Great Western Bancorp (GWB) Q1 2021 Earnings Call Transcript

Great Western Bancorp (GWB)
Q1 2021 Earnings Call
Jan 27, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Great Western Bancorp first-quarter fiscal-year 2021 earnings announcement and call. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Seth Artz, head of investor relations.

Please go ahead.

Seth Artz -- Head of Investor Relations

Thank you, Andrew, and good morning. Joining us for today's presentation and discussion, we have Mark Borrecco, president, chief executive officer; Pete Chapman, chief financial officer; Steve Yose, chief credit officer; and Karlyn Knieriem, chief risk officer. As usual, we have prepared a presentation for today's earnings review, which is available for webcast and also for download through our investor relations website at ir.greatwesternbank.com. We'd like to remind you that today's presentation may contain forward-looking statements that are subject to risks and uncertainty which may cause actual future results to materially differ from those discussed.

Please refer to the forward-looking statement disclosures contained in the earnings materials on the website, along with periodic SEC filings for an outline of the company's risk factors. Additionally, any non-GAAP financial measures presented are provided to further assist you in understanding results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation and SEC filings. I will now turn the call over to Mark Borrecco.

Mark, please go ahead.

Mark Borrecco -- President and Chief Executive Officer

Thank you, Seth, and good morning. Thank you for joining us the -- joining the call. I hope that you remain safe and healthy during these continued times. Before we share our results for the quarter, I want to first thank our employees for their continued efforts in supporting the Great Western Bank mission, to make life great by strengthening our customers and enriching our communities.

For the first-quarter fiscal-year 2021, we reported net income of $41.3 million. Pete will walk through the specifics on our financial shortly. I am pleased with our progress on our current financial performance, but I'm also excited about the progress and our priorities to better position Great Western for the future. With regard to our top priorities, after ensuring the safety of our employees and customers, credit risk management remains priority No.

1. We made progress with our asset quality this quarter, particularly as successful loan workouts and upgrades helped support a 10% decrease in nonaccrual loans and a 7% decrease in classified loans. We made progress in de-risking the bank's balance sheet by completing the sale of $209 million of hotel loans at a 12% discount. We made progress in working with our customers regarding COVID payment deferrals.

We decreased our referrals to $113 million, or 1.29% of total loans, excluding PPP, as of January 13, down from a peak of $1.69 billion that was on deferral in Round 1. Agriculture commodity prices, specifically soybean and corn, continue to improve, which will likely result in future upgrades over the next few quarters. From a measured at -- actions perspection -- perspective on Slide 2, we made progress managing our net interest margin, resulting in a 7-basis-point decrease in our deposit costs. In addition, our NIM benefited from recoveries resulting from focused loan workouts.

We made progress in strengthening our capital position with 40 basis points of improvement through earnings. Since Great Western has a September fiscal year-end, we adopted CECL this quarter. Our quarter-end allowance for credit loss ratio was 3.5% of total loans, excluding PPP, and our comprehensive coverage is 3.84%, which Pete will expand on later. From an organizational standpoint, we continue to make progress at top -- attracting top talent for our senior roles with the recent hire of Rick Robinson as our president of wealth management.

Rick comes to Great Western Bank with extensive wealth experience and it reinforces our commitment to growing revenue in this important noninterest income category. We are making progress in the implementation of our small business center with our pilot launching in 20 markets this March. With this addition, we will improve the way that we originate decision and manage our smaller commercial relationships. This will significantly improve the client experience and allow us to capture more small business opportunities in our footprint.

And lastly, this initiative will also free up our commercial banking team to allow them more time to pursue larger relationships in our underweight segments and market. I am now directly leading our business lines and I'm excited to get closer to our customers and to understand how our key business segments can leverage our bankers, technology, and processes to fuel for future growth. Our company culture continues to evolve with a renewed focus on accountability, commitment, teamwork, service, and trustworthiness. Now, for a review of our financial results, I will turn the call over to our chief financial officer, Pete Chapman.

Pete.

