GREAT WESTERN BANCORP, INC. 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 in Item 8 of this Annual Report on Form 10-K. 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." 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. Tax Equivalent Presentation All references to net interest income, net interest margin, interest income on non-ASC 310-30 loans, yield on ASC 310-30 loans and the related non-GAAP adjusted financial measure of each item are presented on a FTE basis unless otherwise noted. Key Factors Affecting Our Business and Financial Performance We believe that stable long-term growth and profitability are the result of building strong customer relationships while maintaining disciplined underwriting standards and continuing to focus on our operational efficiency. We plan to focus on originating high-quality loans and growing our deposit base through our relationship-based business banking approach. We believe that continuing to focus on our core strengths will enable us to gain market share and increase profitability. For more information on the key components of our strategy for continued success and future growth, see "Part I, Item 1. Business-Our Strategy." We face a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors including the continuing effects of the COVID-19 pandemic on our financial condition and results of operations, as well as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. For more information on these risks and our risk management strategies, see "Cautionary Note Regarding Forward-Looking Statements, "Part I, Item 1. Business" and "Part I, Item 1A. Risk Factors." 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 inArizona ,Colorado ,Iowa ,Kansas ,Minnesota ,Missouri ,Nebraska ,North Dakota andSouth Dakota . We provide financial results based on a fiscal year endingSeptember 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 costs primarily associated with maintaining our Bank's loan and deposit functions; (iv) occupancy expenses for maintaining our Bank's facilities; (v) professional fees, includingFDIC 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. Pending Merger of First Interstate BancSystem andGreat Western Bancorp OnSeptember 16, 2021 , First Interstate BancSystem, Inc. (NASDAQ: FIBK), parent company ofFirst Interstate Bank , andGreat Western Bancorp, Inc. , parent company ofGreat Western Bank , announced they have entered into a definitive agreement under which the companies will combine in an allstock transaction. Under the terms of the agreement, which was unanimously approved by both companies' Boards of Directors, Great Western will merge into FIBK and the combined holding company and bank will operate under the First Interstate name and brand with the company's headquarters remaining inBillings, Montana . Pending regulatory and shareholder approvals and the satisfaction of the closing conditions set forth in the agreement, the transaction is expected to close during the first calendar quarter of 2022. 46- -------------------------------------------------------------------------------- Impact and Response to COVID-19 Pandemic We conduct business in nine states, includingArizona ,Colorado ,Iowa ,Kansas ,Minnesota ,Missouri ,Nebraska ,North Dakota andSouth 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 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 have implemented a full return to work that still provides for flexible remote work optionality and adherence toCDC guidelines in the office. 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 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 Fiscal Year EndedSeptember 30, 2021 Net income and adjusted net income was$203.3 million , or$3.67 per diluted share, for fiscal year 2021, compared to net loss of$680.8 million , or$12.24 per diluted share for fiscal year 2020, while adjusted net income, which excludes the COVID-19 pandemic impact on goodwill, certain intangible assets and credit and other related charges, was$88.9 million , or$1.60 per diluted share for fiscal year 2020. The increase in adjusted net income was due to a reversal of provision for credit losses combined with an increase in noninterest income and a decrease in noninterest expense, excluding the impairment of goodwill and certain intangible assets. Our efficiency ratio, which measures our ability to manage noninterest expenses, was 50.5% for fiscal year 2021, compared to 61.9% for fiscal year 2020. For more information on our adjusted net income and efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "-Non-GAAP Financial Measures" section. Net interest margin, which measures our ability to maintain interest rates on interest earning assets above those of interest-bearing liabilities, was 3.36%, 3.59% and 3.74% for fiscal years 2021, 2020 and 2019, respectively. Adjusted net interest margin, which reflects the realized gain (loss) on interest rate swaps, was 3.26%, 3.51% and 3.74% for the same periods, respectively. 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 were 23 and 25 basis points lower, respectively, compared to fiscal year 2020. Net interest margin decreased between the two periods due to securities yields, which decreased 64 basis points, loan yields, which decreased 15 basis points, and a shift in mix of interest-earning assets toward interest-bearing bank deposits and investment securities, both with lower yields compared to loans. These decreases were partially offset by the cost of deposits, which decreased 41 basis points. A$4.0 million increase in the cost of interest rate swaps between the periods is the primary driver of the more pronounced decrease in adjusted net interest margin compared to 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$8.19 billion as ofSeptember 30, 2021 , compared to$10.08 billion as ofSeptember 30, 2020 , a decrease of$1.89 billion , or 18.8%. The net loan reduction was driven by sales of$267.5 million in hotel loans in fiscal year 2021, a net decrease of$515.3 million of PPP loans, and an increase in paydowns across the commercial and agriculture portfolios. 47- -------------------------------------------------------------------------------- Deposits were$11.31 billion atSeptember 30, 2021 an increase of$301.7 million , or 2.7%, compared to$11.01 billion atSeptember 30, 2020 , due to an$876.7 million increase in checking and savings deposits across both business and consumer accounts, offset by a$229.5 million decrease in business and consumer time deposits and a$345.5 million decrease in public and brokered deposits. FHLB advances and other borrowings decreased by$75.0 million due to matured borrowings during the period. AtSeptember 30, 2021 , nonaccrual loans were$197.9 million , a decrease of$127.0 million compared toSeptember 30, 2020 , driven by repayments on multiple agricultural and commercial nonaccrual loans. Classified loans were$604.9 million as ofSeptember 30, 2021 , a decrease of$164.6 million , compared to$769.5 million atSeptember 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$4.5 million as ofSeptember 30, 2021 , a decrease of$15.5 million , or 77.6%, compared toSeptember 30, 2020 . ASU 2016-13, referred to as the current expected credit loss ("CECL") model, was adopted effectiveOctober 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$246.0 million atSeptember 30, 2021 from$149.9 million atSeptember 30, 2020 due to the impact of CECL adoption onOctober 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$34.7 million for 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$118.4 million as a result of the impact of the COVID-19 pandemic. Net charge-offs for fiscal year 2021 were$47.6 million , or 0.52% of average total loans on an annualized basis, compared to net charge-offs of$39.3 million , or 0.40% of average total loans on an annualized basis, for fiscal year 2020. The increase in charge-offs was driven primarily by$34.0 million of charge-offs related to the sales of certain hotel loans during the period, partially offset by a reduction in agriculture and commercial non-real estate loan charge-offs of$16.2 million and$8.0 million , respectively. Tier 1 capital, total capital and Tier 1 leverage ratios were 15.1%, 16.3% and 10.6%, respectively, atSeptember 30, 2021 , compared to 11.8%, 13.3% and 9.4%, respectively, atSeptember 30, 2020 . In addition, our Common Equity Tier 1 ratio was 14.3% and 11.0% atSeptember 30, 2021 andSeptember 30, 2020 , respectively. Our tangible common equity to tangible assets ratio was 9.3% atSeptember 30, 2021 and 9.2% atSeptember 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. 48- -------------------------------------------------------------------------------- Results of Operations-Fiscal Years EndedSeptember 30, 2021 , 2020 and 2019 Overview The following table highlights certain key financial and performance information for fiscal years 2021, 2020 and 2019. At and for
Fiscal Years Ended
2021 2020 2019
(dollars in thousands, except share and per share amounts)
Operating Data:
Interest income (FTE) $ 431,488 $ 499,718 $ 548,760
Interest expense 23,417 74,147 122,209
Noninterest income 66,564 17 60,732
Noninterest expense 240,756 1,007,368 224,898
(Reversal of) provision for credit losses ² (34,734) 118,392 40,947
Net income (loss) 203,258 (680,808) 167,365
Adjusted net income ¹ $ 203,258 $ 88,890 $ 167,365
Common shares outstanding 55,116,503 55,014,189 56,283,659
Weighted average diluted common shares outstanding 55,443,909
55,612,251 57,257,061
Earnings per common share - diluted $ 3.67 $ (12.24) $ 2.92
Adjusted earnings per common share - diluted ¹ 3.67 1.60 2.92
Performance Ratios:
Net interest margin (FTE) ¹ 3.36 % 3.59 % 3.74 %
Adjusted net interest margin (FTE) ¹ 3.26 % 3.51 % 3.74 %
Return on average total assets 1.59 % (5.32) % 1.33 %
Return on average common equity 18.4 % (44.2) % 9.1 %
Return on average tangible common equity ¹ 18.6 % 2.9 % 15.3 %
Efficiency ratio ¹ 50.5 % 61.9 % 45.8 %
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more
information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP
financial measure, see "-Non-GAAP Financial Measures" section.
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 1 The following tables present net interest income 1, net interest margin and adjusted net interest margin 2 for fiscal years 2021, 2020 and 2019.
