GREAT WESTERN BANCORP, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)


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 in Arizona, Colorado, Iowa,
Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. We provide
financial results based on a fiscal year ending September 30 as a single
reportable segment.
The principal sources of our revenues and cash flows are: (i) interest and fees
earned on loans made or held by our Bank; (ii) interest on fixed income
investments held by our Bank; (iii) fees on wealth management services; (iv)
service charges on deposit accounts maintained at our Bank; (v) gain on the sale
of loans held for sale (vi) gains on sales of securities; and (vii) merchant and
card fees. Our principal expenses are: (i) interest expense on deposit accounts
and other borrowings; (ii) salaries and employee benefits; (iii) data processing
costs primarily associated with maintaining our Bank's loan and deposit
functions; (iv) occupancy expenses for maintaining our Bank's facilities; (v)
professional fees, including FDIC insurance assessments; (vi) business
development; and (vii) other real estate owned expenses. The largest component
contributing to our net income is net interest income, which is the difference
between interest earned on earning assets (primarily loans and investments) and
interest paid on interest-bearing liabilities (primarily deposit accounts and
other borrowings). One of management's principal functions is to manage the
spread between interest earned on earning assets and interest paid on
interest-bearing liabilities in an effort to maximize net interest income while
maintaining an appropriate level of interest rate risk.
Pending Merger of First Interstate BancSystem and Great Western Bancorp
On September 16, 2021, First Interstate BancSystem, Inc. (NASDAQ: FIBK), parent
company of First Interstate Bank, and Great Western Bancorp, Inc., parent
company of Great 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 in Billings, 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.
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Impact and Response to COVID-19 Pandemic
We conduct business in nine states, including Arizona, Colorado, Iowa, Kansas,
Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Many of these
states placed significant restrictions on businesses and individuals at the
outset of the COVID-19 pandemic. While many of these initial restrictions have
been lifted, there is still the possibility that certain restrictions could be
re-imposed or extended to contain further spread if the rate of infection were
to surge again in any of these states, including as a result of the Delta
variant that has recently caused an uptick in infections particularly among
non-vaccinated individuals. As a financial institution, we are considered an
essential business and 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 to CDC 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 Ended September 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 of September 30, 2021, compared to $10.08
billion as of September 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.
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Deposits were $11.31 billion at September 30, 2021 an increase of $301.7
million, or 2.7%, compared to $11.01 billion at September 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.
At September 30, 2021, nonaccrual loans were $197.9 million, a decrease of
$127.0 million compared to September 30, 2020, driven by repayments on multiple
agricultural and commercial nonaccrual loans. Classified loans were $604.9
million as of September 30, 2021, a decrease of $164.6 million, compared to
$769.5 million at September 30, 2020, driven by a number of upgraded agriculture
relationships, and a number of payoffs and sales in both agriculture and
non-agriculture loans. Total other repossessed property balances were $4.5
million as of September 30, 2021, a decrease of $15.5 million, or 77.6%,
compared to September 30, 2020.
ASU 2016-13, referred to as the current expected credit loss ("CECL") model, was
adopted effective October 1, 2020, and as such, the provision for credit losses
in fiscal year 2021 reflects current expected credit losses based on forecasted
economic and other assumptions, including the estimated impacts of COVID-19,
over the remaining expected lives of financial assets and off-balance sheet
credit exposures, whereas the fiscal year 2020 methodology applied an incurred
loss model.
The balance of the ACL increased to $246.0 million at September 30, 2021 from
$149.9 million at September 30, 2020 due to the impact of CECL adoption on
October 1, 2020, where we recognized a Day 1 increase in the ACL of $177.3
million. The increase in ACL related to the adoption of CECL was partially
offset by a reversal of provision for credit losses of $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, at September 30, 2021, compared to 11.8%, 13.3% and 9.4%,
respectively, at September 30, 2020. In addition, our Common Equity Tier 1 ratio
was 14.3% and 11.0% at September 30, 2021 and September 30, 2020, respectively.
Our tangible common equity to tangible assets ratio was 9.3% at September 30,
2021 and 9.2% at September 30, 2020. All regulatory capital ratios remain above
regulatory minimums to be considered "well capitalized". For more information on
our tangible common equity to tangible assets ratio, including a reconciliation
to the most directly comparable GAAP financial measure, see "-Non-GAAP Financial
Measures" section.
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Results of Operations-Fiscal Years Ended September 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 

Closed exercises September 30,

                                                             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 ordinary 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 show Net Interest Income 1, Net Interest Margin, and Adjusted Net Interest Margin 2 for fiscal years 2021, 2020, and 2019.

