwise supplemented within thisour Quarterly Report on Form 10-Q for the quarterly period ended MarchDecember 31, 2020.
Results of Operations—Three and Six Months Ended MarchDecember 31, 2020 and 2019
Overview
The following table highlights certain key financial and performance information for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands, except share and per share amounts) | | | (dollars in thousands, except share and per share amounts) |
Operating Data: | Operating Data: | | Operating Data: | | |
Interest income (FTE) | Interest income (FTE) | $ | 126,757 | | | $ | 135,328 | | | $ | 259,817 | | | $ | 268,879 | | Interest income (FTE) | $ | 117,195 | | | $ | 133,060 | | |
Interest expense | Interest expense | 23,260 | | | 30,411 | | | 49,624 | | | 57,578 | | Interest expense | 7,689 | | | 26,364 | | |
Noninterest income | Noninterest income | (83) | | | 18,223 | | | 15,650 | | | 34,943 | | Noninterest income | 14,148 | | | 15,733 | | |
Noninterest expense | Noninterest expense | 808,453 | | | 56,580 | | | 865,383 | | | 113,686 | | Noninterest expense | 57,449 | | | 56,930 | | |
Provision for loan and lease losses | 71,795 | | | 7,673 | | | 79,898 | | | 12,888 | | |
Provision for credit losses ³ | | Provision for credit losses ³ | 11,899 | | | 8,103 | | |
Net income | Net income | (740,618) | | | 44,511 | | | (697,344) | | | 90,297 | | Net income | 41,319 | | | 43,274 | | |
Adjusted net income ¹ | 29,080 | | | 44,511 | | | 72,354 | | | 90,297 | | |
| Common shares outstanding | Common shares outstanding | 55,013,928 | | | 56,938,435 | | | 55,013,928 | | | 56,938,435 | | Common shares outstanding | 55,105,105 | | | 56,382,915 | | |
Weighted average diluted common shares outstanding | Weighted average diluted common shares outstanding | 55,906,002 | | | 57,074,674 | | | 56,141,816 | | | 57,556,984 | | Weighted average diluted common shares outstanding | 55,247,343 | | | 56,457,967 | | |
Earnings per common share - diluted | Earnings per common share - diluted | $ | (13.25) | | | $ | 0.78 | | | $ | (12.42) | | | $ | 1.57 | | Earnings per common share - diluted | $ | 0.75 | | | $ | 0.77 | | |
Adjusted earnings per common share - diluted ¹ | Adjusted earnings per common share - diluted ¹ | 0.52 | | | 0.78 | | | 1.29 | | | 1.57 | | Adjusted earnings per common share - diluted ¹ | 0.75 | | | 0.77 | | |
Performance Ratios: | Performance Ratios: | | Performance Ratios: | | |
Net interest margin (FTE) ¹ ² | Net interest margin (FTE) ¹ ² | 3.59 | % | | 3.75 | % | | 3.63 | % | | 3.78 | % | Net interest margin (FTE) ¹ ² | 3.63 | % | | 3.68 | % | |
Adjusted net interest margin (FTE) ¹ ² | Adjusted net interest margin (FTE) ¹ ² | 3.55 | % | | 3.76 | % | | 3.60 | % | | 3.79 | % | Adjusted net interest margin (FTE) ¹ ² | 3.52 | % | | 3.65 | % | |
Return on average total assets ² | Return on average total assets ² | (23.16) | % | | 1.44 | % | | (10.86) | % | | 1.46 | % | Return on average total assets ² | 1.30 | % | | 1.34 | % | |
Return on average common equity ² | Return on average common equity ² | (155.3) | % | | 9.9 | % | | (72.9) | % | | 10.0 | % | Return on average common equity ² | 15.2 | % | | 9.0 | % | |
Return on average tangible common equity ¹ ² | Return on average tangible common equity ¹ ² | (9.3) | % | | 16.9 | % | | 2.8 | % | | 17.0 | % | Return on average tangible common equity ¹ ² | 15.3 | % | | 15.0 | % | |
Efficiency ratio ¹ | Efficiency ratio ¹ | 63.5 | % | | 45.6 | % | | 54.1 | % | | 45.8 | % | Efficiency ratio ¹ | 46.2 | % | | 46.2 | % | |
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | 1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | | 1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. |
2 Annualized for all partial-year periods. | 2 Annualized for all partial-year periods. | | 2 Annualized for all partial-year periods. |
3 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the provision for loan and lease losses under the incurred model. | | 3 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the provision for loan and lease losses under the incurred model. | |
Net Interest Income
The following table presents net interest income, net interest margin and adjusted net interest margin for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands) | | | (dollars in thousands) |
Net interest income: | Net interest income: | | Net interest income: | | |
Total interest income (FTE) | Total interest income (FTE) | $ | 126,757 | | | $ | 135,328 | | | $ | 259,817 | | | $ | 268,879 | | Total interest income (FTE) | $ | 117,195 | | | $ | 133,060 | | |
Less: Total interest expense | Less: Total interest expense | 23,260 | | | 30,411 | | | 49,624 | | | 57,578 | | Less: Total interest expense | 7,689 | | | 26,364 | | |
Net interest income (FTE) | Net interest income (FTE) | $ | 103,497 | | | $ | 104,917 | | | $ | 210,193 | | | $ | 211,301 | | Net interest income (FTE) | $ | 109,506 | | | $ | 106,696 | | |
Net interest margin (FTE) and adjusted net interest margin (FTE) ¹ | Net interest margin (FTE) and adjusted net interest margin (FTE) ¹ | | | | | | Net interest margin (FTE) and adjusted net interest margin (FTE) ¹ | | |
Average interest-earning assets | Average interest-earning assets | $ | 11,590,453 | | | $ | 11,345,559 | | | $ | 11,567,032 | | | $ | 11,216,179 | | Average interest-earning assets | $ | 11,965,555 | | | $ | 11,543,610 | | |
Average interest-bearing liabilities | Average interest-bearing liabilities | 10,850,104 | | | 10,639,351 | | | 10,827,113 | | | 10,510,762 | | Average interest-bearing liabilities | 11,436,823 | | | 10,804,123 | | |
Net interest margin (FTE) | Net interest margin (FTE) | 3.59 | % | | 3.75 | % | | 3.63 | % | | 3.78 | % | Net interest margin (FTE) | 3.63 | % | | 3.68 | % | |
Adjusted net interest margin (FTE) ¹ | Adjusted net interest margin (FTE) ¹ | 3.55 | % | | 3.76 | % | | 3.60 | % | | 3.79 | % | Adjusted net interest margin (FTE) ¹ | 3.52 | % | | 3.65 | % | |
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | 1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | | 1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. |
Net interest income was $103.5$109.5 million for the secondfirst quarter of fiscal year 2020,2021, compared to $104.9$106.7 million for the same period in fiscal year 2019, a decrease2020, an increase of $1.4$2.8 million, or 1.4%2.6%. NetFor the first quarter of fiscal year 2021, interest expense decreased $18.7 million driven by a $15.9 million decrease in deposit interest resulting from lower yields on interest-bearing deposits, along with a $2.7 million decrease in borrowings interest. The decrease in interest expense was partially offset by lower interest income was $210.2of $15.9 million foras loan interest decreased $12.1 million from lower volumes and lower yields. Securities interest decreased $3.4 million due to lower yields driven by the first sixlow interest rate environment.
months of fiscal year 2020, compared to $211.3 million for the same period in fiscal year 2019, a decrease of $1.1 million, or 0.5%. The decrease in net interest income for both periods was primarily attributable to a decline in loan and securities yields were outpaced by a decline in deposit and funding yields, particularly in March 2020 following the Federal Reserve's emergency rate cutting of 150 basis points, leading to a lower net interest margins.
Net interest margin was 3.59%3.63% and 3.75%3.68% for the secondfirst quarter of fiscal year 20202021 and 2019,2020, respectively, a decrease of 165 basis points, while the adjusted net interest margin was 3.55%3.52% and 3.76%3.65% for the same periods, respectively, a decrease of 21 basis points. Net interest margin was 3.63% and 3.78% for the first six months of fiscal year 2020, respectively, a decrease of 15 basis points, while the adjusted net interest margin was 3.60% and 3.79% for the same periods, respectively, a decrease of 1913 basis points. The decreasesdecrease in net interest margin for both the three and six month periodsperiod was primarily driven by loan yields, which decreased 49 basis points, and securities yields, which decreased 23 and 1371 basis points, respectively, and loan yields, which decreased 39 and 28 basis points, respectively, resulting from the impact of repricing following the rate cuts discussed previously, partially offset by the yield on deposits, which decreased 33 and 2065 basis points, respectively.points. A $1.7 million and $2.6$2.5 million increase in the cost of interest rate swaps between the three and six month periodsperiod in fiscal year 20202021 and the comparable period in fiscal year 2019, respectively,2020, is the primary driver for the more pronounced decrease in adjusted net interest margin compared to the decrease in net interest margin. For more information on our adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
The following tables present the distribution of average assets, liabilities and equity, interest income and resulting yields on average interest-earning assets, and interest expense and rates on average interest-bearing liabilities for the current and comparable three and six month periods, respectively. Loans on nonaccrual status that had interest accrued as of the date of nonaccrual are immediately reversed as a reduction to interest income, while any interest subsequently recovered is recorded in the period of recovery. Tax-exempt loans and securities, totaling $743.0$710.5 million at MarchDecember 31, 2020 and $753.2$750.1 million at MarchDecember 31, 2019, are typically entered at lower interest rate arrangements than comparable non-exempt loans and securities. The amount of interest income reflected in the following table has been adjusted to include the amount of tax benefit realized in the period and as such is presented on a fully-tax equivalent basis, the calculation of which is outlined in the discussion of non-GAAP items later in this section. Prior to the October 1, 2020 adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, ASC 310-30 loans representrepresented loans accounted for in accordance with ASC 310-30, Accounting for Purchased Loans, that were credit impaired at the time we acquired them. Non-ASC 310-30 loans representrepresented loans we have originated and loans we have acquired that were not credit impaired at the time we acquired them. After adoption of ASU 2016-13, as amended, all loans were presented as non-ASC 310-30 loans.
| | | Three Months Ended | | | Three Months Ended |
| | March 31, 2020 | | | March 31, 2019 | | | December 31, 2020 | | December 31, 2019 |
| | Average Balance | Interest (FTE) | Yield / Cost ¹ | | Average Balance | Interest (FTE) | Yield / Cost ¹ | | Average Balance | Interest (FTE) | Yield / Cost ¹ | | Average Balance | Interest (FTE) | Yield / Cost ¹ |
| | (dollars in thousands) | | | (dollars in thousands) |
Assets | Assets | | Assets | |
Interest-bearing bank deposits ² | Interest-bearing bank deposits ² | $ | 56,883 | | $ | 558 | | 3.95 | % | | $ | 63,546 | | $ | 497 | | 3.17 | % | Interest-bearing bank deposits ² | $ | 492,105 | | $ | 155 | | 0.12 | % | | $ | 32,803 | | $ | 608 | | 7.37 | % |
Investment securities | Investment securities | 1,987,045 | | 11,329 | | 2.29 | % | | 1,603,038 | | 9,957 | | 2.52 | % | Investment securities | 1,905,771 | | 8,119 | | 1.69 | % | | 1,904,350 | | 11,498 | | 2.40 | % |
Non-ASC 310-30 loans, net ³ | Non-ASC 310-30 loans, net ³ | 9,496,153 | | 113,484 | | 4.81 | % | | 9,615,096 | | 122,970 | | 5.19 | % | Non-ASC 310-30 loans, net ³ | 9,567,679 | | 108,921 | | 4.52 | % | | 9,554,161 | | 119,232 | | 4.96 | % |
ASC 310-30 loans, net | 50,372 | | 1,386 | | 11.07 | % | | 63,879 | | 1,904 | | 12.09 | % | |
ASC 310-30 loans, net ⁴ | | ASC 310-30 loans, net ⁴ | — | | — | | — | % | | 52,296 | | 1,722 | | 13.10 | % |
Loans, net | Loans, net | 9,546,525 | | 114,870 | | 4.84 | % | | 9,678,975 | | 124,874 | | 5.23 | % | Loans, net | 9,567,679 | | 108,921 | | 4.52 | % | | 9,606,457 | | 120,954 | | 5.01 | % |
Total interest-earning assets | Total interest-earning assets | 11,590,453 | | 126,757 | | 4.40 | % | | 11,345,559 | | 135,328 | | 4.84 | % | Total interest-earning assets | 11,965,555 | | 117,195 | | 3.89 | % | | 11,543,610 | | 133,060 | | 4.59 | % |
Noninterest-earning assets | Noninterest-earning assets | 1,273,143 | | | 1,186,286 | | | Noninterest-earning assets | 614,946 | | | 1,267,983 | | |
Total assets | Total assets | $ | 12,863,596 | | $ | 126,757 | | 3.96 | % | | $ | 12,531,845 | | $ | 135,328 | | 4.38 | % | Total assets | $ | 12,580,501 | | $ | 117,195 | | 3.70 | % | | $ | 12,811,593 | | $ | 133,060 | | 4.13 | % |
Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | | | | | Liabilities and Stockholders' Equity | | | | |
Noninterest-bearing deposits | Noninterest-bearing deposits | $ | 1,942,686 | | | $ | 1,800,307 | | | Noninterest-bearing deposits | $ | 2,664,117 | | | $ | 1,977,084 | | |
Interest-bearing deposits | Interest-bearing deposits | 6,473,524 | | $ | 12,083 | | 0.75 | % | | 6,363,730 | | $ | 17,865 | | 1.14 | % | Interest-bearing deposits | 7,278,073 | | $ | 3,966 | | 0.22 | % | | 6,306,861 | | $ | 13,373 | | 0.84 | % |
Time deposits | Time deposits | 1,686,977 | | 6,784 | | 1.62 | % | | 2,039,208 | | 9,233 | | 1.84 | % | Time deposits | 1,187,148 | | 2,026 | | 0.68 | % | | 1,847,954 | | 8,567 | | 1.84 | % |
Total deposits | Total deposits | 10,103,187 | | 18,867 | | 0.75 | % | | 10,203,245 | | 27,098 | | 1.08 | % | Total deposits | 11,129,338 | | 5,992 | | 0.21 | % | | 10,131,899 | | 21,940 | | 0.86 | % |
Securities sold under agreements to repurchase | Securities sold under agreements to repurchase | 56,369 | | 24 | | 0.17 | % | | 63,237 | | 43 | | 0.28 | % | Securities sold under agreements to repurchase | 78,639 | | 18 | | 0.09 | % | | 66,527 | | 31 | | 0.19 | % |
FHLB advances and other borrowings | FHLB advances and other borrowings | 581,834 | | 3,131 | | 2.16 | % | | 264,347 | | 1,880 | | 2.88 | % | FHLB advances and other borrowings | 120,000 | | 862 | | 2.85 | % | | 497,034 | | 3,082 | | 2.47 | % |
Subordinated debentures and subordinated notes payable | Subordinated debentures and subordinated notes payable | 108,714 | | 1,238 | | 4.58 | % | | 108,522 | | 1,390 | | 5.19 | % | Subordinated debentures and subordinated notes payable | 108,846 | | 817 | | 2.98 | % | | 108,663 | | 1,311 | | 4.80 | % |
Total borrowings | Total borrowings | 746,917 | | 4,393 | | 2.37 | % | | 436,106 | | 3,313 | | 3.08 | % | Total borrowings | 307,485 | | 1,697 | | 2.19 | % | | 672,224 | | 4,424 | | 2.62 | % |
Total interest-bearing liabilities | Total interest-bearing liabilities | 10,850,104 | | $ | 23,260 | | 0.86 | % | | 10,639,351 | | $ | 30,411 | | 1.16 | % | Total interest-bearing liabilities | 11,436,823 | | $ | 7,689 | | 0.27 | % | | 10,804,123 | | $ | 26,364 | | 0.97 | % |
Noninterest-bearing liabilities | Noninterest-bearing liabilities | 95,457 | | | 69,554 | | | Noninterest-bearing liabilities | 61,601 | | | 98,951 | | |
Stockholders' equity | Stockholders' equity | 1,918,035 | | | 1,822,940 | | | Stockholders' equity | 1,082,077 | | | 1,908,519 | | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 12,863,596 | | | $ | 12,531,845 | | | Total liabilities and stockholders' equity | $ | 12,580,501 | | | $ | 12,811,593 | | |
Net interest spread | Net interest spread | | | 3.10 | % | | | | 3.22 | % | Net interest spread | | | 3.43 | % | | | | 3.16 | % |
Net interest income and net interest margin (FTE) | Net interest income and net interest margin (FTE) | | $ | 103,497 | | 3.59 | % | | $ | 104,917 | | 3.75 | % | Net interest income and net interest margin (FTE) | | $ | 109,506 | | 3.63 | % | | $ | 106,696 | | 3.68 | % |
Less: Tax equivalent adjustment | Less: Tax equivalent adjustment | | 1,514 | | | 1,442 | | | Less: Tax equivalent adjustment | | 1,598 | | | 1,523 | | |
Net interest income and net interest margin - ties to Statements of Comprehensive Income | Net interest income and net interest margin - ties to Statements of Comprehensive Income | | $ | 101,983 | | 3.54 | % | | $ | 103,475 | | 3.70 | % | Net interest income and net interest margin - ties to Statements of Comprehensive Income | | $ | 107,908 | | 3.58 | % | | $ | 105,173 | | 3.62 | % |
¹ Annualized for all partial-year periods. | ¹ Annualized for all partial-year periods. | | ¹ Annualized for all partial-year periods. |
2 Interest income includes $0.4 million and $0.1 million for the second quarter of fiscal years 2020 and 2019, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. | | |
3 Interest income includes $0.4 million and $0.4 million for the second quarter of fiscal years 2020 and 2019, respectively, resulting from accretion of purchase accounting discount associated with acquired loans. | | |
2 Interest income includes nominal and $0.4 million for the first quarter of fiscal years 2021 and 2020, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. | | 2 Interest income includes nominal and $0.4 million for the first quarter of fiscal years 2021 and 2020, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. |
3 Interest income includes $0.0 million and $0.6 million for the first quarter of fiscal years 2021 and 2020, respectively, resulting from accretion of purchase accounting discount associated with acquired loans. | | 3 Interest income includes $0.0 million and $0.6 million for the first quarter of fiscal years 2021 and 2020, respectively, resulting from accretion of purchase accounting discount associated with acquired loans. |
4 Beginning in the first quarter of fiscal year 2021, ASC 310-30 loans began being reported with non-ASC 310-30 loans. Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, discounts on ASC 310-30 loans related to noncredit factors accreted to interest income were immaterial. | | 4 Beginning in the first quarter of fiscal year 2021, ASC 310-30 loans began being reported with non-ASC 310-30 loans. Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, discounts on ASC 310-30 loans related to noncredit factors accreted to interest income were immaterial. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | |
| March 31, 2020 | | | | March 31, 2019 | | |
| Average Balance | Interest (FTE) | Yield / Cost ¹ | | Average Balance | Interest (FTE) | Yield / Cost ¹ |
| (dollars in thousands) | | | | | | |
Assets | | | | | | | |
Interest-bearing bank deposits ² | $ | 44,843 | | $ | 1,166 | | 5.20 | % | | $ | 77,663 | | $ | 1,039 | | 2.68 | % |
Investment securities | 1,945,698 | | 22,827 | | 2.35 | % | | 1,547,161 | | 19,145 | | 2.48 | % |
Non-ASC 310-30 loans, net ³ | 9,525,157 | | 232,716 | | 4.89 | % | | 9,525,498 | | 244,821 | | 5.15 | % |
ASC 310-30 loans, net | 51,334 | | 3,108 | | 12.11 | % | | 65,857 | | 3,874 | | 11.80 | % |
Loans, net | 9,576,491 | | 235,824 | | 4.93 | % | | 9,591,355 | | 248,695 | | 5.20 | % |
Total interest-earning assets | 11,567,032 | | 259,817 | | 4.49 | % | | 11,216,179 | | 268,879 | | 4.81 | % |
Noninterest-earning assets | 1,270,562 | | | | | 1,186,554 | | | |
Total assets | $ | 12,837,594 | | $ | 259,817 | | 4.05 | % | | $ | 12,402,733 | | $ | 268,879 | | 4.35 | % |
Liabilities and Stockholders' Equity | | | | | | | |
Noninterest-bearing deposits | $ | 1,959,885 | | | | | $ | 1,831,877 | | | |
Interest-bearing deposits | 6,390,193 | | $ | 25,456 | | 0.80 | % | | 6,257,167 | | $ | 33,601 | | 1.08 | % |
Time deposits | 1,767,465 | | 15,351 | | 1.74 | % | | 1,988,251 | | 17,291 | | 1.74 | % |
Total deposits | 10,117,543 | | 40,807 | | 0.81 | % | | 10,077,295 | | 50,892 | | 1.01 | % |
Securities sold under agreements to repurchase | 61,448 | | 55 | | 0.18 | % | | 71,543 | | 99 | | 0.28 | % |
FHLB advances and other borrowings | 539,434 | | 6,213 | | 2.30 | % | | 253,421 | | 3,827 | | 3.03 | % |
Subordinated debentures and subordinated notes payable | 108,688 | | 2,549 | | 4.69 | % | | 108,503 | | 2,760 | | 5.10 | % |
Total borrowings | 709,570 | | 8,817 | | 2.49 | % | | 433,467 | | 6,686 | | 3.09 | % |
Total interest-bearing liabilities | 10,827,113 | | $ | 49,624 | | 0.92 | % | | 10,510,762 | | $ | 57,578 | | 1.10 | % |
Noninterest-bearing liabilities | 97,204 | | | | | 71,975 | | | |
Stockholders' equity | 1,913,277 | | | | | 1,819,996 | | | |
Total liabilities and stockholders' equity | $ | 12,837,594 | | | | | $ | 12,402,733 | | | |
Net interest spread | | | 3.13 | % | | | | 3.25 | % |
Net interest income and net interest margin (FTE) | | $ | 210,193 | | 3.63 | % | | | $ | 211,301 | | 3.78 | % |
Less: Tax equivalent adjustment | | 3,037 | | | | | 2,932 | | |
Net interest income and net interest margin - ties to Statements of Comprehensive Income | | $ | 207,156 | | 3.58 | % | | | $ | 208,369 | | 3.73 | % |
¹ Annualized for all partial-year periods. | | | | | | | |
2 Interest income includes $0.8 million and $0.1 million for the first six months of fiscal years 2020 and 2019, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. | | | | | | | |
3 Interest income includes $1.0 million and $0.7 million for the first six months of fiscal years 2020 and 2019, respectively, resulting from accretion of purchase accounting discount associated with acquired loans. | | | | | | | |
Interest Income
The following table presents interest income for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands) | | | (dollars in thousands) |
Interest income: | Interest income: | | Interest income: | | |
Loans (FTE) | Loans (FTE) | $ | 114,870 | | | $ | 124,874 | | | $ | 235,824 | | | $ | 248,695 | | Loans (FTE) | $ | 108,921 | | | $ | 120,954 | | |
Investment securities | Investment securities | 11,329 | | | 9,957 | | | 22,827 | | | 19,145 | | Investment securities | 8,119 | | | 11,498 | | |
Federal funds sold and other | Federal funds sold and other | 558 | | | 497 | | | 1,166 | | | 1,039 | | Federal funds sold and other | 155 | | | 608 | | |
Total interest income (FTE) | Total interest income (FTE) | 126,757 | | | 135,328 | | | 259,817 | | | 268,879 | | Total interest income (FTE) | 117,195 | | | 133,060 | | |
Less: Tax equivalent adjustment | Less: Tax equivalent adjustment | 1,514 | | | 1,442 | | | 3,037 | | | 2,932 | | Less: Tax equivalent adjustment | 1,598 | | | 1,523 | | |
Total interest income (GAAP) | Total interest income (GAAP) | $ | 125,243 | | | $ | 133,886 | | | $ | 256,780 | | | $ | 265,947 | | Total interest income (GAAP) | $ | 115,597 | | | $ | 131,537 | | |
Total interest income consists primarily of interest income on loans and interest income on our investment portfolio. Total interest income was $126.8$117.2 million for the secondfirst quarter of fiscal year 2020,2021, compared to $135.3$133.1 million for the same period of fiscal year 2019,2020, a decrease of $8.5$15.9 million, or 6.3%. Total interest income was $259.8 million for the first six months of fiscal year 2020, compared to $268.9 million for the same period in fiscal year 2019, a decrease of $9.1 million, or 3.4%11.9%. Significant components of interest income are described in further detail below.
