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MarketScreener Homepage  >  Equities  >  Nyse  >  Great Western Bancorp, Inc.    GWB

GREAT WESTERN BANCORP, INC.

(GWB)
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GREAT WESTERN BANCORP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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11/27/2019 | 10:24am EDT
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. In fiscal year 2018, the Tax Reform Act reduced the federal tax
rate for corporations from 35% to 21%. Because of our September 30 fiscal year
end, a blended statutory rate of 24.5% was applied to all FTE non-GAAP adjusted
financial measures for fiscal year 2018 and a fully phased in statutory federal
tax rate of 21% was applied to all FTE non-GAAP adjusted financial measures
beginning in fiscal year 2019.
Overview
We are a full-service regional bank holding company focused on
relationship-based business and agri-business banking. We serve our customers
through 175 branches in attractive markets in nine states: Arizona, Colorado,
Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota.
Our Bank was established more than 80 years ago and we have achieved strong
market positions by developing and maintaining extensive local relationships in
the communities we serve. By leveraging our business and agri-business focus,
presence in attractive markets, highly efficient operating model and robust
approach to risk management, we have achieved significant and profitable
growth-both organically and through disciplined acquisitions. We provide
financial results based on a fiscal year ending September 30 as a single
reportable segment.
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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; (vi) business development; (vii) FDIC insurance assessments;
and (viii) 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.
Highlights for the Fiscal Year Ended September 30, 2019
Net income was $167.4 million, or $2.92 per diluted share, for fiscal year 2019,
compared to net income of $157.9 million, or $2.67 per diluted share, for fiscal
year 2018, an increase of $9.4 million, or 6.0%. Total revenue (non-FTE) for
fiscal year 2019 remained flat, while there was a slight reduction in
noninterest expenses, a higher provision for loan and lease losses and a lower
provision for income taxes. Total revenue (non-FTE) is the sum of net interest
income (non-FTE) and noninterest income. Our efficiency ratio, which measures
our ability to manage noninterest expenses, remained strong during fiscal year
2019 at 45.8%, compared to 47.1% for fiscal year 2018. For more information on
our efficiency ratio, see "-Non-GAAP Financial Measures" and for a
reconciliation to the most directly comparable GAAP financial measure, see "Item
6. Selected Financial Data-Non-GAAP Financial Measures Reconciliations."
Net interest margin, which measures our ability to maintain interest rates on
interest earning assets above those of interest-bearing liabilities, was 3.74%,
3.89% and 3.90% for fiscal years 2019, 2018 and 2017, respectively. Adjusted net
interest margin, which reflects the realized gain (loss) on interest rate swaps,
was 3.74%, 3.84% and 3.76% 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 15 and 10 basis points
lower, respectively, compared to fiscal year 2018. Net interest margin decreased
between the two periods primarily a result of a 40 basis point increase in the
cost of deposits, partially offset by a 24 basis point increase in the yield on
loans. A $6.0 million reduction in the cost of interest rate swaps between the
periods is the primary driver of the less pronounced decrease in adjusted net
interest margin compared to net interest margin. For more information on our
adjusted net interest margin, see "-Non-GAAP Financial Measures" and for a
reconciliation to the most directly comparable GAAP financial measure, see "Item
6. Selected Financial Data-Non-GAAP Financial Measures Reconciliations."
Total loans were $9.71 billion as of September 30, 2019, compared to $9.42
billion as of September 30, 2018. The majority of growth was focused in the CRE
segment of the portfolio, which grew by $463.1 million, or 10.0%, partially
offset by a reduction in the agriculture segment of $174.0 million, or 8.0%.
Deposits as of September 30, 2019 were $10.30 billion, an increase of $566.8
million, or 5.8%, from $9.73 billion as of September 30, 2018, as a result of
brokered deposits being a more cost effective source of funding.
Nonaccrual loans, including ASC 310-30 loans, were $107.2 million at
September 30, 2019 a decrease of $36.0 million, or 25.2%, compared to $143.2
million at September 30, 2018. Loans graded "Watch" were $405.5 million as of
September 30, 2019, an increase of $62.2 million, or 18.1%, compared to $343.3
million at September 30, 2018, while loans graded "Substandard" were $472.5
million, an increase of $219.8 million, or 87.0%, compared to $252.7 million
over the same periods. The increase in loans graded "Watch" was primarily due to
a deterioration during the year of a small number of commercial non-real estate
relationships while the increase in "Substandard" was primarily due to a
deterioration during the year of a small number of dairy relationships. Other
repossessed property balances increased by $13.7 million, or 59.3%, primarily
due to the addition of one large property during the period.
Provision for loan and lease losses was $40.9 million for fiscal year 2019,
compared to $18.0 million for fiscal year 2018. Net charge-offs for fiscal year
2019 were $34.7 million, or 0.36% of average total loans on an annualized basis,
compared to $16.9 million, or 0.18%, for fiscal year 2018. Net charge-offs in
fiscal year 2019 were concentrated in the agriculture segment of the loan
portfolio, which included $18.7 million of net charge-offs related to the cattle
industry, and the commercial non-real estate segment of the loan portfolio,
which included $7.5 million of net charge-offs. The ratio of ALLL to total loans
was 0.73% at September 30, 2019, an increase from 0.69% at September 30, 2018.
The balance of the ALLL increased to $70.8 million at September 30, 2019 from
$64.5 million at September 30, 2018.
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Tier 1 capital, total capital and Tier 1 leverage ratios were 11.7%, 12.7% and
10.1%, respectively, at September 30, 2019, compared to 12.0%, 13.0% and 10.7%,
respectively, at September 30, 2018. In addition, our Common Equity Tier 1 ratio
was 11.0% at September 30, 2019, compared to 11.3% at September 30, 2018. Our
tangible common equity to tangible assets ratio was 9.6% at September 30, 2019
and 2018. All regulatory capital ratios remain above regulatory minimums to be
considered "well capitalized". During fiscal year 2019, $94.3 million was
deployed to repurchase and retire approximately 2.7 million shares of Company's
common stock under the repurchase program authorized by the Board of Directors.
For more information on our tangible common equity to tangible assets ratio, see
"-Non-GAAP Financial Measures" and for a reconciliation to the most directly
comparable GAAP financial measure, see "Item 6. Selected Financial Data-Non-GAAP
Financial Measures Reconciliations."
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 and agri-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 Business 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 such
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."
Results of Operations-Fiscal Years Ended September 30, 2019, 2018 and 2017
Overview
The following table highlights certain key financial and performance information
for fiscal years 2019, 2018 and 2017.
                                                            At and for 

Fiscal Years Ended September 30,

                                                         2019                  2018                  2017
                                                    (dollars in thousands, except share and per share amounts)
Operating Data:
Interest income (FTE)                               $    548,760$    488,434$    443,114
Interest expense                                         122,209                74,000                45,320
Noninterest income                                        60,732                73,609                63,214
Noninterest expense                                      224,898               231,425               216,643
Provision for loan and lease losses                       40,947                17,986                21,539
Net income                                               167,365               157,916               144,786
Adjusted net income ¹                               $    167,365$    171,502$    145,226
Common shares outstanding                             56,283,659            58,917,147            58,834,066
Weighted average diluted common shares outstanding    57,257,061            59,131,650            59,029,382
Earnings per common share - diluted                 $       2.92$       2.67$       2.45
Adjusted earnings per common share - diluted ¹              2.92                  2.90                  2.46
Performance Ratios:
Net interest margin (FTE) ¹                                 3.74  %               3.89  %               3.90  %
Adjusted net interest margin (FTE) ¹                        3.74  %               3.84  %               3.76  %
Return on average total assets                              1.33  %               1.34  %               1.27  %
Return on average common equity                              9.1  %                8.8  %                8.5  %
Return on average tangible common equity ¹                  15.3  %               15.3  %               15.4  %
Efficiency ratio ¹                                          45.8  %               47.1  %               46.5  %

1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more
information on this non-GAAP financial measure, see "-Non-GAAP Financial Measures" and for a reconciliation to
the most directly comparable GAAP financial measure, see "Item 6. Selected Financial Data - Non-GAAP Financial
Measures Reconciliations".


                                      61-
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Net Interest Income The following tables present net interest income, net interest margin and adjusted net interest margin for fiscal years 2019, 2018 and 2017.

                                                                 At and for 

Fiscal Years Ended September 30,

                                                              2019                  2018                  2017
                                                                           (dollars in thousands)
Net interest income:
Total interest income (FTE)                              $    548,760$    488,434$    443,114
Less: Total interest expense                                  122,209                74,000                45,320
Net interest income (FTE)                                $    426,551$    414,434$    397,794
Net interest margin (FTE) and adjusted net interest
margin (FTE) ¹
Average interest-earning assets                          $ 11,414,926$ 10,647,357$ 10,209,741
Average interest-bearing liabilities                     $ 10,698,555$  9,952,961$  9,573,937
Net interest margin (FTE)                                        3.74  %               3.89  %               3.90  %
Adjusted net interest margin (FTE) ¹                             3.74  %               3.84  %               3.76  %

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, see "-Non-GAAP Financial Measures" and for a reconciliation to the
most directly comparable GAAP financial measure, see "Item 6. Selected Financial Data-Non-GAAP Financial Measures
Reconciliations".


Net interest income increased $12.2 million, or 2.9%, to $426.6 million in
fiscal year 2019 from $414.4 million in fiscal year 2018, which increased $16.6
million, or 4.2%, from $397.8 million in fiscal year 2017. The increase in net
interest income for both periods was primarily attributable to higher loan
interest income driven by 5.3% and 5.7% of growth in average loans outstanding
between the periods, respectively, combined with higher yields on total loans,
partially offset by higher interest expense associated with the cost of deposits
for the same periods.
Net interest margin was 3.74% and 3.89% in fiscal years 2019 and 2018,
respectively, while adjusted net interest margin was 3.74% and 3.84% over the
same periods, respectively. The 15 basis points decrease in net interest margin
was primarily due to a 40 basis point increase in the cost of deposits,
partially offset by a 24 basis point increase in the yield on loans. A $6.0
million reduction in the cost of interest rate swaps between the periods is the
primary driver of the less pronounced decrease in adjusted net interest margin
compared to net interest margin.
Net interest margin was 3.89% in fiscal year 2018, compared with 3.90% in fiscal
year 2017. Adjusted net interest margin was 3.84% and 3.76% over the same
periods, respectively. The decrease in net interest margin was primarily due to
a 27 basis point increase in the cost of interest-bearing liabilities, partially
offset by a 25 basis point increase in the cost of interest-earning assets
driven by higher average loan balances as a proportion of earning assets and
improving loan yields. A $9.0 million reduction in the cost of interest rate
swaps between the periods is the primary driver of the more pronounced increase
in adjusted net interest margin compared to net interest margin. For more
information on our adjusted net interest margin, see "-Non-GAAP Financial
Measures" and for a reconciliation to the most directly comparable GAAP
financial measure, see "Item 6. Selected Financial Data-Non-GAAP Financial
Measures Reconciliations."
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 2019, 2018 and 2017, 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
$768.8 million at September 30, 2019 and $789.0 million at September 30, 2018,
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, see "-Non-GAAP Financial
Measures" and for a reconciliation to the most directly comparable GAAP
financial measure, see "Item 6. Selected Financial Data-Non-GAAP Financial
Measures Reconciliations." ASC 310-30 loans represent loans accounted for in
accordance with ASC 310-30 Accounting for Purchased Loans that were credit
impaired at the time we acquired them. Non-ASC 310-30 loans represent loans we
have originated and loans we have acquired that were not credit impaired at the
time we acquired them.
                                      62-

