Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q
 
 
 
(Mark One)
 
 
þ

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2018
 
 
Or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                 to

Commission File Number 001-36688



Great Western Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
47-1308512
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 

225 South Main Avenue
Sioux Falls, South Dakota
 


57104
(Address of principal executive offices)
 
(Zip Code)
(605) 334-2548
Registrant’s telephone number, including area code



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer   o
Non-accelerated filer o  
(Do not check if a smaller reporting company)
Smaller reporting company   o
Emerging growth company o 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No   x
As of August 1, 2018, the number of shares of the registrant’s Common Stock outstanding was 58,911,563.





GREAT WESTERN BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
 

2-




EXPLANATORY NOTE
Except as otherwise stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to:
“we,” “our,” “us” and our “company” refers to Great Western Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries;
"our bank” refers to Great Western Bank, a South Dakota banking corporation;
“NAB” refers to National Australia Bank Limited, an Australian public company that was our ultimate parent company prior to our initial public offering in October 2014 and, until July 31, 2015, was our principal stockholder;
our “states” refers to the nine states (Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) in which we currently conduct our business;
our “footprint” refers to the geographic markets within our states in which we currently conduct our business;
"HF Financial" refers to HF Financial Corporation; and
"FHLB" refers to Federal Home Loan Bank.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” "views," “intends” and similar words or phrases. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” or "Part II, Item 1A Risk Factors" of this Report or the following:
current and future economic and market conditions in the United States generally or in our states in particular, including the rate of growth and employment levels;
our ability to anticipate interest rate changes and manage interest rate risk;
our ability to achieve loan and deposit growth;
the relative strength or weakness of the commercial, agricultural and real estate markets where our borrowers are located, including without limitation related asset and market prices;
declines in asset prices and the market prices for agricultural products or changes in governmental support programs for the agricultural sector;
our ability to effectively execute our strategic plan and manage our growth;
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan and lease loss;
our ability to develop and effectively use the quantitative models we rely upon in our business;

3-




our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruption and fraud risks;
fluctuations in the values of our assets and liabilities and off-balance sheet exposures;
unanticipated changes in our liquidity position, including but not limited to changes in our access to sources of liquidity and capital to address our liquidity needs;
possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including the potential negative effects of imposed and proposed tariffs on products that our customers may import or export, including among others, agricultural products;
possible impairment of our goodwill and other intangible assets, or any adjustment of the valuation of our deferred tax assets;
the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters;
the impact of, and changes in applicable laws, regulations and accounting standards, policies and interpretations, including the impact of the Tax Cuts and Jobs Act of 2017;
legal, compliance and reputational risks, including litigation and regulatory risks;
our inability to receive dividends from our bank and to service debt, pay dividends to our common stockholders and satisfy obligations as they become due;
expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act of 2002 to maintain an effective system of internal control over financial reporting; and
other risks and uncertainties inherent to our business, including those discussed under the heading "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made or to reflect the occurrence of unanticipated events.

4-




PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
GREAT WESTERN BANCORP, INC.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
 
(Unaudited)
 
 
 
June 30, 2018
 
September 30, 2017
Assets
 
 
 
Cash and due from banks
$
162,885

 
$
170,657

Interest-bearing bank deposits
131,729

 
189,739

Cash and cash equivalents
294,614

 
360,396

Securities available for sale
1,372,711

 
1,367,960

Loans, net of unearned discounts and deferred fees, including $46,477 and $57,537 of loans covered by a FDIC loss share agreement at June 30, 2018 and September 30, 2017, respectively, and $888,247 and $1,016,576 of loans at fair value under the fair value option at June 30, 2018 and September 30, 2017, respectively, and $6,805 and $7,456 of loans held for sale at June 30, 2018 and September 30, 2017, respectively
9,379,819

 
8,968,553

Allowance for loan and lease losses
(64,688
)
 
(63,503
)
Net loans
9,315,131

 
8,905,050

Premises and equipment, including $1,107 and $5,147 of property held for sale at June 30, 2018 and September 30, 2017, respectively
107,364

 
112,209

Accrued interest receivable
51,979

 
53,176

Other repossessed property, including $131 and $0 of property covered by FDIC loss share agreements at June 30, 2018 and September 30, 2017, respectively
10,221

 
8,985

Goodwill
739,023

 
739,023

Cash surrender value of life insurance policies
30,245

 
29,619

Net deferred tax assets
31,487

 
42,400

Other assets
56,273

 
71,193

Total assets
$
12,009,048

 
$
11,690,011

Liabilities and stockholders’ equity
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
1,793,293

 
$
1,856,126

Interest-bearing
7,792,025

 
7,121,487

Total deposits
9,585,318

 
8,977,613

Securities sold under agreements to repurchase
105,478

 
132,636

FHLB advances and other borrowings
335,000

 
643,214

Subordinated debentures and subordinated notes payable
108,426

 
108,302

Accrued expenses and other liabilities
58,085

 
73,246

Total liabilities
10,192,307

 
9,935,011

Stockholders’ equity
 
 
 
Common stock, $0.01 par value, authorized 500,000,000 shares; 58,911,563 shares issued and outstanding at June 30, 2018 and 58,834,066 shares issued and outstanding at September 30, 2017
589

 
588

Additional paid-in capital
1,317,327

 
1,314,039

Retained earnings
525,462

 
445,747

Accumulated other comprehensive (loss)
(26,637
)
 
(5,374
)
Total stockholders' equity
1,816,741

 
1,755,000

Total liabilities and stockholders' equity
$
12,009,048

 
$
11,690,011

See accompanying notes.

5-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
Loans
$
116,522

 
$
101,593

 
$
334,196

 
$
301,005

Investment securities
7,471

 
6,803

 
21,526

 
19,719

Federal funds sold and other
424

 
163

 
882

 
728

Total interest income
124,417

 
108,559

 
356,604

 
321,452

Interest expense
 
 
 
 
 
 
 
Deposits
16,460

 
9,478

 
40,116

 
24,596

FHLB advances and other borrowings
1,963

 
1,080

 
6,941

 
4,033

Subordinated debentures and subordinated notes payable
1,322

 
1,113

 
3,699

 
3,299

Total interest expense
19,745

 
11,671

 
50,756

 
31,928

Net interest income
104,672

 
96,888

 
305,848

 
289,524

Provision for loan and lease losses
3,515

 
5,796

 
12,972

 
16,854

Net interest income after provision for loan and lease losses
101,157

 
91,092

 
292,876

 
272,670

Noninterest income
 
 
 
 
 
 
 
Service charges and other fees
12,655

 
14,572

 
37,879

 
41,983

Wealth management fees
2,242

 
2,433

 
6,761

 
7,116

Mortgage banking income, net
1,352

 
1,828

 
4,178

 
6,130

Net gain on sale of securities
15

 

 
6

 
44

Net (decrease) increase in fair value of loans at fair value
(7,370
)
 
6,060

 
(30,872
)
 
(63,158
)
Net realized and unrealized gain on derivatives
8,093

 
(9,088
)
 
29,602

 
51,481

Other
1,952

 
1,522

 
6,801

 
4,878

Total noninterest income
18,939

 
17,327

 
54,355

 
48,474

Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
35,122

 
32,868

 
101,661

 
96,872

Data processing and communication
7,177

 
7,370

 
23,251

 
20,965

Occupancy and equipment
4,974

 
4,866

 
15,112

 
14,812

Professional fees
4,297

 
4,141

 
12,564

 
10,535

Advertising
1,260

 
1,059

 
3,441

 
3,029

Net loss recognized on repossessed property and other related expenses
305

 
152

 
1,519

 
1,208

Amortization of core deposits and other intangibles
416

 
538

 
1,268

 
1,927

Acquisition expenses

 

 

 
710

Other
4,312

 
3,928

 
13,059

 
11,254

Total noninterest expense
57,863

 
54,922

 
171,875

 
161,312

Income before income taxes
62,233

 
53,497

 
175,356

 
159,832

Provision for income taxes
16,359

 
18,437

 
59,720

 
52,707

Net income
$
45,874

 
$
35,060

 
$
115,636

 
$
107,125

Basic earnings per common share
 
 
 
 
 
 
 
Weighted average common shares outstanding
58,948,944

 
58,790,314

 
58,930,963

 
58,776,546

Basic earnings per share
$
0.78

 
$
0.60

 
$
1.96

 
$
1.82

Diluted earnings per common share
 
 
 
 
 
 
 
Weighted average diluted common shares outstanding
59,170,058

 
59,130,632

 
59,134,635

 
59,065,402

Diluted earnings per share
$
0.78

 
$
0.59

 
$
1.96

 
$
1.81

Dividends per share
 
 
 
 
 
 
 
Dividends paid
$
14,724

 
$
11,752

 
$
38,274

 
$
31,722

Dividends per share
$
0.25

 
$
0.20

 
$
0.65

 
$
0.54

See accompanying notes.