At
and for Fiscal Years Ended
2021 2020 2019
(dollars in thousands)
Net interest income ¹:
Total interest income (FTE) $ 431,488 $ 499,718 $ 548,760
Less: Total interest expense 23,417 74,147 122,209
Net interest income (FTE) $ 408,071 $ 425,571 $ 426,551 Net interest margin (FTE) and adjusted net interest margin (FTE) ¹ ² Average interest-earning assets
$ 12,129,324 $ 11,868,666 $ 11,414,926 Average interest-bearing liabilities$ 11,634,953 $ 11,168,035 $ 10,698,555 Net interest margin (FTE) ¹ 3.36 % 3.59 % 3.74 % Adjusted net interest margin (FTE) ² 3.26 % 3.51 % 3.74 % 1 All references to net interest income and net interest margin are presented on a fully-tax equivalent basis unless otherwise noted. 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. Net interest income (FTE) decreased$17.5 million , or 4.1%, to$408.1 million in fiscal year 2021 from$425.6 million in fiscal year 2020. The decrease in net interest income (FTE) was driven by lower interest income of$68.2 million as a result of lower loan volumes and lower loan and securities yields. The decrease in interest income (FTE) was partially offset by a decrease in interest expense of$50.7 million as a result of lower yields on interest-bearing deposits, along with a decrease in borrowings. Net interest income (FTE) in fiscal year 2020 decreased$1.0 million , or 0.2%, from$426.6 million in fiscal year 2019. The decrease in net interest income (FTE) was primarily attributable to lower yields on loans and investments, partially offset by lower interest expense associated with deposits and borrowings for the same periods. 49- -------------------------------------------------------------------------------- Net interest margin was 3.36% and 3.59% in fiscal years 2021 and 2020, respectively, while adjusted net interest margin was 3.26% and 3.51% over the same periods, respectively. The decrease in net interest margin was due to securities yields, which decreased 64 basis points, loan yields, which decreased 15 basis points, and a shift in mix of interest-earning assets toward interest-bearing bank deposits and investment securities, both with lower yields compared to loans. These decreases were partially offset by the cost of deposits, which decreased 41 basis points. A$4.0 million and$9.3 million increase, respectively, in the cost of interest rate swaps in fiscal years 2021 and 2020, is the primary driver for the more pronounced decrease in adjusted net interest margin compared to the decrease in net interest margin. Net interest margin was 3.59% in fiscal year 2020, compared with 3.74% in fiscal year 2019. Adjusted net interest margin was 3.51% and 3.74% over the same periods, respectively. The decrease in net interest margin was primarily due to the cost of deposits and borrowings, which decreased 49 and 58 basis points, respectively, while loan yields decreased 57 basis points and investment yields decreased 30 basis points. A$9.3 million increase in the cost of interest rate swaps between the periods is the primary driver of the more pronounced decrease in adjusted net interest margin compared to 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. 50- -------------------------------------------------------------------------------- The following table presents 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 fiscal years 2021, 2020 and 2019, 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$694.6 million atSeptember 30, 2021 and$717.2 million atSeptember 30, 2020 , are typically entered at lower interest rate arrangements than comparable non-exempt loans and securities. The amount of interest income reflected below has been adjusted to include the amount of tax benefit realized in the period and as such is presented on a fully-tax equivalent basis, the calculation of which is outlined in the discussion of non-GAAP items later in this section. Prior to theOctober 1, 2020 adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, ASC 310-30 loans represented loans accounted for in accordance with ASC 310-30 Accounting for Purchased Loans that were credit impaired at the time we acquired them. Non-ASC 310-30 loans represented loans we have originated and loans we have acquired that were not credit impaired at the time we acquired them. Fiscal Years Ended September 30, 2021 2020 2019 Average Balance Interest
(FTE) Yield / Cost Average Balance Interest (FTE) Yield / Cost
Average Balance Interest (FTE) Yield / Cost
(dollars in thousands)
Assets
Interest-bearing bank deposits ¹$ 1,033,690 $ 1,229 0.12 %$ 100,385 $ 1,383 1.38 % $ 61,646 $ 2,472 4.01 % Other interest-earning assets 85,144 943 1.11 % - - - % - - - % Investment securities 2,225,913 33,995 1.53 % 1,967,873 42,653 2.17 % 1,681,185 41,510 2.47 % Non-ASC 310-30 loans, net ² 8,784,577 395,321 4.50 % 9,750,677 449,855 4.61 % 9,610,956 496,753 5.17 % ASC 310-30 loans, net ³ - - - % 49,731 5,827 11.72 % 61,139 8,025 13.13 % Loans, net 8,784,577 395,321 4.50 % 9,800,408 455,682 4.65 % 9,672,095 504,778 5.22 % Total interest-earning assets 12,129,324 431,488 3.56 % 11,868,666 499,718 4.21 % 11,414,926 548,760 4.81 % Noninterest-earning assets 675,299 937,489 1,206,151 Total assets$ 12,804,623 $ 431,488 3.37 %$ 12,806,155 $ 499,718 3.90 %$ 12,621,077 $ 548,760 4.35 % Liabilities and Stockholders' Equity Noninterest-bearing deposits$ 2,784,732 $ 2,227,518 $ 1,860,645 Interest-bearing deposits 7,589,788$ 11,846 0.16 % 6,708,650$ 35,594 0.53 % 6,286,878$ 69,305 1.10 % Time deposits 953,724 4,908 0.51 % 1,584,191 23,009 1.45 % 2,030,619 37,413 1.84 % Total deposits 11,328,244 16,754 0.15 % 10,520,359 58,603 0.56 % 10,178,142 106,718 1.05 % Securities sold under agreements to repurchase 77,804 62 0.08 % 65,248 88 0.13 % 66,485 180 0.27 % FHLB advances and other borrowings 120,008 3,419 2.85 % 473,689 10,940 2.31 % 345,375 9,771 2.83 % Subordinated debentures and subordinated notes payable 108,897 3,182 2.92 % 108,739 4,516 4.15 % 108,553 5,540 5.10 % Total borrowings 306,709 6,663 2.17 % 647,676 15,544 2.40 % 520,413 15,491 2.98 % Total interest-bearing liabilities 11,634,953$ 23,417 0.20 % 11,168,035$ 74,147 0.66 % 10,698,555$ 122,209 1.14 % Noninterest-bearing liabilities 64,165 96,806 75,045 Stockholders' equity 1,105,505 1,541,314 1,847,477 Total liabilities and stockholders' equity$ 12,804,623 $ 12,806,155 $ 12,621,077 Net interest spread 3.17 % 3.24 % 3.21 % Net interest income and net interest margin (FTE)$ 408,071 3.36 %$ 425,571 3.59 %$ 426,551 3.74 % Less: Tax equivalent adjustment 6,344 6,146 5,843 Net interest income and net interest margin - ties to Statements of Comprehensive Income$ 401,727 3.31 %$ 419,425 3.53 %$ 420,708 3.69 % 1 Interest income includes$0.1 million ,$0.9 million and$0.7 million for fiscal years 2021, 2020 and 2019, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets. 2 Interest income includes$0.0 million ,$1.4 million and$1.3 million for fiscal years 2021, 2020 and 2019, respectively, resulting from accretion of purchase accounting discount associated with acquired loans. 3 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. 51-
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Interest Income 1
The following table presents interest income for fiscal years 2021, 2020 and
2019.
Fiscal Years Ended September 30,
2021 2020 2019
(dollars in thousands)
Interest income:
Loans (FTE) $ 395,321 $ 455,682 $ 504,778
Investment securities 33,995 42,653 41,510
Federal funds sold and other 2,172 1,383 2,472
Total interest income (FTE) 431,488 499,718 548,760
Less: Tax equivalent adjustment 6,344 6,146 5,843
Total interest income (GAAP) $ 425,144 $ 493,572 $ 542,917
Total interest income (FTE) consists primarily of interest income on loans and
interest income on our investment portfolio. Total interest income (FTE)
decreased $68.2 million , or 13.7%, to $431.5 million for fiscal year 2021, from
$499.7 million for fiscal year 2020, which decreased $49.1 million , or 8.9%,
from $548.8 million for fiscal year 2019. Significant components of interest
income are described in further detail below.
Loans. Interest income (FTE) on all loans decreased to $395.3 million in fiscal
year 2021 from $455.7 million in fiscal year 2020, a decrease of $60.4 million ,
or 13.2%. The decrease in loan interest was attributable to lower loan volumes
and loan yields, which decreased 15 basis points, reflecting the impact of PPP
loans which yield a lower rate. Additionally, PPP income, which is included in
loan interest, was $27.5 million and $10.2 million for fiscal years 2021 and
2020, respectively. Average net loan balances for fiscal year 2021 were $8.78
billion , representing a 10.4% decrease compared to the same period in fiscal
year 2020.
Interest income (FTE) on all loans in fiscal year 2020 decreased $49.1 million ,
or 9.7%, from $504.8 million in fiscal year 2019 due to a decrease in yields on
loans as discussed below and an increase in volume. Average net loan balances
for fiscal year 2020 were $9.80 billion , representing a 1.3% increase compared
to the same period in fiscal year 2019.
Our yield on loans is affected by market interest rates, the level of
adjustable-rate loan indices, interest rate floors and caps, customer repayment
activity, the level of loans held for sale, portfolio mix, and the level of
nonaccrual loans. The average tax equivalent yield on loans was 4.50% for fiscal
year 2021, a 15 basis point decrease compared to 4.65% for fiscal year 2020,
which was an 57 basis point decrease from 5.22% for fiscal year 2019. Adjusted
for the current realized gain (loss) on derivatives we use to manage interest
rate risk on certain of our loans at fair value, which we believe represents the
underlying economics of the transactions, the adjusted yield on loans was 4.36%
for fiscal year 2021, a decrease of 16 basis points compared to 4.52% for fiscal
year 2020, which was a 66 basis points decrease compared to 5.18% for fiscal
year 2019. For more information on our adjusted yield on non-ASC 310-30 loans,
including a reconciliation to the most directly comparable GAAP financial
measure, see "-Non-GAAP Financial Measures" section.
The average duration, net of interest rate swaps, of the loan portfolio was 1.5
years as of September 30, 2021 . Approximately 50%, or $4.10 billion , of the
portfolio is comprised of fixed rate loans, $524.5 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 38% are indexed to Wall Street Journal Prime, 26% to 5-year
Treasuries, 25% are indexed to 1-month LIBOR and the balance to various other
indices. Less than 16% of our total loans' rates are floored, with an average
interest rate floor 84 basis points above market rates as of September 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 8 basis points below
market rates.
Loan-related fee income of $40.4 million is included in interest income for
fiscal year 2021, compared to $22.6 million and $15.9 million for fiscal years
2020 and 2019, respectively. In addition, certain fees collected at loan
origination are considered to be a component of yield on the underlying loans
and are deferred and recognized into income over the life of the loans.
Amortization related to the FDIC indemnification assets of $0.0 million , $1.0
million and $1.4 million for fiscal years 2021, 2020 and 2019, respectively, is
included as a reduction to interest income.
Investment Securities Portfolio. The carrying value of investment securities and
FHLB stock, which is included in other assets in the consolidated balance
sheets, totaled $2.72 billion and $1.79 billion as of September 30, 2021 and
2020, respectively. Interest income on investments includes income earned on
investment securities and FHLB stock. Interest income on investments was $34.0
million for fiscal year 2021, a decrease of $8.7 million , or 20.3%, from $42.7
million in fiscal year 2020. The decrease in interest income was driven by a
yield decrease of 64 basis points to 1.53% from 2.17%.
In fiscal year 2020, interest income on investments increased $1.2 million , or
2.8%, from $41.5 million in fiscal year 2019. The increase was driven by an
increase in average investment balance of $286.7 million , or 17.1%, partially
offset by the yield on investments which decreased 30 basis points to 2.17% for
fiscal year 2020, compared to 2.47% for fiscal year 2019.
52-
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The weighted average life of the portfolio was 4.0 years at September 30, 2021 ,
3.2 years at September 30, 2020 and 3.7 years at September 30, 2019 . Average
investments in fiscal years 2021, 2020 and 2019 were 18.4%, 16.6% and 14.7% of
total average interest-earning assets, respectively.
Interest Expense
The following table presents interest expense for fiscal years 2021, 2020 and
2019.
Fiscal Years Ended September 30,
2021 2020 2019
(dollars in thousands)
Interest expense
Deposits $ 16,754 $ 58,603 $ 106,718
FHLB advances and other borrowings 3,481 11,028 9,951
Subordinated debentures and subordinated notes
payable 3,182 4,516 5,540
Total interest expense $ 23,417 $ 74,147 $ 122,209
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 $50.7 million , or 68.4%, to $23.4 million in fiscal year 2021, from
$74.1 million in fiscal year 2020, which decreased $48.1 million , or 39.3%, from
$122.2 million in fiscal year 2019. Average interest-bearing liabilities
increased $466.9 million , or 4.2%, to $11.63 billion in fiscal year 2021, from
$11.17 billion in fiscal year 2020, which increased $469.5 million , or 4.4%,
from $10.70 billion in fiscal year 2019. The average cost of total
interest-bearing liabilities decreased to 0.20% in fiscal year 2021, compared to
0.66% in fiscal year 2020 and 1.14% in fiscal year 2019. Significant components
of interest expense are described in further detail below.
Deposits. Interest expense on deposits, consisting of interest-bearing accounts
and time deposits, was $16.8 million in fiscal year 2021 compared with $58.6
million in fiscal year 2020, a decrease of $41.8 million , or 71.4%. The decrease
was driven by the cost of deposits, which decreased 41 basis points to 0.15% for
fiscal year 2021 from 0.56% for fiscal year 2020, partially offset by an
increase in average deposit balances to $11.33 billion in fiscal year 2021 from
$10.52 billion in fiscal year 2020, an increase of $807.9 million , or 7.7%.
Interest expense on deposits for fiscal year 2020 decreased $48.1 million , or
45.1%, from $106.7 million in fiscal year 2019. The decrease in interest expense
in fiscal year 2020 was driven by the cost of deposits, which decreased 49 basis
points to 0.56% for fiscal year 2020, partially offset by an increase of $342.2
million , or 3.4%, in average deposit balances to $10.52 billion in fiscal year
2020 from $10.18 billion in fiscal year 2019.
