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GWB Great Western Bancorp


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 March 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)
Delaware47-1308512
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
225 South Main Avenue57104
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareGWBNew 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 filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging 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, the number of shares of the registrant’s Common Stock outstanding was 55,013,928.




GREAT WESTERN BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS


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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;
"ALLL" refers to allowance for loan and lease 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;
"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.
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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:
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;
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;
our ability to anticipate interest rate changes and manage interest rate risk;
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;
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;
legal, compliance and reputational risks, including litigation and regulatory risks;
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;
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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.
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. 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.
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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)
March 31, 2020September 30, 2019
Assets
Cash and due from banks$171,219  $201,487  
Interest-bearing bank deposits176,267  41,987  
Cash and cash equivalents347,486  243,474  
Securities available for sale1,990,027  1,783,208  
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, respectively9,693,295  9,706,763  
Allowance for loan and lease losses(135,950) (70,774) 
Net loans9,557,345  9,635,989  
Premises and equipment, including $706 and $2,757 of property held for sale at March 31, 2020 and September 30, 2019, respectively120,653  120,645  
Accrued interest receivable49,358  58,699  
Other repossessed property, including $0 of property covered by a FDIC loss share agreement at both March 31, 2020 and September 30, 201927,289  36,764  
Goodwill—  739,023  
Cash surrender value of life insurance policies31,231  30,796  
Net deferred tax assets48,084  7,286  
Other assets216,335  132,417  
Total assets$12,387,808  $12,788,301  
Liabilities and stockholders’ equity
Noninterest-bearing$1,973,629  $1,956,025  
Interest-bearing8,205,486  8,344,314  
Total deposits10,179,115  10,300,339  
Securities sold under agreements to repurchase64,809  68,992  
FHLB advances and other borrowings800,000  340,000  
Subordinated debentures and subordinated notes payable108,740  108,636  
Accrued expenses and other liabilities81,680  70,085  
Total liabilities11,234,344  10,888,052  
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, 2019550  563  
Additional paid-in capital1,190,381  1,228,714  
Retained earnings(73,705) 657,475  
Accumulated other comprehensive income36,238  13,497  
Total stockholders' equity1,153,464  1,900,249  
Total liabilities and stockholders' equity$12,387,808  $12,788,301  
See accompanying notes.
6-


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,
2020201920202019
Interest income
Loans$113,356  $123,432  $232,787  $245,763  
Investment securities11,329  9,957  22,827  19,145  
Federal funds sold and other558  497  1,166  1,039  
Total interest income125,243  133,886  256,780  265,947  
Interest expense
Deposits18,867  27,098  40,807  50,892  
FHLB advances and other borrowings3,155  1,923  6,268  3,926  
Subordinated debentures and subordinated notes payable1,238  1,390  2,549  2,760  
Total interest expense23,260  30,411  49,624  57,578  
Net interest income101,983  103,475  207,156  208,369  
Provision for loan and lease losses71,795  7,673  79,898  12,888  
Net interest income after provision for loan and lease losses30,188  95,802  127,258  195,481  
Noninterest income
Service charges and other fees9,188  10,209  20,597  21,897  
Wealth management fees3,122  2,117  6,086  4,358  
Mortgage banking income, net1,145  991  2,757  2,311  
Net loss on sale of securities—  —  —  (513) 
Net increase in fair value of loans at fair value35,541  14,018  20,608  33,234  
Net realized and unrealized loss on derivatives(50,214) (11,032) (36,698) (29,348) 
Other1,135  1,920  2,300  3,004  
Total noninterest (loss) income(83) 18,223  15,650  34,943  
Noninterest expense
Salaries and employee benefits37,312  34,537  73,217  69,307  
Data processing and communication6,123  5,964  11,896  11,242  
Occupancy and equipment5,597  5,539  10,690  10,665  
Professional fees5,263  3,970  9,027  7,258  
Advertising958  1,216  1,823  2,154  
Net loss on repossessed property and other related expenses5,691  404  6,033  3,467  
Goodwill and intangible assets impairment742,352  —  742,352  —  
Other5,157  4,950  10,345  9,593  
Total noninterest expense808,453  56,580  865,383  113,686  
(Loss) income before income taxes(778,348) 57,445  (722,475) 116,738  
(Benefit from) provision for income taxes(37,730) 12,934  (25,131) 26,441  
Net (loss) income$(740,618) $44,511  $(697,344) $90,297  
Basic earnings per common share
Weighted average common shares outstanding55,906,002  56,994,817  56,141,816  57,484,838  
Basic earnings per share$(13.25) $0.78  $(12.42) $1.57  
Diluted earnings per common share
Weighted average diluted common shares outstanding55,906,002  57,074,674  56,141,816  57,556,984  
Diluted earnings per share$(13.25) $0.78  $(12.42) $1.57  
Dividends per share
Dividends paid$16,769  $14,235  $33,654  $28,771  
Dividends per share$0.30  $0.25  $0.60  $0.50  
See accompanying notes.
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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended March 31,Six months ended March 31,
2020201920202019
Net (loss) income$(740,618) $44,511  $(697,344) $90,297  
Other comprehensive income, net of tax
Securities available for sale:
Net unrealized holding gain arising during the period38,341  11,523  30,181  30,192  
Reclassification adjustment for net loss realized in net income—  —  —  513  
Income tax expense(9,450) (2,839) (7,440) (7,568) 
Net change in unrealized gain on securities available for sale28,891  8,684  22,741  23,137  
Comprehensive (loss) income$(711,727) $53,195  $(674,603) $113,434  
See accompanying notes.
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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 ValueAdditional
Paid-in Capital
Retained
Earnings
Accumulated Other Comprehensive (Loss) IncomeTotal
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 tax8,684  —  —  —  8,684  8,684  
Total comprehensive income$53,195  
Stock-based compensation, net of tax 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 tax28,891  —  —  —  28,891  28,891  
Total comprehensive (loss)$(711,727) 
Stock-based compensation, net of tax 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  
See accompanying notes.
Comprehensive Income (Loss)Common Stock Par ValueAdditional
Paid-in Capital
Retained
Earnings
Accumulated Other Comprehensive (Loss) IncomeTotal
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 tax23,137  —  —  —  23,137  23,137  
Total comprehensive income$113,434  
Stock-based compensation, net of tax 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 tax22,741  —  —  —  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 1,636  —  —  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.

9-


GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Six Months Ended March 31,
20202019
Operating activities
Net (loss) income$(697,344) $90,297  
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization8,373  5,916  
Amortization of FDIC indemnification asset641  853  
Net loss on sale of securities and other assets4,716  2,974  
Net gain on sale of loans(3,148) (2,724) 
Provision for loan and lease losses79,898  12,888  
Goodwill and intangible assets impairment742,352  —  
Provision for loan servicing rights loss —  
Stock-based compensation1,637  1,839  
Originations of residential real estate loans held for sale(172,370) (98,875) 
Proceeds from sales of residential real estate loans held for sale178,527  103,407  
Net deferred income taxes(48,238) 688  
Changes in:
Accrued interest receivable9,341  2,727  
Other assets(66,709) 22,116  
Accrued interest payable and other liabilities12,890  (27,768) 
Net cash provided by operating activities50,573  114,338  
Investing activities
Purchase of securities available for sale(413,887) (541,872) 
Proceeds from sales of securities available for sale—  97,212  
Proceeds from maturities of securities available for sale234,077  94,926  
Net increase in loans(11,939) (383,665) 
(Payment) recovery of covered losses from FDIC indemnification claims(43) 43  
Purchase of premises and equipment(3,861) (5,953) 
Proceeds from sale of premises and equipment—  299  
Proceeds from sale of repossessed property12,368  6,593  
Purchase of FHLB stock(110,637) (46,948) 
Proceeds from redemption of FHLB stock92,350  47,030  
Net cash paid in business acquisition(4,711) —  
Net cash used in investing activities(206,283) (732,335) 
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) 
Proceeds from FHLB advances and other long-term borrowings650,000  465,000  
Repayments on FHLB advances and other long-term borrowings(190,000) (465,000) 
Common stock repurchased(39,983) (74,659) 
Taxes paid related to net share settlement of equity awards(1,295) (1,227) 
Dividends paid(33,654) (28,771) 
Net cash provided by financing activities259,722  601,939  
Net increase (decrease) in cash and cash equivalents104,012  (16,058) 
Cash and cash equivalents, beginning of period243,474  298,696  
Cash and cash equivalents, end of period$347,486  $282,638  
Supplemental disclosure of cash flow information
Cash payments for interest$56,613  $52,551  
Cash payments for income taxes$17,194  $19,113  
Supplemental disclosure of noncash investing and financing activities
Loans transferred to repossessed properties$(7,507) $(17,919) 
See accompanying notes.
10-


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". 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. 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, 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 ASUs as of October 1, 2019, the Company updated its accounting policy related to leases. See Note 12 for new disclosures and policy information related to the Company's leases. 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, 2019 that could have a material effect on the Company's consolidated financial statements.
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.
In April 2020, the Company offered loans to customers that 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 approval from the FRB to access the PPP Liquidity Facility to fund PPP loans if needed.
On April 30, 2020, the Board 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.
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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. Lessees 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 recorded in other assets and accrued expenses and other liabilities on the consolidated balance sheets were $19.9 million and $20.9 million, respectively, arising from operating leases in which the Company is 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 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 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 costs 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 improvements 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 currently
12-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
evaluating the potential impact on the consolidated financial statements; however, since the magnitude of the anticipated change in the allowance for credit losses will be impacted by economic conditions and trends in the Company’s portfolio at the time of adoption, 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-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 GainsGross Unrealized LossesEstimated
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 Association566,747  11,340  (733) 577,354  
Federal Home Loan Mortgage Corporation556,535  15,747  (731) 571,551  
Federal National Mortgage Association386,996  15,337  (27) 402,306  
Small Business Assistance Program300,498  5,725  (42) 306,181  
States and political subdivision securities60,511  517  (27) 61,001  
Other1,006  45  —  1,051  
Total$1,941,922  $49,665  $(1,560) $1,990,027  