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                                                                                                                             Fiscal Years Ended September 30,
                                                                           2019                                                                                              2018                                                                 2017
                                                  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                 $          61,646    $         2,472              4.01  %       $          75,101    $         1,376              1.83  %       $         123,616    $           922              0.75  %
Investment securities                                    1,681,185             41,510              2.47  %               1,384,632             29,171              2.11  %               1,390,453             26,311              1.89  %
Non-ASC 310-30 loans, net ²                              9,610,956            496,753              5.17  %               9,106,519            446,386              4.90  %               8,581,615            405,080              4.72  %
ASC 310-30 loans, net                                       61,139              8,025             13.13  %                  81,105             11,501             14.18  %                 114,057             10,801              9.47  %
Loans, net                                               9,672,095            504,778              5.22  %               9,187,624            457,887              4.98  %               8,695,672            415,881              4.78  %
Total interest-earning assets                           11,414,926            548,760              4.81  %              10,647,357            488,434              4.59  %              10,209,741            443,114              4.34  %
Noninterest-earning assets                               1,206,151                                                       1,160,802                                                       1,154,861
Total assets                                     $      12,621,077$       548,760              4.35  %       $      11,808,159$       488,434              4.14  %       $      11,364,602$       443,114              3.90  %
Liabilities and Stockholders' Equity
Noninterest-bearing deposits                     $       1,860,645$       1,809,470$       1,806,491
Interest-bearing deposits                                6,286,878    $        69,305              1.10  %               5,990,182    $        43,092              0.72  %               5,709,863    $        25,969              0.45  %
Time deposits                                            2,030,619             37,413              1.84  %               1,483,760             17,020              1.15  %               1,300,987              9,066              0.70  %
Total deposits                                          10,178,142            106,718              1.05  %               9,283,412             60,112              0.65  %               8,817,341             35,035              0.40  %
Securities sold under agreements to repurchase              66,485                180              0.27  %                 108,599                340              0.31  %                 122,188                384              0.31  %
FHLB advances and other borrowings                         345,375              9,771              2.83  %                 452,572              8,508              1.88  %                 525,491              5,437              1.03  %
Subordinated debentures and subordinated notes
payable                                                    108,553              5,540              5.10  %                 108,378              5,040              4.65  %                 108,917              4,464              4.10  %
Total borrowings                                           520,413             15,491              2.98  %                 669,549             13,888              2.07  %                 756,596             10,285              1.36  %
Total interest-bearing liabilities                      10,698,555    $       122,209              1.14  %               9,952,961    $        74,000              0.74  %               9,573,937    $        45,320              0.47  %
Noninterest-bearing liabilities                             75,045                                                          67,045                                                          88,440
Stockholders' equity                                     1,847,477                                                       1,788,153                                                       1,702,225

Total liabilities and stockholders' equity $ 12,621,077

                                      $      11,808,159$      11,364,602
Net interest spread                                                                                3.21  %                                                         3.40  %                                                         3.43  %
Net interest income and net interest margin
(FTE)                                                                 $       426,551              3.74  %                            $       414,434              3.89  %                            $       397,794              3.90  %
Less: Tax equivalent adjustment                                                 5,843                                                           6,597                                                           8,599
Net interest income and net interest margin -
ties to Statements of Comprehensive Income                            $       420,708              3.69  %                            $       407,837              3.83  %                            $       389,195

3.81 %


1 Interest income includes $0.7 million, $0.0 million and $0.0 million for fiscal years 2019, 2018 and 2017, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance
sheets.
2 Interest income includes $1.3 million, $2.7 million and $4.1 million for fiscal years 2019, 2018 and 2017, respectively, resulting from accretion of purchase accounting discount associated with acquired loans.


Interest Income
The following table presents interest income for fiscal years 2019, 2018 and
2017.
                                         Fiscal Years Ended September 30,
                                       2019             2018            2017
                                              (dollars in thousands)
Interest income:
Loans (FTE)                       $   504,778$ 457,887$ 415,881
Investment securities                  41,510          29,171          26,311
Federal funds sold and other            2,472           1,376             922
Total interest income (FTE)           548,760         488,434         443,114
Less: Tax equivalent adjustment         5,843           6,597           8,599
Total interest income (GAAP)      $   542,917$ 481,837$ 434,515


Total interest income consists primarily of interest income on loans and
interest income on our investment portfolio. Total interest income (FTE)
increased $60.4 million, or 12.4%, to $548.8 million for fiscal year 2019, from
$488.4 million for fiscal year 2018, which increased $45.3 million, or 10.2%,
from $443.1 million for fiscal year 2017. Significant components of interest
income are described in further detail below.
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Loans. Interest income on all loans increased to $504.8 million in fiscal year
2019 from $457.9 million in fiscal year 2018, an increase of $46.9 million, or
10.2%. Average net loan balances for fiscal year 2019 were $9.67 billion,
representing a 5.3% increase compared to the same period in fiscal year 2018.
The majority of growth was focused in the CRE segment of the portfolio, which
grew by $463.1 million, or 10.0%, partially offset by a reduction in the
agriculture segment of $174.0 million, or 8.0%. The largest contributors to the
overall growth in the CRE segment during fiscal year 2019 were the
non-owner-occupied CRE segment, which grew $505.9 million, or 21.6%, and the
owner-occupied CRE segment, which increased $76.7 million, or 5.7%, offset in
part by a decrease of $173.9 million, or 27.3%, in the construction and
development segment. Interest income on ASC 310-30 loans, which are purchased
credit impaired loans with a different income recognition model, decreased $3.5
million between the two periods, primarily driven by the runoff of the acquired
loan portfolios.
Interest income on all loans increased to $457.9 million in fiscal year 2018
from $415.9 million in fiscal year 2017, an increase of $42.0 million, or 10.1%
during the fiscal year. Average net loan balances for fiscal year 2018 were
$9.19 billion, representing a 5.7% increase compared to the same period in
fiscal year 2017. The majority of growth was focused in the CRE segment of the
portfolio, which grew by $504.5 million, or 12.2%, partially offset by a
reduction in the residential real estate segment of $95.3 million, or 10.2%. The
largest contributors to growth in the CRE segment during fiscal year 2018 were
the non-owner-occupied CRE subsegment, which grew $321.9 million, or 15.9%, the
owner-occupied CRE subsegment, which showed an increase of $115.0 million, or
9.4%, and the construction and development subsegment, which grew $99.0 million,
or 18.4%. Interest income on ASC 310-30 loans increased $0.7 million between the
two periods, primarily driven by accelerated accretion of interest income on one
pool of purchased credit impaired loans in fiscal year 2018.
Our yield on loans is affected by market interest rates, the level of
adjustable-rate loan indices, interest rate floors and caps, customer repayment
activity, the level of loans held for sale, portfolio mix, and the level of
nonaccrual loans. The average tax equivalent yield on non-ASC 310-30 loans was
5.17% for fiscal year 2019, a 27 basis point increase compared to 4.90% for
fiscal year 2018, which was an 18 basis point increase from 4.72% for fiscal
year 2017. Adjusted for the current realized gain (loss) on derivatives we use
to manage interest rate risk on certain of our loans at fair value, which we
believe represents the underlying economics of the transactions, the adjusted
yield on non-ASC 310-30 loans was 5.18% for fiscal year 2019, an increase of 34
basis points compared to 4.84% for fiscal year 2018, which was a 29 basis points
increase compared to 4.55% for fiscal year 2017. For more information on our
adjusted yield on non-ASC 310-30 loans, see "-Non-GAAP Financial Measures" and
for a reconciliation to the most directly comparable GAAP financial measure, see
"Item 6. Selected Financial Data-Non-GAAP Financial Measures Reconciliations."
The average duration of the loan portfolio, including the impact of the interest
rate swaps on the duration of fair value loans, was a relatively short 1.4 years
as of September 30, 2019. Approximately 47%, or $4.57 billion, of the portfolio
is comprised of fixed rate loans, of which $813.0 million of loans are
fixed-rate loans with an original term of 5 years or greater which we have
entered into equal and offsetting fixed-to-floating interest rate swaps. These
loans effectively behave as floating rate loans. For floating rate loans in the
portfolio, approximately 40% are indexed to Wall Street Journal Prime, 30% to
5-year Treasuries and the balance to various other indices. Less than 7% of our
total loans' rates are floored, with an average interest rate floor 54 basis
points above market rates.
Loan-related fee income of $7.0 million is included in interest income for
fiscal year 2019, compared to $4.9 million and $4.3 million for fiscal years
2018 and 2017, 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 $1.4 million, $2.8
million and $4.7 million for fiscal years 2019, 2018 and 2017, respectively, is
included as a reduction to interest income.
Investment Portfolio. The carrying value of investment securities and FHLB stock
was $1.81 billion and $1.41 billion as of September 30, 2019 and 2018,
respectively. Interest income on investments includes income earned on
investment securities and FHLB stock. Interest income on investments was $41.5
million for fiscal year 2019, an increase of $12.3 million, or 42.3%, from $29.2
million in fiscal year 2018. The increase in interest income was driven by an
increase in average investment balance of $296.6 million, or 21.4%, combined
with the yield on investments which increased 36 basis points to 2.47% for
fiscal year 2019, compared to 2.11% for fiscal year 2018.
In fiscal year 2018, interest income on investments increased to $29.2 million
from $26.3 million in fiscal year 2017, an increase of $2.9 million, or 10.9%.
The increase was driven by a 22 basis point increase in the yield on investments
in fiscal year 2018 to 2.11%, compared to 1.89% for fiscal year 2017, partially
offset by a decrease in average balances.
The weighted average life of the portfolio was 3.7 years at September 30, 2019,
3.9 years at September 30, 2018 and 3.6 years at September 30, 2017. Average
investments in fiscal years 2019, 2018 and 2017 were 14.7%, 13.0% and 13.6% of
total average interest-earning assets, respectively.
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Interest Expense
The following table presents interest expense for fiscal years 2019, 2018 and
2017.
                                                                Fiscal Years Ended September 30,
                                                           2019                 2018               2017
                                                                     (dollars in thousands)
Interest expense
Deposits                                             $    106,718$  60,112$  35,035
FHLB advances and other borrowings                          9,951               8,848              5,821
Subordinated debentures and subordinated notes
payable                                                     5,540               5,040              4,464
Total interest expense                               $    122,209$  74,000$  45,320