Pete Chapman -- Chief Financial Officer

Thanks, Mark, and good morning, everybody. Just looking at Slide 3 here, you'll see we had a strong quarter of earnings with net income of $41 million, an increase from $11 million in the prior quarter, with pre-tax pre-provisioned income of $66 million, an increase from $52 million in the prior quarter as well. Net interest income did benefit this quarter from net interest recoveries of $2.9 million, trimmed by payoffs of nonaccrual loans and from a $1.7 million accretion income of other loan payoffs. Strong mortgage revenues and swap fees helped support noninterest income and expenses, which tend to track lower in fiscal Q1, were further assisted by lower OREO, consulting, and travel spend.

Turning to revenue on Slide 4. Adjusted net interest income was $106 million, a $2 million increase from the prior quarter. Adjusted NIM of 3.52% increased 12 basis points from the prior quarter. And when excluding an 18-basis-point lift from nonaccrual interest recoveries and lower -- loan accretion, underlying NIM declined by 6 basis points for the quarter to 3.34%.

Securities and loan yields declined by 11 basis points were offset by decreased funding costs that excess liquidity reflected in the $630 million increase in cash assets to $1.1 billion contributed to 7 basis points of additional NIM decline. On Slide 5, we showed PPP total loan income was $5.5 million for the quarter. There's approximately $12 million more of PPP fees remaining to be amortized as lo -- those loans are forgiven. We processed $28 million of loans for forgiveness out of the $727 million originated during the quarter.

We're also participating in this current round of PPP lending and have been accepting applications since mid last week. Our loan portfolio yield continues to be supported by $4.2 billion of fixed rate loans yielding 4.34%, $1.9 billion of loans that have reached floors yielding 4.2%, and $1.2 billion of variable loans reprice beyond 90 days yielding 4.45%. Together, this makeup more than 80% of our loan portfolio excu -- excluding PPP. Looking at Slide 6, total noninterest income was $14.1 million, an improvement from the $4 million loss in the prior quarter.

Excluding the fair value adjustments that go through noninterest income, core income was $19.4 million, supported by another strong quarter of mortgage revenue of $4 million, slight increase in service charges to $9.6 million from increased customer transactions, and a $1.2 million increase in swaps sales revenue. On Slide 7, noninterest expenses of $57 million were down significantly from the $75 million in the prior quarter and were up only slightly from a year ago. The decrease was largely related to several one-off items occurred in the prior quarter such as the FHLB prepayment expense, FDIC loss -- loss-sharing expense on close out of that agreement, OREO provisioning, and other severance and branch closure costs. First-quarter expenses typically tracked lower, and this quarter's result was further driven by lower than normal OREO costs and by low professional fees reflecting lower FDIC insurance and lower consulting spend.

But expect expenses to pick back up in March -- in the March quarter as annual sa -- salary and merit increases kicking in that quarter and also consulting spend is expected to increase. Provision for credit loss on loans was $11.9 million for the quarter, a decrease of $5 million from the prior quarter, driven primarily by $7 million of losses on the hotel sales that Mark referred to earlier. Moving to Slide 8 with -- have a summary showing the allowance impacts from adopting CECL. The Day 1 increased with $177 million resulting in an ACL of $327 million to begin the quarter.

A quarter in the ACL decreased to $309 million due to $30 million of net charge-offs and improved unemployment assumptions, partially offset by qualitative adjustments related to concentration risk in certain segments of the hot -- the loan portfolio such as hotels. In addition to the $309 million ACL, we have a $28 million fair value mark against a $612 million of long-term fixed rate loans. We also have a $2.3 million unfunded commitment reserve, which all in aggregate puts our total credit coverage to 3.84%, excluding our PPP loans. On Slide 9, we see current capital ratios mean well in excess of well-capitalized levels.

Total capital increased by 100 basis points to 14.3%. Tier 1 capital increased 90 basis points to 12.7%. Common equity Tier 1 increased 100 basis points to 12%. Our tangible common equity ratio decreased to 8.3%, largely driven by the adoption of CECL.

And excluding the PPP loans, that ratio is ac -- actually 8.8%. CECL also contributed to a net decrease net tangible book value per share, which was 19 point -- $19.28 for the quarter, compared to just over $21 in the prior quarter. Positive earnings reduced risk weighted assets and redu -- reduced dividends are helping support at -- at capital levels and will continue -- which we continue to believe is prudent to preserve capital given our asset quality combined with the current environment. Consequently, we once again have declared a dividend of $0.01 per share for the quarter ended December 31, 2020.