6-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
45,874

 
$
35,060

 
$
115,636

 
$
107,125

Other comprehensive (loss) gain, net of tax:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Net unrealized holding (loss) gain arising during the period
(5,671
)
 
1,896

 
(26,596
)
 
(17,757
)
Reclassification adjustment for net gain realized in net income
(15
)
 

 
(6
)
 
(44
)
Income tax benefit (expense)
1,402

 
(721
)
 
7,692

 
6,764

Net change in unrealized (loss) gain on securities available for sale
(4,284
)
 
1,175

 
(18,910
)
 
(11,037
)
Comprehensive income
$
41,590

 
$
36,235

 
$
96,726

 
$
96,088

See accompanying notes.





7-




GREAT WESTERN BANCORP, INC.
Consolidated Statement of Stockholders' Equity (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
Comprehensive Income
 
Common Stock Par Value
 
Additional
Paid-in Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance, September 30, 2016
 
 
$
587

 
$
1,312,347

 
$
344,923

 
$
5,534

 
$
1,663,391

Net income
$
107,125

 

 

 
107,125

 

 
107,125

Other comprehensive (loss), net of tax
(11,037
)
 

 

 

 
(11,037
)
 
(11,037
)
Total comprehensive income
$
96,088

 
 
 
 
 
 
 
 
 
 
Cumulative effect adjustment ¹
 
 

 
751

 
(488
)
 

 
263

Stock-based compensation, net of tax
 
 

 
4,963

 

 

 
4,963

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.54 per share
 
 

 

 
(31,722
)
 

 
(31,722
)
Balance, June 30, 2017
 
 
$
587

 
$
1,318,061

 
$
419,838

 
$
(5,503
)
 
$
1,732,983

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2017
 
 
$
588

 
$
1,314,039

 
$
445,747

 
$
(5,374
)
 
$
1,755,000

Net income
$
115,636

 

 

 
115,636

 

 
115,636

Other comprehensive (loss), net of tax
(18,910
)
 

 

 

 
(18,910
)
 
(18,910
)
Total comprehensive income
$
96,726

 
 
 
 
 
 
 
 
 
 
Stock-based compensation, net of tax
 
 
1

 
3,288

 

 

 
3,289

Reclassification due to adoption of ASU 2018-02 ²
 
 

 

 
2,353

 
(2,353
)
 

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.65 per share
 
 

 

 
(38,274
)
 

 
(38,274
)
Balance, June 30, 2018
 
 
$
589

 
$
1,317,327

 
$
525,462

 
$
(26,637
)
 
$
1,816,741

¹ Cumulative effect adjustment relates to adoption of ASU 2016-09, Compensation - Stock Based Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
² Reclassification due to adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 2, New Accounting Pronouncements and Note 15, Income Taxes, for additional information.
See accompanying notes.

8-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
 
Nine months ended
 
June 30, 2018
 
June 30, 2017
Operating activities
 
 
 
Net income
$
115,636

 
$
107,125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,496

 
11,187

Amortization of FDIC indemnification asset
2,244

 
3,473

Net loss on sale of securities and other assets
2,711

 
1,465

Gain on redemption of subordinated debentures

 
(111
)
Net gain on sale of loans
(4,924
)
 
(7,381
)
Provision for loan and lease losses
12,972

 
16,854

Reversal of provision for loan servicing rights loss
(72
)
 
(6
)
Stock-based compensation
3,289

 
5,226

Originations of residential real estate loans held for sale
(189,827
)
 
(209,695
)
Proceeds from sales of residential real estate loans held for sale
195,402

 
218,491

Net deferred income taxes
18,743

 
192

Changes in:
 
 
 
Accrued interest receivable
1,197

 
4,053

Other assets
669

 
737

Accrued interest payable and other liabilities
(14,850
)
 
(67,750
)
Net cash provided by operating activities
152,686

 
83,860

Investing activities
 
 
 
Purchase of securities available for sale
(224,159
)
 
(255,014
)
Proceeds from sales of securities available for sale
25,906

 
5,042

Proceeds from maturities of securities available for sale
163,393

 
179,160

Net increase in loans
(433,428
)
 
(130,643
)
Payment of covered losses from FDIC indemnification claims
(588
)
 
(571
)
Purchase of premises and equipment
(5,492
)
 
(4,979
)
Proceeds from sale of premises and equipment
4,600

 
4,024

Proceeds from sale of repossessed property
8,433

 
4,205

Purchase of FHLB stock
(47,372
)
 
(22,945
)
Proceeds from redemption of FHLB stock
59,914

 
39,217

Net cash used in investing activities
(448,793
)
 
(182,504
)
Financing activities
 
 
 
Net increase in deposits
607,914

 
354,801

Net decrease in securities sold under agreements to repurchase and other short-term borrowings
(27,158
)
 
(17,837
)
Proceeds from FHLB advances and other long-term borrowings
150,000

 
375,700

Repayments on FHLB advances and other long-term borrowings
(458,200
)
 
(775,000
)
Redemption of subordinated debentures

 
(3,625
)
Taxes paid related to net share settlement of equity awards
(3,957
)
 
(383
)
Dividends paid
(38,274
)
 
(31,722
)
Net cash provided by (used in) financing activities
230,325

 
(98,066
)
Net decrease in cash and cash equivalents
(65,782
)
 
(196,710
)
Cash and cash equivalents, beginning of period
360,396

 
524,611

Cash and cash equivalents, end of period
$
294,614

 
$
327,901

Supplemental disclosure of cash flow information
 
 
 
Cash payments for interest
$
47,237

 
$
30,996

Cash payments for income taxes
$
39,404

 
$
52,796

Supplemental disclosure of noncash investing and financing activities
 
 
 
Loans transferred to repossessed properties
$
(11,188
)
 
$
(4,182
)
See accompanying notes.

9-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)


1. Nature of Operations and Summary of Significant Policies
Nature of Operations
Great Western Bancorp, Inc. (the “Company”) is a bank holding company organized under the laws of Delaware and is listed on the New York Stock Exchange ("NYSE") under the symbol GWB. The primary business of the Company is ownership of its wholly owned subsidiary, Great Western Bank (the “Bank”). The Bank is a full-service regional bank focused on relationship-based business and agri-business banking in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. The Company and the Bank are subject to the regulation of certain federal and/or state agencies and undergo periodic examinations by those regulatory authorities. Substantially all of the Company’s income is generated from banking operations.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect all adjustments that are, in the opinion of management, necessary for the fair presentation of the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature.
Certain previously reported amounts have been reclassified to conform to the current presentation.
The unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended September 30, 2017, which includes a description of significant accounting policies. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year or any other period.
The accompanying unaudited consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Subsequent Events
The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. Other than those events described below, there were no other material events that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
On July 26, 2018, the Board of Directors of the Company declared a dividend of $0.25 per common share payable on August 22, 2018 to stockholders of record as of close of business on August 10, 2018.
Correction of Prior Period Balances
The consolidated statements of income for the quarter ended June 30, 2017 have been revised to correct an immaterial classification error in interest income and noninterest income related to credit card interchange income. As a result, the consolidated statements of income have been revised to reflect these changes as follows.
 
