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Great Western Bancorp (GWB)

Filed: 4 Aug 21, 5:22pm

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 June 30, 2021
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 July 29, 2021, the number of shares of the registrant’s Common Stock outstanding was 55,116,095.




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;
"ACL" refers to allowance for credit 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, and subsequent related ASUs;
"COVID-19" or "COVID-19 pandemic" refers to the Coronavirus Disease 2019;
"CRE" refers to commercial real estate;
"Exchange Act" refers to the Securities Exchange Act of 1934;
"FASB" refers to the Financial Accounting Standards Board;
"FDIC" refers to the Federal Deposit Insurance Corporation;
"FHLB" refers to the Federal Home Loan Bank;
"FRB" or "Federal Reserve" refers to the Board of Governors of the Federal Reserve System;
"FTE" refers to fully-tax equivalent;
"GAAP" 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:
the severity, magnitude and duration of the COVID-19 pandemic, including the recent surge in infection due to the Delta variant, and the direct and indirect impact of such pandemic, as well as responses to the pandemic by the government, business and consumers, on our operations and personnel, commercial activity and demand across our business and our customers' business;
the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect our liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values and further increase our allowance for credit losses;
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 pandemic;
current and future economic and market conditions in the United States generally or in our states in particular, including the rate of growth, employment levels and recent increases in the rate of inflation;
estimates of fair value of certain of the Company's assets and liabilities, which could change in value significantly from period to period;
our ability to anticipate interest rate changes and manage interest rate risk;
uncertainty about the discontinued use of the London Inter Bank Offered Rate and transition to an alternative rate;
our ability to achieve loan and deposit growth;
the relative strength or weakness of the commercial, agricultural and real estate markets where our borrowers are located, including without limitation related asset and market prices;
declines in asset prices and the market prices for agricultural products or changes in governmental support programs for the agricultural sector;
our ability to effectively execute our strategic plan and manage our growth;
our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses;
our ability to develop and effectively use the quantitative models we rely upon in our business;
possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including the potential negative effects of imposed and proposed tariffs and retaliatory tariffs on products that our customers may import or export, including among others, agricultural products;
our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruption and fraud risks;
fluctuations in the values of our assets and liabilities and off-balance sheet exposures;
unanticipated changes in our liquidity position, including but not limited to changes in our access to sources of liquidity and capital to address our liquidity needs;
possible impairment of our intangible assets, or any adjustment of the valuation of our deferred tax assets;
4-


the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters, social instability and changes in governmental policies;
the effects of adverse weather conditions, particularly on our agricultural borrowers;
the impact of, and changes in applicable laws, regulations and accounting standards, policies and interpretations, including the impact of the Tax Reform Act;
increases in our FDIC insurance premiums, or the collection of special assessments by the FDIC;
legal, compliance and reputational risks, including litigation and regulatory risks;
increased costs of compliance associated with the changes in regulation and the regulatory environment;
our ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith;
our ability to attract and retain senior management experienced in the banking and financial services industries;
our inability to receive dividends from our Bank and to service debt, pay dividends to our common stockholders and satisfy obligations as they become due;
expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act to maintain an effective system of internal control over financial reporting; and
other risks and uncertainties inherent to our business, including those discussed under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made or to reflect the occurrence of unanticipated events.
5-