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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Amortized
Cost
Gross Unrealized GainsGross Unrealized LossesEstimated
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 Association501,139  3,374  (3,027) 501,486  
Federal Home Loan Mortgage Corporation463,974  8,840  (770) 472,044  
Federal National Mortgage Association322,340  5,409  (398) 327,351  
Small Business Assistance Program316,502  3,674  (154) 320,022  
States and political subdivision securities66,145  494  (116) 66,523  
Other1,006  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, 2020September 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 years35,858  36,102  89,836  90,601  
Due after five years through ten years11,667  11,905  12,110  12,324  
Due after ten years—  —  —  —  
130,140  131,584  160,323  161,268  
Mortgage-backed securities1,810,776  1,857,392  1,603,955  1,620,903  
Securities without contractual maturities1,006  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 $863.9 million at March 31, 2020 and September 30, 2019, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required by contractual obligation or law. The counterparties do not have the right to sell or pledge the securities the Company has pledged as collateral.
As detailed in the following tables, certain investments in debt securities, which are approximately 12% and 36% of the Company’s investment portfolio at estimated fair value at March 31, 2020 and September 30, 2019, respectively, are reported in the consolidated financial statements at an amount less than their amortized cost. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, implicit or explicit government guarantees, and information obtained from regulatory filings, management believes the declines in fair value of these securities are temporary. As the Company does not intend to sell the securities and it is not more-likely-than-not the Company will be required to sell the securities before the recovery of their amortized cost basis, which may be maturity, the Company does not consider the securities to be other-than-temporarily impaired at March 31, 2020 or September 30, 2019.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company’s gross unrealized losses and approximate fair value in investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
Less than 12 months12 months or moreTotal
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(dollars in thousands)
As of March 31, 2020
U.S. Treasury securities$—  $—  $—  $—  $—  $—  
Mortgage-backed securities30,374  (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 months12 months or moreTotal
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 securities94,612  (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  
Agriculture1,881,792  2,008,644  
Commercial non-real estate1,699,197  1,719,956  
Residential real estate820,759  812,208  
Consumer52,640  51,925  
Other39,908  47,541  
Ending balance9,717,115  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 net 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 but not classified into a loan category and loan payments received 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.
15-


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.
Nonaccrual
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' 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.
The following table presents the Company’s nonaccrual loans at March 31, 2020 and September 30, 2019, excluding ASC 310-30 loans. Loans greater than 90 days past due and still accruing interest as of March 31, 2020 and September 30, 2019, were $2.3 million and $11.2 million, respectively.
March 31,
2020
September 30,
2019
(dollars in thousands)
Nonaccrual loans
Commercial real estate$41,541  $14,973  
Agriculture143,198  77,880  
Commercial non-real estate21,334  9,502  
Residential real estate4,437  2,661  
Consumer97  74  
Total$210,607  $105,090  
Credit Quality Information
The Company assigns all non-consumer loans a credit quality risk rating. These ratings are Pass, Watch, Substandard, Doubtful and Loss. Loans with a Pass and Watch rating represent those loans not classified on the Company’s rating scale as problem credits, with loans with a Watch rating being monitored and updated at least quarterly by management. Substandard loans are those where a well-defined weakness has been identified that may put full collection of contractual debt at risk. Doubtful loans are those where a well-defined weakness has been identified and a loss of contractual debt is probable. Substandard and doubtful loans are monitored and updated monthly. 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, 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.
As of March 31, 2020Commercial Real EstateAgricultureCommercial
Non-Real Estate
Residential Real Estate ¹Consumer ¹OtherTotal
(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  
Watchlist104,941  229,606  28,859  986  728  —  365,120  
Substandard132,937  345,674  92,849  10,694  122  —  582,276  
Doubtful51  1,437  99  16   —  1,607  
Loss—  —  —  —  —  —  —  
Ending balance4,716,122  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.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

As of September 30, 2019Commercial Real EstateAgricultureCommercial
Non-Real Estate
Residential Real Estate ¹Consumer ¹OtherTotal
(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  
Watchlist85,256  179,965  103,514  6,297  755  —  375,787  
Substandard54,242  322,327  42,048  6,863  205  —  425,685  
Doubtful56  5,811  296  55   —  6,220  
Loss—  —  —  —  —  —  —  
Ending balance4,573,084  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 Due60-89 Days Past Due90 Days or Greater Past DueTotal
Past Due
CurrentTotal 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  
Agriculture30,196  10,160  60,176  100,532  1,633,856  1,734,388  
Commercial non-real estate2,538  956  20,497  23,991  1,529,522  1,553,513  
Residential real estate3,702  252  2,550  6,504  781,888  788,392  
Consumer42   29  76  52,435  52,511  
Other—  —  —  —  39,908  39,908  
Ending balance61,829  15,429  97,004  174,262  8,710,572  8,884,834  
Loans covered by a FDIC loss sharing agreement1,201  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 Due60-89 Days Past Due90 Days or Greater Past DueTotal
Past Due
CurrentTotal 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  
Agriculture13,411  1,267  33,089  47,767  1,806,772  1,854,539  
Commercial non-real estate3,932  120  4,424  8,476  1,561,739  1,570,215  
Residential real estate311  676  939  1,926  775,086  777,012  
Consumer61  110   178  51,580  51,758  
Other—  —  —  —  47,541  47,541  
Ending balance21,302  2,743  40,934  64,979  8,809,170  8,874,149  
Loans covered by a FDIC loss sharing agreement536  410  331  1,277  30,614  31,891  
Total$21,838  $3,153  $41,265  $66,256  $8,839,784  $8,906,040  
17-


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, 2020September 30, 2019
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceRecorded InvestmentUnpaid Principal BalanceRelated 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  
Agriculture35,013  36,267  8,136  98,392  104,350  8,234  
Commercial non-real estate34,227  37,737  8,601  21,331  21,777  6,062  
Residential real estate5,426  5,923  2,115  3,829  4,311  1,795  
Consumer125  133  36  207  214  97  
Total impaired loans with an allowance recorded135,410  141,888  25,908  149,762  156,949  20,347  
With no allowance recorded:
Commercial real estate72,060  110,873  —  28,272  66,631  —  
Agriculture312,866  331,126  —  231,087  255,308  —  
Commercial non-real estate59,250  67,488  —  21,579  31,414  —  
Residential real estate5,475  7,870  —  3,290  5,454  —  
Consumer 110  —   108  —  
Total impaired loans with no allowance recorded449,653  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,
2020201920202019
Average Recorded InvestmentInterest Income Recognized While on Impaired StatusAverage Recorded InvestmentInterest Income Recognized While on Impaired StatusAverage Recorded InvestmentInterest Income Recognized While on Impaired StatusAverage Recorded InvestmentInterest 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  
Agriculture369,598  4,784  151,021  2,203  356,225  13,301  146,423  3,202  
Commercial non-real estate97,672  1,531  22,556  312  79,418  4,401  22,731  678  
Residential real estate10,904  127  6,724  93  9,642  393  6,711  182  
Consumer139   237   162   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 categories in the impaired loans 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 allowance for 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 in a TDR as of March 31, 2020 and September 30, 2019, respectively.
18-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the recorded value of the Company’s TDR balances as of March 31, 2020 and September 30, 2019.
March 31, 2020September 30, 2019
AccruingNonaccrualAccruingNonaccrual
(dollars in thousands)
Commercial real estate$19,843  $3,088  $17,145  $904  
Agriculture11,838  20,357  22,929  24,762  
Commercial non-real estate9,402  4,465  4,398  4,257  
Residential real estate294  92  263  102  
Consumer 40  107  48  
Total$41,382  $28,042  $44,842  $30,073  
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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Recorded InvestmentRecorded InvestmentRecorded InvestmentRecorded Investment
NumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-Modification
(dollars in thousands)
Commercial real estate $2,879  $2,879  —  $—  $—   $2,879  $2,879  —  $—  $—  
Agriculture 993  993  —  —  —   993  993  —  —  —  
Commercial non-real estate 3,952  3,952  —  —  —   5,096  5,096  —  —  —  
Residential real estate 50  50  —  —  —   50  50  —  —  —  
Consumer—  —  —  —  —  —  —  —  —   89  89  
Total accruing $7,874  $7,874  —  $—  $—   $9,018  $9,018   $89  $89  
Change in recorded investment due to principal paydown at time of modification—  $—  $—  —  $—  $—  —  $—  $—  —  $—  $—  
Change in recorded investment due to chargeoffs at time of modification—  —  —  —  —  —  —  —  —  —  —  —  
The following table presents a summary of all nonaccruing loans restructured in TDRs for the three and six months ended March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Recorded InvestmentRecorded InvestmentRecorded InvestmentRecorded Investment
NumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-Modification
(dollars in thousands)
Commercial real estate—  $—  $—  —  $—  $—   $2,216  $2,216  —  $—  $—  
Agriculture—  —  —  —  —  —  10  1,455  1,455  —  —  —  
Commercial non-real estate—  —  —  —  —  —   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—  —  —  —  —  —  —  —  —  —  —  —  
19-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default for the three and six months ended March 31, 2020 and 2019, respectively.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
Number of LoansRecorded InvestmentNumber of LoansRecorded InvestmentNumber of LoansRecorded InvestmentNumber of LoansRecorded Investment
(dollars in thousands)
Commercial real estate—  $—  —  $—  —  $—  —  $—  
Agriculture17  2,106  —  —  19  11,180  —  —  
Commercial non-real estate—  —  —  —   2,834  —  —  
Residential real estate—  —  —  —  —  —  —  —  
Consumer—  —  —  —  —  —  —  —  
Total17  $2,106  —  $—  20  $14,014  —  $—  
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 for the three months ended March 31, 2020 and 2019, respectively, and $0.3 million and $0.0 million for the six months ended March 31, 2020 and 2019, respectively, of 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.
20-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables present the Company’s 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, 2020Commercial Real EstateAgricultureCommercial Non-Real EstateResidential Real EstateConsumerOtherTotal
(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) 
Recoveries114  1,305  59  147  28  87  1,740  
Provision48,285  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  