As originally reported
 
Adjustments
 
As revised
 
(dollars in thousands)
Three months ended June 30, 2017
 
 
 
 
 
Interest income - loans
$
103,435

 
$
(1,842
)
 
$
101,593

Noninterest income - service charges and other fees
12,730

 
1,842

 
14,572

 
 
 
 
 
 
Nine months ended June 30, 2017
 
 
 
 
 
Interest income - loans
$
306,253

 
$
(5,248
)
 
$
301,005

Noninterest income - service charges and other fees
36,735

 
5,248

 
41,983

 
 
 
 
 
 

10-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 
As originally reported
 
Adjustments
 
As revised
 
(dollars in thousands)
Twelve months ended September 30, 2017
 
 
 
 
 
Interest income - loans
$
414,434

 
$
(7,152
)
 
$
407,282

Noninterest income - service charges and other fees
48,573

 
7,152

 
55,725

 
 
 
 
 
 
Twelve months ended September 30, 2016
 
 
 
 
 
Interest income - loans
$
370,444

 
$
(6,716
)
 
$
363,728

Noninterest income - service charges and other fees
46,209

 
6,716

 
52,925

The above revisions had no effect on net income, earnings per share, retained earnings or capital ratios. Periods not presented herein will be revised, as applicable, as they are included in future filings.
2. New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("Tax Reform Act") from other comprehensive income to retained earnings. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company early adopted ASU 2018-02 during the second quarter of fiscal year 2018 with period of adoption application. Upon adoption, the Company made a policy election to reclassify stranded tax effects of approximately $2.4 million from accumulated other comprehensive income to retained earnings.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 is to be applied to all existing hedging relationships on the date of adoption and will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim period, with the effect of adoption reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the potential impact of ASU 2017-12 on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which addresses timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires institutions to measure all expected credit losses related to financial assets measured at amortized costs with an expected loss model based on historical experience, current conditions and reasonable and supportable forecasts relevant to affect the collectability of the financial assets, which is referred to as the current expected credit loss (CECL) model. ASU 2016-13 requires enhanced disclosures, including qualitative and quantitative requirements, to help understand significant estimates and judgments used in estimating credit losses, as well as provide additional information about the amounts recorded in the financial statements. ASU 2016-13 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted after December 15, 2018. The amendment requires the use of the modified retrospective approach for adoption. The Company has formed a project team to work on the implementation of ASU 2016-13 and is in the process of selecting a vendor to partner with to make the required changes to our existing credit loss estimation methodology. The Company is currently evaluating the potential impact on our consolidated financial statements, however, since the magnitude of the anticipated change in the allowance for credit losses will be impacted by economic conditions and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessees recognize the assets and liabilities arising from leases on the balance sheet and disclosing key information about leasing arrangements. Lessees will be required to recognize an obligation for future lease payments measured on a discounted basis and a related right-of-use asset. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, "Revenue from Contracts with Customers." ASU 2016-02 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the potential impact of ASU 2016-02 on our consolidated financial statements.

11-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments, in general, to be measured at fair value with changes in fair value recognized in earnings. It also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires entities to use the exit price notion when measuring fair value, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the measurement category and form on the balance sheet or accompanying notes, clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets, and simplifies the impairment assessment of equity investments without readily determinable fair values. ASU 2016-01 became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not believe ASU 2016-01 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which implements a more robust framework that clarifies the principles for recognizing revenue and gives greater consistency and comparability in revenue recognition practices. In the new framework, an entity recognizes revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. The new model requires the identification of performance obligations included in the contract with customers, a determination of the transaction price and an allocation of the price to those performance obligations. The entity recognizes revenue when performance obligations are satisfied. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, which intends to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which clarifies guidance pertaining to the identification of performance obligations and the licensing implementation. In May 2016, the FASB issued ASU 2016-11 and 2016-12, which further clarify guidance and provide practical expedients related to the adoption of ASU 2014-09. The standard permits the use of either the retrospective or cumulative effect transition method. The standard, along with subsequent guidance from FASB, lists several items that are specifically out of scope for ASU 2014-09, including but not limited to core interest income, derivative instruments, investments, and loan origination fees.
To address the new standard, the Company formed a working group and has completed the initial scoping phase to determine which revenue streams may be subject to accounting or disclosure changes upon adoption in October of 2018. Subsequent to this initial scoping, the Company selected a representative sample of contracts from the in-scope revenue streams for review under the amended guidance ("key contracts"). The review of key contracts is in process. Based on the analysis to date, we do not anticipate significant changes as a result of implementing the standard, but will conclude on quantitative and qualitative impacts during the fourth quarter.
3. Securities Available for Sale
The amortized cost and approximate fair value of investments in securities, all of which are classified as available for sale according to management’s intent, are summarized as follows.
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
(dollars in thousands)
As of June 30, 2018
 
 
 
 
 
 
 
U.S. Treasury securities
$
178,774

 
$

 
$
(1,239
)
 
$
177,535

Mortgage-backed securities:
 
 
 
 
 
 
 
Government National Mortgage Association
445,376

 
48

 
(15,082
)
 
430,342

Federal Home Loan Mortgage Corporation
250,832

 
56

 
(5,720
)
 
245,168

Federal National Mortgage Association
194,515

 
33

 
(5,241
)
 
189,307

Small Business Assistance Program
267,428

 
72

 
(7,167
)
 
260,333

States and political subdivision securities
70,509

 
13

 
(1,496
)
 
69,026

Other
1,006

 

 
(6
)
 
1,000

Total
$
1,408,440

 
$
222

 
$
(35,951
)
 
$
1,372,711


12-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
(dollars in thousands)
As of September 30, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
228,039

 
$
579

 
$
(15
)
 
$
228,603

Mortgage-backed securities:
 
 
 
 
 
 
 
Government National Mortgage Association
511,457

 
228

 
(6,635
)
 
505,050

Federal Home Loan Mortgage Corporation
169,147

 
75

 
(1,247
)
 
167,975

Federal National Mortgage Association
170,247

 
22

 
(1,287
)
 
168,982

Small Business Assistance Program
224,005

 
726

 
(1,001
)
 
223,730

States and political subdivision securities
73,041

 
187

 
(642
)
 
72,586

Other
1,006

 
28

 

 
1,034

Total
$
1,376,942

 
$
1,845

 
$
(10,827
)
 
$
1,367,960

The amortized cost and approximate fair value of debt securities available for sale as of June 30, 2018 and September 30, 2017, by contractual maturity, are shown below. Maturities of mortgage-backed securities may differ from contractual maturities because the mortgages underlying the securities may be called or repaid without penalty.
 
June 30, 2018
 
September 30, 2017
 
Amortized 
Cost
 
Estimated
Fair Value
 
Amortized 
Cost
 
Estimated
Fair Value
 
(dollars in thousands)
Due in one year or less
$
120,927

 
$
120,476

 
$
91,535

 
$
91,597

Due after one year through five years
116,445

 
114,655

 
193,117

 
193,373

Due after five years through ten years
11,789

 
11,308

 
16,306

 
16,097

Due after ten years
122

 
122

 
122

 
122

 
249,283

 
246,561

 
301,080

 
301,189

Mortgage-backed securities
1,158,151

 
1,125,150

 
1,074,856

 
1,065,737

Securities without contractual maturities
1,006

 
1,000

 
1,006

 
1,034

Total
$
1,408,440

 
$
1,372,711

 
$
1,376,942

 
$
1,367,960

Proceeds from sales of securities available for sale were $0.7 million and $25.9 million for the three and nine months ended June 30, 2018 and $0.0 million and $5.0 million for the three and nine months ended June 30, 2017, respectively. Negligible gross gains (pre-tax) or gross losses (pre-tax) were realized on the sales for the three and nine months ended June 30, 2018 and 2017 using the specific identification method. The Company recognized no other-than-temporary impairment for the three and nine months ended June 30, 2018 and 2017.
Securities with an estimated fair value of approximately $901.1 million and $951.4 million at June 30, 2018 and September 30, 2017, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required by contractual obligation or law. The counterparties do not have the right to sell or pledge the securities the Company has pledged as collateral.
As detailed in the following tables, certain investments in debt securities, which are approximately 93% and 68% of the Company’s investment portfolio at estimated fair value at June 30, 2018 and September 30, 2017, respectively, are reported in the consolidated financial statements at an amount less than their amortized cost. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, implicit or explicit government guarantees, and information obtained from regulatory filings, management believes the declines in fair value of these securities are temporary. As the Company does not intend to sell the securities and it is not more likely than not the Company will be required to sell the securities before the recovery of their amortized cost basis, which may be maturity, the Company does not consider the securities to be other-than-temporarily impaired at June 30, 2018 or September 30, 2017.