We'll continue to elev -- to evaluate capital management in close conjunction with the level of classified assets which have shown good impro -- improvement for the quarter but remain more el -- elevated than we would like. Deposits increased $365 million for the quarter to $11.4 billion while average balances were up $103 million than the prior quarter. And mix continued to improve as average time deposits decreased by $184 million, the average of the lower cost interest bearing the cost -- deposits increased $200 million, and the average noninterest-bearing deposits increased $89 million. Total deposit costs of 20 -- 21 basis points is down 7 basis points from the prior quarter and 75 basis points from 0.86% a year ago.

Loans at period end were $9.5 billion, including $700 million of PPP loans, a decrease of $558 million, with 75% of this decrease coming from intentional and measured actions to improve our credit quality. This included the $209 million of host -- hotel loan sales and the repayment of approximately 70 -- $175 million of higher re -- credit-rated and COVID-sensitive loans in the portfolio. In addition, $27 million of PPP loans were forgiven during the period. I'll now hand over the call to our chief credit officer, Steve Yose, to provide you an update on creek -- key credit metrics and asset quality metrics.

Over to you, Steve.

Steve Yose -- Chief Credit Officer

Thank you, Pete, and good morning, everyone. We've been heavily focused on improving our asset quality the past few quarters and we are showing progress on that commitment. Looking at Slide 12, you'll see the three pillars of our focus fall into effective credit risk management, portfolio management, and specialized credit administration. First, effective credit risk management.

Our approach to identifying and managing risk in the portfolio is more consistent in spite of a challenging backdrop. And that's driven by the new risk rating system and by cultural alignment on risk-based decisioning. We saw improvements in our nonaccrual and classified metrics, was success in exiting problem loans, along with a few upgrades. Second, portfolio management.

As Mark and Pete touched on earlier, we made significant progress in improving our portfolio risk by completing the sale of $209 million of hotel loans and three separate transactions. Loan deferrals are now 1.29% of total loans, excluding PPP. And third, specialized credit administration. As Mark touched on earlier, the small business initiative will allow us to be much more efficient with administration of our smaller credits.

Our commercial loan workout groups are making progress on workout of criticized loans and on assessing ways to further optimize our hotel concentration. I am pleased with our progress on asset quality and credit management, particularly in how much of what we are doing is strengthening our position long term. We have more work to do, but tactically and culturally, we are making headway. On Slide 13, we have further details on the hotel loan sales completed in the quarter.

The sales impacted $209 million of loans across 27 properties with proceeds of $183 million reflecting a 12% discount. That discount led to a charge-off of $26 million for the quarter. The sales involve a combination of pass-rated and criticized loans, ultimately leading to a decrease in criticized loans of $131 million. The locations of the properties were spread out across the footprint and helped reduce market concentrations.

The sales reduced the hotel, excluding casino hotel segment, by 20.2%, which ended the quarter at $823 million. Also on Slide 13, you'll see updated information on loans on deferral, which are now down to $113 million, or 1.29% of total loans, excluding PPP. Hotel loan deferrals decreased to $70 million, or 7%, and the remaining balance is spread across several other segments. We have given just five deferrals in the latest round for a total of $23 million, and we would expect to decline the requests going forward.

On Slide 14, we have a summary of our asset quality matrix -- metrics. Net charge-offs, excluding the $25.6 million charge-off from the hotel loan sales, were just $4.8 million or 0.19% of total loans annualized. Classified loans were $717 million, a decrease of 7% from the prior quarter. Classified Ag loans were $321 million, an 18% decrease from the prior quarter, driven by pay downs and a few upgrades.

Classified non-Ag loans were $396 million, an increase of 4%, mostly related to $54 million of hotel loans moved to substandard in the quarter, partially offset by the hotel loan sales. Nonaccrual loans decreased by 10% to $292 million, largely related to a number of payoffs in both Ag and non-Ag relationships, driven by our commercial workout group. On Slide 15 and 16, we continue to provide an overview of key loan segments in our portfolio. On Slide 15, you'll see our total accommodation book of $972 million, consists of $823 million of hotels, excluding casino hotels, $118 million of casino hotels, and $31 million of PPP loans.