Three Months Ended March 31, 2019Commercial Real EstateAgricultureCommercial Non-Real EstateResidential Real EstateConsumerOtherTotal
(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) 
Recoveries162  199  104  125  44  99  733  
Provision(855) 7,508  962  (344) (15) 150  7,406  
Impairment of ASC 310-30 loans23  —  —  244  —  —  267  
Ending balance, March 31, 2019$15,603  $33,725  $13,049  $4,326  $374  $926  $68,003  

Six Months Ended March 31, 2020Commercial Real EstateAgricultureCommercial Non-Real EstateResidential Real EstateConsumerOtherTotal
(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) 
Recoveries234  1,408  172  312  48  137  2,311  
Provision48,857  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, 2019Commercial Real EstateAgricultureCommercial Non-Real EstateResidential Real EstateConsumerOtherTotal
(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) 
Recoveries259  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  

21-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide details regarding the allowance for loan and lease losses and balance by type of allowance as of March 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, 2020Commercial Real EstateAgricultureCommercial Non-Real EstateResidential Real EstateConsumerOtherTotal
(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 impairment4,486,167  1,365,625  1,415,903  774,083  52,001  39,908  8,133,687  
ASC 310-30 loans21,611  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, 2019Commercial Real EstateAgricultureCommercial Non-Real EstateResidential Real EstateConsumerOtherTotal
(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 impairment12,509  22,320  11,476  2,188  330  1,039  49,862  
ASC 310-30 loans159  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 impairment4,418,611  1,501,164  1,480,949  763,645  51,112  47,541  8,263,022  
ASC 310-30 loans22,124  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.
22-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
6. Accounting 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 loan 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 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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(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 noted in the table above represent instances where specific pools of loans are expected to perform better over the remaining lives of the loans than expected at the prior re-assessment date.
The following table provides purchased credit impaired loans at March 31, 2020 and September 30, 2019.
March 31, 2020September 30, 2019
Outstanding Balance ¹Recorded Investment ²Carrying Value ³Outstanding Balance ¹Recorded Investment ²Carrying Value ³
(dollars in thousands)
Commercial real estate$88,443  $21,611  $21,502  $90,295  $22,124  $21,965  
Agriculture4,259  2,970  2,970  4,462  2,756  2,491  
Commercial non-real estate7,072  178  149  7,190  221  192  
Residential real estate32,947  28,263  27,769  35,413  30,280  30,168  
Consumer441  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.

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.
23-


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,
2020201920202019
(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 FDIC39  (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. 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.
The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by the Company as of March 31, 2020 and September 30, 2019.
March 31, 2020September 30, 2019
Notional AmountGross Asset
Fair Value
Gross Liability
Fair Value
Notional AmountGross Asset
Fair Value
Gross Liability
Fair Value
(dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps
Financial institution counterparties$1,279,918  $—  $(68,412) $1,259,765  $35  $(38,755) 
Customer counterparties574,453  83,802  —  499,643  48,652  —  
Interest rate caps
Financial institution counterparties3,438   —  100   —  
Customer counterparties3,438  —  (4) 100  —  (2) 
Risk participation agreements78,194  —  (593) 56,833  —  (58) 
Mortgage loan commitments170,012  636  —  56,665  —  (11) 
Mortgage loan forward sale contracts166,683  —  (636) 61,872  11  —  
Total$2,276,136  $84,442  $(69,645) $1,934,978  $48,700  $(38,826) 
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.
24-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide information on the Company's netting adjustments as of March 31, 2020 and September 30, 2019.
Gross Fair ValueFair Value Offset AmountCash CollateralNet Amount Presented on the Consolidated Balance Sheet
(dollars in thousands)
As of March 31, 2020
Total Derivative Assets$84,442  $(6,922) $21,203  $98,723  
Total Derivative Liabilities ¹(69,645) 6,922  62,083  (640) 
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.

Gross Fair ValueFair Value Offset AmountCash CollateralNet Amount Presented on the Consolidated Balance Sheet
(dollars in thousands)
As of September 30, 2019
Total Derivative Assets$48,700  $(2,445) $12,279  $58,534  
Total Derivative Liabilities ¹(38,826) 2,445  36,368  (13) 
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.
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.
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, the Company entered 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 March 31, 2020 and 2019 was as follows.
Amount of Loss Recognized in Consolidated Statements of Income
Three Months Ended March 31,Six Months Ended March 31,
Location of Loss Recognized in Consolidated Statements of Income2020201920202019
(dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps and other derivativesNet realized and unrealized loss on derivatives$(50,214) $(11,032) $(36,698) $(29,348) 
Mortgage loan commitmentsNet realized and unrealized loss on derivatives620   648  21  
Mortgage loan forward sale contractsNet realized and unrealized loss on derivatives(620) (9) (648) (21) 

25-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
9. 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 18 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 million at March 31, 2020 and a net favorable difference of approximately $34.2 million at September 30, 2019. The total unpaid principal balance of these long-term loans was approximately $734.6 million and $778.8 million at March 31, 2020 and September 30, 2019, 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 March 31, 2020 and September 30, 2019, there were loans with a fair value of $9.1 million and $16.5 million, respectively, which were greater than 90 days past due or in nonaccrual status with an unpaid principal balance of $12.1 million and $17.8 million, respectively.
Changes in fair value for items for which the fair value option has been elected were an increase in fair value of $35.5 million and $20.6 million for the three and six months ended March 31, 2020, respectively, and an increase in fair value of $14.0 million and $33.2 million for the three and six months ended March 31, 2019, respectively. These changes in fair value are reported in noninterest income (loss) within the consolidated statements of income.
For long-term loans, $10.5 million and $12.7 million for the three and six months ended March 31, 2020, respectively, and $0.4 million and $0.8 million for the three and six months ended March 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  $739,023  
Goodwill acquired during the period1,539  —  
Goodwill impairment during the period(740,562) —  
Balance, end of period$—  $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.
26-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
11. Core Deposits and Other Intangibles
The following table presents a summary of intangible assets subject to amortization as of March 31, 2020 and September 30, 2019.
Core Deposit IntangibleBrand
Intangible
Customer Relationships IntangibleOther
Intangible
Total
(dollars in thousands)
As of March 31, 2020
Gross carrying amount$7,339  $—  $3,172  $538  $11,049  
Accumulated amortization(3,933) —  (122) (291) (4,346) 
Net intangible assets$3,406  $—  $3,050  $247  $6,703  
As of September 30, 2019
Gross carrying amount$7,339  $8,464  $—  $538  $16,341  
Accumulated amortization(3,518) (6,392) —  (257) (10,167) 
Net intangible assets$3,821  $2,072  $—  $281  $6,174  
Amortization expense of intangible assets were $0.4 million and $0.9 million for the three and six months ended March 31, 2020, respectively, and $0.4 million and $0.8 million for the three and six months ended March 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  Amount
(dollars in thousands)
Remaining in 2020$538  
20211,014  
2022929  
2023831  
2024742  
2025 and thereafter2,649  
Total$6,703  

12. 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 March 31, 2020.
27-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table summarizes the ROU asset and lease liability as of March 31, 2020.
March 31, 2020
(dollars in thousands)
ROU asset$23,143  
Total lease liability24,036  
Weighted average remaining lease term6.7 years
Weighted average discount rate ¹1.98 %
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.
Total lease expense incurred by the Company was $1.9 million and $3.6 million for the three and six months ended March 31, 2020, respectively, principally made up of contractual lease payments for operating leases.
As of March 31, 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 March 31, 2020:
Three Months Ended March 31, 2020Six Months Ended March 31, 2020
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases$1,416  $2,826  
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases$5,007  $5,631  
The following table presents a maturity analysis of the Company's operating lease liability as of March 31, 2020.
Fiscal year  Amount
(dollars in thousands)
Remaining in 2020$2,832  
20214,741  
20224,049  
20233,580  
20243,072  
2025 and thereafter7,500  
Total undiscounted lease payments25,774  
Less: Amounts representing interest(1,738) 
Lease liability$24,036  

13. 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 million and $94.7 million and fair value of approximately $83.0 million and $94.4 million at March 31, 2020 and September 30, 2019, 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 March 31, 2020 and September 30, 2019.
March 31, 2020
Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 Days30-90 DaysGreater than 90 DaysTotal
(dollars in thousands)
Repurchase agreements
Mortgage-backed securities$64,809  $—  $—  $—  $64,809  
Total repurchase agreements$64,809  $—  $—  $—  $64,809  
28-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

September 30, 2019
Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 Days30-90 DaysGreater than 90 DaysTotal
(dollars in thousands)
Repurchase agreements
Mortgage-backed securities$68,992  $—  $—  $—  $68,992  
Total repurchase agreements$68,992  $—  $—  $—  $68,992  