Loans. Interest income on all loans decreased to $114.9$108.9 million in secondfirst quarter of fiscal year 20202021 from $124.9$121.0 million in the same period in fiscal year 2019,2020, a decrease of $10.0$12.1 million, or 8.0%. Interest income on all loans decreased to $235.8 million for the first six months of fiscal year 2020, from $248.7 million in the same period in fiscal year 2019, a decrease of $12.9 million, or 5.2%10.0%. The decreasesdecrease in loan yields for both periods were primarilyyield was attributable to lower loan interest income driven by decreases of 39lower loan volumes and 28a 49 basis points, respectively,point decrease between the periods. Forperiods reflecting the three and six months ended March 31, 2020, interest income on ASC 310-30impact of PPP loans which are purchased credit impaired loans withyield a different income recognition model, decreased $0.5 million, or 27.2%, and $0.8 million, or 19.8%, respectively, primarily driven by runoff of the acquired loan portfolios.lower rate.
Our yield on loans is also affected by market interest rates, the level of adjustable-rateadjustable rate loan indices, interest rate floors and caps, customer repayment activity, the level of loans held for sale, portfolio mix, and the level of nonaccrual loans. The average tax equivalent yield on non-ASC 310-30 loans was 4.81%4.52% for the secondfirst quarter of fiscal year 2020,2021, a decrease of 3844 basis points compared to the same period in fiscal year 2019. The average tax equivalent yield on non-ASC 310-30 loans was 4.89% for the first six months of fiscal year 2020, a decrease of 26 basis points compared to the same period in fiscal year 2019.2020. Adjusted for the current realized gain (loss)derivative interest expense on derivatives we use to manage interest rate risk on certain of our loans at fair value, which we believe represents the underlying economics of the transactions, the adjusted yield on non-ASC 310-30 loans was 4.75%4.38% for the secondfirst quarter of fiscal year 2020,2021, a 4555 basis point decrease compared to the same period in fiscal year 2019. The adjusted yield on non-ASC 310-30 loans was 4.84% for the first six months of fiscal year 2020, a decrease of 32 basis points, compared to the same period in fiscal year 2019.2020. For more information on our adjusted yield on non-ASC 310-30 loans, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
The average duration, net of interest rate swaps, of the loan portfolio was 1.5 years as of MarchDecember 31, 2020. Approximately 48%52%, or $4.64$4.93 billion, of the portfolio is comprised of fixed rate loans, $611.6 million of which $792.1 million of loans are fixed rate loans withhave an original term of 5 years or greater for which we have entered into equal and offsetting fixed-to-floating interest rate swaps. These loans effectively behave as floating rate loans. For floating and variable rate loans in the portfolio, approximately 40%36% are indexed to Wall Street Journal Prime, 29%28% to 5-year Treasuries, 23% are indexed to 1-month LIBOR and the balance to various other indices. ApproximatelyLess than 22% of our total loans' rates are floored, with an average interest rate floor 119112 basis points above market rates as of MarchDecember 31, 2020. In addition, there were approximately 7% of our total loans with rate floors that have not been reached, with an average interest rate 46 basis points below market rates.
Loan-related fee income of $1.9 million is included in interest income for the second quarter of fiscal year 2020, compared to $1.6 million for the same period in fiscal year 2019. Loan-related fee income of $4.2$1.7 million is included in interest income for the first six monthsquarter of fiscal year 2020,2021, compared to $3.1$2.3 million for the same period in fiscal year 2019.2020. In addition, certain fees collected at loan origination are considered to be a component of yield on the underlying loans and are deferred and recognized into income over the life of the loans. Amortization related to the FDIC indemnification assets of $0.4 million for both of the second quarters of fiscal years 2020 and 2019, respectively, and $0.6 million and $0.9 million for the first six months of fiscal years 2020 and 2019, respectively, is included as a reduction to interest income.
Investment Portfolio. The carrying value of investment securities and FHLB stock, was $2.03which is included in other assets in the consolidated balance sheets, totaled $2.08 billion as of MarchDecember 31, 2020. Interest income on investments includes income earned on investment securities and FHLB stock. Interest income on investments was $11.3$8.1 million for the secondfirst quarter of fiscal year 2020, an increase2021, a decrease of $1.3$3.4 million, or 13.8%29.4%, from $10.0$11.5 million for the same period in fiscal year 2019,2020, driven by an increase in average investment balance of $384.0 million, or 24.0%, offset by a yield decrease to 2.29%1.69% from 2.52%2.40% for the same periods. Interest income on investments was $22.8 million for the first six months of fiscal year 2020, an increase of $3.7 million, or 19.2%, from $19.1 million for the same period in fiscal year 2019, primarily due to an increase in average investment balance of $398.5 million, or 25.8%, offset by a yield decrease to 2.35% from 2.48%.
The weighted average life of the investment portfolio was 3.33.4 and 3.73.2 years at MarchDecember 31, 2020 and September 30, 2019,2020, respectively. Average investments represented 17.1%15.9% and 14.1%16.5% of total average interest-earning assets for the secondfirst quarter of fiscal years 2021 and 2020, and 2019, respectively.
Interest Expense
The following table presents interest expense for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Six Months Ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (dollars in thousands) | | | | | | |
Interest expense | | | | | | | |
Deposits | $ | 18,867 | | | $ | 27,098 | | | $ | 40,807 | | | $ | 50,892 | |
FHLB advances and other borrowings | 3,155 | | | 1,923 | | | 6,268 | | | 3,926 | |
Subordinated debentures and subordinated notes payable | 1,238 | | | 1,390 | | | 2,549 | | | 2,760 | |
Total interest expense | $ | 23,260 | | | $ | 30,411 | | | $ | 49,624 | | | $ | 57,578 | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
| (dollars in thousands) |
Interest expense | | | | | | | |
Deposits | $ | 5,992 | | | $ | 21,940 | | | | | |
FHLB advances and other borrowings | 880 | | | 3,113 | | | | | |
Subordinated debentures and subordinated notes payable | 817 | | | 1,311 | | | | | |
Total interest expense | $ | 7,689 | | | $ | 26,364 | | | | | |
Total interest expense consists primarily of interest expense on three components: deposits, FHLB advances and other borrowings, and our outstanding subordinated debentures and subordinated notes payable. Total interest expense decreased $7.1$18.7 million, or 23.5%70.8%, to $23.3$7.7 million in the secondfirst quarter of fiscal year 2020,2021, from $30.4$26.4 million in the same period in fiscal year 2019. Total interest expense decreased $8.0 million, or 13.8%, to $49.6 million in the first six months of fiscal year 2020, from $57.6 million in the same period in fiscal year 2019.2020. Significant components of interest expense are described in further detail below.
Deposits. Interest expense on deposits, consisting of interest-bearing accounts and time deposits, was $18.9$6.0 million and $27.1$21.9 million for the secondfirst quarter of fiscal years 20202021 and 2019,2020, respectively, a decrease of $8.2$15.9 million, or 30.4%. Interest expense on deposits was $40.8 million and $50.9 million for the first six months of fiscal year 2020 and 2019, respectively, a decrease of $10.1 million, or 19.8%72.7%. The decreases for both periods weredecrease was a result of decreasing interest rates in the cost of deposits.deposits offset with increases in average deposit balances. Average deposit balances increased to $10.12$11.13 billion for the first six monthsquarter of fiscal year 2020,2021, from $10.08$10.13 billion for the comparable period in fiscal year 2019,2020, an increase of $40.2$997.4 million, or 0.4%9.8%. The cost of deposits decreased to 0.81%0.21% for the first six monthsquarter of fiscal year 20202021 from 1.01%0.86% for the same period of fiscal year 2019.2020.
Average noninterest-bearing demand account balances increased to 19.2%23.9% of average total deposits for the secondfirst quarter of fiscal year 20202021 from 17.6%19.5% for the comparable period in fiscal year 2019.2020. Total average other liquid accounts, consisting of interest-bearing demand deposits, increased to 64.1%65.4% of total average deposits for the secondfirst quarter of fiscal year 2020,2021, compared to 62.4%62.2% of total average deposits for the comparable period in fiscal year 2019,2020, while time deposit accounts decreased to 16.7%10.7% of average total deposits for the secondfirst quarter of fiscal year 2020,2021, compared to 20.0%18.2% in the comparable period in fiscal year 2019.2020.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other borrowings was $3.2$0.9 million for the secondfirst quarter of fiscal year 2020, an increase2021, a decrease of $1.3$2.2 million, or 64.1%71.7%, compared to $1.9$3.1 million for the comparable period in 2019,first quarter of fiscal year 2020, reflecting a weighted average cost of 2.16%2.85% and 2.88%2.47%, respectively, for the same periods. The average balance of FHLB advances and other borrowings was $539.4$120.0 million for the first six monthsquarter of fiscal year 20202021 compared to $253.4$497.0 million for the same period in fiscal year 2019. Interest expense on FHLB advances and other borrowings was $6.3 million for the first six months of fiscal year 2020 and $3.9 million for the same period in fiscal year 2019, an increase of $2.3 million, or 59.7%, representing a weighted average cost of 2.30% and 3.03%, respectively, for the same periods.2020. The average rate paid on FHLB advances is impacted by market rates and the various terms and repricing frequency of the specific outstanding borrowings in each year. The weighted average contractual rate paid on our FHLB advances was 1.46%2.81% and 2.85%2.34% at MarchDecember 31, 2020 and 2019, respectively, and the average tenor was 1434 and 4519 months for the same periods.
We must collateralize FHLB advances by pledging real estate loans or investments. We pledge more assets than required by our current level of borrowings in order to maintain additional borrowing capacity. Although we may substitute other loans for such pledged loans, we are restricted in our ability to sell or otherwise pledge these loans without substituting collateral or prepaying a portion of the FHLB advances. At MarchDecember 31, 2020, we had pledged $4.11$3.93 billion of loans to the FHLB, against which we had borrowed $800.0$120.0 million.
Subordinated Debentures and Subordinated Notes Payable. Interest expense on our outstanding junior subordinated debentures and subordinated notes payable was $1.2$0.8 million in secondfirst quarter of fiscal year 20202021 and $1.4$1.3 million in the comparable period in fiscal year 2019,2020, a decrease of $0.2$0.5 million, or 10.9%. Interest expense on our outstanding junior subordinated debentures and subordinated notes payable was $2.5 million for the first six months of fiscal year 2020 and $2.8 million in the comparable period in fiscal year 2019, a decrease of $0.3 million, or 7.6%37.7%. The weighted average contractual rate on outstanding junior subordinated debentures was 3.29%2.44% and 4.87%4.13% at MarchDecember 31, 2020 and 2019, respectively. The weighted average contractual rate on outstanding subordinated notes was 3.37% and 4.88% at both MarchDecember 31, 2020 and 2019.2019, respectively.
Rate and Volume Variances
Net interest income is affected by changes in both volume and interest rates. Volume changes are caused by increases or decreases during the year in the level of average interest-earning assets and average interest-bearing liabilities. Rate changes result from increases or decreases in the yields earned on assets or the rates paid on liabilities.
The following table presents for the current and comparable quarter and six months periods a summary of the changes in interest income and interest expense on a tax equivalent basis resulting from changes in the volume of average asset and liability balances and changes in the average yields or rates compared with the preceding fiscal year. If significant, the change in interest income or interest expense due to both volume and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.
| | | | | | | | | | | | | | | |
| Current Quarter vs Comparable Quarter | | |
| Volume | Rate | Total | | | | |
| (dollars in thousands) |
Increase (decrease) in interest income: | | | | | | | |
Cash and cash equivalents | $ | 693 | | $ | (1,146) | | $ | (453) | | | | | |
Investment securities | 9 | | (3,388) | | (3,379) | | | | | |
| | | | | | | |
| | | | | | | |
Loans | (652) | | (11,381) | | (12,033) | | | | | |
Total increase (decrease) | 50 | | (15,915) | | (15,865) | | | | | |
Increase (decrease) in interest expense: | | | | | | | |
Interest-bearing deposits | 1,796 | | (11,203) | | (9,407) | | | | | |
Time deposits | (2,364) | | (4,177) | | (6,541) | | | | | |
Securities sold under agreements to repurchase | 5 | | (18) | | (13) | | | | | |
FHLB advances and other borrowings | (2,644) | | 424 | | (2,220) | | | | | |
Subordinated debentures and subordinated notes payable | 3 | | (497) | | (494) | | | | | |
Total decrease | (3,204) | | (15,471) | | (18,675) | | | | | |
Increase (decrease) in net interest income (FTE) | $ | 3,254 | | $ | (444) | | $ | 2,810 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Current Quarter vs Comparable Quarter | | | | Current 6 month period vs Comparable 6 month period | | |
| Volume | Rate | Total | | Volume | Rate | Total |
| (dollars in thousands) | | | | | | |
Increase (decrease) in interest income: | | | | | | | |
Cash and cash equivalents | $ | (49) | | $ | 110 | | $ | 61 | | | $ | (557) | | $ | 684 | | $ | 127 | |
Investment securities | 2,313 | | (941) | | 1,372 | | | 4,796 | | (1,114) | | 3,682 | |
Non-ASC 310-30 loans | (1,331) | | (8,155) | | (9,486) | | | (8) | | (12,097) | | (12,105) | |
ASC 310-30 loans | (367) | | (151) | | (518) | | | (857) | | 91 | | (766) | |
Loans | (1,698) | | (8,306) | | (10,004) | | | (865) | | (12,006) | | (12,871) | |
Total increase (decrease) | 566 | | (9,137) | | (8,571) | | | 3,374 | | (12,436) | | (9,062) | |
Increase (decrease) in interest expense: | | | | | | | |
Interest-bearing deposits | 309 | | (6,091) | | (5,782) | | | 710 | | (8,855) | | (8,145) | |
Time deposits | (1,437) | | (1,012) | | (2,449) | | | (1,829) | | (111) | | (1,940) | |
Securities sold under agreements to repurchase | (4) | | (15) | | (19) | | | (12) | | (32) | | (44) | |
FHLB advances and other borrowings | 1,817 | | (566) | | 1,251 | | | 3,488 | | (1,102) | | 2,386 | |
Subordinated debentures and subordinated notes payable | 3 | | (155) | | (152) | | | 5 | | (216) | | (211) | |
Total increase (decrease) | 688 | | (7,839) | | (7,151) | | | 2,362 | | (10,316) | | (7,954) | |
(Decrease) increase in net interest income (FTE) | $ | (122) | | $ | (1,298) | | $ | (1,420) | | | $ | 1,012 | | $ | (2,120) | | $ | (1,108) | |
Provision for Loan and LeaseCredit Losses
We recognized provision for loan and leasecredit losses of $71.8$11.9 million for the secondfirst quarter of fiscal year 20202021 compared to a provision for loan and leasecredit losses of $7.7$8.1 million for the comparable period in fiscal year 2019,2020, an increase of $64.1$3.8 million between the periods due to incurred loss resulting from the COVID-19 pandemic. This increase did not contemplate the potential impact of CECL implementation, which is effective for the Company October 1, 2020. Provision for loan and lease losses was $79.9 million for the first six months of fiscal year 2020, compared to $12.9 million for the comparable period in fiscal year 2019, an increase of $67.0 million between the periods. See "—Overview—Impact and Response to COVID-19 Pandemic" section in this document for further discussion on the increase in provision for loan and lease losses for both periods.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Six Months Ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (dollars in thousands) | | | | | | |
Provision for loan and lease losses, non-ASC 310-30 loans * | $ | 71,699 | | | $ | 7,406 | | | $ | 79,750 | | | $ | 13,006 | |
Provision for (reduction in) loan and lease losses, ASC 310-30 loans | 96 | | | 267 | | | 148 | | | (118) | |
Provision for loan and lease losses, total | $ | 71,795 | | | $ | 7,673 | | | $ | 79,898 | | | $ | 12,888 | |
* As presented above, the non-ASC 310-30 loan portfolio includes originated loans, other than loans for which we have elected the fair value option, and loans we acquired that we did not determine were acquired with deteriorated credit quality. | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
| (dollars in thousands) |
Provision for credit losses, non-ASC 310-30 loans * | $ | 11,976 | | | $ | 8,050 | | | | | |
Decrease in provision for unfunded commitments reserve | (77) | | | — | | | | | |
Impairment in loan and lease losses, ASC 310-30 loans | — | | | 53 | | | | | |
Provision for credit losses, total | $ | 11,899 | | | $ | 8,103 | | | | | |
* As presented above, the non-ASC 310-30 loan portfolio includes originated loans, other than loans for which we have elected the fair value option, and loans we acquired that we did not determine were acquired with deteriorated credit quality. Upon adoption of CECL, ASC 310-30 loans and related activity began being reported with non-ASC 310-30 loans. |
Total Credit-Related Charges
We believe that the following table, which summarizes each component of the total credit-related charges incurred during the current and comparable quarters, and six month periods, is helpful to understanding the overall impact on our quarterly results of operations. Net other repossessed property charges includes other repossessed property operating costs, valuation adjustments and (loss) gain on sale of other repossessed properties, each of which entered other repossessed property as a result of the former borrower failing to perform on a loan obligation. Reversal of interest income on nonaccrual loans occurs when we become aware that a loan, for which we had been recognizing interest income, will no longer be able to perform according to the terms and conditions of the loan agreement, including repayment of interest owed to us, while a recovery of interest income on nonaccrual loans occurs when we receive repayment of interest owed to us. Loan fair value adjustments related to credit relate to the portion of our loan portfolio for which we have elected the fair value option; these amounts reflect the portion of the fair value adjustment related to expected credit losses in the portfolio of loans carried at fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | Six Months Ended March 31, | | |
Item | Included within F/S Line Item(s): | 2020 | | 2019 | | 2020 | | 2019 |
| | (Dollars in thousands) | | | | | | |
Pre-COVID-19 pandemic related | | | | | | | | |
Provision for loan and lease losses | Provision for loan and lease losses | $ | 12,083 | | | $ | 7,673 | | | $ | 20,186 | | | $ | 12,888 | |
Net other repossessed property charges | Net loss on repossessed property and other related expenses | 2,377 | | | 404 | | | 2,719 | | | 3,467 | |
Net reversal of interest income on nonaccrual loans | Interest income on loans | 1,088 | | | 337 | | | 3,094 | | | 296 | |
Loan fair value adjustment related to credit | Net decrease (increase) in fair value of loans at fair value | 3,423 | | | (422) | | | 5,557 | | | 762 | |
Subtotal pre-COVID-19 pandemic related | | $ | 18,971 | | | $ | 7,992 | | | $ | 31,556 | | | $ | 17,413 | |
COVID-19 pandemic related | | | | | | | | |
Provision for loan and lease losses | Provision for loan and lease losses | $ | 59,712 | | | $ | — | | | $ | 59,712 | | | $ | — | |
Net other repossessed property charges | Net loss on repossessed property and other related expenses | 3,314 | | | — | | | 3,314 | | | — | |
Net reversal of interest income on nonaccrual loans | Interest income on loans | — | | | — | | | — | | | — | |
Loan fair value adjustment related to credit | Net decrease (increase) in fair value of loans at fair value | 7,100 | | | — | | | 7,100 | | | — | |
Subtotal COVID-19 pandemic related | | $ | 70,126 | | | $ | — | | | $ | 70,126 | | | $ | — | |
Total credit-related charges | | $ | 89,097 | | | $ | 7,992 | | | $ | 101,682 | | | $ | 17,413 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended December 31, | | |
Item | Included within F/S Line Item(s): | 2020 | | 2019 | | | | |
| | (Dollars in thousands) |
Provision for credit losses ¹ | Provision for credit losses | $ | 11,899 | | | $ | 8,103 | | | | | |
Increase in provision for unfunded commitments reserve ¹ | Other noninterest expense ¹ | — | | | 200 | | | | | |
Net other repossessed property charges | Net loss on repossessed property and other related expenses | 345 | | | 342 | | | | | |
Net (recovery) reversal of interest income on nonaccrual loans | Interest income on loans | (2,913) | | | 2,006 | | | | | |
Net realized credit loss on derivatives | Change in fair value of FVO loans and related derivatives | 210 | | | — | | | | | |
Loan fair value adjustment related to credit | Change in fair value of FVO loans and related derivatives | 1,464 | | | 2,134 | | | | | |
Total credit-related charges | | $ | 11,005 | | | $ | 12,785 | | | | | |
1 Beginning in the first quarter of fiscal year 2021, increase in provision for unfunded commitments reserve is included in provision for credit losses. | |
In determining the credit related charges attributableWe continue to the COVID-19 pandemic, we consideredevaluate the impact uponof COVID-19 on our loan portfolio. Industries such as oil & energy, hotels & resorts (excluding casino hotels), casino hotels, restaurants, oil & energy, retail malls, airlines and othershealthcare have been cited as being at risk forexperienced significant revenue loss.loss due to COVID-19. Within our portfolio at March 31, 2020, $1.14 billion, or 11.8% relates towe are closely monitoring the following segments with elevated risk (excluding PPP loans): hotels & resorts $109.8(excluding casino hotels) with $822.6 million, or 1.1% relates to8.6% of total loans, restaurants with $123.1 million, or 1.3% of total loans, arts and entertainment with $115.5 million, or 1.2% of total loans, senior care with $312.1 million, or 3.3% of total loans, and skilled nursing with $215.2 million, or 2.3% of total loans, for a total exposure of $1.59 billion, or 18.0% of total loans excluding PPP loans. Loan exposure in such other identified industries being immaterial. 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 March 31, 2020.either immaterial or has not shown general distress thus far.