Average noninterest-bearing demand account balances increased to 24.6% of
average total deposits for fiscal year 2021, compared with 21.2% for fiscal year
2020 and 18.3% for fiscal year 2019. Total average other liquid accounts,
consisting of interest-bearing demand accounts, comprised 67.0% of total average
deposits in fiscal year 2021, compared to 63.8% of total average deposits for
fiscal year 2020 and 61.7% in fiscal year 2019, while time deposit accounts
decreased in fiscal year 2021 to 8.4% of total average deposits compared to
15.0% in fiscal year 2020 and 20.0% in fiscal year 2019.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other
borrowings was $3.5 million for fiscal year 2021, compared to $11.0 million for
fiscal year 2020 and $10.0 million for fiscal year 2019, reflecting weighted
average cost of 2.85%, 2.31% and 2.83%, respectively. Our average balance for
FHLB advances and other borrowings decreased to $120.0 million in fiscal year
2021 from $473.7 million in fiscal year 2020, which increased from $345.4
million in fiscal year 2019. Average FHLB advances and other borrowings as a
proportion of total average interest-bearing liabilities were 1.0% for fiscal
year 2021, 4.2% for fiscal year 2020 and 3.2% for fiscal year 2019. 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% at
September 30, 2021 , 1.78% at September 30, 2020 and 2.74% at September 30, 2019 .
The average tenor of our FHLB advances was 25 months at September 30, 2021 , 23
months at September 30, 2020 and 34 months at September 30, 2019 . The amount of
other borrowings and related interest expense are immaterial in each of fiscal
years 2021, 2020 and 2019.
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 September 30, 2021 , we had pledged
$3.18 billion of loans to the FHLB, against which we had borrowed $120.0
million .
Subordinated Debentures and Subordinated Notes Payable. Interest expense on our
outstanding junior subordinated debentures and subordinated notes payable was
$3.2 million for fiscal year 2021, $4.5 million for fiscal year 2020, and $5.5
million for fiscal year 2019. The weighted average contractual rate on
outstanding junior subordinated debentures was 2.34%, 2.47% and 4.38% at
September 30, 2021 , 2020 and 2019, respectively. The weighted average
contractual rate on outstanding subordinated notes payable was 3.27%, 3.43% and
4.88% at September 30, 2021 , 2020 and 2019, respectively.
53-
--------------------------------------------------------------------------------
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 each of the last two fiscal years and 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.
2021 vs 2020 2020 vs 2019
Volume Rate Total Volume Rate Total
(dollars in thousands)
Increase (decrease) in interest income:
Cash and cash equivalents $ 1,310 $ (504) $ 806 $ 1,075 $ (2,164) $ (1,089)
Other interest earning assets 855 (872) (17) - - -
Investment securities 5,726 (14,384) (8,658) 6,621 (5,478) 1,143
Non-ASC 310-30 loans (46,991) (13,370) (60,361) 7,273 (54,171) (46,898)
ASC 310-30 loans - - - (1,384) (814) (2,198)
Loans (46,991) (13,370) (60,361) 5,889 (54,985) (49,096)
Total (decrease) increase (39,100) (29,130) (68,230) 13,585 (62,627) (49,042)
Increase (decrease) in interest expense:
Interest-bearing deposits 4,152 (27,900) (23,748) 4,384 (38,095) (33,711)
Time deposits (6,909) (11,192) (18,101) (7,302) (7,102) (14,404)
Securities sold under agreements to
repurchase 14 (40) (26) (3) (89) (92)
FHLB advances and other borrowings (9,645) 2,124 (7,521) 3,200 (2,031) 1,169
Subordinated debentures and subordinated
notes payable 6 (1,340) (1,334) 10 (1,034) (1,024)
Total (decrease) increase (12,382) (38,348) (50,730) 289 (48,351) (48,062)
(Decrease) increase in net interest income
(FTE) $ (26,718) $ 9,218 $
(17,500)
Provision for Credit Losses We recognized a reversal of provision for credit losses of$34.7 million for fiscal year 2021 compared to a provision for credit losses of$118.4 million for fiscal year 2020, a decrease of$153.1 million . The reversal of provision for credit losses was due to lower loan balances and improved economic factors. The provision for credit losses in fiscal year 2020 was a result of the impact of the COVID-19 pandemic. We recognized a provision for credit losses of$118.4 million for fiscal year 2020 compared to a provision for credit losses of$40.9 million for fiscal year 2019, an increase of$77.4 million . The increase provision for credit losses was due to incurred losses in the portfolio primarily as a result of the COVID-19 pandemic. Included within the provision for credit losses was a net impairment of$0.2 million during fiscal year 2020 associated with ASC 310-30 loans. This compares to net improvement of$0.6 million related to this portion of the portfolio recorded in fiscal year 2019. Fiscal Years Ended September 30, 2021 2020 2019
(dollars in thousands) (Reversal of) provision for credit losses, non-ASC 310-30 loans ¹
$ (33,588) $ 118,204 $ 41,506 Decrease in provision for unfunded commitments reserve ² (1,146) - -
Impairment (improvement) in loan and lease losses, ASC 310-30 loans
- 188 (559)
(Reversal of) provision for credit losses, total
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 fiscal years endedSeptember 30, 2020 and 2019, provision for unfunded commitments reserve of$1.9 million and$0.0 million , respectively, was recorded in other noninterest expense in the consolidated income statement. 54- -------------------------------------------------------------------------------- Total Credit-Related Charges We believe the following table, which summarizes each component of the total credit-related charges incurred during the current and prior fiscal years, is helpful to understanding the overall impact on our yearly results of operations. Net other repossessed property charges include other repossessed property operating costs, valuation adjustments and gain (loss) 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.
Fiscal Years Ended
Included within F/S Line
Item Item(s): 2021 2020 2019
(dollars in thousands) (Reversal of) provision for (Reversal of) provision for credit losses ¹
credit losses ¹ $ (34,734) $ 118,392 $ 40,947 Increase (decrease) in Other noninterest expense ¹ provision for unfunded commitments reserve ¹
- 1,939 -
Net other repossessed property Net (gain) loss on repossessed charges (income)
property and other related
expenses (1,782) 12,858 4,367
Net (recovery) reversal of Interest income on loans interest income on nonaccrual loans
(7,660) 4,894 312
Net realized credit loss on Change in fair value of FVO
derivatives loans and related derivatives 210 2,952 -
Loan fair value adjustment Change in fair value of FVO
related to credit loans and related derivatives (3,664) 59,354 7,664
Total credit-related charges $ (47,630) $ 200,389 $ 53,290 1 Beginning in the first quarter of fiscal year 2021, increase in provision for unfunded commitments reserve is included in provision for credit losses.
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$619.1 million , or 7.7% of total loans, restaurants with$125.7 million , or 1.6% of total loans, arts and entertainment with$159.0 million , or 2.0% of total loans, senior care with$368.0 million , or 4.6% of total loans, and skilled nursing with$206.9 million , or 2.6% of total loans, for a total exposure of$1.48 billion , or 18.5% of total loans (excluding PPP loans) as ofSeptember 30, 2021 , with$195.2 million of these loans being classified as ofSeptember 30, 2021 and loan exposure in other segments of identified industries being either immaterial or having not shown general distress thus far. Total credit-related charges for fiscal year 2020 increased$147.1 million compared to fiscal year 2019. The majority of the increase was driven by increased provision for credit losses due to incurred losses in the portfolio primarily as a result of the COVID-19 pandemic. Noninterest Income The following table presents noninterest income for the fiscal years endedSeptember 30, 2021 , 2020 and 2019. Fiscal
Years Ended
2021 2020 2019
(dollars in thousands)
Noninterest income
Service charges and other fees $ 37,129 $ 37,741 $ 43,893
Wealth management fees 13,347 11,772 8,914
Mortgage banking income, net 11,337 8,959 4,848Net gain (loss) on sale of securities and other assets 249
7,890 (178)
Other 7,261 4,623 5,287
Subtotal, service and product fees 69,323 70,985 62,764
Derivative interest expense (12,727) (8,722) 619
Change in fair value of FVO loans and related
derivatives 3,468 (62,306) (7,666)
Other derivative income 6,500 60 5,015
Subtotal, changes in fair value for loans at fair
value and derivatives (2,759) (70,968) (2,032)
Total noninterest income $ 66,564 $ 17 $ 60,732
55-
-------------------------------------------------------------------------------- Our noninterest income is comprised of the various fees we charge our customers for products and services we provide and the impact of changes in fair value of loans for which we have elected the fair value treatment and realized and unrealized gains (losses) on the related interest rate swaps we utilize to manage interest rate risk on these loans. While we are required under GAAP to present both components within total noninterest income, we believe it is helpful to analyze the two broader components of noninterest income separately to better understand the underlying performance of the business. Noninterest income was$66.6 million for fiscal year 2021, compared with nominal noninterest income for fiscal year 2020, which decreased from$60.7 million for fiscal year 2019. Significant components of noninterest income are described in further detail below. Service and Product Fees. We recognized$69.3 million of noninterest income related to product and service fees in fiscal year 2021, a decrease of$1.7 million , or 2.3%, from$71.0 million for fiscal year 2020 due to an increase in net mortgage banking income and income from additional investments in bank owned life insurance purchased, partially offset by a decrease in the gain on sale of investment securities.. Noninterest income related to product and service fees for the fiscal year 2020 increased$8.2 million , or 13.1%, from$62.8 million for fiscal year 2019. The increase was due to the gain on sale of$7.9 million in investment securities, a$4.1 million increase in mortgage banking income due to stronger origination demand and a$2.9 million increase in wealth management fees, partially offset by a$6.2 million decrease in service charges and interchange revenue driven by declines in transaction activity from COVID-19 pandemic impacts. 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 fiscal years 2021, 2020 and 2019 these items accounted for$2.8 million ,$71.0 million and$2.0 million , respectively of noninterest loss. The change for fiscal year 2021 was driven by a favorable change in the credit risk adjustment of$71.2 million and a$1.0 million increase in swap fees, partially offset by a$4.0 million increase in the current cost of interest rate swaps due to changes in the interest rate environment. The change during fiscal year 2020 was driven by a$9.3 million increase in the current cost of interest rate swaps, a$3.0 million realized loss on derivatives and a$2.9 million decrease in swap fees combined with a net unfavorable change in the credit risk adjustment of$53.7 million . We believe that the current cost of interest rate swaps on the derivatives economically offsets the decrease in yield on the related loans. We present elsewhere the adjusted net interest income and adjusted net interest margin reflecting the metrics we use to manage the business. Noninterest Expense The following table presents noninterest expense for fiscal yearsSeptember 30, 2021 , 2020 and 2019. Fiscal Years Ended September 30, 2021 2020 2019 (dollars in thousands) Noninterest expense Salaries and employee benefits$ 154,288 $ 149,441 $ 136,305 Data processing and communication 27,526 24,455 24,077 Occupancy and equipment 21,270 21,273 20,784 Professional fees 21,332 21,961 14,579 Advertising 2,756 3,396 4,493 Net (gain) loss on repossessed property and other related expenses (1,782) 12,858 4,367 Goodwill and intangible assets impairment - 742,352 - Other 15,366 31,632 20,293 Total noninterest expense$ 240,756