14. FHLB Advances and Other Borrowings
FHLB advances and other borrowings consist of the following at March 31, 2020 and September 30, 2019.
March 31,
2020
September 30,
2019
(dollars in thousands)
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 202075,000  15,000  
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 FHLB325,000  325,000  
Total$800,000  $340,000  
As of March 31, 2020 and September 30, 2019, the Company had a borrowing capacity of $1.23 billion and $1.44 billion, respectively, with the FRB Discount Window. Principal balances of loans pledged to FRB Discount Window to collateralize the borrowing totaled $1.48 billion at March 31, 2020 and $1.72 billion at September 30, 2019. The Company has secured this line for contingency funding.
As of March 31, 2020 and September 30, 2019, based on its collateral pledged, the additional borrowing capacity of the Company with the FHLB was $1.46 billion and $1.80 billion, respectively.
Principal balances of loans pledged to the FHLB to collateralize notes payable totaled $4.11 billion and $4.20 billion at March 31, 2020 and September 30, 2019, 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 million at March 31, 2020 and September 30, 2019, respectively. The Company had additional letters of credit from the FHLB of $14.5 million and $14.9 million at March 31, 2020 and September 30, 2019, respectively, for other purposes.
As of March 31, 2020, FHLB advances and other borrowings are due or callable (whichever is earlier) in subsequent fiscal years as follows.
Fiscal year  Amount
(dollars in thousands)
Remaining in 2020$475,000  
2021120,000  
202260,000  
202385,000  
202460,000  
2025 and thereafter—  
Total$800,000  

29-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
15. 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 March 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 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 March 31, 2020 and September 30, 2019, Debentures, net of fair value adjustment, of $73.8 million and $73.7 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 March 31, 2020 and September 30, 2019, 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 qualify as Tier 2 capital under Capital Rules in effect at March 31, 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 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.
30-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Subordinated debentures and subordinated notes payable are summarized as follows.
March 31, 2020September 30, 2019
Amount OutstandingCommon Shares Held in Other AssetsAmount OutstandingCommon 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 LIBOR30,928  928  30,928  928  
SSB Trust II, variable rate of 1.85%, plus 3 month LIBOR2,062  62  2,062  62  
HF Capital Trust III, variable rate of 3.35%, plus 3 month LIBOR5,155  155  5,155  155  
HF Capital Trust IV, variable rate of 3.10%, plus 3 month LIBOR7,217  217  7,217  217  
HF Capital Trust V, variable rate of 1.83%, plus 3 month LIBOR5,310  310  5,310  310  
HF Capital Trust VI, variable rate of 1.65%, plus 3 month LIBOR2,155  155  2,155  155  
Total junior subordinated debentures payable75,920  $2,520  75,920  $2,520  
Less: fair value adjustment ¹(2,155) (2,223) 
Total junior subordinated debentures payable, net of fair value adjustment73,765  73,697  
Subordinated notes payable
Fixed to floating rate, 4.875% per annum35,000  35,000  
Less: unamortized debt issuance costs(25) (61) 
Total subordinated notes payable34,975  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. 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 million and $3.3 million to the 401(k) Plan for the three and six months ended March 31, 2020, respectively, and $1.1 million and $2.9 million for the three and six months ended March 31, 2019, respectively.
17. 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.
31-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Stock compensation is recognized based on the number of awards 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 million for the three and six months ended March 31, 2020, respectively, and $1.4 million and $3.1 million for the three and six months ended March 31, 2019, respectively. Related income tax benefits recognized were $0.3 million and $0.7 million for the three and six months ended March 31, 2020, respectively and $0.4 million and $0.8 million for the three and six months ended March 31, 2019, respectively.
The following is a summary of the Plans’ restricted share and performance-based stock award activity as of March 31, 2020 and September 30, 2019. The number of performance shares granted in the following table are reflected at the amount of achievement of the pre-established targets.
March 31, 2020September 30, 2019
Common
Shares
Weighted-Average Grant Date Fair ValueCommon
Shares
Weighted-Average Grant Date Fair Value
Restricted Shares
Restricted shares, beginning of fiscal year190,805  $37.20  163,287  $37.86  
Granted134,185  32.34  106,753  37.27  
Vested(83,909) 38.61  (76,210) 38.64  
Forfeited(3,109) 36.61  (3,025) 38.67  
Canceled—  —  —  —  
Restricted shares, end of period237,972  $33.97  190,805  $37.20  
Vested, but not issuable at end of period62,992  $33.98  50,770  $33.88  
Performance Shares
Performance shares, beginning of fiscal year173,332  $38.50  175,196  $36.29  
Granted(48,753) (49.22) 60,583  32.77  
Vested(54,861) 39.43  (59,937) 30.79  
Forfeited(3,732) 38.14  (2,510) 39.25  
Canceled—  —  —  —  
Performance shares, end of period65,986  $34.61  173,332  $38.50  
Vested, but not issuable at end of period5,612  $18.00  5,612  $18.00  
As of March 31, 2020, there was $7.7 million of unrecognized compensation cost related to non-vested restricted stock awards expected to be recognized over a period of 2.7 years. The fair value of the vested, but not issued stock awards was $1.4 million and $1.9 million at March 31, 2020 and September 30, 2019, respectively.
18. 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.
32-


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.
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 March 31, 2020 and September 30, 2019.
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).
33-


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 March 31, 2020 and September 30, 2019.
Fair ValueLevel 1Level 2Level 3
(dollars in thousands)
As of March 31, 2020
U.S. Treasury securities$70,583  $70,583  $—  $—  
Mortgage-backed securities1,857,392  —  1,857,392  —  
States and political subdivision securities61,001  —  57,015  3,986  
Other1,051  —  1,051  —  
Total securities available for sale$1,990,027  $70,583  $1,915,458  $3,986  
Derivatives-assets$98,723  $—  $98,723  $—  
Derivatives-liabilities640  —  640  —  
Fair value loans792,117  —  792,117  —  
Loan servicing rights1,863  —  —  1,863  
As of September 30, 2019
U.S. Treasury securities$94,745  $94,745  $—  $—  
Mortgage-backed securities1,620,903  —  1,620,903  —  
States and political subdivision securities66,523  —  62,403  4,120  
Other1,037  —  1,037  —  
Total securities available for sale$1,783,208  $94,745  $1,684,343  $4,120  
Derivatives-assets$58,534  $—  $58,534  $—  
Derivatives-liabilities13  —  13  —  
Fair value loans812,991  —  812,991  —  
Loan servicing rights2,255  —  —  2,255  
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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands)
Other securities available for sale
Balance, beginning of period$3,986  $961  $4,120  $970  
Additions—  350  —  350  
Principal paydown—  —  (134) (9) 
Balance, end of period$3,986  $1,311  $3,986  $1,311  
Loan servicing rights
Balance, beginning of period$2,054  $2,862  $2,255  $3,087  
Realized and unrealized loss ¹(191) (188) (392) (413) 
Balance, end of period$1,863  $2,674  $1,863  $2,674  
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.
34-


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.
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 March 31, 2020 and September 30, 2019.
Fair ValueLevel 1Level 2Level 3
(dollars in thousands)
As of March 31, 2020
Other repossessed property$21,486  $—  $—  $21,486  
Impaired loans559,155  —  —  559,155  
Mortgage loans held for sale, at lower of cost or fair value4,342  —  4,342  —  
Property held for sale706  —  —  706  
As of September 30, 2019
Other repossessed property$34,721  $—  $—  $34,721  
Impaired loans413,644  —  —  413,644  
Mortgage loans held for sale, at lower of cost or fair value7,351  —  7,351  —  
Property held for sale2,757  —  —  2,757  
The valuation techniques and significant unobservable inputs used to measure Level 3 fair value measurements at March 31, 2020 were as follows.
Fair Value of Assets / (Liabilities) at March 31, 2020Valuation
Technique(s)
Unobservable
Input
RangeWeighted
Average
(dollars in thousands)
Other repossessed property$21,486  Appraisal valueProperty specific adjustmentN/AN/A
Impaired loans559,155  Appraisal valueProperty specific adjustmentN/AN/A
Property held for sale706  Appraisal valueProperty specific adjustmentN/AN/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.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Fair values for on-balance sheet instruments as of March 31, 2020 and September 30, 2019 are as follows.
March 31, 2020September 30, 2019
Level in Fair Value HierarchyCarrying AmountFair
Value
Carrying AmountFair
Value
(dollars in thousands)
Assets
Cash and cash equivalentsLevel 1$347,486  $347,486  $243,474  $243,474  
Loans, net, excluding fair valued loans, loans held for sale and impaired loans ¹Level 38,337,681  8,498,042  8,472,777  8,533,612  
Liabilities
Time depositsLevel 21,528,234  1,532,200  2,095,676  2,101,239  
FHLB advances and other borrowingsLevel 2800,000  818,669  340,000  351,517  
Securities sold under repurchase agreementsLevel 264,809  64,809  68,992  68,992  
Subordinated debentures and subordinated notes payableLevel 2108,740  97,268  108,636  101,164  
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.