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)
June 30, 2021September 30, 2020
Assets
Cash and due from banks$154,046 $150,085 
Interest-bearing bank deposits1,602,299 282,802 
Cash and cash equivalents1,756,345 432,887 
Securities purchased under agreements to resell104,523 
Securities available for sale2,181,514 1,774,626 
Securities held to maturity202,445 
Loans, net of unearned discounts and deferred fees, including $545,149 and $655,185 of loans at fair value under the fair value option at June 30, 2021 and September 30, 2020, respectively; and $1,377 and $12,371 of loans held for sale at June 30, 2021 and September 30, 2020, respectively8,477,783 10,076,142 
Allowance for credit losses ¹(270,298)(149,887)
Net loans8,207,485 9,926,255 
Premises and equipment, including $600 of property held for sale at both June 30, 2021 and September 30, 2020117,240 119,054 
Accrued interest receivable36,245 54,658 
Other repossessed property11,498 20,034 
Cash surrender value of life insurance policies183,575 31,658 
Net deferred tax assets84,981 47,709 
Other assets184,378 197,558 
Total assets$13,070,229 $12,604,439 
Liabilities and stockholders’ equity
Noninterest-bearing$2,958,488 $2,586,743 
Interest-bearing8,579,289 8,422,036 
Total deposits11,537,777 11,008,779 
Securities sold under agreements to repurchase80,167 65,506 
FHLB advances and other borrowings120,000 195,000 
Subordinated debentures and subordinated notes payable108,933 108,832 
Accrued expenses and other liabilities62,283 63,389 
Total liabilities11,909,160 11,441,506 
Stockholders’ equity
Common stock, $0.01 par value, authorized 500,000,000 shares; 55,116,095 shares issued and outstanding at June 30, 2021 and 55,014,189 shares issued and outstanding at September 30, 2020551 550 
Additional paid-in capital1,184,638 1,183,647 
Retained earnings(38,721)(57,169)
Accumulated other comprehensive income14,601 35,905 
Total stockholders' equity1,161,069 1,162,933 
Total liabilities and stockholders' equity$13,070,229 $12,604,439 
1 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model.
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 June 30,Nine Months Ended June 30,
2021202020212020
Interest income
Loans$93,328 $109,227 $300,925 $342,014 
Investment securities8,642 10,532 25,079 33,359 
Federal funds sold and other654 112 1,214 1,278 
Total interest income102,624 119,871 327,218 376,651 
Interest expense
Deposits3,505 10,011 13,976 50,818 
FHLB advances and other borrowings867 2,539 2,603 8,807 
Subordinated debentures and subordinated notes payable789 1,070 2,398 3,619 
Total interest expense5,161 13,620 18,977 63,244 
Net interest income97,463 106,251 308,241 313,407 
(Reversal of) provision for credit losses ¹(20,699)21,641 (13,800)101,539 
Net interest income after (reversal of) provision for credit losses118,162 84,610 322,041 211,868 
Noninterest income
Service charges and other fees9,005 7,731 27,228 28,328 
Wealth management fees3,477 2,773 9,688 8,859 
Mortgage banking income, net2,157 2,422 9,937 5,179 
Net gain on sale of securities and other assets0 247 
Derivative interest expense(3,117)(3,040)(9,692)(5,181)
Change in fair value of FVO loans and related derivatives4,110 (25,001)2,480 (37,658)
Other derivative income1,530 2,242 5,683 950 
Other2,209 1,190 5,141 3,490 
Total noninterest income (loss)19,371 (11,683)50,712 3,967 
Noninterest expense
Salaries and employee benefits40,239 39,042 116,918 112,259 
Data processing and communication7,054 5,817 19,825 17,713 
Occupancy and equipment5,105 5,251 15,829 15,941 
Professional fees4,644 7,382 12,293 16,409 
Advertising602 750 1,635 2,573 
Net (gain) loss on repossessed property and other related expenses(760)2,475 (469)8,508 
Goodwill and intangible assets impairment0 0 742,352 
Other ¹3,621 6,332 11,026 16,677 
Total noninterest expense60,505 67,049 177,057 932,432 
Income (loss) before income taxes77,028 5,878 195,696 (716,597)
Provision for (benefit from) income taxes18,279 478 44,329 (24,653)
Net income (loss)$58,749 $5,400 $151,367 $(691,944)
Basic earnings per common share
Weighted average common shares outstanding55,207,008 55,082,621 55,175,567 55,788,751 
Basic earnings per share$1.06 $0.10 $2.74 $(12.40)
Diluted earnings per common share
Weighted average diluted common shares outstanding55,524,979 55,145,619 55,409,573 55,788,751 
Diluted earnings per share$1.06 $0.10 $2.74 $(12.40)
Dividends per share
Dividends paid$551 $8,252 $1,652 $41,906 
Dividends per share$0.01 $0.15 $0.03 $0.75 
1 For the three and nine months ended June 30, 2021, this line includes a $0.2 million and $0.3 million reversal of provision, respectively, for unfunded commitments reserve. For the three and nine months ended June 30, 2020, provision for unfunded commitments reserve of $2.2 million and $2.9 million, respectively, was recorded in other noninterest expense in the consolidated income statement.
See accompanying notes.
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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
Net income (loss)$58,749 $5,400 $151,367 $(691,944)
Other comprehensive income (loss), net of tax
Securities available for sale:
Net unrealized holding gain (loss) arising during the period11,161 11,838 (28,027)42,019 
Reclassification adjustment for net gain realized in net income0 (247)
Income tax (expense) benefit(2,751)(2,919)6,970 (10,359)
Other comprehensive income (loss), net of tax8,410 8,919 (21,304)31,660 
Comprehensive income (loss)$67,159 $14,319 $130,063 $(660,284)
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 IncomeCommon Stock Par ValueAdditional
Paid-in Capital
Retained
Earnings
Accumulated Other Comprehensive IncomeTotal
Balance, April 1, 2020$550 $1,190,381 $(73,705)$36,238 $1,153,464 
Net income$5,400 — — 5,400 — 5,400 
Other comprehensive income, net of tax8,919 — — — 8,919 8,919 
Total comprehensive income$14,319 
Stock-based compensation, net of tax— 1,113 — — 1,113 
Cash dividends:
Common stock, $0.15 per share— (8,252)— — (8,252)
Balance, June 30, 2020$550 $1,183,242 $(68,305)$45,157 $1,160,644 
Balance, April 1, 2021$551 $1,184,647 $(97,470)$6,191 $1,093,919 
Net income$58,749   58,749  58,749 
Other comprehensive income, net of tax8,410    8,410 8,410 
Total comprehensive income$67,159 
Stock-based compensation, net of tax 542   542 
Cash dividends:
Common stock, $0.01 per share (551)  (551)
Balance, June 30, 2021$551 $1,184,638 $(38,721)$14,601 $1,161,069 
Comprehensive (Loss) IncomeCommon Stock Par ValueAdditional
Paid-in Capital
Retained
Earnings
Accumulated Other Comprehensive IncomeTotal
Balance, October 1, 2019$563 $1,228,714 $657,475 $13,497 $1,900,249 
Net (loss)$(691,944)— — (691,944)— (691,944)
Other comprehensive income, net of tax31,660 — — — 31,660 31,660 
Total comprehensive (loss)$(660,284)
Cumulative effect adjustment related to ASU adoption ¹— — (182)— (182)
Stock-based compensation, net of tax2,749 — — 2,750 
Repurchase common stock(14)(39,969)— — (39,983)
Cash dividends:
Common stock, $0.75 per share— (8,252)(33,654)— (41,906)
Balance, June 30, 2020$550 $1,183,242 $(68,305)$45,157 $1,160,644 
Balance, October 1, 2020$550 $1,183,647 $(57,169)$35,905 $1,162,933 
Net income$151,367   151,367  151,367 
Other comprehensive (loss), net of tax(21,304)   (21,304)(21,304)
Total comprehensive income$130,063 
Cumulative effect adjustment related to ASU adoption ²  (132,919) (132,919)
Stock-based compensation, net of tax1 2,643   2,644 
Cash dividends:
Common stock, $0.03 per share (1,652)0  (1,652)
Balance, June 30, 2021$551 $1,184,638 $(38,721)$14,601 $1,161,069 
¹ Cumulative effect adjustment related to the Company's adoption of ASU 2016-02, Leases (Topic 842), and subsequent related ASUs on October 1, 2019.
2 Cumulative effect adjustment related to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020. For additional information, see Note 2, "New Accounting Pronouncements".
See accompanying notes.
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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Nine Months Ended June 30,
20212020
Operating activities
Net income (loss)$151,367 $(691,944)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and deferred fee accretion, net(13,285)13,152 
Amortization of FDIC indemnification asset0 1,012 
Net (gain) loss on sale of other assets(1,037)6,649 
Net gain on sale of loans(10,469)(5,840)
(Reversal of) provision for credit losses ¹(13,800)101,539 
Goodwill and intangible assets impairment0 742,352 
(Reversal of) provision for loan servicing rights loss(1)
Stock-based compensation2,644 2,750 
Originations of residential real estate loans held for sale(320,216)(231,420)
Proceeds from sales of residential real estate loans held for sale341,680 231,771 
Proceeds from sale of other assets348 
Net deferred income taxes12,570 (56,659)
Changes in:
Accrued interest receivable18,413 744 
Other assets9,586 (71,570)
Accrued interest payable and other liabilities(159)20,128 
Net cash provided by operating activities177,641 62,670 
Investing activities
Net change in securities purchased under agreements to resell(104,523)
Purchase of debt securities available for sale(1,007,175)(540,697)
Proceeds from maturities of debt securities available for sale560,572 387,950 
Purchase of debt securities held to maturity(201,281)
Proceeds from maturities of debt securities held to maturity2,574 
Net decrease (increase) in loans1,568,833 (633,971)
Payment of covered losses from FDIC indemnification claims0 (46)
Purchase of premises and equipment(3,907)(4,988)
Proceeds from sale of premises and equipment572 
Proceeds from sale of repossessed property13,467 18,798 
Purchase of bank owned life insurance policies(150,000)
Purchase of FHLB stock(10)(113,437)
Proceeds from redemption of FHLB stock280 112,992 
Net cash paid in business acquisition0 (4,711)
Net cash provided by (used in) investing activities679,402 (778,110)
Financing activities
Net increase in deposits529,020 850,367 
Net increase in securities sold under agreements to repurchase and other short-term borrowings14,661 1,370 
Proceeds from FHLB advances and other long-term borrowings0 680,000 
Repayments on FHLB advances and other long-term borrowings(75,000)(665,000)
Common stock repurchased0 (39,983)
Taxes paid related to net share settlement of equity awards(614)(1,297)
Dividends paid(1,652)(41,906)
Net cash provided by financing activities466,415 783,551 
Net increase in cash and cash equivalents1,323,458 68,111 
Cash and cash equivalents, beginning of period432,887 243,474 
Cash and cash equivalents, end of period$1,756,345 $311,585 
Supplemental disclosure of cash flow information
Cash payments for interest$22,292 $71,423 
Cash (receipts from) payments for income taxes$29,799 $21,089 
Supplemental disclosure of noncash investing and financing activities
Loans transferred to repossessed properties$(4,029)$(7,762)
1 For the nine months ended June 30, 2021, this line includes a $0.3 million (reversal of) provision for unfunded commitments reserve.
See accompanying notes.
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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 banking in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Substantially all of the Company's income is generated from banking operations. The Company and the Bank are subject to the regulation of certain federal and/or state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with 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, 2020, which includes a description of significant accounting policies. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year or any other period.
The accompanying unaudited consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. The preparation of unaudited consolidated financial statements in conformity with 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 2016-13, as amended, as of October 1, 2020, the Company updated its accounting policies related to securities, loans and allowance for credit losses. See "Note 2. New Accounting Standards" for additional information on the adoption of the standard. See "Note 3. Securities Available for Sale" and "Note 4. Loans and Allowance for Credit Losses" for new disclosures and additional policy information.
In the second quarter of fiscal year 2021, the Company purchased securities under agreements to resell which are collateralized by FHA/VA loans guaranteed by the U.S. government. See "Securities Purchased Under Agreements to Resell" within this section for additional policy information.
In the third quarter of fiscal year 2021, the Company purchased held to maturity debt securities. See "Securities" within this section for additional policy information.
There were no other significant changes to the Company's accounting policies from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 that could have a material effect on the Company's consolidated financial statements.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell are accounted for as collateralized financing transactions with a receivable recorded on the consolidated balance sheet at the amounts at which the securities were acquired, plus accrued interest. Collateral requirements are continually monitored and additional collateral is received as required.
Securities received from counterparties under agreements to resell are not recognized on the consolidated balance sheet unless the counterparty defaults. The securities received under reverse repurchase transactions are residential mortgage-backed securities. Reverse repurchase transactions expose the Company to counterparty risk. The Company manages this risk by performing assessments and establishing concentration limits on each counterparty. Additionally, these transactions include collateral arrangements that require additional collateral pledged if the counterparty's collateral value drops below specified collateral levels.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Securities
Investment securities are accounted for according to their purpose and holding period. Debt securities held for resale are classified as trading. Trading securities are stated at fair value. Realized and unrealized gains and losses from sales and fair value adjustments of trading securities are included in other noninterest income on the consolidated statements of income. There were no trading securities held at June 30, 2021 and September 30, 2020.
Debt securities for which the Company has the ability and positive intent to hold until maturity are classified as held to maturity. Held to maturity securities are stated at amortized cost, which represents actual cost adjusted for premium amortization and discount accretion.
All other securities are classified as available for sale as they may be sold prior to maturity in response to changes in the Company’s interest rate risk profile, funding needs, demand for collateralized deposits by public entities or other reasons. Available for sale securities are stated at fair value. For available for sale debt securities in an unrealized loss position, management first evaluates whether (1) the Company has the intent to sell a security; or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the entire amount of unrealized loss is recognized in the consolidated income statement with a corresponding adjustment to the security's amortized cost basis.
If neither criteria is met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Furthermore, securities issued by the U.S. Government or a U.S. Government sponsored enterprise which carry the explicit or implicit guarantee of the U.S. Government are considered "risk-free" and therefore no credit losses are assumed on those securities. If the assessment indicates a credit loss exists, the amortized cost basis is compared to the present value of cash flows expected to be collected from the security; if it is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the allowance for credit losses are recorded as a provision for (reversal of) credit losses in the consolidated income statement. If the assessment indicates a credit loss does not exist, the change in fair value is recorded as unrealized gains and losses, net of related taxes, and is included in stockholders’ equity as a component of accumulated other comprehensive income (loss).
Equity securities are carried at fair value, with changes in fair value reported in the consolidated statements of income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment.
Realized gains and losses are recorded in noninterest income on the consolidated statements of income and are determined on a trade date basis using the specific identification method. Interest and dividends on investment securities are recognized in interest income on an accrual basis. Premiums and discounts are amortized or accreted into interest income using the interest method over the expected lives of the individual securities.
Transfer of debt securities from the available for sale category to the hold to maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the hold to maturity investment security. Premiums or discounts on investment securities are amortized or accreted as an adjustment of yield over the estimated life of the security. Unrealized holding gains or losses that remain in accumulated other comprehensive income are also amortized or accreted over the estimated life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.
Loans
Originated Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at amortized cost (i.e., outstanding principal balance, adjusted for charge-offs and any unamortized deferred fees or costs). Other fees not associated with originating a loan are recognized as fee income when earned.
Interest income on loans is accrued daily on the outstanding balances. A loan is placed on nonaccrual status when management believes, after considering collection efforts and other factors, the borrower's condition is such that collection of interest is doubtful, which is generally 90 days past due. When loans are placed on nonaccrual status, accrual of interest is discontinued and interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.
12-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
For loans held for sale, loan fees charged or received on origination, net of certain direct loan origination costs, are recognized in income when the related loan is sold. For loans held for investment, loan fees, net of certain direct loan origination costs, are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Company is generally amortizing these amounts over the contractual lives of the loans. Commitment fees are recognized as income when received.
The Company makes commercial, agricultural, residential real estate, consumer and other loans to customers primarily in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower. Collateral held varies but includes accounts receivable, marketable securities, inventory, equipment and real estate. Personal guarantees of the borrower or related parties and government guarantees are also obtained for some loans, which reduces the Company’s risk of loss.
Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value. Loans held for sale include fixed rate single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans are carried at cost and sold within 45 days. These loans are sold with the mortgage servicing rights released. Under limited circumstances, buyers may have recourse to return a purchased loan to the Company. Recourse conditions may include early payment default, breach of representation or warranties, or documentation deficiencies.
Fair value of loans held for sale is determined based on prevailing market prices for loans with similar characteristics, sale contract prices, or, for certain portfolios, discounted cash flow analysis. Declines in fair value below cost (and subsequent recoveries) are recognized in mortgage banking income, net. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Gains or losses on sales are recognized upon delivery and included in mortgage banking income, net on the consolidated statements of income.
Loans at Fair Value Under the Fair Value Option ("FVO loans")
The Company has elected to measure certain long-term loans and written loan commitments at fair value to assist in managing interest rate risk for longer-term loans. Fair value loans are fixed-rate loans having original maturities of 5 years or greater (typically between 5 and 15 years) to our business and agri-business banking customers to assist them in facilitating their risk management strategies. The fair value option was elected upon the origination or acquisition of these loans and written loan commitments. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon closing.
The Company has also entered into interest rate derivative contracts to convert these long term fixed rate loans to variable rates. These contracts do not quality for hedge accounting and instead these interest rate derivative instruments are recognized as other assets or other liabilities on the consolidated balance sheets and measured at fair value, with changes in fair value reported in change in fair value of FVO loans and related derivatives on the consolidated statements of income. Since each fixed rate loan is paired with an offsetting derivative contract, the impact to net income is minimized. When determined necessary, a credit mark is applied against the valuation of the asset that reflects the borrower's credit worthiness. Changes in the credit mark are included in change in fair value of FVO loans and related derivatives on the consolidated statements of income.
Credit Risk Management
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for all credit exposures. The strategy also emphasizes diversification on a geographic, industry, loan class type, and customer level; regular credit examinations; and management reviews of loans exhibiting deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. Loan decisions are documented with respect to the borrower’s business, purpose of the loan, evaluation of the repayment sources, and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The Company assigns all non-consumer loans a credit quality risk rating. The Company implemented a more granular risk rating methodology as of October 1, 2020. See the table below for a summary of credit quality risk ratings at June 30, 2021. For information on the credit quality risk ratings in effect before October 1, 2020, see "1. Nature of Operations and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
Credit Quality
Risk Rating Effective
After October 1, 2020
Credit Quality Indicators
PassCommercial loans within this category are not adversely rated, current as to principal and interest, and are otherwise in material compliance with the contractual terms of the loan agreement. Management believes there is a low likelihood of loss related to loans in this category.
Special MentionCommercial loans within this category have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse classification.
SubstandardCommercial loans within this category are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans in this category are assigned a workout loan officer to closely monitor the relationship.
DoubtfulCommercial loans within this category are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
Revolving lines of credit rated Substandard or Doubtful require a higher level of approval and are reviewed quarterly. Advances are allowed to support the continued operating needs of the borrower for their operation and may include, but not limited to, working capital needs to support inventory, accounts receivable, payroll, tax payments, utilities and other needs to operate the business.
All non-consumer loan risk ratings are monitored by management and updated as deemed appropriate. The Company generally does not risk rate residential real estate or consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Alternatively, delinquencies are monitored and standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.
Troubled Debt Restructurings
Loans modified under troubled debt restructurings involve granting a concession to a borrower who is experiencing financial difficulty. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection, which generally would not otherwise be considered. The Company's TDRs include performing and nonperforming TDRs, which consist of loans that continue to accrue interest at the loan's original interest rate when the Company expects to collect the remaining principal and interest on the loan, and nonaccrual TDRs, which include loans that are in a nonaccrual status and are no longer accruing interest, as the Company does not expect to collect the full amount of principal and interest owed from the borrower on these loans. At the time of modification (except for loans on nonaccrual status), a TDR is classified as nonperforming TDR until a six-month payment history of principal and interest payments, in accordance with the terms of the loan modification, is sustained, at which time the loan is moved to a performing status (performing TDR). If the Company does not expect to collect all principal and interest on the loan, the modified loan is classified as a nonaccrual TDR. All TDRs are accounted for as impaired loans and are included in the analysis of the allowance for credit losses. A TDR that has been renewed for a borrower who is no longer experiencing financial difficulty and which yields a market rate of interest at the time of a renewal is no longer considered a TDR.
In March 2020, a statement was issued by our banking regulators titled "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until December 31, 2020. In December 2020, the Economic Aid to Hard Hit Small Businesses, Non-Profits, and Ventures Act was enacted, which extended the TDR provisions of the CARES Act to January 1, 2022. Accordingly, in appropriate circumstances we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
14-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses ("ACL")
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, which uses the current expected credit loss model ("CECL") to determine the allowance for credit losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and the net investments in leases recognized by a lessor in accordance with Topic 842 on leases. The CECL methodology requires recognition of lifetime expected credit losses that takes into consideration all relevant information, including historical losses, current conditions and reasonable and supportable forecasts of future operating conditions.
Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an individual basis ("individual reserve"). The reserve related to these loans is calculated using the collateral available to repay the loan, most typically the liquidation value of the collateral (less selling costs, if applicable). The Company has chosen to continue to include small, less complex loans within the collective reserve for loans on nonaccrual or with TDR status.
Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. The historical loss experience of the pool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan pool is applied to each loan within the segment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in loss expectations relative to the historical loss rates. These models have been implemented in accordance with the Company's Model Risk Management Policy. Additionally, using its new risk rating system, the Company evaluates if the current credit quality of the portfolio materially differs from the one observed over the historical loss period and applies adjustments to the allowance accordingly. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans servicing practices and changes in underwriting criteria.
ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period.
15-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table describes the Company’s 8 loan portfolio pools, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses.
Loan SegmentCompositionCollateralPrimary Source of RepaymentKey Risk Characteristics
Construction and development 1
Commercial and residential construction loansSecured by commercial and residential real estateCash flowsIndustry and geography of borrower's business, purpose of the loan, repayment sources, borrower's capacity and financial performance, loan covenants, guarantees and nature of pledged collateral
Owner-occupied CRESmall and middle market businessesSecured by commercial real estate
Non-owner-occupied CRE
Multifamily residential real estate
AgricultureAgri-business operating and real estate loansSecured by operating assets, agricultural real estate, and guarantees of ownersCash flowsGeography of the borrower's operations, commodity type and prices and weather patterns, purpose of the loan, repayment sources, borrower's debt capacity and financial performance, loan covenants, guarantees and nature of pledged collateral
Commercial non-real estateSmall and middle market businesses and loans made to public sectorSecured by business assets and guarantees of ownersCash flowsIndustry and geography of the borrower's business, purpose of the loan, repayment sources, borrower's debt capacity and financial performance, loan covenants, guarantees and nature of pledged collateral
Residential real estateResidential mortgages and home equity loans and linesSecured by residential real estateBorrower's incomeBorrower's capacity and willingness to repay, unemployment rates and other economic factors, and customer repayment history
Consumer and otherConsumer loans and all other loan relationships that do not fit within categories above, including consumer and commercial credit cards and consumer deposit account overdraftsSecured by automobiles, unsecured
1 Residential real estate construction loans are included in the construction and development segment until construction is completed, after which the loan is moved to the residential real estate loan segment.
Changes to the allowance for credit losses are made by charges to the provision for credit losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans deemed to be uncollectible are charged off against the allowance for credit losses. Recoveries of amounts previously charged-off are credited to the allowance for credit losses.
Unfunded Commitments and Unfunded Commitments Reserve
Unfunded residential mortgage loan commitments entered into in connection with mortgage loans to be held for sale are considered derivatives and are recorded at fair value and included in accrued expenses and other liabilities on the consolidated balance sheets with changes in fair value recorded in other interest income in the consolidated statements of income. All other unfunded loan commitments are generally related to providing credit facilities to customers and are not considered derivatives.
The unfunded commitments reserve ("unfunded reserve") presents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. An unfunded reserve is not recognized for commitments unconditionally cancellable by the Company, which includes credit cards, warehouse lines of credit and other revolving lines which are deemed to be unconditionally cancellable and is recorded in accrued expenses and other liabilities on the consolidated balance sheet. Changes to the unfunded reserve are recognized in provision for credit losses in the consolidated statements of income. The unfunded reserve is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). Loss rates are estimated by utilizing the same loss rates calculated for the collective reserve of the allowance for credit losses. The Company's change in unfunded commitments reserve from the incurred loss methodology to the current expected credit loss methodology was immaterial as of the date of adoption and therefore no provision was recognized.
16-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Accrued Interest Receivable
Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, the Company has elected the following:
Accrued interest receivable balances are presented separately within the consolidated balance sheets,
Accrued interest receivable balances are excluded from amortized cost of financing receivables and related disclosure requirements, and
Uncollectible accrued interest receivable is written off by reversing interest income, generally upon becoming 90 days past due.
Accordingly, we do not recognize an allowance for credit losses on accrued interest receivable.
Subsequent Events
The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. Other than those described below, there were no material events or transactions that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
On July 29, 2021, the Board of Directors of the Company declared a dividend of $0.05 per common share payable on August 27, 2021 to stockholders of record as of close of business on August 13, 2021.
2. New Accounting Standards
Accounting Standards Adopted in Fiscal Year 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which address recording of estimated lifetime credit losses on loans, including funded and unfunded commitments, and other financial instruments held by financial institutions and other organizations. ASU 2016-13, as amended, requires institutions to measure all expected credit losses related to financial assets measured at amortized cost with an expected loss model based on historical experience, current conditions and reasonable and supportable forecasts relevant to affect the collectability of the financial assets, which is referred to as the CECL model. ASU 2016-13, as amended, requires enhanced disclosures, including qualitative and quantitative requirements, to help understand significant estimates and judgments used in estimating credit losses, as well as provide additional information about the amounts recorded in the financial statements.
The measurement of expected losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit and other similar instruments). In addition, CECL requires debt securities available for sale with an unrealized loss to be recognized as allowance for credit loss rather than as a write-down of the securities amortized cost basis when management intends to sell or believes that it is not more-likely-than-not that they will be required to sell the securities prior to recovery of the securities amortized cost to be recognized as allowance for credit loss rather than as a write-down of the securities amortized cost basis. The CECL standard does not apply to the loan portfolio accounted for using the fair value option.
The Company identified 8 loan portfolio pools for which a model has been established to estimate credit losses. The historical data sets of these pools were identified, populated and validated. Each segment contains loans which have similar risk characteristics. Not unlike the incurred loss model, each segment is split into loans that are individually assessed and those that are collectively assessed.
The Company adopted the standard on October 1, 2020, and applied the standard's provisions under the modified retrospective approach. Upon adoption of the standard, the Company recorded a $177.3 million increase to the ACL, of which $1.5 million related to the transfer of discounts on previously acquired loans and $175.8 million related to changes from the incurred loss model to the CECL model, which resulted in a cumulative effect adjustment decrease of $132.9 million (after-tax) to retained earnings. The tax effect resulted in a $42.9 million increase in deferred tax assets. In addition, the Company has elected the 5 year CECL transition for regulatory capital ratios, resulting in an add-back of $129.5 million to common equity tier 1 capital in the first fiscal quarter 2021.
17-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the composition of loans and allowance by portfolio segment as of September 30, 2020, as adjusted at September 30, 2020 and October 1, 2020.
Reported Balance September 30,
2020
Reclassifications ¹Unamortized Discounts, Unearned Net Deferred Fees and Net Loans in Process Included in Amortized Cost ²Adjusted Balance September 30,
2020
Adoption of ASU 2016-13, as amended ³Adjusted Balance October 1, 2020
(dollars in thousands)
Loans:
Construction and developmentn/a ⁴$512,539 $(2,895)$509,644 $$509,644 
Owner-occupied CREn/a ⁴1,420,061 (2,667)1,417,394 36 1,417,430 
Non-owner-occupied CREn/a ⁴2,902,612 (8,232)2,894,380 1,497 2,895,877 
Multifamily residential real estaten/a ⁴536,828 (2,845)533,983 (8)533,975 
Total commercial real estate5,274,941 (5,274,941)
Agriculture1,724,350 (1,654)1,722,696 55 1,722,751 
Commercial non-real estate2,181,656 (16,618)2,165,038 (85)2,164,953 
Residential real estate830,102 (97,099)(2,191)730,812 23 730,835 
Consumer and other100,553 1,642 102,195 (20)102,175 
Consumer63,206 (63,206)
Other37,347 (37,347)
Ending balance10,111,602 (35,460)10,076,142 1,498 10,077,640 
Less: Unamortized discount
          on acquired loans
(8,215)8,215 
            Unearned net deferred fees and
          costs and net loans in process
(27,245)27,245 
Total$10,076,142 $$$10,076,142 $1,498 $10,077,640 
Allowance:
Construction and developmentn/a ⁴$(7,012)$$(7,012)$(11,963)$(18,975)
Owner-occupied CREn/a ⁴(20,530)(20,530)(4,298)(24,828)
Non-owner-occupied CREn/a ⁴(50,965)(50,965)(98,986)(149,951)
Multifamily residential real estaten/a ⁴(6,726)(6,726)(2,681)(9,407)
Total commercial real estate(84,496)84,496 — — — — 
Agriculture(27,018)(27,018)(24,360)(51,378)
Commercial non-real estate(27,599)(27,599)(32,938)(60,537)
Residential real estate(8,202)737 (7,465)(2,595)(10,060)
Consumer and other(2,572)(2,572)532 (2,040)
Total$(149,887)$$$(149,887)$(177,289)$(327,176)
1 Reclassifications made from reported loan and related allowance segments to align with the eight loan portfolio pools established for adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, to estimate credit losses.
2 Unamortized discount on acquired loans, unearned net deferred fees and costs and net loans in process to related were assigned to appropriate loan portfolio segment to present loan categories at amortized cost.
3 Discounts on previously acquired loans and Day 1 impact of adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, were transferred to allowance for credit losses as a part of CECL adoption.
4 Balance for this segment is included in total commercial real estate for September 30, 2020.
The Company did not record an allowance for available for sale securities upon adoption as the investment portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S. Government for which expected credit loss is zero.
We adopted the CECL standard using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On October 1, 2020, the Company determined $1.5 million of existing discounts on PCD loans was related to credit factors and was reclassified to the ACL. The remaining noncredit discount of $6.7 million was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the remaining life of the loans. For additional information, see "Note 1. Nature of Operations and Summary of Significant Policies", "Note 3. Securities Available for Sale", and "Note 4. Loans and Allowance for Credit Losses."
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
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 eliminated, added and modified certain disclosure requirements for fair value measurements. Among the changes, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted the standard on October 1, 2020. The adoption of this guidance did not have a material impact to the consolidated financial statements.
Accounting Standards Not Yet Adopted in Fiscal Year 2021
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 and does not plan early adoption.
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 and does not plan early adoption.
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
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The amendments in this update are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments also optionally apply to all entities that designate receive-variable rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022. ASU 2021-01 has not had, and is not expected to have, a material impact on the Company’s consolidated financial statements.
In July 2021, the FASB issues ASU 2021-05, Leases (Topic 842) Lessors - Certain Leases with Variable Lease Payments, which updates guidance in Topic 842, to restore long-standing accounting practice for certain sales-type leases with variable payments. ASU 2021-05 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company does not expect adoption of the new guidance to have a significant impact on our financial statements.
19-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
3. Securities
The following table presents amortized cost and approximate fair value of investments in securities.
June 30, 2021September 30, 2020
Amortized
Cost
Gross Unrealized GainsGross Unrealized LossesEstimated
Fair Value
Amortized
Cost
Gross Unrealized GainsGross Unrealized LossesEstimated
Fair Value
(dollars in thousands)
Securities available for sale
U.S. Treasury securities$99,047 $201 $(98)$99,150 $49,924 $228 $$50,152 
U.S. Agency securities24,976 (865)24,111 24,974 86 25,060 
Mortgage-backed securities:
Government National Mortgage Association312,811 6,710 (274)319,247 485,689 11,481 (43)497,127 
Federal Home Loan Mortgage Corporation977,156 11,786 (7,142)981,800 578,650 18,919 (9)597,560 
Federal National Mortgage Association439,752 4,748 (3,864)440,636 287,842 7,788 (16)295,614 
Small Business Assistance Program232,089 7,167 (343)238,913 244,653 7,884 (58)252,479 
States and political subdivision securities47,287 1,091 (1)48,377 54,224 1,356 55,580 
Corporate debt securities28,000 244 28,244 
Other1,006 30 1,036 1,006 48 1,054 
Total$2,162,124 $31,977 $(12,587)$2,181,514 $1,726,962 $47,790 $(126)$1,774,626 
Securities held to maturity
U.S. Treasury securities$13,666 $41 $$13,707 $$$$
Mortgage-backed securities:
Government National Mortgage Association45,964 (49)45,915 
Federal Home Loan Mortgage Corporation53,616 43 (34)53,625 
Federal National Mortgage Association46,408 (186)46,225 
Small Business Assistance Program39,341 (238)39,103 
States and political subdivision securities3,450 3,450 
Total$202,445 $87 $(507)$202,025 $$$$
The Company elected to exclude accrued interest receivable from the amortized cost basis of debt securities disclosed throughout this footnote. Accrued interest receivable on debt securities totaled $5.2 million and $4.5 million as of June 30, 2021 and September 30, 2020, respectively. Accrued interest receivable for debt securities is included in accrued interest receivable on the consolidated balance sheets.
As June 30, 2021 and September 30, 2020 the Company had no transfers from held to maturity debt securities.
20-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The amortized cost and approximate fair value of debt securities as of June 30, 2021 and September 30, 2020, by contractual maturity, are shown below. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without penalty.
June 30, 2021September 30, 2020
Amortized 
Cost
Estimated
Fair Value
Amortized 
Cost
Estimated
Fair Value
(dollars in thousands)
Securities available for sale
Due in one year or less$18,198 $18,289 $67,131 $67,456 
Due after one year through five years123,092 122,998 51,779 52,694 
Due after five years through ten years58,020 58,595 10,212 10,642 
Due after ten years
199,310 199,882 129,122 130,792 
Mortgage-backed securities1,961,808 1,980,596 1,596,834 1,642,780 
Securities without contractual maturities1,006 1,036 1,006 1,054 
Total$2,162,124 $2,181,514 $1,726,962 $1,774,626 
Securities held to maturity
Due in one year or less$150 $150 $$
Due after one year through five years500 500 
Due after five years through ten years16,466 16,507 
Due after ten years
17,116 17,157 
Mortgage-backed securities185,329 184,868 
Securities without contractual maturities
Total$202,445 $202,025 $$
There were 0 sales of securities available for sale for both the three and nine months ended June 30, 2021 and 2020 and as such there were 0 proceeds from the sales of securities available for sale for same periods. NaN gross gains (pre-tax) were realized on the sales for each of the three and nine months ended June 30, 2021 and 2020, using the specific identification method. NaN gross losses (pre-tax) were realized on the sales for each of the three and nine months ended June 30, 2021 and 2020, using the specific identification method.
There were no sales of securities held to maturity for the three and nine months ended June 30, 2021 and as such there were 0 proceeds from the sales of securities held to maturity for same periods. NaN gross gains (pre-tax) were realized on the sales for the three and nine months ended June 30, 2021, using the specific identification method. NaN gross losses (pre-tax) were realized on the sales for each of the three and nine months ended June 30, 2021, using the specific identification method.
As detailed in the following tables, certain investments in available for sale debt securities, which are approximately 42% and 6% of the Company’s investment portfolio at estimated fair value at June 30, 2021 and September 30, 2020, respectively, are reported in the consolidated financial statements at an amount less than their amortized cost. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, implicit or explicit government guarantees, and information obtained from regulatory filings, management believes the declines in fair value of these securities are not the result of credit losses at June 30, 2021, and therefore, an allowance for credit losses was 0t recorded.
Substantially all of the Company's held to maturity debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk free" and have a long history of zero credit loss. Therefore, the Company did not record an allowance for credit losses for those securities at June 30, 2021. In addition, the Company does not intend to sell these securities, and it is not more likely than not the Company will be required to sell the investment securities before recover of their amortized cost basis, which may be maturity.
Prior to the adoption of ASU 2016-13, as amended, the Company recognized 0 other-than-temporary impairment on available for sale or held to maturity debt securities for the three and nine months ended June 30, 2020.
Securities with an estimated fair value of approximately $1.30 billion and $1.10 billion at June 30, 2021 and September 30, 2020, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required by contractual obligation or law. The counterparties do not have the right to sell or pledge the securities the Company has pledged as collateral.
21-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the Company’s gross unrealized losses and approximate fair value of debt securities, separated by length of time that individual securities have been in a continuous unrealized loss position.
As of June 30, 2021
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)
Securities available for sale
U.S. Treasury securities$49,264 $(98)$$$49,264 $(98)
U.S. Agency securities24,111 (865)24,111 (865)
Mortgage-backed securities819,752 (11,477)12,402 (146)832,154 (11,623)
States and political subdivision securities999 (1)999 (1)
Total$894,126 $(12,441)$12,402 $(146)$906,528 $(12,587)
Securities held to maturity
U.S. Treasury securities$$$$$$
Mortgage-backed securities136,102 (507)136,102 (507)
States and political subdivision securities
Total$136,102 $(507)$$$136,102 $(507)
As of September 30, 2020
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)
Securities available for sale
U.S. Treasury securities$$$$$$
U.S. Agency securities
Mortgage-backed securities71,547 (103)27,897 (23)99,444 (126)
States and political subdivision securities
Total$71,547 $(103)$27,897 $(23)$99,444 $(126)
Securities held to maturity
U.S. Treasury securities$$$$$$
Mortgage-backed securities
States and political subdivision securities
Total$$$$$$
As of June 30, 2021 and September 30, 2020, the Company had 90 and 18 available for sale securities, respectively, in an unrealized loss position. As of June 30, 2021 and September 30, 2020, the Company had 11 and 0 held to maturity securities, respectively, in an unrealized loss position.
22-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
4. Loans and Allowance for Credit Losses
The following table presents the composition of loans at amortized cost as of June 30, 2021 and September 30, 2020.
June 30, 2021September 30, 2020
Total LoansLess: Fair Value Option LoansLess: Guaranteed Loans ¹Loans at Amortized CostTotal Loans ²Less: Fair Value Option LoansLess: Guaranteed Loans ¹Loans at Amortized Cost
(dollars in thousands)
Construction and development$433,293 $$$433,293 $509,644 $$$509,644 
Owner-occupied CRE1,318,196 93,756 50,189 1,174,251 1,417,394 109,097 48,468 1,259,829 
Non-owner-occupied CRE2,244,335 230,174 26,802 1,987,359 2,894,380 283,266 27,402 2,583,712 
Multifamily residential real estate592,544 1,474 591,070 533,983 3,847 530,136 
Total commercial real estate4,588,368 325,404 76,991 4,185,973 5,355,401 396,210 75,870 4,883,321 
Agriculture1,438,499 106,060 34,608 1,297,831 1,722,696 129,041 42,353 1,551,302 
Commercial non-real estate1,710,938 113,685 380,812 1,216,441 2,165,038 129,934 744,371 1,290,733 
Residential real estate ³631,688 279 631,409 730,812 290 730,522 
Consumer and other ⁴108,290 108,290 102,195 102,195 
Total$8,477,783 $545,149 $492,690 $7,439,944 $10,076,142 $655,185 $862,884 $8,558,073 
1 Includes loans guaranteed by agencies of the U.S. government.
2 As a part of the adoption of CECL, loan pools are presented based on amortized cost, which includes unpaid principal balance, unamortized discount on acquired loans, and unearned net deferred fees and costs. For additional information on September 30, 2020 loan segment balances, see Note 2.
3 Includes residential real estate loans held for sale of $1.4 million and $12.4 million at June 30, 2021 and September 30, 2020, respectively, recorded at the lower of cost or fair value.
4 Other loans primarily include consumer and commercial credit cards, customer deposit account overdrafts and loans in process.
The following table presents the Company’s past due and nonaccrual loans at amortized cost as of June 30, 2021. This table excludes loans measured at fair value under the fair value option of $545.1 million at June 30, 2021.
As of June 30, 2021Current or Less Than 30 Days Past Due30-89 Days Past Due90 Days Past Due and Still AccruingNonaccrualTotal
(dollars in thousands)
Construction and development$433,271 $$$22 $433,293 
Owner-occupied CRE1,210,373 142 13,925 1,224,440 
Non-owner-occupied CRE2,007,189 6,972 2,014,161 
Multifamily residential real estate584,187 6,883 591,070 
Total commercial real estate4,235,020 142 27,802 4,262,964 
Agriculture1,195,763 8,005 128,671 1,332,439 
Commercial non-real estate1,561,870 1,231 34,152 1,597,253 
Residential real estate624,738 500 6,450 631,688 
Consumer and other108,134 115 10 31 108,290 
Total$7,725,525 $9,993 $10 $197,106 $7,932,634 
The following table presents the Company’s past due loans at September 30, 2020. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value under the fair value option of $655.2 million at September 30, 2020.
As of September 30, 2020Current or Less Than 30 Days Past Due30-89 Days Past Due90 Days Past Due and Still AccruingNonaccrualTotal
(dollars in thousands)
Commercial real estate$4,790,963 $8,894 $$73,146 $4,873,003 
Agriculture1,317,377 60,020 217,642 1,595,039 
Commercial non-real estate2,021,308 3,512 26,843 2,051,663 
Residential real estate821,154 2,459 4,441 828,054 
Consumer and other100,319 45 74 100,438 
Total$9,051,121 $74,930 $$322,146 $9,448,197 
23-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table provides additional information on nonaccrual loans for the three and nine months ended June 30, 2021. The Company did not record any interest income on nonaccrual loans during the three and nine months ended June 30, 2021.
September 30, 2020June 30, 2021Three Months Ended June 30, 2021Nine Months Ended June 30, 2021
NonaccrualNonaccrualNonaccrual Loans with No Related ACLAccrued Interest
Written Off on
Nonaccrual Loans
Accrued Interest
Written Off on
Nonaccrual Loans
(dollars in thousands)
Construction and developmentn/a ¹$22 $$$115 
Owner-occupied CREn/a ¹13,925 4,232 17 31 
Non-owner-occupied CREn/a ¹6,972 1,207 19 1,922 
Multifamily residential real estaten/a ¹6,883 6,883 40 40 
Total commercial real estate$73,146 27,802 12,322 76 2,108 
Agriculture217,642 128,671 40,333 64 775 
Commercial non-real estate26,843 34,152 8,328 26 25 
Residential real estate4,441 6,450 87 75 
Consumer and other74 31 
Total$322,146 $197,106 $61,070 $173 $2,984 
1 Balance for this segment is included in total commercial real estate for September 30, 2020.