Noninterest Income
The following table presents noninterest income for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | Six Months Ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (dollars in thousands) | | | | | | |
Noninterest income | | | | | | | |
Service charges and other fees | $ | 9,188 | | | $ | 10,209 | | | $ | 20,597 | | | $ | 21,897 | |
Wealth management fees | 3,122 | | | 2,117 | | | 6,086 | | | 4,358 | |
Mortgage banking income, net | 1,145 | | | 991 | | | 2,757 | | | 2,311 | |
Net loss on sale of securities | — | | | — | | | — | | | (513) | |
Other | 1,135 | | | 1,920 | | | 2,300 | | | 3,004 | |
Subtotal, product and service fees | 14,590 | | | 15,237 | | | 31,740 | | | 31,057 | |
Net increase in fair value of loans at fair value | 35,541 | | | 14,018 | | | 20,608 | | | 33,234 | |
Net realized and unrealized loss on derivatives | (50,214) | | | (11,032) | | | (36,698) | | | (29,348) | |
Subtotal, loans at fair value and related derivatives | (14,673) | | | 2,986 | | | (16,090) | | | 3,886 | |
Total noninterest income | $ | (83) | | | $ | 18,223 | | | $ | 15,650 | | | $ | 34,943 | |
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | |
| 2020 | | 2019 | | | | |
| (dollars in thousands) |
Noninterest income | | | | | | | |
Service charges and other fees | $ | 9,624 | | | $ | 11,409 | | | | | |
Wealth management fees | 3,029 | | | 2,964 | | | | | |
Mortgage banking income, net | 4,090 | | | 1,612 | | | | | |
Net gain on sale of securities and other assets | 248 | | | — | | | | | |
Other | 1,324 | | | 1,165 | | | | | |
Subtotal, service and product fees | 18,315 | | | 17,150 | | | | | |
Derivative interest expense | (3,393) | | | (890) | | | | | |
Change in fair value of FVO loans and related derivatives | (1,672) | | | (2,124) | | | | | |
Other derivative income (loss) | 898 | | | 1,597 | | | | | |
Subtotal, changes in fair value for loans at fair value and derivatives | (4,167) | | | (1,417) | | | | | |
Total noninterest income | $ | 14,148 | | | $ | 15,733 | | | | | |
Our noninterest income is comprised of the various fees we charge our customers for products and services we provide and the impact of changes in fair value of loans for which we have elected the fair value treatment and realized and unrealized gains (losses) on the related interest rate swaps we utilize to manage interest rate risk on these loans. While we are required under U.S. GAAP to present both components within total noninterest income, we believe it is helpful to analyze the two broader components of noninterest income separately to better understand the underlying performance of the business.risk.
Noninterest income was $(0.1)$14.1 million for the secondfirst quarter of fiscal year 20202021 compared to $18.2$15.7 million for the same period in fiscal year 2019,2020, a decrease of $18.3 million, or 100.5%. Noninterest income was $15.7 million for the first six months of fiscal year 2020 compared to $34.9 million for the same period in fiscal year 2019, a decrease of $19.2 million, or 55.2%.$1.6 million. Significant components of noninterest income are described in further detail below.
ProductService and ServiceProduct Fees. We recognized $14.6 million of noninterest income related to product and service fees in the second quarter of fiscal year 2020, a decrease of $0.6 million, or 4.2%, compared to the same period in fiscal year 2019. We recognized $31.7$18.3 million of noninterest income related to product and service fees in the first six monthsquarter of fiscal year 2020,2021, an increase of $0.7$1.2 million, or 2.2%6.8%, compared to the same period in fiscal year 2019.2020. The decreases for both periodsincrease was primarily due to an increase in mortgage banking income, net of $2.5 million, partially offset by a decrease related to lower service charges and interchange revenue driven by declines in transaction activity from COVID-19 pandemic impacts.
LoansChanges in fair value for loans at fair value and related derivatives. As discussed in "—Analysis of Financial Condition—Derivatives," changes in the fair value of loans for which we have elected the fair value treatment and realized and unrealized gains and losses on the related derivatives are recognized within noninterest income. For the secondfirst quarter of fiscal year 2020,2021, these items accounted for $(14.7)$(4.2) million of noninterest income(loss) compared to $3.0$(1.4) million of noninterest income(loss) for the same period in fiscal year 2019.2020. The change for the period was driven by a $1.7$2.5 million increase in the current cost of interest rate swaps due to changes in the interest rate environment, and a $1.1 million decrease in swap fees, and a net unfavorablefavorable change in the credit risk adjustment of $14.9$0.4 million, $10.4 million of which was related to the COVID-19 pandemic impact on loan fair value adjustment related to credit. For the first six months of fiscal year 2020, these items accounted for $(16.1) million of noninterest income compared to $3.9 million of noninterest income for the same period in fiscal year 2019. The change was drivenpartially offset by a $2.6$0.1 million increase in the current cost of interest rate swaps due to changes in the interest rate environment and $3.0 million decrease in swap fees, and a net unfavorable change in credit risk adjustment of $14.5 million, $10.4 million of which was related to the COVID-19 pandemic impact on loan fair value adjustment related to credit.fees. We believe that the current realized loss on the derivativesderivative interest expense economically offsets the interest income earned on the related loans. We present elsewhere the adjusted net interest income and adjusted net interest margin reflecting the metrics we use to manage the business.
Noninterest Expense
The following table presents noninterest expense for the three and six months ended MarchDecember 31, 2020 and 2019.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
| | (dollars in thousands) | | | (dollars in thousands) |
Noninterest expense | Noninterest expense | | Noninterest expense | | |
Salaries and employee benefits | Salaries and employee benefits | $ | 37,312 | | | $ | 34,537 | | | $ | 73,217 | | | $ | 69,307 | | Salaries and employee benefits | $ | 37,554 | | | $ | 35,905 | | |
Data processing and communication | Data processing and communication | 6,123 | | | 5,964 | | | 11,896 | | | 11,242 | | Data processing and communication | 6,226 | | | 5,773 | | |
Occupancy and equipment | Occupancy and equipment | 5,597 | | | 5,539 | | | 10,690 | | | 10,665 | | Occupancy and equipment | 5,213 | | | 5,093 | | |
Professional fees | Professional fees | 5,263 | | | 3,970 | | | 9,027 | | | 7,258 | | Professional fees | 3,915 | | | 3,764 | | |
Advertising | Advertising | 958 | | | 1,216 | | | 1,823 | | | 2,154 | | Advertising | 556 | | | 865 | | |
Net loss on repossessed property and other related expenses | Net loss on repossessed property and other related expenses | 5,691 | | | 404 | | | 6,033 | | | 3,467 | | Net loss on repossessed property and other related expenses | 345 | | | 342 | | |
Goodwill and intangible assets impairment | 742,352 | | | — | | | 742,352 | | | — | | |
| Other | Other | 5,157 | | | 4,950 | | | 10,345 | | | 9,593 | | Other | 3,640 | | | 5,188 | | |
Total noninterest expense | Total noninterest expense | $ | 808,453 | | | $ | 56,580 | | | $ | 865,383 | | | $ | 113,686 | | Total noninterest expense | $ | 57,449 | | | $ | 56,930 | | |
Our noninterest expense consists primarily of salaries and employee benefits, data processing and communication, occupancy and equipment, professional fees and net loss on repossessed property, goodwill and intangible assets impairment and other related expenses. Noninterest expense was $808.5$57.4 million inand $56.9 million for the secondfirst quarter of fiscal year 2021 and 2020, and $865.4 million for the first six months of fiscal year 2020. Included within these amounts are goodwill impairment of $740.6 million, impairment of certain intangible assets of $1.8 million, and the COVID-19 pandemic credit related charges of a $3.3 million charge for one OREO hotel property negatively impacted by COVID-19 travel restrictions and $0.4 million increase in reserve for unfunded commitments. Excluding these items, noninterest expense was $62.3 million for the second quarter of fiscal year 2020, compared to $56.6 million for the same period in fiscal year 2019,respectively, an increase of $5.8 million, or 10.2%, and $119.3 million for the first six months of fiscal year 2020, compared to $113.7 million for the same period in fiscal year 2019, an$0.5 million. The increase of $5.6 million, or 4.9%. The remaining increases werewas primarily driven by ana $1.6 million increase in salaries and employee benefits related to annual merit increases effectiveoffset by a $1.5 million decrease in January, a one-time bonus payment to retail staff of $0.5 million and elevated legal and administrative costs on OREO assets.other noninterest expense.
Our efficiency ratio was 63.5% and 45.6%46.2% for both the secondfirst quarter of fiscal years 20202021 and 2019, respectively and 54.1% and 45.8% for the first six months of fiscal years 2020 and 2019, respectively. The increases for both periods were mainly due to the decrease in net revenues attributable to emergency rate cuts and decreased deposit service charges from lower account activity combined with increased expense results from both one-off and recurring costs.2020. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" section.
Provision for Income Taxes
The provision for income taxes varies due to the amount of taxable income, the level and effectiveness of tax-advantaged assets and tax credit funds and the rates charged by federal and state authorities. The benefitprovision for income taxes of $37.7$11.4 million for the secondfirst quarter of fiscal year 20202021 represents an effective tax rate of 4.8%21.6% compared to a provision of $12.9$12.6 million, or an effective tax rate of 22.5%, for the comparable period of fiscal year 2019. The benefit for income taxes of $25.1 million for the first six months of fiscal year 2020 represents an effective tax rate of 3.5%, compared to a provision of $26.4 million or an effective tax rate of 22.6% for the same period in fiscal year 2019. The substantial drop in the effective tax rate for both periods was due to the impairment of goodwill and certain intangible assets and provision for loan and lease losses in the current quarter. A sizable portion of the goodwill impairment was related to non-tax-deductible goodwill for which no tax benefit was recorded. Excluding the COVID-19 pandemic related goodwill and certain intangible assets impairment and additional provision for loan and lease losses, the effective tax rate would have been 23.3% and 22.8% for the second quarter and first six months of fiscal year 2020, respectively.2020.
Return on Assets and Equity
The following table presents our return on average total assets, return on average common equity and return on average tangible common equity for the dates presented.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | | | Three Months Ended December 31, | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | |
Return on average total assets | Return on average total assets | (23.16) | % | | 1.44 | % | | (10.86) | % | | 1.46 | % | Return on average total assets | 1.30 | % | | 1.34 | % | |
Return on average common equity | Return on average common equity | (155.3) | % | | 9.9 | % | | (72.9) | % | | 10.0 | % | Return on average common equity | 15.2 | % | | 9.0 | % | |
Return on average tangible common equity ¹ | Return on average tangible common equity ¹ | (9.3) | % | | 16.9 | % | | 2.8 | % | | 17.0 | % | Return on average tangible common equity ¹ | 15.3 | % | | 15.0 | % | |
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | 1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | | 1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. |
Analysis of Financial Condition
The following table highlights certain key financial and performance information as of the dates indicated.
| | | As of March 31, 2020 | | As of September 30, 2019 | | As of December 31, 2020 | | As of September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
Balance Sheet and Other Information: | Balance Sheet and Other Information: | | Balance Sheet and Other Information: | |
Total assets | Total assets | $ | 12,387,808 | | | $ | 12,788,301 | | Total assets | $ | 12,814,383 | | | $ | 12,604,439 | |
Loans ¹ | Loans ¹ | 9,693,295 | | | 9,706,763 | | Loans ¹ | 9,517,876 | | | 10,076,142 | |
Allowance for loan and lease losses | 135,950 | | | 70,774 | | |
Allowance for credit losses ⁴ | | Allowance for credit losses ⁴ | 308,794 | | | 149,887 | |
Deposits | Deposits | 10,179,115 | | | 10,300,339 | | Deposits | 11,373,318 | | | 11,008,779 | |
Stockholders' equity | Stockholders' equity | 1,153,464 | | | 1,900,249 | | Stockholders' equity | 1,068,501 | | | 1,162,933 | |
Tangible common equity ² | Tangible common equity ² | 1,146,761 | | | 1,155,052 | | Tangible common equity ² | 1,062,597 | | | 1,156,769 | |
Tier 1 capital ratio | Tier 1 capital ratio | 11.3 | % | | 11.7 | % | Tier 1 capital ratio | 12.7 | % | | 11.8 | % |
Total capital ratio | Total capital ratio | 12.9 | % | | 12.7 | % | Total capital ratio | 14.3 | % | | 13.3 | % |
Tier 1 leverage ratio | Tier 1 leverage ratio | 9.2 | % | | 10.1 | % | Tier 1 leverage ratio | 9.7 | % | | 9.4 | % |
Common equity tier 1 ratio | Common equity tier 1 ratio | 10.6 | % | | 11.0 | % | Common equity tier 1 ratio | 12.0 | % | | 11.0 | % |
Tangible common equity / tangible assets ² | Tangible common equity / tangible assets ² | 9.3 | % | | 9.6 | % | Tangible common equity / tangible assets ² | 8.3 | % | | 9.2 | % |
Book value per share - GAAP | Book value per share - GAAP | $ | 20.97 | | | $ | 33.76 | | Book value per share - GAAP | $ | 19.39 | | | $ | 21.14 | |
Tangible book value per share ² | Tangible book value per share ² | $ | 20.84 | | | $ | 20.52 | | Tangible book value per share ² | $ | 19.28 | | | $ | 21.03 | |
Nonaccrual loans / total loans | Nonaccrual loans / total loans | 2.20 | % | | 1.10 | % | Nonaccrual loans / total loans | 3.07 | % | | 3.22 | % |
Net charge-offs (recoveries) / average total loans ³ | Net charge-offs (recoveries) / average total loans ³ | 0.31 | % | | 0.36 | % | Net charge-offs (recoveries) / average total loans ³ | 1.22 | % | | 0.40 | % |
Allowance for loan and lease losses / total loans | 1.40 | % | | 0.73 | % | |
1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and loans in process. | | |
Allowance for credit losses ⁴ / total loans | | Allowance for credit losses ⁴ / total loans | 3.24 | % | | 1.49 | % |
1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and net loans in process. | | 1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and net loans in process. |
2 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | 2 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. | | 2 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section. |
3 Annualized for partial-year periods, except for September 30, 2019, which was for the twelve month period. | | |
3 Annualized for partial-year periods, except for September 30, 2020, which was for the twelve month period. | | 3 Annualized for partial-year periods, except for September 30, 2020, which was for the twelve month period. |
4 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model. | | 4 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model. |
Our total assets were $12.39$12.81 billion at MarchDecember 31, 2020, compared with $12.79$12.60 billion at September 30, 2019, a decrease2020, an increase of $400.5$209.9 million, or 3.1%1.7%. The decreaseincrease in total assets during the first six monthsquarter of fiscal year 20202021 was principally attributable to a full impairmentan increase in cash and cash equivalents of goodwill$628.9 million and an increase in investment securities of $739.0$285.0 million, or 100.0%,partially offset by a decrease in net loans of $78.6 million, or 0.8%, offset by an increase in investment securities of $206.8 million, or 11.6%.$717.2 million. At MarchDecember 31, 2020, loans were $9.69$9.52 billion, compared to $9.71$10.08 billion at September 30, 2019.2020. See "—Loan Portfolio" within this section for further discussion on the decrease in net loans. During the first six monthsquarter of fiscal year 2020,2021, total deposits decreasedincreased by $121.2$364.5 million, or 1.2%3.3%, compared to September 30, 2019 due to a reduction in2020. See "—Deposits" within this section for further discussion on the use of brokered deposits offset by an increase in businesstotal deposits.
Loan Portfolio
The following table presents our loan portfolio at amortized cost by category at each of the dates indicated.
| | | | | | | | | | | |
| March 31, 2020 | | September 30, 2019 |
| (dollars in thousands) | | |
Unpaid principal balance: | | | |
Commercial real estate ¹ | | | |
Originated | $ | 5,009,438 | | | $ | 4,824,827 | |
Acquired | 213,381 | | | 267,583 | |
Total | 5,222,819 | | | 5,092,410 | |
Agriculture ¹ | | | |
Originated | 1,814,630 | | | 1,932,722 | |
Acquired | 67,162 | | | 75,922 | |
Total | 1,881,792 | | | 2,008,644 | |
Commercial non-real estate ¹ | | | |
Originated | 1,657,077 | | | 1,691,026 | |
Acquired | 42,120 | | | 28,930 | |
Total | 1,699,197 | | | 1,719,956 | |
Residential real estate | | | |
Originated | 721,122 | | | 696,403 | |
Acquired | 99,637 | | | 115,805 | |
Total | 820,759 | | | 812,208 | |
Consumer | | | |
Originated | 48,815 | | | 47,324 | |
Acquired | 3,825 | | | 4,601 | |
Total | 52,640 | | | 51,925 | |
Other lending | | | |
Originated | 39,908 | | | 47,541 | |
Acquired | — | | | — | |
Total | 39,908 | | | 47,541 | |
Total originated | 9,290,990 | | | 9,239,843 | |
Total acquired | 426,125 | | | 492,841 | |
Total unpaid principal balance | 9,717,115 | | | 9,732,684 | |
Less: Unamortized discount on acquired loans | (10,468) | | | (13,655) | |
Less: Unearned net deferred fees and costs and loans in process | (13,352) | | | (12,266) | |
Total loans | 9,693,295 | | | 9,706,763 | |
Allowance for loan and lease losses | (135,950) | | | (70,774) | |
Loans, net | $ | 9,557,345 | | | $ | 9,635,989 | |
1 Unpaid principal balance for commercial non-real estate, agriculture and commercial real estate loans includes fair value adjustments associated with long-term fixed-rate loans where we have entered into interest rate swaps to manage our interest rate risk. | | | |
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 1 |
| (dollars in thousands) |
Construction and development | $ | 482,462 | | | $ | 509,644 | |
Owner-occupied CRE | 1,411,558 | | | 1,417,394 | |
Non-owner-occupied CRE | 2,660,682 | | | 2,894,380 | |
Multifamily residential real estate | 476,159 | | | 533,983 | |
Total commercial real estate | 5,030,861 | | | 5,355,401 | |
Agriculture | 1,635,952 | | | 1,722,696 | |
Commercial non-real estate | 2,054,478 | | | 2,165,038 | |
Residential real estate ³ | 708,086 | | | 730,812 | |
Consumer and other ² | 88,499 | | | 102,195 | |
Total loans | 9,517,876 | | | 10,076,142 | |
Allowance for credit losses | (308,794) | | | (149,887) | |
Loans, net | $ | 9,209,082 | | | $ | 9,926,255 | |
1 As a part of the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, loan segments are presented based on amortized cost, which includes unpaid principal balance, unamortized discount on acquired loans, unearned net deferred fees and costs and loans in process. For additional information on September 30, 2020 loan segment balances, see Note 2. |
2 Other loans primarily include consumer and commercial credit cards, customer deposit account overdrafts, and loans in process. |
During the first six monthsquarter of fiscal year 2020,2021, total loans decreased by 0.1%5.5%, or $13.5$558.3 million, compared to September 30, 2019.2020. The net loan reduction was mainly attributable todriven by sales of $208.8 million in hotel loans, a reductionnumber of payoffs in the agriculture segment of $126.9 million, or 6.3%, a reduction in the commercial non-real estate segment of $20.8 million, or 1.2%, offset bynonaccrual and classified loans, an increase in the CRE segment of $130.4 million, or 2.6%. The decrease in the agriculture segment was largely due to a seasonal decrease related to customer tax planning and a number of relationships financed elsewhere. The decrease inpaydowns across the commercial, non-real estate segment was due to disbursement transaction timing within our mortgage warehouse lending to independent mortgage originators. The increase in the CRE segment was attributable to growth from construction drawdownsagriculture and new relationships across the footprint. Over the same time period, residential real estate, consumer portfolios, and otherprocessing of $27.8 million of PPP loan balances remained stable.
