GWB Great Western Bancorp, Inc. - 10-K

ITEM 1A. RISK FACTORS

The summary below provides an overview of many of the risks we are exposed to in the normal course of our business activities. As a result, the below summary risks do not contain all of the information that may be important to you. Additional risks, beyond those summarized below or discussed in this section, may also materially and adversely impact our business, financial conditions and results of operation, and you should read the summary risks together with the more detailed discussion of risks set forth following this section as well as elsewhere in this Annual Report. The occurrence of one or more of the events or circumstances described in this section "Risk Factors," alone or in combination with other events or circumstances, may materially adversely affect our business, financial condition and operating results. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Consistent with the foregoing, the risks we face include, but are not limited to, the following:

Risks Relating to Our Business

• The COVID-19 pandemic has caused severe disruptions in the global economy which has had, and may continue to have, a negative impact on our business and operations, as well as our customers, including among others our hospitality, restaurant, health care and CRE loan borrowers who are dependent for repayment on the successful operation and management of their business and the strength of the CRE industry broadly.

• We may be adversely affected by other natural disasters, pandemics, and other catastrophic events, and by man-made problems such as terrorism and civil unrest, global economic, political and unfavorable market conditions, trade policies, continued disruptions in capital markets, and other conditions outside our control which could disrupt our business operations and our business continuity and disaster recovery plans may not adequately protect us from a such disaster, which could negatively impact our ability to raise capital and could have a material adverse effect on our business, financial condition and results of operations.

• The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our business, financial condition or results of operations. Failure to comply with law and regulatory expectations may result in litigation, risk to reputation, enforcement actions, substantial fines, penalties, litigation, and other additional costs or losses.

Risks Related to the Proposed Merger

• Because the market price of First Interstate Class A common stock may fluctuate, holders of our common stock cannot be certain of the market value of the merger consideration they will receive in the Proposed Merger. The shares of First Interstate Class A common stock to be received by holders of our common stock as a result of the Proposed Merger will have different rights from the shares of our common stock. In addition, holders of our common stock will have a reduced ownership and voting interest in the surviving corporation after the Proposed Merger and will exercise less influence over management.

• The merger will not be completed unless important conditions are satisfied or waived, including approval of the merger agreement by our stockholders and approval of the merger agreement and the First Interstate articles amendment by First Interstate shareholders.

• If the Proposed Merger is consummated, the market price of First Interstate Class A common stock may be affected by factors different from those affecting the shares of our common stock currently.

• We and First Interstate are expected to incur significant costs related to the merger and integration, and the combining of First Interstate and Great Western may be more difficult and/or time consuming than expected.

• The future results of the surviving corporation following the merger may suffer if the surviving corporation does not effectively manage its expanded operations and we may fail to realize the anticipated benefits of the merger.

• The surviving corporation may be unable to retain our or First Interstate personnel or customers successfully while the merger is pending or after the merger is completed.

• The COVID-19 pandemic may delay and adversely affect the completion of the merger.

• Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the surviving corporation following the Proposed Merger.

• The merger agreement may be terminated in accordance with its terms and the merger may not be completed, which could negatively affect us.

• The merger agreement limits our ability to pursue alternatives to the Proposed Merger and may discourage other companies from trying to acquire us. In addition, we are also subject to business uncertainties and contractual restrictions while the Proposed Merger is pending.

• Litigation related to the merger could prevent or delay completion of the merger or otherwise negatively affect our and First Interstate's businesses and operations.

Risks Relating to Credit and Interest Rates

• We may suffer credit losses and are subject to a variety of risks in connection with our loan activity.

• We focus on originating business and agricultural loans which may involve greater risk, and we are significantly dependent on the real estate markets where we operate, as a significant portion of our loan portfolio is secured by real estate and are subject to environmental liability and other risks.

• We are subject to interest rate risk which, among other things, could affect our earnings and the value of certain of our assets.

• The value of securities in our investment portfolio may decline in the future.

• Our financial condition and results of operations depends on if we can manage our future growth effectively.

Risks Relating to Our Securities

• Our ability to declare and pay dividends is subject to regulatory restrictions and we may not pay dividends on our common stock in the future.

• We may not be able to report our financial results accurately and timely if we fail to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting.

• We may need to raise additional capital in the future which may not be available when needed or at all.

• Future issues or sales of our capital stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute the ownership interests of our stockholders.

• Our credit ratings may not reflect all risks of an investment in our debt securities.

• The trading market or market value of our publicly issued securities may fluctuate.

Risks Relating to Our Operations and Strategy

• We may not be able to successfully execute our strategic plan or manage our growth.

• We may be adversely affected by risks associated with completed and potential acquisitions.

• Failure to maintain an effective system of operational controls could subject us to regulatory sanctions, harm our business and operating results and cause the trading price of our stock to decline.

• Our ability to maintain, attract and retain customer relationships is highly dependent on our reputation.

• Operational risks are inherent in our business, our lines of business, products and services; reliance on our vendors, and our or their internal controls; processes and procedures may fail or be circumvented and are subject to errors, fraud, regulatory scrutiny, litigation, vendor risk management failure, and cyber-attacks.

• We are subject to risks related to employee management, conduct and compensation, and maintaining key executives and employees.

• Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

• Interruptions, cyber-attacks or other security breaches could have a material adverse effect on our business.

Investing in our common stock involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before investing in our common stock, you should carefully consider the risks and uncertainties described below, in addition to the other information contained in this Annual Report on Form 10-K. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business operations and/or financial condition. As a result, the trading price of our common stock could decline, and you could lose some or all of your investment. Further, to the extent that any of the information in this report, or in other reports we file with the SEC, constitutes forward-looking statements, the risk factors below are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See "Cautionary Note Regarding Forward-Looking Statements."

Risks Related to the Proposed Merger

Because the market price of First Interstate BancSystem, Inc. Class A common stock may fluctuate, holders of our             common stock cannot be certain of the market value of the merger consideration they will receive in the merger.

On September 15, 2021, we entered into a merger agreement with First Interstate, pursuant to and subject to the terms of which we will merge with and into First Interstate, with First Interstate as the surviving corporation. Upon completion of the merger, each share of our common stock issued and outstanding immediately prior to the effective time (other than certain shares held by us or First Interstate) will be converted into 0.8425 shares of First Interstate Class A common stock. This exchange ratio is fixed and will not be adjusted for changes in the market price of either First Interstate Class A common stock or our common stock. Changes in the price of First Interstate Class A common stock prior to the merger will affect the value that holders of our common stock will receive in the merger. We and First Interstate are not permitted to terminate the merger agreement as a result, in and of itself, of any increase or decrease in the market price of First Interstate Class A common stock or our common stock.

There will be a time lapse between the date of this Annual Report on Form 10-K, the date on which our stockholders vote to approve the merger agreement at the special meeting and the date on which our stockholders entitled to receive shares of First Interstate Class A common stock actually receive such shares. The market value of First Interstate Class A common stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, regulatory considerations, including changes in U.S. monetary policy and its effect on global financial markets and on interest rates, changes in First Interstate’s or our business, operations and prospects, the global coronavirus pandemic and the related disruption to local, regional and global economic activity and financial markets, and the impact that any of the foregoing may have on First Interstate, us or the customers or other constituencies of First Interstate or us, many of which factors are beyond First Interstate’s or our control. Therefore, at the time our stockholders must decide whether to approve the merger agreement at the special meeting, they will not know the market value of the consideration to be received by holders of our common stock at the effective time of the merger. You should obtain current market quotations for shares of First Interstate Class A common stock and for shares of our common stock.

The market price of First Interstate Class A common stock after the merger may be affected by factors different from those affecting the shares of our common stock currently.

In the merger, holders of our common stock will become holders of First Interstate Class A common stock. First Interstate’s business differs from that of ours. Accordingly, the financial condition and results of operations of the surviving corporation, as well as the market price of First Interstate Class A common stock after the completion of the merger may be affected by factors different from those currently affecting our financial condition and results of operations.

We and First Interstate are expected to incur significant costs related to the merger and integration.

We and First Interstate have incurred and expect to incur certain non-recurring costs associated with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit-related costs, public company filing fees and other regulatory fees, printing costs and other related costs. Some of these costs are payable by either us or First Interstate regardless of whether or not the merger is completed.

The surviving corporation in the merger is expected to incur substantial costs in connection with the integration of First Interstate and Great Western. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, branch operations, vendor management, risk management, lines of business, pricing and benefits. While we and First Interstate have assumed that a certain level of costs will be incurred, there are many factors beyond their control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the surviving corporation taking charges against earnings following the completion of the merger, and the amount and timing of such charges are uncertain at present.

Combining First Interstate and Great Western may be more difficult, costly or time consuming than expected and we and First Interstate may fail to realize the anticipated benefits of the merger.

The success of the merger will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of First Interstate and Great Western. To realize the anticipated benefits and cost savings from the merger, we and First Interstate must successfully integrate and combine our businesses in a manner that permits those cost savings to be realized. If we and First Interstate are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the merger could be less than anticipated, and integration may result in additional unforeseen expenses.

We and First Interstate have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger will depend, in part, on the surviving corporation’s ability to successfully combine and integrate the businesses of both companies in a manner that does not materially disrupt existing customer relations or result in decreased revenue or reputational harm. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses, difficulties in integrating operations and systems, including communications systems, administrative and information technology infrastructure and financial reporting and internal control systems, or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Any disruption to either company’s business could cause its customers to move their accounts and/or business to a competing financial institution. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on each of us and First Interstate during this transition period and for an undetermined period after completion of the merger on the surviving corporation.

The future results of the surviving corporation following the merger may suffer if the surviving corporation does not effectively manage its expanded operations.

Following the merger, the size of the business of the surviving corporation will increase significantly beyond the current size of either our or First Interstate’s business. The surviving corporation’s future success will depend, in part, upon its ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. The surviving corporation may also face increased scrutiny from governmental authorities as a result of the significant increase in the size of its business. There can be no assurances that the surviving corporation will be successful or that it will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the merger.

The surviving corporation may be unable to retain our or First Interstate personnel successfully while the merger is pending or after the merger is completed.

The success of the merger will depend in part on the surviving corporation’s ability to retain the talents and dedication of key employees currently employed by us and First Interstate. It is possible that these employees may decide not to remain with us or First Interstate, as applicable, while the merger is pending or with the surviving corporation after the merger is consummated. If we or First Interstate are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, we and First Interstate could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, if key employees terminate their employment, the surviving corporation’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating First Interstate and Great Western to hiring suitable replacements, all of which may cause the surviving corporation’s business to suffer. In addition, we and First Interstate may not be able to locate or retain suitable replacements for any key employees who leave either company.

The COVID-19 pandemic may delay and adversely affect the completion of the merger.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our and First Interstate’s business, financial condition, liquidity, capital, and results of operations. Even as efforts to contain the pandemic, including vaccinations, have made progress and some restrictions have relaxed, new variants of the virus are causing additional outbreaks. The impact of the Delta variant, or other variants that may emerge, cannot be predicted at this time, and could depend on numerous factors, including the availability of vaccines in different parts of the world, vaccination rates among the population, the effectiveness of COVID-19 vaccines against the Delta variant and other variants, and the response by governmental bodies to reinstate restrictive measures. If the effects of the COVID-19 pandemic cause a continued or extended decline in the economic environment and our or First Interstate’s financial results, or our or First Interstate’s business operations are further disrupted as a result of the COVID-19 pandemic, efforts to complete the merger and integrate our business with that of First Interstate may also be delayed and adversely affected. Additional time may be required to obtain the requisite regulatory approvals, and the Federal Reserve Board, the MDOB, and the SDDB, and other regulatory authorities may impose additional requirements on us or First Interstate that must be satisfied prior to completion of the merger, which could delay and adversely affect the completion of the merger and could have a material adverse effect on our or First Interstate’s results of operations and financial condition.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the surviving corporation following the merger.

Before the merger and the bank merger may be completed, various approvals, consents and non-objections must be obtained from the Federal Reserve Board, the MDOB, the SDDB and other authorities in the United States. These approvals could be delayed or not obtained at all, including due to any or all of the following: an adverse development in either party’s regulatory standing, or any other factors considered by regulators in granting such approvals; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment, including as a result of changes in regulatory agency leadership.

Even if those approvals are granted, they may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the surviving corporation’s business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the surviving corporation following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, limitations, obligations or restrictions will not result in the delay or abandonment of the merger. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions or decrees by any court or governmental entity of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the merger agreement.

Despite our and First Interstate’s commitments to use our respective reasonable best efforts to resolve any objection that may be asserted by any governmental entity with respect to the merger agreement, under the terms of the merger agreement, we and First Interstate are not required to take any action or agree to any condition or restriction in connection with obtaining these approvals that would reasonably be expected to have a material adverse effect on the business, properties, assets, liabilities, results of operations or financial condition of the surviving corporation and its subsidiaries, taken as a whole, after giving effect to the merger (measured on a scale relative to First Interstate and its subsidiaries, taken as a whole).

The merger agreement may be terminated in accordance with its terms and the merger may not be completed, which could negatively affect us.

If the merger is not completed for any reason, including as a result of our stockholders or First Interstate’s shareholders failing to approve the transaction, there may be various adverse consequences and we may experience negative reactions from the financial markets and from our customers and employees. For example, our business may have been affected adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of our common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee of $70 million to First Interstate.

Additionally, we and First Interstate have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, as well as the costs and expenses of filing, printing and mailing the joint proxy statement/prospectus, and all filing and other fees paid to the SEC in connection with the merger. If the merger is not completed, we and First Interstate would have to pay these expenses without realizing the expected benefits of the merger.

We will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to seek to change existing business relationships with us. In addition, subject to certain exceptions, we and First Interstate have agreed to operate our respective businesses in the ordinary course consistent with past practice in all material respects prior to closing, and we and First Interstate have agreed not to take certain actions, which could cause us to be unable to pursue other beneficial opportunities that may arise prior to the completion of the merger.

The shares of First Interstate Class A common stock to be received by holders of our common stock as a result of the merger will have different rights from the shares of our common stock.

In the merger, holders of our common stock will become holders of First Interstate Class A common stock and their rights as shareholders of First Interstate Class A common stock will be governed by Montana law and the governing documents of the surviving corporation. The rights associated with First Interstate Class A common stock are different from the rights associated with our common stock.

Holders of our common stock will have a reduced ownership and voting interest in the surviving corporation after the merger and will exercise less influence over management.

Holders of our common stock currently have the right to vote in the election of the board of directors and on other matters affecting us. When the merger is completed, each holder of our common stock who receives shares of First Interstate Class A common stock will become a holder of common stock of the surviving corporation, with a percentage ownership of the surviving corporation that is smaller than the holder’s percentage ownership of us. Based on the number of shares of First Interstate and our common stock outstanding as of the close of business on the respective record dates, and based on the number of shares of First Interstate Class A common stock expected to be issued in the merger, the former holders of our common stock, as a group, are estimated to own approximately forty-three percent (43%) of the fully diluted shares of the surviving corporation immediately after the merger and current holders of First Interstate common stock as a group are estimated to own approximately fifty-seven percent (57%) of the fully diluted shares of the surviving corporation immediately after the merger. Because of this, holders of our common stock may have less influence on the management and policies of the surviving corporation than they now have on our management and policies.

Litigation related to the merger could prevent or delay completion of the merger or otherwise negatively affect our and First Interstate’s businesses and operations.

We and First Interstate may incur costs in connection with the defense or settlement of any shareholder or stockholder lawsuits filed in connection with the merger. Such litigation could have an adverse effect on our and First Interstate’s financial condition and results of operations and could prevent or delay the completion of the merger.

The merger agreement limits our ability to pursue alternatives to the merger and may discourage other companies from trying to acquire us.

The merger agreement contains “no shop” covenants that restrict our ability to, directly or indirectly, initiate, solicit, knowingly encourage or knowingly facilitate any inquiries or proposals with respect to any acquisition proposal, engage or participate in any negotiations with any person concerning any acquisition proposal, provide any confidential or nonpublic information or data to, or have or participate in any discussions with, any person relating to any acquisition proposal, subject to certain exceptions, or, unless the merger agreement has been terminated in accordance with its terms, approve or enter into any term sheet, letter of intent, commitment, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or other agreement in connection with or relating to any acquisition proposal.

The merger agreement further provides that, during the twelve (12)-month period following the termination of the merger agreement under specified circumstances, including the entry into a definitive agreement or consummation of a transaction with respect to an alternative acquisition proposal, we may be required to pay a termination fee of $70 million to First Interstate.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of us from considering or proposing that acquisition.

The merger will not be completed unless important conditions are satisfied or waived, including approval of the merger agreement by our stockholders and approval of the merger agreement and the First Interstate articles amendment by First Interstate shareholders.

Specified conditions set forth in the merger agreement must be satisfied or waived to complete the merger and the bank merger. If the conditions are not satisfied or, subject to applicable law, waived, the merger and the bank merger will not occur or will be delayed and we and First Interstate may lose some or all of the intended benefits of the merger. The following conditions must be satisfied or waived, if permissible, before we and First Interstate are obligated to complete the merger:

• approval of the merger agreement and the First Interstate articles amendment by the shareholders of First Interstate and approval of the merger agreement by our stockholders;

• the authorization for listing on the NASDAQ, subject to official notice of issuance, of the shares of First Interstate Class A common stock that will be issued pursuant to the merger agreement;

• the receipt of specified governmental consents and approvals, including from the Federal Reserve Board, the MDOB, and the SDDB, and termination or expiration of all applicable waiting periods in respect thereof, in each case without the imposition of any materially burdensome regulatory condition;

• the effectiveness of the registration statement on Form S-4 filed by First Interstate with the SEC in connection with the transactions contemplated by the merger agreement, and the absence of any stop order suspending the effectiveness of the registration statement or proceedings for such purpose initiated or threatened by the SEC and not withdrawn;

• no order, injunction or decree issued by any court or governmental entity of competent jurisdiction or other legal restraint or prohibition preventing the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement being in effect, and no law, statute, rule, regulation, order, injunction or decree having been enacted, entered, promulgated or enforced by any governmental entity which prohibits or makes illegal the completion of the merger, the bank merger or any of the other transactions contemplated by the merger agreement;

• the accuracy of the representations and warranties of the other party contained in the merger agreement, generally as of the date on which the merger agreement was entered into and as of the closing date, subject to the materiality standards provided in the merger agreement (and the receipt by each party of a certificate dated as of the closing date and signed on behalf of the other party by its chief executive officer or chief financial officer to such effect);

• the performance by the other party in all material respects of the obligations, covenants and agreements required to be performed by it under the merger agreement at or prior to the closing date (and the receipt by each party of a certificate dated as of the closing date and signed on behalf of the other party by its chief executive officer or chief financial officer to such effect); and

• receipt by both parties of an opinion of legal counsel to the effect that on the basis of facts, representations and assumptions set forth or referred to in such opinion, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code.

Economic Risk

The outbreak of the COVID-19 pandemic has caused a significant global economic downturn which has adversely affected, and is expected to continue to adversely affect, our business and results of operations, and the future impacts of the COVID-19 pandemic on the global economy and our business, results of operations, liquidity and financial condition remain uncertain.