Eighty-eight percent of the portfolio is in footprint, with out-of-footprint loans generally associated with experienced and footprint developers. The hotel properties are diversified across more than 100 cities, with most in small to midsize locations, and the largest concentrations still in Colorado Springs, Colorado; Rapid City, South Dakota; Des Moines, Iowa; Omaha, Nebraska; Denver, Colorado; and Sioux Falls, South Dakota. Following the loan sales, certain payoffs, and a number of downgrades, the combined hotel portfolio has $246 million of criticized loans, with $142 million of those as classified. Seven hundred and twenty-five million dollars are pass-rated, including the casino hotels.

On Slide 16, you'll see we remain well-diversified across various Ag segments, and that the Ag conditions are proving constructive for the near to medium term. High level, the latest estimates from the USDA indicate depleted inventories of both corn and soybeans. As a result, general farm price projections strengthen to $4.20 a bushel for corn and $11.15 a bushel for soybeans, which indicate potential for higher margins in the near term. Milk prices have leveled off at $15.72 per hundredweight in December after a strong $23.34 in November and $21.61 in October.

And 2021, futures are tracking 10% higher. The healthcare portfolio remains in stable condition with minimal movement and risk rating from the COVID cycle. The mix of the portfolio across senior care, assisted living, and retirement communities, skilled nursing hospitals, and other health services, and social assistance has us in a comfortable position and we remain highly engaged with our customers to stay on top of any early indicators. That wraps up my commentary.

I'll now hand the call back to Mark.

Mark Borrecco -- President and Chief Executive Officer

Thanks, Steve. I am proud of our team's continued focus on improving performance, addressing asset quality concerns, and implementing our Win Big initiatives all the while dealing with emerging business needs such as PPP origination and forgiveness, stimulus payment processing, and branch lobby decisions as it relates to the pandemic. We made good progress in Q1 and I look forward to continued progress in the quarters to come. With that, I will turn the call back to the operator and we will begin the question-and-answer session.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily to assemble our roster. The first question comes from Terry McEvoy of Stephens. Please go.

Terry McEvoy -- Stephens Inc. -- Analyst

Hey, guys. Good morning.

Mark Borrecco -- President and Chief Executive Officer

Morning.

Pete Chapman -- Chief Financial Officer

Good morning, Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

Maybe, Steve, if we could start with you. Could you just talk about the loan sale of -- of the hotel loans, the level of interest from buyers? I'm just curious, how did pricing change or could you comment on any pricing change before and maybe after the vaccine and when these transactions oc -- occurred? And -- and then maybe the last part is if you think about the quality spectrum of -- of your hotel portfolio, were these more distressed type -- type properties, middle of the road? Any -- any color there would be helpful. Thank you.

Steve Yose -- Chief Credit Officer

Well, I would say in -- in the last part of your question, we focused on those that were either criticized, classified, or -- or are deter -- declining trends. So we did focus on more. They -- they were not nonaccrual, but they were more of our distressed properties. We also focused on in market concentration, so anywhere where we felt we had a higher concentration of hospitality loans.

We focused on seeing if we could sell some of those. And the -- and the loan buyers that we went to were -- were really focused on not distressed properties as much as performing loans. So they were not on nonaccrual performing. When we -- we've been pursuing this for well over 90 days to look at a hospi -- hotel loan sale to see if we had the potential and if we did not need to take too big of a discount.

And I will say, after the vaccine was announced, we found that things accelerated much more quickly as far as being able to consummate the sale. So I do think the vaccine announcement did help us. I don't know if it helps significantly on the pricing because the pricing discussion prior to the vaccine wasn't any different really, but -- but it did accelerate the sale I believe because of the interest in -- in those particular properties.

Terry McEvoy -- Stephens Inc. -- Analyst

Thanks for that, Steve. And then maybe a question for Mark or Pete. Just thinking about the operational alignment and how that relates to spending in 2021. The last couple of quarters, we've heard about some hires and -- and some specialization and focus on things like small business.

Is there more to come and then how is that going to impact spending and expenses in 2021? Thanks.