Noninterest expense was$240.8 million for fiscal year 2021 compared with$1.01 billion for fiscal year 2020 and$224.9 million in fiscal year 2019. Our efficiency ratio was 50.5% for fiscal year 2021, 61.9% for fiscal year 2020 and 45.8% for fiscal year 2019. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "-Non-GAAP Financial Measures" section. Significant changes in components of noninterest expense are described in further detail below. Salaries and Employee Benefits. Salaries and employee benefits are a significant component of noninterest expense and include the cost of incentive compensation, stock compensation, benefit plans, health insurance and payroll taxes. These expenses were$154.3 million for fiscal year 2021, an increase of$4.9 million , or 3.2%, from$149.4 million for fiscal year 2020. The majority of the increase was driven by annual merit increases combined with an increase in incentive accruals and healthcare costs. Salaries and employee benefits for fiscal year 2020 increased$13.1 million , or 9.6%, from$136.3 million for fiscal year 2019. The majority of the increase was driven by annual merit increases combined with a one-time PTO payout of$1.1 million offered to employees and$2.1 million in severance costs during the period. 56- -------------------------------------------------------------------------------- Data Processing and Communication. Data processing and communication expenses include payments to vendors who provide software, data processing, and services on an outsourced basis, costs related to supporting and developing internet-based activities, credit card rewards provided to our customers, depreciation of bank-owned hardware and software, postage and telephone expenses. Expenses for data processing and communication were$27.5 million for fiscal year 2021 and$24.5 million for fiscal year 2020, an increase of$3.0 million , or 12.6%. This increase was related to software maintenance and upgrades. Expenses for data processing and communication for fiscal year 2020 increased$0.4 million , or 1.6%, from$24.1 million for fiscal year 2019. This increase was due to annual increases in data processing and communication expense. Occupancy and Equipment. Occupancy and equipment expenses include our branch network and administrative office locations throughout our footprint, including both owned and leased locations, property taxes, maintenance expense and depreciation of bank-owned furniture and equipment. These costs remained flat at$21.3 million for both fiscal year 2021 and 2020. Expenses for occupancy and equipment for fiscal year 2020 increased$0.5 million , or 2.4%, from$20.8 million for fiscal year 2019. The increase in fiscal years 2021 and 2020 were primarily due to annual increases in rent, utilities and property tax expenses. Professional Fees. Professional fees include ourFDIC assessment, borrower credit reports, the cost of accountants and other consultants, and legal services in connection with delinquent loans, business transactions, regulatory compliance matters and to resolve other legal matters. These expenses were$21.3 million for fiscal year 2021 and$22.0 million for fiscal year 2020, a decrease of$0.7 million , or 2.9%. The decrease in fiscal year 2021 was due to decreasedFDIC assessment costs of$4.6 million and decreased legal costs of$1.0 million , partially offset by$5.2 million in merger-related costs. Expenses for professional fees for fiscal year 2020 increased$7.4 million , or 50.6%, from$14.6 million for fiscal year 2019. The increase in fiscal year 2020 was due to increasedFDIC assessment costs of$4.0 million ,$1.2 million in increased legal costs and$0.9 million increase in loan review fees. Net (Gain) Loss on Repossessed Property and Other Assets. Our net gain on the sale of repossessed property and other assets was$1.8 million for fiscal year 2021, a net loss of$12.9 million for fiscal year 2020, and a net loss of$4.4 million for fiscal year 2019. The gain in fiscal year 2021 was primarily due gains on several properties sold during the period outpacing related expenses. The increase in fiscal year 2020 was primarily due to the valuation writedowns and related expenses of one repossessed property.Goodwill and Intangible Assets Impairment. There was no goodwill and intangible assets impairment in fiscal year 2021. In fiscal year 2020, the COVID-19 pandemic resulted in impairment recognized in noninterest expense of$742.4 million , of which$622.4 million stemmed from goodwill related to the acquisition ofGreat Western Bank in 2008 by NAB,$118.2 million from goodwill related to subsequent acquisitions and$1.8 million from certain intangible assets. There was no goodwill and intangible assets impairment in fiscal year 2019. Other. Other noninterest expenses include costs related to other repossessed property costs prior to foreclosure, business development and professional membership fees, travel and entertainment costs, amortization of core deposits and other intangibles, and other costs incurred. Other noninterest expenses were$15.4 million in fiscal year 2021,$31.6 million in fiscal year 2020 and$20.3 million in fiscal year 2019. The$16.2 million decrease in fiscal year 2021 was due to a$1.9 million decrease in unfunded commitment reserve, which is now accounted for within the loan provisioning under CECL, combined with higher costs in fiscal year 2020 as noted in the following sentence. The fiscal year 2020 increase of$11.3 million was primarily due to$7.6 million in expense related to the early payment of FHLB borrowings and a$2.0 million in expense related to the completion of theFDIC loss-sharing agreement, which endedJune 4, 2020 . Our efficiency ratio, which measures our ability to manage noninterest expenses, was 50.5% for fiscal year 2021, compared to 61.9% for fiscal year 2020. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "-Non-GAAP Financial Measures" section. Provision for Income Taxes The provision for income taxes varies due to the amount of taxable income, the level and effectiveness of tax-advantaged assets and tax credit funds and the rates charged by federal and state authorities. The provision for income taxes of$59.0 million in fiscal year 2021 represents an effective tax rate of 22.5%, compared to the benefit from income taxes of$25.5 million or 3.6%, for fiscal year 2020 and the provision for income taxes of$48.2 million or 22.4%, for fiscal year 2019. The substantial drop in effective tax rate for fiscal year 2020 was due to the impairment of goodwill and certain intangible assets and the increased provision for credit losses during the period. A sizable portion of goodwill impairment was related to non-tax-deductible goodwill for which no tax benefit was recorded. 57- -------------------------------------------------------------------------------- Return on Assets and Equity The table below presents our return on average total assets, return on average common equity and return on average tangible common equity to average assets ratio at and for the dates presented.
Fiscal Years Ended
2021 2020 2019
Return on average total assets 1.59 % (5.32) % 1.33 %
Return on average common equity 18.4 % (44.2) % 9.1 %
Return on average tangible common equity ¹ 18.6 % 2.9 % 15.3 %
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "-Non-GAAP Financial Measures" section.
Analysis of Financial Condition The following table highlights certain key financial and performance information for fiscal years endedSeptember 30, 2021 , 2020 and 2019. As of September 30, 2021 2020 2019 (dollars in thousands) Balance Sheet and Other Information Total assets$ 12,911,468 $ 12,604,439 $ 12,788,301 Loans ¹ 8,185,053 10,076,142 9,706,763 Allowance for credit losses ³ 246,038 149,887 70,774 Deposits 11,310,466 11,008,779 10,300,339 Stockholders' equity 1,201,479 1,162,933 1,900,249 Tangible common equity ²$ 1,196,328 $ 1,156,769 $ 1,155,052 Tier 1 capital ratio 15.1 % 11.8 % 11.7 % Total capital ratio 16.3 % 13.3 % 12.7 % Tier 1 leverage ratio 10.6 % 9.4 % 10.1 % Common equity tier 1 ratio 14.3 % 11.0 % 11.0 % Tangible common equity / tangible assets ² 9.3 % 9.2 % 9.6 % Book value per share - GAAP$ 21.80 $ 21.14 $ 33.76 Tangible book value per share ²$ 21.71 $ 21.03 $ 20.52 Nonaccrual loans / total loans 2.42 % 3.22 % 1.10 % Net charge-offs (recoveries) / average total loans 0.52 % 0.40 % 0.36 % Allowance for credit losses ³ / total loans 3.01 % 1.49 % 0.73 % 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 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, onOctober 1, 2020 , this line represented the allowance for loan and lease losses under the incurred loss model. Our total assets were$12.91 billion atSeptember 30, 2021 , compared with$12.60 billion atSeptember 30, 2020 and$12.79 billion atSeptember 30, 2019 . The increase in total assets for fiscal year 2021 was principally attributable to an increase in cash and cash equivalents and investment securities, partially offset by a decrease in net loans. The decrease in total assets for fiscal year 2020 was due to the COVID-19 related impairment of goodwill and certain intangible assets, partially offset by growth in loans and cash and cash equivalents. AtSeptember 30, 2021 , loans were$8.19 billion , a decrease of$1.89 billion , or 18.8%, from$10.08 billion atSeptember 30, 2020 , which increased$369.4 million , or 3.8%, compared to$9.71 billion atSeptember 30, 2019 . See "-Loan Portfolio" within this section for further discussion on the growth in net loans. Total deposits were$11.31 billion atSeptember 30, 2021 , increase of$301.7 million , or 2.7%, from$11.01 billion atSeptember 30, 2020 , which increased$708.4 million , or 6.9%, from$10.30 billion atSeptember 30, 2019 . See "-Deposits" within this section for further discussion on the growth in deposits. FHLB and other borrowings decreased by$75.0 million , or 38.5%, for the fiscal year. 58- -------------------------------------------------------------------------------- Loan Portfolio The following table presents our loan portfolio by category at each of the dates indicated: As of September 30, 2021 2020 1 2019 3 2018 3 2017 3 (dollars in thousands) Construction and development$ 394,712 $ 509,644 n/a ³ n/a ³ n/a ³ Owner-occupied CRE 1,357,715 1,417,394 n/a ³ n/a ³ n/a ³ Non-owner-occupied CRE 2,191,848 2,894,380 n/a ³ n/a ³ n/a ³ Multifamily residential real estate 539,063 533,983 n/a ³ n/a ³ n/a
³
Total commercial real estate 4,483,338
5,355,401
1,428,614 1,722,696 2,008,644 2,182,688 2,122,138
Commercial non-real estate 1,535,394 2,165,038 1,719,956 1,699,987 1,718,914
Residential real estate 628,098 730,812 812,208 837,569 932,892
Consumer and other ² 109,609 102,195 99,466 96,176 109,766
Subtotal n/a ¹ n/a ¹ 9,732,684 9,445,750 9,008,515
Less: Unamortized discount on acquired loans
and unearned net deferred fees and costs and
loans in process ³ n/a ¹ n/a ¹ (25,921) (29,826) (39,962)
Total loans 8,185,053 10,076,142 9,706,763 9,415,924 8,968,553
Allowance for credit losses (246,038) (149,887) (70,774) (64,540) (63,503)
Loans, net $ 7,939,015 $
9,926,255
During the fiscal year endedSeptember 30, 2021 , total loans decreased by$1.89 billion , or 18.8%. The net loan reduction was driven by sales of$267.5 million in hotel loans in fiscal year 2021, a net decrease of$515.3 million of PPP loans, and an increase in paydowns across the CRE, commercial non-real estate and agriculture portfolios. During the fiscal year endedSeptember 30, 2020 , total loans grew by$369.4 million , or 3.8%. The growth was primarily focused in commercial non-real estate loans, which grew by$445.1 million , or 25.9%, and CRE loans, which grew by$263.0 million , or 5.2%, partially offset by a decrease in agriculture loans of$285.9 million , or 14.2%. Over the same time period, residential real estate, consumer and other loan balances remained generally stable. The following table presents an analysis of the amortized cost of our loan portfolio atSeptember 30, 2021 , by borrower and collateral type and by each of the major geographic areas we use to manage our markets. September 30, 2021 South Dakota / Minnesota / Iowa / Specialized Assets Corporate and Other North Dakota Missouri Nebraska / Kansas Arizona Colorado ¹ ² Total % (dollars in thousands)
Construction and development$ 54,292 $ 43,492 $ 92,361 $ 65,210 $ 114,020 $ 27,670 $ (2,333) $ 394,712 4.8 % Owner-occupied CRE 318,717 327,403 216,818 228,136 253,896 8,974 3,771 1,357,715 16.6 % Non-owner-occupied CRE 445,737 607,258 328,819 227,352 410,898 171,888 (104) 2,191,848 26.8 % Multifamily residential real estate 201,049 125,385 178,714 6,824 27,429 1,001 (1,339) 539,063 6.6 % Total commercial real estate 1,019,795 1,103,538 816,712 527,522 806,243 209,533 (5) 4,483,338 54.8 % Agriculture 378,022 215,081 91,635 593,022 116,258 26,664 7,932 1,428,614 17.4 % Commercial non-real estate 219,163 480,862 386,120 76,179 108,631 6,723 257,716 1,535,394 18.8 % Residential real estate 195,525 160,767 140,504 56,725 63,463 12,465 (1,351) 628,098 7.7 % Consumer and other 11,996 26,618 23,727 311 1,625 4 45,328 109,609 1.3 % Total$ 1,824,501 $ 1,986,866 $ 1,458,698 $ 1,253,759 $ 1,096,220 $ 255,389 $ 309,620 $ 8,185,053 100.0 % % by location 22.3 % 24.3 % 17.8 % 15.3 % 13.4 % 3.1 % 3.8 % 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. 59-
-------------------------------------------------------------------------------- The following table presents additional detail regarding our CRE, agriculture, commercial non-real estate and residential real estate loans atSeptember 30, 2021 . September 30, 2021 (dollars in thousands) Construction and development $ 394,712 Owner-occupied CRE 1,357,715 Non-owner-occupied CRE 2,191,848 Multifamily residential real estate 539,063 Total commercial real estate 4,483,338 Agriculture real estate 679,536 Agriculture operating loans 749,078 Total agriculture 1,428,614 Commercial non-real estate 1,535,394 Home equity lines of credit 97,104 Closed end first lien 506,907 Closed end junior lien 24,087 Total residential real estate 628,098 Consumer and other 109,609 Total $ 8,185,053Commercial 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 theAmerican Banker's Association , atJune 30, 2021 , we were ranked the seventh-largest farm lender bank inthe 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. 60- --------------------------------------------------------------------------------
The following table presents the maturity distribution of our loan portfolio as
of
September 30, 2021
>1 Through 5
1 Year or Less Years >5 Years Total
(dollars in thousands)
Maturity distribution:
Construction and development $ 153,758 $ 198,005 $ 42,949 $ 394,712
Owner-occupied CRE 137,383 478,459 741,873 1,357,715
Non-owner-occupied CRE 201,082 927,311 1,063,455 2,191,848
Multifamily residential real estate 61,340 221,451 256,272 539,063
Total commercial real estate 553,563 1,825,226 2,104,549 4,483,338
Agriculture 687,332 419,994 321,288 1,428,614
Commercial non-real estate 480,659 687,151 367,584 1,535,394
Residential real estate 36,857 121,634 469,607 628,098
Consumer and other 9,465 74,519 25,625 109,609
Total $ 1,767,876 $ 3,128,524 $ 3,288,653 $ 8,185,053
The following table presents the distribution, as of September 30, 2021 , of our
loans that were due after one year between fixed and variable interest rates.