COVID-19, which has been identified as a pandemic by the World Health Organization, continues to cause economic disruption both worldwide and in the markets we operate, as well as having a destabilization effect on financial markets. The ultimate impacts of COVID-19 are uncertain and could have a material adverse effect on our business, financial condition, liquidity and results of operations. The extent of these impacts will depend on future developments, including among others, governmental, regulatory and private sector actions and responses, new information that may emerge concerning the severity of COVID-19, and actions taken to contain or prevent further spread, each of which are highly uncertain and cannot be predicted.

Our business is dependent upon the ability and willingness of our customers to conduct banking and other financial transactions, including the payment of loan obligations. COVID-19 has and continues to disrupt the business, activities, and operations of our customers, which may cause a decline in demand for our products and services which may, in turn, result in a significant decrease in our business, negatively impacting our liquidity position and financial results. Our financial results could also be adversely impacted due to an inability of our customers to meet their loan commitments because of their losses associated with the effects of COVID-19, resulting in increased risk of delinquencies, defaults, foreclosures, declining collateral values and other losses to our Bank. Moreover, current and future governmental action may temporarily require the Company to conduct business differently with respect to foreclosures, repossessions, payments, deferrals and other customer-related transactions.

Further, we also rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers. We have business continuity plans and other safeguards in place, however, there is no assurance that such plans and safeguards will be effective. There is some risk that operational costs could continue to increase as we maintain existing facilities in accordance with health guidelines, while potentially incurring incremental costs to support staff who continue to work remotely. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Although the Company has established a pandemic response plan and procedures, our workforce has been, is, and may continue to be impacted by COVID-19. We have taken precautions to protect the safety and well-being of our employees and customers, including temporary branch and office closures during the early phase of the pandemic, but no assurance can be given that our actions will be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to provide customer support and service. The continued spread could also negatively impact availability of key personnel and employee productivity which could adversely impact our ability to deliver products and services to our customers. Currently, a number of our employees are working remotely. Heightened cybersecurity, information security and operational risks may result from work-from-home arrangements. Our employees have largely returned to the office, but issues surrounding their return may arise, including employee dissatisfaction regarding safety protocols including those regarding testing and vaccines, which may cause employee concern and reduction in employee work satisfaction.

Even after the COVID-19 pandemic subsides, the U.S. economy may experience a recession, and we anticipate our business would materially and adversely affected by a prolonged recession. To the extent the COVID-19 pandemic adversely affects our business, financial condition, liquidity or results of operations.

Economic conditions have affected and could continue to adversely affect our revenues and profits.

Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that we offer, is highly dependent upon the business environment in the markets in which we operate and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; natural disasters; terrorist attacks; disruptions in global or national supply chains; or a combination of these or other factors.

An economic downturn or sustained, high unemployment levels, and stock market volatility, whether due to the COVID-19 pandemic or otherwise, may negatively impact our operating results and have a negative effect on the ability of our borrowers to make timely repayments of their loans increasing the risk of loan defaults and losses.

Changes in economic or political conditions could adversely affect our earnings, as the ability of our borrowers to repay loans, and the value of the collateral securing such loans, declines.

Our success depends, to a certain extent, upon economic or political conditions, local and national, as well as governmental monetary policies. Conditions such as recession, unemployment, changes in interest rates, inflation, money supply, and other factors beyond our control may adversely affect our asset quality, deposit levels, and loan demand and, therefore, our earnings. Because we have a significant amount of commercial real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. In addition, substantially all of our loans are to individuals and businesses in our market area. Consequently, any economic decline in our primary market areas, which include Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, could have an adverse impact on our earnings.

Changes in U.S. trade policies and tariffs, may cause adverse impact .

There continues to be discussions with respect to U.S. trade policies, legislation, treaties and tariffs, including trade policies and tariffs such as the North American Free Trade Agreement that could adversely affect our financial results and ability to service debt; which, in turn, could adversely affect our financial condition and results of operations.

We are subject to interest rate risk which, among other things, could affect our earnings and the value of certain of our assets .

Our earnings and cash flows are largely dependent on net interest income. Interest rates are sensitive to many factors that are beyond our control, such as economic conditions, competition and policies of various governmental and regulatory agencies, and, in particular, the policies of the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but these changes could also affect: (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities, including our securities portfolio; and (iii) the average duration of our interest-earning assets . This also includes the risk that interest-earning assets may be more responsive to changes in interest rates than interest-bearing liabilities, or vice versa (repricing risk), the risk that the individual interest rates or rate indices underlying various interest-earning assets and interest-bearing liabilities may not change in the same degree over a given time period (basis risk), and the risk of changing interest rate relationships across the spectrum of interest-earning asset and interest-bearing liability maturities (yield curve risk), including a prolonged flat or inverted yield curve environment. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

As of September 30, 2021, 49.7% of our loans were advanced to our customers on a variable or adjustable-rate basis and another 6.4% of our loans were advanced to our customers on a fixed-rate basis where we utilized derivative instruments to swap our economic exposure to a variable-rate basis. As a result, an increase in interest rates could result in increased loan defaults, foreclosures and charge-offs and could necessitate further increases to the allowance for credit losses, any of which could have a material adverse effect on our business, financial condition or results of operations. In addition, a decrease in interest rates could negatively impact our margins and profitability. Further, a significant portion of our adjustable rate loans have interest rate floors below which the loan's contractual interest rate may not adjust. As of September 30, 2021, less than 16% of our total loans' rates are floored, with an average interest rate floor 84 basis points above market rates. In addition, there were approximately 7% of our total loans with rate floors that have not been reached, with an average interest rate 8 basis points below market rates. The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance these loans during periods of declining interest rates. Also, when loans are at their floors, there is a further risk that our interest income may not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material adverse effect on our results of operations.

As of September 30, 2021, we had $2.61 billion of noninterest-bearing demand deposits and $8.70 billion of interest-bearing demand deposits. If we need to offer higher interest rates on checking accounts to maintain current clients or attract new clients, our interest expense will increase, perhaps materially. Furthermore, if we fail to offer interest in a sufficient amount to keep these demand deposits, our core deposits may be reduced, which would require us to obtain funding in other ways or risk slowing our future asset growth.

Increases in FDIC insurance premiums may adversely affect our earnings.

Our Bank’s deposits are insured by the FDIC up to legal limits and our Bank is subject to FDIC deposit insurance assessments. We generally cannot control the amount of premiums our Bank will be required to pay for FDIC insurance. As our Bank has exceeded $10 billion in assets, the method for calculating its FDIC assessments has changed and our Bank’s FDIC assessments have increased as a result. See "Item 1. Business—Supervision and Regulation—Deposit Insurance." If there is an increase in financial institution failures, or a decrease in the performance of our Bank, our Bank may be required to pay higher FDIC insurance premiums, or the FDIC may charge additional special assessments. Future increases of FDIC insurance premiums or special assessments could have a material adverse effect on our business, financial condition or results of operations.

Credit and Interest Rate Risk

We focus on originating commercial and agricultural loans which may involve greater risk than residential mortgage lending.

We originate commercial real estate loans, commercial loans, agricultural real estate loans, agricultural loans, consumer loans, and residential real estate loans primarily within our market areas. Commercial real estate, commercial, consumer, and agricultural real estate and operating loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential real estate for the following reasons:

• Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts sufficient to cover operating and debt service.

• Commercial Loans. Repayment is dependent upon the successful operation of the borrower’s business.

• Consumer Loans. Consumer Loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment on the loan due to depreciation, damage or loss.

• Agricultural Loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many factors outside our control or the borrowers. These factors include weather, input costs, commodity and land prices and interest rates.

As of September 30, 2021, our commercial lending, which consists of our CRE and commercial non-real estate loans, represented approximately $6.02 billion, or 73.6%, of our loan portfolio. The core of our commercial lending focus includes CRE loans secured by owner-occupied property and commercial non-real estate loans secured by business assets and guarantees from owners, which totaled approximately $2.89 billion, or 35.3%, of our loan portfolio at September 30, 2021, with undisbursed loan commitments for these loans amounting to an additional $916.8 million. The remainder of our commercial lending included approximately $3.13 billion of other CRE loans ( i.e. , construction and development loans, multifamily residential real estate loans and CRE loans secured by commercial property that is not owner-occupied) at September 30, 2021, or 38.2% of our loan portfolio.

We continue to evaluate the impact of the COVID-19 pandemic on our loan portfolio. Industries such as hotels & resorts (excluding casino hotels), casino hotels, restaurants, arts and entertainment, oil & energy, retail malls, airlines and healthcare have experienced varied business disruptions due to COVID-19. Since the beginning of the pandemic we have been closely monitoring the following loan segments (excluding PPP loans) given elevated industry risk from COVID-19: hotels & resorts (excluding casino hotels) with $619.1 million, or 7.7% of total loans, restaurants with $125.7 million, or 1.6% of total loans, arts and entertainment with $159.0 million, or 2.0% of total loans, senior care with $368.0 million, or 4.6% of total loans, and skilled nursing with $206.9 million, or 2.6% of total loans, all as of September 30, 2021, with $195.2 million of these loans being classified as of September 30, 2021 and loan exposure in other segments of the identified industries being either immaterial or having not shown general distress thus far.

At September 30, 2021, our agricultural loans, consisting primarily of agricultural operating loans ( e.g. , loans to farm and ranch owners and operators) and agricultural real estate loans, were $1.43 billion, representing 17.5% of our total loan portfolio. At September 30, 2021, agricultural operating loans totaled $749.1 million, or 9.2% of our loan portfolio; and agricultural real estate loans totaled $679.5 million, or 8.3%, of our loan portfolio. The primary livestock of our customers to whom we have extended agricultural loans include dairy cows, hogs and feeder cattle, and the primary crops of our customers to whom we have extended agricultural loans include corn, soybeans and, to a lesser extent, wheat and cotton. In addition, we estimate that 8.2% of our commercial non-real estate loans and owner-occupied CRE loans were agriculture-related loans at September 30, 2021.

Our business is significantly dependent on the real estate markets where we operate, as a significant portion of our loan portfolio is secured by real estate.

At September 30, 2021, 70.8% of our aggregate loan portfolio, comprising our CRE loans (representing 54.8% of our aggregate loan portfolio), residential real estate loans (representing 7.7% of our aggregate loan portfolio) and agriculture real estate loans (representing 8.3% of our aggregate loan portfolio), was primarily secured by interests in real estate predominantly located in the states in which we operate. In addition, some of our other lending occasionally involves taking real estate as primary or secondary collateral. Real property values in these states may be different from, and in some instances worse than, real property values in other markets or in the United States as a whole, and may be affected by a variety of factors outside of our control and the control of our borrowers, including national and local economic conditions generally. Declines in real property prices, including prices for homes, commercial properties and farmland, in the states in which we operate could result in a deterioration of the credit quality of our borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, and reduced demand for our products and services generally. Our CRE loans, in particular, totaled approximately $4.48 billion at September 30, 2021, and may have a greater risk of loss than residential mortgage loans, in part because these loans are generally larger or more complex to underwrite, monitor and service. Agricultural real estate loans may be affected by similar factors to those that affect agricultural loans generally, including adverse weather conditions, disease and declines in the market prices for agricultural products or farm real estate. In addition, declines in real property values in the states in which we operate could reduce the value of any collateral we realize following a default on these loans and could adversely affect our ability to continue to grow our loan portfolio consistent with our underwriting standards. Our failure to effectively mitigate these risks could have a material adverse effect on our business, financial condition or results of operations.

Our business depends on our ability to successfully manage credit risk.

The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our bankers follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, our inability to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers may negatively impact the quality of our loan portfolio, result in loan defaults, foreclosures and additional charge-offs and necessitate that we significantly increase our allowance for credit losses. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.

An important feature of our credit risk management system is our use of analytical and forecasting models that reflect certain assumptions about both quantitative and qualitative factors, including among others, interest rates and consumer behavior. If our analytical and forecasting models' underlying assumptions are incorrect, improperly applied, or otherwise inadequate, we may suffer deleterious effects such as higher than expected loan losses, lower than expected net interest income, lower than expected liquidity, lower than expected capital or unanticipated charge-offs, any of which could have a material adverse effect on our business, financial condition and results of operations.

If our actual loan losses exceed our allowance for credit losses, our net income will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of our loans. Despite our underwriting and monitoring practices, the effect of a declining economy could negatively impact the ability of our borrowers to repay loans in a timely manner and could also negatively impact collateral values. As a result, we may experience significant loan losses that could have a material adverse effect on our operating results. Since we must use assumptions regarding individual loans and the economy, our current allowance for credit losses may not be sufficient to cover actual loan losses. Our assumptions may not anticipate the severity or duration of the current credit cycle; and we may need to significantly increase our provision for credit losses if one or more of our larger loans or credit relationships becomes delinquent or if we expand our commercial real estate and commercial lending.

The FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, on June 16, 2016, which changed previous allowance for loan losses methodology to consider current expected credit losses (CECL). This accounting pronouncement was adopted for our fiscal year beginning October 1, 2020. The federal banking regulators, including the Federal Reserve have adopted rules that gives a banking organization the option to phase in over a three-year or five-year period the day-one adverse effects of CECL on its regulatory capital. We elected the five-year period for our Company.

CECL has substantially changed how we calculate our allowance for credit losses. We have adopted CECL and prepared our consolidated financial statements based on the required methodology; however we cannot predict how it will affect our results of operations and financial condition over time, including our regulatory capital. In general, expectations are that the CECL methodology will lead to increased volatility in banking organizations' required level of allowances at different points in the economic cycle, and in their results of operations. For additional discussion, see "Item 8. Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—2. New Accounting Standards." Material additions to our allowance through provision expense would materially decrease our net income. There can be no assurance that our monitoring procedures and policies will reduce certain lending risks or that our allowance for credit losses will be adequate to cover actual losses.

We are subject to environmental liability risk associated with our Bank branches and any real estate collateral we acquire upon foreclosure.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. The costs associated with investigation and remediation activities could be substantial. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage, including damages and costs resulting from environmental contamination emanating from the property. Although we have policies and procedures to perform an environmental review before initiating foreclosure, these actions may not be sufficient to detect all potential environmental hazards.

We also have an extensive branch network, owning separate branch locations throughout the areas we serve that may be subject to similar environmental liability risks. Environmental laws may require us to incur substantial expenses and could materially reduce the affected property's value or limit our ability to use or sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition or results of operations. For additional discussion, see "Item 1. Business - Environmental Laws Potentially Impacting the Bank."

Failure to comply with mortgage loan servicing standards, guidelines, laws and regulations, including the CARES Act, may result in substantial penalties, additional costs or losses.

As a residential mortgage servicer in the U.S., we have a portfolio of loan servicing rights. A loan servicing right is the right to service a mortgage loan (i.e.: collect principal, interest and escrow amounts) for a fee. The housing GSE, such as FNMA, the FHLMC and the FHLB, that own the mortgages that we service in our loan servicing rights portfolio have mortgage servicing standards. HUD and state housing finance agencies govern and establish guidelines for the servicing of GSE mortgages. The failure to comply with these standards and guidelines, as well as other applicable federal and state laws and regulations, could result in penalties assessed by HUD, the GSEs and/or our other regulators, or we could be forced to sell all or part of our loan servicing rights portfolio. In addition, we are subject to certain legal and contractual requirements for how we hold, transfer, use or enforce promissory notes, security instruments and other documents for residential mortgage loans that we service. Further, we currently use MERS for our servicing efforts. If documentation requirements were not met, or if the use of MERS or the MERS system is found not valid or effective, we could be obligated to, or choose to, take remedial actions and may be subject to additional costs or losses.

As a result of the CARES Act and associated regulations, customers of a federally backed mortgage loan (VA, FHA, USDA, Freddie and Fannie) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic have the ability to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency which includes granting a forbearance or deferral with no additional fees, penalties or interest, and with no adverse effects on the borrower’s credit. Foreclosures and evictions are prohibited during timeframes set by the GSEs. As a result of such forbearances, the extensions of any moratoriums, or a backlog of foreclosure cases as a resulting therefrom, there is an increased risk that the collateral value may deteriorate, resulting in a loss to the Bank. The Bank established new and updated existing policies, procedures and a change management process to facilitate the new CARES Act requirements, however, due to the extremely short implementation timeframes, and some ambiguity in the regulations, we are exposed to risks relating to noncompliance, and/or risk that errors may occur, subjecting the Bank to further regulatory, litigation, and/or operational risk, which could have a material adverse effect on our business, financial condition or results of operations.

We rely on the mortgage secondary market for some of our liquidity.

We originate and sell a majority of our residential mortgage loans and their servicing rights, including $402.8 million of predominantly fixed rate residential mortgage loans sold during fiscal year 2021. This does not include the loan servicing portfolio acquired from HF Financial, approximately $262.1 million, and portfolio loans consisting of ARMs and other non-conforming loans of approximately $628.1 million, each at September 30, 2021. We rely on FNMA and other purchasers to purchase loans in order to reduce our credit risk and provide funding for additional loans we desire to originate. We cannot provide assurance that these purchasers will not materially limit their purchases from us due to capital constraints or other factors, including, with respect to FNMA, a change in the criteria for conforming loans. Any reforms to the U.S. residential mortgage finance market, including the role of FNMA, which are not yet known, may limit our ability to sell conforming loans to FNMA. Our inability to comply with all federal and state regulations and investor guidelines regarding the origination, underwriting documentation and servicing of residential mortgage loans may also impact our ability to continue selling residential mortgage loans in the secondary market, effecting our ability to fund, and thus originate, additional residential mortgage loans, which could have a material adverse effect on our business, financial condition or results of operations.

We are subject to a variety of risks in connection with any sale of loans we may conduct.

If any of our representations and warranties to a purchaser about our mortgage loans and the manner in which they were originated and serviced is incorrect, we may be required to indemnify the purchaser for any related losses, or we may be required to repurchase or provide substitute mortgage loans for part or all of the affected loans. We may also be required to repurchase loans as a result of borrower fraud or in the event of early payment default by the borrower on a loan we have sold. If repurchase or indemnity activity becomes material, it could have a material adverse effect on our liquidity, business, financial condition or results of operations.

We may also, from time to time, engage in selling or participating all or part of certain commercial, agricultural or other types of loans. Such sales entail similar risks to those described above.

Uncertainty relating to LIBOR calculation process and phasing out of LIBOR may adversely affect us.

On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR , announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings); (ii) the 1-month, 3-month, 6-month and 12-month US LIBOR settings would cease to exist after June 30, 2023; and (iii) the FCA would consult on whether the remaining nine LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them. Central banks and regulators in a number of major jurisdictions (for example, United States, United Kingdom, European Union, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for interbank offered rates. To identify a successor rate for U.S. dollar LIBOR , the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR . SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. On July 29, 2021, the ARCC formally recommended SOFR as its preferred alternative replacement rate for LIBOR . At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere or, whether the COVID-19 outbreak will have further effect on LIBOR transition plans.

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR -linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, if LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond June 2023 that utilize LIBOR as a factor in determining the interest rate, in order to replace LIBOR with the new standard that is established, which may have an adverse effect on our overall financial condition or results of operations. Following the replacement of LIBOR , some or all of these credit agreements may bear interest a lower interest rate, which could have an adverse impact on our results of operations. Moreover, if LIBOR ceases to exist, we may need to renegotiate certain terms of our credit facilities. If we are unable to do so, amounts drawn under our credit facilities may bear interest at a higher rate, which would increase the cost of our borrowings and, in turn, affect our results of operations. US Banking Regulation requires banks to stop originating new products using LIBOR by December 31, 2021. As of September 30, 2021, we no longer originate new loans or their products using any LIBOR index.