Pete Chapman -- Chief Financial Officer

Look, I think you'll see a little tick up there, Terry. As I said, we're usually a little slower in Q1 just as -- as people finalize budgets and -- and get spending lined up for the year. So look, I'd still expect a tick up, but I think, previously, we've sort of said low 60s, sort of 62 to 64 that's sort of a run rate. So we feel the investment we're going to make is sort of manageable within that range for the year.

We've certainly got some projects up and running that will come on in the next couple of quarters, but we -- we still feel it's a manageable run rate.

Mark Borrecco -- President and Chief Executive Officer

Yeah. And I think for -- for me, Terry, the -- the -- the things that comes back into -- in -- into focus is as we make some of these investments, as we improve the technology, as we rework some of our processes, I do feel comfortable that not only will we be able to improve the client experience, make it easier for our employees to do their jobs, but also we can start to do more with what we have. And so that will help fuel that future growth and that'll help us to do more with those investments without having us, again, see a massive increase in our -- in our overall spending.

Terry McEvoy -- Stephens Inc. -- Analyst

Great. Thank you.

Operator

The next question comes from Jeff Rulis of D.A. Davidson. Please go.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Good morning.

Mark Borrecco -- President and Chief Executive Officer

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Maybe a question for Pete on the -- on the margin. Looks like if you ex the recoveries and accretion down 6 basis points linked quarter.

Pete Chapman -- Chief Financial Officer

Yup.

Jeff Rulis -- D.A. Davidson -- Analyst

Is -- maybe speak of if -- if more recoveries are anticipated in that figure and or just the -- the core margin outlook?

Pete Chapman -- Chief Financial Officer

Probably not, Steve -- Jeff, sorry. In terms of recoveries, recoveries are obviously hard to predict. So certainly, hope we get some, but they're pretty hard to put in the forecast I would think. And then just in terms of margin, I'd see just a general tick down trend there.

I think once again part of that will be driven by mix, just as this quarter, the assumption is we'll see more of those PPP loans forgiven. Just with the way the balance sheets at -- at the moment, I'd expect sort of cash in investment levels to -- to continue to tick up here in the next quarter, which I think will -- will drive sort of a softer -- slightly softer margin in the next quarter as well.

Jeff Rulis -- D.A. Davidson -- Analyst

OK, great. And -- and on -- switching gears on the -- just in -- interested in the reserve balance at this level, a -- a pretty healthy number. And -- and I guess as some -- some volatility here, but looking at for the balance of the fiscal year, kind of net charge-offs versus provision. Do you think those track relatively in check? Do you start to release those reserves? Any thoughts there.

Thanks.

Pete Chapman -- Chief Financial Officer

Look I'll -- I'll get Steve to -- to --to jump in and -- and help with this one, but obviously, we need to -- to get NPAs down, Jeff, that'll be a big driver as well of -- of provisioning levels over the course of the year I think. But, Steve.

Steve Yose -- Chief Credit Officer

I -- I believe what we looked at is look at our portfolio and our mix, is there's still uncertainty at where we're at in the economy in this part of the cycle so we definitely looked at that in our qualitative factors within the CECL reserve. But to -- to Pete's point, if you look at our level of nonaccrual loans and our coverage of the allowance, as we are able to improve in those nonaccrual loans, we will hopefully be able to look at where we go with the allowance.

Jeff Rulis -- D.A. Davidson -- Analyst

Great, thanks.

Mark Borrecco -- President and Chief Executive Officer

Thanks, Jeff.

Operator

The next -- the next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning.

Mark Borrecco -- President and Chief Executive Officer

Good morning.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Steve, it's a question for you. Maybe more an emotional touchy feely question to start I guess before we get into the meat of it. But how -- how do you generally feel about credit? And this follows up on Jeff's question, but kind of the timing and magnitude of when we can see these nonperformers come down? I'm thinking about your -- your Ag comments, and the loan sales, and the deep dives that you guys have done, and it -- it -- it has to be better. But it's just kind of the one thing that I think still nags at your stocks.

I'm just curious how you feel about all of it, kind of off-script if you can?