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
increased $48.2 million, or 65.1%, to $122.2 million in fiscal year 2019, from
$74.0 million in fiscal year 2018, which increased $28.7 million, or 63.3%, from
$45.3 million in fiscal year 2017. Average interest-bearing liabilities
increased $745.6 million, or 7.5%, to $10.70 billion in fiscal year 2019, from
$9.95 billion in fiscal year 2018, which increased $379.0 million, or 4.0%, from
$9.57 billion in fiscal year 2017. The average cost of total interest-bearing
liabilities increased to 1.14% in fiscal year 2019, compared to 0.74% in fiscal
year 2018 and 0.47% in fiscal year 2017. 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 $106.7 million in fiscal year 2019 compared with $60.1
million in fiscal year 2018, an increase of $46.6 million, or 77.5%, which was
an increase of $25.1 million, or 71.6%, from $35.0 million in fiscal year 2017.
The increases for both periods were driven by growth in average deposits
outstanding and increasing benchmark interest rates in the cost of deposits.
Average deposit balances increased to $10.18 billion in fiscal year 2019 from
$9.28 billion in fiscal year 2018, an increase of $894.7 million, or 9.6%, which
was an increase of $466.1 million, or 5.3%, from $8.82 billion in fiscal year
2017. The cost of deposits increased 40 basis points to 1.05% for fiscal year
2019 from 0.65% for fiscal year 2018, which increased 25 basis points from 0.40%
for fiscal year 2017 reflecting a rise in market interest rates and increased
competition for deposit balances.
Average noninterest-bearing demand account balances decreased to 18.3% of
average total deposits for fiscal year 2019, compared with 19.5% for fiscal year
2018 and 20.5% for fiscal year 2017. Total average other liquid accounts,
consisting of interest-bearing demand accounts, comprised 61.8% of total average
deposits in fiscal year 2019, compared to 64.5% of total average deposits for
fiscal year 2018 and 64.8% in fiscal year 2017, while time deposit accounts
increased in fiscal year 2019 to 20.0% of total average deposits compared to
16.0% in fiscal year 2018 and 14.8% in fiscal year 2017.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other
borrowings was $10.0 million for fiscal year 2019, compared to $8.8 million for
fiscal year 2018 and $5.8 million for fiscal year 2017, reflecting weighted
average cost of 2.83%, 1.88% and 1.03%, respectively. Our average balance for
FHLB advances and other borrowings decreased to $345.4 million in fiscal year
2019 from $452.6 million in fiscal year 2018, which decreased from $525.5
million in fiscal year 2017. Average FHLB advances and other borrowings as a
proportion of total average interest-bearing liabilities were 3.2% for fiscal
year 2019, 4.5% for fiscal year 2018 and 5.5% for fiscal year 2017. 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 2.74% at
September 30, 2019, 2.58% at September 30, 2018 and 1.36% at September 30, 2017.
The average tenor of our FHLB advances was 34 months at September 30, 2019, 15
months at September 30, 2018 and 4 months at September 30, 2017. The amount of
other borrowings and related interest expense are immaterial in each of fiscal
years 2019, 2018 and 2017.
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, 2019, we had pledged
$4.20 billion of loans to the FHLB, against which we had borrowed $340.0
million.
Subordinated Debentures and Subordinated Notes Payable. Interest expense on our
outstanding junior subordinated debentures and subordinated notes payable was
$5.5 million for fiscal year 2019, $5.0 million for fiscal year 2018, and $4.5
million for fiscal year 2017. The weighted average contractual rate on
outstanding junior subordinated debentures was 4.38%, 4.55% and 3.53% at
September 30, 2019, 2018 and 2017, respectively. The weighted average
contractual rate on outstanding subordinated notes payable was 4.88% at each of
the periods ended September 30, 2019, 2018 and 2017.
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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.
                                                      2019 vs 2018                                               2018 vs 2017
                                             Volume       Rate        Total            Volume       Rate          Total
                                                                        (dollars in thousands)
Increase (decrease) in interest income:
Cash and cash equivalents                  $   (283)$  1,379$  1,096$   (474)$    928$        454
Investment securities                         6,844       5,495      12,339              (111)      2,971           2,860
Non-ASC 310-30 loans                         25,406      24,961      50,367            25,362      15,944          41,306
ASC 310-30 loans                             (2,670)       (806)     (3,476)           (3,691)      4,391             700
Loans                                        22,736      24,155      46,891            21,671      20,335          42,006
Total increase                               29,297      31,029      60,326            21,086      24,234          45,320
Increase (decrease) in interest expense:
Interest-bearing deposits                     2,209      24,004      26,213             1,333      15,790          17,123
Time deposits                                 7,710      12,683      20,393             1,421       6,533           7,954
Securities sold under agreements to
repurchase                                     (119)        (41)       (160)              (44)          -             (44)
FHLB advances and other borrowings           (2,332)      3,595       1,263              (844)      3,915           3,071
Subordinated debentures and subordinated
notes payable                                     8         492         500               (22)        598             576
Total increase                                7,476      40,733      48,209             1,844      26,836          28,680
Increase (decrease) in net interest income
(FTE)                                      $ 21,821$ (9,704)$ 12,117

$ 19,242$ (2,602)$ 16,640



Provision for Loan and Lease Losses
We recognized a provision for loan and lease losses of $40.9 million for fiscal
year 2019 compared to a provision for loan and lease losses of $18.0 million for
fiscal year 2018, an increase of $22.9 million or 127.7%. The increase in
provision was mainly driven by a higher level of net charge-offs recognized
between the periods. Net charge-offs in fiscal year 2019 were concentrated in
the agriculture segment of the loan portfolio, which included $18.7 million of
net charge-offs related to the cattle industry, and the commercial non-real
estate segment of the loan portfolio, which included $7.5 million of net
charge-offs. Included within the provision for loan and lease losses was a net
reversal of $0.6 million during fiscal year 2019 associated with ASC 310-30
loans. This compares to a net impairment of $0.2 million related to this portion
of the portfolio recorded in fiscal year 2018.
We recognized a provision for loan and lease losses of $18.0 million for fiscal
year 2018 compared to a provision for loan and lease losses of $21.5 million for
fiscal year 2017, a decrease of $3.5 million, or 16.5%. The decrease provision
for loan and lease losses compared to fiscal year 2017 was driven by a lower
level of charge-offs recognized between the periods combined with a stable level
of specific provisions. Included within the provision for loan and lease losses
was a net impairment of $0.2 million during fiscal year 2018 associated with ASC
310-30 loans. This compares to net reversal of $0.7 million related to this
portion of the portfolio recorded in fiscal year 2017.
                                                                 Fiscal 

Years Ended September 30,

                                                            2019                   2018               2017
                                                                     

(dollars in thousands) Provision for loan and lease losses, non-ASC 310-30 loans *

                                             $      41,506

$ 17,754$ 22,210 (Reduction in) provision for loan and lease losses, ASC 310-30 loans

                                             (559)                   232               (671)

Provision for loan and lease losses, total $ 40,947

$ 17,986$ 21,539


* As presented above, the non-ASC 310-30 loan portfolio includes originated loans, other than loans for which
we have elected the fair value option, and loans we acquired that we did not determine were acquired with
deteriorated credit quality.


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Total Credit-Related Charges
We recognized other credit-related charges during fiscal year 2019 that were
higher compared to fiscal year 2018, which was lower compared to fiscal year
2017. 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. We record a recovery of interest income on
nonaccrual loans occurs when we receive payment 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
expected credit losses in the portfolio.
                                                                            

Fiscal Years Ended September 30,

                                     Included within F/S Line
              Item                           Item(s):                 2019                     2018               2017
                                                                           

(dollars in thousands) Provision for loan and lease Provision for loan and lease losses

                            losses                         $    40,947$  17,986$  21,539

Net other repossessed property Net loss on repossessed charges

                           property and other related
                                  expenses                             4,367                   4,369              1,749

Reversal of interest income on Interest income on loans nonaccrual loans

                                                         312                   1,901                930
Loan fair value adjustment        Net increase in fair value of
related to credit                 loans at fair value                  7,664                     194                936
Total                                                            $    53,290$  24,450$  25,154


Total credit-related charges for fiscal year 2019 increased $28.8 million, or
118.0%, compared to fiscal year 2018. The increase in total credit-related
charges was primarily driven by an increase in net charge-offs in fiscal year
2019, mainly concentrated in the agriculture and commercial non-real estate
segments of the loan portfolio. Total credit-related charges for fiscal year
2018 decreased $0.7 million, or 2.8%, compared to fiscal year 2017 primarily
driven by a decrease in net charge-offs, partially offset by higher expenses
associated with other repossessed property.
Noninterest Income
The following table presents noninterest income for the fiscal years ended
September 30, 2019, 2018 and 2017.
                                                                   Fiscal 

Years Ended September 30,

                                                            2019                     2018              2017
                                                                        (dollars in thousands)
Noninterest income
Service charges and other fees                         $    43,893$  51,077$ 55,725
Wealth management fees                                       8,914                   9,219             9,118
Mortgage banking income, net                                 4,848                   5,842             7,928
Net (loss) gain on sale of securities                         (178)                      6                75
Other                                                        5,287                   8,276             5,699
Subtotal, product and service fees                          62,764                  74,420            78,545

Net increase (decrease) in fair value of loans at fair value

                                                       61,412                 (45,407)          (65,231)
Net realized and unrealized (loss) gain on derivatives     (63,444)                 44,596            49,900

Subtotal, loans at fair value and related derivatives (2,032)

           (811)          (15,331)
Total noninterest income                               $    60,732

$ 73,609$ 63,214



Our noninterest income is comprised of the various fees we charge our customers
for products and services we provide and the impact of changes in fair value of
loans for which we have elected the fair value treatment and realized and
unrealized gains (losses) on the related interest rate swaps we utilize to
manage interest rate risk on these loans. While we are required under U.S. GAAP
to present both components within total noninterest income, we believe it is
helpful to analyze the two broader components of noninterest income separately
to better understand the underlying performance of the business.
Noninterest income was $60.7 million for fiscal year 2019, compared with $73.6
million for fiscal year 2018, a decrease of $12.9 million or 17.5%, which
increased $10.4 million, or 16.4%, from $63.2 million for fiscal year 2017.
Significant components of noninterest income are described in further detail
below.
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Product and Service Fees. We recognized $62.8 million of noninterest income
related to product and service fees in fiscal year 2019, a decrease of $11.6
million, or 15.7%, from $74.4 million for fiscal year 2018. The decrease was due
to a $7.2 million decrease in services charges and other fees combined with a
$3.0 million decrease in other income. The decrease in service charges and other
fees was primarily due to the impact of adopting the revenue recognition
accounting standard in fiscal year 2019, which resulted in netting $5.7 million
of credit and debit card network expenses against related interchange income,
combined with a decrease in net overdraft and non-sufficient funds income. The
decrease in other income compared to the prior period was due to a one-time gain
on the sale of Visa, Inc. Class B common stock shares and a sign on bonus
received from a service provider in fiscal year 2018.
Noninterest income related to product and service fees for the fiscal year 2018
decreased $4.1 million, or 5.3%, from $78.5 million for fiscal year 2017. The
decrease was primarily attributable to decreases of $4.6 million, or 8.3%, in
service charges and other fees and $2.1 million, or 26.3%, in mortgage banking
income, partially offset by a $2.6 million increase, or 45.2%, in other income.
The decrease in service charges and other fees reflects the impact of the
"Durbin Amendment" limit on debit card interchange income that became effective
in July 2017. The decrease in mortgage banking income was due to fewer loans
sold during the fiscal year, while the increase in other income was primarily
driven by a gain on the sale of Visa, Inc. Class B common stock shares and the
sign on bonus noted previously.
Loans at fair value and related derivatives. As discussed in "-Analysis of
Financial Condition-Derivatives," changes in the fair value of loans for which
we have elected the fair value treatment and realized and unrealized gains and
losses on the related derivatives are recognized within noninterest income. For
fiscal years 2019, 2018 and 2017 these items accounted for $(2.0) million,
$(0.8) million and $(15.3) million, respectively. The change during fiscal year
2019 was driven by a $6.0 million reduction in the current cost of interest rate
swaps and a $1.7 million increase in swap fees combined with a net unfavorable
change in the credit risk adjustment of $8.9 million. The change during fiscal
year 2018 was driven by a $9.0 million reduction in the current cost of interest
rate swaps and a $4.7 million increase in swap fees combined with a net
favorable change in the credit risk adjustment of $(0.8) million. We believe
that the current realized loss on the derivatives economically offsets the
interest income earned on the related loans. We present elsewhere the adjusted
net interest income and adjusted net interest margin reflecting the metrics we
use to manage the business.
Noninterest Expense
The following table presents noninterest expense for fiscal years September 30,
2019, 2018 and 2017.
                                                                  Fiscal Years Ended September 30,
                                                             2019                2018               2017
                                                                       (dollars in thousands)
Noninterest expense
Salaries and employee benefits                          $   136,305$ 135,352$ 128,135
Data processing and communication                            24,077             29,805             28,288
Occupancy and equipment                                      20,784             20,330             19,817
Professional fees                                            14,579             17,891             15,038
Advertising                                                   4,493              4,507              3,983
Net loss on repossessed property and other related
expenses                                                      4,367              4,369              1,749
Acquisition expenses                                              -                  -                710
Other                                                        20,293             19,171             18,923
Total noninterest expense                               $   224,898