Loans that we make through certain federal programs, including under the Paycheck Protection Program, are dependent on the federal government’s continuation and support of these programs and on our compliance with their requirements.

We participate in various U.S. government agency guarantee programs, including programs operated by the United States Department of Agriculture, Small Business Administration, Farm Service Administration and the United States Department of the Interior. If we fail to follow any applicable regulations, guidelines or policies associated with a particular guarantee program, any loans we originate as part of that program may lose the associated guarantee, exposing us to credit risk we would not otherwise be exposed to or underwritten, or result in our inability to continue originating loans under such programs, either of which could have a material adverse effect on our business, financial condition or results of operations.

Federal and state governments have enacted laws intending to stimulate the economy in light of the business and market disruptions related to COVID-19, including the Small Business Administration Paycheck Protection Program. Our Bank participated as a lender in both rounds of the PPP, having provided over 4,800 loans for $727.3 million in the first round followed by over 4,100 loans for $249.5 million in the second round. We have processed over 6,900 loans totaling $764.8 million related to PPP forgiveness, resulting in an outstanding balance of $212.0 million as of September 30, 2021. We understand that PPP loans are fully guaranteed by the SBA and believe the majority of these loans will be forgiven. However, there can be no assurance that the borrowers will use or have used the funds appropriately or will have satisfied the staffing or payment requirements to qualify for forgiveness in whole or in part. Any portion of the loan that is not forgiven must be repaid by the borrower. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by our Bank, which may or may not be related to an ambiguity in the laws, rules or guidance regarding operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if we have already been paid under the guaranty, seek recovery from us of any loss related to the deficiency. Several other large banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. We and our Bank may be exposed to the risk of litigation, from both customers and non-customers that approached the Bank regarding PPP loans and our PPP process. If any such litigation is filed against the Bank and is not resolved in a manner favorable to the Bank, it may result in significant financial liability or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

We depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information, or from those customers or counterparties or of other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, fraudulent or misleading financial statements, credit reports or other financial information could result in credit losses, reputational damage or other effects that could have a material adverse effect on our business, financial condition or results of operations.

COVID-19 could have negative effects on our hospitality and CRE loans, including loans to hotels, restaurants and health care facilities, which are dependent for repayment on the successful operation and management of the CRE, the strength of the CRE industry broadly and other factors outside of the borrower’s control.

In response to COVID-19, many state and local governments have ordered certain restrictions on non-essential businesses and residents. Certain industries have been particularly hard hit, including the travel and hospitality industry, the restaurant industry and the retail industry. At September 30, 2021, we had outstanding loans with hotels & resorts (excluding casino hotels) with $619.1 million, or 7.7% of total loans, restaurants with $125.7 million, or 1.6% of total loans, arts and entertainment with $159.0 million, or 2.0% of total loans, senior care with $368.0 million, or 4.6% of total loans, and skilled nursing with $206.9 million, or 2.6% of total loans, all as of September 30, 2021, with $195.2 million of these loans being classified as of September 30, 2021 and loan exposure in other segments of the identified industries being either immaterial or having not shown general distress thus far. Our CRE loans are dependent on the profitable operation and management of the property securing the loan and its cash flows. The continued spread of COVID-19 could result in further reduction of demand for hotel rooms and related lodging and entertainment services in general, reduction in business and personal travel, reduction in discretionary spending by our borrowers’ customers, increases in employee health related costs for our customers, operational cost increases due to potential labor, food, energy, water, transportation shortages, government forced closures and travel restrictions, or other unanticipated costs related to such force majeure events like COVID-19. These conditions can also lead to a decline in property sales prices and related assets and properties planned for development. Revenues may decline more quickly than borrowers are able to reduce expenses.

If repercussions of the outbreak are prolonged, COVID-19 could have a significant adverse impact, which could be material to our borrowers, by reducing the revenue and cash flows of our borrowers, impacting the borrowers’ ability to repay the loan, increasing the risk of default by our borrowers and/or reducing the foreclosure value of CRE that serves as collateral for certain of our loans. Loans may also be secured by depreciating assets where any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Any of the foregoing could negatively impact our borrowers, and their financial results, which, in turn, could adversely affect our financial condition and results of operations.

The value of securities in our investment portfolio may decline in the future.

As of September 30, 2021, we owned $2.34 billion of available for sale debt securities and $367.8 million of held to maturity debt securities. The fair value of our investment securities may be adversely affected by market conditions, including changes in interest rates, and the occurrence of any events adversely affecting the issuer of particular securities in our investments portfolio. We analyze our securities on a quarterly basis to determine if a credit impairment has occurred. The process for determining whether impairment is credit related usually requires complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers, we may be required to recognize a credit impairment in future periods, which could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to an Investment in the Company's Securities

Our ability to declare and pay dividends is subject to additional regulatory restrictions and we may not pay dividends on our common stock in the future.

Holders of our common stock are entitled to receive only such dividends as our Board of Directors may declare out of funds legally available for such payments. Our ability to pay dividends depends primarily on our receipt of dividends from our Bank, the payment of which is subject to numerous limitations under federal and state banking laws, regulations and policies. See "Item 1. Business—Supervision and Regulation—Dividends." As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock. In addition, as a bank holding company our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. Due to negative retained earnings, primarily as a result of $713.0 million of impairment of goodwill and certain intangible assets, net of tax, during the second quarter of fiscal year 2020, our Bank has been required to notify the FDIC and SDDB, respectively, prior to declaring and paying a cash dividend from our Bank to the Company.

Our Board of Directors approved dividend payments of $0.01 per share for the first, second and third quarters of fiscal year 2021, and increased the dividend payment to $0.05 per share in the fourth quarter of fiscal year 2021. The Company had been paying quarterly dividends of $0.30 per share during fiscal year 2020, until the third and fourth quarter when the Board of Directors reduced the dividend to $0.15 and $0.01 per share, respectively, to conserve capital in response to the uncertainties associated with the COVID-19 pandemic. Any further changes in the level of our dividends or the suspension of the payment thereof by our Board of Directors could have a material adverse effect on the market price of our common stock.

We may not be able to report our financial results accurately and timely as a publicly listed company if we fail to maintain an effective system of disclosure controls and procedures and internal control over financial reporting.

Management regularly reviews and updates our internal control over financial reporting, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any circumvention of our controls and procedures, or failure to comply with regulations related to controls and procedures, could have a material adverse effect on our business, results of operations and financial condition and could result in a suspension or delisting of our common stock from the NYSE.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital, in the form of additional debt or equity, in the future to have sufficient capital resources and liquidity to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, as well as on acceptable terms, if needed, will depend on, among other things, our credit rating and perception in the marketplace, confidence of debt purchasers, conditions in the capital markets at that time, counterparties participating in the capital markets or other disruption in capital markets and our financial condition. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve System. Further, if we need to raise capital in the future, we may need to compete for investors when seeking to raise capital. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition or results of operations.

We have been rated as "BBB" with a stable outlook by Kroll Bond Rating Agency (“KBRA”). A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Our creditworthiness is not fixed and should be expected to change over time as a result of our performance and industry conditions. We cannot give any assurances that our credit ratings will remain at current levels, and it is possible that our ratings could be lowered or withdrawn by KBRA. Any actual or threatened downgrade or withdrawal of our credit rating could affect our perception in the marketplace and our ability to raise capital, and could increase our debt financing costs.

Future issues or sales of our capital stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute the ownership interests of our stockholders.

Any equity capital we obtain may result in the dilution of the interests of existing holders of our common stock. The market price of our common stock could decline as a result of the issues or sales of a large number of shares of our capital stock or from the perception that such sales could occur. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

On June 1, 2020, we filed a shelf registration statement with the SEC registering an indeterminate amount of our common stock, preferred stock, depositary shares and debt securities which we may decide to issue in the future. To the extent that we choose to issue our common stock or our preferred stock, or rights relating to our common stock or preferred stock (through the issuance of depositary shares), such issuances will increase the number of our shares of capital stock outstanding and the holders of these shares will be able to sell them in the public market. The specific terms of any shares of capital stock that may be issued under our shelf registration statement will be determined by us prior to issuance based on current market conditions and will be described in a supplement to the prospectus contained in such registration statement.

We have filed a registration statement with the SEC registering 2,837,222 shares of our common stock for issuance pursuant to awards granted under our equity incentive plans. We have granted awards covering 1,416,605 shares of our common stock under these plans as of September 30, 2021. Subject to stockholder approval, we may increase the number of shares registered for this purpose from time to time. Once we issue these shares, their holders will be able to sell them in the public market.

Certain banking laws and certain provisions of our certificate of incorporation may have an anti-takeover effect which could limit our stock price.

Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our stockholders. Acquisition of 10% or more of any class of voting stock of a bank holding company or depository institution, including shares of our common stock, generally creates a rebuttable presumption that the acquirer "controls" the bank holding company or depository institution and the acquisition of such control would be subject to federal regulatory approval. In addition, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including our Bank.

There also are provisions in our amended and restated certificate of incorporation and amended and restated bylaws, such as limitations on the ability to call a special meeting of our stockholders, and the classification of our Board of Directors into three separate classes each serving for three-year terms, that may be used to delay or block a takeover attempt. In addition, our Board of Directors is authorized under our amended and restated certificate of incorporation to issue shares of preferred stock, and determine the rights, terms, conditions and privileges of such preferred stock, without stockholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of our common stock.

We have also elected in our amended and restated certificate of incorporation to be governed by Section 203 of the Delaware General Corporation Law which generally prohibits a person qualifying as an "interested stockholder" from entering into a transaction for a business combination with us unless, subject to certain exceptions, such transaction is first approved by our Board of Directors. An "interested stockholder" is generally defined as any person who owns 15% or more of our outstanding voting stock. The purpose of this election is to provide our Board of Directors with leverage in negotiating with an interested stockholder desiring to pursue a business combination with us by making it more difficult for such stockholder to complete such transaction in the absence of board approval. This election may discourage certain take-over attempts which our stockholders may otherwise deem to be in their best interests and this, in turn, could have an adverse effect on the market price of our common stock.

We are required to act as a source of financial and managerial strength for our Bank in times of stress.

Under federal law and longstanding Federal Reserve policy, we are expected to act as a source of financial and managerial strength to our Bank, and to commit resources to support our Bank if necessary. We may be required to commit additional resources to our Bank at times when we may not be in a financial position to provide such resources or when it may not be in our, or our stockholders’ or creditors’, best interests to do so. Providing such support is more likely during times of financial stress for us and our Bank, which may make any capital we are required to raise to provide such support more expensive than it might otherwise be. In addition, any capital loans we make to our Bank are subordinate in right of payment to depositors and to certain other indebtedness of our Bank. In the event of our bankruptcy, any commitment by us to a federal banking regulator to maintain the capital of our Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

We may be subject to more stringent capital requirements in the future.

We are subject to current and changing regulatory requirements specifying minimum amounts and types of capital that we must maintain, which if we fail, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends and repurchasing or redeeming capital securities.

In particular, the capital requirements applicable to us under the recently adopted Capital Rules implementing the Basel III capital framework in the United States started to be phased-in on January 1, 2015. While we expect to meet the requirements of the new Basel III-based Capital Rules, we may fail to do so. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial condition and results of operations. In addition, these requirements could have a negative impact on our ability to lend, grow deposit balances, make acquisitions or make capital distributions in the form of dividends or share repurchases. Higher capital levels could also lower our return on equity.

Strategic Risks

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or an adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry generally.

We operate in a highly competitive industry and market area.

In our markets, we face significant competition from other commercial banks, savings banks, credit unions, non-bank financial services companies and other financial institutions, particularly nationwide and regional banks and larger community banking institutions. We also face competition for agricultural loans from participants in the nationwide Farm Credit System and global banks. In addition, FinTech's are emerging in key areas of banking. Our competitors may have substantially greater resources and lending limits than we do and may offer services that we do not or cannot provide. Many of our nonfinancial institution competitors have fewer regulatory constraints, broader geographic service areas and, in some cases, lower cost structures. Our profitability depends upon our continued ability to compete in our markets.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Our inability to compete successfully in the markets in which we operate could have a material adverse effect on our business, financial condition or results of operations.

We may not be able to successfully execute our strategic plan or manage our growth.

Our growth strategy focuses on organic growth, supplemented by acquisitions and requires us to manage several different elements simultaneously. Sustainable growth requires that we manage our risks by balancing loan and deposit growth at acceptable levels of risk, maintaining adequate liquidity and capital, hiring and retaining qualified employees, successfully managing the costs and implementation risks with respect to strategic projects and initiatives, and integrating acquisition targets and managing the costs. Our growth strategy may also change from time to time as a result of various internal and external factors. Our inability to manage our growth successfully could have a material adverse effect on our business, financial condition or results of operations.

We may be adversely affected by risks associated with completed and potential acquisitions.

Our growth strategy has included consideration of potential acquisition opportunities that we believe support our business strategy and may enhance our profitability. We face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. There can be no assurance that we will be successful in identifying or completing any future acquisitions and there is no assurance that, following any mergers or acquisitions, our integration efforts will be successful or that, after giving effect to the acquisition, we will achieve profits comparable to, or better than, our historical experience. Acquisitions also involve numerous risks, including:

• the time, expense and diversion of management attention associated with identifying and evaluating potential acquisition targets and new markets and negotiating potential transactions;

• the accuracy of the estimates and judgments used to evaluate credit, operations, funding, liquidity, liabilities, management and market risks with respect to the target institution;

• the risk that the acquired business will not perform to our expectations, including a failure to realize anticipated synergies or cost savings;

• difficulties, inefficiencies or cost overruns in integrating and assimilating the organizational cultures, operations, technologies, data, services and products of the acquired business with ours;

• the potential loss of key employees or customers;

• our ability to finance an acquisition and possible dilution to our existing shareholders; and

• the potential for liabilities and claims arising out of the acquired businesses or closing delays and increased expenses related to the resolution of lawsuits filed by shareholders of targets.

Failed bank acquisitions involve risks similar to acquiring operating banks even though the FDIC might provide assistance to mitigate certain risks, such as sharing in exposure to credit losses and providing indemnification against certain liabilities of the failed institution. However, because these acquisitions are typically conducted by the FDIC in a manner that does not allow the time typically taken for a due diligence review or for preparing the integration of an acquired institution, we may face additional risks in transactions with the FDIC. These risks include, among other things, accuracy or completeness of due diligence materials, the loss of core deposits and strain on management resources related to collection and management of problem loans. There can be no assurance that we will be successful in overcoming these risks encountered in connection with such acquisitions, nor that any FDIC-assisted opportunities will be available to us in our markets. Our inability to overcome these risks could have a material adverse effect on our business, financial condition or results of operations.

We must generally receive federal regulatory approval before we can acquire a bank or bank holding company. We cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. We may be required to sell banks or branches as a condition to receiving regulatory approval. Bank regulators consider a number of factors when determining whether to approve a proposed transaction, including the effect of the transaction on financial stability and the ratings and compliance history of all institutions involved, including the CRA, examination results and anti-money-laundering and BSA compliance records of all institutions involved. Failure to comply with such requirements could also have serious legal and reputational consequences, including causing delay in approval or denial of such transactions when regulatory approval is required, or to prohibit such transactions even if approval is not required.

Our ability to maintain, attract and retain customer relationships is highly dependent on our reputation.

Damage to our reputation could undermine the confidence of our current and potential customers. Such damage could also impair the confidence of our counterparties and vendors and affect our ability to effect transactions. Maintenance of our reputation depends on customer service and mitigation of the various risks described herein, as well as on identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, privacy, employee, customer and other third party fraud, record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements, successfully preventing third parties from infringing on the "Great Western Bank" brand and associated trademarks and our other intellectual property and avoiding adverse publicity or negative information regarding our Company, whether or not true, that may be posted on social media, non-mainstream news services or other parts of the internet. Defense of our reputation, trademarks and other intellectual property, could result in material adverse effect on our business, financial condition or results of operations.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial condition or results of operations.

From time to time, the FASB, SEC and other regulators change the financial accounting and reporting standards that govern the preparation of our financial statements, potentially requiring us to modify certain of the assumptions or estimates we have previously used in preparing our financial statements, negatively impacting how we record and report our results of operations and financial condition generally. For additional information on the key areas for which assumptions and estimates are used in preparing our financial statements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and the Impact of Accounting Estimates."

Our accounting estimates and risk management processes rely on analytical and forecasting techniques.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported under a different alternative.

Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include, but are not limited to, the allowance for credit losses, valuation of assets acquired and liabilities assumed in business combinations, goodwill impairment, investment impairments, core deposits and other intangibles, derivatives and income taxes. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for credit losses or sustain credit losses that are significantly higher than the reserve provided; recognize significant impairment on goodwill and other intangible asset balances; reduce the carrying value of an asset measured at fair value; or significantly increase our accrued tax liability. Any of these could have a material adverse effect on our business, financial condition or results of operations. For a discussion of our critical accounting policies, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and the Impact of Accounting Estimates."

We may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.

Within the financial services industry, loss of public confidence, including through default by any one institution, could lead to liquidity challenges or to defaults by other institutions as the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions.

Operational Risk

Operational risks are inherent in our business, including existing and new lines of business, products and services; and internal controls, processes and procedures that may fail or be circumvented.

Our operations depend on our ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations, and to establish and maintain products and services that operationally function accurately and correctly. Although we have implemented risk controls and loss mitigation actions, policies, procedures, corporate governance and substantial resources devoted to developing efficient procedures, identifying and rectifying weaknesses in existing procedures and training staff, the foregoing can only provide reasonable (not absolute) assurances that the objectives of the system are met. Any failure, circumvention or weakness in these systems or controls, or any actual or alleged violations of laws or regulations, could result in increased regulatory scrutiny, enforcement actions, reputational impact or legal proceedings and could have an adverse impact on our business, financial condition or results of operations. Such failure, circumventions or weakness could necessitate changes to our controls, processes and procedures, which may increase our compliance costs, divert management attention from our business. Any of these could have a material adverse effect on our business, financial condition or results of operations.

Our operations could be interrupted if certain external vendors on which we rely experience difficulty, terminate their services or fail to comply with banking laws and regulations.

We depend to a significant extent on relationships with third party service providers. Specifically, we utilize third party core banking services and receive credit card and debit card services, branch capture services, Internet banking services and services complementary to our banking products from various third party service providers. These types of third party relationships are subject to increasingly demanding regulatory requirements where we must maintain and continue to enhance our due diligence and ongoing monitoring and control over our third party vendors. We may be required to renegotiate our agreements to meet these enhanced requirements, which could increase our costs. If our service providers experience difficulties or terminate their services and we are unable to replace them, our operations could be interrupted. It may be difficult for us to timely replace some of our service providers, which may be at a higher cost due to the unique services they provide. A third party provider may fail to provide the services we require, or meet contractual requirements, comply with applicable laws and regulations, or suffer a cyber attack or other security breach. We expect that our regulators will hold us responsible for deficiencies of our third party relationships which could result in enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, or customer remediation, any of which could have a material adverse effect on our business, financial condition or results of operations.

We are subject to risks related to employee management, conduct and compensation.