September 30, 2021
Fixed Variable Total
(dollars in thousands)
Interest rate distribution:
Construction and development $ 56,781 $ 184,173 $ 240,954
Owner-occupied CRE 723,663 496,669 1,220,332
Non-owner-occupied CRE 962,639 1,028,127 1,990,766Multifamily residential real estate 183,262 294,461
477,723 Total commercial real estate 1,926,345 2,003,430 3,929,775 Agriculture 558,238 183,044 741,282 Commercial non-real estate 651,105 403,630 1,054,735 Residential real estate 315,285 275,956 591,241 Consumer and other 41,160 58,984 100,144 Total$ 3,492,133 $ 2,925,044 $ 6,417,177 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 assets at an acceptable price in a timely manner. Our total other repossessed property carrying value was$4.5 million as ofSeptember 30, 2021 , a decrease of$15.5 million , or 77.6%, compared to$20.0 million atSeptember 30, 2020 , which decreased$16.7 million , or 45.5%, compared to$36.8 million atSeptember 30, 2019 . The decrease in fiscal year 2021 was due to three large liquidations during the period. The decrease in fiscal year 2020 was due to the writedown of one large relationship and several large liquidations during the period. The following table presents our other repossessed property balances for the period indicated. Fiscal Years Ended September 30, 2021 2020 2019 (dollars in thousands) Balance, beginning of period$ 20,034 $ 36,764 $ 23,074 Additions to other repossessed property 4,211 14,088 25,668 Valuation adjustments and other (721) (10,776) (2,328) Sales (19,045) (20,042) (9,650) Balance, end of period$ 4,479 $ 20,034 $ 36,764 61-
--------------------------------------------------------------------------------
Asset Quality
We place an asset on nonaccrual status when management believes, after
considering collection efforts and other factors, the borrowers' condition is
such that collection of interest is doubtful, which is generally 90 days past
due. 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.
As of September 30,
2021 2020 2019 2018 2017
(dollars in thousands)
Nonaccrual loans ¹
Construction and development $ 20 n/a ³ n/a ³ n/a ³ n/a ³
Owner-occupied CRE 21,628 n/a ³ n/a ³ n/a ³ n/a ³
Non-owner-occupied CRE 6,495 n/a ³ n/a ³ n/a ³ n/a ³
Multifamily residential real estate 6,787 n/a ³ n/a ³ n/a ³ n/a ³
Total commercial real estate 34,930 $ 73,501 $ 14,973 $ 22,908 $ 14,912
Agriculture 132,724 217,642 77,880 107,226 100,504
Commercial non-real estate 23,993 26,918 9,502 6,887 13,674
Residential real estate 6,254 6,811 4,762 6,124 9,099
Consumer and other 35 74 74 61 123
Total nonaccrual loans 197,936 324,946 107,191 143,206 138,312
Other repossessed property 4,479 20,034 36,764 23,074 8,985
Total nonperforming assets 202,415 344,980 143,955 166,280 147,297
Performing TDRs 49,104 35,205 44,842 19,783 32,490
Total nonperforming and restructured assets 251,519 380,185 188,797 186,063 179,787
Accruing loans 90 days or more past due 41 - 11,180 156 1,859
Nonperforming TDRs included in total nonaccrual
loans $ 33,749 $ 62,792 $ 30,073 $ 77,156 $ 71,334
Percent of total assets
Total nonaccrual loans 1.53 % 2.58 % 0.84 % 1.18 % 1.18 %
Other repossessed property 0.03 % 0.16 % 0.29 % 0.19 % 0.08 %
Nonperforming assets ² 1.57 % 2.74 % 1.13 % 1.37 % 1.26 %
Nonperforming and restructured assets ² 1.95 % 3.02 % 1.48 % 1.54 % 1.54 %
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 , 2019, 2018 and 2017.
At September 30, 2021 , our nonperforming assets were 1.57% of total assets,
compared to 2.74% at September 30, 2020 . Total nonaccrual loans decreased by
$127.0 million compared to September 30, 2020 , which increased $217.7 million
compared to September 30, 2019 . The decrease in nonaccrual loans in fiscal year
2021 was primarily driven by repayments on multiple agricultural and commercial
nonaccrual loans. The increase in nonaccrual loans for fiscal year 2020 was
primarily driven by several relationships in the agriculture and CRE segments of
the loan portfolio moving to nonaccrual during the period.
We recognized approximately $8.8 million of interest income on loans that were
on nonaccrual for the fiscal year ended 2021. We had average nonaccrual loans
(calculated as a two-point average) of $261.4 million outstanding during fiscal
year 2021. Based on the average loan portfolio yield for these loans for the
current fiscal year, we estimate that interest income would have been $11.8
million higher during the 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 September 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.
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.
62-
--------------------------------------------------------------------------------The table below outlines total TDRs, split between performing and nonperforming loans, at each of the dates indicated.
Fiscal Years Ended September 30,
2021 2020 2019
Performing TDRs Nonperforming TDRs Total Performing TDRs Nonperforming TDRs Total Performing TDRs Nonperforming TDRs Total
(dollars in thousands)
Construction and development $ - $ 20 $ 20 n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹
Owner-occupied CRE 3,322 14,555 17,877 n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹
Non-owner-occupied CRE 11,673 371 12,044 n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹
Multifamily residential real estate - - - n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹ n/a ¹
Total commercial real estate 14,995 14,946 29,941 $ 23,215 $ 11,913 $ 35,128 $ 17,145 $ 904 $ 18,049
Agriculture 29,996 9,275 39,271 2,976 45,971 48,947 22,929 24,762 47,691
Commercial non-real estate 3,922 9,467 13,389 8,734 4,803 13,537 4,398 4,257 8,655
Residential real estate 191 48 239 277 74 351 263 102 365
Consumer and other - 13 13 3 31 34 107 48 155
Total $ 49,104 $ 33,749 $ 82,853 $ 35,205 $ 62,792 $ 97,997 $ 44,842 $ 30,073 $ 74,915
1 Balance for this segment is included in total commercial real estate for
As ofSeptember 30, 2021 , total performing TDRs increased$13.9 million compared toSeptember 30, 2020 , which decreased$9.6 million compared toSeptember 30, 2019 . Performing TDRs increased fromSeptember 30, 2020 primarily due to one large relationship in the agriculture portfolio moving from nonperforming to performing status during the period. Performing TDRs decreased fromSeptember 30, 2019 primarily due to the net impact of the payoff of one large relationship in the agriculture portfolio and two large relationships in the agriculture portfolio moving to nonperforming status during the period. As ofSeptember 30, 2021 , total nonperforming TDRs decreased$29.0 million compared toSeptember 30, 2020 , which increased$32.7 million compared toSeptember 30, 2019 . Nonperforming TDRs decreased fromSeptember 30, 2020 mainly due to the one previously mentioned relationship in the agriculture portfolio that transferred to performing status. Nonperforming TDRs increased fromSeptember 30, 2019 mainly due to the net impact of two new relationships in the agriculture portfolio and the two previously mentioned relationships in the agriculture portfolio that transferred from performing status as well as one new commercial real estate relationship 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, onOctober 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 more granular 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 63- -------------------------------------------------------------------------------- servicing practices and changes in underwriting criteria as well as the impact of economic events that are not captured in the historical loss experience or modeled losses. ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period. The following table presents an analysis of our allowance for credit losses, including provisions for credit losses, charge-offs and recoveries, for the periods indicated.