$ 231,425$ 216,643



Noninterest expense was $224.9 million for fiscal year 2019 compared with $231.4
million for fiscal year 2018, a decrease of $6.5 million, or 2.8%, which was an
increase of $14.8 million, or 6.8%, compared to $216.6 million in fiscal year
2017. Our efficiency ratio was 45.8% for fiscal year 2019, 47.1% for fiscal year
2018 and 46.5% for fiscal year 2017. For more information on our efficiency
ratio, see "-Non-GAAP Financial Measures" and for a reconciliation to the most
directly comparable GAAP financial measure, see "Item 6. Selected Financial
Data-Non-GAAP Financial Measures Reconciliations." Significant changes in
components of noninterest expense are described in further detail below.
Salaries and Employee Benefits. Salaries and employee benefits are the largest
component of noninterest expense and include the cost of incentive compensation,
stock compensation, benefit plans, health insurance and payroll taxes. These
expenses were $136.3 million for fiscal year 2019, an increase of $0.9 million,
or 0.7%, from $135.4 million for fiscal year 2018. The majority of the increase
was driven by annual merit increases partially offset by a reduction in health
insurance costs during the period. Salaries and employee benefits for fiscal
year 2018 increased $7.3 million, or 5.6%, from $128.1 million for fiscal year
2017. The majority of the increase was driven by living wage increases in
response to federal tax reform and annual merit increases.
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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 $24.1 million for
fiscal year 2019 and $29.8 million for fiscal year 2018, a decrease of $5.7
million, or 19.2%. This decrease was due to the impact of adopting the revenue
recognition standard as discussed in noninterest income above. Expenses for data
processing and communication for fiscal year 2018 increased $1.5 million, or
5.4%, from $28.3 million for fiscal year 2017. The increase was driven primarily
by an estimated breakage cost of an existing contract.
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 were $20.8
million for fiscal year 2019 and $20.3 million for fiscal year 2018, an increase
of $0.5 million, or 2.2%. Expenses for occupancy and equipment for fiscal year
2018 increased $0.5 million, or 2.6%, from $19.8 million for fiscal year 2017.
The increases in fiscal years 2019 and 2018 were primarily due to annual
increases in rent, utilities and property tax expenses.
Professional Fees. Professional fees include our FDIC and FICO assessments, 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 $14.6 million for fiscal year
2019 and $17.9 million for fiscal year 2018, a decrease of $3.3 million, or
18.5%. Expenses for professional fees for fiscal year 2018 increased $2.9
million, or 19.0%, from $15.0 million for fiscal year 2017. Professional fees
decreased in fiscal year 2019 due to the discontinuation of the surcharge for
banks with assets exceeding $10.0 million in our FDIC assessment and increased
in fiscal year 2018 due to an increase in our FDIC assessment as a result of
exceeding $10.0 billion in total assets.
Net Loss on Repossessed Property and Other Assets. Our net loss on the sale of
repossessed property and other assets was $4.4 million for both fiscal years
2019 and 2018. Net loss on the sale of repossessed property and other assets for
fiscal year 2018 increased $2.7 million, or 149.8%, from $1.7 million for fiscal
year 2017. The increase in fiscal year 2018 was primarily due to the expenses
related to the foreclosure of a single other repossessed property.
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
$20.3 million in fiscal year 2019 and $19.2 million in fiscal year 2018, an
increase of $1.1 million, or 5.9%. The increase was primarily due to increases
in loan expenses. Other noninterest expenses for fiscal year 2018 increased $0.3
million, or 1.3%, from $18.9 million in fiscal year 2017. The increase was
primarily due to an increase in other repossessed property costs prior to
foreclosure.
Our efficiency ratio was 45.8%, 47.1% and 46.5% for the fiscal years 2019, 2018
and 2017, respectively. For more information on our efficiency ratio, see
"-Non-GAAP Financial Measures" and for a reconciliation to the most directly
comparable GAAP financial measure, see "Item 6. Selected Financial Data-Non-GAAP
Financial Measures Reconciliations."
Provision for Income Taxes
The provision for income taxes varies due to the amount of taxable income, the
investments in tax-advantaged securities and tax credit funds and the rates
charged by federal and state authorities. As a result of the Tax Reform Act of
2017, we moved to a fully phased in statutory federal tax rate of 21.0% in
fiscal year 2019 versus a blended statutory federal rate of 24.5% in fiscal year
2018 and a statutory federal rate of 35.0% in fiscal year 2017. The provision
for income taxes of $48.2 million in fiscal year 2019 represents an effective
tax rate of 22.4%, compared to $74.1 million or 31.9%, for fiscal year 2018 and
$69.4 million or 32.4%, for fiscal year 2017. Excluding the deferred taxes
revaluation as a result of the Tax Reform Act, the effective tax rate was 26.1%
for fiscal year 2018.
Return on Assets and Equity
The table below presents our return on average total assets, return on average
common equity and return on average tangible common equity to average assets
ratio at and for the dates presented.
                                                                  Fiscal 

Years Ended September 30,

                                                         2019                    2018                   2017
Return on average total assets                               1.33  %                1.34  %                1.27  %
Return on average common equity                               9.1  %                 8.8  %                 8.5  %
Return on average tangible common equity ¹                   15.3  %                15.3  %                15.4  %

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, see "-Non-GAAP Financial Measures" and for a reconciliation to the
most directly comparable GAAP financial measure, see "Item 6. Selected Financial Data-Non-GAAP Financial Measures
Reconciliations".



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Analysis of Financial Condition
The following table highlights certain key financial and performance information
for fiscal years ended September 30, 2019, 2018 and 2017.
                                                                             As of September 30,
                                                              2019                     2018                  2017
                                                                           (dollars in thousands)
Balance Sheet and Other Information
Total assets                                          $    12,788,301$ 12,116,808$ 11,690,011
Loans ¹                                                     9,706,763                9,415,924             8,968,553
Allowance for loan and lease losses                            70,774                   64,540                63,503
Deposits                                                   10,300,339                9,733,499             8,977,613
Stockholders' equity                                        1,900,249                1,840,551             1,755,000
Tangible common equity ²                              $     1,155,052$  1,093,816$  1,006,603
Tier 1 capital ratio                                             11.7     %               12.0  %               11.4  %
Total capital ratio                                              12.7     %               13.0  %               12.5  %
Tier 1 leverage ratio                                            10.1     %               10.7  %               10.3  %
Common equity tier 1 ratio                                       11.0     %               11.3  %               10.7  %
Tangible common equity / tangible assets ²                        9.6     %                9.6  %                9.2  %
Book value per share - GAAP                           $         33.76             $      31.24$      29.83
Tangible book value per share ²                       $         20.52             $      18.57$      17.11
Nonaccrual loans / total loans                                   1.10     %               1.52  %               1.54  %
Net charge-offs (recoveries) / average total loans               0.36     %               0.18  %               0.26  %
Allowance for loan and lease losses / total loans                0.73     %               0.69  %               0.71  %

1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees
and costs and loans in process.
2 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more
information on this non-GAAP financial measure, see "-Non-GAAP Financial Measures" and for a reconciliation to the most
directly comparable GAAP financial measure, see "Item 6. Selected Financial Data-Non-GAAP Financial Measures
Reconciliations".


Our total assets were $12.79 billion at September 30, 2019, compared with $12.12
billion at September 30, 2018 and $11.69 billion at September 30, 2017. The
increase in total assets for each of the fiscal years 2019 and 2018 was
primarily attributable to growth in loans and securities available for sale,
partially offset by a reduction in cash and cash equivalents compared to the
prior period.
At September 30, 2019, loans were $9.71 billion, an increase of $290.8 million,
or 3.1%, from $9.42 billion at September 30, 2018, which increased $447.4
million, or 5.0%, compared to $8.97 billion at September 30, 2017. The majority
of the growth for fiscal year 2019 occurred in the CRE segment of the portfolio,
which grew by $463.1 million, mainly across the non-owner segment, partially
offset by a reduction of $174.0 million in the agriculture segment of the
portfolio.
Total deposits were $10.30 billion at September 30, 2019, an increase of $566.8
million, or 5.8%, from $9.73 billion at September 30, 2018, which increased
$755.9 million, or 8.4%, from $8.98 billion at September 30, 2017.
Noninterest-bearing deposits were $1.96 billion, a 6.1% increase for the fiscal
year and interest-bearing deposits were $8.34 billion, a 5.7% increase for the
fiscal year. FHLB and other borrowings increased slightly by $65.0 million, or
23.6%, for the fiscal year.
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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,
                                                   2019                   2018                 2017                 2016                 2015
                                                                                    (dollars in thousands)
Unpaid principal balance:
Commercial real estate ¹
Originated                                  $   4,824,827$ 4,255,272$ 3,628,235$ 3,171,516$ 2,708,512
Acquired                                          267,583                374,058              496,570              582,591              137,236
Total                                           5,092,410              4,629,330            4,124,805            3,754,107            2,845,748
Agriculture ¹
Originated                                      1,932,722              2,082,778            1,990,648            1,974,226            1,841,437
Acquired                                           75,922                 99,910              131,490              194,711               20,028
Total                                           2,008,644              2,182,688            2,122,138            2,168,937            1,861,465
Commercial non-real estate ¹
Originated                                      1,691,026              1,656,563            1,670,349            1,601,328            1,591,974
Acquired                                           28,930                 43,424               48,565               71,838               17,536
Total                                           1,719,956              1,699,987            1,718,914            1,673,166            1,609,510
Residential real estate
Originated                                        696,403                682,615              724,906              746,384              714,855
Acquired                                          115,805                154,954              207,986              274,574              208,290
Total                                             812,208                837,569              932,892            1,020,958              923,145
Consumer
Originated                                         47,324                 43,325               56,467               59,850               68,840
Acquired                                            4,601                  6,364               10,092               16,423                4,209
Total                                              51,925                 49,689               66,559               76,273               73,049
Other lending
Originated                                         47,541                 46,487               43,132               42,398               38,371
Acquired                                                -                      -                   75                   79                    -
Total                                              47,541                 46,487               43,207               42,477               38,371
Total originated                                9,239,843              8,767,040            8,113,737            7,595,702            6,963,989
Total acquired                                    492,841                678,710              894,778            1,140,216              387,299
Total unpaid principal balance                  9,732,684              9,445,750            9,008,515            8,735,918            7,351,288
Less: Unamortized discount on acquired
loans                                             (13,655)               (18,283)             (29,121)             (39,947)             (19,264)
Less: Unearned net deferred fees and costs
and loans in process                              (12,266)               (11,543)             (10,841)             (13,327)              (6,826)
Total loans                                     9,706,763              9,415,924            8,968,553            8,682,644            7,325,198
Allowance for loan and lease losses               (70,774)               (64,540)             (63,503)             (64,642)             (57,200)
Loans, net                                  $   9,635,989            $ 

9,351,384 $ 8,905,050$ 8,618,002$ 7,267,998

1 Unpaid principal balance for commercial real estate, agriculture and commercial non-real estate loans includes fair value adjustments associated with long-term fixed-rate loans where we have entered into interest rate swaps to manage our interest rate risk.