Steve Yose -- Chief Credit Officer

So as the chief credit officer, it's always fun to get a touchy feely question. I don't get those too often. But when it comes to -- I -- I believe -- I believe one of the big things that I feel very comfortable with and positive is the cultural change we have as an institution as the way of how we look at credit risk, and how we look at risk adjusted returns, and as we look at future growth. I always look at not just loan growth but is at the right risk and are we bringing -- putting the right loans on.

So it's not just loan growth for loan growth sake. But -- and we definitely are focusing on how we grow the book of business going forward to make sure that we continue to retain a consistent credit risk culture. So I feel we've made huge strides in the last six months culturally. I think also because of our mix of agribusiness, we do anticipate, we've seen stable to improving trends.

We saw improving asset quality in the Ag book this quarter. We anticipate that in the next two quarters as well. So I'm very encouraged in our agribusiness book. As we look at our hotel portfolio.

That is an area that because of the vaccine and other things, I'm mu -- I'm much more encouraged as we look at the next six months and I feel very good about the loan sale and in trying to de-risk our hotel portfolio. But we are really not looking at future portfolio sales. We're looking at more of a strategic, focused, how can we rightsize that portfolio over time rather than another big portfolio. So like we did this last quarter.

We felt it was necessary to get -- to de-risk it. But that is not a strategy going forward. So at this point, I feel very comfortable and -- and positive about our cultural change. Now, we just need to continue to stay focused and improve quarter by quarter.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. That -- that helps. And then another maybe bigger picture question for you. Longer term, what -- what's an acceptable reserve in nonperforming level for a bank like yours in -- in your eyes.

I know it's a difficult question and CECL complicates it. But where would you like to be longer term?

Steve Yose -- Chief Credit Officer

Well, if you look at -- I -- I came from a similar sized mid-tier bank when I -- I -- at my prior institution and we moved nonaccrual loans there down to 50 basis points. And I think that's a good nonaccrual balance. So I mean we have a long ways to go to go there if you look us close to 3% today. But if -- if we can keep focused, and the way we've looked at when we say risk-focused decisioning, we looked at those by risk rating.

We've changed our hold limits. We've done a lot of things to sort of going forward that we have a different risk in our portfolio, but I would like to see us consistently be definitely less than 1% on nonaccrual and long term 50 basis points nonaccrual. And I think I'd -- I'd feel like we've arrived where we should on the asset quality. And then your questions will all be about loan growth after that.

Jon Arfstrom -- RBC Capital Markets -- Analyst

I was just going to pivot to Mark. That -- that's the other part of this, Mark, because I think expenses and Steve's work on credit and fees, they all kind of line up. But the -- the one thing is growth, and I know you've done a lot to kind of change things. But when -- when do you think we might see some resumption in growth and are there any signs of life in --in your markets? Thanks.

Mark Borrecco -- President and Chief Executive Officer

Yeah, sure. I -- I -- I think from a -- all into the second part first. So from a signs of life in our market, I would say that I feel good and every day getting better as it relates to the activity levels in our markets. We see the number of COVID cases coming down.

We see, in -- in many ways, businesses getting back to kind of some sense of normalcy. Now, normalcy is different than obviously it was a year ago, but still, things are resuming. I know that I'm having a chance to go to have dinner with the -- with the client tomorrow night here in Sioux Falls. And so from that standpoint, I am seeing and we are seeing activity levels start to come back to -- to I think very reasonable levels.

As far as loan growth, I would say that for the next two quarters, I would expect to see us to continue to have continued erosion in our overall loan balances as we continue to have focused workouts, as we continue to de-risk the balance sheet as it relates to our hotel portfolio. And so I would say for the next two quarters, I would expect those numbers to go down. And then I would expect after those two quarters for things to get back and to see us start to have the -- the asset generation that we need to have to grow this organization. I see pipelines today are improving.

And so I'm encouraged by that. We've had an internal focus of back to business. We have been playing defense a bit over the last nine months and that was a necessary evil given our asset quality, but that is now changing, and we are pivoting the organization to be more focused on asset generation. We have some -- some I think very aggressive offers in the market, and we have a very focused set of commercial bankers.

And so from that standpoint, I would think that we would see those pipelines grow then that asset growth to follow two quarters from now.

Jon Arfstrom -- RBC Capital Markets -- Analyst

OK. Good. Thanks and congrats on hopefully seeing some of this credit -- credit issues [Inaudible]. Thank you.