Our success depends, in large part, on the skills of our management team and our ability to retain, recruit and motivate key officers and employees that may be difficult to replace. We cannot predict whether significant resignations will occur. Our ability to effectively compete for senior executives and other qualified personnel with appropriate skills and knowledge to support our business may require us to offer compensation, including incentive based compensation, and benefits which could reduce our earnings. In addition, such arrangements may be restricted by applicable banking laws and regulations such as the compensation-related provisions of the Dodd-Frank Act, and other laws now and in the future, which prohibit incentive-based payment arrangements that encourage inappropriate risk taking. Deficiencies identified could lead to diminished supervisory ratings, enforcement actions and legal and reputational risk. For more information see "Item 1. Business—Supervision and Regulation—Incentive Compensation."

Due to competition and other factors, we may have difficulty recruiting qualified personnel, including uniquely qualified banking personnel to provide relationship based commercial and agribusiness banking services, to ensure the continued growth and successful operation of our business. We may also fail to detect and prevent fraudulent, illegal or wrongful activities by our employees. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

We rely extensively on models in managing many aspects of our business, and these models may be inaccurate or misinterpreted.

We rely extensively on models in managing many aspects of our business, including liquidity and capital planning, customer selection, credit and other risk management, pricing, reserving and collections management. The models may prove in practice to be less predictive than we expect. The errors or inaccuracies in our models may be material, and could lead us to make wrong or sub-optimal decisions in managing our business, and this could have a material adverse effect on our business, financial condition or results of operations. See "—Our business depends on our ability to successfully manage credit risk " for more information on models utilized in credit activities.

Risks Related to Legal, Reputational and Compliance Matters

Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance ("ESG") practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs for us as well as among our suppliers, vendors and various other parties within our supply chain could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.

Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. In the normal course of business, we are periodically involved in claims and related litigation from our customers, employees or other parties. These claims and legal actions, whether meritorious or not, as well as reviews, investigations and proceedings by governmental and self-regulatory agencies could involve large monetary claims and significant legal expense and may negatively impact our reputation in the marketplace and lessen customer demand. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could materially and adversely affect our business, financial condition or results of operations.

The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our business, financial condition or results of operations.

The banking industry is extensively regulated and supervised under federal and state laws and regulations, and payment card industry operating regulations that are intended primarily for the protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our stockholders and creditors. We are subject to regulation and supervision by the Federal Reserve, and our Bank is subject to regulation and supervision by the FDIC, the SD Division of Banking and the CFPB. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves our Bank must hold against deposits it takes, the types of deposits our Bank may accept and the rates it may pay on such deposits, maintenance of adequate capital and liquidity, changes in the control of us and our Bank, restrictions on dividends and establishment of new offices by our Bank. We must obtain approval from our regulators before engaging in certain activities, and there can be no assurance that any regulatory approvals we may require will be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to, or restrict us from, taking certain actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with payment card operating regulations could result in termination of our license to use the payment card networks. Failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition or results of operations.

Federal and state banking laws and regulations continue to undergo substantial change. Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities which may result in increased costs of doing business, decreased revenues and net income, reductions in our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes could affect us in substantial and unpredictable ways, impact the regulatory structure under which we operate, significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and modify our business strategy, limit our ability to pursue business opportunities in an efficient manner, or other ways that could have a material adverse effect on our business, financial condition or results of operations.

We are subject to heightened regulatory requirements as our total assets exceed $10 billion.

The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements, more restrictive interchange revenue and a more frequent and enhanced regulatory examination regime, including being examined by the CFPB with respect to various federal consumer financial protection laws, with the FDIC maintaining supervision over some consumer related regulations. As a relatively new agency with evolving regulations and practices, there is some uncertainty as to how the CFPB’s examination and regulatory authority might impact our business. Compliance may necessitate that we hire additional compliance or other personnel, implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations.

We are subject to the CRA, fair lending, consumer compliance, and other laws and regulations, and our failure to comply with these laws and regulations could lead to material penalties.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose non-discriminatory lending and other requirements on financial institutions. The U.S. Department of Justice and other federal agencies, including the FDIC and CFPB, are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA, fair lending and other compliance laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. The costs of defending, and any adverse outcome from, any such challenge could damage our reputation or could have a material adverse effect on our business, financial condition or results of operations. Our Bank received an overall rating of "satisfactory" in its most recently completed CRA examination.

Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorney's fees. Federal bank regulators, state attorney generals and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, enforcement actions, customer rescission rights and civil money penalties in the jurisdictions in which we operate. Failure to comply with consumer protection requirements may also result in delays or restrictions on mergers and acquisitions and expansionary activities we may wish to pursue.

Failure to comply with the USA PATRIOT ACT, OFAC, the BSA and related FinCEN and FFIEC Guidelines and regulations could result in material implications.

Regulatory authorities routinely examine financial institutions for compliance with the USA PATRIOT ACT, OFAC, the BSA and related FinCEN and FFIEC Guidelines. Certain products we offer may expose us to enhanced risk in the event of noncompliance, including and not limited to providing our treasury management services to certain money transmitters and money services businesses. Failure to maintain and implement adequate programs as required by these obligations to combat terrorist financing, elder abuse, human trafficking, anti-money laundering and other suspicious activity and to fully comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for us, causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and significant civil money penalties against institutions found to be violating these regulations.

Risks Related to Privacy and Technology

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

We ourselves must, and are also responsible to ensure our third party service providers in providing services to us, comply with various privacy, information security and data protection laws, such as the Gramm-Leach-Bliley Act. New privacy regulations may require substantial operational changes, updated disclosures, enhancements to our robust security program and planned privacy, data protection and information security-related practices, and our collection, use, sharing, retention and safeguarding of consumer or employee information. Such actions would increase in our costs of compliance and business operations and could reduce income from certain business initiatives. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.

Interruptions, cyber-attacks or other security breaches could have a material adverse effect on our business.

In the normal course of business, we directly or through third parties collect, store, share, process and retain sensitive and confidential information regarding our customers. We devote significant resources and management focus to ensuring the integrity of our systems, against damage from fires or other natural disasters; power or telecommunications failures; acts of terrorism or wars or other catastrophic events; breaches, physical break-ins or errors resulting in interruptions and unauthorized disclosure of confidential information, through information security and business continuity programs. Notwithstanding, our facilities and systems, and those of third party service providers, are vulnerable to interruptions, external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, force majeure events, or other similar events. We outsource certain aspects of our data processing and other operational functions to certain third-party providers. If our third-party providers encounter difficulties including those resulting from breach, breakdowns or other disruptions in communication services, cyber-attacks and security breaches or if we otherwise have difficulty in our ability to deliver products and services to our customers and otherwise conduct business operations, our business, financial condition or results of operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer's information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. Increased use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and operations, coupled with the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others increases our security risks. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers continue to engage in attacks against large financial institutions. These attacks include denial of service attacks designed to disrupt external customer facing services, and ransomware attacks designed to deny organizations access to key internal resources or systems. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection. Further, our cardholders use their debit and credit cards to make purchases from third parties or through third party processing services. As such, we are subject to risk from data breaches of such third party's information systems or their payment processors. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems where we may be liable for losses. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our customers' or counterparties' confidential information, including employees.

The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies and business secrets, failures or disruptions in our communications, information and technology systems, or our failure to adequately address them, could negatively affect our customer relationship management, general ledger, deposit, loan or other systems. We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. Our insurance may not fully cover all types of losses. The occurrence of any failures or interruptions of our communications, information and technology systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition or results of operations. We could be required to provide notices of security breaches. Such failures could result in increased regulatory scrutiny, legal liability, a loss of confidence in the security of our systems, our payment cards, products and services, and negative effects on our brand which could have a material adverse effect on our business, financial condition or results of operations.

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with new, technology-driven products and services which increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, increased efficiencies in our operations and upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands. Service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws, having a material adverse effect on our business, financial condition or results of operations.

We are subject to escheatment laws and regulations which could have a material impact on our operations.

We are subject to unclaimed or abandoned property (escheat) laws in the United States and abroad which require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time, such as unredeemed money transfers. We hold property subject to escheat laws and we have an ongoing program to comply with those laws; however, unclaimed property reporting is extremely complex, state reporting guidelines may be unclear, or internal bank systems may have operational limitations, causing a greater likelihood of error. There is litigation risk for failure to accurately report unclaimed property, and we could be subject to sanctions, including fines, interest and penalties on amounts that should have been escheated. Any difference between the amounts we have accrued for unclaimed property and amounts that are claimed by a state or foreign jurisdiction could have a significant impact on our results of operations and cash flows. From time to time, the treasurers or controllers of various states and other jurisdictions, or their revenue departments, conduct audits of companies’ unclaimed property practices. We have received notice that a private contractor is initiating such an audit of the Bank, on behalf of the treasurers, controllers, or revenue departments of several states, to evaluate the Bank’s compliance with unclaimed property laws. The audits may result in additional escheatment of funds deemed abandoned under state laws, administrative penalties, interest, and changes to our procedures for the identification and escheatment of abandoned property. We believe additional escheatment of funds will not be material to our financial condition or results. However, at this time, we are not able to estimate any of these possible amounts.

General Risk Factors

Severe weather, natural disasters, acts of war or terrorism or other external events could significantly impact our business.

Severe weather, natural disasters, widespread disease or new pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. Because of the concentration of agricultural loans in our lending portfolio and the volume of our borrowers in regions dependent on agriculture, we could be disproportionately affected relative to others in the case of external events such as floods, droughts and hail affecting the agricultural conditions in the markets we serve. The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.

We may have exposure to tax liabilities that are larger than we anticipate.

The tax laws applicable to our business activities, including the laws of the United States, South Dakota and other jurisdictions, are subject to interpretation and may change over time. From time to time, legislative initiatives, such as corporate tax rate changes, which may impact our effective tax rate and could adversely affect our deferred tax assets or our tax positions or liabilities, may be enacted. The taxing authorities in the jurisdictions in which we operate may challenge our tax positions, which could increase our effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being higher than anticipated in jurisdictions that have higher statutory tax rates or by changes in tax laws, regulations or accounting principles. We are subject to audit and review by U.S. federal and state tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our provision for income taxes and other liabilities requires significant judgment by management. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and could have a material adverse effect on our financial results in the period or periods for which such determination is made.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The historical consolidated financial data discussed below reflects our historical results of operations and financial condition and should be read in conjunction with our financial statements and related notes thereto presented in Item 8 of this Annual Report on Form 10-K. In addition to historical financial data, this discussion includes certain forward-looking statements regarding events and trends that may affect our future results. Such statements are subject to risks and uncertainties that could cause our actual results to differ materially. See "Cautionary Note Regarding Forward-Looking Statements." For a more complete discussion of the factors that could affect our future results, see "Item 1A. Risk Factors."

Any discrepancies included in this filing between totals and the sums of percentages and dollar amounts presented, or between rounded dollar amounts, are due to rounding.

Tax Equivalent Presentation

All references to net interest income, net interest margin, interest income on non-ASC 310-30 loans, yield on ASC 310-30 loans and the related non-GAAP adjusted financial measure of each item are presented on a FTE basis unless otherwise noted.

Key Factors Affecting Our Business and Financial Performance

We believe that stable long-term growth and profitability are the result of building strong customer relationships while maintaining disciplined underwriting standards and continuing to focus on our operational efficiency. We plan to focus on originating high-quality loans and growing our deposit base through our relationship-based business banking approach. We believe that continuing to focus on our core strengths will enable us to gain market share and increase profitability. For more information on the key components of our strategy for continued success and future growth, see "Part I, Item 1. Business—Our Strategy."

We face a variety of risks that may impact various aspects of our risk profile from time to time. The extent of such impacts may vary depending on factors including the continuing effects of the COVID-19 pandemic on our financial condition and results of operations, as well as the current economic, political and regulatory environment, merger and acquisition activity and operational challenges. For more information on these risks and our risk management strategies, see "Cautionary Note Regarding Forward-Looking Statements, "Part I, Item 1. Business" and "Part I, Item 1A. Risk Factors."

Overview

We are a full-service regional bank holding company focused on relationship-based business banking. Our Bank was established more than 80 years ago and we have achieved strong market positions by developing and maintaining extensive local relationships in the communities we serve. We serve our customers through 174 branches in attractive markets in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. We provide financial results based on a fiscal year ending September 30 as a single reportable segment.

The principal sources of our revenues and cash flows are: (i) interest and fees earned on loans made or held by our Bank; (ii) interest on fixed income investments held by our Bank; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at our Bank; (v) gain on the sale of loans held for sale (vi) gains on sales of securities; and (vii) merchant and card fees. Our principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs primarily associated with maintaining our Bank's loan and deposit functions; (iv) occupancy expenses for maintaining our Bank's facilities; (v) professional fees, including FDIC insurance assessments; (vi) business development; and (vii) other real estate owned expenses. The largest component contributing to our net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposit accounts and other borrowings). One of management's principal functions is to manage the spread between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

Pending Merger of First Interstate BancSystem and Great Western Bancorp

On September 16, 2021, First Interstate BancSystem, Inc. (NASDAQ: FIBK), parent company of First Interstate Bank, and Great Western Bancorp, Inc., parent company of Great Western Bank, announced they have entered into a definitive agreement under which the companies will combine in an all‐stock transaction. Under the terms of the agreement, which was unanimously approved by both companies’ Boards of Directors, Great Western will merge into FIBK and the combined holding company and bank will operate under the First Interstate name and brand with the company’s headquarters remaining in Billings, Montana. Pending regulatory and shareholder approvals and the satisfaction of the closing conditions set forth in the agreement, the transaction is expected to close during the first calendar quarter of 2022.

Impact and Response to COVID-19 Pandemic

We conduct business in nine states, including Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. Many of these states placed significant restrictions on businesses and individuals at the outset of the COVID-19 pandemic. While many of these initial restrictions have been lifted, there is still the possibility that certain restrictions could be re-imposed or extended to contain further spread if the rate of infection were to surge again in any of these states, including as a result of the Delta variant that has recently caused an uptick in infections particularly among non-vaccinated individuals. As a financial institution, we are considered an essential business and remain focused on keeping our employees safe and our bank running effectively to serve our customers and continue to monitor the continued spread of COVID-19 and its Delta variant. Our branches have been reopened across our footprint, and we have implemented a full return to work that still provides for flexible remote work optionality and adherence to CDC guidelines in the office.

Furthermore, the onset and continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our business and continuation of operations, including the following:

• Market interest rates have declined significantly, and these reductions, especially if prolonged, could adversely affect our net interest income, net interest margin and earnings;

• We have experienced and continue to anticipate a slowdown in demand for our products and services, including the demand for traditional loans. Although the decline has been offset, in part, due to PPP loans under the CARES Act and other governmental programs established in response to the pandemic, the PPP forgiveness process will continue to lessen the positive impact of these programs;

• We have experienced and continue to anticipate an increase in risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, all of which may result in additional credit charges and other losses in our loan portfolio;

• Volatility in economic forecasts caused by the COVID-19 pandemic create wider uncertainty in the outlook for future net charge off activity resulting in the potential for changing levels of reserves in the allowance for credit losses;

• Declines in fair value of investment securities in our portfolio due to economic uncertainties could reduce the unrealized gains reported as part of our consolidated comprehensive income (loss); and

• In meeting our objective to maintain our capital levels and liquidity position through the COVID-19 pandemic, our Board of Directors indefinitely suspended additional stock buybacks and reduced our dividend payments from pre-pandemic levels, and could still determine to altogether forego future dividends in order to maintain and/or strengthen our capital and liquidity position.

Highlights for the Fiscal Year Ended September 30, 2021

Net income and adjusted net income was $203.3 million, or $3.67 per diluted share, for fiscal year 2021, compared to net loss of $680.8 million, or $12.24 per diluted share for fiscal year 2020, while adjusted net income, which excludes the COVID-19 pandemic impact on goodwill, certain intangible assets and credit and other related charges, was $88.9 million, or $1.60 per diluted share for fiscal year 2020. The increase in adjusted net income was due to a reversal of provision for credit losses combined with an increase in noninterest income and a decrease in noninterest expense, excluding the impairment of goodwill and certain intangible assets. Our efficiency ratio, which measures our ability to manage noninterest expenses, was 50.5% for fiscal year 2021, compared to 61.9% for fiscal year 2020. For more information on our adjusted net income and efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" section.

Net interest margin, which measures our ability to maintain interest rates on interest earning assets above those of interest-bearing liabilities, was 3.36%, 3.59% and 3.74% for fiscal years 2021, 2020 and 2019, respectively. Adjusted net interest margin, which reflects the realized gain (loss) on interest rate swaps, was 3.26%, 3.51% and 3.74% for the same periods, respectively. We believe our adjusted net interest margin is more representative of our underlying performance and is the measure we use internally to evaluate our results. Net interest margin and adjusted net interest margin were 23 and 25 basis points lower, respectively, compared to fiscal year 2020. Net interest margin decreased between the two periods due to securities yields, which decreased 64 basis points, loan yields, which decreased 15 basis points, and a shift in mix of interest-earning assets toward interest-bearing bank deposits and investment securities, both with lower yields compared to loans. These decreases were partially offset by the cost of deposits, which decreased 41 basis points. A $4.0 million increase in the cost of interest rate swaps between the periods is the primary driver of the more pronounced decrease in adjusted net interest margin compared to net interest margin. For more information on our adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

Total loans were $8.19 billion as of September 30, 2021, compared to $10.08 billion as of September 30, 2020, a decrease of $1.89 billion, or 18.8%. The net loan reduction was driven by sales of $267.5 million in hotel loans in fiscal year 2021, a net decrease of $515.3 million of PPP loans, and an increase in paydowns across the commercial and agriculture portfolios.

Deposits were $11.31 billion at September 30, 2021 an increase of $301.7 million, or 2.7%, compared to $11.01 billion at September 30, 2020, due to an $876.7 million increase in checking and savings deposits across both business and consumer accounts, offset by a $229.5 million decrease in business and consumer time deposits and a $345.5 million decrease in public and brokered deposits. FHLB advances and other borrowings decreased by $75.0 million due to matured borrowings during the period.

At September 30, 2021, nonaccrual loans were $197.9 million, a decrease of $127.0 million compared to September 30, 2020, driven by repayments on multiple agricultural and commercial nonaccrual loans. Classified loans were $604.9 million as of September 30, 2021, a decrease of $164.6 million, compared to $769.5 million at September 30, 2020, driven by a number of upgraded agriculture relationships, and a number of payoffs and sales in both agriculture and non-agriculture loans. Total other repossessed property balances were $4.5 million as of September 30, 2021, a decrease of $15.5 million, or 77.6%, compared to September 30, 2020.

ASU 2016-13, referred to as the current expected credit loss ("CECL") model, was adopted effective October 1, 2020, and as such, the provision for credit losses in fiscal year 2021 reflects current expected credit losses based on forecasted economic and other assumptions, including the estimated impacts of COVID-19, over the remaining expected lives of financial assets and off-balance sheet credit exposures, whereas the fiscal year 2020 methodology applied an incurred loss model.