During the fiscal year ended September 30, 2019, total loans grew by $290.8
million, or 3.1%. The growth was primarily focused in CRE loans, which grew
$463.1 million, or 10.0%, partially offset by agriculture loans, which decreased
$174.0 million, or 8.0%. Over the same time period, commercial non-real estate,
residential real estate, consumer and other loan balances remained generally
stable. During the fiscal year ended September 30, 2018, total loans grew by
$447.4 million, or 5.0%. The growth was primarily focused in CRE loans, which
grew $504.5 million, or 12.2%, partially offset by residential real estate
loans, which declined $95.3 million, or 10.2%. Over the same time period,
agriculture, commercial non-real estate, consumer and other loan balances
remained stable.
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The following table presents an analysis of the unpaid principal balance of our
loan portfolio at September 30, 2019, by loan and collateral type and by each of
the six major geographic areas we use to manage our markets.
                                                                                                          September 30, 2019
                                                              Iowa /
                                            South             Kansas /                                                               North Dakota /
                                            Dakota            Missouri           Nebraska           Arizona            Colorado        Minnesota        Other ²           Total            %
                                                                                                        (dollars in thousands)
Commercial real estate ¹              $   1,112,863$   1,430,247$     920,062$     516,445$     853,975$ 231,500$    27,318$   5,092,410        52.3  %
Agriculture ¹                               599,664            358,610            140,570            738,580            166,635          2,183            2,402          2,008,644        20.6  %
Commercial non-real estate ¹                307,080            736,273            389,917             83,256            108,400          6,614           88,416          1,719,956        17.7  %
Residential real estate                     203,497            235,330            170,580             36,524            129,189         20,197           16,891            812,208         8.4  %
Consumer                                     17,244             19,315             12,386                487              1,441            502              550             51,925         0.5  %
Other lending                                     -                  -                  -                  -                  -              -           47,541             47,541         0.5  %
Total                                 $   2,240,348$   2,779,775$   1,633,515$   1,375,292$   1,259,640$ 260,996$   183,118$   9,732,684       100.0  %
% by location                                  23.0    %          28.6    %          16.8    %          14.1    %          12.9    %       2.7    %         1.9    %         100.0  %

1 Unpaid principal balance for commercial real estate, agriculture and commercial non-real estate loans includes fair value adjustments associated with long-term fixed-rate loans where we have entered into interest rate swaps to manage our interest rate risk.

2 Balances in this column represent acquired workout loans and certain other loans managed by our workout staff, commercial and consumer credit card loans, fair value adjustments related to acquisitions and loans for which we have elected the fair value option, which could result in a negative carrying amount in the event of a net negative fair value adjustment.



The following table presents additional detail regarding our CRE, agriculture,
commercial non-real estate and residential real estate loans at September 30,
2019.
                                          September 30, 2019
                                        (dollars in thousands)
Construction and development           $              463,757
Owner-occupied CRE                                  1,411,199
Non-owner-occupied CRE                              2,853,131
Multifamily residential real estate                   364,323
Commercial real estate                              5,092,410
Agriculture real estate                               957,568
Agriculture operating loans                         1,051,076
Agriculture                                         2,008,644
Commercial non-real estate                          1,719,956
Home equity lines of credit                           185,444
Closed-end first lien                                 498,108
Closed-end junior lien                                 36,865
Residential construction                               91,791
Residential real estate                               812,208
Consumer                                               51,925
Other                                                  47,541
Total unpaid principal balance         $            9,732,684


Commercial Real Estate. CRE includes owner-occupied CRE, non-owner-occupied CRE,
construction and development lending, and multi-family residential real estate.
While CRE lending is a significant component of our overall loan portfolio, we
are committed to managing our exposure to riskier construction and development
deals 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, 2019, we were ranked the sixth-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, due in part to the effects of recently imposed and proposed tariffs on
the export of agricultural products, waivers of the amount of ethanol to be
blended into the country's gasoline production and isolated areas of flooding
within parts of the Midwest in which certain of our agricultural borrowers
conduct their operations. While these events, or a further downturn in the
agriculture economy, could directly and adversely affect our agricultural loan
portfolio and indirectly and adversely impact other lending
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categories including commercial non-real estate, CRE, residential real estate
and consumer, we believe there continues to typically be strong secondary
sources of repayment and low borrower leverage for the agriculture loan
portfolio.
Commercial Non-Real Estate. Commercial non-real estate, or business lending,
represents one of our core competencies. We believe that providing a tailored
range of integrated products and services, including lending, to small- and
medium-enterprise customers is the business at which we excel and through which
we can generate favorable returns for our stockholders. We offer a number of
different products including working capital and other shorter-term lines of
credit, fixed-rate loans and variable rate loans with interest rate swaps over a
wide range of terms, and variable-rate loans with varying terms.
Residential Real Estate. Residential real estate lending reflects 1-to-4-family
real estate construction loans, closed-end first-lien mortgages (primarily
single-family long-term first mortgages resulting from acquisitions of other
banks), closed-end junior-lien mortgages and HELOCs. Our closed-end first-lien
mortgages include a small percentage of single-family first mortgages that we
originate and do not subsequently sell into the secondary market, including some
jumbo products, adjustable-rate mortgages and rural home mortgages. Conversely,
a large percentage of our total single-family first mortgage originations are
sold into the secondary market in order to meet our interest rate risk
management objectives.
Consumer. Our consumer lending offering comprises a relatively small portion of
our total loan portfolio, and predominantly reflects small-balance secured and
unsecured products marketed by our branches.
Other Lending. Other lending includes all other loan relationships that do not
fit within the categories above, primarily consumer and commercial credit cards,
customer deposit account overdrafts, and lease receivables.
The following table presents the maturity distribution of our loan portfolio as
of September 30, 2019. The maturity dates were determined based on the
contractual maturity date of the loan.
                                                                                              September 30, 2019
                                                             1 Year or Less          >1 Through 5 Years           >5 Years              Total
                                                                                            (dollars in thousands)
Maturity distribution:
Commercial real estate                                      $      516,537$       2,201,971$ 2,373,902$ 5,092,410
Agriculture                                                        961,934                    668,418              378,292            2,008,644
Commercial non-real estate                                         824,653                    554,238              341,065            1,719,956
Residential real estate                                            150,326                    256,811              405,071              812,208
Consumer                                                             8,308                     37,157                6,460               51,925
Other lending                                                       47,541                          -                    -               47,541
Total                                                       $    2,509,299$       3,718,595$ 3,504,790$ 9,732,684


The following table presents the distribution, as of September 30, 2019, of our
loans that were due after one year between fixed and variable interest rates.
                                             September 30, 2019
                                 Fixed            Variable           Total
                                           (dollars in thousands)
Maturity distribution:
Commercial real estate       $ 2,170,598$ 2,405,275$ 4,575,873
Agriculture                      803,985           242,725         1,046,710
Commercial non-real estate       581,326           313,977           895,303
Residential real estate          287,066           374,816           661,882
Consumer                          40,659             2,958            43,617
Total                        $ 3,883,634$ 3,339,751$ 7,223,385


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
$36.8 million as of September 30, 2019, an increase of $13.7 million, or 59.3%,
compared to $23.1 million at September 30, 2018, which increased $14.1 million,
or 156.8%, compared to $9.0 million at September 30, 2017. The increase in
fiscal year 2019 was due to one large relationship moving into other repossessed
property during the year. The increase in fiscal year 2018 was primarily due to
the addition of one large property during the period.
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The following table presents our other repossessed property balances for the
period indicated.
                                                   Fiscal Years Ended September 30,
                                               2019                  2018           2017
                                                        (dollars in thousands)
Balance, beginning of period              $    23,074$  8,985$ 10,282
Additions to other repossessed property        25,668               25,926  

7,786

Valuation adjustments and other                (2,328)              (1,447)        (1,630)
Sales                                          (9,650)             (10,390)        (7,453)
Balance, end of period                    $    36,764$ 23,074$  8,985


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 a specific
reserve. If there is a collateral shortfall, we generally work with the borrower
for a principal reduction, pledge of additional collateral or guarantee. If
these alternatives are not available, we engage in formal collection activities.
Restructured loans for which we grant payment or significant interest rate
concessions are placed on nonaccrual status until collectability improves and a
satisfactory payment history is established, generally by the receipt of at
least six consecutive payments.
The following table presents the dollar amount of nonaccrual loans, other
repossessed property, restructured performing loans and accruing loans over 90
days past due, at the end of the dates indicated. We entered into a loss-sharing
agreement with the FDIC related to certain assets (loans and other repossessed
property) acquired from TierOne Bank on June 4, 2010. Loans covered by a FDIC
loss-sharing agreement are generally pooled with other similar loans and are
accreting purchase discount into income each period. Subject to compliance with
the applicable loss-sharing agreement, we are indemnified by the FDIC at a rate
of 80% for any future credit losses for single-family real estate loans and
other repossessed property covered by the FDIC loss-sharing agreement through
June 4, 2020.
                                                                               As of September 30,
                                                 2019               2018               2017               2016               2015
                                                                              (dollars in thousands)
Nonaccrual loans ¹
Commercial real estate ²                     $  14,973$  22,908

$ 14,912$ 20,624$ 16,870 Agriculture ²

                                   77,880            107,226            100,504             68,526             24,569
Commercial non-real estate ²                     9,502              6,887             13,674             27,307             14,287
Residential real estate
Loans covered by a FDIC loss-sharing
agreement                                        2,190              2,699              4,893              4,095              5,317
Loans not covered by a FDIC loss-sharing
agreement                                        2,572              3,425              4,206              5,599              7,124
Total                                            4,762              6,124              9,099              9,694             12,441
Consumer ²                                          74                 61                123                244                122

Total nonaccrual loans covered by a FDIC
loss-sharing agreement                           2,190              2,699              4,893              4,095              5,317
Total nonaccrual loans not covered by a FDIC
loss-sharing agreement                         105,001            140,507            133,419            122,300             62,972
Total nonaccrual loans                         107,191            143,206            138,312            126,395             68,289
Other repossessed property                      36,764             23,074              8,985             10,282             15,892
Total nonperforming assets                     143,955            166,280            147,297            136,677             84,181
Restructured performing loans                   44,842             19,783             32,490             46,568             60,371

Total nonperforming and restructured assets $ 188,797$ 186,063

$ 179,787$ 183,245$ 144,552 Accruing loans 90 days or more past due $ 11,180$ 156

$ 1,859$ 1,991$ 58 Nonperforming restructured loans included in total nonaccrual loans

                       $  30,073$  77,156$  71,334$  36,778$  13,966
Percent of total assets
Nonaccrual loans not covered by a FDIC
loss-sharing agreement                            0.82  %            1.16  %            1.14  %            1.06  %            0.64  %
Total nonaccrual loans                            0.84  %            1.18  %            1.18  %            1.10  %            0.70  %
Other repossessed property                        0.29  %            0.19  %            0.08  %            0.09  %            0.16  %
Nonperforming assets ³                            1.13  %            1.37  %            1.26  %            1.19  %            0.86  %
Nonperforming and restructured assets ³           1.48  %            1.54  %            1.54  %            1.59  %            1.48  %

1 Includes nonperforming restructured loans. 2 Loans not covered by FDIC loss-sharing agreement. 3 Includes nonaccrual loans, which includes nonperforming restructured loans.