24-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
This table presents the loans based on credit quality, loan segment and year of origination at amortized cost and excludes loans measured at fair value under the fair value option of $545.1 million at June 30, 2021.
Term loans
Fiscal Year to DateFiscal Year
20212020201920182017Prior to 2017Revolving LoansRevolving Loans
Converted to Term Loans
Total
(dollars in thousands)
Construction and development
Pass$167,374 $116,332 $57,660 $11,743 $712 $612 $53,861 $$408,294 
Special Mention2,560 196 2,756 
Substandard20,824 1,419 22,243 
Doubtful
Total construction and development$190,758 $116,332 $59,275 $11,743 $712 $612 $53,861 $$433,293 
Owner-occupied CRE
Pass$236,108 $332,095 $205,302 $103,336 $117,637 $122,449 $43,401 $$1,160,328 
Special Mention7,716 1,606 2,810 5,798 5,525 7,723 383 31,561 
Substandard6,067 3,968 2,277 524 11,906 4,544 75 29,361 
Doubtful3,190 3,190 
Total owner-occupied CRE$249,891 $337,669 $213,579 $109,658 $135,068 $134,716 $43,859 $$1,224,440 
Non-owner-occupied CRE
Pass$214,538 $335,587 $275,953 $273,022 $246,273 $257,951 $36,659 $$1,639,983 
Special Mention16,343 28,609 45,051 57,833 34,774 14,608 345 197,563 
Substandard66,008 6,273 31,616 32,466 7,623 8,052 24,193 176,231 
Doubtful384 384 
Total non-owner-occupied CRE$297,273 $370,469 $352,620 $363,321 $288,670 $280,611 $61,197 $$2,014,161 
Multifamily residential real estate
Pass$153,086 $96,574 $145,985 $68,696 $67,826 $37,156 $1,186 $$570,509 
Special Mention1,261 1,042 808 3,111 
Substandard252 499 9,393 423 10,567 
Doubtful6,883 6,883 
Total multifamily residential real estate$153,338 $103,956 $147,246 $78,089 $68,868 $38,387 $1,186 $$591,070 
Total commercial real estate
Pass$771,106 $880,588 $684,900 $456,797 $432,448 $418,168 $135,107 $$3,779,114 
Special Mention26,619 30,215 49,318 63,631 41,341 23,139 728 234,991 
Substandard93,151 10,740 35,312 42,383 19,529 13,019 24,268 238,402 
Doubtful384 6,883 3,190 10,457 
Total commercial real estate$891,260 $928,426 $772,720 $562,811 $493,318 $454,326 $160,103 $$4,262,964 
Agriculture
Pass$185,395 $148,858 $73,722 $58,803 $57,291 $22,670 $444,244 $$990,983 
Special Mention22,971 12,862 4,131 24,327 4,842 3,562 28,318 101,013 
Substandard25,786 8,929 14,828 36,941 36,381 4,312 87,780 214,957 
Doubtful1,704 888 21,391 1,007 496 25,486 
Total agriculture$235,856 $170,649 $93,569 $141,462 $99,521 $30,544 $560,838 $$1,332,439 
Commercial non-real estate
Pass$412,511 $263,816 $172,804 $47,621 $40,763 $33,105 $527,533 $$1,498,153 
Special Mention1,967 2,283 2,821 151 2,520 763 18,271 28,776 
Substandard13,229 4,563 10,080 17,974 118 1,098 17,310 64,372 
Doubtful47 62 3,969 1,874 5,952 
Total commercial non-real estate$427,707 $270,662 $185,752 $65,808 $43,401 $38,935 $564,988 $$1,597,253 
25-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Term loans
Fiscal Year to DateFiscal Year
20212020201920182017Prior to 2017Revolving LoansRevolving Loans
Converted to Term Loans
Total
(dollars in thousands)
Residential real estate ¹
Pass$106,126 $180,443 $61,267 $40,503 $24,232 $96,829 $110,650 $274 $620,324 
Special Mention731 219 267 297 128 294 148 2,084 
Substandard37 952 1,591 739 499 4,540 922 9,280 
Doubtful
Total residential real estate$106,894 $181,614 $63,125 $41,539 $24,859 $101,663 $111,720 $274 $631,688 
Consumer and other ¹
Pass$20,711 $11,906 $16,675 $1,910 $734 $797 $55,492 $$108,225 
Special Mention34 34 
Substandard20 31 
Doubtful
Total consumer and other$20,711 $11,909 $16,683 $1,910 $734 $797 $55,546 $$108,290 
Total loans
Pass$1,495,849 $1,485,611 $1,009,368 $605,634 $555,468 $571,569 $1,273,026 $274 $6,996,799 
Special Mention52,288 45,579 56,537 88,406 48,831 27,758 47,499 366,898 
Substandard132,203 25,187 61,819 98,037 56,527 22,969 130,300 527,042 
Doubtful2,088 6,883 4,125 21,453 1,007 3,969 2,370 41,895 
Total loans$1,682,428 $1,563,260 $1,131,849 $813,530 $661,833 $626,265 $1,453,195 $274 $7,932,634 
1 The Company generally does not risk rate residential real estate or consumer and other loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer and other loans.
The following table presents the composition of the loan portfolio by internally assigned grade as of September 30, 2020. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value under the fair value option of $655.2 million at September 30, 2020.
As of September 30, 2020Commercial Real EstateAgricultureCommercial
Non-Real Estate
Residential Real Estate ¹Consumer and Other ¹Total
(dollars in thousands)
Credit Risk Profile by Internally Assigned Grade
Grade:
Pass$4,062,814 $968,875 $1,851,323 $806,436 $99,632 $7,789,080 
Watchlist577,399 265,714 94,401 6,972 709 945,195 
Substandard229,467 348,910 94,316 13,173 93 685,959 
Doubtful3,323 11,540 11,623 1,473 27,963 
Loss
Total$4,873,003 $1,595,039 $2,051,663 $828,054 $100,438 $9,448,197 
1 The Company generally does not risk rate residential real estate or consumer and other loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer and other loans.
26-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The next three tables include additional disclosures previously required by ASC Topic 310 related to the Company's September 30, 2020 balances and activity for the three and nine ended June 30, 2020.
The following table presents the Company’s impaired loans at September 30, 2020. This table excludes purchased credit impaired loans and loans measured at fair value under the fair value option.
September 30, 2020
Recorded InvestmentUnpaid Principal BalanceRelated Allowance for Credit Losses
Impaired loans:(dollars in thousands)
With an allowance for credit losses recorded:
Commercial real estate$111,121 $114,034 $25,087 
Agriculture53,052 55,145 8,151 
Commercial non-real estate39,821 47,571 7,822 
Residential real estate5,670 6,314 1,903 
Consumer and other98 109 30 
Total impaired loans with an allowance for credit losses recorded209,762 223,173 42,993 
With no allowance for credit losses recorded:
Commercial real estate121,380 161,211 — 
Agriculture308,734 332,272 — 
Commercial non-real estate66,542 75,365 — 
Residential real estate6,543 8,818 — 
Consumer and other108 — 
Total impaired loans with no allowance for credit losses recorded503,199 577,774 — 
Total impaired loans$712,961 $800,947 $42,993 
The following table presents the average recorded investment on impaired loans and interest income recognized on impaired loans for the three and nine months ended June 30, 2020.
Three Months Ended June 30, 2020Nine Months Ended June 30, 2020
Average Recorded InvestmentInterest Income Recognized While on Impaired StatusAverage Recorded InvestmentInterest Income Recognized While on Impaired Status
(dollars in thousands)
Commercial real estate$152,871 $1,684 $113,146 $5,350 
Agriculture348,006 3,421 354,202 16,722 
Commercial non-real estate97,310 678 84,849 5,079 
Residential real estate10,901 120 9,957 513 
Consumer117 148 
Total$609,205 $5,905 $562,302 $27,670 
The Company did not acquire any loans during the three and nine months ended June 30, 2021. Prior to October 1, 2020, the Company accounted for acquired impaired loans in accordance with ASC 310-30. The following table is a summary of changes in the accretable difference for all loans accounted for under ASC 310-30 during the three and nine months ended June 30, 2020.
Three Months Ended June 30, 2020Nine Months Ended June 30, 2020
(dollars in thousands)
Balance, beginning of period$19,340 $26,047 
Accretion(1,854)(5,547)
Reclassification (to) nonaccretable difference(776)(3,790)
Balance, end of period$16,710 $16,710 
Troubled Debt Restructurings
Included in certain loan categories in the impaired loans are TDRs that were classified as impaired. Loans are designated as TDRs when the borrower is experiencing financial difficulty, and the Company agrees to concessions that are both significant and outside of market terms. Individual reserves included in the allowance for credit losses for TDRs were $11.6 million and $11.0 million at June 30, 2021 and September 30, 2020, respectively. There were $0.5 million and 0minal commitments to lend additional funds to borrowers whose loans were modified in a TDR at both June 30, 2021 and September 30, 2020.
27-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the amortized cost of the Company’s TDR balances as of June 30, 2021 and recorded value of TDR balances as of September 30, 2020.
June 30, 2021September 30, 2020
AccruingNonaccrualAccruingNonaccrual
(dollars in thousands)
Construction and development$$22 n/a ¹n/a ¹
Owner-occupied CRE3,346 4,166 n/a ¹n/a ¹
Non-owner-occupied CRE11,756 10 n/a ¹n/a ¹
Multifamily residential real estaten/a ¹n/a ¹
Total commercial real estate15,102 4,198 $23,215 $11,913 
Agriculture20,908 9,275 2,976 45,971 
Commercial non real estate4,626 22,769 8,734 4,803 
Residential real estate236 52 277 74 
Consumer and other18 31 
Total$40,872 $36,312 $35,205 $62,792 
1 Balance for this segment is included in total commercial real estate for September 30, 2020.
TDRs are generally restructured through either a rate modification, term extension, payment modification or due to a bankruptcy. The following table presents a summary of all accruing loans restructured in TDRs for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
Recorded InvestmentRecorded InvestmentRecorded InvestmentRecorded Investment
NumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-Modification
(dollars in thousands)
Construction and development$$n/a ¹n/a ¹n/a ¹$$n/a ¹n/a ¹n/a ¹
Owner-occupied CREn/a ¹n/a ¹n/a ¹638 638 n/a ¹n/a ¹n/a ¹
Non-owner-occupied CREn/a ¹n/a ¹n/a ¹10,561 10,561 n/a ¹n/a ¹n/a ¹
Multifamily residential real estaten/a ¹n/a ¹n/a ¹n/a ¹n/a ¹n/a ¹
Total commercial real estate12,001 12,001 11,199 11,199 14,880 14,880 
Agriculture654 654 993 993 
Commercial non-real estate212 212 5,096 5,096 
Residential real estate50 50 
Consumer and other
Total accruing$$$12,001 $12,001 $12,065 $12,065 $21,019 $21,019 
Change in recorded investment due to principal paydown at time of modification$$$$$$$$
Change in recorded investment due to chargeoffs at time of modification
1 Balance for this segment is included in total commercial real estate for the three and nine months ended June 30, 2020.
28-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents a summary of all nonaccruing loans restructured in TDRs for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
Recorded InvestmentRecorded InvestmentRecorded InvestmentRecorded Investment
NumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-ModificationNumberPre-ModificationPost-Modification
(dollars in thousands)
Construction and development$$n/a ¹n/a ¹n/a ¹$$n/a ¹n/a ¹n/a ¹
Owner-occupied CRE1,446 1,446 n/a ¹n/a ¹n/a ¹1,446 1,446 n/a ¹n/a ¹n/a ¹
Non-owner-occupied CREn/a ¹n/a ¹n/a ¹n/a ¹n/a ¹n/a ¹
Multifamily residential real estaten/a ¹n/a ¹n/a ¹n/a ¹n/a ¹n/a ¹
Total commercial real estate1,446 1,446 1,446 1,446 2,216 2,216 
Agriculture1,758 1,758 19,342 19,342 4,305 4,305 11 20,797 20,797 
Commercial non-real estate15,238 15,238 922 922 15,982 15,982 1,752 1,752 
Residential real estate
Consumer and other
Total nonaccruing11 $18,442 $18,442 $20,264 $20,264 15 $21,733 $21,733 17 $24,765 $24,765 
Change in recorded investment due to principal paydown at time of modification$$$$$$$$
Change in recorded investment due to chargeoffs at time of modification
1 Balance for this segment is included in total commercial real estate for the three and nine months ended June 30, 2020.
The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default or a charge-off for the three and nine months ended June 30, 2021 and 2020, respectively.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
Number of LoansRecorded InvestmentNumber of LoansRecorded InvestmentNumber of LoansRecorded InvestmentNumber of LoansRecorded Investment
(dollars in thousands)
Construction and development$n/a ¹n/a ¹$n/a ¹n/a ¹
Owner-occupied CREn/a ¹n/a ¹n/a ¹n/a ¹
Non-owner-occupied CREn/a ¹n/a ¹n/a ¹n/a ¹
Multifamily residential real estaten/a ¹n/a ¹n/a ¹n/a ¹
Total commercial real estate$1,720 $1,720 
Agriculture166 10 1,261 
Commercial non-real estate1,308 1,308 
Residential real estate
Consumer and other
Total$10 $3,194 $15 $4,289 
1 Balance for this segment is included in total commercial real estate for the three and nine months ended June 30, 2020.
For purposes of the table above, a loan is considered to be in payment default once it is 90 days or more contractually past due under the modified terms. The table includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date. There were 0 loans removed from TDR status during the three and nine months ended June 30, 2021 and $0.0 million and $0.3 million loans removed from TDR status during the three and nine months ended June 30, 2020, respectively, as they were restructured at market terms and are performing.
29-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Allowance for Credit Losses ("ACL")
As previously mentioned in Note 2. New Accounting Standards, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which resulted in a significant change to the Company's methodology for estimating the ACL. As a result of this adoption, the Company recorded a $177.3 million increase to the allowance as a cumulative-effect adjustment on October 1, 2020.
The following tables presents ACL activity by loan portfolio segment for the three and nine months ended June 30, 2021.
Three Months Ended June 30, 2021Beginning balance, April 1, 2021Charge-offsRecoveriesProvision for (reversal of) credit losses on loansEnding balance, June 30, 2021
(dollars in thousands)
Construction and development$15,088 $$38 $1,054 $16,180 
Owner-occupied CRE24,611 (483)97 (3,793)20,432 
Non-owner-occupied CRE135,933 (3,310)(6,668)125,956 
Multifamily residential real estate11,855 (377)(5,317)6,161 
Total commercial real estate187,487 (4,170)136 (14,724)168,729 
Agriculture45,783 (1,654)176 (3,648)40,657 
Commercial non-real estate52,074 (19)301 (1,332)51,024 
Residential real estate8,903 (1)29 (893)8,038 
Consumer and other1,706 (150)141 153 1,850 
Total$295,953 $(5,994)$783 $(20,444)$270,298 
Nine Months Ended June 30, 2021Adjusted balance September 30, 2020 ¹Adoption of ASU 2016-13, as amendedAdjusted beginning balance, October 1, 2020Charge-offsRecoveries(Reversal of) provision for credit losses on loansEnding balance, June 30, 2021
(dollars in thousands)
Construction and development$7,012 $11,963 $18,975 $(27)$377 $(3,145)$16,180 
Owner-occupied CRE20,530 4,298 24,828 (483)98 (4,011)20,432 
Non-owner-occupied CRE50,965 98,986 149,951 (36,951)455 12,501 125,956 
Multifamily residential real estate6,726 2,681 9,407 (377)(2,869)6,161 
Total commercial real estate85,233 117,928 203,161 (37,838)930 2,476 168,729 
Agriculture27,018 24,360 51,378 (5,042)2,673 (8,352)40,657 
Commercial non-real estate27,599 32,938 60,537 (4,750)860 (5,623)51,024 
Residential real estate7,465 2,595 10,060 (300)248 (1,970)8,038 
Consumer and other2,572 (532)2,040 (619)428 1,850 
Total$149,887 $177,289 $327,176 $(48,549)$5,139 $(13,468)$270,298 
1 At September 30, 2020, the allowance balances were reclassified to align with the eight loan portfolio pools established for adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs. For additional information, see Note 2.
The allowance for unfunded commitments was $2.1 million and $2.4 million at June 30, 2021 and September 30, 2020, respectively, and is recorded in accrued expenses and other liabilities on the consolidated balance sheets. The reversal of provision for unfunded commitments was $0.2 million and $0.3 million for the three and nine months ended June 30, 2021, respectively, and is included in provision for credit losses in the consolidated statements of income. The provision for unfunded commitments was $2.2 million and $2.9 million for the three and nine months ended June 30, 2020, respectively, and is included in other noninterest expense in the consolidated statements of income.
30-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables present ACL activity by loan portfolio segment for the three and nine months ended June 30, 2020.
Three Months Ended June 30, 2020Beginning balance, April 1, 2020Charge-offsRecoveriesProvision for credit losses on loansImpairment of ASC 310-30 loansEnding balance, June 30, 2020
(dollars in thousands)
Commercial real estate$64,414 $(1,335)$121 $15,392 $31 $78,623 
Agriculture29,526 (4,250)735 3,418 29,429 
Commercial non-real estate31,766 (3,210)131 359 29,046 
Residential real estate8,356 (92)48 229 8,541 
Consumer and other1,888 (1,720)139 2,203 2,519 
Total$135,950 $(10,607)$1,174 $21,601 $40 $148,158 
Nine Months Ended June 30, 2020Beginning balance, October 1, 2019Charge-offsRecoveriesProvision for credit losses on loans(Improvement) impairment of ASC 310-30 loansEnding balance, June 30, 2020
(dollars in thousands)
Commercial real estate$16,827 $(2,789)$355 $64,249 $(19)$78,623 
Agriculture30,819 (13,378)2,143 10,110 (265)29,429 
Commercial non-real estate17,567 (8,269)303 19,445 29,046 
Residential real estate4,095 (379)360 4,023 442 8,541 
Consumer and other1,466 (2,825)324 3,524 30 2,519 
Total$70,774 $(27,640)$3,485 $101,351 $188 $148,158 
5. Derivative Financial Instruments
The Company uses interest rate swaps and interest rate caps/floors to manage its interest rate risk and market risk in accommodating the needs of its customers. Interest rate swaps include both traditional interest rate swaps and interest rate swaps which can be canceled by the customer on specified dates at no cost, typically referred to as swaptions. The Company recognizes all derivatives on the consolidated balance sheet at fair value in either other assets or accrued expenses and other liabilities as appropriate.
The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by the Company as of June 30, 2021 and September 30, 2020.
June 30, 2021September 30, 2020
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 - FVO loan portfolio
Financial institution counterparties$522,170 $$(37,253)$592,241 $$(62,587)
Interest rate swaps - Other
Financial institution counterparties782,712 (1,046)641,189 (1,672)
Customer counterparties782,712 55,329 (3,733)641,189 83,533 
Interest rate caps
Financial institution counterparties30,529 20,538 
Customer counterparties30,529 (5)20,538 (2)
Risk participation agreements107,552 (207)80,681 (32)
Mortgage loan commitments45,349 (6)92,278 (96)
Mortgage loan forward sale contracts44,577 94,084 96 
Total$2,346,130 $55,340 $(42,250)$2,182,738 $83,631 $(64,389)
Netting of Derivatives
The Company records the derivatives on a net basis when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. When bilateral netting agreements or similar agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract by counterparty basis.
31-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following tables provide information on the Company's netting adjustments as of June 30, 2021 and September 30, 2020.
Gross Fair ValueFair Value Offset AmountCash CollateralNet Amount Presented on the Consolidated Balance Sheet
(dollars in thousands)
As of June 30, 2021
Total Derivative Assets$55,340 $(2,898)$13,474 $65,916 
Total Derivative Liabilities ¹(42,250)2,898 35,607 (3,745)
1 There was an additional $25.8 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at June 30, 2021 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, 2020
Total Derivative Assets$83,631 $(5,263)$20,012 $98,380 
Total Derivative Liabilities ¹(64,389)5,263 59,028 (98)
1 There was an additional $22.9 million of collateral held for initial margin with a Futures Clearing Merchant for clearing derivatives at September 30, 2020 and is included in other assets in the consolidated balance sheets.
As with any financial instrument, derivative financial instruments have inherent risk including adverse changes in interest rates. The Company’s exposure to derivative credit risk is defined as the possibility of sustaining a loss due to the failure of the counterparty to perform in accordance with the terms of the contract. Credit risks associated with interest rate swaps are similar to those relating to traditional on-balance sheet financial instruments. The Company manages interest rate swap credit risk with the same standards and procedures applied to its commercial lending activities.
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.
The Company enters 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 nine months ended June 30, 2021 and 2020 was as follows.
Amount of (Loss) Gain Recognized in Consolidated Statements of Income
Three Months Ended June 30,Nine Months Ended June 30,
Location of (Loss) Gain Recognized in Consolidated Statements of Income2021202020212020
(dollars in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps - FVO loan portfolioDerivative interest expense$(3,117)$(3,040)$(9,692)$(5,181)
Interest rate swaps - FVO loan portfolioChange in fair value of FVO loans and related derivatives(3,685)(2,883)27,641 (36,148)
Interest rate swaps and other derivativesOther derivative income1,530 2,242 5,683 950 
Mortgage loan commitmentsOther derivative income175 (627)90 21 
Mortgage loan forward sale contractsOther derivative income(175)627 (90)(21)