                                                                       At 

and for closed exercises September 30,

                                                                    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 remunerated asset

                           $      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.
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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.
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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 at September 30, 2021 and $717.2 million at September 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 the October 1, 2020 adoption of ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, and subsequent related ASUs, ASC 310-30 loans represented loans
accounted for in accordance with ASC 310-30 Accounting for Purchased Loans that
were credit impaired at the time we acquired them. Non-ASC 310-30 loans
represented loans we have originated and loans we have acquired that were not
credit impaired at the time we acquired them.
                                                                                                                       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.


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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.
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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.
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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) $ 13,296 $ (14,276) ($ 980)


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
                                                                   

(in thousands of dollars) (Reversal of) allowance for credit losses, loans not ASC 310-30 ¹

                                        $ (33,588)         $ 118,204          $  41,506
Decrease in provision for unfunded commitments
reserve ²                                                (1,146)                 -                  -

Impairment (improvement) of loan and rental losses, loans ASC 310-30

                                              -                188               (559)

(Reversal of) allowance for credit losses, total $ (34,734) $ 118,392 $ 40,947

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 ended September 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.


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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.
                                                                            

Closed exercises September 30,

                                   Included within F/S Line
             Item                          Item(s):                     2021                   2020               2019
                                                                           

(in thousands of dollars) (Reversal of) allowance for (Reversal of) allowance for bad debts ¹

                 credit losses ¹                 $    (34,734)              $ 118,392          $  40,947

Increase (decrease) in other non-interest expenses ¹ provision for unfunded commitments ¹

                                                      -                   1,939                  -

Other assets taken back net (gain) Net loss on expenses taken back (income)

                property and other related
                                expenses                              (1,782)                 12,858              4,367

Net write-back (recovery) of loan interest income unrecognized loan interest income

                                                                 (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 As of the first quarter of fiscal 2021, the increase in the allowance for unfunded commitments is included in the allowance 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 of September 30, 2021, with $195.2
million of these loans being classified as of September 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 ended
September 30, 2021, 2020 and 2019.
                                                                 Fiscal 

Years completed September 30,

                                                            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             4,848

Net 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


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Our noninterest income is comprised of the various fees we charge our customers
for products and services we provide and the impact of changes in fair value of
loans for which we have elected the fair value treatment and realized and
unrealized gains (losses) on the related interest rate swaps we utilize to
manage interest rate risk on these loans. While we are required under 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 years September 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         

$ 1,007,368 $ 224,898


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.
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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 our FDIC 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 decreased
FDIC 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
increased FDIC 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 of Great 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 the FDIC loss-sharing agreement, which ended June
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.
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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.
                                                                        

Closed exercises September 30,

                                                              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 that we believe is useful in 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 the “Non-GAAP Financial Measures” section.


Analysis of Financial Condition
The following table highlights certain key financial and performance information
for fiscal years ended September 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, on October 1, 2020, this line represented the allowance for
loan and lease losses under the incurred loss model.


Our total assets were $12.91 billion at September 30, 2021, compared with $12.60
billion at September 30, 2020 and $12.79 billion at September 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.
At September 30, 2021, loans were $8.19 billion, a decrease of $1.89 billion, or
18.8%, from $10.08 billion at September 30, 2020, which increased $369.4
million, or 3.8%, compared to $9.71 billion at September 30, 2019. See "-Loan
Portfolio" within this section for further discussion on the growth in net
loans.
Total deposits were $11.31 billion at September 30, 2021, increase of $301.7
million, or 2.7%, from $11.01 billion at September 30, 2020, which increased
$708.4 million, or 6.9%, from $10.30 billion at September 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-

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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 

??