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At September 30, 2019, our nonperforming assets were 1.13% of total assets,
compared to 1.37% at September 30, 2018. Total nonaccrual loans decreased by
$36.0 million, or 25.2% compared to September 30, 2018, which increased $4.9
million, or 3.5%, compared to September 30, 2017. The decrease in nonaccrual
loans in fiscal year 2019 was primarily driven by our focus on exiting loans in
all categories with a higher risk profile. The increase in nonaccrual loans for
fiscal year 2018 was primarily driven by the deterioration of a relationship in
the CRE portfolio that has been closely monitored for a number of quarters,
partially offset by improvements in the commercial non-real estate portfolio.
We recognized approximately $2.6 million of interest income on loans that were
on nonaccrual for the fiscal year ended 2019. Excluding loans covered by a FDIC
loss-sharing agreement, we had average nonaccrual loans (calculated as a
two-point average) of $122.8 million outstanding during fiscal year 2019. Based
on the average loan portfolio yield for these loans for the current fiscal year,
we estimate that interest income would have been $6.3 million higher during the
period had these loans been accruing.
We consistently monitor all loans internally rated "watch" or worse because that
rating indicates we have identified some potential weakness emerging; but loans
rated "watch" will not necessarily become problem loans or become impaired.
Aside from the loans on the watch list, we do not believe we have any potential
problem loans that are not already identified as nonaccrual, past due or
restructured as it is our policy to promptly reclassify loans as soon as we
become aware of doubts as to the borrowers' ability to meet repayment terms.
When we grant concessions to borrowers that we would not otherwise grant if not
for the borrowers' financial difficulties, such as reduced interest rates or
extensions of loan periods, we consider these modifications TDRs.
The table below outlines total TDRs, split between accruing and nonaccruing
loans, at each of the dates indicated.
                                     Fiscal Years Ended September 30,
                                  2019                2018            2017
                                          (dollars in thousands)
Commercial real estate
Performing TDRs              $   17,145$  2,649$   1,121
Nonperforming TDRs                  904               2,616           5,351
Total                            18,049               5,265           6,472
Agriculture
Performing TDRs                  22,929              13,248          22,678
Nonperforming TDRs               24,762              73,741          59,633
Total                            47,691              86,989          82,311
Commercial non-real estate
Performing TDRs                   4,398               3,420           8,369
Nonperforming TDRs                4,257                 656           5,641
Total                             8,655               4,076          14,010
Residential real estate
Performing TDRs                     263                 389             311
Nonperforming TDRs                  102                 143             688
Total                               365                 532             999
Consumer
Performing TDRs                     107                  77              11
Nonperforming TDRs                   48                   -              21
Total                               155                  77              32
Total performing TDRs            44,842              19,783          32,490
Total nonperforming TDRs         30,073              77,156          71,334
Total TDRs                   $   74,915$ 96,939$ 103,824


As of September 30, 2019, total performing TDRs increased $25.1 million, or
126.7%, compared to September 30, 2018, which decreased $12.7 million, or 39.1%,
compared to September 30, 2017. Performing TDRs increased from September 30,
2018 primarily due to one large relationship in the commercial real estate
segment of the loan portfolio. Performing TDRs decreased from September 30, 2017
primarily due to a large relationship in the agriculture portfolio that
transferred from performing to nonperforming TDR status. As of September 30,
2019, total nonperforming TDRs decreased $47.1 million, or 61.0%, compared to
September 30, 2018, which increased $5.8 million, or 8.2%, compared to
September 30, 2017. Nonperforming TDRs decreased from September 30, 2018 mainly
due to two large relationships in the agriculture portfolio, one that moved into
other repossessed property and one that paid off. Nonperforming TDRs increased
from September 30, 2017 mainly due to the large relationship in the agriculture
portfolio that moved to nonperforming status.
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The following table presents nonaccrual loans, TDRs, and other repossessed
property covered by the remaining FDIC loss-sharing agreement; a rollforward of
the allowance for loan and lease losses for loans covered by the remaining FDIC
loss-sharing agreement; a rollforward of allowance for loan and lease losses for
only ASC 310-30 loans covered by the remaining FDIC loss-sharing agreement; and
a rollforward of other repossessed property covered by the remaining FDIC
loss-sharing agreement at and for the periods presented.
                                                                     At and 

for Fiscal Years Ended September 30,

                                                      2019              2018             2017             2016             2015
                                                                               (dollars in thousands)
Assets covered by a FDIC loss-sharing agreement
Nonaccrual loans ¹                                $   2,190$ 2,699$ 4,893$ 4,095$  5,317
TDRs                                                     43              154              191              255               425
Other repossessed property                                -              131                -              106                61
Allowance for loan and lease losses, loans
covered by a FDIC loss-sharing agreement
Balance, beginning of period                      $     262          $   

196 $ 907$ 1,625$ 5,108 Additional impairment recorded

                          309              386              196                -               782
Recoupment of previously-recorded impairment           (379)            (302)            (892)            (677)           (1,701)
Charge-offs                                             (79)             (18)             (15)             (41)                -
Expiration of loss-sharing arrangement                    -                -                -                -            (2,564)
Balance, end of period                            $     113          $   

262 $ 196$ 907$ 1,625


Other repossessed property covered by a
loss-sharing agreement
Balance, beginning of period                      $     131          $     

- $ 106$ 61$ 10,628 Additions to other repossessed property

                   -              131               14              182             1,666
Valuation adjustments and other                           -                -                -              (15)           (2,034)
Sales                                                  (131)               -             (120)            (122)           (7,031)
Expiration of loss-sharing agreement                      -                -                -                -            (3,168)
Balance, end of period                            $       -          $   

131 $ - $ 106$ 61

1 Includes nonperforming restructured loans.



Allowance for Loan and Lease Losses
We establish an allowance for the inherent risk of probable losses within our
loan portfolio. The allowance for loan and lease losses is management's best
estimate of probable credit losses that are incurred in the loan portfolio. We
determine the allowance for loan and lease losses based on an ongoing
evaluation, driven primarily by monitoring changes in loan risk grades,
delinquencies and other credit risk indicators, which is an inherently
subjective process. We consider the uncertainty related to certain industry
sectors and the extent of credit exposure to specific borrowers within the
portfolio. In addition, we consider concentration risks associated with the
various loan portfolios and current economic conditions that might impact the
portfolio. All of these estimates are susceptible to significant change. Changes
to the allowance for loan and lease losses are made by charges to the provision
for loan and lease losses. Loans deemed to be uncollectible are charged off
against the allowance for loan and lease losses. Recoveries of amounts
previously charged-off are credited to the allowance for loan and lease losses.
Our allowance for loan and lease losses consists of two components. For
non-impaired loans, we calculate a weighted average loss ratio of 12-, 36- and
60-month historical realized losses by collateral type; adjust as necessary for
our interpretation of current economic conditions, environmental factors and
current portfolio trends including credit quality, concentrations, aging of the
portfolio and/or significant policy and underwriting changes not entirely
covered by the calculated historical loss rates; and apply the loss rates to
outstanding loan balances in each collateral category. We calculate the weighted
average ratio of 12-, 36- and 60-month historical realized losses for each
collateral type by dividing the average net annual charge-offs by the average
outstanding loans of such type subject to the calculation for each of the 12-,
36- and 60-month periods, then averaging those three results. For impaired
loans, we estimate our exposure for each individual relationship, given the
current payment status of the loan and the value of the underlying collateral as
supported by third party appraisals, broker's price opinions, and/or the
borrower's financial statements and internal valuation assessments, each
adjusted for liquidation costs. Any shortfall between the liquidation value of
the underlying collateral and the recorded investment value of the loan is
considered the required specific reserve amount. Actual losses in any period may
exceed allowance amounts. We evaluate and adjust our allowance for loan and
lease losses, and the allocation of the allowance between loan categories, each
month.
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The following table presents an analysis of our allowance for loan and lease losses, including provisions for loan and lease losses, charge-offs and recoveries, for the periods indicated.

At and for Fiscal Years Ended September 30,

                                                    2019                    2018                 2017                 2016                 2015
                                                                                     (dollars in thousands)
Allowance for loan and lease losses:
Balance, beginning of period                $         64,540           $    

63,503 $ 64,642$ 57,200$ 47,518 Provision charged to expense

                          41,506                17,754               22,210               18,011               19,718
(Improvement) impairment of ASC 310-30
loans                                                   (559)                  232                 (671)              (1,056)                (677)
Charge-offs:
Commercial real estate                                (1,511)               (3,925)              (2,043)              (3,625)              (1,971)
Agriculture                                          (24,847)               (9,473)              (7,853)              (4,294)                (606)
Commercial non-real estate                            (7,895)               (3,813)             (12,576)              (2,629)             (11,153)
Residential real estate                                 (998)                 (569)                (809)              (1,157)                (238)
Consumer                                                (452)                 (192)                (196)                (206)                (129)
Other lending                                         (1,358)               (1,932)              (2,403)              (2,255)              (1,617)
Total charge-offs                                    (37,061)              (19,904)             (25,880)             (14,166)             (15,714)
Recoveries:
Commercial real estate                                   567                   533                  485                  719                1,339
Agriculture                                              385                   332                  415                  556                  131
Commercial non-real estate                               392                   994                  652                1,429                3,407
Residential real estate                                  468                   337                  507                  495                  231
Consumer                                                 174                   141                  102                  149                  104
Other lending                                            362                   618                1,041                1,305                1,143
Total recoveries                                       2,348                 2,955                3,202                4,653                6,355
Net loan charge-offs                                 (34,713)              (16,949)             (22,678)              (9,513)              (9,359)
Balance, end of period                      $         70,774           $    64,540$    63,503$    64,642$    57,200

Average total loans for the period ¹        $      9,741,293           $ 

9,252,436 $ 8,760,869$ 7,912,457$ 7,071,987 Total loans at period end ¹

                 $      9,706,763$ 9,415,924$ 8,968,553$ 8,682,644$ 7,325,198
Ratios
Net charge-offs (recoveries) / average
total loans                                             0.36   %              0.18  %              0.26  %              0.12  %              0.13  %
Allowance for loan and lease losses to:
Total loans                                             0.73   %              0.69  %              0.71  %              0.74  %              0.78  %
Nonaccruing loans ²                                    67.40   %             45.93  %             47.60  %             52.86  %             90.83  %

1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and loans in process. 2 Nonaccruing loans excludes loans covered by FDIC loss-sharing agreement.