At and for Fiscal Years Ended
2021 2020 2019 2018 2017
(dollars in thousands)
Allowance for credit losses on loans:
Balance, beginning of period $ 149,887 $
70,774
177,289 - - - -
(Reversal of) provision for credit losses ² (33,588) 118,204 41,506 17,754 22,210
Impairment (improvement) of ASC 310-30 loans - 188 (559) 232 (671)
Charge-offs:
Construction and development (27) n/a ³ n/a ³ n/a ³ n/a ³ Owner-occupied CRE (2,965) n/a ³ n/a ³ n/a ³ n/a ³ Non-owner-occupied CRE (36,951) n/a ³ n/a ³ n/a ³ n/a ³ Multifamily residential real estate (377) n/a ³ n/a ³ n/a ³ n/a
³
Total commercial real estate (40,320) (5,181) (1,511) (3,925) (2,043) Agriculture (5,523) (21,705) (24,847) (9,473) (7,853) Commercial non-real estate (6,216) (14,178) (7,895) (3,813) (12,576) Residential real estate (389) (615) (998) (569) (809) Consumer and other (939) (3,071) (1,810) (2,124) (2,599) Total charge-offs (53,387) (44,750) (37,061) (19,904) (25,880) Recoveries: Construction and development 424 n/a ³ n/a ³ n/a ³ n/a ³ Owner-occupied CRE 144 n/a ³ n/a ³ n/a ³ n/a ³ Non-owner-occupied CRE 457 n/a ³ n/a ³ n/a ³ n/a ³ Multifamily residential real estate - n/a ³ n/a ³ n/a ³ n/a
³
Total commercial real estate 1,025 1,395 567 533 485 Agriculture 2,869 2,189 385 332 415 Commercial non-real estate 1,155 1,018 392 994 652 Residential real estate 289 453 468 337 507 Consumer and other 499 416 536 759 1,143 Total recoveries 5,837 5,471 2,348 2,955 3,202 Net loan charge-offs (47,550) (39,279) (34,713) (16,949) (22,678) Balance, end of period$ 246,038 $
149,887
Average total loans for the period ¹$ 9,070,830 $
9,908,495
$ 8,185,053 $
10,076,142
0.52 % 0.40 % 0.36 % 0.18 % 0.26 %
Allowance for credit losses on loans to:
Total loans 3.01 % 1.49 % 0.73 % 0.69 % 0.71 %
Nonaccruing loans 124.30 % 46.13 % 66.03 % 45.07 % 45.91 %
1 Loans are shown at amortized cost.
2 For September 30, 2021 , (reversal of) provision for credit losses in the consolidated statements of income includes $1.1 million of reversal of
provision for unfunded commitments reserve.
3 Balance for this segment is included in total commercial real estate for September 30, 2020 , 2019, 2018 and 2017.
In the fiscal year 2021, we recorded net charge-offs of $47.6 million ,
representing 0.52% of average total loans, a 12 basis point increase compared to
0.40% of average total loans for fiscal year 2020. The increase in net
charge-offs in fiscal year 2021 included $34.0 million of charge-offs related to
the sales of certain hotel loans during the period, partially offset by a
reduction in agriculture and commercial non-real estate loan charge-offs of
$16.2 million and $8.0 million , respectively.
64-
--------------------------------------------------------------------------------
At September 30, 2021 , the allowance for credit losses was 3.01% of our total
loan portfolio, a 152 basis point increase compared with 1.49% at September 30,
2020 . The balance of the ACL increased from $149.9 million to $246.0 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 $34.7
million for fiscal year 2021 due to lower loan balances and improved economic
factors.
Additionally, a portion of our loans which are carried at fair value, totaling
$524.5 million and $655.2 million at September 30, 2021 and 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
$22.3 million and $30.5 million at September 30, 2021 and 2020, respectively, or
0.27% and 0.30% of total loans at September 30, 2021 and 2020, respectively.
The following tables present management's allocation of the allowance for credit
losses by loan category, in both dollars and percentage of our total allowance
for credit losses, to specific loans in those categories at the dates indicated.
September 30,
2021 2020 1 2019 2018 2017
(dollars in thousands)
Allocation of allowance for credit losses:
Construction and development $ 20,075 $ 7,012 n/a ¹ n/a ¹ n/a ¹
Owner-occupied CRE 18,223 20,530 n/a ¹ n/a ¹ n/a ¹
Non-owner-occupied CRE 112,134 50,965 n/a ¹ n/a ¹ n/a ¹
Multifamily residential real estate 4,878 6,726 n/a ¹ n/a ¹ n/a ¹
Total commercial real estate 155,310 85,233 $ 16,827 $ 16,777 $ 16,941
Agriculture 40,340 27,018 30,819 28,121 25,757
Commercial non-real estate 39,256 27,599 17,567 13,610 14,114
Residential real estate 9,132 7,465 4,095 4,749 5,347
Consumer and other 2,000 2,572 1,466 1,283 1,344
Total $ 246,038 $ 149,887 $ 70,774 $ 64,540 $ 63,503
Allocation of allowance for credit losses:
Construction and development 8.2 % 4.7 % n/a ¹ n/a ¹ n/a ¹
Owner-occupied CRE 7.4 % 13.7 % n/a ¹ n/a ¹ n/a ¹
Non-owner-occupied CRE 45.5 % 34.0 % n/a ¹ n/a ¹ n/a ¹
Multifamily residential real estate 2.0 % 4.5 % n/a ¹ n/a ¹ n/a ¹
Total commercial real estate 63.1 % 56.9 % 23.8 % 26.0 % 26.7 %
Agriculture 16.4 % 18.0 % 43.5 % 43.6 % 40.6 %
Commercial non-real estate 16.0 % 18.4 % 24.8 % 21.1 % 22.2 %
Residential real estate 3.7 % 5.0 % 5.8 % 7.3 % 8.4 %
Consumer and other 0.8 % 1.7 % 2.1 % 2.0 % 2.1 %
Total 100.0 %
100.0 % 100.0 % 100.0 % 100.0 %
1 At
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 quarterly 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 expected losses 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 allowance for 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$1.3 million and$2.4 million atSeptember 30, 2021 and 2020, respectively, and is recorded in accrued expenses and other liabilities in the consolidated balance sheet. 65- --------------------------------------------------------------------------------
Investment Securities The following table presents the amortized cost of each category of our investment portfolio at the dates indicated.
September 30,
2021 2020 2019
(dollars in thousands)
Securities available for sale
U.S. Treasury securities $ 99,093 $ 49,924 $ 94,178
U.S. Agency securities 24,976 24,974 -
Mortgage-backed securities:
Government National Mortgage Association 284,757 485,689 501,139
Federal Home Loan Mortgage Corporation 1,033,335 578,650
463,974
Federal National Mortgage Association 575,336 287,842
322,340
Small Business Assistance Program 235,402 244,653
316,502
States and political subdivision securities 43,614 54,224 66,145 Corporate debt securities 39,000 - - Other 1,006 1,006 1,006 Total$ 2,336,519 $ 1,726,962 $ 1,765,284 Securities held to maturity U.S. Treasury securities$ 27,782 $ - $ - Mortgage-backed securities: Government National Mortgage Association 55,698 - - Federal Home Loan Mortgage Corporation 130,272 - - Federal National Mortgage Association 84,002 - - Small Business Assistance Program 66,547 - - States and political subdivision securities 3,450 - - Total$ 367,751 $ - $ - 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 byU.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. SinceSeptember 30, 2020 , the carrying value of the portfolio has increased by$936.3 million , or 52.8%. 66- -------------------------------------------------------------------------------- The following tables present the aggregate amortized cost of each investment category of the investment portfolio and the weighted average yield ("WA yield") for each investment category for each maturity period atSeptember 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 WA yield on these assets is presented below based on the contractual rate, as opposed to a tax equivalent yield concept. September 30, 2021 Due in one year Due after one year Due after five years Due after Mortgage-backed Securities without or less through five years through ten years ten years securities contractual maturities Total Amount WA Yield Amount WA Yield Amount WA Yield Amount WA Yield Amount WA Yield Amount WA Yield Amount WA Yield (dollars in
thousands)
Securities available for saleU.S. Treasury securities $ - - %$ 49,396 0.78 %$ 49,697 1.22 % $ - - % $ - - % $ - - %$ 99,093 1.00 %U.S. Agency securities - - % 24,976 1.13 % - - % - - % - - % - - % 24,976 1.13 % Mortgage-backed securities - - % - - % - - % - - % 2,128,830 1.42 % - - % 2,128,830 1.42 % States and political subdivision securities ¹ ² 15,745 1.71 % 24,869 1.90 % 3,000 1.65 % - - % - - % - - % 43,614 1.81 % Corporate debt securities - - % 32,000 3.14 % 7,000 2.75 % - - % - - % - - % 39,000 3.07 % Other - - % - - % - - % - - % - - % 1,006 - % 1,006 - % Total$ 15,745 1.71 %$ 131,241 1.63 %$ 59,697 1.42 % $ - - %$ 2,128,830 1.42 %$ 1,006 - %$ 2,336,519 1.43 % Securities held to maturityU.S. Treasury securities $ - - % $ - - %$ 27,782 1.23 % $ - - % $ - - % $ - - %$ 27,782 1.23 % Mortgage-backed securities - - % - - % - - % - - % 336,519 1.17 % - - % 336,519 1.17 % States and political subdivision securities ¹ ² 150 3.00 % 500 2.00 % 2,800 1.78 % - - % - - % - - % 3,450 1.86 % Total$ 150 3.00 %$ 500 2.00 %$ 30,582 1.28 % $ - - %$ 336,519 1.17 % $ - - %$ 367,751 1.18 %
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 theU.S. Government or aU.S. Government sponsored enterprise which carry the explicit or implicit guarantee of theU.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. AtSeptember 30, 2021 andSeptember 30, 2020 , our total deposits were$11.31 billion and$11.01 billion , respectively, representing increase of$301.7 million , or 2.7%, due to a$876.7 million increase in checking and savings deposits across both business and consumer accounts, offset by a$229.5 million decrease in business and consumer time deposits and a$345.5 million decrease in public and brokered deposits. Our accounts are federally insured by theFDIC up to the legal maximum. 67- --------------------------------------------------------------------------------
The following table presents the balances and weighted average cost of our deposit portfolio at the following dates.
September 30,
2021 2020 2019
Weighted Avg. Weighted Avg. Weighted Avg.