13-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

The following table presents the Company’s gross unrealized losses and approximate fair value in investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(dollars in thousands)
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
167,539

 
$
(1,234
)
 
$
9,996

 
$
(5
)
 
$
177,535

 
$
(1,239
)
Mortgage-backed securities
313,945

 
(6,369
)
 
713,284

 
(26,841
)
 
1,027,229

 
(33,210
)
States and political subdivision securities
20,601

 
(145
)
 
44,235

 
(1,351
)
 
64,836

 
(1,496
)
Other
1,000

 
(6
)
 

 

 
1,000

 
(6
)
Total
$
503,085

 
$
(7,754
)
 
$
767,515

 
$
(28,197
)
 
$
1,270,600

 
$
(35,951
)
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(dollars in thousands)
As of September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
10,003

 
$
(15
)
 
$

 
$

 
$
10,003

 
$
(15
)
Mortgage-backed securities
635,969

 
(5,425
)
 
241,368

 
(4,746
)
 
877,337

 
(10,171
)
States and political subdivision securities
21,705

 
(197
)
 
25,773

 
(444
)
 
47,478

 
(641
)
Other

 

 

 

 

 

Total
$
667,677

 
$
(5,637
)
 
$
267,141

 
$
(5,190
)
 
$
934,818

 
$
(10,827
)
As of June 30, 2018 and September 30, 2017, the Company had 361 and 249 securities, respectively, in an unrealized loss position.
4. Loans
The composition of loans as of June 30, 2018 and September 30, 2017, is as follows.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Commercial real estate
$
4,529,446

 
$
4,124,805

Agriculture
2,176,318

 
2,122,138

Commercial non-real estate
1,750,827

 
1,718,914

Residential real estate
857,848

 
932,892

Consumer
51,417

 
66,559

Other
44,187

 
43,207

Ending balance
9,410,043

 
9,008,515

Less: Unamortized discount on acquired loans
(19,850
)
 
(29,121
)
Unearned net deferred fees and costs and loans in process
(10,374
)
 
(10,841
)
Total
$
9,379,819

 
$
8,968,553

The loan segments above include loans covered by a FDIC loss sharing agreement totaling $46.5 million and $57.5 million as of June 30, 2018 and September 30, 2017, respectively, residential real estate loans held for sale totaling $6.8 million and $7.5 million at June 30, 2018 and September 30, 2017, respectively, and $888.2 million and $1.02 billion of loans accounted for at fair value at June 30, 2018 and September 30, 2017, respectively.
Unearned net deferred fees and costs totaled $13.1 million and $11.6 million as of June 30, 2018 and September 30, 2017, respectively.
Loans in process represent loans that have been funded as of the balance sheet dates but not classified into a loan category and loan payments received as of the balance sheet dates that have not been applied to individual loan accounts. Loans in process totaled $(2.7) million and $(0.8) million at June 30, 2018 and September 30, 2017, respectively.

14-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

Loans guaranteed by agencies of the U.S. government totaled $169.7 million and $168.3 million at June 30, 2018 and September 30, 2017, respectively.
Principal balances of residential real estate loans sold totaled $72.7 million and $66.0 million for the three months ended June 30, 2018 and 2017, respectively, and $190.5 million and $211.1 million for the nine months ended June 30, 2018 and 2017, respectively.
Nonaccrual
Interest income on loans is accrued daily on the outstanding balances. Accrual of interest is discontinued when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of interest is doubtful, which is usually at 90 days past due. Generally, when loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.
The following table presents the Company’s nonaccrual loans at June 30, 2018 and September 30, 2017, excluding ASC 310-30 loans. Loans greater than 90 days past due and still accruing interest as of June 30, 2018 and September 30, 2017, were $0.1 million and $1.9 million, respectively.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Nonaccrual loans
 
 
 
Commercial real estate
$
29,869

 
$
14,693

Agriculture
81,387

 
99,325

Commercial non-real estate
9,154

 
13,674

Residential real estate
3,590

 
4,421

Consumer
55

 
112

Total
$
124,055

 
$
132,225

Credit Quality Information
The Company assigns all non-consumer loans a credit quality risk rating. These ratings are Pass, Watch, Substandard, Doubtful, and Loss. Loans with a Pass and Watch rating represent those loans not classified on the Company’s rating scale for problem credits, with loans with a Watch rating being monitored and updated at least quarterly by management. Substandard loans are those where a well-defined weakness has been identified that may put full collection of contractual debt at risk. Doubtful loans are those where a well-defined weakness has been identified and a loss of contractual debt is probable. Substandard and doubtful loans are monitored and updated monthly. All loan risk ratings are updated and monitored on a continuous basis. The Company generally does not risk rate residential real estate or consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of consumer loans.

15-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

The following table presents the composition of the loan portfolio by internally assigned grade as of June 30, 2018 and September 30, 2017. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value with changes in fair value reported in earnings of $888.2 million at June 30, 2018 and $1.02 billion at September 30, 2017.
As of June 30, 2018
Commercial Real Estate
 
Agriculture
 
Commercial
Non-Real Estate
 
Residential Real Estate ¹
 
Consumer ¹
 
Other
 
Total
 
(dollars in thousands)
Credit Risk Profile by Internally Assigned Grade
 
 
 
 
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
3,971,920

 
$
1,680,976

 
$
1,438,425

 
$
795,325

 
$
50,657

 
$
44,187

 
$
7,981,490

Watchlist
55,047

 
166,130

 
23,440

 
5,158

 
336

 

 
250,111

Substandard
61,592

 
127,661

 
25,935

 
6,050

 
165

 

 
221,403

Doubtful
97

 
4

 
2,322

 
39

 

 

 
2,462

Loss

 

 

 

 

 

 

Ending balance
4,088,656

 
1,974,771

 
1,490,122

 
806,572

 
51,158

 
44,187

 
8,455,466

Loans covered by a FDIC loss sharing agreement

 

 

 
46,477

 

 

 
46,477

Total
$
4,088,656

 
$
1,974,771

 
$
1,490,122

 
$
853,049

 
$
51,158

 
$
44,187

 
$
8,501,943

1 The Company generally does not risk rate residential real estate or consumer loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.
As of September 30, 2017
Commercial Real Estate
 
Agriculture
 
Commercial
Non-Real Estate
 
Residential Real Estate ¹
 
Consumer ¹
 
Other
 
Total
 
(dollars in thousands)
Credit Risk Profile by Internally Assigned Grade
 
 
 
 
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
3,519,689

 
$
1,577,403

 
$
1,369,803

 
$
853,266

 
$
65,673

 
$
43,207

 
$
7,429,041

Watchlist
80,195

 
157,407

 
31,878

 
4,158

 
187

 

 
273,825

Substandard
37,627

 
130,953

 
21,438

 
7,368

 
306

 

 
197,692

Doubtful
521

 
119

 
3,841

 
242

 

 

 
4,723

Loss

 

 

 

 

 

 

Ending balance
3,638,032

 
1,865,882

 
1,426,960

 
865,034

 
66,166

 
43,207

 
7,905,281

Loans covered by a FDIC loss sharing agreement

 

 

 
57,537

 

 

 
57,537

Total
$
3,638,032

 
$
1,865,882

 
$
1,426,960

 
$
922,571

 
$
66,166

 
$
43,207

 
$
7,962,818

1 The Company generally does not risk rate residential real estate or consumer loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.
Past Due Loans
The following table presents the Company’s past due loans at June 30, 2018 and September 30, 2017. This table is presented net of unamortized discount on acquired loans and excludes loans measured at fair value with changes in fair value reported in earnings of $888.2 million at June 30, 2018 and $1.02 billion at September 30, 2017.
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total Financing Receivables
 