Total commercial real estate                        4,483,338            

5 355 401 $ 5,092,410 $ 4,629,330 $ 4,124,805
Agriculture

                                         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 $ 9,635,989 $ 9,351,384 $ 8,905,050
1 As part of the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Subject 326): Assessment of Credit Losses on Financial Instruments, and subsequent related ASUs, the loan segments are presented on the amortized cost basis, which includes the outstanding principal balance. , unamortized discount on acquired loans, unearned net deferred charges and charges and loans in progress. For more information on September 30, 2020 balances in the credit segment, see note 2. 2 Other loans mainly include consumer and commercial credit cards, overdrafts on customer deposit accounts and outstanding loans. 3 loan segments for September 30, 2019, 2018 and 2017 are presented on the basis of the unpaid principal balance and do not include the unamortized discount on acquired loans, unearned net deferred charges and costs, and outstanding loans. In addition, commercial real estate sub-segments were not available.


During the fiscal year ended September 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 ended September 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 at September 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-
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The following table presents additional detail regarding our CRE, agriculture,
commercial non-real estate and residential real estate loans at September 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                                  $             8,185,053


Commercial Real Estate. CRE includes commercial and residential construction and
development, owner-occupied CRE, non-owner-occupied CRE, and multi-family
residential real estate. While CRE lending is a significant component of our
overall loan portfolio, we are committed to managing our exposure to riskier
construction and development lending specifically, and to CRE lending in
general, by targeting relationships with sound management and financials, which
are priced to reflect the amount of risk we accept as the lender.
Agriculture. Agriculture loans include farm operating loans and loans
collateralized by farm land. According to the American Banker's Association, at
June 30, 2021, we were ranked the seventh-largest farm lender bank in the United
States measured by total dollar volume of farm loans. We consider agriculture
lending one of our core lending areas. We target a portfolio composition for
agriculture loans not to exceed 225% of total capital according to our Risk
Appetite Statement approved by our Board of Directors. Within our agriculture
portfolio, loans are diversified across a wide range of subsectors with the
majority of the portfolio concentrated within various types of grain, livestock
and dairy products, and across different geographical segments within our
footprint. Over recent years, our borrowers have experienced volatile commodity
prices, the adverse effects of tariffs imposed on the export of agricultural
products, and the effects of waivers of the amount of ethanol to be blended into
the country's gasoline production. While these events, the continuing impact of
the COVID-19 pandemic or a further downturn in the agriculture economy, could
directly and adversely affect our agricultural loan portfolio and indirectly and
adversely impact other lending categories including commercial non-real estate,
CRE, residential real estate and consumer, we believe there continues to
typically be strong secondary sources of repayment for the agriculture loan
portfolio.
Commercial Non-Real Estate. Commercial non-real estate, or business lending,
represents one of our core competencies through providing a tailored range of
integrated products and services, including lending, to small- and
medium-enterprise customers. We offer a number of different products including
working capital and other shorter-term lines of credit, fixed-rate loans and
variable rate loans with interest rate swaps over a wide range of terms, and
variable-rate loans with varying terms.
Residential Real Estate. Residential real estate lending reflects 1-to-4-family
closed-end first-lien mortgages (primarily single-family long-term first
mortgages resulting from acquisitions of other banks), closed-end junior-lien
mortgages and HELOCs. A large percentage of our total single-family first
mortgage originations are sold into the secondary market in order to meet our
interest rate risk management objectives. Our closed-end first-lien mortgages
include a small percentage of single-family first mortgages that we originate
and do not subsequently sell into the secondary market, including some jumbo
products, adjustable-rate mortgages and rural home mortgages.
Consumer. Our consumer lending offering comprises a relatively small portion of
our total loan portfolio, and predominantly reflects small-balance secured and
unsecured products marketed by our branches. Other lending includes all other
loan relationships that do not fit within the categories above, primarily
consumer and commercial credit cards, customer deposit account overdrafts, and
loans in process.
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The following table shows the breakdown of the maturities of our loan portfolio at September 30, 2021. The maturity dates were determined based on the contractual maturity date of the loan.