The balance of the ACL increased to $246.0 million at September 30, 2021 from $149.9 million at September 30, 2020 due to the impact of CECL adoption on October 1, 2020, where we recognized a Day 1 increase in the ACL of $177.3 million. The increase in ACL related to the adoption of CECL was partially offset by a reversal of provision for credit losses of $34.7 million for fiscal year 2021 due to lower loan balances and improved economic factors. For the same period in fiscal year 2020, we recognized a provision for credit losses of $118.4 million as a result of the impact of the COVID-19 pandemic. Net charge-offs for fiscal year 2021 were $47.6 million, or 0.52% of average total loans on an annualized basis, compared to net charge-offs of $39.3 million, or 0.40% of average total loans on an annualized basis, for fiscal year 2020. The increase in charge-offs was driven primarily by $34.0 million of charge-offs related to the sales of certain hotel loans during the period, partially offset by a reduction in agriculture and commercial non-real estate loan charge-offs of $16.2 million and $8.0 million, respectively.

Tier 1 capital, total capital and Tier 1 leverage ratios were 15.1%, 16.3% and 10.6%, respectively, at September 30, 2021, compared to 11.8%, 13.3% and 9.4%, respectively, at September 30, 2020. In addition, our Common Equity Tier 1 ratio was 14.3% and 11.0% at September 30, 2021 and September 30, 2020, respectively. Our tangible common equity to tangible assets ratio was 9.3% at September 30, 2021 and 9.2% at September 30, 2020. All regulatory capital ratios remain above regulatory minimums to be considered "well capitalized". For more information on our tangible common equity to tangible assets ratio, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

Results of Op erations—Fiscal Years Ended September 30, 2021 , 2020 and 2019

Overview

The following table highlights certain key financial and performance information for fiscal years 2021, 2020 and 2019.

At and for Fiscal Years Ended September 30,

(dollars in thousands, except share and per share amounts)

Operating Data:

Interest income (FTE)

Interest expense

Noninterest income

Noninterest expense

(Reversal of) provision for credit losses ²

Net income (loss)

Adjusted net income ¹

Common shares outstanding

Weighted average diluted common shares outstanding

Earnings per common share - diluted

Adjusted earnings per common share - diluted ¹

Performance Ratios:

Net interest margin (FTE) ¹

Adjusted net interest margin (FTE) ¹

Return on average total assets

Return on average common equity

Return on average tangible common equity ¹

Efficiency ratio ¹

1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

3 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the provision for loan and lease losses under the incurred model.

Net Interest Income 1

The following tables present net interest income 1 , net interest margin and adjusted net interest margin 2 for fiscal years 2021, 2020 and 2019.

At and for Fiscal Years Ended September 30,

(dollars in thousands)

Net interest income ¹:

Total interest income (FTE)

Less: Total interest expense

Net interest income (FTE)

Net interest margin (FTE) and adjusted net interest margin (FTE) ¹ ²

Average interest-earning assets

Average interest-bearing liabilities

Net interest margin (FTE) ¹

Adjusted net interest margin (FTE) ²

1 All references to net interest income and net interest margin are presented on a fully-tax equivalent basis unless otherwise noted.

2 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

Net interest income (FTE) decreased $17.5 million, or 4.1%, to $408.1 million in fiscal year 2021 from $425.6 million in fiscal year 2020. The decrease in net interest income (FTE) was driven by lower interest income of $68.2 million as a result of lower loan volumes and lower loan and securities yields. The decrease in interest income (FTE) was partially offset by a decrease in interest expense of $50.7 million as a result of lower yields on interest-bearing deposits, along with a decrease in borrowings. Net interest income (FTE) in fiscal year 2020 decreased $1.0 million, or 0.2%, from $426.6 million in fiscal year 2019. The decrease in net interest income (FTE) was primarily attributable to lower yields on loans and investments, partially offset by lower interest expense associated with deposits and borrowings for the same periods.

Net interest margin was 3.36% and 3.59% in fiscal years 2021 and 2020, respectively, while adjusted net interest margin was 3.26% and 3.51% over the same periods, respectively. The decrease in net interest margin was due to securities yields, which decreased 64 basis points, loan yields, which decreased 15 basis points, and a shift in mix of interest-earning assets toward interest-bearing bank deposits and investment securities, both with lower yields compared to loans. These decreases were partially offset by the cost of deposits, which decreased 41 basis points. A $4.0 million and $9.3 million increase, respectively, in the cost of interest rate swaps in fiscal years 2021 and 2020, is the primary driver for the more pronounced decrease in adjusted net interest margin compared to the decrease in net interest margin.

Net interest margin was 3.59% in fiscal year 2020, compared with 3.74% in fiscal year 2019. Adjusted net interest margin was 3.51% and 3.74% over the same periods, respectively. The decrease in net interest margin was primarily due to the cost of deposits and borrowings, which decreased 49 and 58 basis points, respectively, while loan yields decreased 57 basis points and investment yields decreased 30 basis points. A $9.3 million increase in the cost of interest rate swaps between the periods is the primary driver of the more pronounced decrease in adjusted net interest margin compared to net interest margin. For more information on our adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

The following table presents the distribution of average assets, liabilities and equity, interest income and resulting yields on average interest-earning assets, and interest expense and rates on average interest-bearing liabilities for fiscal years 2021, 2020 and 2019, respectively. Loans on nonaccrual status that had interest accrued as of the date of nonaccrual are immediately reversed as a reduction to interest income, while any interest subsequently recovered is recorded in the period of recovery. Tax-exempt loans and securities, totaling $694.6 million at September 30, 2021 and $717.2 million at September 30, 2020, are typically entered at lower interest rate arrangements than comparable non-exempt loans and securities. The amount of interest income reflected below has been adjusted to include the amount of tax benefit realized in the period and as such is presented on a fully-tax equivalent basis, the calculation of which is outlined in the discussion of non-GAAP items later in this section. Prior to the October 1, 2020 adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and subsequent related ASUs, ASC 310-30 loans represented loans accounted for in accordance with ASC 310-30 Accounting for Purchased Loans that were credit impaired at the time we acquired them. Non-ASC 310-30 loans represented loans we have originated and loans we have acquired that were not credit impaired at the time we acquired them.

Fiscal Years Ended September 30,

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

Other interest-earning assets

Investment securities

Non-ASC 310-30 loans, net ²

ASC 310-30 loans, net ³

Loans, net

Total interest-earning assets

Noninterest-earning assets

Total assets

Liabilities and Stockholders' Equity

Noninterest-bearing deposits

Interest-bearing deposits

Time deposits

Total deposits

Securities sold under agreements to repurchase

FHLB advances and other borrowings

Subordinated debentures and subordinated notes payable

Total borrowings

Total interest-bearing liabilities

Noninterest-bearing liabilities

Stockholders' equity

Total liabilities and stockholders' equity

Net interest spread

Net interest income and net interest margin (FTE)

Less: Tax equivalent adjustment

Net interest income and net interest margin - ties to Statements of Comprehensive Income

1 Interest income includes $0.1 million, $0.9 million and $0.7 million for fiscal years 2021, 2020 and 2019, respectively, resulting from interest earned on derivative collateral included in other assets on the consolidated balance sheets.

2 Interest income includes $0.0 million, $1.4 million and $1.3 million for fiscal years 2021, 2020 and 2019, respectively, resulting from accretion of purchase accounting discount associated with acquired loans.

3 Beginning in the first quarter of fiscal year 2021, ASC 310-30 loans began being reported with non-ASC 310-30 loans. Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and subsequent related ASUs, discounts on ASC 310-30 loans related to noncredit factors accreted to interest income were immaterial.

Interest Income 1

The following table presents interest income for fiscal years 2021, 2020 and 2019.

Fiscal Years Ended September 30,

(dollars in thousands)

Interest income:

Loans (FTE)

Investment securities

Federal funds sold and other

Total interest income (FTE)

Less: Tax equivalent adjustment

Total interest income (GAAP)

Total interest income (FTE) consists primarily of interest income on loans and interest income on our investment portfolio. Total interest income (FTE) decreased $68.2 million, or 13.7%, to $431.5 million for fiscal year 2021, from $499.7 million for fiscal year 2020, which decreased $49.1 million, or 8.9%, from $548.8 million for fiscal year 2019. Significant components of interest income are described in further detail below.

Loans. Interest income (FTE) on all loans decreased to $395.3 million in fiscal year 2021 from $455.7 million in fiscal year 2020, a decrease of $60.4 million, or 13.2%. The decrease in loan interest was attributable to lower loan volumes and loan yields, which decreased 15 basis points, reflecting the impact of PPP loans which yield a lower rate. Additionally, PPP income, which is included in loan interest, was $27.5 million and $10.2 million for fiscal years 2021 and 2020, respectively. Average net loan balances for fiscal year 2021 were $8.78 billion, representing a 10.4% decrease compared to the same period in fiscal year 2020.

Interest income (FTE) on all loans in fiscal year 2020 decreased $49.1 million, or 9.7%, from $504.8 million in fiscal year 2019 due to a decrease in yields on loans as discussed below and an increase in volume. Average net loan balances for fiscal year 2020 were $9.80 billion, representing a 1.3% increase compared to the same period in fiscal year 2019.

Our yield on loans is affected by market interest rates, the level of adjustable-rate loan indices, interest rate floors and caps, customer repayment activity, the level of loans held for sale, portfolio mix , and the level of nonaccrual loans. The average tax equivalent yield on loans was 4.50% for fiscal year 2021, a 15 basis point decrease compared to 4.65% for fiscal year 2020, which was an 57 basis point decrease from 5.22% for fiscal year 2019. Adjusted for the current realized gain (loss) on derivatives we use to manage interest rate risk on certain of our loans at fair value, which we believe represents the underlying economics of the transactions, the adjusted yield on loans was 4.36% for fiscal year 2021, a decrease of 16 basis points compared to 4.52% for fiscal year 2020, which was a 66 basis points decrease compared to 5.18% for fiscal year 2019. For more information on our adjusted yield on non-ASC 310-30 loans, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

The average duration, net of interest rate swaps, of the loan portfolio was 1.5 years as of September 30, 2021. Approximately 50%, or $4.10 billion, of the portfolio is comprised of fixed rate loans, $524.5 million of which have an original term of 5 years or greater for which we have entered into equal and offsetting fixed-to-floating interest rate swaps. These loans effectively behave as floating rate loans. For floating and variable rate loans in the portfolio, approximately 38% are indexed to Wall Street Journal Prime, 26% to 5-year Treasuries, 25% are indexed to 1-month LIBOR and the balance to various other indices. Less than 16% of our total loans' rates are floored, with an average interest rate floor 84 basis points above market rates as of September 30, 2021. In addition, there were approximately 7% of our total loans with rate floors that have not been reached, with an average interest rate 8 basis points below market rates.

Loan-related fee income of $40.4 million is included in interest income for fiscal year 2021, compared to $22.6 million and $15.9 million for fiscal years 2020 and 2019, respectively. In addition, certain fees collected at loan origination are considered to be a component of yield on the underlying loans and are deferred and recognized into income over the life of the loans. Amortization related to the FDIC indemnification assets of $0.0 million, $1.0 million and $1.4 million for fiscal years 2021, 2020 and 2019, respectively, is included as a reduction to interest income.

Investment Securities Portfolio. The carrying value of investment securities and FHLB stock, which is included in other assets in the consolidated balance sheets, totaled $2.72 billion and $1.79 billion as of September 30, 2021 and 2020, respectively. Interest income on investments includes income earned on investment securities and FHLB stock. Interest income on investments was $34.0 million for fiscal year 2021, a decrease of $8.7 million, or 20.3%, from $42.7 million in fiscal year 2020. The decrease in interest income was driven by a yield decrease of 64 basis points to 1.53% from 2.17%.

In fiscal year 2020, interest income on investments increased $1.2 million, or 2.8%, from $41.5 million in fiscal year 2019. The increase was driven by an increase in average investment balance of $286.7 million, or 17.1%, partially offset by the yield on investments which decreased 30 basis points to 2.17% for fiscal year 2020, compared to 2.47% for fiscal year 2019.

The weighted average life of the portfolio was 4.0 years at September 30, 2021, 3.2 years at September 30, 2020 and 3.7 years at September 30, 2019. Average investments in fiscal years 2021, 2020 and 2019 were 18.4%, 16.6% and 14.7% of total average interest-earning assets, respectively.

Interest Expense

The following table presents interest expense for fiscal years 2021, 2020 and 2019.

Fiscal Years Ended September 30,

(dollars in thousands)

Interest expense

Deposits

FHLB advances and other borrowings

Subordinated debentures and subordinated notes payable

Total interest expense

Total interest expense consists primarily of interest expense on three components: deposits, FHLB advances and other borrowings, and our outstanding subordinated debentures and subordinated notes payable. Total interest expense decreased $50.7 million, or 68.4%, to $23.4 million in fiscal year 2021, from $74.1 million in fiscal year 2020, which decreased $48.1 million, or 39.3%, from $122.2 million in fiscal year 2019. Average interest-bearing liabilities increased $466.9 million, or 4.2%, to $11.63 billion in fiscal year 2021, from $11.17 billion in fiscal year 2020, which increased $469.5 million, or 4.4%, from $10.70 billion in fiscal year 2019. The average cost of total interest-bearing liabilities decreased to 0.20% in fiscal year 2021, compared to 0.66% in fiscal year 2020 and 1.14% in fiscal year 2019. Significant components of interest expense are described in further detail below.

Deposits. Interest expense on deposits, consisting of interest-bearing accounts and time deposits, was $16.8 million in fiscal year 2021 compared with $58.6 million in fiscal year 2020, a decrease of $41.8 million, or 71.4%. The decrease was driven by the cost of deposits, which decreased 41 basis points to 0.15% for fiscal year 2021 from 0.56% for fiscal year 2020, partially offset by an increase in average deposit balances to $11.33 billion in fiscal year 2021 from $10.52 billion in fiscal year 2020, an increase of $807.9 million, or 7.7%.

Interest expense on deposits for fiscal year 2020 decreased $48.1 million, or 45.1%, from $106.7 million in fiscal year 2019. The decrease in interest expense in fiscal year 2020 was driven by the cost of deposits, which decreased 49 basis points to 0.56% for fiscal year 2020, partially offset by an increase of $342.2 million, or 3.4%, in average deposit balances to $10.52 billion in fiscal year 2020 from $10.18 billion in fiscal year 2019.

Average noninterest-bearing demand account balances increased to 24.6% of average total deposits for fiscal year 2021, compared with 21.2% for fiscal year 2020 and 18.3% for fiscal year 2019. Total average other liquid accounts, consisting of interest-bearing demand accounts, comprised 67.0% of total average deposits in fiscal year 2021, compared to 63.8% of total average deposits for fiscal year 2020 and 61.7% in fiscal year 2019, while time deposit accounts decreased in fiscal year 2021 to 8.4% of total average deposits compared to 15.0% in fiscal year 2020 and 20.0% in fiscal year 2019.

FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other borrowings was $3.5 million for fiscal year 2021, compared to $11.0 million for fiscal year 2020 and $10.0 million for fiscal year 2019, reflecting weighted average cost of 2.85%, 2.31% and 2.83%, respectively. Our average balance for FHLB advances and other borrowings decreased to $120.0 million in fiscal year 2021 from $473.7 million in fiscal year 2020, which increased from $345.4 million in fiscal year 2019. Average FHLB advances and other borrowings as a proportion of total average interest-bearing liabilities were 1.0% for fiscal year 2021, 4.2% for fiscal year 2020 and 3.2% for fiscal year 2019. The average rate paid on FHLB advances is impacted by market rates and the various terms and repricing frequency of the specific outstanding borrowings in each year. The weighted average contractual rate paid on our FHLB advances was 2.81% at September 30, 2021, 1.78% at September 30, 2020 and 2.74% at September 30, 2019. The average tenor of our FHLB advances was 25 months at September 30, 2021, 23 months at September 30, 2020 and 34 months at September 30, 2019. The amount of other borrowings and related interest expense are immaterial in each of fiscal years 2021, 2020 and 2019.

We must collateralize FHLB advances by pledging real estate loans or investments. We pledge more assets than required by our current level of borrowings in order to maintain additional borrowing capacity. Although we may substitute other loans for such pledged loans, we are restricted in our ability to sell or otherwise pledge these loans without substituting collateral or prepaying a portion of the FHLB advances. At September 30, 2021, we had pledged $3.18 billion of loans to the FHLB, against which we had borrowed $120.0 million.

Subordinated Debentures and Subordinated Notes Payable. Interest expense on our outstanding junior subordinated debentures and subordinated notes payable was $3.2 million for fiscal year 2021, $4.5 million for fiscal year 2020, and $5.5 million for fiscal year 2019. The weighted average contractual rate on outstanding junior subordinated debentures was 2.34%, 2.47% and 4.38% at September 30, 2021, 2020 and 2019, respectively. The weighted average contractual rate on outstanding subordinated notes payable was 3.27%, 3.43% and 4.88% at September 30, 2021, 2020 and 2019, respectively.

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.

Volume

Rate

Total

Volume

Rate

Total

(dollars in thousands)

Increase (decrease) in interest income:

Cash and cash equivalents

Other interest earning assets

Investment securities

Non-ASC 310-30 loans

ASC 310-30 loans

Loans

Total (decrease) increase

Increase (decrease) in interest expense:

Interest-bearing deposits

Time deposits

Securities sold under agreements to repurchase

FHLB advances and other borrowings

Subordinated debentures and subordinated notes payable

Total (decrease) increase

(Decrease) increase in net interest income (FTE)

Provision for Credit Losses

We recognized a reversal of provision for credit losses of $34.7 million for fiscal year 2021 compared to a provision for credit losses of $118.4 million for fiscal year 2020, a decrease of $153.1 million. The reversal of provision for credit losses was due to lower loan balances and improved economic factors. The provision for credit losses in fiscal year 2020 was a result of the impact of the COVID-19 pandemic.

We recognized a provision for credit losses of $118.4 million for fiscal year 2020 compared to a provision for credit losses of $40.9 million for fiscal year 2019, an increase of $77.4 million. The increase provision for credit losses was due to incurred losses in the portfolio primarily as a result of the COVID-19 pandemic. Included within the provision for credit losses was a net impairment of $0.2 million during fiscal year 2020 associated with ASC 310-30 loans. This compares to net improvement of $0.6 million related to this portion of the portfolio recorded in fiscal year 2019.

Fiscal Years Ended September 30,

(dollars in thousands)

(Reversal of) provision for credit losses, non-ASC 310-30 loans ¹

Decrease in provision for unfunded commitments reserve ²

Impairment (improvement) in loan and lease losses, ASC 310-30 loans

(Reversal of) provision for credit losses, total

1 As presented above, the non-ASC 310-30 loan portfolio includes originated loans, other than loans for which we have elected the fair value option, and loans we acquired that we did not determine were acquired with deteriorated credit quality. Upon adoption of CECL, ASC 310-30 loans and related activity began being reported with non-ASC 310-30 loans.

2 For the fiscal years ended September 30, 2020 and 2019, provision for unfunded commitments reserve of $1.9 million and $0.0 million, respectively, was recorded in other noninterest expense in the consolidated income statement.

Total Credit-Related Charges

We believe the following table, which summarizes each component of the total credit-related charges incurred during the current and prior fiscal years, is helpful to understanding the overall impact on our yearly results of operations. Net other repossessed property charges include other repossessed property operating costs, valuation adjustments and gain (loss) on sale of other repossessed properties, each of which entered other repossessed property as a result of the former borrower failing to perform on a loan obligation. Reversal of interest income on nonaccrual loans occurs when we become aware that a loan, for which we had been recognizing interest income, will no longer be able to perform according to the terms and conditions of the loan agreement, including repayment of interest owed to us, while a recovery of interest income on nonaccrual loans occurs when we receive repayment of interest owed to us. Loan fair value adjustments related to credit relate to the portion of our loan portfolio for which we have elected the fair value option; these amounts reflect the portion of the fair value adjustment related to expected credit losses in the portfolio of loans carried at fair value.