32-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
6. The Fair Value Option for Certain Loans
The Company has elected to measure certain long-term loans at fair value to assist in managing the interest rate risk for longer-term loans. This fair value option was elected upon the origination of these loans. Interest income is recognized in the same manner as interest on non-fair value loans.
See Note 14 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 $16.6 million at June 30, 2021 and a net favorable difference of approximately $37.3 million at September 30, 2020. The total unpaid principal balance of these long-term loans was approximately $528.5 million and $617.9 million at June 30, 2021 and September 30, 2020, respectively. The fair value of these loans is included in total loans in the consolidated balance sheets and are grouped with commercial real estate, agricultural and commercial non-real estate loans in Note 4. As of June 30, 2021 and September 30, 2020, there were loans with a fair value of $13.0 million and $21.7 million, respectively, which were greater than 90 days past due or in nonaccrual status with an unpaid principal balance of $13.1 million and $26.2 million, respectively.
Changes in fair value for items for which the fair value option has been elected were an increase in fair value of $7.8 million and $25.2 million for the three and nine months ended June 30, 2021, respectively, and a decrease in fair value of $22.1 million and $1.5 million for the three and nine months ended June 30, 2020, respectively. These changes in fair value are reported net of the related derivative activity in change in fair value of FVO loans and related derivatives within the consolidated statements of income.
For long-term loans, $4.1 million and $2.7 million for the three and nine June 30, 2021, respectively, and $23.3 million and $35.9 million for the three and nine months ended June 30, 2020, 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.
7. Core Deposits and Other Intangibles
The following table presents a summary of intangible assets subject to amortization as of June 30, 2021 and September 30, 2020.
Core Deposit IntangibleCustomer Relationships IntangibleOther
Intangible
Total
(dollars in thousands)
As of June 30, 2021
Gross carrying amount$7,339 $3,172 $538 $11,049 
Accumulated amortization(4,858)(427)(374)(5,659)
Net intangible assets$2,481 $2,745 $164 $5,390 
As of September 30, 2020
Gross carrying amount$7,339 $3,172 $538 $11,049 
Accumulated amortization(4,316)(244)(325)(4,885)
Net intangible assets$3,023 $2,928 $213 $6,164 
Amortization expense of intangible assets were $0.2 million and $0.8 million for the three and nine months ended June 30, 2021, respectively, and $0.3 million and $1.2 million for the three and nine months ended June 30, 2020, respectively.
Fiscal yearAmount
(dollars in thousands)
Remaining in 2021$240 
2022929 
2023831 
2024742 
2025683 
2026 and thereafter1,965 
Total$5,390 

33-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
8. Leases
ASC Topic 842, Leases ("ASC 842"), became effective for the Company on October 1, 2019. ASC 842 requires a lease, whether classified as an operating lease or a financing lease, be accounted for as a right-of-use asset ("ROU asset") with a related lease liability recorded at the present value of the lease payments. The ROU asset represents the Company's right to use an underlying asset for the lease term and is included in other assets on the Company's consolidated balance sheets. The lease liability represents the Company's obligation to make lease payments and is included in accrued expenses and other liabilities on the Company's consolidated balance sheets. The cost of the lease is recognized on a straight-line basis over the lease term as lease expense. As permitted by ASC 842, the Company elected not to reassess (i) whether any expired or existing contracts are leases or contain leases, (ii) the lease classification of any expired or existing leases, and (iii) the initial direct costs for existing leases.
Subsequent to the adoption of ASC 842, the Company assesses contracts at inception to determine whether the contract is a lease or contains an embedded lease. A ROU asset and lease liability is recorded on the consolidated balance sheet for all leases except those with an original lease term of twelve months or less. Most of these leases include one or more renewal options, and certain leases also include lessee termination options. As these renewal options are not generally considered reasonably certain of exercise, they are not included in the lease term.
The Company leases certain branch and corporate offices, land and ATM facilities through operating leases with terms typically ranging from 1 to 15 years, with the longest term having a lease expiration of March 31, 2034. The Company has no significant financing leases as of June 30, 2021.
The following table summarizes the ROU asset and lease liability as of June 30, 2021 and September 30, 2020.
June 30, 2021September 30, 2020
(dollars in thousands)
ROU asset$19,861 $22,709 
Total lease liability21,019 24,114 
Weighted average remaining lease term5.85 years6.29 years
Weighted average discount rate ¹1.82 %1.83 %
1 The Company uses its incremental borrowing rate to calculate the present value of lease payments when the interest rate implicit in the lease is not disclosed.
Total lease expense incurred by the Company was $1.6 million and $5.0 million for the three and nine months ended June 30, 2021, respectively, and $1.8 million and $5.4 million for the three and nine months ended June 30, 2020, respectively, principally made up of contractual lease payments for operating leases.
As of June 30, 2021 and September 30, 2020, the Company had 0 operating leases that had not yet commenced.
The following table presents supplemental cash flow information related to leases for the three and nine months ended June 30, 2021 and 2020:
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases$1,413 $1,400 $4,341 $4,226 
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases$(443)$2,415 $2,444 $8,046 
34-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents a maturity analysis of the Company's operating lease liability as of June 30, 2021.
Fiscal yearAmount
(dollars in thousands)
Remaining in 2021$1,895 
20224,973 
20234,294 
20243,545 
20252,605 
2026 and thereafter5,446 
Total undiscounted lease payments22,758 
Less: Amounts representing interest(1,739)
Lease liability$21,019 

9. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase generally mature overnight following the transaction date. Securities underlying the agreements had an amortized cost of approximately $95.4 million and $82.6 million and fair value of approximately $96.2 million and $84.7 million at June 30, 2021 and September 30, 2020, respectively. In most cases, in alignment with the repurchase agreements in place with customers, the Company over-collateralizes the agreements at 102% of total funds borrowed to protect the purchaser from changes in market value. Additionally, the Company utilizes held-in-custody procedures to ensure the securities sold under repurchase agreements are unencumbered.
The following tables present the gross obligation by the class of collateral pledged and the remaining contractual maturity of the agreements at June 30, 2021 and September 30, 2020.
June 30, 2021
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$80,167 $$$$80,167 
Total repurchase agreements$80,167 $$$$80,167 
September 30, 2020
Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 Days30-90 DaysGreater than 90 DaysTotal
(dollars in thousands)
Repurchase agreements
Mortgage-backed securities$65,506 $$$$65,506 
Total repurchase agreements$65,506 $$$$65,506 

10. FHLB Advances and Other Borrowings
FHLB advances and other borrowings consist of the following at June 30, 2021 and September 30, 2020.
June 30,
2021
September 30,
2020
(dollars in thousands)
Short-term borrowings:
Fed funds purchased, matured in October 2020$$75,000 
Long-term borrowings:
Notes payable to FHLB, interest rates from 2.76% to 2.88% and maturity dates from September 2022 to September 2024 collateralized by real estate loans120,000 120,000 
Total$120,000 $195,000 
35-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
As of June 30, 2021 and September 30, 2020, the Company had a borrowing capacity of $911.0 million and $947.7 million, respectively, with the FRB Discount Window. Principal balances of loans pledged to the FRB Discount Window to collateralize the borrowing totaled $1.08 billion at June 30, 2021 and $1.17 billion at September 30, 2020. The Company has secured this line for contingency funding.
As of June 30, 2021 and September 30, 2020, based on its collateral pledged, the additional borrowing capacity of the Company with the FHLB was $1.79 billion and $2.03 billion, respectively.
Principal balances of loans pledged to the FHLB to collateralize notes payable totaled $3.42 billion and $4.07 billion at June 30, 2021 and September 30, 2020, respectively. The Company purchased letters of credit from the FHLB to pledge as collateral on public deposits. The amount outstanding was $0.0 million and $75.0 million at June 30, 2021 and September 30, 2020, respectively. The Company had additional letters of credit from the FHLB of $10.2 million and $14.6 million at June 30, 2021 and September 30, 2020, respectively, for other purposes.
As of June 30, 2021, FHLB advances and other borrowings are due or callable (whichever is earlier) in subsequent fiscal years as follows.
Fiscal yearAmount
(dollars in thousands)
Remaining in 2021$
202230,000 
202330,000 
202460,000 
2025
2026 and thereafter
Total$120,000 

11. Subordinated Debentures and Subordinated Notes Payable
Junior Subordinated Deferrable Interest Debentures
The Company has 7 trusts which were created or assumed as part of prior acquisitions that as of June 30, 2021 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 June 30, 2021 and September 30, 2020, Debentures, net of fair value adjustment, of $73.9 million and $73.8 million, respectively, were eligible for treatment as Tier 1 capital.
Relating to the trusts, the Company held as assets $2.5 million in common shares at June 30, 2021 and September 30, 2020, which are included in other assets on the consolidated balance sheets.
36-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
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, whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter ended September 30, 2020, and whose eligibility will continue to reduce 20% on the anniversary date thereof each of the next four years, 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. Proceeds from the private placement of subordinated notes repaid outstanding subordinated debt.
Subordinated debentures and subordinated notes payable are summarized as follows.
June 30, 2021September 30, 2020
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(1,987)(2,088)
Total junior subordinated debentures payable, net of fair value adjustment73,933 73,832 
Subordinated notes payable
Fixed to floating rate effective August 2020, 3.150% plus 3 month LIBOR35,000 35,000 
Total subordinated debentures and subordinated notes payable$108,933 $108,832 
1 Adjustment reflects the fair value adjustments related to the junior subordinated deferrable interest debentures assumed as part of the HF Financial acquisition.