                                                                                          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        1,990,766

Multi-family 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 of September 30, 2021, a decrease of $15.5 million, or 77.6%,
compared to $20.0 million at September 30, 2020, which decreased $16.7 million,
or 45.5%, compared to $36.8 million at September 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


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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.
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The table below presents the total TOR, broken down between performing and non-performing loans, for 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 The balance of this segment is included in the total of commercial real estate for September 30, 2020 and 2019.


As of September 30, 2021, total performing TDRs increased $13.9 million compared
to September 30, 2020, which decreased $9.6 million compared to September 30,
2019. Performing TDRs increased from September 30, 2020 primarily due to one
large relationship in the agriculture portfolio moving from nonperforming to
performing status during the period. Performing TDRs decreased from
September 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 of September 30, 2021, total nonperforming TDRs decreased $29.0 million
compared to September 30, 2020, which increased $32.7 million compared to
September 30, 2019. Nonperforming TDRs decreased from September 30, 2020 mainly
due to the one previously mentioned relationship in the agriculture portfolio
that transferred to performing status. Nonperforming TDRs increased from
September 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, on October 1, 2020, which uses the current expected credit loss
model ("CECL") to determine the allowance for credit losses based on an ongoing
evaluation, driven primarily by monitoring changes in loan risk grades,
delinquencies, and other credit risk indicators, which are inherently
subjective. The measurement of expected credit losses under the CECL methodology
is applicable to financial assets measured at amortized cost, including loan
receivables and held-to-maturity debt securities. It also applies to off-balance
sheet credit exposures not accounted for as insurance (loan commitments, standby
letters of credit, financial guarantees, and other similar instruments) and the
net investments in leases recognized by a lessor in accordance with Topic 842 on
leases. The CECL methodology requires recognition of lifetime expected credit
losses that takes into consideration all relevant information, including
historical losses, current conditions and reasonable and supportable forecasts
of future operating conditions.
Loans that do not share similar risk characteristics and are collateral
dependent, primarily large loans on nonaccrual status and those which have
undergone a TDR, are evaluated on an individual basis ("individual reserve").
The reserve related to these loans is calculated using the collateral available
to repay the loan, most typically the liquidation value of the collateral (less
selling costs, if applicable). The Company has chosen to continue to include
small, less complex loans within the collective reserve for loans on nonaccrual
or with TDR status.
Loans that are not reserved for on an individual basis are measured on a
collective, or pooled basis ("collective reserve"). Loans are aggregated into
pools based on similar risk characteristics including borrower type, collateral
type and expected credit loss patterns. The historical loss experience of the
pool is generally the starting point for estimating expected credit losses under
the collective reserve methodology. The historical loss experience rate of the
loan pool is applied to each loan within the segment over the contractual life
of each loan, adjusted for estimated prepayments. Management then determines an
appropriate macroeconomic forecast based on the expectation of future
conditions, including but not limited to the unemployment rate, which is the
most significant factor, gross domestic product and corporate bond spreads, and
applies the forecast to models which estimate the change in loss expectations
relative to the historical loss rates. These models have been implemented in
accordance with the Company's Model Risk Management Policy. Additionally, using
its 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
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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 closed years September 30,

                                                      2021                  2020                  2019                 2018                 2017
                                                                                       (dollars in thousands)
Allowance for credit losses on loans:
Balance, beginning of period                    $    149,887           $    

70,774 $ 64,540 $ 63,503 $ 64,642
Adoption of ASU 2016-13, as amended

                  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)

Settlements:

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

??

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

??

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 $ 70,774 $ 64,540 $ 63,503

Average total loans for the period ¹            $  9,070,830           $  

9,908,495 $ 9,741,293 $ 9,252,436 $ 8,760,869
Total loans at the end of the period ¹

                     $  8,185,053           $ 

10 076 142 $ 9,706,763 $ 9,415,924 $ 8,968,553
Average Net Write-offs / Total Loans Ratios

                  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.
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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 To September 30, 2020, provision balances have been reclassified to align with the eight loan portfolio groups established for the adoption of the CECL. For more information, see note 2.