Fiscal Years Ended September 30,

Item

Included within F/S Line Item(s):

(dollars in thousands)

(Reversal of) provision for credit losses ¹

(Reversal of) provision for credit losses ¹

Increase (decrease) in provision for unfunded commitments reserve ¹

Other noninterest expense ¹

Net other repossessed property charges (income)

Net (gain) loss on repossessed property and other related expenses

Net (recovery) reversal of interest income on nonaccrual loans

Interest income on loans

Net realized credit loss on derivatives

Change in fair value of FVO loans and related derivatives

Loan fair value adjustment related to credit

Change in fair value of FVO loans and related derivatives

Total credit-related charges

1 Beginning in the first quarter of fiscal year 2021, increase in provision for unfunded commitments reserve is included in provision for credit losses.

We continue to evaluate the impact of the COVID-19 pandemic on our loan portfolio. Industries such as hotels & resorts (excluding casino hotels), casino hotels, restaurants, arts and entertainment, oil & energy, retail malls, airlines and healthcare have experienced varied business disruptions due to COVID-19. Since the beginning of the pandemic we have been closely monitoring the following loan segments (excluding PPP loans) given elevated industry risk from COVID-19: hotels & resorts (excluding casino hotels) with $619.1 million, or 7.7% of total loans, restaurants with $125.7 million, or 1.6% of total loans, arts and entertainment with $159.0 million, or 2.0% of total loans, senior care with $368.0 million, or 4.6% of total loans, and skilled nursing with $206.9 million, or 2.6% of total loans, for a total exposure of $1.48 billion, or 18.5% of total loans (excluding PPP loans) as of September 30, 2021, with $195.2 million of these loans being classified as of September 30, 2021 and loan exposure in other segments of identified industries being either immaterial or having not shown general distress thus far.

Total credit-related charges for fiscal year 2020 increased $147.1 million compared to fiscal year 2019. The majority of the increase was driven by increased provision for credit losses due to incurred losses in the portfolio primarily as a result of the COVID-19 pandemic.

Noninterest Income

The following table presents noninterest income for the fiscal years ended September 30, 2021, 2020 and 2019.

Fiscal Years Ended September 30,

(dollars in thousands)

Noninterest income

Service charges and other fees

Wealth management fees

Mortgage banking income, net

Net gain (loss) on sale of securities and other assets

Other

Subtotal, service and product fees

Derivative interest expense

Change in fair value of FVO loans and related derivatives

Other derivative income

Subtotal, changes in fair value for loans at fair value and derivatives

Total noninterest income

Our noninterest income is comprised of the various fees we charge our customers for products and services we provide and the impact of changes in fair value of loans for which we have elected the fair value treatment and realized and unrealized gains (losses) on the related interest rate swaps we utilize to manage interest rate risk on these loans. While we are required under GAAP to present both components within total noninterest income, we believe it is helpful to analyze the two broader components of noninterest income separately to better understand the underlying performance of the business.

Noninterest income was $66.6 million for fiscal year 2021, compared with nominal noninterest income for fiscal year 2020, which decreased from $60.7 million for fiscal year 2019. Significant components of noninterest income are described in further detail below.

Service and Product Fees. We recognized $69.3 million of noninterest income related to product and service fees in fiscal year 2021, a decrease of $1.7 million, or 2.3%, from $71.0 million for fiscal year 2020 due to an increase in net mortgage banking income and income from additional investments in bank owned life insurance purchased, partially offset by a decrease in the gain on sale of investment securities..

Noninterest income related to product and service fees for the fiscal year 2020 increased $8.2 million, or 13.1%, from $62.8 million for fiscal year 2019. The increase was due to the gain on sale of $7.9 million in investment securities, a $4.1 million increase in mortgage banking income due to stronger origination demand and a $2.9 million increase in wealth management fees, partially offset by a $6.2 million decrease in service charges and interchange revenue driven by declines in transaction activity from COVID-19 pandemic impacts.

Changes in fair value for loans at fair value and derivatives. As discussed in "—Analysis of Financial Condition—Derivatives," changes in the fair value of loans for which we have elected the fair value treatment and realized and unrealized gains and losses on the related derivatives are recognized within noninterest income. For fiscal years 2021, 2020 and 2019 these items accounted for $2.8 million, $71.0 million and $2.0 million, respectively of noninterest loss. The change for fiscal year 2021 was driven by a favorable change in the credit risk adjustment of $71.2 million and a $1.0 million increase in swap fees, partially offset by a $4.0 million increase in the current cost of interest rate swaps due to changes in the interest rate environment. The change during fiscal year 2020 was driven by a $9.3 million increase in the current cost of interest rate swaps, a $3.0 million realized loss on derivatives and a $2.9 million decrease in swap fees combined with a net unfavorable change in the credit risk adjustment of $53.7 million. We believe that the current cost of interest rate swaps on the derivatives economically offsets the decrease in yield on the related loans. We present elsewhere the adjusted net interest income and adjusted net interest margin reflecting the metrics we use to manage the business.

Noninterest Expense

The following table presents noninterest expense for fiscal years September 30, 2021, 2020 and 2019.

Fiscal Years Ended September 30,

(dollars in thousands)

Noninterest expense

Salaries and employee benefits

Data processing and communication

Occupancy and equipment

Professional fees

Advertising

Net (gain) loss on repossessed property and other related expenses

Goodwill and intangible assets impairment

Other

Total noninterest expense

Noninterest expense was $240.8 million for fiscal year 2021 compared with $1.01 billion for fiscal year 2020 and $224.9 million in fiscal year 2019. Our efficiency ratio was 50.5% for fiscal year 2021, 61.9% for fiscal year 2020 and 45.8% for fiscal year 2019. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" section. Significant changes in components of noninterest expense are described in further detail below.

Salaries and Employee Benefits . Salaries and employee benefits are a significant component of noninterest expense and include the cost of incentive compensation, stock compensation, benefit plans, health insurance and payroll taxes. These expenses were $154.3 million for fiscal year 2021, an increase of $4.9 million, or 3.2%, from $149.4 million for fiscal year 2020. The majority of the increase was driven by annual merit increases combined with an increase in incentive accruals and healthcare costs. Salaries and employee benefits for fiscal year 2020 increased $13.1 million, or 9.6%, from $136.3 million for fiscal year 2019. The majority of the increase was driven by annual merit increases combined with a one-time PTO payout of $1.1 million offered to employees and $2.1 million in severance costs during the period.

Data Processing and Communication . Data processing and communication expenses include payments to vendors who provide software, data processing, and services on an outsourced basis, costs related to supporting and developing internet-based activities, credit card rewards provided to our customers, depreciation of bank-owned hardware and software, postage and telephone expenses. Expenses for data processing and communication were $27.5 million for fiscal year 2021 and $24.5 million for fiscal year 2020, an increase of $3.0 million, or 12.6%. This increase was related to software maintenance and upgrades. Expenses for data processing and communication for fiscal year 2020 increased $0.4 million, or 1.6%, from $24.1 million for fiscal year 2019. This increase was due to annual increases in data processing and communication expense.

Occupancy and Equipment . Occupancy and equipment expenses include our branch network and administrative office locations throughout our footprint, including both owned and leased locations, property taxes, maintenance expense and depreciation of bank-owned furniture and equipment. These costs remained flat at $21.3 million for both fiscal year 2021 and 2020. Expenses for occupancy and equipment for fiscal year 2020 increased $0.5 million, or 2.4%, from $20.8 million for fiscal year 2019. The increase in fiscal years 2021 and 2020 were primarily due to annual increases in rent, utilities and property tax expenses.

Professional Fees . Professional fees include our FDIC assessment, borrower credit reports, the cost of accountants and other consultants, and legal services in connection with delinquent loans, business transactions, regulatory compliance matters and to resolve other legal matters. These expenses were $21.3 million for fiscal year 2021 and $22.0 million for fiscal year 2020, a decrease of $0.7 million, or 2.9%. The decrease in fiscal year 2021 was due to decreased FDIC assessment costs of $4.6 million and decreased legal costs of $1.0 million, partially offset by $5.2 million in merger-related costs. Expenses for professional fees for fiscal year 2020 increased $7.4 million, or 50.6%, from $14.6 million for fiscal year 2019. The increase in fiscal year 2020 was due to increased FDIC assessment costs of $4.0 million, $1.2 million in increased legal costs and $0.9 million increase in loan review fees.

Net (Gain) Loss on Repossessed Property and Other Assets . Our net gain on the sale of repossessed property and other assets was $1.8 million for fiscal year 2021, a net loss of $12.9 million for fiscal year 2020, and a net loss of $4.4 million for fiscal year 2019. The gain in fiscal year 2021 was primarily due gains on several properties sold during the period outpacing related expenses. The increase in fiscal year 2020 was primarily due to the valuation writedowns and related expenses of one repossessed property.

Goodwill and Intangible Assets Impairment. There was no goodwill and intangible assets impairment in fiscal year 2021. In fiscal year 2020, the COVID-19 pandemic resulted in impairment recognized in noninterest expense of $742.4 million, of which $622.4 million stemmed from goodwill related to the acquisition of Great Western Bank in 2008 by NAB, $118.2 million from goodwill related to subsequent acquisitions and $1.8 million from certain intangible assets. There was no goodwill and intangible assets impairment in fiscal year 2019.

Other . Other noninterest expenses include costs related to other repossessed property costs prior to foreclosure, business development and professional membership fees, travel and entertainment costs, amortization of core deposits and other intangibles, and other costs incurred. Other noninterest expenses were $15.4 million in fiscal year 2021, $31.6 million in fiscal year 2020 and $20.3 million in fiscal year 2019. The $16.2 million decrease in fiscal year 2021 was due to a $1.9 million decrease in unfunded commitment reserve, which is now accounted for within the loan provisioning under CECL, combined with higher costs in fiscal year 2020 as noted in the following sentence. The fiscal year 2020 increase of $11.3 million was primarily due to $7.6 million in expense related to the early payment of FHLB borrowings and a $2.0 million in expense related to the completion of the FDIC loss-sharing agreement, which ended June 4, 2020.

Our efficiency ratio, which measures our ability to manage noninterest expenses, was 50.5% for fiscal year 2021, compared to 61.9% for fiscal year 2020. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" section.

Provision for Income Taxes

The provision for income taxes varies due to the amount of taxable income, the level and effectiveness of tax-advantaged assets and tax credit funds and the rates charged by federal and state authorities. The provision for income taxes of $59.0 million in fiscal year 2021 represents an effective tax rate of 22.5%, compared to the benefit from income taxes of $25.5 million or 3.6%, for fiscal year 2020 and the provision for income taxes of $48.2 million or 22.4%, for fiscal year 2019. The substantial drop in effective tax rate for fiscal year 2020 was due to the impairment of goodwill and certain intangible assets and the increased provision for credit losses during the period. A sizable portion of goodwill impairment was related to non-tax-deductible goodwill for which no tax benefit was recorded.

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,

Return on average total assets

Return on average common equity

Return on average tangible common equity ¹

1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

Analysis of Financial Condition

The following table highlights certain key financial and performance information for fiscal years ended September 30, 2021, 2020 and 2019.

As of September 30,

(dollars in thousands)

Balance Sheet and Other Information

Total assets

Loans ¹

Allowance for credit losses ³

Deposits

Stockholders' equity

Tangible common equity ²

Tier 1 capital ratio

Total capital ratio

Tier 1 leverage ratio

Common equity tier 1 ratio

Tangible common equity / tangible assets ²

Book value per share - GAAP

Tangible book value per share ²

Nonaccrual loans / total loans

Net charge-offs (recoveries) / average total loans

Allowance for credit losses ³ / total loans

1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and net loans in process.

2 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

3 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model.

Our total assets were $12.91 billion at September 30, 2021, compared with $12.60 billion at September 30, 2020 and $12.79 billion at September 30, 2019. The increase in total assets for fiscal year 2021 was principally attributable to an increase in cash and cash equivalents and investment securities, partially offset by a decrease in net loans. The decrease in total assets for fiscal year 2020 was due to the COVID-19 related impairment of goodwill and certain intangible assets, partially offset by growth in loans and cash and cash equivalents.

At September 30, 2021, loans were $8.19 billion, a decrease of $1.89 billion, or 18.8%, from $10.08 billion at September 30, 2020, which increased $369.4 million, or 3.8%, compared to $9.71 billion at September 30, 2019. See "—Loan Portfolio" within this section for further discussion on the growth in net loans.

Total deposits were $11.31 billion at September 30, 2021, increase of $301.7 million, or 2.7%, from $11.01 billion at September 30, 2020, which increased $708.4 million, or 6.9%, from $10.30 billion at September 30, 2019. See "—Deposits" within this section for further discussion on the growth in deposits. FHLB and other borrowings decreased by $75.0 million, or 38.5%, for the fiscal year.

Loan Portfolio

The following table presents our loan portfolio by category at each of the dates indicated:

As of September 30,

(dollars in thousands)

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other ²

Subtotal

Less: Unamortized discount on acquired loans and unearned net deferred fees and costs and loans in process ³

Total loans

Allowance for credit losses

Loans, net

1 As a part of the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , and subsequent related ASUs, loan segments are presented based on amortized cost, which includes unpaid principal balance, unamortized discount on acquired loans, unearned net deferred fees and costs and loans in process. For additional information on September 30, 2020 loan segment balances, see Note 2.

2 Other loans primarily include consumer and commercial credit cards, customer deposit account overdrafts, and loans in process.

3 Loan segments for September 30, 2019, 2018 and 2017 are presented based on unpaid principal balance and do not include unamortized discount on acquired loans, unearned net deferred fees and costs and loans in process. In addition, commercial real estate subsegments were not available.

During the fiscal year ended September 30, 2021, total loans decreased by $1.89 billion, or 18.8%. The net loan reduction was driven by sales of $267.5 million in hotel loans in fiscal year 2021, a net decrease of $515.3 million of PPP loans, and an increase in paydowns across the CRE, commercial non-real estate and agriculture portfolios. During the fiscal year ended September 30, 2020, total loans grew by $369.4 million, or 3.8%. The growth was primarily focused in commercial non-real estate loans, which grew by $445.1 million, or 25.9%, and CRE loans, which grew by $263.0 million, or 5.2%, partially offset by a decrease in agriculture loans of $285.9 million, or 14.2%. Over the same time period, residential real estate, consumer and other loan balances remained generally stable.

The following table presents an analysis of the amortized cost of our loan portfolio at September 30, 2021, by borrower and collateral type and by each of the major geographic areas we use to manage our markets.

September 30, 2021

South Dakota / Minnesota / North Dakota

Iowa /

Missouri

Nebraska / Kansas

Arizona

Colorado

Specialized Assets ¹

Corporate and Other ²

Total

(dollars in thousands)

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total

% by location

1 Balances in this column represent workout loans and certain other loans the Company placed with a central team for enhanced monitoring and potential exit.

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

The following table presents additional detail regarding our CRE, agriculture, commercial non-real estate and residential real estate loans at September 30, 2021.

September 30, 2021

(dollars in thousands)

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture real estate

Agriculture operating loans

Total agriculture

Commercial non-real estate

Home equity lines of credit

Closed end first lien

Closed end junior lien

Total residential real estate

Consumer and other

Total

Commercial Real Estate. CRE includes commercial and residential construction and development, owner-occupied CRE, non-owner-occupied CRE, and multi-family residential real estate. While CRE lending is a significant component of our overall loan portfolio, we are committed to managing our exposure to riskier construction and development lending specifically, and to CRE lending in general, by targeting relationships with sound management and financials, which are priced to reflect the amount of risk we accept as the lender.

Agriculture. Agriculture loans include farm operating loans and loans collateralized by farm land. According to the American Banker's Association, at June 30, 2021, we were ranked the seventh-largest farm lender bank in the United States measured by total dollar volume of farm loans. We consider agriculture lending one of our core lending areas. We target a portfolio composition for agriculture loans not to exceed 225% of total capital according to our Risk Appetite Statement approved by our Board of Directors. Within our agriculture portfolio, loans are diversified across a wide range of subsectors with the majority of the portfolio concentrated within various types of grain, livestock and dairy products, and across different geographical segments within our footprint. Over recent years, our borrowers have experienced volatile commodity prices, the adverse effects of tariffs imposed on the export of agricultural products, and the effects of waivers of the amount of ethanol to be blended into the country's gasoline production. While these events, the continuing impact of the COVID-19 pandemic or a further downturn in the agriculture economy, could directly and adversely affect our agricultural loan portfolio and indirectly and adversely impact other lending categories including commercial non-real estate, CRE, residential real estate and consumer, we believe there continues to typically be strong secondary sources of repayment for the agriculture loan portfolio.

Commercial Non-Real Estate. Commercial non-real estate, or business lending, represents one of our core competencies through providing a tailored range of integrated products and services, including lending, to small- and medium-enterprise customers. We offer a number of different products including working capital and other shorter-term lines of credit, fixed-rate loans and variable rate loans with interest rate swaps over a wide range of terms, and variable-rate loans with varying terms.

Residential Real Estate. Residential real estate lending reflects 1-to-4-family closed-end first-lien mortgages (primarily single-family long-term first mortgages resulting from acquisitions of other banks), closed-end junior-lien mortgages and HELOCs. A large percentage of our total single-family first mortgage originations are sold into the secondary market in order to meet our interest rate risk management objectives. Our closed-end first-lien mortgages include a small percentage of single-family first mortgages that we originate and do not subsequently sell into the secondary market, including some jumbo products, adjustable-rate mortgages and rural home mortgages.

Consumer. Our consumer lending offering comprises a relatively small portion of our total loan portfolio, and predominantly reflects small-balance secured and unsecured products marketed by our branches. Other lending includes all other loan relationships that do not fit within the categories above, primarily consumer and commercial credit cards, customer deposit account overdrafts, and loans in process.

The following table presents the maturity distribution of our loan portfolio as of September 30, 2021. The maturity dates were determined based on the contractual maturity date of the loan.

September 30, 2021

1 Year or Less

>1 Through 5 Years

>5 Years

Total

(dollars in thousands)

Maturity distribution:

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total

The following table presents the distribution, as of September 30, 2021, of our loans that were due after one year between fixed and variable interest rates.

September 30, 2021

Fixed

Variable

Total

(dollars in thousands)

Interest rate distribution:

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total

Other Repossessed Property

In the normal course of business, we obtain title to real estate and other assets when borrowers are unable to meet their contractual obligations and we initiate foreclosure proceedings, or via deed in lieu of foreclosure actions. Other repossessed property assets are considered nonperforming assets. When we obtain title to an asset, we evaluate how best to maintain and protect our interest in the property and seek to liquidate the assets at an acceptable price in a timely manner. Our total other repossessed property carrying value was $4.5 million as of September 30, 2021, a decrease of $15.5 million, or 77.6%, compared to $20.0 million at September 30, 2020, which decreased $16.7 million, or 45.5%, compared to $36.8 million at September 30, 2019. The decrease in fiscal year 2021 was due to three large liquidations during the period. The decrease in fiscal year 2020 was due to the writedown of one large relationship and several large liquidations during the period.