19. 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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands, except per share data)
Net income$(740,618) $44,511  $(697,344) $90,297  
Weighted average common shares outstanding55,906,002  56,994,817  56,141,816  57,484,838  
Dilutive effect of stock based compensation—  79,857  —  72,146  
Weighted average common shares outstanding for diluted earnings per share calculation55,906,002  57,074,674  56,141,816  57,556,984  
Basic earnings per share$(13.25) $0.78  $(12.42) $1.57  
Diluted earnings per share$(13.25) $0.78  $(12.42) $1.57  
The Company had 5,037 and 0 shares of unvested performance stock as of March 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 63,076 and 67,971 shares of anti-dilutive stock awards outstanding as of March 31, 2020 and 2019, respectively.
20. 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. 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:
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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,
2020201920202019
(dollars in thousands)
Noninterest income
Service charges and other fees$9,188  $10,209  $20,597  $21,897  
Wealth management fees3,122  2,117  6,086  4,358  
Other664  1,118  1,332  1,700  
Noninterest income from contracts with customers within the scope of ASC Topic 60612,974  13,444  28,015  27,955  
Noninterest income within the scope of other GAAP Topics ¹(13,057) 4,779  (12,365) 6,988  
Total noninterest income$(83) $18,223  $15,650  $34,943  
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.
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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, 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.
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 March 31, 2020 and references to "the comparable period" or "the comparable quarter" refer to the fiscal quarter ended March 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 leveraging our business and agri-business focus, presence in attractive markets, highly efficient operating model and robust approach to risk management, we have achieved significant and profitable growth—both organically and through disciplined acquisitions. 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 companies and individuals in March 2020 as a result of the COVID-19 pandemic. 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 remain in effect until the restrictions are lifted by governmental authorities, we continue to operate and maintain our customer relationships. The health and safety of our employees and customers is a major concern to our management and every effort is being made to have employees work from home or, if working from one of our locations is required, to maintain appropriate social distancing and observe other health precautions.
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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 of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our Company and its 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 anticipate 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 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 result in increased risk of delinquencies, defaults, foreclosures, declining collateral values and ability of our borrowers to repay their loans resulting in losses to our Company;
The COVID-19 pandemic restrictions have created significant volatility and disruption in the financial markets, and these conditions may require us to recognize an elevated level of other than temporary impairments on investment securities in our portfolio as issues of these securities are negatively impacted by the economic slowdown. 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 and our Bank are required to comply with minimum capital and leverage requirements. Our capital strategy is primarily to maintain capital levels through the COVID-19 pandemic, and our Board of Directors could determine further 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 March 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, compared to 11.7%, 12.7% and 10.1%, respectively, at September 30, 2019. In addition, our Common Equity Tier 1 ratio was 10.6% 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". 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.
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.
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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%, 3.68% and 3.75%, respectively, for the three months ended March 31, 2020, December 31, 2019 and March 31, 2019. Adjusted net interest margin, which reflects the realized gain (loss) on interest rate swaps, was 3.55%, 3.65% and 3.76%, 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 16 and 21 basis points, respectively, compared to the same quarter in fiscal year 2019. Net interest margin decreased between the two periods primarily due to securities and loan yields, which decreased 23 and 39 basis points, respectively, reflecting the impact of repricing following the emergency rate cuts discussed previously, partially offset by a 33 basis point decrease in the cost of deposits to 0.75%. A $1.7 million increase in the current quarter of the cost of interest rate swaps compared to the same period in fiscal year 2019 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 billion at March 31, 2020 compared to $9.71 billion at September 30, 2019, a decrease of $13.5 million, or 0.1%. The decline in loans during the period was mainly attributable to a reduction in the agriculture segment of $126.9 million, or 6.3%, largely due to a seasonal decrease related to customer tax planning and a number of relationships refinanced elsewhere, a reduction 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 March 31, 2020, a decrease of $121.2 million, or 1.2%, compared to $10.30 billion at September 30, 2019, due 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 relationships 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 the agriculture and agriculture-related commercial non-real estate segments, with a small number of downgrades in the commercial non-real estate segment. Total other repossessed property balances were $27.3 million as of March 31, 2020, a decrease of $9.5 million, or 25.8%, compared to September 30, 2019.
Provision for loan and lease losses was $71.8 million for the second quarter of fiscal year 2020, compared to $7.7 million for the same period of fiscal year 2019, an increase of $64.1 million 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. Net charge-offs for the second quarter of fiscal year 2020 were $8.6 million, or 0.36% of average total loans on an annualized basis, compared to net charge-offs of $5.9 million, or 0.25% of average total loans on an annualized basis for the comparable period in fiscal year 2019, with the majority of net charge-offs concentrated in the agriculture segment of the loan portfolio. The ratio of ALLL to total loans was 1.40% at March 31, 2020 compared to 0.73% at September 30, 2019. The balance of the ALLL increased to $136.0 million at March 31, 2020 from $70.8 million at September 30, 2019.
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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, 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 this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.
Results of Operations—Three and Six Months Ended March 31, 2020 and 2019
Overview
The following table highlights certain key financial and performance information for the three and six months ended March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands, except share and per share amounts)
Operating Data:
Interest income (FTE)$126,757  $135,328  $259,817  $268,879  
Interest expense23,260  30,411  49,624  57,578  
Noninterest income(83) 18,223  15,650  34,943  
Noninterest expense808,453  56,580  865,383  113,686  
Provision for loan and lease losses71,795  7,673  79,898  12,888  
Net income(740,618) 44,511  (697,344) 90,297  
Adjusted net income ¹29,080  44,511  72,354  90,297  
Common shares outstanding55,013,928  56,938,435  55,013,928  56,938,435  
Weighted average diluted common shares outstanding55,906,002  57,074,674  56,141,816  57,556,984  
Earnings per common share - diluted$(13.25) $0.78  $(12.42) $1.57  
Adjusted earnings per common share - diluted ¹0.52  0.78  1.29  1.57  
Performance Ratios:
Net interest margin (FTE) ¹ ²3.59 %3.75 %3.63 %3.78 %
Adjusted net interest margin (FTE) ¹ ²3.55 %3.76 %3.60 %3.79 %
Return on average total assets ²(23.16)%1.44 %(10.86)%1.46 %
Return on average common equity ²(155.3)%9.9 %(72.9)%10.0 %
Return on average tangible common equity ¹ ²(9.3)%16.9 %2.8 %17.0 %
Efficiency ratio ¹63.5 %45.6 %54.1 %45.8 %
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.
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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands)
Net interest income:
Total interest income (FTE)$126,757  $135,328  $259,817  $268,879  
Less: Total interest expense23,260  30,411  49,624  57,578  
Net interest income (FTE)$103,497  $104,917  $210,193  $211,301  
Net interest margin (FTE) and adjusted net interest margin (FTE) ¹
Average interest-earning assets$11,590,453  $11,345,559  $11,567,032  $11,216,179  
Average interest-bearing liabilities10,850,104  10,639,351  10,827,113  10,510,762  
Net interest margin (FTE)3.59 %3.75 %3.63 %3.78 %
Adjusted net interest margin (FTE) ¹3.55 %3.76 %3.60 %3.79 %
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 million for the second quarter of fiscal year 2020, compared to $104.9 million for the same period in fiscal year 2019, a decrease of $1.4 million, or 1.4%. Net interest income was $210.2 million for the first six
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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% and 3.75% for the second quarter of fiscal year 2020 and 2019, respectively, a decrease of 16 basis points, while the adjusted net interest margin was 3.55% and 3.76% 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 19 basis points. The decreases in net interest margin for both the three and six month periods was primarily driven by securities yields, which decreased 23 and 13 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 20 basis points, respectively. A $1.7 million and $2.6 million increase in the cost of interest rate swaps between the three and six month periods in fiscal year 2020 and the comparable period in fiscal year 2019, respectively, 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 million at March 31, 2020 and $753.2 million at March 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. ASC 310-30 loans represent 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 represent loans we have originated and loans we have acquired that were not credit impaired at the time we acquired them.
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Three Months Ended
March 31, 2020March 31, 2019
Average BalanceInterest (FTE)Yield / Cost ¹Average BalanceInterest (FTE)Yield / Cost ¹
(dollars in thousands)
Assets
Interest-bearing bank deposits ²$56,883  $558  3.95 %$63,546  $497  3.17 %
Investment securities1,987,045  11,329  2.29 %1,603,038  9,957  2.52 %
Non-ASC 310-30 loans, net ³9,496,153  113,484  4.81 %9,615,096  122,970  5.19 %
ASC 310-30 loans, net50,372  1,386  11.07 %63,879  1,904  12.09 %
Loans, net9,546,525  114,870  4.84 %9,678,975  124,874  5.23 %
Total interest-earning assets11,590,453  126,757  4.40 %11,345,559  135,328  4.84 %
Noninterest-earning assets1,273,143  1,186,286  
Total assets$12,863,596  $126,757  3.96 %$12,531,845  $135,328  4.38 %
Liabilities and Stockholders' Equity
Noninterest-bearing deposits$1,942,686  $1,800,307  
Interest-bearing deposits6,473,524  $12,083  0.75 %6,363,730  $17,865  1.14 %
Time deposits1,686,977  6,784  1.62 %2,039,208  9,233  1.84 %
Total deposits10,103,187  18,867  0.75 %10,203,245  27,098  1.08 %
Securities sold under agreements to repurchase56,369  24  0.17 %63,237  43  0.28 %
FHLB advances and other borrowings581,834  3,131  2.16 %264,347  1,880  2.88 %
Subordinated debentures and subordinated notes payable108,714  1,238  4.58 %108,522  1,390  5.19 %
Total borrowings746,917  4,393  2.37 %436,106  3,313  3.08 %
Total interest-bearing liabilities10,850,104  $23,260  0.86 %10,639,351  $30,411  1.16 %
Noninterest-bearing liabilities95,457  69,554  
Stockholders' equity1,918,035  1,822,940  
Total liabilities and stockholders' equity$12,863,596  $12,531,845  
Net interest spread3.10 %3.22 %
Net interest income and net interest margin (FTE)$103,497  3.59 %$104,917  3.75 %
Less: Tax equivalent adjustment1,514  1,442  
Net interest income and net interest margin - ties to Statements of Comprehensive Income$101,983  3.54 %$103,475  3.70 %
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.