(dollars in thousands)
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
3,199

 
$
94

 
$
23,019

 
$
26,312

 
$
4,062,344

 
$
4,088,656

Agriculture
1,138

 
2,746

 
20,060

 
23,944

 
1,950,827

 
1,974,771

Commercial non-real estate
685

 
128

 
7,481

 
8,294

 
1,481,828

 
1,490,122

Residential real estate
1,562

 
444

 
1,410

 
3,416

 
803,156

 
806,572

Consumer
106

 
15

 

 
121

 
51,037

 
51,158

Other

 

 

 

 
44,187

 
44,187

Ending balance
6,690

 
3,427

 
51,970

 
62,087

 
8,393,379

 
8,455,466

Loans covered by a FDIC loss sharing agreement
274

 
541

 
263

 
1,078

 
45,399

 
46,477

Total
$
6,964

 
$
3,968

 
$
52,233

 
$
63,165

 
$
8,438,778

 
$
8,501,943


16-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total Financing Receivables
 
(dollars in thousands)
As of September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
876

 
$
22,536

 
$
6,504

 
$
29,916

 
$
3,608,116

 
$
3,638,032

Agriculture
1,453

 
3,181

 
20,844

 
25,478

 
1,840,404

 
1,865,882

Commercial non-real estate
2,485

 
115

 
8,580

 
11,180

 
1,415,780

 
1,426,960

Residential real estate
1,428

 
76

 
951

 
2,455

 
862,579

 
865,034

Consumer
71

 
24

 
18

 
113

 
66,053

 
66,166

Other

 

 

 

 
43,207

 
43,207

Ending balance
6,313

 
25,932

 
36,897

 
69,142

 
7,836,139

 
7,905,281

Loans covered by a FDIC loss sharing agreement
998

 
54

 
738

 
1,790

 
55,747

 
57,537

Total
$
7,311

 
$
25,986

 
$
37,635

 
$
70,932

 
$
7,891,886

 
$
7,962,818

Impaired Loans
The following table presents the Company’s impaired loans. This table excludes purchased credit impaired loans and loans measured at fair value with changes in fair value reported in earnings of $888.2 million at June 30, 2018 and $1.02 billion at September 30, 2017.
 
June 30, 2018
 
September 30, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
(dollars in thousands)
Impaired loans:
 
 
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
45,330

 
$
47,969

 
$
5,313

 
$
20,819

 
$
24,893

 
$
3,621

Agriculture
63,272

 
77,756

 
10,720

 
79,219

 
88,268

 
11,468

Commercial non-real estate
18,798

 
21,701

 
5,343

 
17,950

 
28,755

 
4,779

Residential real estate
4,383

 
5,032

 
2,022

 
5,177

 
5,874

 
2,581

Consumer
166

 
171

 
70

 
280

 
287

 
86

Total impaired loans with an allowance recorded
131,949

 
152,629

 
23,468

 
123,445

 
148,077

 
22,535

 
 
 
 
 
 
 
 
 
 
 
 
With no allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
15,316

 
54,750

 

 
16,652

 
69,677

 

Agriculture
64,317

 
67,427

 

 
51,256

 
64,177

 

Commercial non-real estate
10,176

 
19,316

 

 
13,983

 
38,924

 

Residential real estate
1,802

 
4,267

 

 
2,574

 
9,613

 

Consumer
1

 
118

 

 
13

 
950

 

Total impaired loans with no allowance recorded
91,612

 
145,878

 

 
84,478

 
183,341

 

Total impaired loans
$
223,561

 
$
298,507

 
$
23,468

 
$
207,923

 
$
331,418

 
$
22,535


17-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

The following table presents the average recorded investment on impaired loans and interest income recognized on impaired loans for the three and nine months ended June 30, 2018 and 2017, respectively, are as follows.
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
Average Recorded Investment
 
Interest Income Recognized While on Impaired Status
 
Average Recorded Investment
 
Interest Income Recognized While on Impaired Status
 
Average Recorded Investment
 
Interest Income Recognized While on Impaired Status
 
Average Recorded Investment
 
Interest Income Recognized While on Impaired Status
 
(dollars in thousands)
Commercial real estate
$
61,257

 
$
402

 
$
40,939

 
$
579

 
$
57,818

 
$
2,456

 
$
45,294

 
$
1,794

Agriculture
126,262

 
1,592

 
140,512

 
1,993

 
125,047

 
3,763

 
127,621

 
5,186

Commercial non-real estate
28,915

 
354

 
43,224

 
331

 
30,402

 
1,130

 
45,424

 
1,111

Residential real estate
6,780

 
54

 
9,051

 
112

 
7,273

 
335

 
9,489

 
352

Consumer
199

 
3

 
415

 
13

 
234

 
10

 
408

 
40

Total
$
223,413

 
$
2,405

 
$
234,141

 
$
3,028

 
$
220,774

 
$
7,694

 
$
228,236

 
$
8,483

Valuation adjustments made to repossessed properties totaled $0.5 million and $0.1 million for the three months ended June 30, 2018 and 2017 and $1.2 million and $1.0 million for the nine months ended June 30, 2018 and 2017, respectively. The adjustments are included in net loss recognized on repossessed property and other related expenses in noninterest expense.
Troubled Debt Restructurings
Included in certain loan categories in the impaired loans are troubled debt restructurings (“TDRs”) that were classified as impaired. These TDRs do not include purchased credit impaired loans. When the Company grants concessions to borrowers such as reduced interest rates or extensions of loan periods that would not be considered other than because of borrowers’ financial difficulties, the modification is considered a TDR. Specific reserves included in the allowance for loan and lease losses for TDRs were $10.4 million and $8.8 million at June 30, 2018 and September 30, 2017, respectively. There were $5.2 million commitments to lend additional funds to borrowers whose loans were modified in a TDR as of June 30, 2018 and negligible commitments to lend additional funds to borrowers whose loans were modified in a TDR as of September 30, 2017.
The following table presents the recorded value of the Company’s TDR balances as of June 30, 2018 and September 30, 2017.
 
June 30, 2018
 
September 30, 2017
 
Accruing
 
Nonaccrual
 
Accruing
 
Nonaccrual
 
(dollars in thousands)
Commercial real estate
$
612

 
$
2,623

 
$
1,121

 
$
5,351

Agriculture
32,203

 
57,685

 
22,678

 
59,633

Commercial non real estate
3,564

 
3,792

 
8,369

 
5,641

Residential real estate
299

 
261

 
311

 
688

Consumer
80

 

 
11

 
21

Total
$
36,758

 
$
64,361

 
$
32,490

 
$
71,334


18-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of all accruing loans restructured in TDRs through either a rate modification, term extension, payment modification or due to a bankruptcy during the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
 
Recorded Investment
 
 
Recorded Investment
 
 
Recorded Investment
 
 
Recorded Investment
 
Number
Pre-Modification
Post-Modification
 
Number
Pre-Modification
Post-Modification
 
Number
Pre-Modification
Post-Modification
 
Number
Pre-Modification
Post-Modification
 
(dollars in thousands)
Commercial real estate

$

$

 
1

$
3,230

$
3,230

 

$

$

 
1

$
3,230

$
3,230

Agriculture
3

4,680

4,680

 
6

8,289

8,289

 
5

10,753

10,753

 
8

16,723

16,723

Commercial non-real estate



 
2

692

692

 



 
6

1,218

1,218

Residential real estate



 



 



 
1

9

9

Consumer



 



 
1

73

73

 



Total accruing
3

$
4,680

$
4,680

 
9

$
12,211

$
12,211

 
6

$
10,826

$
10,826

 
16

$
21,180

$
21,180

Change in recorded investment due to principal paydown at time of modification

$

$

 

$

$

 

$

$

 

$

$

Change in recorded investment due to chargeoffs at time of modification



 



 



 



The following table presents a summary of all non-accruing loans restructured in TDRs through either a rate modification, term extension, payment modification or due to a bankruptcy during the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
 