The following table presents our other repossessed property balances for the period indicated.

Fiscal Years Ended September 30,

(dollars in thousands)

Balance, beginning of period

Additions to other repossessed property

Valuation adjustments and other

Sales

Balance, end of period

Asset Quality

We place an asset on nonaccrual status when management believes, after considering collection efforts and other factors, the borrowers' condition is such that collection of interest is doubtful, which is generally 90 days past due. If a borrower has failed to comply with the original contractual terms, further action may be required, including a downgrade in the risk rating, movement to nonaccrual status, a charge-off or the establishment of an individual reserve. If there is a collateral shortfall, we generally work with the borrower for a principal reduction, pledge of additional collateral or guarantee. If these alternatives are not available, we engage in formal collection activities. Restructured loans for which we grant payment or significant interest rate concessions are placed on nonaccrual status until collectability improves and a satisfactory payment history is established, generally by the receipt of at least six consecutive payments.

The following table presents the dollar amount of nonaccrual loans, other repossessed property, restructured performing loans and accruing loans over 90 days past due, at the end of the dates indicated.

As of September 30,

(dollars in thousands)

Nonaccrual loans ¹

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total nonaccrual loans

Other repossessed property

Total nonperforming assets

Performing TDRs

Total nonperforming and restructured assets

Accruing loans 90 days or more past due

Nonperforming TDRs included in total nonaccrual loans

Percent of total assets

Total nonaccrual loans

Other repossessed property

Nonperforming assets ²

Nonperforming and restructured assets ²

1 Includes nonperforming restructured loans.

2 Includes nonaccrual loans, which includes nonperforming restructured loans.

3 Balance for this segment is included in total commercial real estate for September 30, 2020, 2019, 2018 and 2017.

At September 30, 2021, our nonperforming assets were 1.57% of total assets, compared to 2.74% at September 30, 2020. Total nonaccrual loans decreased by $127.0 million compared to September 30, 2020, which increased $217.7 million compared to September 30, 2019. The decrease in nonaccrual loans in fiscal year 2021 was primarily driven by repayments on multiple agricultural and commercial nonaccrual loans. The increase in nonaccrual loans for fiscal year 2020 was primarily driven by several relationships in the agriculture and CRE segments of the loan portfolio moving to nonaccrual during the period.

We recognized approximately $8.8 million of interest income on loans that were on nonaccrual for the fiscal year ended 2021. We had average nonaccrual loans (calculated as a two-point average) of $261.4 million outstanding during fiscal year 2021. Based on the average loan portfolio yield for these loans for the current fiscal year, we estimate that interest income would have been $11.8 million higher during the period had these loans been accruing.

The Company implemented a more granular risk rating methodology as of October 1, 2020. We consistently monitor all loans internally rated "special mention" or worse because that rating indicates we have identified some potential weakness emerging; but loans rated "special mention" will not necessarily become problem loans or become impaired. Aside from the loans rated "special mention", we do not believe that we have any potential problem loans as of September 30, 2021 that are not already identified as nonaccrual, past due or restructured as it is our policy to promptly reclassify loans as soon as we become aware of doubts as to the borrowers’ ability to meet repayment terms.

When we grant concessions to borrowers that we would not otherwise grant if not for the borrowers’ financial difficulties, such as reduced interest rates or extensions of loan periods, we consider these modifications TDRs.

The table below outlines total TDRs, split between performing and nonperforming loans, at each of the dates indicated.

Fiscal Years Ended September 30,

Performing TDRs

Nonperforming TDRs

Total

Performing TDRs

Nonperforming TDRs

Total

Performing TDRs

Nonperforming TDRs

Total

(dollars in thousands)

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total

1 Balance for this segment is included in total commercial real estate for September 30, 2020 and 2019.

As of September 30, 2021, total performing TDRs increased $13.9 million compared to September 30, 2020, which decreased $9.6 million compared to September 30, 2019. Performing TDRs increased from September 30, 2020 primarily due to one large relationship in the agriculture portfolio moving from nonperforming to performing status during the period. Performing TDRs decreased from September 30, 2019 primarily due to the net impact of the payoff of one large relationship in the agriculture portfolio and two large relationships in the agriculture portfolio moving to nonperforming status during the period.

As of September 30, 2021, total nonperforming TDRs decreased $29.0 million compared to September 30, 2020, which increased $32.7 million compared to September 30, 2019. Nonperforming TDRs decreased from September 30, 2020 mainly due to the one previously mentioned relationship in the agriculture portfolio that transferred to performing status. Nonperforming TDRs increased from September 30, 2019 mainly due to the net impact of two new relationships in the agriculture portfolio and the two previously mentioned relationships in the agriculture portfolio that transferred from performing status as well as one new commercial real estate relationship during the period.

Allowance for Credit Losses

The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, which uses the current expected credit loss model ("CECL") to determine the allowance for credit losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and the net investments in leases recognized by a lessor in accordance with Topic 842 on leases. The CECL methodology requires recognition of lifetime expected credit losses that takes into consideration all relevant information, including historical losses, current conditions and reasonable and supportable forecasts of future operating conditions.

Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an individual basis ("individual reserve"). The reserve related to these loans is calculated using the collateral available to repay the loan, most typically the liquidation value of the collateral (less selling costs, if applicable). The Company has chosen to continue to include small, less complex loans within the collective reserve for loans on nonaccrual or with TDR status.

Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. The historical loss experience of the pool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan pool is applied to each loan within the segment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in loss expectations relative to the historical loss rates. These models have been implemented in accordance with the Company's Model Risk Management Policy. Additionally, using its more granular risk rating system, the Company evaluates if the current credit quality of the portfolio materially differs from the one observed over the historical loss period and applies adjustments to the allowance accordingly. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans

servicing practices and changes in underwriting criteria as well as the impact of economic events that are not captured in the historical loss experience or modeled losses.

ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period.

The following table presents an analysis of our allowance for credit losses, including provisions for credit losses, charge-offs and recoveries, for the periods indicated.

At and for Fiscal Years Ended September 30,

(dollars in thousands)

Allowance for credit losses on loans:

Balance, beginning of period

Adoption of ASU 2016-13, as amended

(Reversal of) provision for credit losses ²

Impairment (improvement) of ASC 310-30 loans

Charge-offs:

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total charge-offs

Recoveries:

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total recoveries

Net loan charge-offs

Balance, end of period

Average total loans for the period ¹

Total loans at period end ¹

Ratios

Net charge-offs to average total loans

Allowance for credit losses on loans to:

Total loans

Nonaccruing loans

1 Loans are shown at amortized cost.

2 For September 30, 2021, (reversal of) provision for credit losses in the consolidated statements of income includes $1.1 million of reversal of provision for unfunded commitments reserve.

3 Balance for this segment is included in total commercial real estate for September 30, 2020, 2019, 2018 and 2017.

In the fiscal year 2021, we recorded net charge-offs of $47.6 million, representing 0.52% of average total loans, a 12 basis point increase compared to 0.40% of average total loans for fiscal year 2020. The increase in net charge-offs in fiscal year 2021 included $34.0 million of charge-offs related to the sales of certain hotel loans during the period, partially offset by a reduction in agriculture and commercial non-real estate loan charge-offs of $16.2 million and $8.0 million, respectively.

At September 30, 2021, the allowance for credit losses was 3.01% of our total loan portfolio, a 152 basis point increase compared with 1.49% at September 30, 2020. The balance of the ACL increased from $149.9 million to $246.0 million over the same period due to the impact of CECL adoption on October 1, 2020, where we recognized a Day 1 increase in the ACL of $177.3 million, which resulted in a cumulative effect adjustment decrease of $132.9 million (after-tax) to retained earnings. The tax effect resulted in a $42.9 million increase in deferred tax assets. The increase in ACL related to the adoption of CECL was partially offset by a reversal of provision for credit losses of $34.7 million for fiscal year 2021 due to lower loan balances and improved economic factors.

Additionally, a portion of our loans which are carried at fair value, totaling $524.5 million and $655.2 million at September 30, 2021 and 2020, respectively, have no associated allowance for credit losses, but rather have a fair value adjustment related to credit risk included within their carrying value, thus driving the overall ratio of allowance for credit losses to total loans lower. The amount of fair value adjustment related to credit risk on these loans was $22.3 million and $30.5 million at September 30, 2021 and 2020, respectively, or 0.27% and 0.30% of total loans at September 30, 2021 and 2020, respectively.

The following tables present management’s allocation of the allowance for credit losses by loan category, in both dollars and percentage of our total allowance for credit losses, to specific loans in those categories at the dates indicated.

September 30,

(dollars in thousands)

Allocation of allowance for credit losses:

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total

Allocation of allowance for credit losses:

Construction and development

Owner-occupied CRE

Non-owner-occupied CRE

Multifamily residential real estate

Total commercial real estate

Agriculture

Commercial non-real estate

Residential real estate

Consumer and other

Total

1 At September 30, 2020, the allowance balances were reclassified to align with the eight loan portfolio pools established for adoption of CECL. For additional information, see Note 2.

Management will continue to evaluate the loan portfolio and assess economic conditions in order to determine future allowance levels and the amount of credit loss provisions. We review the appropriateness of our allowance for credit losses on a quarterly basis. Management monitors closely all past due and restructured loans in assessing the appropriateness of its allowance for credit losses. In addition, we follow procedures for reviewing and grading all substantial commercial and agriculture relationships at least annually. Based predominantly upon the review and grading process, we determine the appropriate level of the allowance in response to our assessment of the probable risk of expected losses inherent in our loan portfolio. Management makes additional credit loss provisions when the results of our problem loan assessment methodology or overall allowance testing of appropriateness indicates additional provisions are required.

The review of problem loans is an ongoing process during which management may determine that additional charge-offs are required or additional loans should be placed on nonaccrual status. We have also recorded an allowance for unfunded lending reserve related commitments that represents our estimate of credit losses on the portion of lending commitments that borrowers have not advanced. The Company's change in unfunded commitments reserve from the incurred loss methodology to the current expected credit loss methodology was immaterial as of the date of adoption and therefore no provision was recognized. The balance of the unfunded lending-related commitments reserve was $1.3 million and $2.4 million at September 30, 2021 and 2020, respectively, and is recorded in accrued expenses and other liabilities in the consolidated balance sheet.

Investment Securities

The following table presents the amortized cost of each category of our investment portfolio at the dates indicated.

September 30,

(dollars in thousands)

Securities available for sale

U.S. Treasury securities

U.S. Agency securities

Mortgage-backed securities:

Government National Mortgage Association

Federal Home Loan Mortgage Corporation

Federal National Mortgage Association

Small Business Assistance Program

States and political subdivision securities

Corporate debt securities

Other

Total

Securities held to maturity

U.S. Treasury securities

Mortgage-backed securities:

Government National Mortgage Association

Federal Home Loan Mortgage Corporation

Federal National Mortgage Association

Small Business Assistance Program

States and political subdivision securities

Total

We generally invest excess deposits in high-quality, liquid investment securities including residential agency mortgage-backed securities and, to a lesser extent, U.S. Treasury securities, corporate debt securities and securities issued by U.S. states and political subdivisions. Our investment securities portfolio serves as a means to collateralize FHLB borrowings and public funds deposits, to earn net spread income on excess deposits, to maintain liquidity and to balance interest rate risk. Since September 30, 2020, the carrying value of the portfolio has increased by $936.3 million, or 52.8%.

The following tables present the aggregate amortized cost of each investment category of the investment portfolio and the weighted average yield ("WA yield") for each investment category for each maturity period at September 30, 2021. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or prepaid without any penalties. The WA yield on these assets is presented below based on the contractual rate, as opposed to a tax equivalent yield concept.

September 30, 2021

Due in one year

or less

Due after one year

through five years

Due after five years

through ten years

Due after

ten years

Mortgage-backed

securities

Securities without

contractual maturities

Total

Amount

WA Yield

Amount

WA Yield

Amount

WA Yield

Amount

WA Yield

Amount

WA Yield

Amount

WA Yield

Amount

WA Yield

(dollars in thousands)

Securities available for sale

U.S. Treasury securities

U.S. Agency securities

Mortgage-backed securities

States and political subdivision securities ¹ ²

Corporate debt securities

Other

Total

Securities held to maturity

U.S. Treasury securities

Mortgage-backed securities

States and political subdivision securities ¹ ²

Total

1 Information related to obligations of state and political subdivisions is presented based upon yield to first optional call date if the security is purchased at a premium, yield to maturity if purchased at par or a discount.

2 Maturity calculations for obligations of state and political subdivisions are based on the first optional call date for securities with a fair value above par and contractual maturity for securities with a fair value equal to or below par.

Available for sale securities are stated at fair value. For available for sale debt securities in an unrealized loss position, management first evaluates whether (1) the Company has the intent to sell a security; or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the entire amount of unrealized loss is recognized in the consolidated income statement with a corresponding adjustment to the security's amortized cost basis.

If neither criteria is met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Furthermore, securities issued by the U.S. Government or a U.S. Government sponsored enterprise which carry the explicit or implicit guarantee of the U.S. Government are considered "risk-free" and therefore no credit losses are assumed on those securities. If the assessment indicates a credit loss exists, the amortized cost basis is compared to the present value of cash flows expected to be collected from the security; if it is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the allowance for credit losses are recorded as a provision for (reversal of) credit losses in the consolidated income statement. If the assessment indicates a credit loss does not exist, the change in fair value is recorded as unrealized gains and losses, net of related taxes, and is included in stockholders’ equity as a component of accumulated other comprehensive income (loss).

Debt securities for which the Company has the ability and positive intent to hold until maturity are classified as held to maturity. Held to maturity securities are stated at amortized cost, which represents actual cost adjusted for premium amortization and discount accretion.

Deposits

We obtain funds from depositors by offering consumer and business interest-bearing accounts and term time deposits. At September 30, 2021 and September 30, 2020, our total deposits were $11.31 billion and $11.01 billion, respectively, representing increase of $301.7 million, or 2.7%, due to a $876.7 million increase in checking and savings deposits across both business and consumer accounts, offset by a $229.5 million decrease in business and consumer time deposits and a $345.5 million decrease in public and brokered deposits. Our accounts are federally insured by the FDIC up to the legal maximum.

The following table presents the balances and weighted average cost of our deposit portfolio at the following dates.

September 30,

Amount

Weighted Avg. Cost

Amount

Weighted Avg. Cost

Amount

Weighted Avg. Cost

(dollars in thousands)

Noninterest-bearing demand

Interest-bearing demand

Time deposits, greater than $250,000

Time deposits, less than or equal to $250,000

Total

At September 30, 2021 and 2020, we had $76.1 million and $329.0 million, respectively, in brokered deposits. As a result of the passage of the Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, most reciprocal deposits are no longer treated as brokered deposits and are now included with core commercial deposits.

Municipal public deposits constituted $1.15 billion and $1.25 billion of our deposit portfolio at September 30, 2021, and September 30, 2020, respectively, of which $770.6 million and $859.7 million, respectively, were required to be collateralized. Our top 10 depositors were responsible for 7.3% and 6.4% of our total deposits at September 30, 2021 and September 30, 2020, respectively.

The following table presents deposits by region.

September 30,

(dollars in thousands)

South Dakota / Minnesota / North Dakota

Iowa / Missouri

Nebraska / Kansas

Arizona

Colorado

Specialized Assets

Other

Total deposits

We fund a portion of our assets with time deposits that have balances greater than $250,000 and that have maturities generally in excess of six months. At September 30, 2021 and September 30, 2020, our time deposits greater than $250,000 totaled $147.0 million and $352.9 million, respectively. The following table presents the maturities of our time deposits greater than $250,000 and less than or equal to $250,000 in size at September 30, 2021.

September 30, 2021

Greater than $250,000

Less than or equal to $250,000

(dollars in thousands)

Remaining maturity:

Three months or less

Over three through six months

Over six through twelve months

Over twelve months

Total

Percent of total deposits

At September 30, 2021 and September 30, 2020, the average remaining maturity of all time deposits was approximately 9 and 8 months, respectively. The average time deposit amount per account was approximately $25,522 and $37,174 at September 30, 2021 and September 30, 2020, respectively.

Derivatives

Prior to 2017 we entered into fixed-rate loans having original maturities of 5 years or greater (typically between 5 and 15 years) with certain of our commercial and agri-business banking customers to assist them in facilitating their risk management strategies. We mitigated our interest rate risk associated with certain of these loans by entering into equal and offsetting fixed-to-floating interest rate swap agreements for these loans with swap counterparties. We elected to account for the loans at fair value under ASC 825, Fair Value Option . Changes in the fair value of these loans are recorded in earnings as a component of noninterest income in the relevant period. The related interest rate swaps are recognized as either assets or liabilities in our financial statements and any gains or losses on these swaps, both realized and unrealized, are recorded in earnings as a component of noninterest income. The interest rate swaps are fully effective from an interest rate risk perspective, as gains and losses on our swaps are directly offset by changes in fair value of the fair value option loans ( i.e. , swap interest rate risk adjustments are directly offset by associated loan interest rate risk adjustments). Consequently, any changes in noninterest income associated with changes in fair value resulting from interest rate movement, as opposed to changes in credit quality, on the loans are directly offset by equal and opposite unrealized charges to or reductions in noninterest income for the related interest rate swap. Any changes in the fair value of the loans related to credit quality and the derivative interest expense on derivatives are not offsetting amounts within noninterest income. To ensure the correlation of movements in fair value between the interest rate swap and the related loan, we pass on all economic costs associated with our interest rate swap activity resulting from loan customer prepayments (partial or full) to the customer.

In addition, we enter into interest rate derivative contracts to support the business needs of our customers. These interest rate swaps sales are used to enable customers to achieve a long-term fixed rate by selling the customer a long-term variable rate loan indexed to LIBOR plus a credit spread whereby the Bank enters into an interest rate swap with our customer where the customer pays a fixed rate of interest set at the time of origination on the interest rate swap and then the customer receives a floating rate equal to the rate paid on the loan, thus resulting in a fixed rate of interest over the life of the interest rate swap. We then enter into a mirrored interest rate swap with a swap dealer where we pay and receive the same fixed and floating rate as we pay and receive from the interest rate swap we have with our customer. As the interest paid and received by us on the two swaps net to zero, we are left with the variable rate of the long-term loan.

We enter into RPAs with some of our derivative counterparties to assume the credit exposure related to interest rate derivative contracts. Our loan customer enters into an interest rate swap directly with a derivative counterparty and we agree through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer. The notional amounts of RPAs sold were $106.9 million and $80.7 million as of September 30, 2021 and September 30, 2020, respectively. Assuming all underlying loan customers defaulted on their obligation to perform under the interest rate swap with a derivative counterparty, the exposure from these RPAs would be $0.2 million and nominal at September 30, 2021 and September 30, 2020, respectively, based on the fair value of the underlying swaps.

Short-Term Borrowings

Our primary sources of short-term borrowings include securities sold under repurchase agreements and certain FHLB advances maturing within 12 months. The following table presents certain information with respect to only our borrowings with original maturities less than 12 months at and for the periods noted.

At and for Fiscal Years Ended September 30,

(dollars in thousands)

Short-term borrowings:

Securities sold under agreements to repurchase

FHLB advances

Other short-term borrowings

Total short-term borrowings

Maximum amount outstanding at any month-end during the period

Average amount outstanding during the period

Weighted average rate for the period

Weighted average rate as of date indicated

Other Borrowings

In addition to FHLB short-term advances, we also had FHLB long-term borrowings of $120.0 million outstanding for both September 30, 2021 and September 30, 2020.