Mark Borrecco -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Andrew Liesch of Piper Sandler. Please go.

Andrew Liesch -- Piper Sandler -- Analyst

Hey, everyone. Good morning. Nice to see some of this de-risking here. Just want to kind of continue on the same theme here just with the -- the hotel and the casino loans now down to about 10% of the portfolio.

Where do you think is a good level, a good concentration mix for that -- for that book as -- as we move through the year?

Steve Yose -- Chief Credit Officer

So -- so in the longer term, I would like -- would like to see that portfolio under $500 million. So as we -- and -- and that wouldn't be like overnight over the next few quarters, but over a period of time, we would like to long term have that portfolio be under $500 million basically.

Andrew Liesch -- Piper Sandler -- Analyst

Got it. And -- and it sounds like it might be masked by continued run after that book in the next couple quarters, but sounds like there's some good optimism in other -- in other loan types. Where should we see -- what -- what portfolios you think we'll -- we'll see growth here in the next couple of quarters?

Steve Yose -- Chief Credit Officer

Well, agribusiness is still a continued focus of Great Western Bank. And I -- I wouldn't say we have a lot of growth there, but we've got continued focus in agribusiness. And we also anticipate improved asset quality in agribusiness, so I think that will be a place that we'll continue to focus. And then, of course, with our initiatives on small business, we're hopeful that we will focus more on small business and other areas of the portfolio.

But Mark might have some other views on growth as well.

Mark Borrecco -- President and Chief Executive Officer

Yeah, I -- I think Steve mentioned that the focus on Ag, and I would expect that to be a focus and to see some moderate growth there. Nothing to -- to -- to overwhelm. But again, consistent growth. I look at the C&I sector and I look at some of the initiatives that we have as it relates to growing the C&I book at Great Western, and so I would expect growth in that.

And then overall, just more owner occupied real estate as well. So that -- that's where I want to see us continue to, again, get back to business and start to see those three sectors or those three segments help fuel -- fuel our future growth.

Andrew Liesch -- Piper Sandler -- Analyst

OK. That's -- that's helpful. And then I -- I guess just -- just going back to the reserve ratio, one of the highest in the industry right now. And I recognize that there's still some -- some credit uncertainty out there and the -- the level of nonperformers need to be worked down, but you guys seem pretty well-reserved, so I'm just -- any commentary on why the provision would even need to stay near this $12 million level going forward?

Pete Chapman -- Chief Financial Officer

As in the P&L charge, Andrew, you mean?

Andrew Liesch -- Piper Sandler -- Analyst

Yeah, it seems like there's -- there's opportunities for -- for like smaller provisioning in -- in the coming quarters.

Pete Chapman -- Chief Financial Officer

Look, too early to declare victory on that. I would certainly hope so, but I still -- I still think wer'e a few quarters away from the world getting back to normal. So little -- little early to declare that. Obviously, we hope -- hope so, Andrew, but maybe a -- a few quarters on we can revisit that one.

Andrew Liesch -- Piper Sandler -- Analyst

All right. Thanks for taking the questions. I'll step back.

Mark Borrecco -- President and Chief Executive Officer

Thanks, Andrew.

Operator

The next question comes from Damon DelMonte of KBW. Please go.

Damon DelMonte -- KBW -- Analyst

Hey, good -- good morning, guys. Hope everybody's doing well today. My -- so my first question, just kind of curious on your PPP loan forgiveness process. I think you guys noted like $28 million of loans were forgiven during the quarter, which as kind of as a percentage of your overall PPP loans was a lot lower than what we're seeing with others.

So just kind of curious on what some of your experiences were with that during the last quarter?

Pete Chapman -- Chief Financial Officer

They look just a little slow to get going. If you look at our loan balance in that category though, Damon, about 80% is below 150,000. So the feedback we've got from a lot of customers is CPA firms and the like are advising just to hold off until that -- the -- the lower level of forgiveness documentation was required. So I think that drove quite a lot of it to be honest with you, Damon.

So hopefully, it picks up here a little bit this quarter.

Damon DelMonte -- KBW -- Analyst

Got it. OK. That makes sense. Thanks.