Recorded Investment
 
 
Recorded Investment
 
 
Recorded Investment
 
 
Recorded Investment
 
Number
Pre-Modification
Post-Modification
 
Number
Pre-Modification
Post-Modification
 
Number
Pre-Modification
Post-Modification
 
Number
Pre-Modification
Post-Modification
 
(dollars in thousands)
Commercial real estate

$

$

 

$

$

 

$

$

 

$

$

Agriculture



 
3

4,351

4,351

 
6

8,374

8,374

 
9

17,339

17,339

Commercial non-real estate



 



 



 



Residential real estate



 



 



 
1

21

21

Consumer



 



 



 
3

21

21

Total non-accruing

$

$

 
3

$
4,351

$
4,351

 
6

$
8,374

$
8,374

 
13

$
17,381

$
17,381

Change in recorded investment due to principal paydown at time of modification

$

$

 

$

$

 

$

$

 

$

$

Change in recorded investment due to chargeoffs at time of modification



 



 



 



The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default for the three and nine months ended June 30, 2018 and 2017, respectively.
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
Number of Loans
Recorded Investment
 
Number of Loans
Recorded Investment
 
Number of Loans
Recorded Investment
 
Number of Loans
Recorded Investment
 
(dollars in thousands)
Commercial real estate

$

 

$

 

$

 

$

Agriculture
2

130

 


 
2

130

 


Commercial non-real estate
2

3,214

 
1


 
2

3,214

 
1


Residential real estate


 


 


 


Consumer


 


 


 


Total
4

$
3,344

 
1

$

 
4

$
3,344

 
1

$

For purposes of the table above, a loan is considered to be in payment default once it is 90 days or more contractually past due under the modified terms. The table includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date. For the three months ended June 30, 2018 and 2017, there were $0.2 million and $3.4 million, respectively, and $0.8 million and $5.5 million for the nine months ended June 30, 2018 and 2017, respectively, of loans removed from TDR status as they were restructured at market terms and are performing.

19-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

5. Allowance for Loan and Lease Losses
The allowance for loan and lease losses is determined 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 Company considers the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. In addition, consideration is given to concentration risks associated with the various loan portfolios and current economic conditions that might impact the portfolio. The Company also considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry, or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes in unemployment rates, gross domestic product, and consumer bankruptcy filings.
Changes to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans that are 90 days or more past due are put on nonaccrual status unless a repayment is eminent. Loans deemed to be uncollectible are charged off against the allowance for loan and lease losses. Recoveries of amounts previously charged-off are credited to the allowance for loan and lease losses.
The allowance for loan and lease losses consist of reserves for probable losses that have been identified related to specific borrowing relationships that are individually evaluated for impairment (“specific reserve”), as well as probable losses inherent in our loan portfolio that are not specifically identified (“collective reserve”).
The specific reserve relates to impaired loans. A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. Specific reserves are determined on a loan-by-loan basis based on management’s best estimate of the Company's exposure, given the current payment status of the loan, the present value of expected payments, and the value of any underlying collateral. Impaired loans also include loans modified in troubled debt restructurings. Generally, the impairment related to troubled debt restructurings is measured based on the fair value of the collateral, less cost to sell, or the present value of expected payments relative to the unpaid principal balance. If the impaired loan is identified as collateral dependent, then the fair value of the collateral method of measuring the amount of the impairment is utilized. This method requires obtaining an independent appraisal of the collateral and reducing the appraised value by applying a discount factor to the appraised value, if necessary, and including costs to sell.
Management’s estimate for collective reserves reflects losses incurred in the loan portfolio as of the consolidated balance sheet reporting date. Incurred loss estimates primarily are based on historical loss experience and portfolio mix. Incurred loss estimates may be adjusted for qualitative factors such as current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and/or significant policy and underwriting changes.
The following tables present the Company’s allowance for loan and lease losses roll forward for the three and nine months ended June 30, 2018 and 2017.
Three Months Ended June 30, 2018
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Beginning balance April 1, 2018
$
18,914

 
$
24,129

 
$
15,730

 
$
5,111

 
$
279

 
$
976

 
$
65,139

Charge-offs
(1,671
)
 
(1,978
)
 
(333
)
 
(167
)
 
(60
)
 
(399
)
 
(4,608
)
Recoveries
116

 
103

 
140

 
100

 
48

 
135

 
642

Provision
354

 
3,035

 
323

 
(529
)
 
20

 
302

 
3,505

(Improvement) impairment of ASC 310-30 loans
(28
)
 

 

 
38

 

 

 
10

Ending balance June 30, 2018
$
17,685

 
$
25,289

 
$
15,860

 
$
4,553

 
$
287

 
$
1,014

 
$
64,688


20-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

Three Months Ended June 30, 2017
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Beginning balance April 1, 2017
$
16,996

 
$
26,320

 
$
11,949

 
$
6,069

 
$
371

 
$
980

 
$
62,685

Charge-offs
(57
)
 
(288
)
 
(4,076
)
 
(236
)
 
(28
)
 
(518
)
 
(5,203
)
Recoveries
57

 
258

 
283

 
50

 
45

 
243

 
936

Provision
1,209

 
(1,805
)
 
6,269

 
(123
)
 
(38
)
 
338

 
5,850

(Improvement) of ASC 310-30 loans
(54
)
 

 

 

 

 

 
(54
)
Ending balance June 30, 2017
$
18,151

 
$
24,485

 
$
14,425

 
$
5,760

 
$
350

 
$
1,043

 
$
64,214

Nine Months Ended June 30, 2018
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Beginning balance October 1, 2017
$
16,941

 
$
25,757

 
$
14,114

 
$
5,347

 
$
329

 
$
1,015

 
$
63,503

Charge-offs
(3,268
)
 
(4,959
)
 
(3,176
)
 
(442
)
 
(176
)
 
(1,491
)
 
(13,512
)
Recoveries
326

 
275

 
349

 
216

 
90

 
469

 
1,725

Provision
3,675

 
4,331

 
4,573

 
(539
)
 
44

 
1,021

 
13,105

Impairment (improvement) of ASC 310-30 loans
11

 
(115
)
 

 
(29
)
 

 

 
(133
)
Ending balance June 30, 2018
$
17,685

 
$
25,289

 
$
15,860

 
$
4,553

 
$
287

 
$
1,014

 
$
64,688

Nine Months Ended June 30, 2017
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Beginning balance October 1, 2016
$
17,946

 
$
25,115

 
$
12,990

 
$
7,106

 
$
438

 
$
1,047

 
$
64,642

Charge-offs
(1,881
)
 
(7,708
)
 
(7,769
)
 
(502
)
 
(138
)
 
(1,834
)
 
(19,832
)
Recoveries
441

 
402

 
502

 
311

 
75

 
819

 
2,550

Provision
1,759

 
6,676

 
8,702

 
(263
)
 
(25
)
 
1,011

 
17,860

(Improvement) of ASC 310-30 loans
(114
)
 

 

 
(892
)
 

 

 
(1,006
)
Ending balance June 30, 2017
$
18,151

 
$
24,485

 
$
14,425

 
$
5,760

 
$
350

 
$
1,043

 
$
64,214

The following tables provide details regarding the allowance for loan and lease losses and balance by type of allowance as of June 30, 2018 and September 30, 2017. These tables are presented net of unamortized discount on acquired loans and excludes loans of $888.2 million measured at fair value, loans held for sale of $6.8 million, and guaranteed loans of $161.3 million for June 30, 2018 and loans measured at fair value of $1.02 billion, loans held for sale of $7.5 million, and guaranteed loans of $168.3 million for September 30, 2017.
As of June 30, 2018
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,313

 
$
10,720

 
$
5,343

 
$
2,022

 
$
70

 
$

 
$
23,468

Collectively evaluated for impairment
11,679

 
14,569

 
10,517

 
2,376

 
217

 
1,014

 
40,372

ASC 310-30 loans
693

 

 

 
155

 

 

 
848

Total allowance
$
17,685

 
$
25,289

 
$
15,860

 
$
4,553

 
$
287

 
$
1,014

 
$
64,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financing Receivables
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
60,646