Amount Cost Amount Cost Amount Cost
(dollars in thousands)Noninterest-bearing demand$ 2,608,579 - %$ 2,586,743 - %$ 1,956,025 - % Interest-bearing demand 7,967,316 0.11 % 7,139,058 0.26 % 6,248,638 1.00 % Time deposits, greater than$250,000 146,962 0.70 % 352,913 1.12 % 493,530 2.30
%
Time deposits, less than or equal to$250,000 587,609 0.29 % 930,065 0.75 % 1,602,146 1.68 % Total$ 11,310,466 0.10 %$ 11,008,779 0.27 %$ 10,300,339 0.98 % AtSeptember 30, 2021 and 2020, we had$76.1 million and$329.0 million , respectively, in brokered deposits. As a result of the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act inMay 2018 , most reciprocal deposits are no longer treated as brokered deposits and are now included with core commercial deposits. Municipal public deposits constituted$1.15 billion and$1.25 billion of our deposit portfolio atSeptember 30, 2021 , andSeptember 30, 2020 , respectively, of which$770.6 million and$859.7 million , respectively, were required to be collateralized. Our top 10 depositors were responsible for 7.3% and 6.4% of our total deposits atSeptember 30, 2021 andSeptember 30, 2020 , respectively. The following table presents deposits by region. September 30, 2021 2020 2019 (dollars in thousands)
$ 2,631,091 Iowa / Missouri 3,291,639 3,184,321 2,799,597 Nebraska / Kansas 2,893,535 2,833,921 2,611,332 Arizona 688,407 590,567 508,308 Colorado 1,392,378 1,300,351 1,237,052 Specialized Assets 18,677 - - Other 66,504 229,500 512,959 Total deposits$ 11,310,466 $ 11,008,779 $ 10,300,339 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. AtSeptember 30, 2021 andSeptember 30, 2020 , our time deposits greater than$250,000 totaled$147.0 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 atSeptember 30, 2021 . September 30, 2021 Greater than Less than or$250,000 equal to$250,000 (dollars in thousands) Remaining maturity: Three months or less$ 49,781 $ 171,410 Over three through six months 34,452 128,047 Over six through twelve months 39,267 152,362 Over twelve months 23,462 135,790 Total$ 146,962 $ 587,609 Percent of total deposits 1.3 % 5.2 % AtSeptember 30, 2021 andSeptember 30, 2020 , the average remaining maturity of all time deposits was approximately 9 and 8 months, respectively. The average time deposit amount per account was approximately$25,522 and$37,174 atSeptember 30, 2021 andSeptember 30, 2020 , respectively. 68- --------------------------------------------------------------------------------
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$106.9 million and$80.7 million as ofSeptember 30, 2021 andSeptember 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 atSeptember 30, 2021 andSeptember 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
Fiscal Years Ended
2021 2020 2019
(dollars in thousands)
Short-term borrowings:
Securities sold under agreements to repurchase $ 91,289 $ 65,506 $ 68,992
FHLB advances - - 15,000
Other short-term borrowings - 75,000 -
Total short-term borrowings $ 91,289 Maximum amount outstanding at any month-end during the period
$ 92,528 $ 539,809 $ 371,649 Average amount outstanding during the period$ 77,812 $ 218,340 $ 175,133 Weighted average rate for the period 0.08 % 0.75 % 1.72 % Weighted average rate as of date indicated 0.08 % 0.09 % 0.91 % Other Borrowings In addition to FHLB short-term advances, we also had FHLB long-term borrowings of$120.0 million outstanding for bothSeptember 30, 2021 andSeptember 30, 2020 . We had outstanding$74.0 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 ofSeptember 30, 2021 andSeptember 30, 2020 , respectively. We are permitted under applicable laws and regulations to count these trust preferred securities as part of our Tier 1 capital. 69- -------------------------------------------------------------------------------- We issued$35.0 million of fixed-to-floating rate subordinated notes that mature onAugust 15, 2025 through a private placement. The notes, whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter endedSeptember 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 eachNovember 15 ,February 15 ,April 15 andAugust 15 . During the fiscal year 2021, we incurred$3.2 million in interest expense on all outstanding subordinated debentures and notes compared to$4.5 million and$5.5 million in fiscal years 2020 and 2019, respectively. 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 atSeptember 30, 2021 . Customer deposit obligations categorized as "not determined" include noninterest-bearing demand accounts and interest-bearing demand accounts with no stated maturity date. September 30, 2021 Less Than 1 Year 1 to 2 Years 2 to 5 Years >5 Years Not Determined Total (dollars in thousands) Contractual Obligations: Customer deposits $ 545,587 $
105,017
$ 11,310,466 Securities sold under agreement to repurchase 91,289 - - - - 91,289 FHLB advances and other borrowings 30,000 30,000 60,000 - - 120,000 Subordinated debentures - - - 75,920 - 75,920 Subordinated notes payable - - 35,000 - - 35,000 Accrued interest payable 1,596 - - - - 1,596 Interest on FHLB advances 3,363 2,532 1,214 - - 7,109 Interest on subordinated debentures 1,775 1,775 5,326 14,241 - 23,117 Interest on subordinated notes payable 1,146 1,146 2,149 - - 4,441 Unfunded commitment for investment in affordable housing limited partnership 468 2,402 6,844 187 - 9,900 Other Commitments: Commitments to extend credit-non-credit card$ 1,342,882 $ 194,570 $ 251,795 $ 223,945 $ -$ 2,013,192 Commitments to extend credit-credit card 132,129 - - - - 132,129 Letters of credit 43,976 - - - - 43,976 Advisory fees related to pending merger 13,391 - - - - 13,391 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. September 30, 2021 2020 2019 (dollars in thousands) Commitments to extend credit$ 2,145,321 $ 2,138,138 $ 2,229,678 Letters of credit 43,976 65,707 68,983 Total$ 2,189,297 $ 2,203,845 $ 2,298,661 Liquidity Liquidity refers to our ability to maintain resources that are adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost. 70- -------------------------------------------------------------------------------- Our liquidity risk is managed through a comprehensive framework of policies and limits overseen by our Bank's asset and liability committee. We continuously monitor and make adjustments to our liquidity position by adjusting the balance between sources and uses of funds as we deem appropriate. Our primary measures of liquidity include monthly cash flow analyses under ordinary business activities and conditions and under situations simulating a severe run on our Bank. We also monitor our Bank's deposit to loan ratio to ensure high quality funding is available to support our strategic lending growth objectives, and have internal management targets for theFDIC's liquidity ratio, net short-term non-core funding dependence ratio and non-core liabilities to total assets ratio. The results of these measures and analyses are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.Great Western Bancorp, Inc. Our primary source of liquidity is cash obtained from dividends by our Bank. We primarily use our cash for the payment of dividends, when and if declared by our Board of Directors, and the payment of interest on our outstanding junior subordinated debentures and subordinated notes. We also use cash, as necessary, to satisfy the needs of our Bank through equity contributions and for acquisitions. AtSeptember 30, 2021 , our holding company had$28.6 million of cash. During the first quarter of fiscal year 2022, we declared and paid a dividend of$0.05 per common share. The outstanding amount under our private placement subordinated capital notes was$35.0 million atSeptember 30, 2021 . Our management believes that the sources of available liquidity are adequate to meet all reasonably foreseeable short-term and intermediate-term demands. We may consider raising additional capital in public or private offerings of debt or equity securities. To this end, onJune 1, 2020 we filed a shelf registration statement with theSEC registering an indeterminate amount of our common stock, debt securities and other securities which we may decide to issue in the future. The specific terms of any shares or other securities we choose to issue will be based on current market conditions and will be described in a supplement to the prospectus contained in the shelf registration statement.Great Western Bank . Our Bank maintains sufficient liquidity by maintaining minimum levels of excess cash reserves (measured on a daily basis), a sufficient amount of unencumbered, highly liquid assets and access to contingent funding. AtSeptember 30, 2021 , our Bank had cash of$1.55 billion (inclusive of$28.6 million of cash from our holding company) and$2.34 billion of highly-liquid available for sale securities held in our investment portfolio, of which$1.26 billion were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. The balance could be sold to meet liquidity requirements. Our Bank had$120.0 million in FHLB borrowings atSeptember 30, 2021 , with additional available lines of$1.66 billion . Our Bank also had an additional borrowing capacity of$933.7 million with the FRB Discount Window. Our Bank primarily uses liquidity to meet loan requests and commitments (including commitments under letters of credit), to accommodate outflows in deposits and to take advantage of interest rate market opportunities. AtSeptember 30, 2021 , we had a total of$2.19 billion of outstanding exposure under commitments to extend credit and issued letters of credit. Our management believes that the sources of available liquidity are adequate to meet all our Bank's reasonably foreseeable short-term and intermediate-term demands. 71- --------------------------------------------------------------------------------
Capital
As a bank holding company, we must comply with the capital requirements established by theFederal Reserve , and our Bank must comply with the capital requirements established by theFDIC . The current risk-based guidelines applicable to us and our Bank are based on the Basel III framework, as implemented by the federal bank regulators. The following table presents our regulatory capital ratios atSeptember 30, 2021 and the standards for both well-capitalized depository institutions and minimum capital requirements. Our capital ratios exceeded applicable regulatory requirements as of that date. September 30, 2021 Actual Minimum Capital Well Capitalized Capital Amount Ratio Requirement Ratio ¹ Ratio (dollars in thousands)Great Western Bancorp, Inc. Tier 1 capital$ 1,378,832 15.1 % 6.0 % N/A Total capital 1,491,639 16.3 % 8.0 % N/A Tier 1 leverage 1,378,832 10.6 % 4.0 % N/A Common equity Tier 1 ² 1,304,865 14.3 % 4.5 % N/A Risk-weighted assets$ 9,128,666 Great Western Bank Tier 1 capital$ 1,377,944 15.1 % 6.0 % 8.0 % Total capital 1,469,751 16.1 % 8.0 % 10.0 % Tier 1 leverage 1,377,944 10.6 % 4.0 % 5.0 % Common equity Tier 1 ² 1,377,944 15.1 % 4.5 % 6.5 % Risk-weighted assets$ 9,126,409
1 Does not include capital conservation buffer, which was 2.5% at
AtSeptember 30, 2021 andSeptember 30, 2020 , our Tier 1 capital included an aggregate of$74.0 million and$73.8 million , respectively, of trust preferred securities issued by our subsidiaries, net of fair value adjustment. AtSeptember 30, 2021 , our Tier 2 capital included$91.8 million of the allowance for credit losses and$21.0 million of subordinated capital notes whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter endingSeptember 30, 2020 . AtSeptember 30, 2020 , our Tier 2 capital included$127.2 million of the allowance for credit losses and$28.0 million of subordinated capital notes. Our total risk-weighted assets were$9.13 billion atSeptember 30, 2021 . Non-GAAP Financial Measures We rely on certain non-GAAP financial measures in making financial and operational decisions about our business. We believe that each of the non-GAAP financial measures presented is helpful in highlighting trends in our business, financial condition and results of operations which might not otherwise be apparent when relying solely on our financial results calculated in accordance with GAAP. We disclose net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. We believe this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis. In particular, we evaluate our profitability and performance based on our adjusted net income, adjusted earnings per common share, pre-provision pre-tax income ("PTPP"), tangible net income and return on average tangible common equity. Our adjusted net income and adjusted earnings per common share exclude the after-tax effect of items with a significant impact to net income that we do not believe to be recurring in nature, (e.g., one-time acquisition expenses as well as the second quarter of fiscal year 2020 COVID-19 impact on credit and other related charges and the impairment of goodwill and certain intangible assets). Our PTPP income excludes total provision for credit losses, credit gain/losses on loans held for investment measured at fair value and goodwill impairment. Our tangible net income and return on average tangible common equity exclude the effects of amortization expense relating to intangible assets and our acquisitions of other institutions. We believe these measures help highlight trends associated with our financial condition and results of operations by providing net income and return information excluding significant nonrecurring items (for adjusted net income and adjusted earnings per common share), measure our ability to generate capital by providing net income excluding credit losses (for PTPP income) and measure net income based on our cash payments and receipts during the applicable period (for tangible net income and return on average tangible common equity). We also evaluate our profitability and performance based on our adjusted net interest income, adjusted net interest margin, adjusted interest income on loans and adjusted yield on loans. We adjust each of these four measures to include the derivative interest expense we use to manage interest rate risk on certain of our loans, which we believe economically offsets the interest income earned on the loans. Similarly, we evaluate our operational efficiency based on our efficiency ratio, which excludes the effect of amortization of core deposit and other intangibles (a non-cash expense item) and includes the tax benefit associated with our tax-advantaged loans. 72- -------------------------------------------------------------------------------- We evaluate our financial condition based on the ratio of our tangible common equity to our tangible assets and the ratio of our tangible common equity to common shares outstanding. Our calculation of this ratio excludes the effect of our goodwill and other intangible assets. We believe this measure is helpful in highlighting the common equity component of our capital and because of its focus by federal bank regulators when reviewing the health and strength of financial institutions in recent years and when considering regulatory approvals for certain actions, including capital actions. We also believe the ratio of our tangible common equity to common shares outstanding is helpful in understanding our stockholders' relative ownership position as we undertake various actions to issue and retire common shares outstanding.