The following table presents an analysis of the unpaid principal balanceamortized cost of our loan portfolio at MarchDecember 31, 2020, by borrower and collateral type and by each of the six major geographic areas we use to manage our markets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | | | | | |
| South Dakota | Iowa / Missouri | Nebraska / Kansas | Arizona | Colorado | North Dakota / Minnesota | Other ² | Total | % |
| (dollars in thousands) | | | | | | | | |
Commercial real estate ¹ | $ | 1,087,541 | | $ | 1,241,095 | | $ | 1,149,213 | | $ | 539,362 | | $ | 922,553 | | $ | 242,597 | | $ | 40,458 | | $ | 5,222,819 | | 53.7 | % |
Agriculture ¹ | 554,250 | | 342,397 | | 127,061 | | 705,235 | | 141,993 | | 1,516 | | 9,340 | | 1,881,792 | | 19.4 | % |
Commercial non-real estate ¹ | 300,086 | | 568,771 | | 541,070 | | 80,327 | | 111,204 | | 5,247 | | 92,492 | | 1,699,197 | | 17.5 | % |
Residential real estate | 216,427 | | 227,743 | | 185,824 | | 37,792 | | 116,682 | | 20,204 | | 16,087 | | 820,759 | | 8.5 | % |
Consumer | 15,206 | | 17,652 | | 15,153 | | 421 | | 3,277 | | 440 | | 491 | | 52,640 | | 0.5 | % |
Other lending | — | | — | | — | | — | | — | | — | | 39,908 | | 39,908 | | 0.4 | % |
Total | $ | 2,173,510 | | $ | 2,397,658 | | $ | 2,018,321 | | $ | 1,363,137 | | $ | 1,295,709 | | $ | 270,004 | | $ | 198,776 | | $ | 9,717,115 | | 100.0 | % |
% by location | 22.4 | % | 24.7 | % | 20.8 | % | 14.0 | % | 13.3 | % | 2.8 | % | 2.0 | % | 100.0 | % | |
1 Unpaid principal balance for commercial non-real estate, agriculture and commercial real estate loans includes fair value adjustments associated with long-term fixed-rate loans where we have entered into interest rate swaps to manage our interest rate risk. | | | | | | | | | |
2 Balances in this column represent acquired workout loans and certain other loans managed by our staff, commercial and consumer credit card loans, fair value adjustments related to acquisitions and loans for which we have elected the fair value option, which could result in a negative carrying amount in the event of a net negative fair value adjustment. | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| South Dakota | Iowa / Missouri | Nebraska / Kansas | Arizona | Colorado | North Dakota / Minnesota | Specialized Assets ¹ | Corporate and Other ² | Total | % |
| (dollars in thousands) |
Construction and development | $ | 29,882 | | $ | 72,209 | | $ | 113,183 | | $ | 132,066 | | $ | 121,431 | | $ | 12,280 | | $ | 4,107 | | $ | (2,696) | | $ | 482,462 | | 5.1 | % |
Owner-occupied CRE | 312,784 | | 398,567 | | 214,120 | | 166,976 | | 267,270 | | 33,931 | | 10,963 | | 6,947 | | 1,411,558 | | 14.8 | % |
Non-owner-occupied CRE | 422,180 | | 651,288 | | 536,876 | | 264,849 | | 454,842 | | 84,586 | | 234,944 | | 11,117 | | 2,660,682 | | 28.0 | % |
Multifamily residential real estate | 109,209 | | 102,609 | | 85,670 | | 8,039 | | 51,768 | | 119,406 | | 1,032 | | (1,574) | | 476,159 | | 5.0 | % |
Total commercial real estate | 874,055 | | 1,224,673 | | 949,849 | | 571,930 | | 895,311 | | 250,203 | | 251,046 | | 13,794 | | 5,030,861 | | 52.9 | % |
Agriculture | 407,080 | | 287,791 | | 113,737 | | 659,125 | | 100,595 | | 332 | | 66,579 | | 713 | | 1,635,952 | | 17.2 | % |
Commercial non-real estate | 321,762 | | 652,899 | | 566,853 | | 159,593 | | 200,046 | | 7,623 | | 23,606 | | 122,096 | | 2,054,478 | | 21.6 | % |
Residential real estate ³ | 207,487 | | 185,153 | | 165,083 | | 52,574 | | 70,814 | | 14,365 | | 14,506 | | (1,896) | | 708,086 | | 7.4 | % |
Consumer and other | 13,454 | | 22,004 | | 21,419 | | 404 | | 1,661 | | 52 | | 8 | | 29,497 | | 88,499 | | 0.9 | % |
Total | $ | 1,823,838 | | $ | 2,372,520 | | $ | 1,816,941 | | $ | 1,443,626 | | $ | 1,268,427 | | $ | 272,575 | | $ | 355,745 | | $ | 164,204 | | $ | 9,517,876 | | 100.0 | % |
% by location | 19.2 | % | 24.9 | % | 19.1 | % | 15.2 | % | 13.3 | % | 2.9 | % | 3.7 | % | 1.7 | % | 100.0 | % | |
1 Balances in this column represent workout loans and certain other loans the Company placed with a central team for enhanced monitoring and potential exit. |
2 Balances in this column represent commercial and consumer credit card loans, certain other loans managed by our staff, and fair value adjustments related to acquisitions and loans for which we have elected the fair value option, which could result in a negative carrying amount in the event of a net negative fair value adjustment. |
The following table presents additional detail regarding our agriculture, CRE and residential real estate loans at MarchDecember 31, 2020.
| | | | | |
| MarchDecember 31, 2020 |
| (dollars in thousands) |
Construction and development | $ | 434,264482,462 | |
Owner-occupied CRE | 1,414,4761,411,558 |
Non-owner-occupied CRE | 2,910,5162,660,682 |
Multifamily residential real estate | 463,563476,159 |
CommercialTotal commercial real estate | 5,222,8195,030,861 | |
Agriculture real estate | 916,106773,379 | |
Agriculture operating loans | 965,686862,573 |
AgricultureTotal agriculture | 1,881,7921,635,952 | |
Commercial non-real estate | 1,699,1972,054,478 |
Home equity lines of credit | 169,121133,081 |
Closed-end first lien | 520,126545,499 |
Closed-end junior lien | 33,64729,506 |
Residential construction | 97,865 |
ResidentialTotal residential real estate | 820,759708,086 |
Consumer and other | 52,640 |
Other | 39,90888,499 |
Total unpaid principal balance | $ | 9,717,1159,517,876 | |
Commercial Real Estate. CRE includes commercial and residential construction and development, owner-occupied CRE, non-owner-occupied CRE, construction and development lending, and multi-family residential real estate. While CRE lending is a significant component of our overall loan portfolio, we are committed to managing our exposure to riskier construction and development lending specifically, and to CRE lending in general, by targeting relationships with sound management and financials, which are priced to reflect the amount of risk we accept as the lender.
Agriculture. Agriculture loans include farm operating loans and loans collateralized by farm land. According to the American Banker's Association, at December 31, 2019,September 30, 2020, we were ranked the fifth-largestseventh-largest farm lender bank in the United States measured by total dollar volume of farm loans. We consider agriculture lending one of our core lending areas. We target a portfolio composition for agriculture loans not to exceed 225% of total capital according to our Risk Appetite Statement approved by our Board of Directors. Within our agriculture portfolio, loans are diversified across a wide range of subsectors with the majority of the portfolio concentrated within various types of grain, livestock and dairy products, and across different geographical segments within our footprint. Over recent years, our borrowers have experienced volatile commodity prices, and the adverse effects of recently imposed and proposed tariffs on the export of agricultural products, effects of waivers of the amount of ethanol to be blended into the country's gasoline production and isolated areas of flooding within parts of the Midwest in which certain of our agricultural borrowers conduct their operations. While these events, the impacts of the COVID-19 pandemic or a further downturn in the agriculture economy, could directly and adversely affect our agricultural loan portfolio and
indirectly and adversely impact other lending categories including commercial non-real estate, CRE, residential real estate and consumer, we believe there continues to typically be strong secondary sources of repayment for the agriculture loan portfolio.
Commercial Non-Real Estate. Commercial non-real estate, or business lending, represents one of our core competencies. We believe thatcompetencies through providing a tailored range of integrated products and services, including lending, to small- and medium-enterprise customers is the business at which we excel and through which we can generate favorable returns for our stockholders.customers. We offer a number of different products including working capital and other shorter-term lines of credit, fixed-rate loans and variable rate loans with interest rate swaps over a wide range of terms, and variable-rate loans with varying terms.
Residential Real Estate. Residential real estate lending reflects 1-to-4-family real estate construction loans, closed-end first-lien mortgages (primarily single-family long-term first mortgages resulting from acquisitions of other banks), closed-end junior-lien mortgages and HELOCs. A large percentage of our total single-family first mortgage originations are sold into the secondary market in order to meet our interest rate risk management objectives. Our closed-end first-lien mortgages include a small percentage of single-family first mortgages that we originate and do not subsequently sell into the secondary market, including some jumbo products, adjustable-rateadjustable rate mortgages and rural home mortgages. Conversely, a large percentage of our total single-family first mortgage originations are sold into the secondary market in order to meet our interest rate risk management objectives.
Consumer. Our consumer lending offering comprises a relatively small portion of our total loan portfolio, and predominantly reflects small-balance secured and unsecured products marketed by our branches.
Other Lending. Other lending includes all other loan relationships that do not fit within the categories above, primarily consumer and commercial credit cards, customer deposit account overdrafts, and lease receivables.loans in process.
The following table presents the maturity distribution of our loan portfolio as of MarchDecember 31, 2020. The maturity dates were determined based on the contractual maturity date of the loan.
| | | March 31, 2020 | | | December 31, 2020 |
| | 1 Year or Less | | >1 Through 5 Years | | >5 Years | | Total | | 1 Year or Less | | >1 Through 5 Years | | >5 Years | | Total |
| | (dollars in thousands) | | | (dollars in thousands) |
Maturity distribution: | Maturity distribution: | | Maturity distribution: | |
Commercial real estate | $ | 621,604 | | | $ | 2,139,467 | | | $ | 2,461,748 | | | $ | 5,222,819 | | |
Construction and development | | Construction and development | $ | 319,141 | | | $ | 121,963 | | | $ | 41,358 | | | $ | 482,462 | |
Owner-occupied CRE | | Owner-occupied CRE | 1,304,756 | | | 64,114 | | | 42,688 | | | 1,411,558 | |
Non-owner-occupied CRE | | Non-owner-occupied CRE | 2,330,443 | | | 167,544 | | | 162,695 | | | 2,660,682 | |
Multifamily residential real estate | | Multifamily residential real estate | 435,253 | | | 24,169 | | | 16,737 | | | 476,159 | |
Total commercial real estate | | Total commercial real estate | 4,389,593 | | | 377,790 | | | 263,478 | | | 5,030,861 | |
Agriculture | Agriculture | 902,870 | | | 631,222 | | | 347,700 | | | 1,881,792 | | Agriculture | 1,588,991 | | | 29,860 | | | 17,101 | | | 1,635,952 | |
Commercial non-real estate | Commercial non-real estate | 832,875 | | | 505,318 | | | 361,004 | | | 1,699,197 | | Commercial non-real estate | 1,926,093 | | | 85,060 | | | 43,325 | | | 2,054,478 | |
Residential real estate | Residential real estate | 161,211 | | | 235,799 | | | 423,749 | | | 820,759 | | Residential real estate | 603,546 | | | 69,209 | | | 35,331 | | | 708,086 | |
Consumer | 9,062 | | | 35,725 | | | 7,853 | | | 52,640 | | |
Other lending | 39,908 | | | — | | | — | | | 39,908 | | |
Consumer and other | | Consumer and other | 73,630 | | | 13,780 | | | 1,089 | | | 88,499 | |
Total | Total | $ | 2,567,530 | | | $ | 3,547,531 | | | $ | 3,602,054 | | | $ | 9,717,115 | | Total | $ | 8,581,853 | | | $ | 575,699 | | | $ | 360,324 | | | $ | 9,517,876 | |
The following table presents the distribution, as of MarchDecember 31, 2020, of our loans that were due after one year between fixed and variable interest rates.
| | | March 31, 2020 | | | December 31, 2020 |
| | Fixed | | Variable | | Total | | Fixed | | Variable | | Total |
| | (dollars in thousands) | | | (dollars in thousands) |
Maturity distribution: | Maturity distribution: | | Maturity distribution: | |
Commercial real estate | $ | 2,240,425 | | | $ | 2,360,790 | | | $ | 4,601,215 | | |
Construction and development | | Construction and development | $ | 35,291 | | | $ | 128,030 | | | $ | 163,321 | |
Owner-occupied CRE | | Owner-occupied CRE | 59,744 | | | 47,058 | | | 106,802 | |
Non-owner-occupied CRE | | Non-owner-occupied CRE | 126,202 | | | 204,037 | | | 330,239 | |
Multifamily residential real estate | | Multifamily residential real estate | 5,416 | | | 35,490 | | | 40,906 | |
Total commercial real estate | | Total commercial real estate | 226,653 | | | 414,615 | | | 641,268 | |
Agriculture | Agriculture | 762,995 | | | 215,927 | | | 978,922 | | Agriculture | 13,956 | | | 33,005 | | | 46,961 | |
Commercial non-real estate | Commercial non-real estate | 529,107 | | | 337,215 | | | 866,322 | | Commercial non-real estate | 60,814 | | | 67,571 | | | 128,385 | |
Residential real estate | Residential real estate | 307,012 | | | 352,536 | | | 659,548 | | Residential real estate | 47,229 | | | 57,311 | | | 104,540 | |
Consumer | 36,627 | | | 6,951 | | | 43,578 | | |
Consumer and other | | Consumer and other | 768 | | | 14,101 | | | 14,869 | |
Total | Total | $ | 3,876,166 | | | $ | 3,273,419 | | | $ | 7,149,585 | | Total | $ | 349,420 | | | $ | 586,603 | | | $ | 936,023 | |
Other Repossessed Property
In the normal course of business, we obtain title to real estate and other assets when borrowers are unable to meet their contractual obligations and we initiate foreclosure proceedings, or via deed in lieu of foreclosure actions. Other repossessed property assets are considered nonperforming assets. When we obtain title to an asset, we evaluate how best to maintain and protect our interest in the property and seek to liquidate the asset at an acceptable price in a timely manner. Our total other repossessed property carrying value was $27.3$18.1 million as of MarchDecember 31, 2020, a decrease of $9.5$1.9 million, or 25.8%9.7%, compared to September 30, 2019,2020, due primarily to one large relationship liquidation andduring the write down of the value of a hotel property negatively impacted by COVID-19 travel restrictions.
The following table presents our other repossessed property balances for the period indicated.
| | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | Six Months Ended March 31, 2020 |
| (dollars in thousands) | | |
Balance, beginning of period | $ | 39,490 | | | $ | 36,764 | |
Additions to other repossessed property | 212 | | | 7,507 | |
Valuation adjustments and other | (4,756) | | (4,756) |
Sales | (7,657) | | (12,226) |
Balance, end of period | $ | 27,289 | | | $ | 27,289 | |
| | | | | | | |
| Three Months Ended December 31, 2020 | | |
| (dollars in thousands) |
Balance, beginning of period | $ | 20,034 | | | |
Additions to other repossessed property | — | | | |
Valuation adjustments and other | (8) | | |
Sales | (1,940) | | |
Balance, end of period | $ | 18,086 | | | |
Asset Quality
We place an asset on nonaccrual status when management believes, after considering collection efforts and other factors, the borrower's condition is such that collection of interest is doubtful, which is generally 90 days past due. If a borrower has failed to comply with the original contractual terms, further action may be required, including a downgrade in the risk rating, movement to nonaccrual status, a charge-off or the establishment of a specifican individual reserve. If there is a collateral shortfall, we generally work with the borrower for a principal reduction, pledge of additional collateral or guarantee. If these alternatives are not available, we engage in formal collection activities. Restructured loans for which we grant payment or significant interest rate concessions are placed on nonaccrual status until collectability improves and a satisfactory payment history is established, generally by the receipt of at least six consecutive payments.
The following table presents the dollar amount of nonaccrual loans, other repossessed property, restructured performing loans and accruing loans over 90 days past due, at the end of the dates indicated. We entered into a non-commercial loss-sharing agreement with the FDIC related to certain assets (loans and other repossessed property) acquired from TierOne Bank on June 4, 2010. Loans covered by a FDIC loss-sharing agreement are generally pooled with other similar loans and are accreting purchase discount into income each period. Subject to compliance with the applicable loss-sharing agreement, we are indemnified by the FDIC at a rate of 80% for any future credit losses for single-family real estate loans and other repossessed property covered by the FDIC loss-sharing agreement through June 4, 2020.
| | | | | | | | | | | |
| March 31, 2020 | | September 30, 2019 |
| (dollars in thousands) | | |
Nonaccrual loans ¹ | | | |
Commercial real estate ² | $ | 41,886 | | | $ | 14,973 | |
Agriculture ² | 143,277 | | | 77,880 | |
Commercial non-real estate ² | 21,334 | | | 9,502 | |
Residential real estate | | | |
Loans covered by a FDIC loss-sharing agreement | 2,128 | | | 2,190 | |
Loans not covered by a FDIC loss-sharing agreement | 4,353 | | | 2,572 | |
Total | 6,481 | | | 4,762 | |
Consumer ² | 97 | | | 74 | |
Total nonaccrual loans covered by a FDIC loss-sharing agreement | 2,128 | | | 2,190 | |
Total nonaccrual loans not covered by a FDIC loss-sharing agreement | 210,947 | | | 105,001 | |
Total nonaccrual loans | 213,075 | | | 107,191 | |
Other repossessed property | 27,289 | | | 36,764 | |
Total nonperforming assets | 240,364 | | | 143,955 | |
Performing TDRs | 41,382 | | | 44,842 | |
Total nonperforming and restructured assets | $ | 281,746 | | | $ | 188,797 | |
Accruing loans 90 days or more past due | $ | 2,300 | | | $ | 11,180 | |
Nonperforming TDRs included in total nonaccrual loans | 28,042 | | | 30,073 | |
| | | |
Percent of total assets | | | |
Nonaccrual loans not covered by a FDIC loss-sharing agreement | 1.70 | % | | 0.82 | % |
Total nonaccrual loans | 1.72 | % | | 0.84 | % |
Other repossessed property | 0.22 | % | | 0.29 | % |
Nonperforming assets ³ | 1.94 | % | | 1.13 | % |
Nonperforming and restructured assets ³ | 2.27 | % | | 1.48 | % |
1 Includes nonperforming restructured loans. | | | |
2 Loans not covered by a FDIC loss-sharing agreement. | | | |
3 Includes nonaccrual loans, which includes nonperforming restructured loans. | | | |
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| (dollars in thousands) |
Nonaccrual loans ¹ | | | |
Construction and development | $ | 14,257 | | | n/a ³ |
Owner-occupied CRE | 16,776 | | | n/a ³ |
Non-owner-occupied CRE | 36,765 | | | n/a ³ |
Multifamily residential real estate | 1,540 | | | n/a ³ |
Total commercial real estate | 69,338 | | | $ | 73,501 | |
Agriculture | 192,988 | | | 217,642 | |
Commercial non-real estate | 23,187 | | | 26,918 | |
Residential real estate | 6,774 | | | 6,811 | |
Consumer and other | 70 | | | 74 | |
Total nonaccrual loans | 292,357 | | | 324,946 | |
Other repossessed property | 18,086 | | | 20,034 | |
Total nonperforming assets | 310,443 | | | 344,980 | |
Performing TDRs | 31,088 | | | 35,205 | |
Total nonperforming and restructured assets | $ | 341,531 | | | $ | 380,185 | |
Accruing loans 90 days or more past due | $ | — | | | $ | — | |
Nonperforming TDRs included in total nonaccrual loans | 52,592 | | | 62,792 | |
| | | |
Percent of total assets | | | |
Total nonaccrual loans | 2.28 | % | | 2.58 | % |
Other repossessed property | 0.14 | % | | 0.16 | % |
Nonperforming assets ² | 2.42 | % | | 2.74 | % |
Nonperforming and restructured assets ² | 2.67 | % | | 3.02 | % |
1 Includes nonperforming restructured loans. |
2 Includes nonaccrual loans, which includes nonperforming restructured loans. |
3 Balance for this segment is included in total commercial real estate for September 30, 2020. |
At MarchDecember 31, 2020 and September 30, 2019,2020, our nonperforming assets were 1.94%2.42% and 1.13%2.74%, respectively, of total assets. Nonaccrual loans were $213.1$292.4 million as of MarchDecember 31, 2020, with $2.1 million of the balance covered by the FDIC non-commercial loss-sharing agreement, which represented a total increasedecrease in nonaccrual loans of $105.9$32.6 million or 98.8%, compared to September 30, 2019.2020. The decrease resulted from a number of payoffs including $24.7 million of agriculture loans and $7.9 million of non-agriculture loans.
We recognized approximately $1.0$3.3 million of interest income on loans that were on nonaccrual for the first six monthsquarter of fiscal year 2020. Excluding loans covered by the FDIC non-commercial loss-sharing agreement, we2021. We had average nonaccrual loans (calculated as a two-point average) of $158.0$308.7 million outstanding during the first six monthsquarter of fiscal year 2020.2021. Based on the average loan portfolio yield for these loans for the first six monthsquarter of fiscal year 2020,2021, we estimate that interest income would have been $3.9$3.5 million higher during this period had these loans been accruing.
The Company implemented a more granular risk rating methodology as of October 1, 2020. We consistently monitor all loans internally rated "watch""special mention" or worse because that rating indicates we have identified some potential weakness emerging; but loans rated "watch""special mention" will not necessarily become problem loans or become impaired. Aside from the loans on the watch list,rated "special mention", we do not believe we have any potential problem loans that are not already identified as nonaccrual, past due or restructured as it is our policy to promptly reclassify loans as soon as we become aware of doubts as to the borrowers’ ability to meet repayment terms.
When we grant concessions to borrowers that we would not otherwise grant if not for the borrowers’ financial difficulties, such as reduced interest rates or extensions of loan periods, we consider these modifications TDRs.