And then, Pete, can you just give a little -- little bit perspective on -- on your expectations versus the income as we go through the -- the next few quarters?

Pete Chapman -- Chief Financial Officer

Look, I think it will hold up, Damon. Mortgage volumes is still unseasonably strong just due to lower rates. So maybe not the pickup we've seen in the last couple of quarters, but I think that -- that would -- will at least hold in as well as the other -- the fee income line item. So, look, I don't think you'll see huge growth there, just seasonally it gets a little bit slower here bit in this quarter.

But certainly, I think it'll hold in pretty well.

Damon DelMonte -- KBW -- Analyst

All right, great. Thank you very much.

Mark Borrecco -- President and Chief Executive Officer

Thank you.

Operator

The next quest -- the next question comes from Janet Lee of J.P. Morgan. Please go ahead.

Janet Lee -- J.P. Morgan -- Analyst

Good morning. On reserves, I feel like I'm asking this question that other people have asked in a different way, so I apologize for that. But on -- on reserve, so it sounds like it might be several quarters away before we see really our reserve releases and that being accompanied with the steeper step-down in NPAs in order for us to see that. What -- what kind of NPA step-down or levels would that be in order for you to be more comfortable releasing reserves?

Steve Yose -- Chief Credit Officer

Well, we have -- if you look at our nonaccruals, our coverage of those is about 1.05. I -- I think if we're successful in reducing those nonaccrual loans, I think the reserve would go in concert with that. I mean we'll look at other issues too like, for example, some improvement in the economy and in relationship to hotel loans and others will also impact that. But we -- we just are -- are taking a -- a careful approach to -- to just see what happens in the next two quarters.

But I think it really is driven by those nonaccruals. And the -- the nonaccruals we do have, we have four or five that are larger nonaccruals, so if we can make success on those loans, they are well-secured. We have updated appraisal, so we are encouraged that we -- we do not see a lot of loss exposure there. So our hope is is that as we reduce those and show improvement on -- in the hotel portfolio, that -- that that's when we'll -- we'll feel we've turned the corner.

Janet Lee -- J.P. Morgan -- Analyst

Great. Thanks. And also on loan growth. So it appears that the loan growth over the near term will be relatively modest but more upside over the intermediate term.

Can -- can you just provide more color around what your plan around the deployment of excess liquidity?

Pete Chapman -- Chief Financial Officer

Yes, certainly. From a balance sheet perspective, generally, expect us to be elevated here for the next couple of quarters as well. We've got a little bit of term FHLB borrowings left, but it doesn't really make a lot of sense to prepay those. So look, really, we'll -- we'll carry more elevated levels of liquidity, certainly run off any higher cost deposits that we've got.

And really just carry that here for the next couple of quarters as loan volumes, as Mark said, are expected to be a little softer here before redeploying that in a couple of quarters time.

Janet Lee -- J.P. Morgan -- Analyst

Great, thanks. Just one follow-up for me. So given the improved outlook on credit for the industry and -- and for you guys as well, can you just elaborate more on your capital deployment plans, including potential [Inaudible] and dividend again are or -- or share repurchases? Thanks.

Pete Chapman -- Chief Financial Officer

Yeah, look, no plans at this stage, Janet. As -- as I said in my -- my comments, NPA is still more elevated than we'd like and substandard, so probably consistent with the provisioning discussion. Let's see those metrics improve before we -- we move forward on any sort of capital -- capital actions here.

Janet Lee -- J.P. Morgan -- Analyst

All right. Thank you.

Mark Borrecco -- President and Chief Executive Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Borrecco for any closing remarks.

Mark Borrecco -- President and Chief Executive Officer

Thank you, Operator. And again, thank you everyone today for joining us. If you do have any follow-up questions, please do reach out to us. Stay safe and have a great week.

Thank you.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Seth Artz -- Head of Investor Relations

Mark Borrecco -- President and Chief Executive Officer

Pete Chapman -- Chief Financial Officer

Steve Yose -- Chief Credit Officer

Terry McEvoy -- Stephens Inc. -- Analyst

Jeff Rulis -- D.A. Davidson -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Damon DelMonte -- KBW -- Analyst

Janet Lee -- J.P. Morgan -- Analyst

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