12. Profit Sharing Plan
The Company participates in a multiple employer 401(k) profit sharing plan ("401(k) Plan"). All employees are eligible to participate, beginning with the first day of the month coincident with or immediately following the completion of one year of service and having reached the age of 21. In addition to employee contributions, the Company may contribute discretionary amounts for eligible participants. Contribution rates for participating employees must be equal. The Company contributed $1.7 million and $4.9 million for the three and nine months ended June 30, 2021, respectively, and $1.8 million and $5.1 million to the 401(k) Plan for the three and nine months ended June 30, 2020, respectively.
13. Stock-Based Compensation
On September 26, 2014, the Board of Directors adopted, and on October 10, 2014, NAB, at that time the Company's controlling shareholder, approved the Great Western Bancorp, Inc. 2014 Omnibus Incentive Compensation Plan ("2014 Plan"), the Great Western Bancorp, Inc. 2014 Non-Employee Director Plan ("2014 Director Plan"), and the Great Western Bancorp, Inc. Executive Incentive Compensation Plan ("Bonus Plan"), collectively ("the Plans"), which provide for the issuance of restricted share units and performance based share units to certain officers, employees and directors of the Company. On February 22, 2018 and February 9, 2021, 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.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
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.
Stock compensation is recognized based on the number of awards expected to vest using actual forfeiture amounts. For performance-based stock awards, an estimate is made of the number of shares expected to vest as a result of actual performance against the performance targets to determine the amount of compensation expense to be recognized. The estimate is reevaluated quarterly and total compensation expense is adjusted for any change in the current period. Stock-based compensation expense is included in salaries and employee benefits expense in the consolidated statements of income. Stock compensation expense was $0.6 million and $3.0 million for the three and nine months ended June 30, 2021, respectively, and $1.1 million and $4.0 million for the three and nine months ended June 30, 2020, respectively. Related income tax benefits recognized were $0.1 million and $0.7 million for the three and nine months ended June 30, 2021, respectively, and $0.3 million and $1.0 million for the three and nine months ended June 30, 2020, respectively.
The following is a summary of the Plans’ restricted share and performance-based stock award activity as of June 30, 2021 and September 30, 2020. The number of performance shares granted in the following table are reflected at the amount of achievement of the pre-established targets.
June 30, 2021September 30, 2020
Common
Shares
Weighted-Average Grant Date Fair ValueCommon
Shares
Weighted-Average Grant Date Fair Value
Restricted Shares
Restricted shares, beginning of fiscal year249,180 $32.89 190,805 $37.20 
Granted180,125 18.92 147,282 30.68 
Vested(94,247)33.42 (84,316)38.60 
Forfeited(4,388)26.90 (4,591)36.18 
Canceled
Restricted shares, end of period330,670 $25.21 249,180 $32.89 
Vested, but not issuable at end of period87,324 $29.32 62,992 $33.98 
Performance Shares
Performance shares, beginning of fiscal year175,740 $33.56 173,332 $38.50 
Granted106,000 18.87 62,278 40.15 
Vested(25,452)41.07 (54,861)39.43 
Forfeited(5,242)28.85 (5,009)37.90 
Canceled
Performance shares, end of period251,046 $25.08 175,740 $33.56 
Vested, but not issuable at end of period5,612 $18.00 5,612 $18.00 
As of June 30, 2021, there was $5.5 million of unrecognized compensation cost related to non-vested restricted stock awards expected to be recognized over a period of 3.6 years. The fair value of the vested, but not issued stock awards was $3.0 million and $0.9 million at June 30, 2021 and September 30, 2020, respectively.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
14. Fair Value Measurements
The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes the following three levels of inputs that may be used to measure fair value:
Level 1    Quoted prices in active markets for identical assets or liabilities;
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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 in 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 the securities are classified as Level 2 securities and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. 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 June 30, 2021 and September 30, 2020.
Interest Rate Swaps and Loans
Interest rate swaps are valued by the Company's Swap Dealers using cash flow valuation techniques with observable market data inputs. The fair value of loans accounted for under the fair value option represents the net carrying value of the loan, plus the equal and opposite amount of the value of the swap needed to offset the interest rate risk and an adjustment for credit risk based on the Company's assessment of existing market conditions for the specific portfolio of loans. This is used due to the strict prepayment penalties put in the loan terms to cover the cost of exiting the interest rate swap of the loans in the case of early prepayment or termination. The adjustment for credit risk on loans accounted for under the fair value option is not significant to the overall fair value of the loans. The fair values estimated by the Company's Swap Dealers use interest rates that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The Company has entered into Collateral Agreements with its Swap Dealers and Futures Clearing Merchant which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted. The Company regularly enters into interest rate lock commitments on mortgage loans to be held for sale with corresponding forward sales contracts related to these interest rate lock commitments, the fair values of which are calculated by applying observable market values from Fannie Mae TBA pricing to each interest rate lock commitment and forward sales contract, and 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.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
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).
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 June 30, 2021 and September 30, 2020.
Fair ValueLevel 1Level 2Level 3 ¹
(dollars in thousands)
As of June 30, 2021
U.S. Treasury securities$99,150 $99,150 $$
U.S. Agency securities24,111 24,111 
Mortgage-backed securities1,980,596 1,980,596 
States and political subdivision securities48,377 48,377 
Corporate debt securities28,244 28,244 
Other1,036 1,036 
Total securities available for sale$2,181,514 $123,261 $2,058,253 $
Derivatives-assets$65,916 $$65,916 $
Derivatives-liabilities3,745 3,745 
Fair value loans545,149 545,149 
Loan servicing rights771 771 
As of September 30, 2020
U.S. Treasury securities$50,152 $50,152 $$
U.S. Agency securities25,060 25,060 
Mortgage-backed securities1,642,780 1,642,780 
States and political subdivision securities55,580 51,783 3,797 
Other1,054 1,054 
Total securities available for sale$1,774,626 $75,212 $1,695,617 $3,797 
Derivatives-assets$98,380 $$98,380 $
Derivatives-liabilities98 98 
Fair value loans655,185 655,185 
Loan servicing rights1,303 1,303 
1 All following disclosures related to Level 3 recurring and non-recurring assets do not include those deemed to be immaterial.
The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Loan servicing rights
Balance, beginning of period$900 $1,863 $1,303 $2,255 
Realized and unrealized loss ¹(129)(269)(532)(661)
Balance, end of period$771 $1,594 $771 $1,594 
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.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
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.
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 June 30, 2021 and September 30, 2020.
Fair ValueLevel 1Level 2Level 3
(dollars in thousands)
As of June 30, 2021
Other repossessed property$5,786 $$$5,786 
Impaired loans187,903 187,903 
Mortgage loans held for sale, at lower of cost or fair value1,377 1,377 
Property held for sale600 600 
As of September 30, 2020
Other repossessed property$17,991 $$$17,991 
Impaired loans669,968 669,968 
Mortgage loans held for sale, at lower of cost or fair value12,371 12,371 
Property held for sale600 600 
The valuation techniques and significant unobservable inputs used to measure Level 3 fair value measurements at June 30, 2021 were as follows.
Fair Value of Assets / (Liabilities) at June 30, 2021Valuation
Technique(s)
Unobservable
Input
RangeWeighted
Average
(dollars in thousands)
Other repossessed property$5,786 Appraisal valueCollateral specific adjustmentN/AN/A
Impaired loans187,903 Appraisal valueCollateral specific adjustmentN/AN/A
Property held for sale600 Appraisal valueCollateral specific adjustmentN/AN/A
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
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.
Fair values for on-balance sheet instruments as of June 30, 2021 and September 30, 2020 are as follows.
June 30, 2021September 30, 2020
Level in Fair Value HierarchyCarrying AmountFair
Value
Carrying AmountFair
Value
(dollars in thousands)
Assets
Cash and cash equivalentsLevel 1$1,756,345 $1,756,345 $432,887 $432,887 
Securities purchased under agreements to resellLevel 1104,523 104,523 
Securities held to maturityLevel 113,666 13,707 
Securities held to maturityLevel 2185,329 184,868 
Securities held to maturityLevel 33,450 3,450 
Loans, net, excluding fair valued loans, loans held for sale and impaired loans ¹Level 37,743,354 7,754,795 8,738,617 8,768,314 
Liabilities
Time depositsLevel 2797,185 798,418 1,282,978 1,287,814 
FHLB advances and other borrowingsLevel 2120,000 127,027 195,000 204,715 
Securities sold under repurchase agreementsLevel 280,167 80,167 65,506 65,506 
Subordinated debentures and subordinated notes payableLevel 2108,933 96,988 108,832 96,424 
1 Includes $29.2 million and $29.0 million of net deferred loan fees at June 30, 2021 and September 30, 2020, respectively, of which carrying value approximates fair value.

15. Earnings per Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding determined for the basic earnings per share calculation plus the dilutive effect of stock compensation using the treasury stock method.
The following information was used in the computation of basic and diluted earnings per share (EPS) for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands, except per share data)
Net income (loss)$58,749 $5,400 $151,367 $(691,944)
Weighted average common shares outstanding55,207,008 55,082,621 55,175,567 55,788,751 
Dilutive effect of stock based compensation317,971 62,998 234,006 
Weighted average common shares outstanding for diluted earnings per share calculation55,524,979 55,145,619 55,409,573 55,788,751 
Basic earnings per share$1.06 $0.10 $2.74 $(12.40)
Diluted earnings per share$1.06 $0.10 $2.74 $(12.40)
The Company had 0 and 9,570 shares of unvested performance stock as of June 30, 2021 and 2020, 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 0 and 125,544 shares of anti-dilutive stock awards outstanding as of June 30, 2021 and 2020, respectively.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
16. Revenue Recognition
The Company recognizes revenue from contracts with customers in accordance with ASC Topic 606, Revenue from Contracts with Customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company's revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans, letters of credit, derivatives and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP and discussed elsewhere within Item 8. Financial Statements and Supplementary Data, "Note 1. Nature of Operations and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. Descriptions of the Company's revenue-generating activities that are within the scope of ASC Topic 606, which are presented in the consolidated income statements as components of noninterest income, are as follows:
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 June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Noninterest income (loss)
Service charges and other fees$9,005 $7,731 $27,228 $28,328 
Wealth management fees3,477 2,773 9,688 8,859 
Other700 745 2,429 2,077 
Noninterest income from contracts with customers within the scope of ASC Topic 60613,182 11,249 39,345 39,264 
Noninterest income (loss) within the scope of other GAAP Topics ¹6,189 (22,932)11,367 (35,297)
Total noninterest income (loss)$19,371 $(11,683)$50,712 $3,967 
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.