We had outstanding $74.0 million and $73.8 million of junior subordinated debentures to affiliated trusts in connection with the issuance of trust preferred securities by such trusts as of September 30, 2021 and September 30, 2020, respectively. We are permitted under applicable laws and regulations to count these trust preferred securities as part of our Tier 1 capital.

We issued $35.0 million of fixed-to-floating rate subordinated notes that mature on August 15, 2025 through a private placement. The notes, whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter ended September 30, 2020, and whose eligibility will continue to reduce 20% on the anniversary date thereof each of the next four years, bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 3.15%, payable quarterly on each November 15, February 15, April 15 and August 15. During the fiscal year 2021, we incurred $3.2 million in interest expense on all outstanding subordinated debentures and notes compared to $4.5 million and $5.5 million in fiscal years 2020 and 2019, respectively.

Off-Balance Sheet Commitments, Commitments, Guarantees and Contractual Obligations

The following table summarizes the maturity of our contractual obligations and other commitments to make future payments at September 30, 2021. Customer deposit obligations categorized as "not determined" include noninterest-bearing demand accounts and interest-bearing demand accounts with no stated maturity date.

September 30, 2021

Less Than 1 Year

1 to 2 Years

2 to 5 Years

>5 Years

Not Determined

Total

(dollars in thousands)

Contractual Obligations:

Customer deposits

Securities sold under agreement to repurchase

FHLB advances and other borrowings

Subordinated debentures

Subordinated notes payable

Accrued interest payable

Interest on FHLB advances

Interest on subordinated debentures

Interest on subordinated notes payable

Unfunded commitment for investment in affordable housing limited partnership

Other Commitments:

Commitments to extend credit—non-credit card

Commitments to extend credit—credit card

Letters of credit

Advisory fees related to pending merger

Instruments with Off-Balance Sheet Risk

In the normal course of business, we enter into various transactions that are not included in our consolidated financial statements in accordance with GAAP. These transactions include commitments to extend credit to our customers and letters of credit. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued primarily to support or guarantee the performance of a customer’s obligations to a third party. The credit risk involved in issuing letters of credit is essentially the same as originating a loan to the customer. We manage the risks associated with these arrangements by evaluating each customer’s creditworthiness prior to issuance through a process similar to that used by us in deciding whether to extend credit to the customer.

The following table presents the total notional amounts of all commitments by us to extend credit and letters of credit as of the dates indicated.

September 30,

(dollars in thousands)

Commitments to extend credit

Letters of credit

Total

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.

Great Western Bancorp, Inc. Our primary source of liquidity is cash obtained from dividends by our Bank. We primarily use our cash for the payment of dividends, when and if declared by our Board of Directors, and the payment of interest on our outstanding junior subordinated debentures and subordinated notes. We also use cash, as necessary, to satisfy the needs of our Bank through equity contributions and for acquisitions. At September 30, 2021, our holding company had $28.6 million of cash. During the first quarter of fiscal year 2022, we declared and paid a dividend of $0.05 per common share. The outstanding amount under our private placement subordinated capital notes was $35.0 million at September 30, 2021. Our management believes that the sources of available liquidity are adequate to meet all reasonably foreseeable short-term and intermediate-term demands. We may consider raising additional capital in public or private offerings of debt or equity securities. To this end, on June 1, 2020 we filed a shelf registration statement with the SEC registering an indeterminate amount of our common stock, debt securities and other securities which we may decide to issue in the future. The specific terms of any shares or other securities we choose to issue will be based on current market conditions and will be described in a supplement to the prospectus contained in the shelf registration statement.

Great Western Bank . Our Bank maintains sufficient liquidity by maintaining minimum levels of excess cash reserves (measured on a daily basis), a sufficient amount of unencumbered, highly liquid assets and access to contingent funding. At September 30, 2021, our Bank had cash of $1.55 billion (inclusive of $28.6 million of cash from our holding company) and $2.34 billion of highly-liquid available for sale securities held in our investment portfolio, of which $1.26 billion were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. The balance could be sold to meet liquidity requirements. Our Bank had $120.0 million in FHLB borrowings at September 30, 2021, with additional available lines of $1.66 billion. Our Bank also had an additional borrowing capacity of $933.7 million with the FRB Discount Window. Our Bank primarily uses liquidity to meet loan requests and commitments (including commitments under letters of credit), to accommodate outflows in deposits and to take advantage of interest rate market opportunities. At September 30, 2021, we had a total of $2.19 billion of outstanding exposure under commitments to extend credit and issued letters of credit. Our management believes that the sources of available liquidity are adequate to meet all our Bank’s reasonably foreseeable short-term and intermediate-term demands.

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, 2021 and the standards for both well-capitalized depository institutions and minimum capital requirements. Our capital ratios exceeded applicable regulatory requirements as of that date.

September 30, 2021

Actual

Capital Amount

Ratio

Minimum Capital Requirement Ratio ¹

Well Capitalized Ratio

(dollars in thousands)

Great Western Bancorp, Inc.

Tier 1 capital

Total capital

Tier 1 leverage

Common equity Tier 1 ²

Risk-weighted assets

Great Western Bank

Tier 1 capital

Total capital

Tier 1 leverage

Common equity Tier 1 ²

Risk-weighted assets

1 Does not include capital conservation buffer, which was 2.5% at September 30, 2021.

At September 30, 2021 and September 30, 2020, our Tier 1 capital included an aggregate of $74.0 million and $73.8 million, respectively, of trust preferred securities issued by our subsidiaries, net of fair value adjustment. At September 30, 2021, our Tier 2 capital included $91.8 million of the allowance for credit losses and $21.0 million of subordinated capital notes whose eligibility as Tier 2 capital was reduced by 20% beginning in the quarter ending September 30, 2020. At September 30, 2020, our Tier 2 capital included $127.2 million of the allowance for credit losses and $28.0 million of subordinated capital notes. Our total risk-weighted assets were $9.13 billion at September 30, 2021.

Non-GAAP Financial Measures

We rely on certain non-GAAP financial measures in making financial and operational decisions about our business. We believe that each of the non-GAAP financial measures presented is helpful in highlighting trends in our business, financial condition and results of operations which might not otherwise be apparent when relying solely on our financial results calculated in accordance with GAAP. We disclose net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. We believe this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.

In particular, we evaluate our profitability and performance based on our adjusted net income, adjusted earnings per common share, pre-provision pre-tax income ("PTPP"), tangible net income and return on average tangible common equity. Our adjusted net income and adjusted earnings per common share exclude the after-tax effect of items with a significant impact to net income that we do not believe to be recurring in nature, (e.g., one-time acquisition expenses as well as the second quarter of fiscal year 2020 COVID-19 impact on credit and other related charges and the impairment of goodwill and certain intangible assets). Our PTPP income excludes total provision for credit losses, credit gain/losses on loans held for investment measured at fair value and goodwill impairment. Our tangible net income and return on average tangible common equity exclude the effects of amortization expense relating to intangible assets and our acquisitions of other institutions. We believe these measures help highlight trends associated with our financial condition and results of operations by providing net income and return information excluding significant nonrecurring items (for adjusted net income and adjusted earnings per common share), measure our ability to generate capital by providing net income excluding credit losses (for PTPP income) and measure net income based on our cash payments and receipts during the applicable period (for tangible net income and return on average tangible common equity).

We also evaluate our profitability and performance based on our adjusted net interest income, adjusted net interest margin, adjusted interest income on loans and adjusted yield on loans. We adjust each of these four measures to include the derivative interest expense we use to manage interest rate risk on certain of our loans, which we believe economically offsets the interest income earned on the loans. Similarly, we evaluate our operational efficiency based on our efficiency ratio, which excludes the effect of amortization of core deposit and other intangibles (a non-cash expense item) and includes the tax benefit associated with our tax-advantaged loans.

We evaluate our financial condition based on the ratio of our tangible common equity to our tangible assets and the ratio of our tangible common equity to common shares outstanding. Our calculation of this ratio excludes the effect of our goodwill and other intangible assets. We believe this measure is helpful in highlighting the common equity component of our capital and because of its focus by federal bank regulators when reviewing the health and strength of financial institutions in recent years and when considering regulatory approvals for certain actions, including capital actions. We also believe the ratio of our tangible common equity to common shares outstanding is helpful in understanding our stockholders’ relative ownership position as we undertake various actions to issue and retire common shares outstanding.

At and for Fiscal Years Ended September 30,

(Dollars in thousands except share and per share amounts)

Adjusted net income and adjusted earnings per common share:

Net income (loss) - GAAP

Add: Acquisition expenses, net of tax

Add: COVID-19 related impairment of goodwill and certain intangible assets, net of tax

Add: COVID-19 impact on credit and other related charges, net of tax

Add: Deferred taxes revaluation due to Tax Reform Act

Adjusted net income

Weighted average diluted common shares outstanding

Earnings per common share - diluted

Adjusted earnings per common share - diluted

Pre-tax pre-provision income ("PTPP"):

Income (loss) before income taxes - GAAP

Add: (Reversal of) provision for credit losses - GAAP

Add: Change in fair value of FVO loans and related derivatives - GAAP

Add: Goodwill impairment - GAAP

Pre-tax pre-provision income

Tangible net income and return on average tangible common equity:

Net income (loss) - GAAP

Add: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets, net of tax

Tangible net income

Average common equity

Less: Average goodwill and other intangible assets

Average tangible common equity

Return on average common equity *

Return on average tangible common equity **

* Calculated as net income - GAAP divided by average common equity.

** Calculated as tangible net income divided by average tangible common equity.

Adjusted net interest income and adjusted net interest margin (fully-tax equivalent basis), on non-ASC 310-30 loans:

Net interest income - GAAP

Add: Tax equivalent adjustment

Net interest income (FTE)

Add: Derivative interest expense

Adjusted net interest income (FTE)

Average interest-earning assets

Net interest margin (FTE) *

Adjusted net interest margin (FTE) **

* Calculated as net interest income (FTE) divided by average interest earning assets.

** Calculated as adjusted net interest income (FTE) divided by average interest earning assets.

At and for Fiscal Years Ended September 30,

(Dollars in thousands except share and per share amounts)

Adjusted interest income and adjusted yield (fully-tax equivalent basis), on non-ASC 310-30 loans:

Interest income - GAAP

Add: Tax equivalent adjustment

Interest income (FTE)

Add: Derivative interest expense

Adjusted interest income (FTE)

Average non-ASC310-30 loans

Yield (FTE) *

Adjusted yield (FTE) **

* Calculated as interest income (FTE) divided by average loans.

** Calculated as adjusted interest income (FTE) divided by average loans.

Efficiency ratio:

Total revenue - GAAP

Add: Tax equivalent adjustment

Total revenue (FTE)

Noninterest expense

Less: Amortization of intangible assets and COVID-19 related impairment of goodwill and certain intangible assets

Tangible noninterest expense

Efficiency ratio *

* Calculated as the ratio of tangible noninterest expense to total revenue (FTE).

Tangible common equity and tangible common equity to tangible assets:

Total stockholders' equity

Less: Goodwill and other intangible assets

Tangible common equity

Total assets

Less: Goodwill and other intangible assets

Tangible assets

Tangible common equity to tangible assets

Tangible book value per share:

Total stockholders' equity

Less: Goodwill and other intangible assets

Tangible common equity

Common shares outstanding

Book value per share - GAAP

Tangible book value per share

Impact of Inflation and Changing Prices

Our financial statements included in this Annual Report on Form 10-K have been prepared in accordance with GAAP, which requires us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession generally are not considered. The primary effect of inflation on our operations is reflected in increased operating costs. In our management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.

Recent Accounting Pronouncements

See "Note 2. New Accounting Standards" in the accompanying "Notes to Consolidated Financial Statements" included in this Annual Report on Form 10-K for a discussion of new accounting pronouncements and their expected impact on our financial statements.

Critical Accounting Policies and the Impact of Accounting Estimates

Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. Our accounting policies are more fully described in Note 1 of the consolidated financial statements. Certain accounting policies require our management to use significant judgment and assumptions, which can have a material impact on the carrying amount of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

We have identified the following accounting policies as critical: the allowance for credit losses, core deposits and other intangibles, derivatives, and income taxes. Additionally, in the prior year we identified goodwill impairment as a critical accounting policy. We have reviewed these critical accounting estimates and related disclosures with our Audit Committee.

Allowance for Credit Losses

Description. We maintain an allowance for credit losses at a level management believes is appropriate based on ongoing evaluation of the loan portfolio based on the current expected credit loss model driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective.

Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an individual basis ("individual reserve"). The reserve related to these loans is calculated using the collateral available to repay the loan, most typically the liquidation value of the collateral (less selling costs, if applicable).

Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). The historical loss experience of the pool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan pool is applied to each loan within the segment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in loss expectations relative to the historical loss rates over a forecasted 2 year period after which the loss rates revert back to the historical loss rates over a 1 year reversion period. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans servicing practices and changes in underwriting criteria as well as the impact of economic events that are not captured in the historical loss experience or modeled losses.

Changes to the allowance for credit losses are made by charges to or reductions in the provision for credit losses, which are reflected in the consolidated statements of income. Loans deemed to be uncollectible are charged off against the allowance for credit losses. Recoveries of amounts previously charged-off are credited to the allowance for credit losses. Further discussion of the methodology used in establishing the allowance for credit losses is provided in the Allowance for Credit Losses section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Note 1. Nature of Operations and Summary of Significant Accounting Policies."

Judgments and Uncertainties. Management makes a range of assumptions to determine what is believed to be the appropriate level of allowance for credit losses. Management determines an appropriate macroeconomic forecast based on the expectation of future conditions over a supportable forecast period as described above, as well as qualitative adjustments based on current and future conditions that may not be fully captured in the modeling components above. All of these estimates are susceptible to significant change.

Effect if Actual Results Differ From Assumptions. The allowance represents our best estimate of expected current credit losses in the loan portfolio, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on our financial condition and results of operations.

Core Deposits and Other Intangibles

Description. Intangible assets are non-physical assets generally recognized as part of an acquisition, where the acquirer is allowed to assign some portion of the purchase price to acquired intangible assets having a useful life of greater than one year. These assets often involve estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques. Our intangible assets include core deposits, brand intangibles, customer relationships, and other intangibles. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under ASC Topic 350, Goodwill and Other Intangible Assets , intangible assets are evaluated for impairment if indicators of impairment are identified.

Judgments and Uncertainties. The determination of fair values is based on a quantitative analysis using management's assumptions of future growth rates, future attrition of the customer base, discount rates and other relevant factors.

Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of core deposits and other intangibles and could result in an impairment loss affecting our consolidated financial statements as a whole.

Derivatives

Description. We maintain an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. We enter into interest rate swap contracts to offset the interest rate risk associated with borrowers who lock in long-term fixed rates (greater than or equal to 5 years to maturity) through a fixed rate loan. Generally, under these swaps, we agree with various swap counterparties to exchange the difference between fixed-rate and floating-rate interest amounts based upon notional principal amounts. These contracts do not qualify for hedge accounting. These interest rate derivative instruments are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value, with changes in fair value reported in net realized and unrealized gain (loss) on derivatives. Since each fixed rate loan is paired with an offsetting derivative contract, the impact to net income is minimized. We also have back to back swaps with customers where we enter into an interest rate swap with loan customers to provide a facility to mitigate the interest rate risk associated with offering a fixed rate and simultaneously enters into a swap with an outside third party that is matched in exact offsetting terms. The back to back swaps are recorded at fair value and recognized as assets and liabilities, depending on the rights or obligations under the contract, in fair value of derivatives on the consolidated balance sheet, with changes in fair value reported in net realized and unrealized gain (loss) on derivatives.

We enter into interest rate derivative contracts to support the business needs of our customers. These interest rate swaps sales are used to enable customers to achieve a long-term fixed rate by selling the customer a long-term variable rate loan indexed to LIBOR plus a credit spread whereby the Bank enters into an interest rate swap with our customer where the customer pays a fixed rate of interest set at the time of origination on the interest rate swap and then the customer receives a floating rate equal to the rate paid on the loan, thus resulting in a fixed rate of interest over the life of the interest rate swap. We minimize the market and liquidity risks of the swaps entered into with the customer by entering into an offsetting position with a swap dealer.

We enter into RPAs with some of our derivative counterparties to assume the credit exposure related to interest rate derivative contracts. Our loan customer enters into an interest rate swap directly with a derivative counterparty and we agree through an RPA to take on the counterparty's risk of loss on the interest rate swap due to a default by the customer.

We enter into forward interest rate lock commitments on mortgage loans to be held for sale, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding. We also have corresponding forward sales contracts related to these interest rate lock commitments. Both the mortgage loan commitments and the related sales contracts are considered derivatives and are recorded at fair value with changes in fair value recorded in noninterest income.

Judgments and Uncertainties. Our exposure to derivative credit risk is defined as the possibility of sustaining a loss due to the failure of the counterparty to perform in accordance with the terms of the contract. Credit risks associated with interest rate swaps are similar to those relating to traditional on-balance sheet financial instruments. We manage interest rate swap credit risk with the same standards and procedures applied to our commercial lending activities.

Effect if Actual Results Differ From Assumptions. As with any financial instrument, derivative financial instruments have inherent risk including adverse changes in interest rates. We have agreements with our derivative counterparties that contain a provision where if we fail to maintain our status as a well/adequately capitalized institution, then the counterparty has the right to terminate the derivative positions and we would be required to settle our obligations under the agreements.

Income Taxes

Description. We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly, and as new information becomes available, the balances are adjusted as appropriate. We follow ASC Topic 740, Income Taxes , which prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized on the consolidated financial statements.

Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

Effect if Actual Results Differ From Assumptions. Although we believe the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.

Goodwill Impairment

Description. Prior to fiscal year 2021, goodwill represented the excess purchase price over the fair value of identifiable net assets of acquired companies. Goodwill often involved estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under ASC Topic 350, we conducted a goodwill impairment test on the basis of one reporting unit at least annually, and more frequently if events occurred or circumstances changed that would more-likely-than-not reduce the fair value below its carrying amount. We assessed qualitative factors to determine whether it was more-likely-than-not the fair value was less than its carrying amount. If we concluded based on the qualitative assessment that goodwill may be impaired, we would perform a quantitative one-step impairment test. An impairment loss would be recognized for any excess of carrying value over fair value of the goodwill, and any subsequent increases in goodwill would not be recognized on the consolidated financial statements.

Judgments and Uncertainties. When performing the qualitative assessment to determine whether the fair value of the reporting unit was less than the carrying value, we assessed relevant events and circumstances, including macroeconomic conditions, industry and market considerations, overall financial performance, changes in the composition or carrying amount of assets and liabilities, the market price of the Company's common stock, and other relevant factors. If a quantitative assessment was considered necessary, the fair value of the reporting unit was calculated with the assistance of a third party using management's assumptions of future growth rates, future attrition of the customer base, discount rates, multiples of earnings and other relevant factors.

Effect if Actual Results Differ From Assumptions. Changes in these qualitative and quantitative factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the fair value of the reporting unit in relation to the carrying value of goodwill and could result in an impairment loss affecting our consolidated financial statements as a whole.