 
$
127,589

 
$
28,974

 
$
6,185

 
$
167

 
$

 
$
223,561

Collectively evaluated for impairment
3,919,649

 
1,821,465

 
1,401,583

 
796,039

 
50,506

 
44,187

 
8,033,429

ASC 310-30 loans
28,119

 
2,838

 
2,041

 
43,388

 
485

 

 
76,871

Loans Outstanding
$
4,008,414

 
$
1,951,892

 
$
1,432,598

 
$
845,612

 
$
51,158

 
$
44,187

 
$
8,333,861


21-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

As of September 30, 2017
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,621

 
$
11,468

 
$
4,779

 
$
2,581

 
$
86

 
$

 
$
22,535

Collectively evaluated for impairment
12,638

 
14,174

 
9,335

 
2,570

 
243

 
1,015

 
39,975

ASC 310-30 loans
682

 
115

 

 
196

 

 

 
993

Total allowance
$
16,941

 
$
25,757

 
$
14,114

 
$
5,347

 
$
329

 
$
1,015

 
$
63,503

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financing Receivables
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
37,471

 
$
130,475

 
$
31,933

 
$
7,751

 
$
293

 
$

 
$
207,923

Collectively evaluated for impairment
3,487,232

 
1,702,634

 
1,333,888

 
854,330

 
65,207

 
43,207

 
7,486,498

ASC 310-30 loans
30,099

 
7,174

 
1,920

 
52,736

 
666

 

 
92,595

Loans Outstanding
$
3,554,802

 
$
1,840,283

 
$
1,367,741

 
$
914,817

 
$
66,166

 
$
43,207

 
$
7,787,016

For acquired loans not accounted for under ASC 310-30 (purchased non-impaired), the Company utilizes specific and collective reserve calculation methods similar to originated loans. The required ALLL for these loans is included in the individually evaluated for impairment bucket of the ALLL if the loan is rated substandard or worse, and in the collectively evaluated for impairment bucket for pass rated loans.
The Company maintains an ALLL for acquired loans accounted for under ASC 310-30 as a result of impairment to loan pools arising from the periodic re-valuation of these loans. Any impairment in the individual pool is generally recognized in the current period as provision for loan and lease losses. Any improvement in the estimated cash flows, is generally not recognized immediately, but is instead reflected as an adjustment to the related loan pools yield on a prospective basis once any previously recorded impairment has been recaptured.
The ALLL for ASC 310-30 loans totaled $0.8 million at June 30, 2018, compared to $1.0 million at September 30, 2017. For the three and nine months ended June 30, 2018, loan pools accounted for under ASC 310-30 had a negligible net provision and a net reversal of provision of $0.1 million, respectively. The net provision for the three month period ended June 30, 2018 was a result of cash flows being lower than expected in one of the pools during the period while the net reversal of provision for the nine month period ended June 30, 2018 was driven by an overall increase in expected cash flows. Net provision reversal for the three and nine months ended June 30, 2017, totaled $0.1 million and $1.0 million, respectively. The net reversals of provision for the periods ended June 30, 2017 were a result of updated assumptions being applied to one of the acquired mortgage pools which resulted in higher than expected cash flows.
The reserve for unfunded loan commitments was $0.5 million at both June 30, 2018 and September 30, 2017 and is recorded in accrued expenses and other liabilities on the consolidated balance sheets.
6. Accounting for Certain Loans Acquired with Deteriorated Credit Quality
In June 2010 and May 2016, the Company acquired certain loans that had deteriorated credit quality (ASC 310-30 loans or Purchased Credit Impaired loans). Several factors were considered when evaluating whether a loan was considered a purchased credit impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information and updated loan-to-values ("LTV"). Further, these purchased credit impaired loans had differences between contractual amounts owed and cash flows expected to be collected, that were at least in part, due to credit quality. U.S. GAAP allows purchasers to aggregate purchased credit impaired loans acquired in the same fiscal quarter in one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
Loan pools are periodically reassessed to determine expected cash flows. In determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller, homogeneous loans are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans are fixed or variable rate loans. Prepayments may be assumed on large individual loans that consider similar prepayment factors listed above for smaller homogeneous loans. The re-assessment of purchased credit impaired loans resulted in the following changes in the accretable yield during the three and nine months ended June 30, 2018 and 2017.

22-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Balance at beginning of period
$
37,841

 
$
38,705

 
$
44,131

 
$
38,124

Accretion
(3,993
)
 
(3,789
)
 
(11,038
)
 
(9,767
)
Reclassification from nonaccretable difference
2,554

 
13,218

 
3,309

 
19,777

Balance at end of period
$
36,402

 
$
48,134

 
$
36,402

 
$
48,134

The reclassifications from nonaccretable difference noted in the table above represent instances where specific pools of loans are expected to perform better over the remaining lives of the loans than expected at the prior re-assessment date.
The following table provides purchased credit impaired loans at June 30, 2018 and September 30, 2017.
 
June 30, 2018
 
September 30, 2017
 
Outstanding Balance ¹
 
Recorded Investment ²
 
Carrying Value ³
 
Outstanding Balance ¹
 
Recorded Investment ²
 
Carrying Value ³
 
(dollars in thousands)
Commercial real estate
$
102,633

 
$
28,119

 
$
27,426

 
$
110,797

 
$
30,099

 
$
29,417

Agriculture
5,065

 
2,838

 
2,838

 
10,463

 
7,174

 
7,059

Commercial non-real estate
9,196

 
2,041

 
2,041

 
9,825

 
1,920

 
1,920

Residential real estate
50,421

 
43,388

 
43,233

 
61,981

 
52,736

 
52,540

Consumer
553

 
485

 
485

 
798

 
666

 
666

Total lending
$
167,868

 
$
76,871

 
$
76,023

 
$
193,864

 
$
92,595

 
$
91,602

1 Represents the legal balance of ASC 310-30 loans.
2 Represents the book balance of ASC 310-30 loans.
3 Represents the book balance of ASC 310-30 loans net of the related allowance for loan and lease losses.
7. FDIC Indemnification Asset
Under the terms of the purchase and assumption agreement with the FDIC with regard to the TierOne Bank acquisition, the Company is reimbursed for a portion of the losses incurred on covered assets. As covered assets are resolved, whether it be through repayment, short sale of the underlying collateral, the foreclosure on or sale of collateral, or the sale or charge-off of loans or other repossessed property, any differences between the carrying value of the covered assets versus the payments received during the resolution process, that are reimbursable by the FDIC, are recognized as reductions in the FDIC indemnification asset. Any gains or losses realized from the resolution of covered assets reduce or increase, respectively, the amount recoverable from the FDIC.
The following table represents a summary of the activity related to the FDIC indemnification asset for the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Balance at beginning of period
$
3,678

 
$
8,371

 
$
5,704

 
$
10,777

Amortization
(494
)
 
(1,492
)
 
(2,244
)
 
(3,473
)
Changes in expected reimbursements from FDIC for changes in expected credit losses
(23
)
 
36

 
(56
)
 
(69
)
Changes in reimbursable expenses
(340
)
 
(283
)
 
(1,002
)
 
(821
)
Reimbursements of covered losses to the FDIC
169

 
353

 
588

 
571

Balance at end of period
$
2,990

 
$
6,985

 
$
2,990

 
$
6,985

The loss claims filed are subject to review, approval, and annual audits by the FDIC or its assigned agents for compliance with the terms in the loss sharing agreement. The commercial loss share agreement claim period ended on June 4, 2015. The non-commercial loss share agreement ends June 4, 2020.

23-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

8. Derivative Financial Instruments
The Company uses interest rate swaps to manage its interest rate risk and market risk in accommodating the needs of its customers. The Company recognizes all derivatives on the consolidated balance sheet at fair value in either other assets or accrued expenses and other liabilities as appropriate. The following table presents the notional amounts and gross fair values of all derivative assets and liabilities held by the Company as of June 30, 2018 and September 30, 2017.
 