The following table outlines total TDRs, split between performing and nonperforming loans, at each of the dates indicated.
| | | | | | | | | | | |
| March 31, 2020 | | September 30, 2019 |
| (dollars in thousands) | | |
Commercial real estate | | | |
Performing TDRs | $ | 19,843 | | | $ | 17,145 | |
Nonperforming TDRs | 3,088 | | | 904 | |
Total | 22,931 | | | 18,049 | |
Agriculture | | | |
Performing TDRs | 11,838 | | | 22,929 | |
Nonperforming TDRs | 20,357 | | | 24,762 | |
Total | 32,195 | | | 47,691 | |
Commercial non-real estate | | | |
Performing TDRs | 9,402 | | | 4,398 | |
Nonperforming TDRs | 4,465 | | | 4,257 | |
Total | 13,867 | | | 8,655 | |
Residential real estate | | | |
Performing TDRs | 294 | | | 263 | |
Nonperforming TDRs | 92 | | | 102 | |
Total | 386 | | | 365 | |
Consumer | | | |
Performing TDRs | 5 | | | 107 | |
Nonperforming TDRs | 40 | | | 48 | |
Total | 45 | | | 155 | |
Total performing TDRs | 41,382 | | | 44,842 | |
Total nonperforming TDRs | 28,042 | | | 30,073 | |
Total TDRs | $ | 69,424 | | | $ | 74,915 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| Performing TDRs | Nonperforming TDRs | Total | | Performing TDRs | Nonperforming TDRs | Total |
| (dollars in thousands) |
Construction and development | $ | 1,364 | | $ | 27 | | $ | 1,391 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Owner-occupied CRE | 5,590 | | — | | 5,590 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Non-owner-occupied CRE | 12,203 | | 11,637 | | 23,840 | | | n/a ¹ | n/a ¹ | n/a ¹ |
Multifamily residential real estate | — | | — | | — | | | n/a ¹ | n/a ¹ | n/a ¹ |
Total commercial real estate | 19,157 | | 11,664 | | 30,821 | | | $ | 23,215 | | $ | 11,913 | | $ | 35,128 | |
Agriculture | 3,356 | | 35,736 | | 39,092 | | | 2,976 | | 45,971 | | 48,947 | |
Commercial non-real estate | 8,304 | | 5,096 | | 13,400 | | | 8,734 | | 4,803 | | 13,537 | |
Residential real estate | 269 | | 69 | | 338 | | | 277 | | 74 | | 351 | |
Consumer and other | 2 | | 27 | | 29 | | | 3 | | 31 | | 34 | |
Total | $ | 31,088 | | $ | 52,592 | | $ | 83,680 | | | $ | 35,205 | | $ | 62,792 | | $ | 97,997 | |
1 Balance for this segment is included in total commercial real estate for September 30, 2020. |
As of MarchDecember 31, 2020, total performing TDRs decreased $3.5$4.1 million, or 7.7%11.7%, compared to September 30, 2019, primarily due to the payoff of one large relationship in the agriculture loan portfolio.2020. Total nonperforming TDRs decreased $2.0$10.2 million, or 6.8%16.2%, compared to September 30, 20192020 primarily due to paydowns intwo relationship payoffs during the agriculture portfolio.
The following table presents nonaccrual loans, TDRs, and other repossessed property covered by the loss-sharing agreement; a rollforward of the allowance for loan and lease losses for loans covered by the loss-sharing agreement; a rollforward of allowance for loan and lease losses for ASC 310-30 loans covered by the loss-sharing agreement; and a rollforward of other repossessed property covered by the loss-sharing agreement at and for the periods presented.
| | | | | | | | | | | |
| At and for the Six Months Ended March 31, 2020 | | At and for the Fiscal Year Ended September 30, 2019 |
| (dollars in thousands) | | |
Assets covered by a FDIC loss-sharing agreement | | | |
Nonaccrual loans ¹ | $ | 2,128 | | | $ | 2,190 | |
TDRs | 33 | | | 43 | |
Other repossessed property | — | | | — | |
Allowance for loan and lease losses, loans covered by a FDIC loss-sharing agreement | | | |
Balance, beginning of period | $ | 113 | | | $ | 262 | |
Additional impairment recorded | 442 | | | 309 | |
Recoupment of previously-recorded impairment | — | | | (379) | |
Charge-offs | (61) | | | (79) | |
Balance, end of period | $ | 494 | | | $ | 113 | |
| | | |
Other repossessed property covered by a loss-sharing agreement | | | |
Balance, beginning of period | $ | — | | | $ | 131 | |
Additions to other repossessed property | — | | | — | |
Sales | — | | | (131) | |
Balance, end of period | $ | — | | | $ | — | |
1 Includes nonperforming restructured loans. | | | |
period.Allowance for LoanCredit Losses
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and Lease Losses
We establish an allowance forsubsequent related ASUs, on October 1, 2020, which uses the inherent risk of probable losses within our loan portfolio. The allowance for loan and lease losses is management’s best estimate of probablecurrent expected credit losses that are incurred in the loan portfolio. Weloss model ("CECL") to determine the allowance for loan and leasecredit losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and the net investments in leases recognized by a lessor in accordance with Topic 842 on leases. The CECL methodology requires recognition of lifetime expected credit losses that takes into consideration all relevant information, including historical losses, current conditions and reasonable and supportable forecasts of future operating conditions.
Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an inherently subjective process. We consider the uncertaintyindividual basis ("individual reserve"). The reserve related to certain industry sectors andthese loans is using the extent of credit exposurecollateral available to specific borrowers within the portfolio. In addition, we consider concentration risks associated with the various loan portfolios, current economic conditions and other environmental factors that might impact the portfolio. All of these estimates are susceptible to significant change. Changes to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses. Loans deemed to be uncollectible are charged off against the allowance for loan and lease losses. Recoveries of amounts previously charged-off are credited to the allowance for loan and lease losses.
Our allowance for loan and lease losses consists of two components. For non-impaired loans, we calculate a weighted average loss ratio of 12-, 36- and 60-month historical realized losses by collateral type; adjust as necessary for our interpretation of current economic conditions, environmental factors and current portfolio trends including credit quality, concentrations, aging of the portfolio and/or significant policy and underwriting changes not entirely covered by the calculated historical loss rates; and apply the loss rates to outstanding loan balances in each collateral category. We calculate the weighted average ratio of 12-, 36- and 60-month historical realized losses for each collateral type by dividing the average net annual charge-offs by the average outstanding loans of such type subject to the calculation for each of the 12-, 36- and 60-month periods, then averaging those three results. For impaired loans, we estimate our exposure for each individual relationship, given the current payment status ofrepay the loan, and the value of the underlying collateral as supported by third party appraisals, broker’s price opinions, and/or the borrower’s financial statements and internal valuation assessments, each adjusted for liquidation costs. Any shortfall betweenmost typically the liquidation value of the underlying collateral (less selling costs, if applicable). The Company has chosen to continue to include small, less complex loans within the collective reserve for loans on nonaccrual or with TDR status.
Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). Loans are aggregated into pools (or segments) based on similar risk characteristics including borrower type, collateral, type and expected credit loss patterns. The historical loss experience of the recorded investment valuepool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan segment is consideredapplied to each loan within the required specific reserve amount. Actual lossessegment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in any period may exceed allowance amounts. We evaluate and adjust our allowance for loan and lease losses, andloss expectations relative to the allocationhistorical loss rates. These models have been implemented in accordance with the Company's Model Risk Management Policy. Additionally, using its new risk rating system, the Company evaluates if the current credit quality of the portfolio materially differs from the one observed over the historical loss period and applies adjustments to the allowance between loan categories, each month.accordingly. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans servicing practices and changes in underwriting criteria.
ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current
economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period.
The following table presents an analysis of our allowance for loan and leasecredit losses, including provisions for loan and leasecredit losses, charge-offs and recoveries, for the periods indicated.
| | | At and for the Six Months Ended March 31, 2020 | | At and for the Fiscal Year Ended September 30, 2019 | | At and for the Three Months Ended December 31, 2020 | | At and for the Fiscal Year Ended September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
Allowance for loan and lease losses: | | |
Allowance for credit losses on loans: | | Allowance for credit losses on loans: | |
Balance, beginning of period | Balance, beginning of period | $ | 70,774 | | | $ | 64,540 | | Balance, beginning of period | $ | 149,887 | | | $ | 70,774 | |
Provision charged to expense | 79,750 | | | 41,506 | | |
Impairment (improvement) of ASC 310-30 loans | 148 | | | (559) | | |
Adoption of ASU 2016-13, as amended | | Adoption of ASU 2016-13, as amended | 177,289 | | | — | |
Provision for credit losses ³ | | Provision for credit losses ³ | 11,976 | | | 118,204 | |
(Improvement) impairment of ASC 310-30 loans | | (Improvement) impairment of ASC 310-30 loans | — | | | 188 | |
Charge-offs: | Charge-offs: | | Charge-offs: | |
Commercial real estate | (1,454) | | | (1,511) | | |
Construction and development | | Construction and development | (27) | | | n/a ⁴ |
Owner-occupied CRE | | Owner-occupied CRE | — | | | n/a ⁴ |
Non-owner-occupied CRE | | Non-owner-occupied CRE | (28,269) | | | n/a ⁴ |
Multifamily residential real estate | | Multifamily residential real estate | — | | | n/a ⁴ |
Total commercial real estate | | Total commercial real estate | (28,296) | | | (5,181) | |
Agriculture | | Agriculture | (2,144) | | | (21,705) | |
Commercial non-real estate | | Commercial non-real estate | (2,043) | | | (14,178) | |
Consumer | | Consumer | (96) | | | (615) | |
Consumer and other | | Consumer and other | (232) | | | (3,071) | |
Total charge-offs | | Total charge-offs | (32,811) | | | (44,750) | |
Recoveries: | | Recoveries: | | | |
Construction and development | | Construction and development | 268 | | | n/a ⁴ |
Owner-occupied CRE | | Owner-occupied CRE | — | | | n/a ⁴ |
Non-owner-occupied CRE | | Non-owner-occupied CRE | 61 | | | n/a ⁴ |
Multifamily residential real estate | | Multifamily residential real estate | — | | | n/a ⁴ |
Total commercial real estate | | Total commercial real estate | 329 | | | 1,395 | |
Agriculture | Agriculture | (9,128) | | | (24,847) | | Agriculture | 1,734 | | | 2,189 | |
Commercial non-real estate | Commercial non-real estate | (5,059) | | | (7,895) | | Commercial non-real estate | 245 | | | 1,018 | |
Residential real estate | Residential real estate | (287) | | | (998) | | Residential real estate | 32 | | | 453 | |
Consumer | (45) | | | (452) | | |
Other lending | (1,060) | | | (1,358) | | |
Total charge-offs | (17,033) | | | (37,061) | | |
Recoveries: | | | | |
Commercial real estate | 234 | | | 567 | | |
Agriculture | 1,408 | | | 385 | | |
Commercial non-real estate | 172 | | | 392 | | |
Residential real estate | 312 | | | 468 | | |
Consumer | 48 | | | 174 | | |
Other lending | 137 | | | 362 | | |
Consumer and other | | Consumer and other | 113 | | | 416 | |
Total recoveries | Total recoveries | 2,311 | | | 2,348 | | Total recoveries | 2,453 | | | 5,471 | |
Net loan charge-offs | Net loan charge-offs | (14,722) | | | (34,713) | | Net loan charge-offs | (30,358) | | | (39,279) | |
Balance, end of period | Balance, end of period | $ | 135,950 | | | $ | 70,774 | | Balance, end of period | $ | 308,794 | | | $ | 149,887 | |
| Average total loans for the period ¹ | Average total loans for the period ¹ | $ | 9,648,678 | | | $ | 9,741,293 | | Average total loans for the period ¹ | $ | 9,840,055 | | | $ | 9,908,495 | |
Total loans at period end ¹ | Total loans at period end ¹ | 9,693,295 | | | 9,706,763 | | Total loans at period end ¹ | 9,517,876 | | | 10,076,142 | |
Ratios | Ratios | | Ratios | |
Net charge-offs to average total loans ³ | 0.31 | % | | 0.36 | % | |
Allowance for loan and lease losses to: | | |
Net charge-offs to average total loans ² | | Net charge-offs to average total loans ² | 1.22 | % | | 0.40 | % |
Allowance for credit losses on loans to: | | Allowance for credit losses on loans to: | |
Total loans | Total loans | 1.40 | % | | 0.73 | % | Total loans | 3.24 | % | | 1.49 | % |
Nonaccruing loans ² | 64.45 | % | | 67.40 | % | |
1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and loans in process. | | |
2 Nonaccruing loans excludes loans covered by a FDIC loss-sharing agreement. | | |
3 Annualized for partial-year periods. | | |
Nonaccruing loans | | Nonaccruing loans | 105.62 | % | | 46.13 | % |
1 Loans are shown at amortized cost. | | 1 Loans are shown at amortized cost. |
2 Annualized for partial-year periods. | | 2 Annualized for partial-year periods. |
3 For December 31, 2020, provision for credit losses in the consolidated statements of income includes $(0.1) million of (reversal of) provision for unfunded commitments reserve. | | 3 For December 31, 2020, provision for credit losses in the consolidated statements of income includes $(0.1) million of (reversal of) provision for unfunded commitments reserve. |
4 Balance for this segment is included in total commercial real estate for September 30, 2020. | | 4 Balance for this segment is included in total commercial real estate for September 30, 2020. |
In the first six monthsquarter of fiscal year 2020,2021, net charge-offs were $14.7$30.4 million, or 0.31%1.22%, of average total loans on an annualized basis, comprised of $17.0$32.8 million of charge-offs and $2.3$2.4 million of recoveries. The increase was driven by $25.6 million of discount on the sales of certain hotel loans. Excluding those, net charge-offs for the quarter were concentrated in the agriculture and commercial non-real estate segments in the loan portfolio.$4.8 million, or 0.19% of average total loans (annualized). For fiscal year 2019,2020, net charge-offs were $34.7$39.3 million, or 0.36%0.40%, of average total loans.
At MarchDecember 31, 2020, the allowance for loan and leasecredit losses on loans was 1.40%3.24% of our total loan portfolio, a 67 basis point increase, compared to 0.73%1.49% at September 30, 2019.2020. The balance of the ALLLACL increased to $136.0$308.8 million from $70.8$149.9 million over the same period due to incurred loss resulting from COVID-19 pandemic. This increase did not contemplate the potential impact of CECL implementation, which is effective for the Companyadoption on October 1, 2020. In determining2020, where we recognized a Day 1 increase in the creditACL of $177.3 million, which resulted in a cumulative effect adjustment decrease of $132.9 million (after-tax) to retained earnings. The tax effect resulted in a $42.9 million increase in deferred tax assets. The increase in ACL related charges attributable to the COVID-19 pandemic, we consideredadoption of CECL was partially offset by the net impact upon our loan portfolio. Industries such as oil & energy, hotels & resorts, restaurants, retail malls, airlinesfrom provisioning and others have been cited as being at risk for significant revenue loss. Within our portfolio, $1.14 billion, or 11.8% relates to hotels & resorts, $109.8 million, or 1.1% relates to restaurants, with exposure in such other identified industries being immaterial. At this time it is difficult to determine ultimate impact upon our portfolio, but we are ofcharge-offs during the view the credit-related adjustments reflect the best estimate of incurred losses in our portfolio as of March 31, 2020.
Additionally, a portion of our loans which are carried at fair value, totaling $792.1$611.6 million at MarchDecember 31, 2020 and $813.0$655.2 million at September 30, 2019,2020, respectively, have no associated allowance for loan and leasecredit losses, but rather have a fair value adjustment related to credit risk included within their carrying value, thus driving the overall ratio of allowance for loan and leasecredit losses to total loans lower. The amount of fair value adjustment related to credit risk on these loans was $16.7$27.5 million and $6.8$30.5 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively, or 0.17%0.29% and 0.07%0.30% of total loans, respectively. Finally, total purchase discount remaining on all acquired loans equates to 0.11% and 0.14% of total loans at March 31, 2020 and September 30, 2019, respectively.
The following table presents management’s allocation of the allowance for loan and leasecredit losses on loans by loan category, in both dollars and percentage of our total allowance for loan and leasecredit losses on loans, to specific loans in those categories at the dates indicated.
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | September 30, 2019 | |
| Amount | Percent | | Amount | Percent |
| (dollars in thousands) | | | | |
Allocation of allowance for loan and lease losses: | | | | | |
Commercial real estate | $ | 64,414 | | 47.4 | % | | $ | 16,827 | | 23.8 | % |
Agriculture | 29,526 | | 21.7 | % | | 30,819 | | 43.5 | % |
Commercial non-real estate | 31,766 | | 23.4 | % | | 17,567 | | 24.8 | % |
Residential real estate | 8,356 | | 6.1 | % | | 4,095 | | 5.8 | % |
Consumer | 777 | | 0.6 | % | | 427 | | 0.6 | % |
Other lending | 1,111 | | 0.8 | % | | 1,039 | | 1.5 | % |
Total | $ | 135,950 | | 100.0 | % | | $ | 70,774 | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Adjusted balance September 30, 2020 ¹ |
| Amount | Percent | | Amount | Percent |
| (dollars in thousands) |
Allocation of allowance for credit losses on loans: | | | | | |
Construction and development | $ | 18,714 | | 6.1 | % | | $ | 7,012 | | 4.7 | % |
Owner-occupied CRE | 25,086 | | 8.1 | % | | $ | 20,530 | | 13.7 | % |
Non-owner-occupied CRE | 120,751 | | 39.1 | % | | $ | 50,965 | | 34.0 | % |
Multifamily residential real estate | 9,773 | | 3.2 | % | | $ | 6,726 | | 4.5 | % |
Total commercial real estate | 174,324 | | 56.5 | % | | $ | 85,233 | | 56.9 | % |
Agriculture | 46,979 | | 15.2 | % | | 27,018 | | 18.0 | % |
Commercial non-real estate | 75,955 | | 24.6 | % | | 27,599 | | 18.4 | % |
Residential real estate ³ | 9,672 | | 3.1 | % | | 7,465 | | 5.0 | % |
Consumer and other | 1,864 | | 0.6 | % | | 2,572 | | 1.7 | % |
Total | $ | 308,794 | | 100.0 | % | | $ | 149,887 | | 100.0 | % |
1 At September 30, 2020, the allowance balances were reclassified to align with the eight loan portfolio segments established for adoption of CECL. For additional information, see Note 2. |
Management will continue to evaluate the loan portfolio and assess economic conditions in order to determine future allowance levels and the amount of loan and leasecredit loss provisions. We review the appropriateness of our allowance for loan and leasecredit losses on a monthly basis. Management monitors closely all past due and restructured loans in assessing the appropriateness of its allowance for loan and leasecredit losses. In addition, we follow procedures for reviewing and grading all substantial commercial and agriculture relationships at least annually. Based predominantly upon the review and grading process, we determine the appropriate level of the allowance in response to our assessment of the probable risk of loss inherent in our loan portfolio. Management makes additional loan and leasecredit loss provisions when the results of our problem loan assessment methodology or overall allowance testing of appropriateness indicates additional provisions are required.
The review of problem loans is an ongoing process during which management may determine that additional charge-offs are required or additional loans should be placed on nonaccrual status. We have also recorded an allowance for unfunded lending-relatedlending reserve related commitments that represents our estimate of incurredcredit losses on the portion of lending commitments that borrowers have not advanced. The Company's change in unfunded commitments reserve from the incurred loss methodology to the current expected credit loss methodology was immaterial as of the date of adoption and therefore no provision was recognized. The balance of the allowance for unfunded lending-related commitments reserve was $1.1$2.3 million and $0.5$2.4 million at MarchDecember 31, 2020 and September 30, 2019,2020, respectively, and is recorded in accrued expenses and other liabilities in the consolidated balance sheet.
Investment Securities
The following table presents the amortized cost of each category of our investment portfolio at the dates indicated.
| | | March 31, 2020 | | September 30, 2019 | | December 31, 2020 | | September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
U.S. Treasury securities | U.S. Treasury securities | $ | 69,629 | | | $ | 94,178 | | U.S. Treasury securities | $ | 24,991 | | | $ | 49,924 | |
U.S. Agency securities | | U.S. Agency securities | 24,975 | | | 24,974 | |
Mortgage-backed securities: | Mortgage-backed securities: | | Mortgage-backed securities: | |
Government National Mortgage Association | Government National Mortgage Association | 566,747 | | | 501,139 | | Government National Mortgage Association | 424,756 | | | 485,689 | |
Federal Home Loan Mortgage Corporation | Federal Home Loan Mortgage Corporation | 556,535 | | | 463,974 | | Federal Home Loan Mortgage Corporation | 769,254 | | | 578,650 | |
Federal National Mortgage Association | Federal National Mortgage Association | 386,996 | | | 322,340 | | Federal National Mortgage Association | 455,651 | | | 287,842 | |
Small Business Assistance Program | Small Business Assistance Program | 300,498 | | | 316,502 | | Small Business Assistance Program | 264,798 | | | 244,653 | |
States and political subdivision securities | States and political subdivision securities | 60,511 | | | 66,145 | | States and political subdivision securities | 51,120 | | | 54,224 | |
Other | Other | 1,006 | | | 1,006 | | Other | 1,006 | | | 1,006 | |
Total | Total | $ | 1,941,922 | | | $ | 1,765,284 | | Total | $ | 2,016,551 | | | $ | 1,726,962 | |
We generally invest excess deposits in high-quality, liquid investment securities including residential agency mortgage-backed securities and, to a lesser extent, U.S. Treasury securities, corporate debt securities and securities issued by U.S. states and political subdivisions. Our investment portfolio serves as a means to collateralize FHLB borrowings and public funds deposits, to earn net spread income on excess deposits, to maintain liquidity and to balance interest rate risk. Since September 30, 2019,2020, the fair value of the portfolio has increased by $206.8$285.0 million, or 11.6%16.1%.