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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, 2020, previously filed with the SEC. In addition to historical financial data, this discussion includes certain forward-looking statements regarding events and trends that may affect our future results. Such statements are subject to risks and uncertainties that could cause our actual results to differ materially. See "Cautionary Note Regarding Forward-Looking Statements." For a more complete discussion of the factors that could affect our future results, see "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q and "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
Any discrepancies included in this filing between totals and the sums of percentages and dollar amounts presented, or between rounded dollar amounts, are due to rounding.
Unless otherwise noted, references to "the current period" or "the current quarter" refer to the fiscal quarter ended June 30, 2021 and references to "the comparable period" or "the comparable quarter" refer to the fiscal quarter ended June 30, 2020.
Tax Equivalent Presentation
All references to net interest income, net interest margin, interest income on loans, yield on 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 banking. 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. We serve our customers through 174 branches in attractive markets in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. We provide financial results based on a fiscal year ending September 30 as a single reportable segment.
The principal sources of our revenues and cash flows are: (i) interest and fees earned on loans made or held by our Bank; (ii) interest on fixed income investments held by our Bank; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at our Bank; (v) gain on the sale of loans held for sale (vi) gains on sales of securities; and (vii) merchant and card fees. Our principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing and communication costs primarily associated with maintaining our Bank's loan and deposit functions; (iv) occupancy expenses for maintaining our Bank's facilities; (v) professional fees, including FDIC insurance assessments; (vi) business development; and (vii) other real estate owned expenses. The largest component contributing to our net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposit accounts and other borrowings). One of management's principal functions is to manage the spread between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
Impact and Response to COVID-19 Pandemic
We conduct business in nine states, including Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Many of these states placed significant restrictions on businesses and individuals at the outset of the COVID-19 pandemic. While many of these initial restrictions have been lifted, there is still the possibility that certain restrictions could be re-imposed or extended to contain further spread if the rate of infection were to surge again in any of these states, including as a result of the Delta variant that has recently caused an uptick in infections particularly among non-vaccinated individuals. As a financial institution, we are considered an essential business and we have therefore continued to operate on a modified basis throughout the pandemic to comply with governmental restrictions and public health authority guidelines.
We remain focused on keeping our employees safe and our bank running effectively to serve our customers and continue to monitor the continued spread of COVID-19 and its Delta variant. Our branches have been reopened across our footprint, and we are targeting a full return to work on September 7th that still provides for flexible remote work optionality and adherence to CDC guidelines in the office. For our customers, we have supported PPP, having provided over 4,800 loans for $727.3 million in the first round followed by over 4,100 loans for $249.5 million in the second round. We have processed over 4,300 loans totaling $612.0 million related to PPP forgiveness, resulting in an outstanding balance of $364.9 million as of June 30, 2021. Additionally, we granted both full and partial payment deferrals to help provide relief from COVID-19, which resulted in a peak of $1.69 billion of loans on deferral as of the third quarter of fiscal year 2020 that decreased to $19.7 million as of April 16, 2021 and to $0.2 million as of July 16, 2021.
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Furthermore, the onset and continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our business and continuation of operations, including the following:
Market interest rates have declined significantly and remain near historic lows, and these reductions, especially if prolonged, could adversely affect our net interest income, net interest margin and earnings;
We have experienced and continue to anticipate a slowdown in demand for our products and services, including the demand for traditional loans. Although the decline has been offset, in part, due to PPP loans under the CARES Act and other governmental programs established in response to the pandemic, the PPP forgiveness process will continue to lessen the positive impact of these programs;
We have experienced and continue to anticipate an increase in risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, all of which may result in additional credit charges and other losses in our loan portfolio;
Volatility in economic forecasts caused by the COVID-19 pandemic create wider uncertainty in the outlook for future net charge off activity resulting in the potential for changing levels of reserves in the allowance for credit losses;
Declines in fair value of investment securities in our portfolio due to economic uncertainties could reduce the unrealized gains reported as part of our consolidated comprehensive income (loss); and
In meeting our objective to maintain our capital levels and liquidity position through the COVID-19 pandemic, our Board of Directors indefinitely suspended additional stock buybacks and reduced our dividend payments from pre-pandemic levels, and could still determine to altogether forego future dividends in order to maintain and/or strengthen our capital and liquidity position.
Highlights for the Three and Nine Months Ended June 30, 2021
Net income was $58.7 million, or $1.06 per diluted share, for the third quarter of fiscal year 2021, compared to net income of $5.4 million, or $0.10 per diluted share, for the same period in fiscal year 2020, an increase of $53.3 million. The increase in net income in the current quarter was primarily due to a $33.6 million increase in net interest income after provision for credit losses combined with a $31.1 million increase in noninterest income and a $6.5 million decrease in noninterest expense, partially offset with a $17.8 million increase in provision for income taxes. Our efficiency ratio was 50.9% and 69.4%, respectively, for the third quarter of fiscal year 2021 and 2020. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" section.
Net interest margin, which measures our ability to maintain interest rates on interest earning assets above those of interest bearing liabilities, was 3.23%, 3.51% and 3.57%, respectively, for the three months ended June 30, 2021, March 31, 2021 and June 30, 2020. Adjusted net interest margin, which reflects the derivative interest expense on interest rate swaps, was 3.13%, 3.40% and 3.47%, 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 each decreased by 34 basis points compared to the same quarter in fiscal year 2020. Net interest margin decreased between the two periods primarily driven by securities yields, which decreased 63 basis points, partially offset by the yield on deposits, which decreased 25 basis points, and loan yields, which increased 3 basis points. A minimal increase of $0.1 million in the current quarter of the cost of interest rate swaps compared to the same period in fiscal year 2020 resulted in the flat difference between adjusted net interest margin and 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 $8.48 billion at June 30, 2021 compared to $10.08 billion at September 30, 2020, a decrease of $1.60 billion, or 15.9%. The net loan reduction was driven by sales of $267.5 million in hotel loans in fiscal year 2021, a net decrease of $362.4 million of PPP loans in the current period, a number of payoffs in nonaccrual and criticized loans, and an increase in paydowns across the commercial, agriculture and consumer portfolios.
Deposits were $11.54 billion at June 30, 2021, an increase of $529.0 million, or 4.8%, compared to $11.01 billion at September 30, 2020, due to a $892.1 million increase in checking and savings deposits across both business and consumer accounts, offset by a $184.9 million decrease in business and consumer time deposits and a $178.2 million decrease in public and brokered deposits. FHLB advances and other borrowings decreased by $75.0 million due to matured borrowings during the period.
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At June 30, 2021, nonaccrual loans were $210.1 million, a decrease of $114.8 million compared to September 30, 2020, driven by a number of payoffs, including $80.7 million of agriculture loans and $34.1 million of non-agriculture loans and no material downgrades. Classified loans were $612.2 million as of June 30, 2021, a decrease of $157.3 million from $769.5 million as of September 30, 2020, driven by a number of upgraded agriculture relationships, and a number of payoffs and sales in both agriculture and non-agriculture loans. Total other repossessed property balances were $11.5 million as of June 30, 2021, a decrease of $8.5 million, or 42.6%, compared to September 30, 2020.
ASU 2016-13, referred to as the current expected credit loss ("CECL") model, was adopted effective October 1, 2020, and as such, the provision for credit losses in fiscal year 2021 reflects current expected credit losses based on forecasted economic and other assumptions, including the estimated impacts of COVID-19, over the remaining expected lives of financial assets and off-balance sheet credit exposures, whereas the fiscal year 2020 methodology applied an incurred loss model.
The balance of the ACL increased to $270.3 million at June 30, 2021 from $149.9 million at September 30, 2020 due to the impact of CECL adoption on October 1, 2020, where we recognized a Day 1 increase in the ACL of $177.3 million. The increase in ACL related to the adoption of CECL was partially offset by a reversal of provision for credit losses of $13.8 million for the first nine months of fiscal year 2021 due to lower loan balances and improved economic factors. For the same period in fiscal year 2020, we recognized a provision for credit losses of $101.5 million as a result of the impact of the COVID-19 pandemic. Net charge-offs for the first nine months of fiscal year 2021 were $43.4 million, or 0.62% of average total loans on an annualized basis, compared to net charge-offs of $24.2 million, or 0.33% of average total loans on an annualized basis, for the comparable period in fiscal year 2020. The increase in charge-offs was driven by $34.0 million of charge-offs related to the sales of certain hotel loans during the period.
Tier 1 capital, total capital and Tier 1 leverage ratios were 14.5%, 16.0% and 10.1%, respectively, at June 30, 2021, compared to 11.8%, 13.3% and 9.4%, respectively, at September 30, 2020. In addition, our Common Equity Tier 1 ratio was 13.7% and 11.0% at June 30, 2021 and September 30, 2020, respectively. Our tangible common equity to tangible assets ratio was 8.8% at June 30, 2021 and 9.2% at September 30, 2020. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized". For more information on our tangible common equity to tangible assets ratio, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
Key Factors Affecting Our Business and Financial Performance
As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, our financial performance is impacted by a number of external factors outside our control, as well as our ability to execute on the key components of our strategy for continued success and future growth. There have been no material changes to these factors or key components of our strategy except as otherwise supplemented within our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.
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Results of Operations—Three and Nine Months Ended June 30, 2021 and 2020
Overview
The following table highlights certain key financial and performance information for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands, except share and per share amounts)
Operating Data:
Interest income (FTE)$104,219 $121,472 $331,988 $381,289 
Interest expense5,161 13,620 18,977 63,244 
Noninterest income (loss)19,371 (11,683)50,712 3,967 
Noninterest expense60,505 67,049 177,057 932,432 
(Reversal of) provision for credit losses ³(20,699)21,641 (13,800)101,539 
Net income (loss)58,749 5,400 151,367 (691,944)
Adjusted net income ¹58,749 5,400 151,367 77,754 
Common shares outstanding55,116,095 55,014,047 55,116,095 55,014,047 
Weighted average diluted common shares outstanding55,524,979 55,145,619 55,409,573 55,788,751 
Earnings per common share - diluted$1.06 $0.10 $2.74 $(12.40)
Adjusted earnings per common share - diluted ¹1.06 0.10 2.74 1.39 
Performance Ratios:
Net interest margin (FTE) ¹ ²3.23 %3.57 %3.46 %3.61 %
Adjusted net interest margin (FTE) ¹ ²3.13 %3.47 %3.35 %3.55 %
Return on average total assets ²1.81 %0.17 %1.59 %(7.22)%
Return on average common equity ²21.2 %1.9 %18.7 %(55.6)%
Return on average tangible common equity ¹ ²21.4 %2.0 %18.9 %2.5 %
Efficiency ratio ¹50.9 %69.4 %48.5 %58.7 %
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.
3 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the provision for loan and lease losses under the incurred model.
Net Interest Income
The following table presents net interest income, net interest margin and adjusted net interest margin for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Net interest income:
Total interest income (FTE)$104,219 $121,472 $331,988 $381,289 
Less: Total interest expense5,161 13,620 18,977 63,244 
Net interest income (FTE)$99,058 $107,852 $313,011 $318,045 
Net interest margin (FTE) and adjusted net interest margin (FTE) ¹
Average interest-earning assets$12,299,046 $12,156,505 $12,112,699 $11,763,523 
Average interest-bearing liabilities11,864,829 11,493,387 11,622,695 11,049,204 
Net interest margin (FTE)3.23 %3.57 %3.46 %3.61 %
Adjusted net interest margin (FTE) ¹3.13 %3.47 %3.35 %3.55 %
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 $99.1 million for the third quarter of fiscal year 2021, compared to $107.9 million for the same period in fiscal year 2020, a decrease of $8.8 million, or 8.2%. Interest expense decreased $8.4 million driven by a $6.5 million decrease in deposit interest resulting from lower yields on interest-bearing deposits, along with a $1.9 million decrease in borrowings interest. The decrease in interest expense was partially offset by lower interest income of $17.3 million mainly driven by a $15.9 million decrease in loan interest due to lower volumes and lower yields. Securities interest decreased $1.9 million due to lower yields driven by the low interest rate environment.
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For the first nine months of fiscal year 2021, net interest income was $313.0 million, compared to $318.0 million for the same period in fiscal year 2020, a decrease of $5.0 million, or 1.6%. Interest expense decreased $44.2 million driven mainly by a $36.8 million decrease in deposit interest resulting from lower yields on interest-bearing deposits, along with a $7.4 million decrease in borrowings interest. The decrease in interest expense was partially offset by lower interest income of $49.3 million as loan interest decreased $41.0 million from lower volumes and lower yields. Securities interest decreased $8.3 million due to lower yields driven by the low interest rate environment.
Net interest margin was 3.23% and 3.57% for the third quarter of fiscal year 2021 and 2020, respectively, a decrease of 34 basis points, while the adjusted net interest margin was 3.13% and 3.47% for the same periods, respectively, a decrease of 34 basis points. Net interest margin was 3.46% and 3.61% for the first nine months of fiscal year 2021 and 2020, respectively, a decrease of 15 basis points, while the adjusted net interest margin was 3.35% and 3.55% for the same periods, respectively, a decrease of 20 basis points. The decrease in net interest margin for the three month period was primarily driven by securities yields, which decreased 63 basis points, partially offset by the yield on deposits, which decreased 25 basis points and loan yields, which increased 3 basis points. The decrease in net interest margin for the nine month period was primarily driven by securities yields, which decreased 69 basis points, and loan yields, which decreased 23 basis points, partially offset by the yield on deposits, which decreased 49 basis points. A $0.1 million and $4.5 million increase, respectively, in the cost of interest rate swaps between the three and nine month period in fiscal year 2021 and the comparable periods in fiscal year 2020, is the primary driver for the more pronounced decreases in adjusted net interest margin compared to the decreases 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.
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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 nine 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 $712.9 million at June 30, 2021 and $741.5 million at June 30, 2020, are typically entered at lower interest rate arrangements than comparable non-exempt loans and securities. The amount of interest income reflected in the following table has been adjusted to include the amount of tax benefit realized in the period and as such is presented on a fully-tax equivalent basis, the calculation of which is outlined in the discussion of non-GAAP items later in this section. Prior to the October 1, 2020 adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, ASC 310-30 loans represented 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 represented loans we have originated and loans we have acquired that were not credit impaired at the time we acquired them. After adoption of ASU 2016-13, as amended, all loans were presented as non-ASC 310-30 loans.
Three Months Ended
June 30, 2021June 30, 2020
Average BalanceInterest (FTE)Yield / Cost ¹Average BalanceInterest (FTE)Yield / Cost ¹
(dollars in thousands)
Assets
Interest-bearing bank deposits ²$1,357,821 $306 0.09 %$144,805 $112 0.31 %
Other interest-earning assets121,981 348 1.14 %— — — %
Investment securities2,318,325 8,642 1.50 %1,987,648 10,532 2.13 %
Non-ASC 310-30 loans, net ³8,500,919 94,923 4.48 %9,974,802 109,326 4.41 %
ASC 310-30 loans, net ⁴— — — %49,250 1,502 12.27 %
Loans, net8,500,919 94,923 4.48 %10,024,052 110,828 4.45 %
Total interest-earning assets12,299,046 104,219 3.40 %12,156,505 121,472 4.02 %
Noninterest-earning assets743,109 598,159 
Total assets$13,042,155 $104,219 3.21 %$12,754,664 $121,472 3.83 %
Liabilities and Stockholders' Equity
Noninterest-bearing deposits$2,863,176 $2,414,567 
Interest-bearing deposits7,834,032 $2,618 0.13 %6,974,915 $5,604 0.32 %
Time deposits863,923 887 0.41 %1,430,246 4,407 1.24 %
Total deposits11,561,131 3,505 0.12 %10,819,728 10,011 0.37 %
Securities sold under agreements to repurchase74,785 14 0.08 %64,645 15 0.09 %
FHLB advances and other borrowings120,000 853 2.85 %500,248 2,524 2.03 %
Subordinated debentures and subordinated notes payable108,913 789 2.91 %108,766 1,070 3.96 %
Total borrowings303,698 1,656 2.19 %673,659 3,609 2.15 %
Total interest-bearing liabilities11,864,829 $5,161 0.17 %11,493,387 $13,620 0.48 %
Noninterest-bearing liabilities63,535 97,553 
Stockholders' equity1,113,791 1,163,724 
Total liabilities and stockholders' equity$13,042,155 $12,754,664 
Net interest spread3.04 %3.35 %
Net interest income and net interest margin (FTE)$99,058 3.23 %$107,852 3.57 %
Less: Tax equivalent adjustment1,595 1,601 
Net interest income and net interest margin - ties to Statements of Comprehensive Income$97,463 3.18 %$106,251 3.52 %
¹ Annualized for all partial-year periods.
2 Interest income includes $0.1 million for the third quarter of fiscal year 2020 resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. For the third quarter of fiscal year 2021, all amounts were included in other interesting-earning assets.
3 Interest income includes $0.0 million and $0.2 million for the third quarter of fiscal years 2021 and 2020, respectively, resulting from accretion of purchase accounting discount associated with acquired loans.
4 Beginning in the first quarter of fiscal year 2021, ASC 310-30 loans began being reported with non-ASC 310-30 loans. Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, discounts on ASC 310-30 loans related to noncredit factors accreted to interest income were immaterial.
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Nine Months Ended
June 30, 2021June 30, 2020
Average BalanceInterest (FTE)Yield / Cost ¹Average BalanceInterest (FTE)Yield / Cost ¹
(dollars in thousands)
Assets
Interest-bearing bank deposits ²$889,362 $622 0.09 %$78,164 $1,278 2.18 %
Other interest-earning assets71,085 592 1.11 %— — — %
Investment securities2,123,979 25,079 1.58 %1,959,681 33,359 2.27 %
Non-ASC 310-30 loans, net ³9,028,273 305,695 4.53 %9,675,039 342,042 4.72 %
ASC 310-30 loans, net ⁴— — — %50,639 4,610 12.16 %
Loans, net9,028,273 305,695 4.53 %9,725,678 346,652 4.76 %
Total interest-earning assets12,112,699 331,988 3.66 %11,763,523 381,289 4.33 %
Noninterest-earning assets653,353 1,046,576 
Total assets$12,766,052 $331,988 3.48 %$12,810,099 $381,289 3.98 %
Liabilities and Stockholders' Equity
Noninterest-bearing deposits$2,746,884 $2,111,445 
Interest-bearing deposits7,554,204 $9,780 0.17 %6,585,100 $31,060 0.63 %
Time deposits1,018,492 4,196 0.55 %1,655,059 19,758 1.59 %
Total deposits11,319,580 13,976 0.17 %10,351,604 50,818 0.66 %
Securities sold under agreements to repurchase74,235 45 0.08 %62,513 70 0.15 %
FHLB advances and other borrowings120,000 2,558 2.85 %526,372 8,737 2.22 %
Subordinated debentures and subordinated notes payable108,880 2,398 2.94 %108,715 3,619 4.45 %
Total borrowings303,115 5,001 2.21 %697,600 12,426 2.38 %
Total interest-bearing liabilities11,622,695 $18,977 0.22 %11,049,204 $63,244 0.76 %
Noninterest-bearing liabilities61,605 97,475 
Stockholders' equity1,081,752 1,663,420 
Total liabilities and stockholders' equity$12,766,052 $12,810,099 
Net interest spread3.26 %3.22 %
Net interest income and net interest margin (FTE)$313,011 3.46 %$318,045 3.61 %
Less: Tax equivalent adjustment4,770 4,638 
Net interest income and net interest margin - ties to Statements of Comprehensive Income$308,241 3.40 %$313,407 3.56 %
¹ Annualized for all partial-year periods.
2 Interest income includes $0.8 million for the first nine months of fiscal year 2020 resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. For the first nine months of fiscal year 2021, all amounts were included in other interest-earning assets.
3 Interest income includes $0.0 million and $1.2 million for the first nine months of fiscal years 2021 and 2020, respectively, resulting from accretion of purchase accounting discount associated with acquired loans.
4 Beginning in the first quarter of fiscal year 2021, ASC 310-30 loans began being reported with non-ASC 310-30 loans. Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, discounts on ASC 310-30 loans related to noncredit factors accreted to interest income were immaterial.
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Interest Income
The following table presents interest income for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Interest income:
Loans (FTE)$94,923 $110,828 $305,695 $346,652 
Investment securities8,642 10,532 25,079 33,359 
Federal funds sold and other654 112 1,214 1,278 
Total interest income (FTE)104,219 121,472 331,988 381,289 
Less: Tax equivalent adjustment1,595 1,601 4,770 4,638 
Total interest income (GAAP)$102,624 $119,871 $327,218 $376,651 
Total interest income consists primarily of interest income on loans and interest income on our investment portfolio. Total interest income was $104.2 million for the third quarter of fiscal year 2021, compared to $121.5 million for the same period of fiscal year 2020, a decrease of $17.3 million, or 14.2%. Total interest income was $332.0 million for the first nine months of fiscal year 2021, compared to $381.3 million for the same period of fiscal year 2020, a decrease of $49.3 million, or 12.9%. Significant components of interest income are described in further detail below.
Loans. Interest income on loans decreased to $94.9 million in the third quarter of fiscal year 2021 from $110.8 million in the same period in fiscal year 2020, decrease of $15.9 million, or 14.4%. Interest income on loans was $305.7 million for the first nine months of fiscal year 2021, compared to $346.7 million for the same period of fiscal year 2020, a decrease of $41.0 million, or 11.8%. The decrease in loan interest for both periods was attributable to lower loan volumes and loan yields, which increased 3 basis points in third quarter of fiscal year 2021 and decreased 23 basis points in the first nine months of fiscal year 2021, reflecting the impact of PPP loans which yield a lower rate.
Our yield on loans is also 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 loans was 4.48% for the third quarter of fiscal year 2021, an increase of 3 basis points compared to the same period in fiscal year 2020. Adjusted for the derivative interest expense on derivatives we use to manage interest rate risk on certain of our loans at fair value, which we believe represents the underlying economics of the transactions, the adjusted yield on loans was 4.33% for the third quarter of fiscal year 2021, a 4 basis point increase compared to the same period in fiscal year 2020. The average tax equivalent yield on loans was 4.53% for the first nine months of fiscal year 2021, a decrease of 23 basis points compared to the same period in fiscal year 2020, while the adjusted yield on loans was 4.38% for the first nine months of fiscal year 2021, a 27 basis point decrease compared to the same period in fiscal year 2020. For more information on our adjusted yield on non-ASC 310-30 loans, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
The average duration, net of interest rate swaps, of the loan portfolio was 1.4 years as of June 30, 2021. Approximately 50%, or $4.20 billion, of the portfolio is comprised of fixed rate loans, $545.1 million of which have 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 34% are indexed to Wall Street Journal Prime, 27% to 5-year Treasuries, 26% are indexed to 1-month LIBOR and the balance to various other indices. Less than 19% of our total loans' rates are floored, with an average interest rate floor 88 basis points above market rates as of June 30, 2021. In addition, there were approximately 7% of our total loans with rate floors that have not been reached, with an average interest rate 18 basis points below market rates.
Loan-related fee income of $9.5 million is included in interest income for the third quarter of fiscal year 2021, compared to $6.5 million for the same period in fiscal year 2020, an increase of $3.0 million. Loan-related fee income of $31.7 million is included in interest income for the first nine months of fiscal year 2021, compared to $14.6 million for the same period in fiscal year 2020, an increase of $17.1 million. The increases in both periods were driven by PPP loan fee amortization recognized in the current periods. 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.
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Investment Securities Portfolio. The carrying value of investment securities and FHLB stock, which is included in other assets in the consolidated balance sheets, totaled $2.40 billion as of June 30, 2021. Interest income on investments includes income earned on investment securities and FHLB stock. Interest income on investments was $8.6 million for the third quarter of fiscal year 2021, a decrease of $1.9 million, or 17.9%, from $10.5 million for the same period in fiscal year 2020, driven by a yield decrease to 1.50% from 2.13% for the same periods. Interest income on investments was $25.1 million for the first nine months of fiscal year 2021, a decrease of $8.3 million, or 24.8%, from $33.4 million for the same period in fiscal year 2020, driven by a yield decrease to 1.58% from 2.27% for the same periods.
The weighted average life of the investment portfolio was 4.0 and 3.2 years at June 30, 2021 and September 30, 2020, respectively. Average investments represented 18.8% and 16.4% of total average interest-earning assets for the third quarter of fiscal years 2021 and 2020, respectively.
Interest Expense
The following table presents interest expense for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Interest expense
Deposits$3,505 $10,011 $13,976 $50,818 
FHLB advances and other borrowings867 2,539 2,603 8,807 
Subordinated debentures and subordinated notes payable789 1,070 2,398 3,619 
Total interest expense$5,161 $13,620 $18,977 $63,244 
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 $8.4 million, or 62.1%, to $5.2 million in the third quarter of fiscal year 2021, from $13.6 million in the same period in fiscal year 2020. Total interest expense decreased $44.2 million, or 70.0%, to $19.0 million for the first nine months of fiscal year 2021, from $63.2 million in the same period in fiscal year 2020. Significant components of interest expense are described in further detail below.
Deposits. Interest expense on deposits, consisting of interest-bearing accounts and time deposits, was $3.5 million and $10.0 million for the third quarter of fiscal years 2021 and 2020, respectively, a decrease of $6.5 million. Interest expense on deposits was $14.0 million and $50.8 million for the first nine months of fiscal years 2021 and 2020, respectively, a decrease of $36.8 million. The decreases for both periods were a result of decreasing cost of deposits offset with increases in average deposit balances. Average deposit balances increased to $11.32 billion for the first nine months of fiscal year 2021, from $10.35 billion for the comparable period in fiscal year 2020, an increase of $968.0 million. The cost of deposits decreased to 0.17% for the first nine months of fiscal year 2021 from 0.66% for the same period of fiscal year 2020.
Average noninterest-bearing demand account balances increased to 24.8% of average total deposits for the third quarter of fiscal year 2021 from 22.3% for the comparable period in fiscal year 2020. Total average other liquid accounts, consisting of interest-bearing demand deposits, increased to 67.7% of total average deposits for the third quarter of fiscal year 2021, compared to 64.5% of total average deposits for the comparable period in fiscal year 2020, while time deposit accounts decreased to 7.5% of average total deposits for the third quarter of fiscal year 2021, compared to 13.2% in the comparable period in fiscal year 2020.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other borrowings was $0.9 million for the third quarter of fiscal year 2021, a decrease of $1.6 million compared to $2.5 million for the third quarter of fiscal year 2020, reflecting a weighted average cost of 2.85% and 2.03%, respectively, for the same periods. The average balance of FHLB advances and other borrowings was $120.0 million for the first nine months of fiscal year 2021 compared to $526.4 million for the same period in fiscal year 2020. Interest expense on FHLB advances and other borrowings was $2.6 million for the third quarter of fiscal year 2021, a decrease of $6.2 million compared to $8.8 million for the third quarter of fiscal year 2020, reflecting a weighted average cost of 2.85% and 2.22%, 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 2.81% and 2.56% at June 30, 2021 and 2020, respectively, and the average tenor was 28 and 24 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 June 30, 2021, we had pledged $3.42 billion of loans to the FHLB, against which we had borrowed $120.0 million.
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Subordinated Debentures and Subordinated Notes Payable. Interest expense on our outstanding junior subordinated debentures and subordinated notes payable was $0.8 million in third quarter of fiscal year 2021 and $1.1 million in the comparable period in fiscal year 2020, a decrease of $0.3 million. Interest expense on our outstanding junior subordinated debentures and subordinated notes payable was $2.4 million for the first nine months of fiscal year 2021 and $3.6 million in the comparable period in fiscal year 2020, a decrease of $1.2 million. The weighted average contractual rate on outstanding junior subordinated debentures was 2.35% and 2.85% at June 30, 2021 and 2020, respectively. The weighted average contractual rate on outstanding subordinated notes was 3.31% and 4.88% at June 30, 2021 and 2020, respectively.
Rate and Volume Variances
Net interest income is affected by changes in both volume and interest rates. Volume changes are caused by increases or decreases during the year in the level of average interest-earning assets and average interest-bearing liabilities. Rate changes result from increases or decreases in the yields earned on assets or the rates paid on liabilities.
The following table presents for the current and comparable quarter and nine months periods a summary of the changes in interest income and interest expense on a tax equivalent basis resulting from changes in the volume of average asset and liability balances and changes in the average yields or rates compared with the preceding fiscal year. If significant, the change in interest income or interest expense due to both volume and rate has been prorated between the volume and the rate variances based on the dollar amount of each variance.
Current Quarter vs Comparable QuarterCurrent 9 month period vs Comparable 9 month period
VolumeRateTotalVolumeRateTotal
(dollars in thousands)
Increase (decrease) in interest income:
Cash and cash equivalents$273 $— $273 $820 $(573)$247 
Other interest earning assets250 19 269 563 (874)(311)
Investment securities1,734 (3,624)(1,890)3,151 (11,431)(8,280)
Loans(16,998)1,093 (15,905)(24,835)(16,122)(40,957)
Total decrease(14,741)(2,512)(17,253)(20,301)(29,000)(49,301)
Increase (decrease) in interest expense:
Interest-bearing deposits620 (3,606)(2,986)4,006 (25,286)(21,280)
Time deposits(1,311)(2,209)(3,520)(5,765)(9,797)(15,562)
Securities sold under agreements to repurchase(3)(1)11 (36)(25)
FHLB advances and other borrowings(2,427)756 (1,671)(8,169)1,990 (6,179)
Subordinated debentures and subordinated notes payable(282)(281)(1,226)(1,221)
Total decrease(3,115)(5,344)(8,459)(9,912)(34,355)(44,267)
(Decrease) increase in net interest income (FTE)$(11,626)$2,832 $(8,794)$(10,389)$5,355 $(5,034)
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Provision for Credit Losses
We recognized a reversal of provision for credit losses of $20.7 million for the third quarter of fiscal year 2021 compared to a provision for credit losses of $21.6 million for the comparable period in fiscal year 2020, a decrease of $42.3 million between the periods. We recognized reversal of provision for credit losses of $13.8 million for the first nine months of fiscal year 2021 compared to a provision for credit losses of $101.5 million for the comparable period in fiscal year 2020, a decrease of $115.3 million between the periods. The reversal of provision for credit losses for both periods in fiscal year 2021 was due to lower loan balances in both periods and the increased benefit this quarter due to improved economic factors. The provision for credit losses for both periods in fiscal year 2020 was a result of the impact of the COVID-19 pandemic.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
(Reversal of) provision for credit losses, non-ASC 310-30 loans ¹$(20,444)$21,601 $(13,468)$101,351 
Decrease in provision for unfunded commitments reserve ²(255)— (332)— 
Impairment in loan and lease losses, ASC 310-30 loans— 40 — 188 
(Reversal of) provision for credit losses, total$(20,699)$21,641 $(13,800)$101,539 
1 As presented above, the non-ASC 310-30 loan portfolio includes originated loans, other than loans for which we have elected the fair value option, and loans we acquired that we did not determine were acquired with deteriorated credit quality. Upon adoption of CECL, ASC 310-30 loans and related activity began being reported with non-ASC 310-30 loans.
2 For the three and nine months ended June 30, 2020, provision for unfunded commitments reserve of $2.2 million and $2.9 million, respectively, was recorded in other noninterest expense in the consolidated income statement.
Total Credit-Related Charges
We believe that the following table, which summarizes each component of the total credit-related charges incurred during the current and comparable quarters and nine months periods, is helpful to understanding the overall impact on our quarterly results of operations. Net other repossessed property charges includes other repossessed property operating costs, valuation adjustments and (loss) gain on sale of other repossessed properties, each of which entered other repossessed property as a result of the former borrower failing to perform on a loan obligation. Reversal of interest income on nonaccrual loans occurs when we become aware that a loan, for which we had been recognizing interest income, will no longer be able to perform according to the terms and conditions of the loan agreement, including repayment of interest owed to us, while a recovery of interest income on nonaccrual loans occurs when we receive repayment of interest owed to us. Loan fair value adjustments related to credit relate to the portion of our loan portfolio for which we have elected the fair value option; these amounts reflect the portion of the fair value adjustment related to expected credit losses in the portfolio of loans carried at fair value.
Three Months Ended June 30,Nine Months Ended June 30,
ItemIncluded within F/S Line Item(s):2021202020212020
(Dollars in thousands)
(Reversal of) provision for credit losses ¹(Reversal of) provision for credit losses ¹$(20,699)$21,641 $(13,800)$101,539 
Increase in provision for unfunded commitments reserve ¹Other noninterest expense ¹— 2,215 — 2,859 
Net other repossessed property charges (income)Net (gain) loss on repossessed property and other related expenses(760)2,475 (469)8,508 
Net (recovery) reversal of interest income on nonaccrual loansInterest income on loans(2,514)1,070 (6,134)4,164 
Net realized credit loss on derivativesChange in fair value of FVO loans and related derivatives— 1,709 210 1,709 
Loan fair value adjustment related to creditChange in fair value of FVO loans and related derivatives(4,111)23,292 (2,674)35,949 
Total credit-related charges$(28,084)$52,402 $(22,867)$154,728 
1 Beginning in the first quarter of fiscal year 2021, increase in provision for unfunded commitments reserve is included in provision for credit losses.
54-