Management will continue to evaluate the loan portfolio and assess economic
conditions in order to determine future allowance levels and the amount of
credit loss provisions. We review the appropriateness of our allowance for
credit losses on a 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 at September 30, 2021 and 2020, respectively, and is recorded in accrued
expenses and other liabilities in the consolidated balance sheet.
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Investment securities The following table shows the amortized cost of each category of our investment portfolio as of 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 Mortgage Company for Real Estate Loans 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 by U.S. states and political subdivisions. Our investment
securities portfolio serves as a means to collateralize FHLB borrowings and
public funds deposits, to earn net spread income on excess deposits, to maintain
liquidity and to balance interest rate risk. Since September 30, 2020, the
carrying value of the portfolio has increased by $936.3 million, or 52.8%.
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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 at September 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 sale
U.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 maturity
U.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 on government bonds and political subdivisions is presented on the basis of the yield on the first optional call date if the security is purchased at a premium, the yield to maturity if purchased at par or a discount. 2 Maturity calculations for state and political subdivision obligations are based on the first optional call date for securities with a fair value greater than par and the contractual maturity for securities with a fair value equal to or lower than par.


Available for sale securities are stated at fair value. For available for sale
debt securities in an unrealized loss position, management first evaluates
whether (1) the Company has the intent to sell a security; or (2) it is
more-likely-than-not that the Company will be required to sell the security
before recovery of its amortized cost basis. If either criteria is met, the
entire amount of unrealized loss is recognized in the consolidated income
statement with a corresponding adjustment to the security's amortized cost
basis.
If neither criteria is met, the Company evaluates whether the decline in fair
value has resulted from credit losses or other factors. In making this
assessment, management considers the extent to which fair value is less than
amortized cost, any changes to the rating of the security by a rating agency,
and adverse conditions specifically related to the security, among other
factors. Furthermore, securities issued by the U.S. Government or a U.S.
Government sponsored enterprise which carry the explicit or implicit guarantee
of the U.S. Government are considered "risk-free" and therefore no credit losses
are assumed on those securities. If the assessment indicates a credit loss
exists, the amortized cost basis is compared to the present value of cash flows
expected to be collected from the security; if it is less than the amortized
cost basis, a credit loss exists and an allowance for credit losses is recorded.
Changes in the allowance for credit losses are recorded as a provision for
(reversal of) credit losses in the consolidated income statement. If the
assessment indicates a credit loss does not exist, the change in fair value is
recorded as unrealized gains and losses, net of related taxes, and is included
in stockholders' equity as a component of accumulated other comprehensive income
(loss).
Debt securities for which the Company has the ability and positive intent to
hold until maturity are classified as held to maturity. Held to maturity
securities are stated at amortized cost, which represents actual cost adjusted
for premium amortization and discount accretion.
Deposits
We obtain funds from depositors by offering consumer and business
interest-bearing accounts and term time deposits. At September 30, 2021 and
September 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 the FDIC up to the legal maximum.
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The following table presents the balances and the weighted average cost of our deposit portfolio on 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  %


At September 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 in May 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 at September 30, 2021, and September 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 at September 30, 2021 and September 30, 2020, respectively.
The following table presents deposits by region.
                                                            September 30,
                                               2021              2020              2019
                                                        (dollars in thousands)

South Dakota / Minnesota / North Dakota $ 2,959,326 $ 2,870,119

  $  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. At
September 30, 2021 and September 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 at September 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    %


At September 30, 2021 and September 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 at
September 30, 2021 and September 30, 2020, respectively.
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Derivatives