In the fiscal year 2019, we recorded net charge-offs of $34.7 million,
representing 0.36% of average total loans, an 18 basis point increase compared
to 0.18% of average total loans for fiscal year 2018. The increase in net
charge-offs in fiscal year 2019 was primarily driven by net charge-offs in the
agriculture segment of the loan portfolio, which included $18.7 million of net
charge-offs related to the cattle industry, and $7.5 million of net charge-offs
related to the commercial non-real estate segment of the loan portfolio.
At September 30, 2019, the allowance for loan and lease losses was 0.73% of our
total loan portfolio, a 4 basis point increase compared with 0.69% at
September 30, 2018. The balance of the ALLL increased from $64.5 million to
$70.8 million over the same period.
Additionally, a portion of our loans which are carried at fair value, totaling
$813.0 million and $865.4 million at September 30, 2019 and 2018, respectively,
have no associated allowance for loan and lease losses, but rather have a fair
value adjustment related to credit risk included within their carrying value,
thus driving the overall ratio of allowance for loan and lease losses to total
loans lower. The amount of fair value adjustment related to credit risk on these
loans was $6.8 million and $7.4 million at September 30, 2019 and 2018,
respectively, translating to an additional 0.07% and 0.08% of total loans at
September 30, 2019 and 2018, respectively. Finally, the total purchase discount
remaining on all acquired loans equates to 0.14% and 0.19% of total loans at
September 30, 2019 and 2018, respectively.
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The following tables present management's allocation of the allowance for loan
and lease losses by loan category, in both dollars and percentage of our total
allowance for loan and lease losses, to specific loans in those categories at
the dates indicated.
                                                                               September 30,
                                               2019              2018              2017              2016              2015
                                                                          (dollars in thousands)
Allocation of allowance for loan and lease
losses:
Commercial real estate                      $ 16,827$ 16,777$ 16,941$ 17,946$ 18,014
Agriculture                                   30,819            28,121            25,757            25,115            13,952
Commercial non-real estate                    17,567            13,610            14,114            12,990            15,996
Residential real estate                        4,095             4,749             5,347             7,106             8,025
Consumer                                         427               257               329               438               348
Other lending                                  1,039             1,026             1,015             1,047               865
Total                                       $ 70,774$ 64,540$ 63,503$ 64,642$ 57,200



                                                                                       September 30,
                                                  2019                  2018                 2017                 2016                 2015
Allocation of allowance for loan and lease
losses:
Commercial real estate                               23.8  %              26.0  %              26.7  %              27.8  %              31.5  %
Agriculture                                          43.5  %              43.6  %              40.6  %              38.9  %              24.4  %
Commercial non-real estate                           24.8  %              21.1  %              22.2  %              20.1  %              28.0  %
Residential real estate                               5.8  %               7.3  %               8.4  %              11.0  %              14.0  %
Consumer                                              0.6  %               0.4  %               0.5  %               0.6  %               0.6  %
Other lending                                         1.5  %               1.6  %               1.6  %               1.6  %               1.5  %
Total                                               100.0  %             100.0  %             100.0  %             100.0  %             100.0  %


Management will continue to evaluate the loan portfolio and assess economic
conditions in order to determine future allowance levels and the amount of loan
and lease loss provisions. We review the appropriateness of our allowance for
loan and lease losses on a monthly basis. Management monitors closely all past
due and restructured loans in assessing the appropriateness of its allowance for
loan and lease losses. In addition, we follow procedures for reviewing and
grading all substantial commercial and agriculture relationships at least
annually. Based predominantly upon the review and grading process, we determine
the appropriate level of the allowance in response to our assessment of the
probable risk of loss inherent in our loan portfolio. Management makes
additional loan and lease loss provisions when the results of our problem loan
assessment methodology or overall allowance testing of appropriateness indicates
additional provisions are required.
The review of problem loans is an ongoing process during which management may
determine that additional charge-offs are required or additional loans should be
placed on nonaccrual status. We have also recorded an allowance for unfunded
lending-related commitments that represents our estimate of incurred losses on
the portion of lending commitments that borrowers have not advanced. The balance
of the allowance for unfunded lending-related commitments was $0.5 million at
both September 30, 2019 and September 30, 2018 and is recorded in accrued
expenses and other liabilities in the consolidated balance sheet.
Investment Securities
The following table presents the amortized cost of each category of our
investment portfolio at the dates indicated.
                                                                September 30,
                                                   2019              2018              2017
                                                            (dollars in thousands)
U.S. Treasury securities                      $    94,178$   168,394$   228,039

Mortgage-backed securities:
Government National Mortgage Association          501,139           442,458 

511,457

Federal Home Loan Mortgage Corporation            463,974           297,380 

169,147

Federal National Mortgage Association             322,340           188,192 

170,247

Small Business Assistance Program                 316,502           260,458 

224,005

States and political subdivision securities        66,145            69,566            73,041

Other                                               1,006             1,006             1,006
Total                                         $ 1,765,284$ 1,427,454$ 1,376,942

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

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political subdivisions. Our investment portfolio serves as a means to
collateralize FHLB borrowings and public funds deposits, to earn net spread
income on excess deposits and to maintain liquidity and balance interest rate
risk. Since September 30, 2018, the fair value of the portfolio has increased by
$397.6 million, or 28.7%.
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, 2019.
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, 2019
                                                                                                                                    Due after five
                                         Due in one year                           Due after one year                                    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)
U.S.Treasury securities         $    44,761             1.68  %       $ 49,417          2.85  %       $      -              -  %         $      -              -  %       $         -              -  %       $     -                     -  %       $    94,178           2.29  %
Mortgage-backed securities                 -                -  %              -             -  %              -              -  %                -              -  %         1,603,955           2.51  %             -                     -  %         1,603,955           2.51  %
States and political subdivision
securities ¹ ²                        13,616             1.46  %         40,419          1.71  %         12,110           2.53  %                -              -  %                 -              -  %             -                     -  %            66,145           1.81  %
Other                                      -                -  %              -             -  %              -              -  %                -              -  %                 -              -  %         1,006                     -  %             1,006              -  %
Total                            $    58,377             1.63  %       $ 89,836          2.34  %       $ 12,110           2.53  %         $      -              -  %       $ 1,603,955           2.51  %       $ 1,006                     -  %       $ 1,765,284           2.47  %

1 Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount. 2 Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par.



Declines in the fair value of investment securities available for sale that are
deemed to be other-than-temporary are recognized in earnings as a realized loss,
and a new cost basis for the securities is established. In evaluating
other-than-temporary impairment, we consider the length of time and extent to
which the fair value has been less than amortized cost, the financial condition
and near-term prospects of the issuer, and our intent and ability to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value in the near term. Declines in the fair value
of debt securities below amortized cost are deemed to be other-than-temporary in
circumstances where: (1) we have the intent to sell a security; (2) it is
more-likely-than-not that we will be required to sell the security before
recovery of its amortized cost basis; or (3) we do not expect to recover the
entire amortized cost basis of the security. If we intend to sell a security or
if it is more-likely-than-not that we will be required to sell the security
before recovery, an other-than-temporary impairment loss is recognized in
earnings equal to the difference between the security's amortized cost basis and
its fair value. If we do not intend to sell the security or it is not
more-likely-than-not that it will be required to sell the security before
recovery, the other-than-temporary impairment write-down is separated into an
amount representing credit loss, which is recognized in earnings, and an amount
related to all other factors, which is recognized in other comprehensive income
(loss).
Deposits
We obtain funds from depositors by offering consumer and business
interest-bearing accounts and term time deposits. At September 30, 2019 and
September 30, 2018, our total deposits were $10.30 billion and $9.73 billion,
respectively, representing an increase of 5.8%, which was primarily spread
across brokered deposits, consumer and commercial deposit accounts. Our accounts
are federally insured by the FDIC up to the legal maximum.
The following table presents the balances and weighted average cost of our
deposit portfolio at the following dates.
                                                                                                September 30,
                                                               2019                                            2018                                            2017
                                                                  Weighted Avg.                         Weighted Avg.                        Weighted Avg.
                                                     Amount            Cost                 Amount          Cost                 Amount           Cost
                                                                                           (dollars in thousands)
Noninterest-bearing demand                       $  1,956,025                -  %       $ 1,842,704               -  %       $ 1,856,126                -  %
Interest-bearing demand                             6,248,638             1.00  %         6,043,717            0.95  %         5,847,432             0.55  %
Time deposits, greater than $250,000                  493,530             2.30  %           383,868            1.89  %           273,365             1.16  %
Time deposits, less than or equal to $250,000       1,602,146             1.68  %         1,463,210            1.29  %         1,000,690             0.78  %
Total                                            $ 10,300,339             0.98  %       $ 9,733,499            0.86  %       $ 8,977,613             0.48  %

At September 30, 2019 and 2018, we had $706.5 million and $600.2 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.

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Municipal public deposits constituted $1.04 billion and $959.4 million of our
deposit portfolio at September 30, 2019, and September 30, 2018, respectively,
of which $691.9 million and $622.1 million, respectively, were required to be
collateralized. Our top 10 depositors were responsible for 7.0% and 6.6% of our
total deposits at September 30, 2019 and September 30, 2018, respectively.
The following table presents deposits by region.
                                              September 30,
                                2019               2018              2017
                                         (dollars in thousands)
South Dakota               $  2,575,833$ 2,422,208$ 2,231,857
Iowa / Kansas / Missouri      2,936,256         2,757,408         2,561,315
Nebraska                      2,474,673         2,472,297         2,521,631
Arizona                         508,308           399,212           377,610
Colorado                      1,237,052         1,228,762         1,153,058
North Dakota / Minnesota         55,258            50,359            51,527
Corporate and other             512,959           403,253            80,615
Total deposits             $ 10,300,339$ 9,733,499$ 8,977,613


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, 2019 and September 30, 2018, our time deposits greater than
$250,000 totaled $493.5 million and $383.9 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, 2019.
                                                                          

September 30, 2019

                                                                Greater than         Less than or equal
                                                                  $250,000              to $250,000
                                                                        (dollars in thousands)
Remaining maturity:
Three months or less                                           $    105,363$     613,444
Over three through six months                                       106,654                408,358
Over six through twelve months                                      170,889                342,188
Over twelve months                                                  110,624                238,156
Total                                                          $    493,530$   1,602,146
Percent of total deposits                                               4.8  %                15.6    %


At September 30, 2019 and September 30, 2018, the average remaining maturity of
all time deposits was approximately 8 and 11 months, respectively. The average
time deposit amount per account was approximately $45,936 and $39,896 at
September 30, 2019 and September 30, 2018, respectively.
Derivatives
Beginning in the second quarter of fiscal year 2018, we entered 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 $56.8 million
and $37.4 million as of September 30, 2019 and September 30, 2018, 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 $0.1 million and $0.4 million at September 30, 2019 and
September 30, 2018, respectively, based on the fair value of the underlying
swaps.
In 2017 we began a new program of selling interest swaps directly to 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.
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
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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 current realized gain (loss) 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.
Short-Term Borrowings
Our primary sources of short-term borrowings include securities sold under
repurchase agreements and certain FHLB advances maturing within 12 months. The
following table presents certain information with respect to only our borrowings
with original maturities less than 12 months at and for the periods noted.
                                                           At and for 