At and for Fiscal Years Ended
2021 2020 2019 2018 2017
(Dollars in thousands except share and per share amounts)
Adjusted net income and adjusted earnings per
common share:
Net income (loss) - GAAP $ 203,258 $
(680,808)
- - - - 440
Add: COVID-19 related impairment of goodwill
and certain intangible assets, net of tax - 713,013 - - -
Add: COVID-19 impact on credit and other
related charges, net of tax - 56,685 - - -
Add: Deferred taxes revaluation due to Tax
Reform Act - - - 13,586 -
Adjusted net income $ 203,258 $ 88,890 $ 167,365 $ 171,502 $ 145,226
Weighted average diluted common shares
outstanding 55,443,909 55,612,251 57,257,061 59,131,650 59,029,382
Earnings per common share - diluted$ 3.67 $
(12.24)
1.60
Pre-tax pre-provision income ("PTPP"):
Income (loss) before income taxes - GAAP $ 262,269 $ (706,318) $ 215,595 $ 232,035 $ 214,227
Add: (Reversal of) provision for credit losses
- GAAP (34,734) 118,392 40,947 17,986 21,539
Add: Change in fair value of FVO loans and
related derivatives - GAAP (3,468) 62,306 7,666 194 936
Add: Goodwill impairment - GAAP - 742,352 - - -
Pre-tax pre-provision income $ 224,067 $
216,732
Tangible net income and return on average tangible common equity: Net income (loss) - GAAP$ 203,258 $ (680,808) $ 167,365 $ 157,916 $ 144,786 Add: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets, net of tax 1,014 714,339 1,337 1,460 2,044 Tangible net income$ 204,272 $
33,531
Average common equity$ 1,105,505 $ 1,541,314 1,847,477 1,788,153 1,702,225 Less: Average goodwill and other intangible assets 5,619 375,549 745,920 747,513 749,393 Average tangible common equity$ 1,099,886 $
1,165,765
Return on average common equity * 18.4 % (44.2) % 9.1 % 8.8 % 8.5 % Return on average tangible common equity ** 18.6 % 2.9 % 15.3 % 15.3 % 15.4 %
* Calculated as net income - GAAP divided by average common equity. ** Calculated as tangible net income divided by average tangible common equity.
Adjusted net interest income and adjusted net interest margin (fully-tax equivalent basis), on non-ASC 310-30 loans: Net interest income - GAAP$ 401,727 $
419,425
6,344 6,146 5,843 6,597 8,599
Net interest income (FTE) 408,071 425,571 426,551 414,434 397,794
Add: Derivative interest expense (12,727) (8,721) 619 (5,365) (14,395)
Adjusted net interest income (FTE) $ 395,344 $
416,850
Average interest-earning assets$ 12,129,324 $
11,868,666
3.36 % 3.59 % 3.74 % 3.89 % 3.90 %
Adjusted net interest margin (FTE) ** 3.26 % 3.51 % 3.74 % 3.84 % 3.76 %
* Calculated as net interest income (FTE) divided by average interest earning assets. ** Calculated as adjusted net interest income (FTE) divided by average interest earning assets.
73-
--------------------------------------------------------------------------------
At and for Fiscal Years Ended
2021 2020 2019 2018 2017
(Dollars in thousands except share and per share amounts)
Adjusted interest income and adjusted yield
(fully-tax equivalent basis), on non-ASC 310-30
loans:
Interest income - GAAP $ 388,977 $
443,709
6,344 6,146 5,843 6,597 8,599
Interest income (FTE) 395,321 449,855 496,753 446,386 405,080
Add: Derivative interest expense (12,727) (8,721) 619 (5,365) (14,395)
Adjusted interest income (FTE) $ 382,594 $
441,134
Average non-ASC310-30 loans$ 8,784,577 $
9,750,677
4.50 % 4.61 % 5.17 % 4.90 % 4.72 %
Adjusted yield (FTE) ** 4.36 % 4.52 % 5.18 % 4.84 % 4.55 %
* Calculated as interest income (FTE) divided by average loans. ** Calculated as adjusted interest income (FTE) divided by average loans.
Efficiency ratio: Total revenue - GAAP$ 468,291 $
419,442
6,344 6,146 5,843 6,597 8,599
Total revenue (FTE) $ 474,635 $
425,588
Noninterest expense$ 240,756 $ 1,007,368 $ 224,898 $ 231,425 $ 216,643 Less: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets 1,014 743,745 1,538 1,662 2,358 Tangible noninterest expense$ 239,742 $ 263,623 $ 223,360 $ 229,763 $ 214,285 Efficiency ratio * 50.5 % 61.9 % 45.8 % 47.1 % 46.5 %
* Calculated as the ratio of tangible noninterest expense to total revenue (FTE).
Tangible common equity and tangible common equity to tangible assets: Total stockholders' equity$ 1,201,479 $
1,162,933
5,151 6,164 745,197 746,735 748,397
Tangible common equity $ 1,196,328 $ 1,156,769 $ 1,155,052 $ 1,093,816 $ 1,006,603
Total assets $ 12,911,468 $
12,604,439
5,151 6,164 745,197 746,735 748,397
Tangible assets $ 12,906,317 $ 12,598,275 $ 12,043,104 $ 11,370,073 $ 10,941,614
Tangible common equity to tangible assets 9.3 % 9.2 % 9.6 % 9.6 % 9.2 %
Tangible book value per share:
Total stockholders' equity $ 1,201,479 $
1,162,933
5,151 6,164 745,197 746,735 748,397
Tangible common equity $ 1,196,328 $
1,156,769
Common shares outstanding 55,116,503 55,014,189 56,283,659 58,917,147
58,834,066
Book value per share - GAAP$ 21.80 $
21.14
$ 21.71 $
21.03
Impact of Inflation and Changing Prices Our financial statements included in this Annual Report on Form 10-K have been prepared in accordance with GAAP, which requires us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession generally are not considered. The primary effect of inflation on our operations is reflected in increased operating costs. In our management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies ofthe United States government, its agencies and various other governmental regulatory authorities. 74- -------------------------------------------------------------------------------- Recent Accounting Pronouncements See "Note 2. New Accounting Standards" in the accompanying "Notes to Consolidated Financial Statements" included in this Annual Report on Form 10-K for a discussion of new accounting pronouncements and their expected impact on our financial statements. Critical Accounting Policies and the Impact of Accounting Estimates Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Our accounting policies are more fully described in Note 1 of the consolidated financial statements. Certain accounting policies require our management to use significant judgment and assumptions, which can have a material impact on the carrying amount of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. We have identified the following accounting policies as critical: the allowance for credit losses, core deposits and other intangibles, derivatives, and income taxes. Additionally, in the prior year we identified goodwill impairment as a critical accounting policy. We have reviewed these critical accounting estimates and related disclosures with our Audit Committee. Allowance for Credit Losses Description. We maintain an allowance for credit losses at a level management believes is appropriate based on ongoing evaluation of the loan portfolio based on the current expected credit loss model driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. 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). Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). 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 over a forecasted 2 year period after which the loss rates revert back to the historical loss rates over a 1 year reversion period. 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 as well as the impact of economic events that are not captured in the historical loss experience or modeled losses. Changes to the allowance for credit losses are made by charges to or reductions in the provision for credit losses, which are reflected in the consolidated statements of income. 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. Further discussion of the methodology used in establishing the allowance for credit losses is provided in the Allowance for Credit Losses section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 1. Nature of Operations and Summary of Significant Accounting Policies." Judgments and Uncertainties. Management makes a range of assumptions to determine what is believed to be the appropriate level of allowance for credit losses. Management determines an appropriate macroeconomic forecast based on the expectation of future conditions over a supportable forecast period as described above, as well as qualitative adjustments based on current and future conditions that may not be fully captured in the modeling components above. All of these estimates are susceptible to significant change. Effect if Actual Results Differ From Assumptions. The allowance represents our best estimate of expected current credit losses in the loan portfolio, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on our financial condition and results of operations. 75 -------------------------------------------------------------------------------- Core Deposits and Other Intangibles Description. Intangible assets are non-physical assets generally recognized as part of an acquisition, where the acquirer is allowed to assign some portion of the purchase price to acquired intangible assets having a useful life of greater than one year. These assets often involve estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques. Our intangible assets include core deposits, brand intangibles, customer relationships, and other intangibles. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under ASC Topic 350,Goodwill and Other Intangible Assets, intangible assets are evaluated for impairment if indicators of impairment are identified. Judgments and Uncertainties. The determination of fair values is based on a quantitative analysis using management's assumptions of future growth rates, future attrition of the customer base, discount rates and other relevant factors. Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of core deposits and other intangibles and could result in an impairment loss affecting our consolidated financial statements as a whole. Derivatives Description. We maintain an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. We enter into interest rate swap contracts to offset the interest rate risk associated with borrowers who lock in long-term fixed rates (greater than or equal to 5 years to maturity) through a fixed rate loan. Generally, under these swaps, we agree with various swap counterparties to exchange the difference between fixed-rate and floating-rate interest amounts based upon notional principal amounts. These contracts do not qualify for hedge accounting. These interest rate derivative instruments are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value, with changes in fair value reported in net realized and unrealized gain (loss) on derivatives. Since each fixed rate loan is paired with an offsetting derivative contract, the impact to net income is minimized. We also have back to back swaps with customers where we enter into an interest rate swap with loan customers to provide a facility to mitigate the interest rate risk associated with offering a fixed rate and simultaneously enters into a swap with an outside third party that is matched in exact offsetting terms. The back to back swaps are recorded at fair value and recognized as assets and liabilities, depending on the rights or obligations under the contract, in fair value of derivatives on the consolidated balance sheet, with changes in fair value reported in net realized and unrealized gain (loss) on derivatives. 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 minimize the market and liquidity risks of the swaps entered into with the customer by entering into an offsetting position with a swap dealer. 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. We enter into forward interest rate lock commitments on mortgage loans to be held for sale, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding. We also have corresponding forward sales contracts related to these interest rate lock commitments. Both the mortgage loan commitments and the related sales contracts are considered derivatives and are recorded at fair value with changes in fair value recorded in noninterest income. Judgments and Uncertainties. Our 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. We manage interest rate swap credit risk with the same standards and procedures applied to our commercial lending activities. Effect if Actual Results Differ From Assumptions. As with any financial instrument, derivative financial instruments have inherent risk including adverse changes in interest rates. We have agreements with our derivative counterparties that contain a provision where if we fail to maintain our status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and we would be required to settle our obligations under the agreements. Income Taxes Description. We are subject to the income tax laws of theU.S. , its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly, and as new information becomes available, the balances are adjusted as appropriate. We follow ASC Topic 740, Income Taxes, which prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized on the consolidated financial statements. 76-
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Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. Effect if Actual Results Differ From Assumptions. Although we believe the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution. Goodwill Impairment Description. Prior to fiscal year 2021, goodwill represented the excess purchase price over the fair value of identifiable net assets of acquired companies.Goodwill often involved estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under ASC Topic 350, we conducted a goodwill impairment test on the basis of one reporting unit at least annually, and more frequently if events occurred or circumstances changed that would more-likely-than-not reduce the fair value below its carrying amount. We assessed qualitative factors to determine whether it was more-likely-than-not the fair value was less than its carrying amount. If we concluded based on the qualitative assessment that goodwill may be impaired, we would perform a quantitative one-step impairment test. An impairment loss would be recognized for any excess of carrying value over fair value of the goodwill, and any subsequent increases in goodwill would not be recognized on the consolidated financial statements. Judgments and Uncertainties. When performing the qualitative assessment to determine whether the fair value of the reporting unit was less than the carrying value, we assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company's common stock, and other relevant factors. If a quantitative assessment was considered necessary, the fair value of the reporting unit was calculated with the assistance of a third party using management's assumptions of future growth rates, future attrition of the customer base, discount rates, multiples of earnings and other relevant factors. Effect if Actual Results Differ From Assumptions. Changes in these qualitative and quantitative factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the fair value of the reporting unit in relation to the carrying value of goodwill and could result in an impairment loss affecting our consolidated financial statements as a whole.
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