Prior to 2017 we entered into fixed-rate loans having original maturities of 5
years or greater (typically between 5 and 15 years) with certain of our
commercial and agri-business banking customers to assist them in facilitating
their risk management strategies. We mitigated our interest rate risk associated
with certain of these loans by entering into equal and offsetting
fixed-to-floating interest rate swap agreements for these loans with swap
counterparties. We elected to account for the loans at fair value under ASC 825,
Fair Value Option. Changes in the fair value of these loans are recorded in
earnings as a component of noninterest income in the relevant period. The
related interest rate swaps are recognized as either assets or liabilities in
our financial statements and any gains or losses on these swaps, both realized
and unrealized, are recorded in earnings as a component of noninterest income.
The interest rate swaps are fully effective from an interest rate risk
perspective, as gains and losses on our swaps are directly offset by changes in
fair value of the fair value option loans (i.e., swap interest rate risk
adjustments are directly offset by associated loan interest rate risk
adjustments). Consequently, any changes in noninterest income associated with
changes in fair value resulting from interest rate movement, as opposed to
changes in credit quality, on the loans are directly offset by equal and
opposite unrealized charges to or reductions in noninterest income for the
related interest rate swap. Any changes in the fair value of the loans related
to credit quality and the derivative interest expense on derivatives are not
offsetting amounts within noninterest income. To ensure the correlation of
movements in fair value between the interest rate swap and the related loan, we
pass on all economic costs associated with our interest rate swap activity
resulting from loan customer prepayments (partial or full) to the customer.
In addition, we enter into interest rate derivative contracts to support the
business needs of our customers. These interest rate swaps sales are used to
enable customers to achieve a long-term fixed rate by selling the customer a
long-term variable rate loan indexed to LIBOR plus a credit spread whereby the
Bank enters into an interest rate swap with our customer where the customer pays
a fixed rate of interest set at the time of origination on the interest rate
swap and then the customer receives a floating rate equal to the rate paid on
the loan, thus resulting in a fixed rate of interest over the life of the
interest rate swap. We then enter into a mirrored interest rate swap with a swap
dealer where we pay and receive the same fixed and floating rate as we pay and
receive from the interest rate swap we have with our customer. As the interest
paid and received by us on the two swaps net to zero, we are left with the
variable rate of the long-term loan.
We enter into RPAs with some of our derivative counterparties to assume the
credit exposure related to interest rate derivative contracts. Our loan customer
enters into an interest rate swap directly with a derivative counterparty and we
agree through an RPA to take on the counterparty's risk of loss on the interest
rate swap due to a default by the customer. The notional amounts of RPAs sold
were $106.9 million and $80.7 million as of September 30, 2021 and September 30,
2020, respectively. Assuming all underlying loan customers defaulted on their
obligation to perform under the interest rate swap with a derivative
counterparty, the exposure from these RPAs would be $0.2 million and nominal at
September 30, 2021 and September 30, 2020, respectively, based on the fair value
of the underlying swaps.
Short-Term Borrowings
Our primary sources of short-term borrowings include securities sold under
repurchase agreements and certain FHLB advances maturing within 12 months. The
following table presents certain information with respect to only our borrowings
with original maturities less than 12 months at and for the periods noted.
                                                            At and for 

Closed exercises September 30,

                                                            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         

$ 140,506 $ 83,992

Maximum amount remaining due at each end of the month 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 both September 30, 2021 and September 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 of September 30, 2021 and September 30,
2020, respectively. We are permitted under applicable laws and regulations to
count these trust preferred securities as part of our Tier 1 capital.
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We issued $35.0 million of fixed-to-floating rate subordinated notes that mature
on August 15, 2025 through a private placement. The notes, whose eligibility as
Tier 2 capital was reduced by 20% beginning in the quarter ended September 30,
2020, and whose eligibility will continue to reduce 20% on the anniversary date
thereof each of the next four years, bear interest at a rate per annum equal to
three-month LIBOR for the related interest period plus 3.15%, payable quarterly
on each November 15, February 15, April 15 and August 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 at September 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 $ 52,817 $ 1,419 $ 10,605,626