Fiscal Years Ended September 30,

                                                            2019                  2018               2017
                                                                      (dollars in thousands)
Short-term borrowings:
Securities sold under agreements to repurchase       $       68,992$  90,907$ 132,636
FHLB advances                                                15,000             100,000            587,200

Total short-term borrowings                          $       83,992

$ 190,907$ 719,836

Maximum amount outstanding at any month-end during the period

                                           $      371,649$ 808,325$ 719,836
Average amount outstanding during the period         $      175,133$ 442,398$ 352,395
Weighted average rate for the period                           1.72   %            1.32  %            0.70  %
Weighted average rate as of date indicated                     0.91   %            0.80  %            1.24  %


Other Borrowings
In addition to FHLB short-term advances, we also have FHLB long-term borrowings
of $325.0 million and $175.0 million outstanding as of September 30, 2019 and
September 30, 2018, respectively.
We have outstanding $73.7 million and $73.6 million of junior subordinated
debentures to affiliated trusts in connection with the issuance of trust
preferred securities by such trusts as of September 30, 2019 and September 30,
2018, respectively. We are permitted under applicable laws and regulations to
count these trust preferred securities as part of our Tier 1 capital.
We issued $35.0 million of fixed-to-floating rate subordinated notes that mature
on August 15, 2025 through a private placement. The notes, which qualify as Tier
2 capital under Capital Rules in effect at September 30, 2019, have an interest
rate of 4.875 per annum, payable semi-annually on each February 15 and August
15, commencing on February 15, 2016 until August 15, 2020. During the fiscal
year 2019, we incurred $5.5 million in interest expense on all outstanding
subordinated debentures and notes compared to $5.0 million in fiscal year 2018.
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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, 2019. Customer
deposit obligations categorized as "not determined" include noninterest-bearing
demand accounts and interest-bearing demand accounts with no stated maturity
date.
                                                                                                 September 30, 2019
                                           Less Than 1 Year          1 to 2 Years          2 to 5 Years           >5 Years          Not Determined              Total
                                                                                               (dollars in thousands)
Contractual Obligations:
Customer deposits                         $      1,724,682          $    

250,248 $ 98,221$ 311$ 8,226,877

       $ 10,300,339
Securities sold under agreement to
repurchase                                          68,992                     -                     -                  -                       -       

68,992

FHLB advances and other borrowings                  15,000               120,000               205,000                  -                       -               340,000
Subordinated debentures                                  -                     -                     -             75,920                       -                75,920
Subordinated notes payable                               -                     -                     -             35,000                       -                35,000
Operating leases, net of sublease income             5,327                 4,193                 9,117              7,355                       -                25,992
Accrued interest payable                            16,091                     -                     -                  -                       -                16,091
Interest on FHLB advances                            9,012                 7,969                10,432                  -                       -                27,413
Interest on subordinated notes payable               3,324                 3,324                 9,973             33,897                       -      

50,518

Interest on subordinated debentures                  1,706                 1,706                 5,119              1,493                       -      

10,024

Other Commitments:
Commitments to extend credit-non-credit
card                                      $        316,520$    959,117$    485,245$ 342,491          $            -          $  2,103,373
Commitments to extend credit-credit card           126,305                     -                     -                  -                       -               126,305
Letters of credit                                   68,983                     -                     -                  -                       -                68,983


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 U.S.
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,
                                      2019              2018              2017
                                               (dollars in thousands)
Commitments to extend credit     $ 2,229,678$ 2,344,550$ 2,515,653
Letters of credit                     68,983            69,613            70,186
Total                            $ 2,298,661$ 2,414,163$ 2,585,839


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.
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.
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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, 2019, our holding
company had $57.5 million of cash. During the first quarter of fiscal year 2020,
we declared and paid a dividend of $0.30 per common share. The outstanding
amount under our private placement subordinated capital notes was $35.0 million
at September 30, 2019. 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, in August 2018
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
with the FHLB. At September 30, 2019, our Bank had cash of $243.5 million and
$1.78 billion of highly-liquid securities held in our investment portfolio, of
which $863.9 million 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 has a letter of credit from the FHLB, which is pledged as collateral on
public deposits, for $170.0 million. Our Bank had $340.0 million in FHLB
borrowings at September 30, 2019, with additional available lines of $1.80
billion. Our Bank also had an additional borrowing capacity of $1.44 billion
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, 2019, we had a total of $2.30 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.
Capital
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, 2019
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, 2019
                                                                Actual
                                                                                              Minimum Capital            Well Capitalized
                                                    Capital Amount        Ratio             Requirement Ratio ¹                Ratio
                                                                                    (dollars in thousands)
Great Western Bancorp, Inc.
Tier 1 capital                                    $     1,225,355            11.7  %                      6.0  %                      N/A
Total capital                                           1,331,611            12.7  %                      8.0  %                      N/A
Tier 1 leverage                                            1,225,355         10.1  %                      4.0  %                      N/A
Common equity Tier 1                                       1,151,658         11.0  %                      4.5  %                      N/A
Risk-weighted assets                              $    10,458,225Great Western Bank
Tier 1 capital                                    $     1,201,476            11.5  %                      6.0  %                      8.0  %
Total capital                                              1,272,733         12.2  %                      8.0  %                     10.0  %
Tier 1 leverage                                         1,201,476             9.9  %                      4.0  %                      5.0  %
Common equity Tier 1                                    1,201,476            11.5  %                      4.5  %                      6.5  %
Risk-weighted assets                              $    10,455,186

1 Does not include capital conservation buffer, which was 2.5% at September 30, 2019.



At September 30, 2019 and September 30, 2018, our Tier 1 capital included an
aggregate of $73.7 million and $73.6 million, respectively, of trust preferred
securities issued by our subsidiaries, net of fair value adjustment. At
September 30, 2019, our Tier 2 capital included $70.8 million of the allowance
for loan and lease losses and $35.0 million of subordinated capital notes. At
September 30, 2018, our Tier 2 capital included $64.5 million of the allowance
for loan and lease losses and $35.0 million of subordinated capital notes. Our
total risk-weighted assets were $10.46 billion at September 30, 2019.
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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 U.S. 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, 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 effect of
revaluation of deferred taxes). Our tangible net income and return on average
tangible common equity exclude the effects of amortization expense relating to
intangible assets and related tax effects from the acquisition of us by NAB 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) and 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
non-ASC 310-30 loans and adjusted yield on non-ASC 310-30 loans. We adjust each
of these four measures to include the current realized gain (loss) of
derivatives 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.
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.
For reconciliations for each of these non-GAAP financial measures to the closest
GAAP financial measures, see "Item 6. Selected Financial Data-Non-GAAP Financial
Measures Reconciliations" and "Item 6. Selected Financial Data-Non-GAAP
Quarterly Financial Measures Reconciliations." Each of the non-GAAP financial
measures presented should be considered in context with our GAAP financial
results included in this Annual Report on Form 10-K.
Impact of Inflation and Changing Prices
Our financial statements included in this Annual Report on Form 10-K have been
prepared in accordance with U.S. 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.
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.
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Critical Accounting Policies and the Impact of Accounting Estimates
Our consolidated financial statements and accompanying notes are prepared in
accordance with U.S. 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 loan and lease losses, goodwill impairment, core deposits and other
intangibles, derivatives, and income taxes. We have reviewed these critical
accounting estimates and related disclosures with our Audit Committee.
Allowance for Loan and Lease Losses
Description. We maintain an allowance for loan and lease losses at a level
management believes is appropriate based on ongoing evaluation of the probable
estimated losses inherent in the loan portfolio driven primarily by monitoring
changes in loan risk grades, delinquencies, and other credit risk indicators,
which are inherently subjective. A well-documented methodology has been
developed and is applied to ensure consistency across our markets. We also have
a formalized independent loan review program to evaluate loan administration,
credit quality, and compliance with corporate loan standards. This program
includes periodic, regular reviews of problem loan reports, delinquencies and
charge-offs.
The allowance for loan and lease losses consists of reserves for probable losses
that have been identified related to specific borrowing relationships that are
individually evaluated for impairment ("specific reserve"), as well as probable
losses inherent in our loan portfolio that are not specifically identified
("collective reserve"). Changes to the allowance for loan and lease losses are
made by charges to the provision for loan and lease losses, which is reflected
in the consolidated statements of income. Loans deemed to be uncollectible are
charged off against the allowance for loan and lease losses. Recoveries of
amounts previously charged-off are credited to the allowance for loan and lease
losses.
The specific reserve relates to impaired loans. A loan is impaired when, based
on current information and events, it is probable we will be unable to collect
all amounts due (interest as well as principal) according to the contractual
terms of the loan agreement. Specific reserves are determined on a loan-by-loan
basis based on management's best estimate of our exposure, given the current
payment status of the loan, the present value of expected payments, and the
value of any underlying collateral. If the impaired loan is identified as
collateral dependent, then the fair value of the collateral method of measuring
the amount of the impairment is utilized. This method requires obtaining an
independent appraisal of the collateral and reducing the appraised value by
applying a discount factor to the appraised value, if necessary, and including
costs to sell.
Management's estimate for collective reserves reflects losses incurred in the
loan portfolio as of the consolidated balance sheet reporting date. Incurred
loss estimates primarily are based on historical loss experience and portfolio
mix. Incurred loss estimates may be adjusted for qualitative factors such as
current economic conditions and current portfolio trends including credit
quality, concentrations, aging of the portfolio, and/or significant policy and
underwriting changes, which may not be reflected in historical loss experience.
Further discussion of the methodology used in establishing the allowance for
loan and lease losses is provided in the Allowance for Loan and Lease 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 loan and
lease losses. Specific reserves for impaired loans rely on a present value of
expected payments or the value of underlying collateral generally based on
independent appraisals. Collective reserves rely on historical loss experience
based on the portfolio mix, qualitative factors such as current economic
conditions and current portfolio trends including credit quality,
concentrations, aging of the portfolio, and/or significant policy and
underwriting changes. All of these estimates are susceptible to significant
change.
Effect if Actual Results Differ From Assumptions. The allowance represents our
best estimate of estimated 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 position and results of operations.
                                      85-
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Goodwill Impairment
Description. Goodwill represents the excess purchase price over the fair value
of identifiable net assets of acquired companies. Goodwill often involves
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, Goodwill and Other Intangible Assets, we conduct a goodwill
impairment test on the basis of one reporting unit at least annually, and more
frequently if events occur or circumstances change that would
more-likely-than-not reduce the fair value below its carrying amount. We assess
qualitative factors to determine whether it is more-likely-than-not the fair
value is less than its carrying amount. If we conclude 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 is less than the carrying
value, we assess 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 is considered necessary, the fair value of the reporting
unit is 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.
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.
In 2017 we began a new program of selling interest swaps directly to 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.
                                      86-

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In 2018 we entered 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.
On December 22, 2017, the Tax Reform Act was enacted into law. Beginning in
2018, the Tax Reform Act reduced the federal tax rate for corporations from
35.0% to 21.0% and changed or limited certain tax deductions. The Tax Reform Act
required us to revalue our net deferred tax assets in the period of enactment,
which stranded certain effects of the tax rate change in accumulated other
comprehensive income. We adopted new accounting guidance in the second quarter
of fiscal year 2018 that allowed reclassification of $2.4 million in stranded
tax effects that related to a change in the federal tax rate from accumulated
other comprehensive income to retained earnings. Further discussion is provided
in "Note 18. Income Taxes:" on the consolidated financial statements.
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.

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