We continue to evaluate the impact of the COVID-19 pandemic on our loan portfolio. Industries such as hotels & resorts (excluding casino hotels), casino hotels, restaurants, arts and entertainment, oil & energy, retail malls, airlines and healthcare have experienced varied business disruptions due to COVID-19. Since the beginning of the pandemic we have been closely monitoring the following loan segments (excluding PPP loans) given elevated industry risk from COVID-19: hotels & resorts (excluding casino hotels) with $709.7 million, or 8.7% of total loans, restaurants with $121.7 million, or 1.5% of total loans, arts and entertainment with $153.9 million, or 1.9% of total loans, senior care with $379.7 million, or 4.7% of total loans, and skilled nursing with $209.2 million, or 2.6% of total loans, for a total exposure of $1.57 billion, or 19.4% of total loans (excluding PPP loans) as of June 30, 2021, with $194.6 million of these loans being classified as of June 30, 2021 and loan exposure in other segments of identified industries being either immaterial or having not shown general distress thus far.
Noninterest Income
The following table presents noninterest income for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Noninterest income
Service charges and other fees$9,005 $7,731 $27,228 $28,328 
Wealth management fees3,477 2,773 9,688 8,859 
Mortgage banking income, net2,157 2,422 9,937 5,179 
Net gain on sale of securities and other assets— — 247 — 
Other2,209 1,190 5,141 3,490 
Subtotal, service and product fees16,848 14,116 52,241 45,856 
Derivative interest expense(3,117)(3,040)(9,692)(5,181)
Change in fair value of FVO loans and related derivatives4,110 (25,001)2,480 (37,658)
Other derivative income (loss)1,530 2,242 5,683 950 
Subtotal, changes in fair value for loans at fair value and derivatives2,523 (25,799)(1,529)(41,889)
Total noninterest income (loss)$19,371 $(11,683)$50,712 $3,967 
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.
Noninterest income was $19.4 million for the third quarter of fiscal year 2021 compared to a noninterest loss of $11.7 million for the same period in fiscal year 2020, an increase of $31.1 million. Noninterest income was $50.7 million for the first nine months of fiscal year 2021 compared to $4.0 million for the same period in fiscal year 2020, an increase of $46.7 million. Significant components of noninterest income are described in further detail below.
Service and Product Fees. We recognized $16.8 million of noninterest income related to product and service fees in the third quarter of fiscal year 2021, an increase of $2.7 million, or 19.4%, compared to the same period in fiscal year 2020 due to increases in account activity and interchange fees and income from additional investments in bank owned life insurance purchased. We recognized $52.2 million of noninterest income related to product and service fees in for the first nine months of fiscal year 2021, an increase of $6.3 million, or 13.9%, compared to the same period in fiscal year 2020 primarily due to an increase in net mortgage banking income and income from the additional investments in bank owned life insurance purchased.
Changes in fair value for loans at fair value and 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 third quarter of fiscal year 2021, these items accounted for $2.5 million of noninterest income compared to $25.8 million of noninterest loss for the same period in fiscal year 2020. The change for the period was driven by a favorable change in the credit risk adjustment of $27.2 million partially offset by a $0.5 million decrease in swap fees and a $0.1 million increase in the current cost of interest rate swaps due to changes in the interest rate environment. For the first nine months of fiscal year 2021, these items accounted for $1.5 million of noninterest loss compared to $41.9 million of noninterest loss for the same period in fiscal year 2020. The change for the period was driven by a favorable change in the credit risk adjustment of $43.2 million and a $0.2 million increase in swap fees, partially offset by a $4.5 million increase in the current cost of interest rate swaps due to changes in the interest rate environment. We believe that the derivative interest expense economically offsets the interest income earned on the related loans. We present elsewhere the adjusted net interest income and adjusted net interest margin reflecting the metrics we use to manage the business.
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Noninterest Expense
The following table presents noninterest expense for the three and nine months ended June 30, 2021 and 2020.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
(dollars in thousands)
Noninterest expense
Salaries and employee benefits$40,239 $39,042 $116,918 $112,259 
Data processing and communication7,054 5,817 19,825 17,713 
Occupancy and equipment5,105 5,251 15,829 15,941 
Professional fees4,644 7,382 12,293 16,409 
Advertising602 750 1,635 2,573 
Net (gain) loss on repossessed property and other related expenses(760)2,475 (469)8,508 
Goodwill and intangible assets impairment— — — 742,352 
Other ¹3,621 6,332 11,026 16,677 
Total noninterest expense$60,505 $67,049 $177,057 $932,432 
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 asset impairment and other related expenses. Noninterest expense was $60.5 million and $67.0 million for the third quarter of fiscal year 2021 and 2020, respectively, a decrease of $6.5 million. Noninterest expense was $177.1 million and $190.1 million (excluding $742.4 million of goodwill and intangible asset impairment) for the first nine months of fiscal year 2021 and 2020, respectively, a decrease of $13.0 million. The decreases for both periods were primarily driven by lower net loss on repossessed property and other related expenses, decreases in professional fees and other noninterest expense, partially offset by increases in salaries and employee benefits.
Our efficiency ratio was 50.9% and 69.4% for the third quarter of fiscal years 2021 and 2020, respectively. Our efficiency ratio was 48.5% and 58.7% for the first nine months of fiscal years 2021 and 2020, respectively. The higher ratios for both prior periods were mainly due to emergency rate cuts in the second quarter of fiscal year 2020 as a result of the COVID-19 pandemic which decreased net revenues, a decrease in 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 provision for income taxes of $18.3 million for the third quarter of fiscal year 2021 represents an effective tax rate of 23.7% compared to a provision for income taxes of $0.5 million, or an effective tax rate of 8.1%, for the comparable period of fiscal year 2020. The provision for income taxes of $44.3 million for the first nine months of fiscal year 2021 represents an effective tax rate of 22.7% compared to a benefit for income taxes of $24.7 million, or an effective tax rate of 3.4%, for the comparable period of fiscal year 2020. The substantial change in the effective tax rate for both prior comparable periods was due to the impairment of goodwill and certain intangible assets and provision for loan and lease losses in the second quarter of fiscal year 2020. 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 21.8% for the first nine months of fiscal year 2020.
Return on Assets and Equity
The following table presents our return on average total assets, return on average common equity and return on average tangible common equity for the dates presented.
Three Months Ended June 30,Nine Months Ended June 30,
2021202020212020
Return on average total assets1.81 %0.17 %1.59 %(7.22)%
Return on average common equity21.2 %1.9 %18.7 %(55.6)%
Return on average tangible common equity ¹21.4 %2.0 %18.9 %2.5 %
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.

56-


Analysis of Financial Condition
The following table highlights certain key financial and performance information as of the dates indicated.
As of June 30,
2021
As of September 30,
2020
(dollars in thousands)
Balance Sheet and Other Information:
Total assets$13,070,229 $12,604,439 
Loans ¹8,477,783 10,076,142 
Allowance for credit losses ⁴270,298 149,887 
Deposits11,537,777 11,008,779 
Stockholders' equity1,161,069 1,162,933 
Tangible common equity ²1,155,679 1,156,769 
Tier 1 capital ratio14.5 %11.8 %
Total capital ratio16.0 %13.3 %
Tier 1 leverage ratio10.1 %9.4 %
Common equity tier 1 ratio13.7 %11.0 %
Tangible common equity / tangible assets ²8.8 %9.2 %
Book value per share - GAAP$21.07 $21.14 
Tangible book value per share ²$20.97 $21.03 
Nonaccrual loans / total loans2.48 %3.22 %
Net charge-offs (recoveries) / average total loans ³0.62 %0.40 %
Allowance for credit losses ⁴ / total loans3.19 %1.49 %
1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and net loans in process.
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, 2020, which was for the twelve month period.
4 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model.
Our total assets were $13.07 billion at June 30, 2021, compared with $12.60 billion at September 30, 2020, an increase of $465.8 million, or 3.7%. The increase in total assets during the first nine months of fiscal year 2021 was principally attributable to an increase in cash and cash equivalents of $1.32 billion and an increase in investment securities of $609.3 million, partially offset by a decrease in net loans of $1.72 billion. At June 30, 2021, loans were $8.48 billion, compared to $10.08 billion at September 30, 2020. See "—Loan Portfolio" within this section for further discussion on the decrease in net loans. During the first nine months of fiscal year 2021, total deposits increased by $529.0 million, or 4.8%, compared to September 30, 2020. See "—Deposits" within this section for further discussion on the increase in total deposits.
57-


Loan Portfolio
The following table presents our loan portfolio at amortized cost by category at each of the dates indicated.
June 30,
2021
September 30,
2020 1
(dollars in thousands)
Construction and development$433,293 $509,644 
Owner-occupied CRE1,318,196 1,417,394 
Non-owner-occupied CRE2,244,335 2,894,380 
Multifamily residential real estate592,544 533,983 
Total commercial real estate4,588,368 5,355,401 
Agriculture1,438,499 1,722,696 
Commercial non-real estate1,710,938 2,165,038 
Residential real estate ³631,688 730,812 
Consumer and other ²108,290 102,195 
Total loans8,477,783 10,076,142 
Allowance for credit losses(270,298)(149,887)
Loans, net$8,207,485 $9,926,255 
1 As a part of the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, loan segments are presented based on amortized cost, which includes unpaid principal balance, unamortized discount on acquired loans, unearned net deferred fees and costs and loans in process. For additional information on September 30, 2020 loan segment balances, see Note 2.
2 Other loans primarily include consumer and commercial credit cards, customer deposit account overdrafts, and loans in process.
During the first nine months of fiscal year 2021, total loans decreased by 15.9%, or $1.60 billion, compared to September 30, 2020. The net loan reduction was driven by sales of $267.5 million in hotel loans in fiscal year 2021, a net decrease of $362.4 million of PPP loans in the current period, a number of payoffs in nonaccrual and criticized loans, and an increase in paydowns across the commercial, agriculture and consumer portfolios.
The following table presents an analysis of the amortized cost of our loan portfolio at June 30, 2021, by borrower and collateral type and by each of the major geographic areas we use to manage our markets.
June 30, 2021
South Dakota / Minnesota / North DakotaIowa / 
Missouri
Nebraska / KansasArizonaColoradoSpecialized Assets ¹Corporate and Other ²Total%
(dollars in thousands)
Construction and development$52,264 $44,178 $98,531 $115,716 $98,859 $26,287 $(2,542)$433,293 5.1 %
Owner-occupied CRE306,240 362,051 217,033 166,697 252,582 9,011 4,582 1,318,196 15.5 %
Non-owner-occupied CRE470,935 582,122 335,692 264,938 383,148 204,878 2,622 2,244,335 26.5 %
Multifamily residential real estate219,026 123,748 215,386 6,513 28,264 1,014 (1,407)592,544 7.0 %
Total commercial real estate1,048,465 1,112,099 866,642 553,864 762,853 241,190 3,255 4,588,368 54.1 %
Agriculture360,568 232,460 93,416 591,526 115,919 28,846 15,764 1,438,499 17.0 %
Commercial non-real estate238,326 527,132 421,182 104,242 116,599 29,949 273,508 1,710,938 20.2 %
Residential real estate ³196,733 171,314 141,513 50,616 59,541 13,396 (1,425)631,688 7.4 %
Consumer and other12,101 27,524 26,292 542 1,575 40,250 108,290 1.3 %
Total$1,856,193 $2,070,529 $1,549,045 $1,300,790 $1,056,487 $313,387 $331,352 $8,477,783 100.0 %
% by location21.9 %24.4 %18.3 %15.3 %12.5 %3.7 %3.9 %100.0 %
1 Balances in this column represent workout loans and certain other loans the Company placed with a central team for enhanced monitoring and potential exit.
2 Balances in this column represent commercial and consumer credit card loans, certain other loans managed by our staff, and fair value adjustments related to acquisitions and loans for which we have elected the fair value option, which could result in a negative carrying amount in the event of a net negative fair value adjustment.
58-


The following table presents additional detail regarding our agriculture, CRE and residential real estate loans at June 30, 2021.
June 30, 2021
(dollars in thousands)
Construction and development$433,293 
Owner-occupied CRE1,318,196
Non-owner-occupied CRE2,244,335
Multifamily residential real estate592,544
Total commercial real estate4,588,368 
Agriculture real estate680,975 
Agriculture operating loans757,524
Total agriculture1,438,499 
Commercial non-real estate1,710,938
Home equity lines of credit104,516
Closed end first lien502,193
Closed end junior lien24,979
Total residential real estate631,688
Consumer and other108,290
Total$8,477,783 
Commercial Real Estate. CRE includes commercial and residential construction and development, owner-occupied CRE, non-owner-occupied CRE, 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 March 31, 2021, we were ranked the seventh-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, the adverse effects of tariffs imposed on the export of agricultural products, and the effects of waivers of the amount of ethanol to be blended into the country's gasoline production. While these events, the continuing impact of the COVID-19 pandemic or a further downturn in the agriculture economy, could directly and adversely affect our agricultural loan portfolio and indirectly and adversely impact other lending categories including commercial non-real estate, CRE, residential real estate and consumer, we believe there continues to typically be strong secondary sources of repayment for the agriculture loan portfolio.
Commercial Non-Real Estate. Commercial non-real estate, or business lending, represents one of our core competencies through providing a tailored range of integrated products and services, including lending, to small- and medium-enterprise customers. We offer a number of different products including working capital and other shorter-term lines of credit, fixed-rate loans and variable rate loans with interest rate swaps over a wide range of terms, and variable-rate loans with varying terms.
Residential Real Estate. Residential real estate lending reflects 1-to-4 family closed-end first-lien mortgages (primarily single-family long-term first mortgages resulting from acquisitions of other banks), closed-end junior-lien mortgages and HELOCs. A large percentage of our total single-family first mortgage originations are sold into the secondary market in order to meet our interest rate risk management objectives. Our closed-end first-lien mortgages include a small percentage of single-family first mortgages that we originate and do not subsequently sell into the secondary market, including some jumbo products, adjustable rate mortgages and rural home mortgages.
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 includes all other loan relationships that do not fit within the categories above, primarily consumer and commercial credit cards, customer deposit account overdrafts, and loans in process.
59-