The following table presents the aggregate amortized cost of each investment category of the investment portfolio and the weighted average yield for each investment category for each maturity period held at MarchDecember 31, 2020. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. The weighted-average yield ("WA Yield") on these assets is presented in the following table based on the contractual rate, as opposed to a tax equivalent yield concept.
| | | March 31, 2020 | | | December 31, 2020 |
| | Due in one year or less | | | Due after one year through five years | | | Due after five years through ten years | | | Due after ten years | | | Mortgage-backed securities | | | Securities without contractual maturities | | | Total | | | Due in one year or less | | Due after one year through five years | | Due after five years through ten years | | Due after ten years | | Mortgage-backed securities | | Securities without contractual maturities | | Total |
| | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield | | Amount | WA Yield |
| | (dollars in thousands) | | | (dollars in thousands) |
U.S. Treasury securities | U.S. Treasury securities | $ | 69,629 | | 2.50 | % | | $ | — | | 0.00 | % | | $ | — | | — | % | | $ | — | | — | % | | $ | — | | — | % | | $ | — | | — | % | | $ | 69,629 | | 2.50 | % | U.S. Treasury securities | $ | 24,991 | | 2.87 | % | | $ | — | | — | % | | $ | — | | — | % | | $ | — | | — | % | | $ | — | | — | % | | $ | — | | — | % | | $ | 24,991 | | 2.87 | % |
U.S. Agency securities | | U.S. Agency securities | — | | — | % | | 24,975 | | 1.13 | % | | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | 24,975 | | 1.13 | % |
Mortgage-backed securities | Mortgage-backed securities | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | 1,810,776 | | 2.21 | % | | — | | — | % | | 1,810,776 | | 2.21 | % | Mortgage-backed securities | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | 1,914,459 | | 1.62 | % | | — | | — | % | | 1,914,459 | | 1.62 | % |
States and political subdivision securities ¹ ² | States and political subdivision securities ¹ ² | 12,986 | | 1.51 | % | | 35,858 | | 1.75 | % | | 11,667 | | 2.54 | % | | — | | — | % | | — | | — | % | | — | | — | % | | 60,511 | | 1.85 | % | States and political subdivision securities ¹ ² | 17,982 | | 1.72 | % | | 23,072 | | 1.79 | % | | 10,066 | | 2.56 | % | | — | | — | % | | — | | — | % | | — | | — | % | | 51,120 | | 1.92 | % |
Other | Other | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | 1,006 | | — | % | | 1,006 | | — | % | Other | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | — | | — | % | | 1,006 | | — | % | | 1,006 | | — | % |
Total | Total | $ | 82,615 | | 2.34 | % | | $ | 35,858 | | 1.75 | % | | $ | 11,667 | | 2.54 | % | | $ | — | | — | % | | $ | 1,810,776 | | 2.21 | % | | $ | 1,006 | | — | % | | $ | 1,941,922 | | 2.21 | % | Total | $ | 42,973 | | 2.39 | % | | $ | 48,047 | | 1.45 | % | | $ | 10,066 | | 2.56 | % | | $ | — | | — | % | | $ | 1,914,459 | | 1.62 | % | | $ | 1,006 | | — | % | | $ | 2,016,551 | | 1.64 | % |
1 Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount. | 1 Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount. | | 1 Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount. |
2 Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par. | 2 Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par. | | 2 Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par. |
Declines in theAvailable for sale securities are stated at fair value of investment securitiesvalue. For available for sale that are deemed to be other-than-temporary are recognized in earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary impairment, we consider the length of time and extent to which the fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where:an unrealized loss position, management first evaluates whether (1) we havethe Company has the intent to sell a security; or (2) it is more-likely-than-not that wethe Company will be required to sell the security before recovery of its amortized cost basis; or (3) we do not expect to recoverbasis. If either criteria is met, the entire amortized cost basisamount of the security. If we intend to sell a security or if it is more-likely-than-not that we will be required to sell the security before recovery, an other-than-temporary impairmentunrealized loss is recognized in earnings equalthe consolidated income statement with a corresponding adjustment to the difference betweensecurity's amortized cost basis.
If neither criteria is met, the security’sCompany evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Furthermore, securities issued by the U.S. Government or a U.S. Government sponsored enterprise which carry the explicit or implicit guarantee of the U.S. Government are considered "risk-free" and therefore no credit losses are assumed on those securities. If the assessment indicates a credit loss exists, the amortized cost basis and its fair value. If we do not intendis compared to sell the security orpresent value of cash flows
expected to be collected from the security; if it is not more-likely-than-not that it will be required to sellless than the security before recovery, the other-than-temporary impairment write-down is separated into an amount representingamortized cost basis, a credit loss which is recognized in earnings,exists and an amountallowance for credit losses is recorded. Changes in the allowance for credit losses are recorded as a provision for (reversal of) credit losses in the consolidated income statement. If the assessment indicates a credit loss does not exist, the change in fair value is recorded as unrealized gains and losses, net of related to all other factors, whichtaxes, and is recognizedincluded in stockholders’ equity as a component of accumulated other comprehensive income (loss).
Deposits
We obtain funds from depositors by offering consumer and business interest-bearing accounts and term time deposits. At MarchDecember 31, 2020 and September 30, 2019,2020, our total deposits were $10.18$11.37 billion and $10.30$11.01 billion, respectively, representing a decreasean increase of $121.2$364.5 million, or 1.2%3.3%, due to a $438.5 million increase in checking and savings deposits across both business and consumer accounts offset with a $67.9 million reduction in the use ofbusiness and consumer time deposits and a $6.1 million decrease in public and brokered deposits partially offset by an increase in business deposits. Our accounts are federally insured by the FDIC up to the legal maximum.
The following table presents the balances and weighted average cost of our deposit portfolio at the following dates.
| | | March 31, 2020 | | | September 30, 2019 | | | December 31, 2020 | | September 30, 2020 |
| | Amount | Weighted Avg. Cost | | Amount | Weighted Avg. Cost | | Amount | Weighted Avg. Cost | | Amount | Weighted Avg. Cost |
| | (dollars in thousands) | | | (dollars in thousands) |
Noninterest-bearing demand | Noninterest-bearing demand | $ | 1,973,629 | | — | % | | $ | 1,956,025 | | — | % | Noninterest-bearing demand | $ | 2,858,455 | | — | % | | $ | 2,586,743 | | — | % |
Interest-bearing demand | Interest-bearing demand | 6,677,252 | | 0.61 | % | | 6,248,638 | | 1.00 | % | Interest-bearing demand | 7,436,283 | | 0.21 | % | | 7,139,058 | | 0.26 | % |
Time deposits, greater than $250,000 | Time deposits, greater than $250,000 | 416,361 | | 1.98 | % | | 493,530 | | 2.30 | % | Time deposits, greater than $250,000 | 283,635 | | 0.97 | % | | 352,913 | | 1.12 | % |
Time deposits, less than or equal to $250,000 | Time deposits, less than or equal to $250,000 | 1,111,873 | | 1.20 | % | | 1,602,146 | | 1.68 | % | Time deposits, less than or equal to $250,000 | 794,945 | | 0.54 | % | | 930,065 | | 0.75 | % |
Total | Total | $ | 10,179,115 | | 0.61 | % | | $ | 10,300,339 | | 0.98 | % | Total | $ | 11,373,318 | | 0.20 | % | | $ | 11,008,779 | | 0.27 | % |
At MarchDecember 31, 2020 and September 30, 2019,2020, we had $464.0$261.5 million and $706.5$329.0 million, respectively, in brokered deposits, a decrease of $242.5$67.5 million, or 34.3%20.5%.
Municipal public deposits constituted $1.01$1.30 billion and $1.04$1.25 billion of our deposit portfolio at MarchDecember 31, 2020, and September 30, 2019,2020, respectively, of which $636.0$941.6 million and $691.9$859.7 million, respectively, were required to be collateralized. Our top 10 depositors were responsible for 8.1%7.7% and 7.0%6.4% of our total deposits at MarchDecember 31, 2020 and September 30, 2019,2020, respectively.
The following table presents deposits by region.
| | | March 31, 2020 | | September 30, 2019 | | December 31, 2020 | | September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
South Dakota | South Dakota | $ | 2,634,144 | | | $ | 2,575,833 | | South Dakota | $ | 2,961,862 | | | $ | 2,839,891 | |
Iowa / Missouri | Iowa / Missouri | 2,925,216 | | | 2,799,597 | | Iowa / Missouri | 3,446,114 | | | 3,184,321 | |
Nebraska / Kansas | Nebraska / Kansas | 2,591,149 | | | 2,611,332 | | Nebraska / Kansas | 2,819,476 | | | 2,833,921 | |
Arizona | Arizona | 479,846 | | | 508,308 | | Arizona | 601,376 | | | 590,567 | |
Colorado | Colorado | 1,226,068 | | | 1,237,052 | | Colorado | 1,319,271 | | | 1,300,351 | |
North Dakota / Minnesota | North Dakota / Minnesota | 44,682 | | | 55,258 | | North Dakota / Minnesota | 28,479 | | | 30,228 | |
Corporate and other | 278,010 | | | 512,959 | | |
Specialized Assets | | Specialized Assets | 11,947 | | | — | |
Corporate and Other | | Corporate and Other | 184,793 | | | 229,500 | |
Total deposits | Total deposits | $ | 10,179,115 | | | $ | 10,300,339 | | Total deposits | $ | 11,373,318 | | | $ | 11,008,779 | |
We fund a portion of our assets with time deposits that have balances greater than $250,000 and that have maturities generally in excess of six months. At MarchDecember 31, 2020 and September 30, 2019,2020, our time deposits greater than $250,000 totaled $416.4$283.6 million and $493.5$352.9 million, respectively. The following table presents the maturities of our time deposits greater than $250,000 and less than or equal to $250,000 in size at MarchDecember 31, 2020.
| | | March 31, 2020 | | | December 31, 2020 |
| | Greater than $250,000 | | Less than or equal to $250,000 | | Greater than $250,000 | | Less than or equal to $250,000 |
| | (dollars in thousands) | | | (dollars in thousands) |
Remaining maturity: | Remaining maturity: | | Remaining maturity: | |
Three months or less | Three months or less | $ | 118,963 | | | $ | 405,357 | | Three months or less | $ | 76,140 | | | $ | 238,532 | |
Over three through six months | Over three through six months | 121,962 | | | 199,388 | | Over three through six months | 79,412 | | | 185,450 | |
Over six through twelve months | Over six through twelve months | 111,495 | | | 305,220 | | Over six through twelve months | 71,696 | | | 223,606 | |
Over twelve months | Over twelve months | 63,941 | | | 201,908 | | Over twelve months | 56,387 | | | 147,357 | |
Total | Total | $ | 416,361 | | | $ | 1,111,873 | | Total | $ | 283,635 | | | $ | 794,945 | |
Percent of total deposits | Percent of total deposits | 4.1 | % | | 10.9 | % | Percent of total deposits | 2.5 | % | | 7.0 | % |
At both MarchDecember 31, 2020 and September 30, 2019,2020, the average remaining maturity of all time deposits was approximately 9 and 8 months.months, respectively. The average time deposits amount per account was approximately $39,576$33,062 and $45,936$37,174 at MarchDecember 31, 2020 and September 30, 2019,2020, respectively.
Derivatives
Beginning in the second quarter of fiscal year 2018, we entered into RPAs with some of our derivative counterparties to assume the credit exposure related to interest rate derivative contracts. Our loan customer enters into an interest rate swap directly with a derivative counterparty and we agree through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer. The notional amounts of RPAs sold were $78.2 million and $56.8 million as of March 31, 2020 and September 30, 2019, respectively. Assuming all underlying loan customers defaulted on their obligation to perform under the interest rate swap with a derivative counterparty, the exposure from these RPAs would be $0.6 million and $0.1 million at March 31, 2020 and September 30, 2019, respectively, based on the fair value of the underlying swaps.
In 2017, we began a new program of selling interest swaps directly to customers. These interest rate swaps sales are used to enable customers to achieve a long-term fixed rate by selling the customer a long-term variable rate loan indexed to LIBOR plus a credit spread whereby the Bank enters into an interest rate swap with our customer where the customer pays a fixed rate of interest set at the time of origination on the interest rate swap and then the customer receives a floating rate equal to the rate paid on the loan, thus resulting in a fixed rate of interest over the life of the interest rate swap. We then enter into a mirrored interest rate swap with a swap dealer where we pay and receive the same fixed and floating rate as we pay and receive from the interest rate swap we have with our customer. As the interest paid and received by us on the two swaps net to zero, we are left with the variable rate of the long-term loan.
Prior to 2017 we entered into fixed-rate loans having original maturities of 5 years or greater (typically between 5 and 15 years) with certain of our commercial and agri-business banking customers to assist them in facilitating their risk management strategies. We mitigated our interest rate risk associated with certain of these loans by entering into equal and offsetting fixed-to-floating interest rate swap agreements for these loans with swap counterparties. We elected to account for the loans at fair value under ASC 825, Fair Value Option. Changes in the fair value of these loans are recorded in earnings as a component of noninterest income in the relevant period. The related interest rate swaps are recognized as either assets or liabilities in our financial statements and any gains or losses on these swaps, both realized and unrealized, are recorded in earnings as a component of noninterest income. The interest rate swaps are fully effective from an interest rate risk perspective, as gains and losses on our swaps are directly offset by changes in fair value of the fair value option loans (i.e., swap interest rate risk adjustments are directly offset by associated loan interest rate risk adjustments). Consequently, any changes in noninterest income associated with changes in fair value resulting from interest rate movement, as opposed to changes in credit quality, on the loans are directly offset by equal and opposite unrealized charges to or reductions in noninterest income for the related interest rate swap. Any changes in the fair value of the loans related to credit quality and the current realized gain (loss)derivative interest expense on derivatives are not offsetting amounts within noninterest income. To ensure the correlation of movements in fair value between the interest rate swap and the related loan, we pass on all economic costs associated with our interest rate swap activity resulting from loan customer prepayments (partial or full) to the customer.
In addition, we enter into interest rate derivative contracts to support the business needs of our customers. These interest rate swaps sales are used to enable customers to achieve a long-term fixed rate by selling the customer a long-term variable rate loan indexed to LIBOR plus a credit spread whereby the Bank enters into an interest rate swap with our customer where the customer pays a fixed rate of interest set at the time of origination on the interest rate swap and then the customer receives a floating rate equal to the rate paid on the loan, thus resulting in a fixed rate of interest over the life of the interest rate swap. We then enter into a mirrored interest rate swap with a swap dealer where we pay and receive the same fixed and floating rate as we pay and receive from the interest rate swap we have with our customer. As the interest paid and received by us on the two swaps net to zero, we are left with the variable rate of the long-term loan.
We enter into RPAs with some of our derivative counterparties to assume the credit exposure related to interest rate derivative contracts. Our loan customer enters into an interest rate swap directly with a derivative counterparty and we agree through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer. The notional amounts of RPAs sold were $82.1 million and $80.7 million as of December 31, 2020 and September 30, 2020, respectively. Assuming all underlying loan customers defaulted on their obligation to perform under the interest rate swap with a derivative counterparty, the exposure from these RPAs would be nominal at both December 31, 2020 and September 30, 2020, respectively, based on the fair value of the underlying swaps.
Short-Term Borrowings
Our primary sources of short-term borrowings include securities sold under repurchase agreements and certain FHLB advances maturing within 12 months. The following table presents certain information with respect to only our borrowings with original maturities less than 12 months at and for the periods noted.
| | | At and for the Six Months Ended March 31, 2020 | | At and for the Fiscal Year Ended September 30, 2019 | | At and for the Three Months Ended December 31, 2020 | | At and for the Fiscal Year Ended September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
Short-term borrowings: | Short-term borrowings: | | Short-term borrowings: | |
Securities sold under agreements to repurchase | Securities sold under agreements to repurchase | $ | 64,809 | | | $ | 68,992 | | Securities sold under agreements to repurchase | $ | 80,355 | | | $ | 65,506 | |
FHLB advances | 475,000 | | | 15,000 | | |
| Other short-term borrowings | | Other short-term borrowings | — | | | 75,000 | |
Total short-term borrowings | Total short-term borrowings | $ | 539,809 | | | $ | 83,992 | | Total short-term borrowings | $ | 80,355 | | | $ | 140,506 | |
| Maximum amount outstanding at any month-end during the period | Maximum amount outstanding at any month-end during the period | $ | 539,809 | | | $ | 371,649 | | Maximum amount outstanding at any month-end during the period | $ | 80,355 | | | $ | 539,809 | |
Average amount outstanding during the period | Average amount outstanding during the period | 275,882 | | | 175,133 | | Average amount outstanding during the period | 78,640 | | | 218,340 | |
Weighted average rate for the period | Weighted average rate for the period | 0.96 | % | | 1.72 | % | Weighted average rate for the period | 0.09 | % | | 0.75 | % |
Weighted average rate as of date indicated | Weighted average rate as of date indicated | 0.65 | % | | 0.91 | % | Weighted average rate as of date indicated | 0.09 | % | | 0.09 | % |
Other Borrowings
In addition to FHLBthe short-term advances,borrowings above, we also had FHLB long-term borrowings of $325.0$120.0 million outstanding as of both MarchDecember 31, 2020 and September 30, 2019.2020.
We had outstanding $73.8$73.9 million and $73.7$73.8 million of junior subordinated debentures to affiliated trusts in connection with the issuance of trust preferred securities by such trusts as of MarchDecember 31, 2020 and September 30, 2019,2020, respectively. We are permitted under applicable laws and regulations to count these trust preferred securities as part of our Tier 1 capital.
We issued $35.0 million of fixed-to-floating rate subordinated notes that mature on August 15, 2025 through a private placement. The notes, which qualifywhose eligibility as Tier 2 capital under Capital Ruleswas reduced by 20% beginning in effectthe quarter ended September 30, 2020, bear interest at March 31, 2020, have an interesta rate of 4.875% per annum equal to three-month LIBOR for the related interest period plus 3.150%, payable semi-annuallyquarterly on each November 15, February 15, April 15 and August 15, commencing on February 15, 2016 until August 15, 2020.15. During the secondfirst quarter of fiscal year 2020,2021, we incurred $1.2$0.8 million in interest expense on all outstanding subordinated debentures and notes compared to $1.4$1.3 million in the same period in fiscal year 2019. During the first six months of fiscal years 2020 and 2019, interest expense on all outstanding subordinated debentures and notes was $2.5 million and $2.8 million, respectively.2020.
Off-Balance Sheet Commitments, Commitments, Guarantees and Contractual Obligations
The following table summarizes the maturity of our contractual obligations and other commitments to make future payments at MarchDecember 31, 2020. Customer deposit obligations categorized as "not determined" include noninterest-bearing demand accounts and interest-bearing demand accounts with no stated maturity date.
| | | March 31, 2020 | | | December 31, 2020 |
| | Less Than 1 Year | | 1 to 2 Years | | 2 to 5 Years | | >5 Years | | Not Determined | | Total | | Less Than 1 Year | | 1 to 2 Years | | 2 to 5 Years | | >5 Years | | Not Determined | | Total |
| | (dollars in thousands) | | | (dollars in thousands) |
Contractual Obligations: | Contractual Obligations: | | Contractual Obligations: | |
Customer deposits | Customer deposits | $ | 1,240,321 | | | $ | 189,147 | | | $ | 76,510 | | | $ | 192 | | | $ | 8,672,945 | | | $ | 10,179,115 | | Customer deposits | $ | 848,202 | | | $ | 147,652 | | | $ | 54,507 | | | $ | 1,585 | | | $ | 10,321,372 | | | $ | 11,373,318 | |
Securities sold under agreement to repurchase | Securities sold under agreement to repurchase | 64,809 | | | — | | | — | | | — | | | — | | | 64,809 | | Securities sold under agreement to repurchase | 80,355 | | | — | | | — | | | — | | | — | | | 80,355 | |
FHLB advances and other borrowings | FHLB advances and other borrowings | 515,000 | | | 110,000 | | | 175,000 | | | — | | | — | | | 800,000 | | FHLB advances and other borrowings | — | | | 30,000 | | | 90,000 | | | — | | | — | | | 120,000 | |
Subordinated debentures | Subordinated debentures | — | | | — | | | — | | | 75,920 | | | — | | | 75,920 | | Subordinated debentures | — | | | — | | | — | | | 75,920 | | | — | | | 75,920 | |
Subordinated notes payable | Subordinated notes payable | — | | | — | | | — | | | 35,000 | | | — | | | 35,000 | | Subordinated notes payable | — | | | — | | | 35,000 | | | — | | | — | | | 35,000 | |
Accrued interest payable | Accrued interest payable | 9,102 | | | — | | | — | | | — | | | — | | | 9,102 | | Accrued interest payable | 4,035 | | | — | | | — | | | — | | | — | | | 4,035 | |
Interest on FHLB advances | Interest on FHLB advances | 9,176 | | | 6,481 | | | 7,471 | | | — | | | — | | | 23,128 | | Interest on FHLB advances | 3,372 | | | 3,156 | | | 3,111 | | | — | | | — | | | 9,639 | |
Interest on subordinated debentures | Interest on subordinated debentures | 2,495 | | | 2,495 | | | 7,484 | | | 23,906 | | | — | | | 36,380 | | Interest on subordinated debentures | 1,852 | | | 1,852 | | | 5,557 | | | 16,275 | | | — | | | 25,536 | |
Interest on subordinated notes payable | Interest on subordinated notes payable | 1,706 | | | 1,706 | | | 5,119 | | | 640 | | | — | | | 9,171 | | Interest on subordinated notes payable | 1,180 | | | 1,180 | | | 3,097 | | | — | | | — | | | 5,457 | |
Other Commitments: | Other Commitments: | | Other Commitments: | |
Commitments to extend credit—non-credit card | Commitments to extend credit—non-credit card | $ | 987,183 | | | $ | 308,861 | | | $ | 392,305 | | | $ | 224,108 | | | $ | — | | | $ | 1,912,457 | | Commitments to extend credit—non-credit card | $ | 1,471,544 | | | $ | 181,417 | | | $ | 241,291 | | | $ | 154,769 | | | $ | — | | | $ | 2,049,021 | |
Commitments to extend credit—credit card | Commitments to extend credit—credit card | 128,429 | | | — | | | — | | | — | | | — | | | 128,429 | | Commitments to extend credit—credit card | 129,447 | | | — | | | — | | | — | | | — | | | 129,447 | |
Letters of credit | Letters of credit | 69,768 | | | — | | | — | | | — | | | — | | | 69,768 | | Letters of credit | 52,760 | | | — | | | — | | | — | | | — | | | 52,760 | |
We rent certain premises and equipment under operating leases. See Note 128 to the consolidated financial statements for additional information on long-term lease arrangements.