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Six Months Ended
March 31, 2020March 31, 2019
Average BalanceInterest (FTE)Yield / Cost ¹Average BalanceInterest (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 securities1,945,698  22,827  2.35 %1,547,161  19,145  2.48 %
Non-ASC 310-30 loans, net ³9,525,157  232,716  4.89 %9,525,498  244,821  5.15 %
ASC 310-30 loans, net51,334  3,108  12.11 %65,857  3,874  11.80 %
Loans, net9,576,491  235,824  4.93 %9,591,355  248,695  5.20 %
Total interest-earning assets11,567,032  259,817  4.49 %11,216,179  268,879  4.81 %
Noninterest-earning assets1,270,562  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 deposits6,390,193  $25,456  0.80 %6,257,167  $33,601  1.08 %
Time deposits1,767,465  15,351  1.74 %1,988,251  17,291  1.74 %
Total deposits10,117,543  40,807  0.81 %10,077,295  50,892  1.01 %
Securities sold under agreements to repurchase61,448  55  0.18 %71,543  99  0.28 %
FHLB advances and other borrowings539,434  6,213  2.30 %253,421  3,827  3.03 %
Subordinated debentures and subordinated notes payable108,688  2,549  4.69 %108,503  2,760  5.10 %
Total borrowings709,570  8,817  2.49 %433,467  6,686  3.09 %
Total interest-bearing liabilities10,827,113  $49,624  0.92 %10,510,762  $57,578  1.10 %
Noninterest-bearing liabilities97,204  71,975  
Stockholders' equity1,913,277  1,819,996  
Total liabilities and stockholders' equity$12,837,594  $12,402,733  
Net interest spread3.13 %3.25 %
Net interest income and net interest margin (FTE)$210,193  3.63 %$211,301  3.78 %
Less: Tax equivalent adjustment3,037  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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands)
Interest income:
Loans (FTE)$114,870  $124,874  $235,824  $248,695  
Investment securities11,329  9,957  22,827  19,145  
Federal funds sold and other558  497  1,166  1,039  
Total interest income (FTE)126,757  135,328  259,817  268,879  
Less: Tax equivalent adjustment1,514  1,442  3,037  2,932  
Total interest income (GAAP)$125,243  $133,886  $256,780  $265,947  
Total interest income consists primarily of interest income on loans and interest income on our investment portfolio. Total interest income was $126.8 million for the second quarter of fiscal year 2020, compared to $135.3 million for the same period of fiscal year 2019, a decrease of $8.5 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%. Significant components of interest income are described in further detail below.
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Loans. Interest income on all loans decreased to $114.9 million in second quarter of fiscal year 2020 from $124.9 million in the same period in fiscal year 2019, a decrease of $10.0 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%. The decreases in loan yields for both periods were primarily attributable to lower loan interest income driven by decreases of 39 and 28 basis points, respectively, between the periods. For the three and six months ended March 31, 2020, interest income on ASC 310-30 loans, which are purchased credit impaired loans with 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.
Our yield on loans is affected by market interest rates, the level of adjustable-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% for the second quarter of fiscal year 2020, a decrease of 38 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. Adjusted for the current realized gain (loss) 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% for the second quarter of fiscal year 2020, a 45 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. 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 March 31, 2020. Approximately 48%, or $4.64 billion, of the portfolio is comprised of fixed rate loans, of which $792.1 million of loans are fixed rate loans with 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% are indexed to Wall Street Journal Prime, 29% to 5-year Treasuries and the balance to various other indices. Approximately 22% of our total loans' rates are floored, with an average interest rate floor 119 basis points above market rates as of March 31, 2020.
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 million is included in interest income for the first six months of fiscal year 2020, compared to $3.1 million for the same period in fiscal year 2019. 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 $2.03 billion as of March 31, 2020. Interest income on investments includes income earned on investment securities and FHLB stock. Interest income on investments was $11.3 million for the second quarter of fiscal year 2020, an increase of $1.3 million, or 13.8%, from $10.0 million for the same period in fiscal year 2019, driven by an increase in average investment balance of $384.0 million, or 24.0%, offset by a yield decrease to 2.29% from 2.52% 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 3.3 and 3.7 years at March 31, 2020 and September 30, 2019, respectively. Average investments represented 17.1% and 14.1% of total average interest-earning assets for the second quarter of fiscal years 2020 and 2019, respectively.
Interest Expense
The following table presents interest expense for the three and six months ended March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands)
Interest expense
Deposits$18,867  $27,098  $40,807  $50,892  
FHLB advances and other borrowings3,155  1,923  6,268  3,926  
Subordinated debentures and subordinated notes payable1,238  1,390  2,549  2,760  
Total interest expense$23,260  $30,411  $49,624  $57,578  
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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 million, or 23.5%, to $23.3 million in the second quarter of fiscal year 2020, from $30.4 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. 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 million and $27.1 million for the second quarter of fiscal years 2020 and 2019, respectively, a decrease of $8.2 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%. The decreases for both periods were a result of decreasing interest rates in the cost of deposits. Average deposit balances increased to $10.12 billion for the first six months of fiscal year 2020, from $10.08 billion for the comparable period in fiscal year 2019, an increase of $40.2 million, or 0.4%. The cost of deposits decreased to 0.81% for the first six months of fiscal year 2020 from 1.01% for the same period of fiscal year 2019.
Average noninterest-bearing demand account balances increased to 19.2% of average total deposits for the second quarter of fiscal year 2020 from 17.6% for the comparable period in fiscal year 2019. Total average other liquid accounts, consisting of interest-bearing demand deposits, increased to 64.1% of total average deposits for the second quarter of fiscal year 2020, compared to 62.4% of total average deposits for the comparable period in fiscal year 2019, while time deposit accounts decreased to 16.7% of average total deposits for the second quarter of fiscal year 2020, compared to 20.0% in the comparable period in fiscal year 2019.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other borrowings was $3.2 million for the second quarter of fiscal year 2020, an increase of $1.3 million, or 64.1%, compared to $1.9 million for the comparable period in 2019, reflecting a weighted average cost of 2.16% and 2.88%, respectively, for the same periods. The average balance of FHLB advances and other borrowings was $539.4 million for the first six months of fiscal year 2020 compared to $253.4 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. 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% and 2.85% at March 31, 2020 and 2019, respectively, and the average tenor was 14 and 45 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 March 31, 2020, we had pledged $4.11 billion of loans to the FHLB, against which we had borrowed $800.0 million.
Subordinated Debentures and Subordinated Notes Payable. Interest expense on our outstanding junior subordinated debentures and subordinated notes payable was $1.2 million in second quarter of fiscal year 2020 and $1.4 million in the comparable period in fiscal year 2019, a decrease of $0.2 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 $0.3 million, or 7.6%. The weighted average contractual rate on outstanding junior subordinated debentures was 3.29% and 4.87% at March 31, 2020 and 2019, respectively. The weighted average contractual rate on outstanding subordinated notes was 4.88% at both March 31, 2020 and 2019.
Rate and Volume Variances
Net interest income is affected by changes in both volume and interest rates. Volume changes are caused by increases or decreases during the year in the level of average interest-earning assets and average interest-bearing liabilities. Rate changes result from increases or decreases in the yields earned on assets or the rates paid on liabilities.
The following table presents for the current and comparable quarter and six months periods a summary of the changes in interest income and interest expense on a tax equivalent basis resulting from changes in the volume of average asset and liability balances and changes in the average yields or rates compared with the preceding fiscal year. If significant, the change in interest income or interest expense due to both volume and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.
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Current Quarter vs Comparable QuarterCurrent 6 month period vs Comparable 6 month period
VolumeRateTotalVolumeRateTotal
(dollars in thousands)
Increase (decrease) in interest income:
Cash and cash equivalents$(49) $110  $61  $(557) $684  $127  
Investment securities2,313  (941) 1,372  4,796  (1,114) 3,682  
Non-ASC 310-30 loans(1,331) (8,155) (9,486) (8) (12,097) (12,105) 
ASC 310-30 loans(367) (151) (518) (857) 91  (766) 
Loans(1,698) (8,306) (10,004) (865) (12,006) (12,871) 
Total increase (decrease)566  (9,137) (8,571) 3,374  (12,436) (9,062) 
Increase (decrease) in interest expense:
Interest-bearing deposits309  (6,091) (5,782) 710  (8,855) (8,145) 
Time deposits(1,437) (1,012) (2,449) (1,829) (111) (1,940) 
Securities sold under agreements to repurchase(4) (15) (19) (12) (32) (44) 
FHLB advances and other borrowings1,817  (566) 1,251  3,488  (1,102) 2,386  
Subordinated debentures and subordinated notes payable (155) (152)  (216) (211) 
Total increase (decrease)688  (7,839) (7,151) 2,362  (10,316) (7,954) 
(Decrease) increase in net interest income (FTE)$(122) $(1,298) $(1,420) $1,012  $(2,120) $(1,108) 
Provision for Loan and Lease Losses
We recognized provision for loan and lease losses of $71.8 million for the second quarter of fiscal year 2020 compared to a provision for loan and lease losses of $7.7 million for the comparable period in fiscal year 2019, an increase of $64.1 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,
2020201920202019
(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 loans96  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.
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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,
ItemIncluded within F/S Line Item(s):2020201920202019
(Dollars in thousands)
Pre-COVID-19 pandemic related
Provision for loan and lease lossesProvision for loan and lease losses$12,083  $7,673  $20,186  $12,888  
Net other repossessed property chargesNet loss on repossessed property and other related expenses2,377  404  2,719  3,467  
Net reversal of interest income on nonaccrual loansInterest income on loans1,088  337  3,094  296  
Loan fair value adjustment related to creditNet decrease (increase) in fair value of loans at fair value3,423  (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 lossesProvision for loan and lease losses$59,712  $—  $59,712  $—  
Net other repossessed property chargesNet loss on repossessed property and other related expenses3,314  —  3,314  —  
Net reversal of interest income on nonaccrual loansInterest income on loans—  —  —  —  
Loan fair value adjustment related to creditNet decrease (increase) in fair value of loans at fair value7,100  —  7,100  —  
Subtotal COVID-19 pandemic related$70,126  $—  $70,126  $—  
Total credit-related charges$89,097  $7,992  $101,682  $17,413  
In determining the credit related charges attributable to the COVID-19 pandemic, we considered the impact upon our loan portfolio. Industries such as oil & energy, hotels & resorts, restaurants, retail malls, airlines and others have been cited as being at risk for significant revenue loss. Within our portfolio at March 31, 2020, $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 of the view the credit-related adjustments reflect the best estimate of incurred losses in our portfolio as of March 31, 2020.
Noninterest Income
The following table presents noninterest income for the three and six months ended March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands)
Noninterest income
Service charges and other fees$9,188  $10,209  $20,597  $21,897  
Wealth management fees3,122  2,117  6,086  4,358  
Mortgage banking income, net1,145  991  2,757  2,311  
Net loss on sale of securities—  —  —  (513) 
Other1,135  1,920  2,300  3,004  
Subtotal, product and service fees14,590  15,237  31,740  31,057  
Net increase in fair value of loans at fair value35,541  14,018  20,608  33,234  
Net realized and unrealized loss on derivatives(50,214) (11,032) (36,698) (29,348) 
Subtotal, loans at fair value and related derivatives(14,673) 2,986  (16,090) 3,886  
Total noninterest income$(83) $18,223  $15,650  $34,943  
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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.
Noninterest income was $(0.1) million for the second quarter of fiscal year 2020 compared to $18.2 million for the same period in fiscal year 2019, 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%. Significant components of noninterest income are described in further detail below.
Product and Service 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 million of noninterest income related to product and service fees in the first six months of fiscal year 2020, an increase of $0.7 million, or 2.2%, compared to the same period in fiscal year 2019. The decreases for both periods was primarily related to declines in transaction activity from COVID-19 pandemic impacts.
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 second quarter of fiscal year 2020, these items accounted for $(14.7) million of noninterest income compared to $3.0 million of noninterest income for the same period in fiscal year 2019. The change was driven by a $1.7 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 unfavorable change in the credit risk adjustment of $14.9 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 driven by a $2.6 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. We believe that the current realized loss on the derivatives 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 March 31, 2020 and 2019.
Three Months Ended March 31,Six Months Ended March 31,
2020201920202019
(dollars in thousands)
Noninterest expense
Salaries and employee benefits$37,312  $34,537  $73,217  $69,307  
Data processing and communication6,123  5,964  11,896  11,242  
Occupancy and equipment5,597  5,539  10,690  10,665  
Professional fees5,263  3,970  9,027  7,258  
Advertising958  1,216  1,823  2,154  
Net loss on repossessed property and other related expenses5,691  404  6,033  3,467  
Goodwill and intangible assets impairment742,352  —  742,352  —  
Other5,157  4,950  10,345  9,593  
Total noninterest expense$808,453  $56,580  $865,383  $113,686  
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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 million in the second quarter of fiscal year 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, 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 increase of $5.6 million, or 4.9%. The remaining increases were driven by an increase in salaries and employee benefits related to annual merit increases effective in January, a one-time bonus payment to retail staff of $0.5 million and elevated legal and administrative costs on OREO assets.
Our efficiency ratio was 63.5% and 45.6% for the second quarter of fiscal years 2020 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. 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 benefit for income taxes of $37.7 million for the second quarter of fiscal year 2020 represents an effective tax rate of 4.8% compared to a provision of $12.9 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.
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,
2020201920202019
Return on average total assets(23.16)%1.44 %(10.86)%1.46 %
Return on average common equity(155.3)%9.9 %(72.9)%10.0 %
Return on average tangible common equity ¹(9.3)%16.9 %2.8 %17.0 %
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.