The following table presents the maturity distribution of our loan portfolio as of June 30, 2021. The maturity dates were determined based on the contractual maturity date of the loan.
June 30, 2021
1 Year or Less>1 Through 5 Years>5 YearsTotal
(dollars in thousands)
Maturity distribution:
Construction and development$180,706 $204,599 $47,988 $433,293 
Owner-occupied CRE78,438 505,523 734,235 1,318,196 
Non-owner-occupied CRE190,434 938,342 1,115,559 2,244,335 
Multifamily residential real estate116,272 234,066 242,206 592,544 
Total commercial real estate565,850 1,882,530 2,139,988 4,588,368 
Agriculture682,936 438,573 316,990 1,438,499 
Commercial non-real estate635,245 711,607 364,086 1,710,938 
Residential real estate40,435 130,295 460,958 631,688 
Consumer and other7,292 74,690 26,308 108,290 
Total$1,931,758 $3,237,695 $3,308,330 $8,477,783 
The following table presents the distribution, as of June 30, 2021, of our loans that were due after one year between fixed and variable interest rates.
June 30, 2021
FixedVariableTotal
(dollars in thousands)
Maturity distribution:
Construction and development$52,425 $200,162 $252,587 
Owner-occupied CRE739,814 499,944 1,239,758 
Non-owner-occupied CRE909,655 1,144,246 2,053,901 
Multifamily residential real estate218,879 257,393 476,272 
Total commercial real estate1,920,773 2,101,745 4,022,518 
Agriculture569,769 185,794 755,563 
Commercial non-real estate715,092 360,601 1,075,693 
Residential real estate308,056 283,197 591,253 
Consumer and other42,139 58,859 100,998 
Total$3,555,829 $2,990,196 $6,546,025 
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 $11.5 million as of June 30, 2021, a decrease of $8.5 million, or 42.6%, compared to September 30, 2020, due primarily to three large liquidations during the period.
The following table presents our other repossessed property balances for the period indicated.
Three Months Ended June 30, 2021Nine Months Ended June 30, 2021
(dollars in thousands)
Balance, beginning of period$17,529 $20,034 
Additions to other repossessed property3,151 4,029 
Valuation adjustments and other(241)(714)
Sales(8,941)(11,851)
Balance, end of period$11,498 $11,498 
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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 an individual reserve. If there is a collateral shortfall, we generally work with the borrower for a principal reduction, pledge of additional collateral or guarantee. If these alternatives are not available, we engage in formal collection activities. Restructured loans for which we grant payment or significant interest rate concessions are placed on nonaccrual status until collectability improves and a satisfactory payment history is established, generally by the receipt of at least six consecutive payments.
The following table presents the dollar amount of nonaccrual loans, other repossessed property, restructured performing loans and accruing loans over 90 days past due, at the end of the dates indicated.
June 30,
2021
September 30,
2020
(dollars in thousands)
Nonaccrual loans ¹
Construction and development$22 n/a ³
Owner-occupied CRE13,925 n/a ³
Non-owner-occupied CRE6,972 n/a ³
Multifamily residential real estate6,883 n/a ³
Total commercial real estate27,802 $73,501 
Agriculture136,958 217,642 
Commercial non-real estate38,842 26,918 
Residential real estate6,450 6,811 
Consumer and other31 74 
Total nonaccrual loans210,083 324,946 
Other repossessed property11,498 20,034 
Total nonperforming assets221,581 344,980 
Performing TDRs40,872 35,205 
Total nonperforming and restructured assets$262,453 $380,185 
Accruing loans 90 days or more past due$10 $— 
Nonperforming TDRs included in total nonaccrual loans36,312 62,792 
Percent of total assets
Total nonaccrual loans1.61 %2.58 %
Other repossessed property0.09 %0.16 %
Nonperforming assets ²1.70 %2.74 %
Nonperforming and restructured assets ²2.01 %3.02 %
1 Includes nonperforming restructured loans.
2 Includes nonaccrual loans, which includes nonperforming restructured loans.
3 Balance for this segment is included in total commercial real estate for September 30, 2020.
At June 30, 2021 and September 30, 2020, our nonperforming assets were 1.70% and 2.74%, respectively, of total assets. Nonaccrual loans were $210.1 million as of June 30, 2021, which represented a total decrease in nonaccrual loans of $114.8 million compared to $324.9 million at September 30, 2020. The decrease resulted from a number of payoffs including $80.7 million of agriculture loans and $34.1 million of non-agriculture loans and no material downgrades.
We recognized approximately $7.2 million of interest income on loans that were on nonaccrual for the first nine months of fiscal year 2021. We had average nonaccrual loans (calculated as a two-point average) of $267.5 million outstanding during the first nine months of fiscal year 2021. Based on the average loan portfolio yield for these loans for the first nine months of fiscal year 2021, we estimate that interest income would have been $9.1 million higher during this period had these loans been accruing.
The Company implemented a more granular risk rating methodology as of October 1, 2020. We consistently monitor all loans internally rated "special mention" or worse because that rating indicates we have identified some potential weakness emerging; but loans rated "special mention" will not necessarily become problem loans or become impaired. Aside from the loans rated "special mention", we do not believe that we have any potential problem loans as of June 30, 2021 that are not already identified as nonaccrual, past due or restructured as it is our policy to promptly reclassify loans as soon as we become aware of doubts as to the borrowers’ ability to meet repayment terms.
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When we grant concessions to borrowers that we would not otherwise grant if not for the borrowers’ financial difficulties, such as reduced interest rates or extensions of loan periods, we consider these modifications TDRs.
The following table outlines total TDRs, split between performing and nonperforming loans, at each of the dates indicated.
June 30,
2021
September 30,
2020
Performing TDRsNonperforming TDRsTotalPerforming TDRsNonperforming TDRsTotal
(dollars in thousands)
Construction and development$— $22 $22 n/a ¹n/a ¹n/a ¹
Owner-occupied CRE3,346 4,166 7,512 n/a ¹n/a ¹n/a ¹
Non-owner-occupied CRE11,756 10 11,766 n/a ¹n/a ¹n/a ¹
Multifamily residential real estate— — — n/a ¹n/a ¹n/a ¹
Total commercial real estate15,102 4,198 19,300 $23,215 $11,913 $35,128 
Agriculture20,908 9,275 30,183 2,976 45,971 48,947 
Commercial non-real estate4,626 22,769 27,395 8,734 4,803 13,537 
Residential real estate236 52 288 277 74 351 
Consumer and other— 18 18 31 34 
Total$40,872 $36,312 $77,184 $35,205 $62,792 $97,997 
1 Balance for this segment is included in total commercial real estate for September 30, 2020.
As of June 30, 2021, total performing TDRs increased $5.7 million, or 16.1%, compared to September 30, 2020. Total nonperforming TDRs decreased $26.5 million, or 42.2%, compared to September 30, 2020 primarily due to several relationship payoffs in the agriculture portfolio during the period.
Allowance for Credit Losses
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, which uses the current expected credit loss model ("CECL") to determine the allowance for credit losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and the net investments in leases recognized by a lessor in accordance with Topic 842 on leases. The CECL methodology requires recognition of lifetime expected credit losses that takes into consideration all relevant information, including historical losses, current conditions and reasonable and supportable forecasts of future operating conditions.
Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an individual basis ("individual reserve"). The reserve related to these loans is calculated using the collateral available to repay the loan, most typically the liquidation value of the collateral (less selling costs, if applicable). The Company has chosen to continue to include small, less complex loans within the collective reserve for loans on nonaccrual or with TDR status.
Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. The historical loss experience of the pool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan pool is applied to each loan within the segment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in loss expectations relative to the historical loss rates. These models have been implemented in accordance with the Company's Model Risk Management Policy. Additionally, using its new risk rating system, the Company evaluates if the current credit quality of the portfolio materially differs from the one observed over the historical loss period and applies adjustments to the allowance accordingly. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans servicing practices and changes in underwriting criteria.
ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current
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economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period.
The following table presents an analysis of our allowance for credit losses, including provisions for credit losses, charge-offs and recoveries, for the periods indicated.
At and for the Nine Months Ended June 30, 2021At and for the Fiscal Year Ended September 30, 2020
(dollars in thousands)
Allowance for credit losses on loans:
Balance, beginning of period$149,887 $70,774 
Adoption of ASU 2016-13, as amended177,289 — 
Provision for credit losses ³(13,468)118,204 
(Improvement) impairment of ASC 310-30 loans— 188 
Charge-offs:
Construction and development(27)n/a ⁴
Owner-occupied CRE(483)n/a ⁴
Non-owner-occupied CRE(36,951)n/a ⁴
Multifamily residential real estate(377)n/a ⁴
Total commercial real estate(37,838)(5,181)
Agriculture(5,042)(21,705)
Commercial non-real estate(4,750)(14,178)
Residential real estate(300)(615)
Consumer and other(619)(3,071)
Total charge-offs(48,549)(44,750)
Recoveries:
Construction and development377 n/a ⁴
Owner-occupied CRE98 n/a ⁴
Non-owner-occupied CRE455 n/a ⁴
Multifamily residential real estate— n/a ⁴
Total commercial real estate930 1,395 
Agriculture2,673 2,189 
Commercial non-real estate860 1,018 
Residential real estate248 453 
Consumer and other428 416 
Total recoveries5,139 5,471 
Net loan charge-offs(43,410)(39,279)
Balance, end of period$270,298 $149,887 
Average total loans for the period ¹$9,320,370 $9,908,495 
Total loans at period end ¹8,477,783 10,076,142 
Ratios
Net charge-offs to average total loans ²0.62 %0.40 %
Allowance for credit losses on loans to:
Total loans3.19 %1.49 %
Nonaccruing loans128.66 %46.13 %
1 Loans are shown at amortized cost.
2 Annualized for partial-year periods.
3 For June 30, 2021, (reversal of) provision for credit losses in the consolidated statements of income includes $(0.3) million of (reversal of) provision for unfunded commitments reserve.
4 Balance for this segment is included in total commercial real estate for September 30, 2020.
In the first nine months of fiscal year 2021, net charge-offs were $43.4 million, or 0.62%, of average total loans on an annualized basis, comprised of $48.5 million of charge-offs and $5.1 million of recoveries. The net charge-offs included $34.0 million of charge-offs related to the sales of certain hotel loans during the period. Excluding those, net charge-offs for the period were $9.4 million, or 0.14% of average total loans (annualized). For fiscal year 2020, net charge-offs were $39.3 million, or 0.40%, of average total loans.
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At June 30, 2021, the allowance for credit losses on loans was 3.19% of our total loan portfolio, compared to 1.49% at September 30, 2020. The balance of the ACL increased to $270.3 million from $149.9 million over the same period due to the impact of CECL adoption on October 1, 2020, where we recognized a Day 1 increase in the ACL of $177.3 million, which resulted in a cumulative effect adjustment decrease of $132.9 million (after-tax) to retained earnings. The tax effect resulted in a $42.9 million increase in deferred tax assets. The increase in ACL related to the adoption of CECL was partially offset by a reversal of provision for credit losses of $13.8 million for the first nine months of fiscal year 2021 due to lower loan balances and improved economic factors. For the same period in fiscal year 2020, we recognized a provision for credit losses of $101.5 million as a result of the impact of the COVID-19 pandemic.
Additionally, a portion of our loans which are carried at fair value, totaling $545.1 million at June 30, 2021 and $655.2 million at September 30, 2020, respectively, have no associated allowance for credit 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 credit losses to total loans lower. The amount of fair value adjustment related to credit risk on these loans was $23.3 million and $30.5 million at June 30, 2021 and September 30, 2020, respectively, or 0.28% and 0.30% of total loans, respectively.
The following table presents management’s allocation of the allowance for credit losses on loans by loan category, in both dollars and percentage of our total allowance for credit losses on loans, to specific loans in those categories at the dates indicated.
June 30, 2021Adjusted balance September 30, 2020 ¹
AmountPercentAmountPercent
(dollars in thousands)
Allocation of allowance for credit losses on loans:
Construction and development$16,180 6.0 %$7,012 4.7 %
Owner-occupied CRE20,432 7.5 %$20,530 13.7 %
Non-owner-occupied CRE125,956 46.6 %$50,965 34.0 %
Multifamily residential real estate6,161 2.3 %$6,726 4.5 %
Total commercial real estate168,729 62.4 %$85,233 56.9 %
Agriculture40,657 15.0 %27,018 18.0 %
Commercial non-real estate51,024 18.9 %27,599 18.4 %
Residential real estate8,038 3.0 %7,465 5.0 %
Consumer and other1,850 0.7 %2,572 1.7 %
Total$270,298 100.0 %$149,887 100.0 %
1 At September 30, 2020, the allowance balances were reclassified to align with the eight loan portfolio pools established for adoption of CECL. For additional information, see Note 2.
Management will continue to evaluate the loan portfolio and assess economic conditions in order to determine future allowance levels and the amount of credit loss provisions. We review the appropriateness of our allowance for credit losses on a monthly basis. Management monitors closely all past due and restructured loans in assessing the appropriateness of its allowance for credit 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 credit 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 unfunded lending reserve related commitments that represents our estimate of credit losses on the portion of lending commitments that borrowers have not advanced. The Company's change in unfunded commitments reserve from the incurred loss methodology to the current expected credit loss methodology was immaterial as of the date of adoption and therefore no provision was recognized. The balance of the unfunded lending-related commitments reserve was $2.1 million and $2.4 million at June 30, 2021 and September 30, 2020, respectively, and is recorded in accrued expenses and other liabilities in the consolidated balance sheet.
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Investment Securities
The following table presents amortized cost of each category of our investment securities portfolio at the dates indicated.
June 30,
2021
September 30,
2020
(dollars in thousands)
Securities available for sale
U.S. Treasury securities$99,047 $49,924 
U.S. Agency securities24,976 24,974 
Mortgage-backed securities:
Government National Mortgage Association312,811 485,689 
Federal Home Loan Mortgage Corporation977,156 578,650 
Federal National Mortgage Association439,752 287,842 
Small Business Assistance Program232,089 244,653 
States and political subdivision securities47,287 54,224 
Corporate debt securities28,000 — 
Other1,006 1,006 
Total$2,162,124 $1,726,962 
Securities held to maturity
U.S. Treasury securities$13,666 $— 
Mortgage-backed securities:
Government National Mortgage Association45,964 — 
Federal Home Loan Mortgage Corporation53,616 — 
Federal National Mortgage Association46,408 — 
Small Business Assistance Program39,341 — 
States and political subdivision securities3,450 — 
Total$202,445 $— 
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 securities 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, 2020, the carrying value of the portfolio has increased by $609.3 million, or 34.3%.
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The following table presents the aggregate amortized cost of each investment category of the investment portfolio and the weighted average yield for each investment category for each maturity period held at June 30, 2021. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. The weighted-average yield ("WA Yield") on these assets is presented in the following table based on the contractual rate, as opposed to a tax equivalent yield concept.
June 30, 2021
Due in one year
or less
Due after one year
through five years
Due after five years
through ten years
Due after
ten years
Mortgage-backed
securities
Securities without
contractual maturities
Total
AmountWA YieldAmountWA YieldAmountWA YieldAmountWA YieldAmountWA YieldAmountWA YieldAmountWA Yield
(dollars in thousands)
Securities available for sale
U.S. Treasury securities$— — %$49,362 0.78 %$49,685 1.22 %$— — %$— — %$— — %$99,047 1.00 %
U.S. Agency securities— — %24,976 1.13 %— — %— — %— — %— — %24,976 1.13 %
Mortgage-backed securities— — %— — %— — %— — %1,961,808 1.54 %— — %1,961,808 1.54 %
States and political subdivision securities ¹ ²18,198 1.72 %20,754 1.82 %8,335 1.99 %— — %— — %— — %47,287 1.81 %
Corporate debt securities— — %28,000 3.20 %— — %— — %— — %— — %28,000 3.20 %
Other— — %— — %— — %— — %— — %1,006 — %1,006 — %
Total$18,198 1.72 %$123,092 0.85 %$58,020 1.33 %$— — %$1,961,808 1.54 %$1,006 — %$2,162,124 1.54 %
Securities held to maturity
U.S. Treasury securities$— — %$— — %$13,666 1.38 %$— — %$— — %$— — %$13,666 1.38 %
Mortgage-backed securities— — %— — %— — %— — %185,329 1.23 %— — %185,329 1.23 %
States and political subdivision securities ¹ ²150 3.00 %500 2.00 %2,800 1.78 %— — %— — %— — %3,450 1.86 %
Total$150 3.00 %$500 2.00 %$16,466 1.45 %$— — %$185,329 1.23 %$— — %$202,445 1.25 %
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.
Available for sale securities are stated at fair value. For available for sale debt securities in an unrealized loss position, management first evaluates whether (1) the Company has the intent to sell a security; or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the entire amount of unrealized loss is recognized in the consolidated income statement with a corresponding adjustment to the security's amortized cost basis.
If neither criteria is met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Furthermore, securities issued by the U.S. Government or a U.S. Government sponsored enterprise which carry the explicit or implicit guarantee of the U.S. Government are considered "risk-free" and therefore no credit losses are assumed on those securities. If the assessment indicates a credit loss exists, the amortized cost basis is compared to the present value of cash flows expected to be collected from the security; if it is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the allowance for credit losses are recorded as a provision for (reversal of) credit losses in the consolidated income statement. If the assessment indicates a credit loss does not exist, the change in fair value is recorded as unrealized gains and losses, net of related taxes, and is included in stockholders’ equity as a component of accumulated other comprehensive income (loss).
Debt securities for which the Company has the ability and positive intent to hold until maturity are classified as held to maturity. Held to maturity securities are stated at amortized cost, which represents actual cost adjusted for premium amortization and discount accretion.
Deposits
We obtain funds from depositors by offering consumer and business interest-bearing accounts and term time deposits. At June 30, 2021 and September 30, 2020, our total deposits were $11.54 billion and $11.01 billion, respectively, representing an increase of $529.0 million, or 4.8%, due to a $892.1 million increase in checking and savings deposits across both business and consumer accounts, offset by a $184.9 million decrease in business and consumer time deposits and a $178.2 million decrease in public and brokered deposits.
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The following table presents the balances and weighted average cost of our deposit portfolio at June 30, 2021 and September 30, 2020.
June 30, 2021September 30, 2020
AmountWeighted Avg. CostAmountWeighted Avg. Cost
(dollars in thousands)
Noninterest-bearing demand$2,958,488 — %$2,586,743 — %
Interest-bearing demand7,782,104 0.13 %7,139,058 0.26 %
Time deposits, greater than $250,000183,820 0.70 %352,913 1.12 %
Time deposits, less than or equal to $250,000613,365 0.32 %930,065 0.75 %
Total$11,537,777 0.12 %$11,008,779 0.27 %
At June 30, 2021 and September 30, 2020, we had $88.1 million and $329.0 million, respectively, in brokered deposits, a decrease of $240.9 million, or 73.2%.
Municipal public deposits constituted $1.31 billion and $1.25 billion of our deposit portfolio at June 30, 2021, and September 30, 2020, respectively, of which $929.1 million and $859.7 million, respectively, were required to be collateralized. Our top 10 depositors were responsible for 7.7% and 6.4% of our total deposits at June 30, 2021 and September 30, 2020, respectively.
The following table presents deposits by region.
June 30,
2021
September 30,
2020
(dollars in thousands)
South Dakota / Minnesota / North Dakota$2,978,809 $2,870,119 
Iowa / Missouri3,446,128 3,184,321 
Nebraska / Kansas3,009,231 2,833,921 
Arizona652,397 590,567 
Colorado1,380,128 1,300,351 
Specialized Assets19,770 — 
Other51,314 229,500 
Total deposits$11,537,777 $11,008,779 
We fund a portion of our assets with time deposits that have balances greater than $250,000 and that have maturities generally in excess of six months. At June 30, 2021 and September 30, 2020, our time deposits greater than $250,000 totaled $183.8 million and $352.9 million, respectively. The following table presents the maturities of our time deposits greater than $250,000 and less than or equal to $250,000 in size at June 30, 2021.
June 30, 2021
Greater than $250,000Less than or equal to $250,000
(dollars in thousands)
Remaining maturity:
Three months or less$51,972 $157,487 
Over three through six months44,936 143,720 
Over six through twelve months59,025 186,230 
Over twelve months27,887 125,928 
Total$183,820 $613,365 
Percent of total deposits1.6 %5.3 %
At June 30, 2021 and September 30, 2020, the average remaining maturity of all time deposits was approximately 9 and 8 months, respectively. The average time deposits amount per account was approximately $26,687 and $37,174 at June 30, 2021 and September 30, 2020, respectively.
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Derivatives
Prior to 2017 we entered into fixed-rate loans having original maturities of 5 years or greater (typically between 5 and 15 years) with certain of our commercial and agri-business banking customers to assist them in facilitating their risk management strategies. We mitigated our interest rate risk associated with certain of these loans by entering into equal and offsetting fixed-to-floating interest rate swap agreements for these loans with swap counterparties. We elected to account for the loans at fair value under ASC 825, Fair Value Option. Changes in the fair value of these loans are recorded in earnings as a component of noninterest income in the relevant period. The related interest rate swaps are recognized as either assets or liabilities in our financial statements and any gains or losses on these swaps, both realized and unrealized, are recorded in earnings as a component of noninterest income. The interest rate swaps are fully effective from an interest rate risk perspective, as gains and losses on our swaps are directly offset by changes in fair value of the fair value option loans (i.e., swap interest rate risk adjustments are directly offset by associated loan interest rate risk adjustments). Consequently, any changes in noninterest income associated with changes in fair value resulting from interest rate movement, as opposed to changes in credit quality, on the loans are directly offset by equal and opposite unrealized charges to or reductions in noninterest income for the related interest rate swap. Any changes in the fair value of the loans related to credit quality and the derivative interest expense on derivatives are not offsetting amounts within noninterest income. To ensure the correlation of movements in fair value between the interest rate swap and the related loan, we pass on all economic costs associated with our interest rate swap activity resulting from loan customer prepayments (partial or full) to the customer.
In addition, we enter into interest rate derivative contracts to support the business needs of our customers. These interest rate swaps sales are used to enable customers to achieve a long-term fixed rate by selling the customer a long-term variable rate loan indexed to LIBOR plus a credit spread whereby the Bank enters into an interest rate swap with our customer where the customer pays a fixed rate of interest set at the time of origination on the interest rate swap and then the customer receives a floating rate equal to the rate paid on the loan, thus resulting in a fixed rate of interest over the life of the interest rate swap. We then enter into a mirrored interest rate swap with a swap dealer where we pay and receive the same fixed and floating rate as we pay and receive from the interest rate swap we have with our customer. As the interest paid and received by us on the two swaps net to zero, we are left with the variable rate of the long-term loan.
We enter into RPAs with some of our derivative counterparties to assume the credit exposure related to interest rate derivative contracts. Our loan customer enters into an interest rate swap directly with a derivative counterparty and we agree through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer. The notional amounts of RPAs sold were $107.6 million and $80.7 million as of June 30, 2021 and September 30, 2020, respectively. Assuming all underlying loan customers defaulted on their obligation to perform under the interest rate swap with a derivative counterparty, the exposure from these RPAs would be $0.2 million and nominal at June 30, 2021 and September 30, 2020, respectively, based on the fair value of the underlying swaps.
Short-Term Borrowings
Our primary sources of short-term borrowings include securities sold under repurchase agreements and certain FHLB advances maturing within 12 months. The following table presents certain information with respect to only our borrowings with original maturities less than 12 months at and for the periods noted.
At and for the Nine Months Ended June 30, 2021At and for the Fiscal Year Ended September 30, 2020
(dollars in thousands)
Short-term borrowings:
Securities sold under agreements to repurchase$80,167 $65,506 
Other short-term borrowings— 75,000 
Total short-term borrowings$80,167 $140,506 
Maximum amount outstanding at any month-end during the period$80,355 $539,809 
Average amount outstanding during the period74,235 218,340 
Weighted average rate for the period0.08 %0.75 %
Weighted average rate as of date indicated0.08 %0.09 %
Other Borrowings
In addition to the short-term borrowings above, we also had FHLB long-term borrowings of $120.0 million outstanding as of both June 30, 2021 and September 30, 2020.
We had outstanding $73.9 million and $73.8 million of junior subordinated debentures to affiliated trusts in connection with the issuance of trust preferred securities by such trusts as of June 30, 2021 and September 30, 2020, respectively. We are permitted under applicable laws and regulations to count these trust preferred securities as part of our Tier 1 capital.
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We issued $35.0 million of fixed-to-floating rate subordinated notes that mature on August 15, 2025 through a private placement. The notes, whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter ended September 30, 2020, and whose eligibility will continue to reduce 20% on the anniversary date thereof each of the next four years, bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 3.150%, payable quarterly on each November 15, February 15, April 15 and August 15. During the third quarter of fiscal year 2021, we incurred $0.8 million in interest expense on all outstanding subordinated debentures and notes compared to $1.1 million in the same period in fiscal year 2020. During the first nine months of fiscal year 2021, we incurred $2.4 million in interest expense on all outstanding subordinated debentures and notes compared to $3.6 million in the same period in fiscal year 2020.
Off-Balance Sheet Commitments, Commitments, Guarantees and Contractual Obligations
The following table summarizes the maturity of our contractual obligations and other commitments to make future payments at June 30, 2021. Customer deposit obligations categorized as "not determined" include noninterest-bearing demand accounts and interest-bearing demand accounts with no stated maturity date.
June 30, 2021
Less Than 1 Year1 to 2 Years2 to 5 Years>5 YearsNot DeterminedTotal
(dollars in thousands)
Contractual Obligations:
Customer deposits$613,294 $100,233 $52,059 $1,523 $10,770,668 $11,537,777 
Securities sold under agreement to repurchase80,167 — — — — 80,167 
FHLB advances and other borrowings— 30,000 90,000 — — 120,000 
Subordinated debentures— — — 75,920 — 75,920 
Subordinated notes payable— — 35,000 — — 35,000 
Accrued interest payable1,773 — — — — 1,773 
Interest on FHLB advances3,372 2,742 1,839 — — 7,953 
Interest on subordinated debentures1,787 1,787 5,361 14,776 — 23,711 
Interest on subordinated notes payable1,157 1,157 2,459 — — 4,773 
Other Commitments:
Commitments to extend credit—non-credit card$1,406,527 $225,981 $253,783 $216,852 $— $2,103,143 
Commitments to extend credit—credit card128,174 — — — — 128,174 
Letters of credit52,870 — — — — 52,870 
We rent certain premises and equipment under operating leases. See Note 8 to the consolidated financial statements for additional information on long-term lease arrangements.
Instruments with Off-Balance Sheet Risk
In the normal course of business, we enter into various transactions that are not included in our consolidated financial statements in accordance with GAAP. These transactions include commitments to extend credit to our customers and letters of credit. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued primarily to support or guarantee the performance of a customer’s obligations to a third party. The credit risk involved in issuing letters of credit is essentially the same as originating a loan to the customer. We manage the risks associated with these arrangements by evaluating each customer’s creditworthiness prior to issuance through a process similar to that used by us in deciding whether to extend credit to the customer.
The following table presents the total notional amounts of all commitments by us to extend credit and letters of credit as of the dates indicated.
June 30,
2021
September 30,
2020
(dollars in thous