Instruments with Off-Balance Sheet Risk
In the normal course of business, we enter into various transactions that are not included in our consolidated financial statements in accordance with U.S. GAAP. These transactions include commitments to extend credit to our customers and letters of credit. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued primarily to support or guarantee the performance of a customer’s obligations to a third party. The credit risk involved in issuing letters of credit is essentially the same as originating a loan to the customer. We manage the risks associated with these arrangements by evaluating each customer’s creditworthiness prior to issuance through a process similar to that used by us in deciding whether to extend credit to the customer.
The following table presents the total notional amounts of all commitments by us to extend credit and letters of credit as of the dates indicated.
| | | March 31, 2020 | | September 30, 2019 | | December 31, 2020 | | September 30, 2020 |
| | (dollars in thousands) | | | (dollars in thousands) |
Commitments to extend credit | Commitments to extend credit | $ | 2,040,886 | | | $ | 2,229,678 | | Commitments to extend credit | $ | 2,178,468 | | | $ | 2,138,138 | |
Letters of credit | Letters of credit | 69,768 | | 68,983 | Letters of credit | 52,760 | | 65,707 |
Total | Total | $ | 2,110,654 | | | $ | 2,298,661 | | Total | $ | 2,231,228 | | | $ | 2,203,845 | |
Liquidity
Liquidity refers to our ability to maintain resources that are adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost.
Our liquidity risk is managed through a comprehensive framework of policies and limits overseen by our Bank’s asset and liability committee. We continuously monitor and make adjustments to our liquidity position by adjusting the balance between sources and uses of funds as we deem appropriate. Our primary measures of liquidity include monthly cash flow analyses under ordinary business activities and conditions and under situations simulating a severe run on our Bank. We also monitor our Bank’s deposit to loan ratio to ensure high quality funding is available to support our strategic lending growth objectives, and have internal management targets for the FDIC’s liquidity ratio, net short-term non-core funding dependence ratio and non-core liabilities to total assets ratio. The results of these measures and analyses are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.
Great Western Bancorp, Inc. Our primary source of liquidity is cash obtained from dividends paid by our Bank. We primarily use our cash for the payment of dividends, when and if declared by our Board of Directors, and the payment of interest on our outstanding junior subordinated debentures and subordinated notes. We also use cash, as necessary, to satisfy the needs of our Bank through equity contributions and for acquisitions. At MarchDecember 31, 2020, our holding company had $31.4$34.1 million of cash. During the secondfirst quarter of fiscal year 2020,2021, we declared and paid a dividend of $0.30$0.01 per common share. The outstanding amount under our private placement subordinated capital notes was $35.0 million at MarchDecember 31, 2020. Our management believes that the sources of available liquidity are adequate to meet all reasonably foreseeable short-term and intermediate-term demands. We may consider raising additional capital in public or private offerings of debt or equity securities. To this end, in August 2018on June 1, 2020 we filed a shelf registration statement with the SEC registering an indeterminate amount of our common stock, debt securities and other securities which we may decide to issue in the future. The specific terms of any shares or other securities we choose to issue will be based on current market conditions and will be described in a supplement to the prospectus contained in the shelf registration statement.
Great Western Bank. Our Bank maintains sufficient liquidity by maintaining minimum levels of excess cash reserves (measured on a daily basis), a sufficient amount of unencumbered, highly liquid assets and access to contingent funding. At MarchDecember 31, 2020, our Bank had cash of $347.5$1.06 billion (inclusive of $34.1 million of cash from our holding company) and $1.99$2.06 billion of highly-liquid securities held in our investment portfolio, of which $918.8 million$1.07 billion were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. The balance could be sold to meet liquidity requirements. Our Bank had $800.0$120.0 million in FHLB borrowings at MarchDecember 31, 2020, with additional available lines of $1.46$1.99 billion. Our Bank also had an additional borrowing capacity of $1.23 billion$943.5 million with the FRB Discount Window. Our Bank primarily uses liquidity to meet loan requests and commitments (including commitments under letters of credit), to accommodate outflows in deposits and to take advantage of interest rate market opportunities. At MarchDecember 31, 2020, we had a total of $2.11$2.23 billion of outstanding exposure under commitments to extend credit and issued letters of credit. Our management believes that the sources of available liquidity are adequate to meet all our Bank’s reasonably foreseeable short-term and intermediate-term demands.
Capital
As a bank holding company, we must comply with the capital requirements established by the Federal Reserve, and our Bank must comply with the capital requirements established by the FDIC. The current risk-based guidelines applicable to us and our Bank are based on the Basel III framework, as implemented by the federal bank regulators.
The following table presents our regulatory capital ratios at MarchDecember 31, 2020 and the standards for both well-capitalized depository institutions and minimum capital requirements. Our capital ratios exceeded applicable regulatory requirements as of that date.
| | | March 31, 2020 | | | December 31, 2020 |
| | Actual | | | | Actual | |
| | Capital Amount | Ratio | | Minimum Capital Requirement Ratio ¹ | | Well Capitalized Ratio | | Capital Amount | Ratio | | Minimum Capital Requirement Ratio ¹ | | Well Capitalized Ratio |
| | (dollars in thousands) | | | (dollars in thousands) |
Great Western Bancorp, Inc. | Great Western Bancorp, Inc. | | Great Western Bancorp, Inc. | |
Tier 1 capital | Tier 1 capital | $ | 1,185,668 | | 11.3 | % | | 6.0 | % | | N/A | | Tier 1 capital | $ | 1,234,286 | | 12.7 | % | | 6.0 | % | | N/A |
Total capital | Total capital | 1,352,037 | 12.9 | % | | 8.0 | % | | N/A | | Total capital | 1,383,691 | 14.3 | % | | 8.0 | % | | N/A |
Tier 1 leverage | Tier 1 leverage | 1,185,668 | 9.2 | % | | 4.0 | % | | N/A | | Tier 1 leverage | 1,234,286 | 9.7 | % | | 4.0 | % | | N/A |
Common equity Tier 1 | 1,111,903 | 10.6 | % | | 4.5 | % | | N/A | | |
Common equity Tier 1 ² | | Common equity Tier 1 ² | 1,160,420 | 12.0 | % | | 4.5 | % | | N/A |
Risk-weighted assets | Risk-weighted assets | 10,504,680 | | Risk-weighted assets | 9,698,465 | |
Great Western Bank | Great Western Bank | | Great Western Bank | |
Tier 1 capital | Tier 1 capital | $ | 1,183,213 | | 11.3 | % | | 6.0 | % | | 8.0 | % | Tier 1 capital | $ | 1,228,516 | | 12.7 | % | | 6.0 | % | | 8.0 | % |
Total capital | Total capital | 1,314,582 | 12.5 | % | | 8.0 | % | | 10.0 | % | Total capital | 1,349,899 | 13.9 | % | | 8.0 | % | | 10.0 | % |
Tier 1 leverage | Tier 1 leverage | 1,183,213 | | 9.2 | % | | 4.0 | % | | 5.0 | % | Tier 1 leverage | 1,228,516 | | 9.7 | % | | 4.0 | % | | 5.0 | % |
Common equity Tier 1 | 1,183,213 | | 11.3 | % | | 4.5 | % | | 6.5 | % | |
Common equity Tier 1 ² | | Common equity Tier 1 ² | 1,228,516 | | 12.7 | % | | 4.5 | % | | 6.5 | % |
Risk-weighted assets | Risk-weighted assets | 10,503,830 | | | Risk-weighted assets | 9,696,713 | | |
1 Does not include capital conservation buffer, which was 2.5% at March 31, 2020. | | |
1 Does not include capital conservation buffer, which was 2.5% at December 31, 2020. | | 1 Does not include capital conservation buffer, which was 2.5% at December 31, 2020. |
2 The Company has elected the 5 year CECL transition for regulatory capital ratios, resulting in an add-back of $129.5 million to common equity Tier 1 capital as of December 31, 2020. | | 2 The Company has elected the 5 year CECL transition for regulatory capital ratios, resulting in an add-back of $129.5 million to common equity Tier 1 capital as of December 31, 2020. |
At MarchDecember 31, 2020 and September 30, 2019,2020, our Tier 1 capital included an aggregate of $73.8$73.9 million and $73.7$73.8 million, respectively, of trust preferred securities issued by our subsidiaries, net of fair value adjustment. At MarchDecember 31, 2020, our Tier 2 capital included $131.4$121.4 million of the allowance for loan and leasecredit losses and $35.0$28.0 million of private placement subordinated capital notes.notes whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter ending September 2020. At September 30, 2019,2020, our Tier 2 capital included $70.8$127.2 million of the allowance for loan and leasecredit losses and $35.0$28.0 million of private placement subordinated capital notes. Our total risk-weighted assets were $10.50$9.70 billion at MarchDecember 31, 2020.
Non-GAAP Financial Measures
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, pre-provision pre-tax income ("PTPP"), 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 second quarter of fiscal year 2020 COVID-19 impact on credit and other related charges and the impairment of goodwill and certain intangible assets). Our PTPP income excludes total provision for credit losses, credit gain/losses on loans held for investment measured at fair value and goodwill impairment. 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 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), measure our ability to generate capital by providing net income excluding credit losses (for PTPP income) and measure net income 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 derivativesderivative interest expense 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 following tables. Each of the non-GAAP financial measures presented should be considered in context with our GAAP financial results included in this filing.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or for the six months ended: | | | At or for the three months ended: | | | | |
| March 31, 2020 | March 31, 2019 | | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 |
| (Dollars in thousands except share and per share amounts) | | | | | | | |
Adjusted net income and adjusted earnings per common share: | | | | | | | | |
Net (loss) income - GAAP | $ | (697,344) | | $ | 90,297 | | | $ | (740,618) | | $ | 43,274 | | $ | 50,285 | | $ | 26,783 | | $ | 44,511 | |
Add: COVID-19 related impairment of goodwill and certain intangible assets, net of tax | 713,013 | | — | | | 713,013 | | — | | — | | — | | — | |
Add: COVID-19 impact on credit and other related charges, net of tax | 56,685 | | — | | | 56,685 | | — | | — | | — | | — | |
Adjusted net income | $ | 72,354 | | $ | 90,297 | | | $ | 29,080 | | $ | 43,274 | | $ | 50,285 | | $ | 26,783 | | $ | 44,511 | |
| | | | | | | | |
Weighted average diluted common shares outstanding | 56,141,816 | | 57,556,984 | | | 55,906,002 | | 56,457,967 | | 56,804,172 | | 57,110,103 | | 57,074,674 | |
Earnings per common share - diluted | $ | (12.42) | | $ | 1.57 | | | $ | (13.25) | | $ | 0.77 | | $ | 0.89 | | $ | 0.47 | | $ | 0.78 | |
Adjusted earnings per common share - diluted | $ | 1.29 | | $ | 1.57 | | | $ | 0.52 | | $ | 0.77 | | $ | 0.89 | | $ | 0.47 | | $ | 0.78 | |
| | | | | | | | |
Tangible net income and return on average tangible common equity: | | | | | | | | |
Net (loss) income - GAAP | $ | (697,344) | | $ | 90,297 | | | $ | (740,618) | | $ | 43,274 | | $ | 50,285 | | $ | 26,783 | | $ | 44,511 | |
Add: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets, net of tax | 713,817 | | 687 | | | 713,440 | | 377 | | 315 | | 335 | | 343 | |
Tangible net income | $ | 16,473 | | $ | 90,984 | | | $ | (27,178) | | $ | 43,651 | | $ | 50,600 | | $ | 27,118 | | $ | 44,854 | |
| | | | | | | | |
Average common equity | $ | 1,913,277 | | $ | 1,819,996 | | | $ | 1,918,035 | | $ | 1,908,519 | | $ | 1,885,785 | | $ | 1,864,132 | | $ | 1,822,940 | |
Less: Average goodwill and other intangible assets | 744,702 | | 746,305 | | | 741,257 | | 748,146 | | 745,349 | | 745,718 | | 746,107 | |
Average tangible common equity | $ | 1,168,575 | | $ | 1,073,691 | | | $ | 1,176,778 | | $ | 1,160,373 | | $ | 1,140,436 | | $ | 1,118,414 | | $ | 1,076,833 | |
| | | | | | | | |
Return on average common equity * | (72.9) | % | 10.0 | % | | (155.3) | % | 9.0 | % | 10.6 | % | 5.8 | % | 9.9 | % |
Return on average tangible common equity ** | 2.8 | % | 17.0 | % | | (9.3) | % | 15.0 | % | 17.6 | % | 9.7 | % | 16.9 | % |
* Calculated as net income - GAAP divided by average common equity. Annualized for partial-year periods. | | | | | | | | |
** Calculated as tangible net income divided by average tangible common equity. Annualized for partial-year periods. | | | | | | | | |
| | | | | | | | |
Adjusted net interest income and adjusted net interest margin (fully-tax equivalent basis): | | | | | | | | |
Net interest income - GAAP | $ | 207,156 | | $ | 208,369 | | | $ | 101,983 | | $ | 105,173 | | $ | 106,709 | | $ | 105,629 | | $ | 103,475 | |
Add: Tax equivalent adjustment | 3,037 | | 2,932 | | | 1,514 | | 1,523 | | 1,487 | | 1,424 | | 1,442 | |
Net interest income (FTE) | 210,193 | | 211,301 | | | 103,497 | | 106,696 | | 108,196 | | 107,053 | | 104,917 | |
Add: Current realized derivative gain (loss) | (2,140) | | 426 | | | (1,250) | | (890) | | (127) | | 321 | | 405 | |
Adjusted net interest income (FTE) | $ | 208,053 | | $ | 211,727 | | | $ | 102,247 | | $ | 105,806 | | $ | 108,069 | | $ | 107,374 | | $ | 105,322 | |
| | | | | | | | |
Average interest-earning assets | $ | 11,567,032 | | $ | 11,216,179 | | | $ | 11,590,453 | | $ | 11,543,610 | | $ | 11,609,823 | | $ | 11,617,521 | | $ | 11,345,559 | |
Net interest margin (FTE) * | 3.63 | % | 3.78 | % | | 3.59 | % | 3.68 | % | 3.70 | % | 3.70 | % | 3.75 | % |
Adjusted net interest margin (FTE) ** | 3.60 | % | 3.79 | % | | 3.55 | % | 3.65 | % | 3.69 | % | 3.71 | % | 3.76 | % |
* Calculated as net interest income (FTE) divided by average interest earning assets. Annualized for partial-year periods. | | | | | | | | |
** Calculated as adjusted net interest income (FTE) divided by average interest earning assets. Annualized for partial-year periods. | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | At or for the three months ended: |
| | | | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 |
| | | | (Dollars in thousands except share and per share amounts) |
Adjusted net income and adjusted earnings per common share: | | | | | | | | |
Net income (loss) - GAAP | | | | $ | 41,319 | | $ | 11,136 | | $ | 5,400 | | $ | (740,618) | | $ | 43,274 | |
Add: COVID-19 related impairment of goodwill and certain intangible assets, net of tax | | | | — | | — | | — | | 713,013 | | — | |
Add: COVID-19 impact on credit and other related charges, net of tax | | | | — | | — | | — | | 56,685 | | — | |
Adjusted net income | | | | $ | 41,319 | | $ | 11,136 | | $ | 5,400 | | $ | 29,080 | | $ | 43,274 | |
| | | | | | | | |
Weighted average diluted common shares outstanding | | | | 55,247,343 | | 55,164,548 | | 55,145,619 | | 55,906,002 | | 56,457,967 | |
Earnings per common share - diluted | | | | $ | 0.75 | | $ | 0.20 | | $ | 0.10 | | $ | (13.25) | | $ | 0.77 | |
Adjusted earnings per common share - diluted | | | | $ | 0.75 | | $ | 0.20 | | $ | 0.10 | | $ | 0.52 | | $ | 0.77 | |
| | | | | | | | |
Pre-tax pre-provision income ("PTPP"): | | | | | | | | |
Income (loss) before income taxes - GAAP | | | | $ | 52,708 | | $ | 10,279 | | $ | 5,878 | | $ | (778,348) | | $ | 55,873 | |
Add: Provision for credit losses - GAAP | | | | 11,899 | | 16,853 | | 21,641 | | 71,795 | | 8,103 | |
Add: Change in fair value of FVO loans and related derivatives - GAAP | | | | 1,672 | | 24,648 | | 25,001 | | 10,533 | | 2,124 | |
Add: Goodwill impairment - GAAP | | | | — | | — | | — | | 742,352 | | — | |
Pre-tax pre-provision income | | | | $ | 66,279 | | $ | 51,780 | | $ | 52,520 | | $ | 46,332 | | $ | 66,100 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | At or for the three months ended: |
| | | | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 |
| | | | (Dollars in thousands except share and per share amounts) |
Tangible net income and return on average tangible common equity: | | | | | | | | |
Net income (loss) - GAAP | | | | $ | 41,319 | | $ | 11,136 | | $ | 5,400 | | $ | (740,618) | | $ | 43,274 | |
Add: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets, net of tax | | | | 261 | | 261 | | 261 | | 713,440 | | 377 | |
Tangible net income (loss) | | | | $ | 41,580 | | $ | 11,397 | | $ | 5,661 | | $ | (27,178) | | $ | 43,651 | |
| | | | | | | | |
Average common equity | | | | $ | 1,082,077 | | $ | 1,174,996 | | $ | 1,163,724 | | $ | 1,918,035 | | $ | 1,908,519 | |
Less: Average goodwill and other intangible assets | | | | 6,004 | | 6,265 | | 6,527 | | 741,257 | | 748,146 | |
Average tangible common equity | | | | $ | 1,076,073 | | $ | 1,168,731 | | $ | 1,157,197 | | $ | 1,176,778 | | $ | 1,160,373 | |
| | | | | | | | |
Return on average common equity * | | | | 15.2 | % | 3.8 | % | 1.9 | % | (155.3) | % | 9.0 | % |
Return on average tangible common equity ** | | | | 15.3 | % | 3.9 | % | 2.0 | % | (9.3) | % | 15.0 | % |
* Calculated as net income - GAAP divided by average common equity. Annualized for partial-year periods. |
** Calculated as tangible net income divided by average tangible common equity. Annualized for partial-year periods. |
| | | | | | | | |
Adjusted net interest income and adjusted net interest margin (fully-tax equivalent basis): | | | | | | | | |
Net interest income - GAAP | | | | $ | 107,908 | | $ | 106,018 | | $ | 106,251 | | $ | 101,983 | | $ | 105,173 | |
Add: Tax equivalent adjustment | | | | 1,598 | | 1,508 | | 1,601 | | 1,514 | | 1,523 | |
Net interest income (FTE) | | | | 109,506 | | 107,526 | | 107,852 | | 103,497 | | 106,696 | |
Add: Derivative interest expense | | | | (3,393) | | (3,541) | | (3,040) | | (1,250) | | (890) | |
Adjusted net interest income (FTE) | | | | $ | 106,113 | | $ | 103,985 | | $ | 104,812 | | $ | 102,247 | | $ | 105,806 | |
| | | | | | | | |
Average interest-earning assets | | | | $ | 11,965,555 | | $ | 12,184,093 | | $ | 12,156,505 | | $ | 11,590,453 | | $ | 11,543,610 | |
Net interest margin (FTE) * | | | | 3.63 | % | 3.51 | % | 3.57 | % | 3.59 | % | 3.68 | % |
Adjusted net interest margin (FTE) ** | | | | 3.52 | % | 3.40 | % | 3.47 | % | 3.55 | % | 3.65 | % |
* Calculated as net interest income (FTE) divided by average interest earning assets. Annualized for partial-year periods. |
** Calculated as adjusted net interest income (FTE) divided by average interest earning assets. Annualized for partial-year periods. |
| | | | | | | | |
Adjusted net interest income and adjusted net interest margin (fully-tax equivalent basis): | | | | | | | | |
Interest income - GAAP | | | | $ | 107,323 | | $ | 106,305 | | $ | 107,725 | | $ | 111,970 | | $ | 117,709 | |
Add: Tax equivalent adjustment | | | | 1,598 | | 1,508 | | 1,601 | | 1,514 | | 1,523 | |
Interest income (FTE) | | | | 108,921 | | 107,813 | | 109,326 | | 113,484 | | 119,232 | |
Add: Derivative interest expense | | | | (3,393) | | (3,541) | | (3,040) | | (1,250) | | (890) | |
Adjusted interest income (FTE) | | | | $ | 105,528 | | $ | 104,272 | | $ | 106,286 | | $ | 112,234 | | $ | 118,342 | |
| | | | | | | | |
Average non-ASC310-30 loans | | | | $ | 9,567,679 | | $ | 9,977,591 | | $ | 9,974,802 | | $ | 9,496,153 | | $ | 9,554,161 | |
Yield (FTE) * | | | | 4.52 | % | 4.30 | % | 4.41 | % | 4.81 | % | 4.96 | % |
Adjusted yield (FTE) ** | | | | 4.38 | % | 4.16 | % | 4.29 | % | 4.75 | % | 4.93 | % |
* Calculated as interest income (FTE) divided by average loans. Annualized for partial-year periods. |
** Calculated as adjusted interest income (FTE) divided by average loans. Annualized for partial-year periods. |
| | | | | | | | |
Efficiency ratio: | | | | | | | | |
Total revenue - GAAP | | | | $ | 122,056 | | $ | 102,068 | | $ | 94,568 | | $ | 101,900 | | $ | 120,906 | |
Add: Tax equivalent adjustment | | | | 1,598 | | 1,508 | | 1,601 | | 1,514 | | 1,523 | |
Total revenue (FTE) | | | | $ | 123,654 | | $ | 103,576 | | $ | 96,169 | | $ | 103,414 | | $ | 122,429 | |
| | | | | | | | |
Noninterest expense | | | | $ | 57,449 | | $ | 74,936 | | $ | 67,049 | | $ | 808,453 | | $ | 56,930 | |
Less: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets | | | | 261 | | 261 | | 278 | | 742,779 | | 427 | |
Tangible noninterest expense | | | | $ | 57,188 | | $ | 74,675 | | $ | 66,771 | | $ | 65,674 | | $ | 56,503 | |
| | | | | | | | |
Efficiency ratio * | | | | 46.2 | % | 72.1 | % | 69.4 | % | 63.5 | % | 46.2 | % |
* Calculated as the ratio of tangible noninterest expense to total revenue (FTE). |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or for the six months ended: | | | At or for the three months ended: | | | | |
| March 31, 2020 | March 31, 2019 | | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 |
| (Dollars in thousands except share and per share amounts) | | | | | | | |
Adjusted interest income and adjusted yield (fully-tax equivalent basis), on non-ASC 310-30 loans: | | | | | | | | |
Interest income - GAAP | $ | 229,679 | | $ | 241,889 | | | $ | 111,970 | | $ | 117,709 | | $ | 124,923 | | $ | 124,098 | | $ | 121,528 | |
Add: Tax equivalent adjustment | 3,037 | | 2,932 | | | 1,514 | | 1,523 | | 1,487 | | 1,424 | | 1,442 | |
Interest income (FTE) | 232,716 | | 244,821 | | | 113,484 | | 119,232 | | 126,410 | | 125,522 | | 122,970 | |
Add: Current realized derivative gain (loss) | (2,140) | | 426 | | | (1,250) | | (890) | | (127) | | 321 | | 405 | |
Adjusted interest income (FTE) | $ | 230,576 | | $ | 245,247 | | | $ | 112,234 | | $ | 118,342 | | $ | 126,283 | | $ | 125,843 | | $ | 123,375 | |
| | | | | | | | |
Average non-ASC 310-30 loans | $ | 9,525,157 | | $ | 9,525,498 | | | $ | 9,496,153 | | $ | 9,554,161 | | $ | 9,693,395 | | $ | 9,699,433 | | $ | 9,615,096 | |