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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
(dollars in thousands)
Balance Sheet and Other Information:
Total assets$12,387,808  $12,788,301  
Loans ¹9,693,295  9,706,763  
Allowance for loan and lease losses135,950  70,774  
Deposits10,179,115  10,300,339  
Stockholders' equity1,153,464  1,900,249  
Tangible common equity ²1,146,761  1,155,052  
Tier 1 capital ratio11.3 %11.7 %
Total capital ratio12.9 %12.7 %
Tier 1 leverage ratio9.2 %10.1 %
Common equity tier 1 ratio10.6 %11.0 %
Tangible common equity / tangible assets ²9.3 %9.6 %
Book value per share - GAAP$20.97  $33.76  
Tangible book value per share ²$20.84  $20.52  
Nonaccrual loans / total loans2.20 %1.10 %
Net charge-offs (recoveries) / average total loans ³0.31 %0.36 %
Allowance for loan and lease losses / total loans1.40 %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.
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.
Our total assets were $12.39 billion at March 31, 2020, compared with $12.79 billion at September 30, 2019, a decrease of $400.5 million, or 3.1%. The decrease in total assets during the first six months of fiscal year 2020 was principally attributable to a full impairment of goodwill of $739.0 million, or 100.0%, 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%. At March 31, 2020, loans were $9.69 billion, compared to $9.71 billion at September 30, 2019. See "—Loan Portfolio" within this section for further discussion on the decrease in net loans. During the first six months of fiscal year 2020, total deposits decreased by $121.2 million, or 1.2%, compared to September 30, 2019 due to a reduction in the use of brokered deposits offset by an increase in business deposits.
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Loan Portfolio
The following table presents our loan portfolio 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  
Acquired213,381  267,583  
Total5,222,819  5,092,410  
Agriculture ¹
Originated1,814,630  1,932,722  
Acquired67,162  75,922  
Total1,881,792  2,008,644  
Commercial non-real estate ¹
Originated1,657,077  1,691,026  
Acquired42,120  28,930  
Total1,699,197  1,719,956  
Residential real estate
Originated721,122  696,403  
Acquired99,637  115,805  
Total820,759  812,208  
Consumer
Originated48,815  47,324  
Acquired3,825  4,601  
Total52,640  51,925  
Other lending
Originated39,908  47,541  
Acquired—  —  
Total39,908  47,541  
Total originated9,290,990  9,239,843  
Total acquired426,125  492,841  
Total unpaid principal balance9,717,115  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 loans9,693,295  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.
During the first six months of fiscal year 2020, total loans decreased by 0.1%, or $13.5 million, compared to September 30, 2019. The net loan reduction was mainly attributable to a reduction 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 by 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 in 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 drawdowns and new relationships across the footprint. Over the same time period, residential real estate, consumer and other loan balances remained stable.
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The following table presents an analysis of the unpaid principal balance of our loan portfolio at March 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 / KansasArizonaColoradoNorth Dakota / MinnesotaOther ²Total%
(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 ¹554,250  342,397  127,061  705,235  141,993  1,516  9,340  1,881,792  19.4 %
Commercial non-real estate ¹300,086  568,771  541,070  80,327  111,204  5,247  92,492  1,699,197  17.5 %
Residential real estate216,427  227,743  185,824  37,792  116,682  20,204  16,087  820,759  8.5 %
Consumer15,206  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 location22.4 %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.
The following table presents additional detail regarding our agriculture, CRE and residential real estate loans at March 31, 2020.
March 31, 2020
(dollars in thousands)
Construction and development$434,264  
Owner-occupied CRE1,414,476
Non-owner-occupied CRE2,910,516
Multifamily residential real estate463,563
Commercial real estate5,222,819  
Agriculture real estate916,106  
Agriculture operating loans965,686
Agriculture1,881,792  
Commercial non-real estate1,699,197
Home equity lines of credit169,121
Closed-end first lien520,126
Closed-end junior lien33,647
Residential construction97,865
Residential real estate820,759
Consumer52,640
Other39,908
Total unpaid principal balance$9,717,115  
Commercial Real Estate. CRE includes 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, we were ranked the fifth-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
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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 that 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. 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. 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-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.
The following table presents the maturity distribution of our loan portfolio as of March 31, 2020. The maturity dates were determined based on the contractual maturity date of the loan.
March 31, 2020
1 Year or Less>1 Through 5 Years>5 YearsTotal
(dollars in thousands)
Maturity distribution:
Commercial real estate$621,604  $2,139,467  $2,461,748  $5,222,819  
Agriculture902,870  631,222  347,700  1,881,792  
Commercial non-real estate832,875  505,318  361,004  1,699,197  
Residential real estate161,211  235,799  423,749  820,759  
Consumer9,062  35,725  7,853  52,640  
Other lending39,908  —  —  39,908  
Total$2,567,530  $3,547,531  $3,602,054  $9,717,115  
The following table presents the distribution, as of March 31, 2020, of our loans that were due after one year between fixed and variable interest rates.
March 31, 2020
FixedVariableTotal
(dollars in thousands)
Maturity distribution:
Commercial real estate$2,240,425  $2,360,790  $4,601,215  
Agriculture762,995  215,927  978,922  
Commercial non-real estate529,107  337,215  866,322  
Residential real estate307,012  352,536  659,548  
Consumer36,627  6,951  43,578  
Total$3,876,166  $3,273,419  $7,149,585  
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 million as of March 31, 2020, a decrease of $9.5 million, or 25.8%, compared to September 30, 2019, due primarily to one large relationship liquidation and the write down of the value of a hotel property negatively impacted by COVID-19 travel restrictions.
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The following table presents our other repossessed property balances for the period indicated.
Three Months Ended March 31, 2020Six Months Ended March 31, 2020
(dollars in thousands)
Balance, beginning of period$39,490  $36,764  
Additions to other repossessed property212  7,507  
Valuation adjustments and other(4,756)(4,756)
Sales(7,657)(12,226)
Balance, end of period$27,289  $27,289  
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 specific 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 ²143,277  77,880  
Commercial non-real estate ²21,334  9,502  
Residential real estate
Loans covered by a FDIC loss-sharing agreement2,128  2,190  
Loans not covered by a FDIC loss-sharing agreement4,353  2,572  
Total6,481  4,762  
Consumer ²97  74  
Total nonaccrual loans covered by a FDIC loss-sharing agreement2,128  2,190  
Total nonaccrual loans not covered by a FDIC loss-sharing agreement210,947  105,001  
Total nonaccrual loans213,075  107,191  
Other repossessed property27,289  36,764  
Total nonperforming assets240,364  143,955  
Performing TDRs41,382  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 loans28,042  30,073  
Percent of total assets
Nonaccrual loans not covered by a FDIC loss-sharing agreement1.70 %0.82 %
Total nonaccrual loans1.72 %0.84 %
Other repossessed property0.22 %0.29 %
Nonperforming assets ³1.94 %1.13 %
Nonperforming and restructured assets ³2.27 %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.
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At March 31, 2020 and September 30, 2019, our nonperforming assets were 1.94% and 1.13%, respectively, of total assets. Nonaccrual loans were $213.1 million as of March 31, 2020, with $2.1 million of the balance covered by the FDIC non-commercial loss-sharing agreement, which represented a total increase in nonaccrual loans of $105.9 million, or 98.8%, compared to September 30, 2019.
We recognized approximately $1.0 million of interest income on loans that were on nonaccrual for the first six months of fiscal year 2020. Excluding loans covered by the FDIC non-commercial loss-sharing agreement, we had average nonaccrual loans (calculated as a two-point average) of $158.0 million outstanding during the first six months of fiscal year 2020. Based on the average loan portfolio yield for these loans for the first six months of fiscal year 2020, we estimate that interest income would have been $3.9 million higher during this period had these loans been accruing.
We consistently monitor all loans internally rated "watch" or worse because that rating indicates we have identified some potential weakness emerging; but loans rated "watch" will not necessarily become problem loans or become impaired. Aside from the loans on the watch list, 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 TDRs3,088  904  
Total22,931  18,049  
Agriculture
Performing TDRs11,838  22,929  