         $ 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.
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Our liquidity risk is managed through a comprehensive framework of policies and
limits overseen by our Bank's asset and liability committee. We continuously
monitor and make adjustments to our liquidity position by adjusting the balance
between sources and uses of funds as we deem appropriate. Our primary measures
of liquidity include monthly cash flow analyses under ordinary business
activities and conditions and under situations simulating a severe run on our
Bank. We also monitor our Bank's deposit to loan ratio to ensure high quality
funding is available to support our strategic lending growth objectives, and
have internal management targets for the FDIC's liquidity ratio, net short-term
non-core funding dependence ratio and non-core liabilities to total assets
ratio. The results of these measures and analyses are incorporated into our
contingency funding plan, which provides the basis for the identification of our
liquidity needs. We also acquire brokered deposits when the cost of funds is
advantageous to other funding sources.
Great Western Bancorp, Inc. Our primary source of liquidity is cash obtained
from dividends by our Bank. We primarily use our cash for the payment of
dividends, when and if declared by our Board of Directors, and the payment of
interest on our outstanding junior subordinated debentures and subordinated
notes. We also use cash, as necessary, to satisfy the needs of our Bank through
equity contributions and for acquisitions. At September 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
at September 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, on June 1, 2020
we filed a shelf registration statement with the SEC registering an
indeterminate amount of our common stock, debt securities and other securities
which we may decide to issue in the future. The specific terms of any shares or
other securities we choose to issue will be based on current market conditions
and will be described in a supplement to the prospectus contained in the shelf
registration statement.
Great Western Bank. Our Bank maintains sufficient liquidity by maintaining
minimum levels of excess cash reserves (measured on a daily basis), a sufficient
amount of unencumbered, highly liquid assets and access to contingent funding.
At September 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 at September 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. At September 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.
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Capital city

As a bank holding company, we must comply with the capital requirements
established by the Federal Reserve, and our Bank must comply with the capital
requirements established by the FDIC. The current risk-based guidelines
applicable to us and our Bank are based on the Basel III framework, as
implemented by the federal bank regulators.
The following table presents our regulatory capital ratios at September 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 the capital conservation buffer, which was 2.5% at September 30, 2021.


At September 30, 2021 and September 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. At
September 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 ending
September 30, 2020. At September 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 at
September 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.
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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 closed years September 30,

                                                     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) $ 167,365 $ 157,916 $ 144,786
Add: Acquisition costs, net of tax

                      -                     -                     -                     -                   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) $ 2.92 $ 2.67 $ 2.45
Adjusted earnings per common share – diluted $ 3.67 $

1.60 $ 2.92 $ 2.90 $ 2.46

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 $ 264,208 $ 250,215 $ 236,702

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 $ 168,702 $ 159,376 $ 146,830

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 $ 1,101,557 $ 1,040,640 $ 952,832

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 GAAP net income divided by average ordinary 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 $ 420,708 $ 407,837 $ 389,195
Add: tax equivalent adjustment

                         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 $ 427,170 $ 409,069 $ 383,399

Average interest-earning assets                 $ 12,129,324          $ 

11 868 666 $ 11,414,926 $ 10,647,357 $ 10,209,741
Net interest margin (FTE) *

                             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.


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At and for closed years September 30,

                                                       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 $ 490,910 $ 439,789 $ 396,481
Add: tax equivalent adjustment

                           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 $ 497,372 $ 441,021 $ 390,685

Average non-ASC310-30 loans                       $  8,784,577          $  

9 750 677 $ 9,610,956 $ 9,106,519 $ 8,581,615
Yield (FTE) *

                                             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 $ 481,440 $ 481,446 $ 452,409
Add: tax equivalent adjustment

                           6,344                 6,146                 5,843                 6,597                 8,599
Total revenue (FTE)                               $    474,635          $   

425,588 $ 487,283 $ 488,043 $ 461,008

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 non-interest expenditure to total income (FTE).

Tangible common equity and tangible common equity
to tangible assets:
Total stockholders' equity                        $  1,201,479          $  

1,162,933 $ 1,900,249 $ 1,840,551 $ 1,755,000
Less: Good will and other intangible assets

               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 $ 12,788,301 $ 12,116,808 $ 11,690,011
Less: Good will and other intangible assets

               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 $ 1,900,249 $ 1,840,551 $ 1,755,000
Less: Good will and other intangible assets

               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

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 $ 33.76 $ 31.24 $ 29.83
Tangible book value per share

                     $      21.71          $   

21.03 $ 20.52 $ 18.57 $ 17.11


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 of the United States government,
its agencies and various other governmental regulatory authorities.
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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


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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 the U.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.
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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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