Yield (FTE) * | 4.89 | % | 5.15 | % | | 4.81 | % | 4.96 | % | 5.17 | % | 5.19 | % | 5.19 | % |
Adjusted yield (FTE) ** | 4.84 | % | 5.16 | % | | 4.75 | % | 4.93 | % | 5.17 | % | 5.20 | % | 5.20 | % |
* Calculated as interest income (FTE) divided by average loans. Annualized for partial-year periods. | | | | | | | | |
** Calculated as adjusted interest income (FTE) divided by average loans. Annualized for partial-year periods. | | | | | | | | |
| | | | | | | | |
Efficiency ratio: | | | | | | | | |
Total revenue - GAAP | $ | 222,806 | | $ | 243,312 | | | $ | 101,900 | | $ | 120,906 | | $ | 121,732 | | $ | 116,395 | | $ | 121,698 | |
Add: Tax equivalent adjustment | 3,037 | | 2,932 | | | 1,514 | | 1,523 | | 1,487 | | 1,424 | | 1,442 | |
Total revenue (FTE) | $ | 225,843 | | $ | 246,244 | | | $ | 103,414 | | $ | 122,429 | | $ | 123,219 | | $ | 117,819 | | $ | 123,140 | |
| | | | | | | | |
Noninterest expense | $ | 865,383 | | $ | 113,686 | | | $ | 808,453 | | $ | 56,930 | | $ | 55,212 | | $ | 56,000 | | $ | 56,580 | |
Less: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets | 743,206 | | 788 | | | 742,779 | | 427 | | 366 | | 385 | | 394 | |
Tangible noninterest expense | $ | 122,177 | | $ | 112,898 | | | $ | 65,674 | | $ | 56,503 | | $ | 54,846 | | $ | 55,615 | | $ | 56,186 | |
| | | | | | | | |
Efficiency ratio * | 54.1 | % | 45.8 | % | | 63.5 | % | 46.2 | % | 44.5 | % | 47.2 | % | 45.6 | % |
* Calculated as the ratio of tangible noninterest expense to total revenue (FTE). | | | | | | | | |
| | | | | | | | |
Tangible common equity and tangible common equity to tangible assets: | | | | | | | | |
Total stockholders' equity | $ | 1,153,464 | | $ | 1,852,394 | | | $ | 1,153,464 | | $ | 1,920,669 | | $ | 1,900,249 | | $ | 1,881,128 | | $ | 1,852,394 | |
Less: Goodwill and other intangible assets | 6,703 | | 745,947 | | | 6,703 | | 749,481 | | 745,197 | | 745,563 | | 745,947 | |
Tangible common equity | $ | 1,146,761 | | $ | 1,106,447 | | | $ | 1,146,761 | | $ | 1,171,188 | | $ | 1,155,052 | | $ | 1,135,565 | | $ | 1,106,447 | |
| | | | | | | | |
Total assets | $ | 12,387,808 | | $ | 12,830,162 | | | $ | 12,387,808 | | $ | 12,851,665 | | $ | 12,788,301 | | $ | 12,954,896 | | $ | 12,830,162 | |
Less: Goodwill and other intangible assets | 6,703 | | 745,947 | | | 6,703 | | 749,481 | | 745,197 | | 745,563 | | 745,947 | |
Tangible assets | $ | 12,381,105 | | $ | 12,084,215 | | | $ | 12,381,105 | | $ | 12,102,184 | | $ | 12,043,104 | | $ | 12,209,333 | | $ | 12,084,215 | |
| | | | | | | | |
Tangible common equity to tangible assets | 9.3 | % | 9.2 | % | | 9.3 | % | 9.7 | % | 9.6 | % | 9.3 | % | 9.2 | % |
| | | | | | | | |
Tangible book value per share: | | | | | | | | |
Total stockholders' equity | $ | 1,153,464 | | $ | 1,852,394 | | | $ | 1,153,464 | | $ | 1,920,669 | | $ | 1,900,249 | | $ | 1,881,128 | | $ | 1,852,394 | |
Less: Goodwill and other intangible assets | 6,703 | | 745,947 | | | 6,703 | | 749,481 | | 745,197 | | 745,563 | | 745,947 | |
Tangible common equity | $ | 1,146,761 | | $ | 1,106,447 | | | $ | 1,146,761 | | $ | 1,171,188 | | $ | 1,155,052 | | $ | 1,135,565 | | $ | 1,106,447 | |
| | | | | | | | |
Common shares outstanding | 55,013,928 | | 56,938,435 | | | 55,013,928 | | 56,382,915 | | 56,283,659 | | 56,939,032 | | 56,938,435 | |
Book value per share - GAAP | $ | 20.97 | | $ | 32.53 | | | $ | 20.97 | | $ | 34.06 | | $ | 33.76 | | $ | 33.04 | | $ | 32.53 | |
Tangible book value per share | $ | 20.84 | | $ | 19.43 | | | $ | 20.84 | | $ | 20.77 | | $ | 20.52 | | $ | 19.94 | | $ | 19.43 | |
| | | | | | | | | | | | | | | | | | | | |
| | | At or for the three months ended: |
| | | | December 31, 2020 | September 30, 2020 | June 30, 2020 | March 31, 2020 | December 31, 2019 |
| | | | (Dollars in thousands except share and per share amounts) |
Tangible common equity and tangible common equity to tangible assets: | | | | | | | | |
Total stockholders' equity | | | | $ | 1,068,501 | | $ | 1,162,933 | | $ | 1,160,644 | | $ | 1,153,464 | | $ | 1,920,669 | |
Less: Goodwill and other intangible assets | | | | 5,904 | | 6,164 | | 6,425 | | 6,703 | | 749,481 | |
Tangible common equity | | | | $ | 1,062,597 | | $ | 1,156,769 | | $ | 1,154,219 | | $ | 1,146,761 | | $ | 1,171,188 | |
| | | | | | | | |
Total assets | | | | $ | 12,814,383 | | $ | 12,604,439 | | $ | 12,934,328 | | $ | 12,387,808 | | $ | 12,851,665 | |
Less: Goodwill and other intangible assets | | | | 5,904 | | 6,164 | | 6,425 | | 6,703 | | 749,481 | |
Tangible assets | | | | $ | 12,808,479 | | $ | 12,598,275 | | $ | 12,927,903 | | $ | 12,381,105 | | $ | 12,102,184 | |
| | | | | | | | |
Tangible common equity to tangible assets | | | | 8.3 | % | 9.2 | % | 8.9 | % | 9.3 | % | 9.7 | % |
| | | | | | | | |
Tangible book value per share: | | | | | | | | |
Total stockholders' equity | | | | $ | 1,068,501 | | $ | 1,162,933 | | $ | 1,160,644 | | $ | 1,153,464 | | $ | 1,920,669 | |
Less: Goodwill and other intangible assets | | | | 5,904 | | 6,164 | | 6,425 | | 6,703 | | 749,481 | |
Tangible common equity | | | | $ | 1,062,597 | | $ | 1,156,769 | | $ | 1,154,219 | | $ | 1,146,761 | | $ | 1,171,188 | |
| | | | | | | | |
Common shares outstanding | | | | 55,105,105 | | 55,014,189 | | 55,014,047 | | 55,013,928 | | 56,382,915 | |
Book value per share - GAAP | | | | $ | 19.39 | | $ | 21.14 | | $ | 21.10 | | $ | 20.97 | | $ | 34.06 | |
Tangible book value per share | | | | $ | 19.28 | | $ | 21.03 | | $ | 20.98 | | $ | 20.84 | | $ | 20.77 | |
Recent Accounting Pronouncements
See "Note 2. New Accounting Standards" in the accompanying "Notes to Consolidated Financial Statements (Unaudited)" included in this report for a discussion of new accounting pronouncements and their expected impact on our financial statements.
Impact of Inflation and Changing Prices
Our financial statements included in this report have been prepared in accordance with U.S. GAAP, which requires us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession generally are not considered. The primary effect of inflation on our operations is reflected in increased operating costs. In our management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.
Critical Accounting Policies and the Impact of Accounting Estimates
See "Note 1. Nature of Operations and Summary of Significant Policies" in the accompanying "Notes to Consolidated Financial Statements (Unaudited)" included in this report for a discussion of changes to our lease accountingsecurities, loans, allowance for credit losses, unfunded commitments and unfunded commitments reserve, and accrued interest receivable policies as a result of adopting ASU 2016-02, "2016-13, LeasesFinancial Instruments-Credit Losses (Topic 842)326): Measurement of Credit Losses on Financial Instruments", and subsequent related ASUs, in the current fiscal year. The remainder of our critical accounting policies and accounting estimates have had no material changes from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of MarchDecember 31, 2020, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.2020.
Evaluation of Interest Rate Risk
We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios regularly and compare these results against a scenario with no changes in interest rates. Our net interest income simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments on and off balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in our assets, such as floors and caps, (7) the effect of our interest rate swaps, and (8) overall growth and repayment rates and product mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.
Potential changes to our adjusted net interest income (i.e., GAAP net interest income plus current realized gain or loss on derivatives)derivative interest expense) in hypothetical rising and declining rate scenarios calculated as of MarchDecember 31, 2020 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100 and 200 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points and (2) gradual shiftsshift downward of 100 and 200 basis points over 12 months and gradual shifts upward of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 300 and 400 basis points does not provide us with realistic results. In a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than 0%. For the immediate-shift scenarios, we assume short-term rates follow a forward yield curve throughout the forecast period that is dictated by the instantaneously shocked yield curve from the as of date. In the gradual-shift scenarios, we take each rate across the yield curve from the as of date and shock it by 1/12th of the total change in rates each month for twelve months.
| | | Estimated Increase (Decrease) in Annualized Adjusted Net Interest Income for the Quarter Ended March 31, 2020 | | | Estimated Increase (Decrease) in Annualized Adjusted Net Interest Income for the Quarter Ended December 31, 2020 |
Change in Market Interest Rates as of March 31, 2020 | Twelve Months Ending March 31, 2021 | | Twelve Months Ending March 31, 2022 | |
Change in Market Interest Rates as of December 31, 2020 | | Change in Market Interest Rates as of December 31, 2020 | Twelve Months Ending December 31, 2021 | | Twelve Months Ending December 31, 2022 |
Immediate Shifts | Immediate Shifts | | Immediate Shifts | |
+400 basis points | +400 basis points | 7.76 | % | | 13.24 | % | +400 basis points | 13.60 | % | | 21.30 | % |
+300 basis points | +300 basis points | 5.86 | % | | 10.33 | % | +300 basis points | 10.30 | % | | 16.40 | % |
+200 basis points | +200 basis points | 3.87 | % | | 7.27 | % | +200 basis points | 7.00 | % | | 11.30 | % |
+100 basis points | +100 basis points | 1.86 | % | | 3.97 | % | +100 basis points | 3.70 | % | | 6.10 | % |
-100 basis points | -100 basis points | (2.26) | % | | (3.33) | % | -100 basis points | (3.50) | % | | (8.10) | % |
-200 basis points | (2.47) | % | | (3.48) | % | |
| Gradual Shifts | Gradual Shifts | | Gradual Shifts | |
+400 basis points | +400 basis points | (0.28) | % | | +400 basis points | 3.20 | % | |
+300 basis points | +300 basis points | (0.06) | % | | +300 basis points | 2.50 | % | |
+200 basis points | +200 basis points | 0.14 | % | | +200 basis points | 1.90 | % | |
+100 basis points | +100 basis points | 0.25 | % | | +100 basis points | 1.30 | % | |
-100 basis points | -100 basis points | (0.42) | % | | -100 basis points | (1.20) | % | |
-200 basis points | (1.37) | % | | |
|
We primarily use interest rate swaps to ensure that long-term fixed-rate loans are effectively re-priced as short-term rates change, which we believe would allow us to achieve these results. The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts, such as a flattening or steepening of the yield curve or changes in interest rate spreads, would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or interest rate swap strategies.
For more information on our adjusted net interest income, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" above.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management is responsible for establishing and maintaining effective disclosure controls and procedures as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the period covered by this report. Based on and as of the time of that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
(b) Changes in Internal Control over Financial Reporting. During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to various litigation and regulatory matters incidental to the conduct of our business. We establish reserves for such matters when potential losses become probable and can be reasonably estimated. We believe the ultimate resolution of existing litigation and regulatory matters will not have a material adverse effect on our financial condition, results of operations or cash flows. However, changes in circumstances or additional information could result in additional accruals or resolution of these matters in excess of established accruals, which could adversely affect our financial condition, results of operations or cash flows, potentially materially.
ITEM 1A. RISK FACTORS
There are certain risks and uncertaintieshave been no material changes in our business that could cause our actual results to differ materially from those anticipated. Seethe risk factors as described in "Part I, Item 1A. Risk Factors" of the Annual Report on Form 10-K of Great Western Bancorp, Inc., for the fiscal year ended September 30, 2019 (the “2019 Form 10-K”), which includes a detailed discussion of our risk factors. Other than as noted below, our risk factors have not changed significantly from those disclosed in our 2019 Form 10-K. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in our 2019 Form 10-K could materially affect our business, consolidated financial condition or future results of operations and the actual outcome of matters as to which forward-looking statements are made. The risk factors described in our 2019 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, consolidated financial condition and/or future results of operations.
The outbreak of the COVID-19 pandemic has caused a significant global economic downturn which has adversely affected, and is expected to continue to adversely affect, our business and results of operations, and the future impacts of the COVID-19 pandemic on the global economy and our business, results of operations and financial condition remain uncertain.
Health epidemics or pandemics (or expectations about them) such as COVID-19, have destabilized financial markets in which we operate. COVID-19, which has been identified as a pandemic by the World Health Organization, is causing worldwide concern and economic disruption. The ongoing COVID-19 global and national health emergency has caused and will likely continue to cause significant disruption in the international and United States economies and financial markets, including the capital markets, as well as locally in our markets. There are cases of COVID-19 in all of our states in which we have branches. The ultimate extent of the impact on our business, financial condition, liquidity, results of operations and prospects will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the pandemic, and actions taken to contain or prevent further spread. These and other potential impacts of epidemics, pandemics or other outbreaks of an illness, disease or virus could therefore materially and adversely affect our business, revenue, operations, financial condition, liquidity, results of operations and prospects. If the response to contain COVID-19 is unsuccessful, material adverse effects may be exacerbated.
COVID-19 and its associated impacts on economic activities have had, are currently having and may for some time continue to have a destabilizing effect on financial markets and economic activity and have coincided with heightened volatility and significant disruption in financial markets and economy in the United States and worldwide, which could have a material adverse effect on our business, cash flows, business and consumer confidence, consolidated financial condition, results of operations, profitability, and growth asset quality. The full extent of the impact of COVID-19 is currently uncertain, cannot be predicted and will depend on certain developments, including, among others, governmental, regulatory and private sector actions and responses. Market interest rates have declined significantly. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income, margins and our profitability. Our assets and liabilities may be significantly impacted by changes in interest rates.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 could disrupt the business, activities, and operations of our customers, cause a decline in demand for our products and services, including loans and deposits which may result in a significant decrease in business and would negatively impact our liquidity position, our growth strategy and our ability to make payments under our debt obligations as they become due. Our financial results could also be impacted due to an inability of our customers to meet their loan commitments because of their losses associated with impacts of the disease, and could also result in increased risk of delinquencies, defaults, foreclosures, declining collateral values and the ability of our borrowers to repay their loans resulting in losses to our Bank. Moreover, current and future governmental action may temporarily require the Company to conduct business related to foreclosures, repossessions, payments, deferrals and other customer-related transactions differently.
Although the Company has established a pandemic response plan and procedures, our workforce has been, is, and may continue to be impacted by COVID-19. We are taking precautions to protect the safety and well-being of our employees and customers, including temporary branch and office closures, but no assurance can be given that our actions will be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to provide customer support and service. The spread could also negatively impact availability of key personnel and employee productivity, as well as the business and operations of third-party service providers who perform critical services for us, which could adversely impact our ability to deliver products and services to our customers.
Federal and state governments have enacted laws intending to stimulate the economy. President Trump has signed into law three economic stimulus packages, including the $2.0 trillion Coronavirus Relief and Economic Security Act on March 26, 2020, which, among other things, initiated the Small Business Administration PPP. On April 16, 2020 the original $349.0 billion of funding under the PPP ran out, however on April 24, 2020 the Federal Government added an additional $310.0 billion. Our Bank participated as a lender in both the initial and second rounds of the PPP which was designed to help small businesses maintain their workforce during the COVID-19 pandemic. As of April 24, 2020, we have made approximately 2,300 PPP loans totaling over $600.0 million. The Company understands that these loans are fully guaranteed by the U.S. government and believes the majority of these loans will be forgiven. However, in the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already been paid under the guaranty, seek recovery of any loss related to the deficiency from the Company. In addition, there can be no assurance that the borrowers will use the funds appropriately to qualify for forgiveness.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its processes and procedures used in processing applications for the PPP. If any such litigation is filed against the Bank and is not resolved in a manner favorable to the Bank, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Equity Securities
None.
Purchases of Equity Securities
On September 1, 2019, our Board of Directors approved an amendment to our stockWe did not repurchase program originally approved on October 26, 2016, wherein we may repurchase up to $100.0 millionany of our common stock. Pursuant to the amendment, we may repurchase up to an additional $75.0 million of our common stock. The plan does not have an expiration date. In early March 2020, the Company determined to indefinitely suspend additional buybacks within its remaining authorization to support the Federal Reserve Board in actions taken to moderate the impact of COVID-19 by maintaining strong capital levels and liquidity to support customers and other stakeholders. Information on the shares purchasedstock during the secondfirst quarter of fiscal year 2020 is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total number of shares (or units) purchased (a) | | Average price paid per share (or unit) (b) | | Total number of shares (or units) purchased as part of publicly announced plans or programs (c) | | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (d) |
1/1/2020 - 1/31/2020 | | 298,400 | | | | $ | 30.46 | | | 298,400 | | | | $ | 66,030,076 | |
2/1/2020 - 2/29/2020 | | 830,387 | | | | 30.07 | | | 830,387 | | | | 41,422,294 | |
3/1/2020 - 3/31/2020 | | 242,283 | | | | 26.07 | | | 242,283 | | | | 35,089,719 | |
Total | | 1,371,070 | | | | $ | 29.45 | | | 1,371,070 | | | | $ | 35,089,719 | |
2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
71-
ITEM 6. EXHIBITS
| | | | | |
Exhibit Number | Description |
| |
| Employment Agreement, dated February 6, 2020, between Great Western Bancorp, Inc. and Mark Borrecco (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Great Western Bancorp, Inc. on February 11, 2020 (File No. 001-36688)) |
| |
| Employment Agreement, dated April 20, 2020, between Great Western Bancorp, Inc. and Stephen W. Yose (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Great Western Bancorp, Inc. on April 22, 2020 (File No. 001-36688)) |
| |
11.1 | Statement regarding Computation of Per Share Earnings (included as Note 1815 to the registrant's unaudited consolidated financial statements) |
| |
| Rule 13a-14(a) Certification of Chief Executive Officer of Great Western Bancorp, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| Rule 13a-14(a) Certification of Chief Financial Officer of Great Western Bancorp, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| Section 1350 Certification of Chief Executive Officer of Great Western Bancorp, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| Section 1350 Certification of Chief Financial Officer of Great Western Bancorp, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
101.INS*** | | XBRL Instance Document |
| |
101.SCH*** | | XBRL Taxonomy Extension Schema Document |
| |
101.CAL*** | | XBRL Taxonomy Extension Calculation Linkbase Document |
| |
101.DEF*** | | XBRL Taxonomy Extension Definition Linkbase Document |
| |
101.LAB*** | | XBRL Taxonomy Extension Label Linkbase Document |
| |
101.PRE*** | | XBRL Taxonomy Extension Presentation Linkbase Document |
| |
* Indicates management contract or compensatory plan | |
** Filed herewith | | |
*** Furnished, not filed | | |
| |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| | Great Western Bancorp, Inc.
|
Date: April 30, 2020February 9, 2021 | By: | /s/ Peter Chapman |
| Name: | Peter Chapman |
| Title: | Chief Financial Officer and Executive Vice President (Principal Financial Officer and Authorized Officer) |