Nonperforming TDRs20,357  24,762  
Total32,195  47,691  
Commercial non-real estate
Performing TDRs9,402  4,398  
Nonperforming TDRs4,465  4,257  
Total13,867  8,655  
Residential real estate
Performing TDRs294  263  
Nonperforming TDRs92  102  
Total386  365  
Consumer
Performing TDRs 107  
Nonperforming TDRs40  48  
Total45  155  
Total performing TDRs41,382  44,842  
Total nonperforming TDRs28,042  30,073  
Total TDRs$69,424  $74,915  
As of March 31, 2020, total performing TDRs decreased $3.5 million, or 7.7%, compared to September 30, 2019, primarily due to the payoff of one large relationship in the agriculture loan portfolio. Total nonperforming TDRs decreased $2.0 million, or 6.8%, compared to September 30, 2019 primarily due to paydowns in the agriculture portfolio.
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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, 2020At 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  
TDRs33  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 recorded442  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.
Allowance for Loan and Lease Losses
We establish an allowance for the inherent risk of probable losses within our loan portfolio. The allowance for loan and lease losses is management’s best estimate of probable credit losses that are incurred in the loan portfolio. We determine the allowance for loan and lease losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies and other credit risk indicators, which is an inherently subjective process. We consider the uncertainty related to certain industry sectors and the extent of credit exposure 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 of 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 between the liquidation value of the underlying collateral and the recorded investment value of the loan is considered the required specific reserve amount. Actual losses in any period may exceed allowance amounts. We evaluate and adjust our allowance for loan and lease losses, and the allocation of the allowance between loan categories, each month.
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The following table presents an analysis of our allowance for loan and lease losses, including provisions for loan and lease losses, charge-offs and recoveries, for the periods indicated.
At and for the Six Months Ended March 31, 2020At and for the Fiscal Year Ended September 30, 2019
(dollars in thousands)
Allowance for loan and lease losses:
Balance, beginning of period$70,774  $64,540  
Provision charged to expense79,750  41,506  
Impairment (improvement) of ASC 310-30 loans148  (559) 
Charge-offs:
Commercial real estate(1,454) (1,511) 
Agriculture(9,128) (24,847) 
Commercial non-real estate(5,059) (7,895) 
Residential real estate(287) (998) 
Consumer(45) (452) 
Other lending(1,060) (1,358) 
Total charge-offs(17,033) (37,061) 
Recoveries:
Commercial real estate234  567  
Agriculture1,408  385  
Commercial non-real estate172  392  
Residential real estate312  468  
Consumer48  174  
Other lending137  362  
Total recoveries2,311  2,348  
Net loan charge-offs(14,722) (34,713) 
Balance, end of period$135,950  $70,774  
Average total loans for the period ¹$9,648,678  $9,741,293  
Total loans at period end ¹9,693,295  9,706,763  
Ratios
Net charge-offs to average total loans ³0.31 %0.36 %
Allowance for loan and lease losses to:
Total loans1.40 %0.73 %
Nonaccruing loans ²64.45 %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.
In the first six months of fiscal year 2020, net charge-offs were $14.7 million, or 0.31%, of average total loans on an annualized basis, comprised of $17.0 million of charge-offs and $2.3 million of recoveries. The charge-offs were concentrated in the agriculture and commercial non-real estate segments in the loan portfolio. For fiscal year 2019, net charge-offs were $34.7 million, or 0.36%, of average total loans.
At March 31, 2020, the allowance for loan and lease losses was 1.40% of our total loan portfolio, a 67 basis point increase, compared to 0.73% at September 30, 2019. The balance of the ALLL increased to $136.0 million from $70.8 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 Company October 1, 2020. In determining the credit related charges attributable to the COVID-19 pandemic, we considered the impact upon our loan portfolio. Industries such as oil & energy, hotels & resorts, restaurants, retail malls, airlines 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 of the view the credit-related adjustments reflect the best estimate of incurred losses in our portfolio as of March 31, 2020.
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Additionally, a portion of our loans which are carried at fair value, totaling $792.1 million at March 31, 2020 and $813.0 million at September 30, 2019, respectively, have no associated allowance for loan and lease 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 lease losses to total loans lower. The amount of fair value adjustment related to credit risk on these loans was $16.7 million and $6.8 million at March 31, 2020 and September 30, 2019, respectively, or 0.17% and 0.07% 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 lease losses by loan category, in both dollars and percentage of our total allowance for loan and lease losses, to specific loans in those categories at the dates indicated.
March 31, 2020September 30, 2019
AmountPercentAmountPercent
(dollars in thousands)
Allocation of allowance for loan and lease losses:
Commercial real estate$64,414  47.4 %$16,827  23.8 %
Agriculture29,526  21.7 %30,819  43.5 %
Commercial non-real estate31,766  23.4 %17,567  24.8 %
Residential real estate8,356  6.1 %4,095  5.8 %
Consumer777  0.6 %427  0.6 %
Other lending1,111  0.8 %1,039  1.5 %
Total$135,950  100.0 %$70,774  100.0 %
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 lease loss provisions. We review the appropriateness of our allowance for loan and lease losses on a monthly basis. Management monitors closely all past due and restructured loans in assessing the appropriateness of its allowance for loan and lease 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 lease 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-related commitments that represents our estimate of incurred losses on the portion of lending commitments that borrowers have not advanced. The balance of the allowance for unfunded lending-related 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 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
(dollars in thousands)
U.S. Treasury securities$69,629  $94,178  
Mortgage-backed securities:
Government National Mortgage Association566,747  501,139  
Federal Home Loan Mortgage Corporation556,535  463,974  
Federal National Mortgage Association386,996  322,340  
Small Business Assistance Program300,498  316,502  
States and political subdivision securities60,511  66,145  
Other1,006  1,006  
Total$1,941,922  $1,765,284  
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, the fair value of the portfolio has increased by $206.8 million, or 11.6%.
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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 March 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
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
AmountWA YieldAmountWA YieldAmountWA YieldAmountWA YieldAmountWA YieldAmountWA YieldAmountWA Yield
(dollars in thousands)
U.S. Treasury securities$69,629  2.50 %$—  0.00 %$—  — %$—  — %$—  — %$—  — %$69,629  2.50 %
Mortgage-backed securities—  — %—  — %—  — %—  — %1,810,776  2.21 %—  — %1,810,776  2.21 %
States and political subdivision securities ¹ ²12,986  1.51 %35,858  1.75 %11,667  2.54 %—  — %—  — %—  — %60,511  1.85 %
Other—  — %—  — %—  — %—  — %—  — %1,006  — %1,006  — %
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 %
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.
Declines in the fair value of investment securities 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: (1) we have the intent to sell a security; (2) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis 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 impairment loss is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If we do not intend to sell the security or it is not more-likely-than-not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income (loss).
Deposits
We obtain funds from depositors by offering consumer and business interest-bearing accounts and term time deposits. At March 31, 2020 and September 30, 2019, our total deposits were $10.18 billion and $10.30 billion, respectively, representing a decrease of $121.2 million, or 1.2%, due to a reduction in the use of 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, 2020September 30, 2019
AmountWeighted Avg. CostAmountWeighted Avg. Cost
(dollars in thousands)
Noninterest-bearing demand$1,973,629  — %$1,956,025  — %
Interest-bearing demand6,677,252  0.61 %6,248,638  1.00 %
Time deposits, greater than $250,000416,361  1.98 %493,530  2.30 %
Time deposits, less than or equal to $250,0001,111,873  1.20 %1,602,146  1.68 %
Total$10,179,115  0.61 %$10,300,339  0.98 %
At March 31, 2020 and September 30, 2019, we had $464.0 million and $706.5 million, respectively, in brokered deposits, a decrease of $242.5 million, or 34.3%.
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Municipal public deposits constituted $1.01 billion and $1.04 billion of our deposit portfolio at March 31, 2020, and September 30, 2019, respectively, of which $636.0 million and $691.9 million, re