June 30, 2018
 
September 30, 2017
 
Notional Amount
 
Gross Asset
Fair Value
 
Gross Liability
Fair Value
 
Notional Amount
 
Gross Asset
Fair Value
 
Gross Liability
Fair Value
 
(dollars in thousands)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
Financial institution counterparties
$
1,078,868

 
$
18,404

 
$
(4,028
)
 
$
1,025,474

 
$
4,967

 
$
(22,737
)
Customer counterparties
183,790

 
2,440

 
(1,542
)
 
36,072

 
615

 

Mortgage loan commitments
31,074

 
8

 

 
37,765

 

 
(48
)
Mortgage loan forward sale contracts
34,254

 

 
(8
)
 
43,628

 
48

 

Total
$
1,327,986

 
$
20,852

 
$
(5,578
)
 
$
1,142,939

 
$
5,630

 
$
(22,785
)
Netting of Derivatives
We record the derivatives on a net basis when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement. When bilateral netting agreements or similar agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by derivative contract by counterparty basis. The following tables provide information on the Company's netting adjustments as of June 30, 2018 and September 30, 2017.
 
Gross Fair Value
 
Fair Value Offset Amount
 
Cash Collateral
 
Net Amount Presented on the Consolidated Balance Sheet
 
(dollars in thousands)
June 30, 2018
 
 
 
 
 
 
 
Total Derivative Assets
$
20,852

 
$
(4,028
)
 
$
(13,178
)
 
$
3,646

Total Derivative Liabilities ¹ ²
$
(5,578
)
 
$
4,028

 
$

 
$
(1,550
)
1 In addition to the cash collateral, there were securities of $5.0 million posted as collateral for financial institution counterparties at June 30, 2018.
2 There was an additional $0.9 million of collateral held for initial margin with our Futures Clearing Merchant for clearing derivatives at June 30, 2018 and is included in other assets in the consolidated balance sheets.
 
Gross Fair Value
 
Fair Value Offset Amount
 
Cash Collateral
 
Net Amount Presented on the Consolidated Balance Sheet
 
(dollars in thousands)
September 30, 2017
 
 
 
 
 
 
 
Total Derivative Assets
$
1,850

 
$
(1,850
)
 
$

 
$

Total Derivative Liabilities ¹ ²
(19,005
)
 
1,850

 

 
(17,155
)
1 In addition to the cash collateral, there were securities of $25.0 million posted as collateral for financial institution counterparties at September 30, 2017.
2 There was an additional $2.3 million of collateral held for initial margin with our Futures Clearing Merchant for clearing derivatives at September 30, 2017 and is included in other assets in the consolidated balance sheets.
As with any financial instrument, derivative financial instruments have inherent risk including adverse changes in interest rates. The Company’s 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. The Company manages interest rate swap credit risk with the same standards and procedures applied to its commercial lending activities.

24-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

Credit-risk-related contingent features
The Company has agreements with its derivative counterparties that contain a provision where if the Company or the derivative counterparty fails to maintain its status as a well/adequately capitalized institution, then the other party has the right to terminate the derivative positions and the Company or the derivative counterparty would be required to settle its obligations under the agreements. The Company has minimum collateral posting thresholds with its Swap Dealers and Futures Clearing Merchant.
Beginning in the second quarter of fiscal year 2018, the Company entered into risk participation agreements ("RPA"s) with some of its derivative counterparties to assume the credit exposure related to interest rate derivative contracts. The Company's loan customer enters into an interest rate swap directly with a derivative counterparty and the Company agrees 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 $37.4 million as of June 30, 2018. 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 $0.8 million at June 30, 2018 based on the fair value of the underlying swaps.
The effect of derivatives on the consolidated statements of income for the three and nine months ended June 30, 2018 and 2017 was as follows.
 
 
 
Amount of Gain (Loss) Recognized in Statements of Income
 
 
 
Three Months Ended
 
Nine Months Ended
 
Location of Gain (Loss) Recognized in Statements of Income
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
(dollars in thousands)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Net realized and unrealized gain on derivatives
 
$
8,093

 
$
(9,088
)
 
$
29,602

 
$
51,481

Mortgage loan commitments
Net realized and unrealized gain on derivatives
 
4

 
(109
)
 
8

 
(56
)
Mortgage loan forward sale contracts
Net realized and unrealized gain on derivatives
 
(4
)
 
109

 
(8
)
 
56

9. The Fair Value Option for Certain Loans
The Company has elected to measure certain long-term loans at fair value to assist in managing the interest rate risk for longer-term loans. This fair value option was elected upon the origination of these loans. Interest income is recognized in the same manner as interest on non-fair value loans.
See Note 18 for additional disclosures regarding the fair value of the fair value option loans.
Long-term loans for which the fair value option has been elected had a net unfavorable difference between the aggregate fair value and the aggregate unpaid loan principal balance and written loan commitment amount of approximately $28.4 million at June 30, 2018 and a net favorable difference of approximately $8.8 million at September 30, 2017. The total unpaid principal balance of these long-term loans was approximately $916.6 million and $1.01 billion at June 30, 2018 and September 30, 2017, respectively. The fair value of these loans is included in total loans in the consolidated balance sheets and are grouped with commercial real estate, agricultural and commercial non-real estate loans in Note 4. As of June 30, 2018 and September 30, 2017, there were loans with a fair value of $13.2 million and $14.7 million, respectively, which were greater than 90 days past due or in nonaccrual status with an unpaid principal balance of $14.7 million and $17.0 million, respectively.
Changes in fair value for items for which the fair value option has been elected and the line items in which these changes are reported within the consolidated statements of income are as follows for the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Nine Months Ended June 30, 2018
 
Nine Months Ended June 30, 2017
 
Noninterest Income
 
Total Changes in Fair Value
 
Noninterest Income
 
Total Changes in Fair Value
 
Noninterest Income
 
Total Changes in Fair Value
 
Noninterest Income
 
Total Changes in Fair Value
 
(dollars in thousands)
Long-term loans
$
(7,370
)
 
$
(7,370
)
 
$
6,060

 
$
6,060

 
$
(30,872
)
 
$
(30,872
)
 
$
(63,158
)
 
$
(63,158
)

25-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

For long-term loans, $0.1 million and $0.3 million for the three months ended June 30, 2018 and 2017, respectively, and $0.2 million and a negligible amount for the nine months ended June 30, 2018 and 2017, respectively, of the total change in fair value is attributable to changes in specific credit risk. The gains or losses attributable to changes in instrument-specific credit risk were determined based on an assessment of existing market conditions and credit quality of the underlying loan for the specific portfolio of loans.
10. Core Deposits and Other Intangibles
The following table presents a summary of intangible assets subject to amortization as of June 30, 2018 and September 30, 2017.
 
Core Deposit Intangible
 
Brand
Intangible
 
Other
Intangible
 
Total
 
(dollars in thousands)
As of June 30, 2018
 
 
 
 
 
 
 
Gross carrying amount
$
7,339

 
$
8,464

 
$
538

 
$
16,341

Accumulated amortization
(2,374
)
 
(5,687
)
 
(174
)
 
(8,235
)
Net intangible assets
$
4,965

 
$
2,777

 
$
364

 
$
8,106

 
 
 
 
 
 
 
 
As of September 30, 2017
 
 
 
 
 
 
 
Gross carrying amount
$
7,339

 
$
8,464

 
$
538

 
$
16,341

Accumulated amortization
(1,579
)
 
(5,264
)
 
(124
)
 
(6,967
)
Net intangible assets
$
5,760

 
$
3,200

 
$
414

 
$
9,374

Amortization expense of intangible assets was $0.4 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively, and $1.3 million and $1.9 million for the nine months ended June 30, 2018 and 2017.
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in subsequent fiscal years is as follows.
 
Amount
 
(dollars in thousands)
Remaining in 2018
$
394

2019
1,538

2020
1,430

2021
1,334

2022
1,249

2023 and thereafter
2,161

Total
$
8,106

11. Loan Servicing Rights
Loan servicing rights are created when residential mortgage loans are sold in the secondary market with the seller retaining the right to service those loans and receive servicing income over the life of the loan. The Company acquired loan servicing rights as a part of the acquisition of HF Financial. The actual balance of loans being serviced for others are not reported as assets in the accompanying consolidated balance sheets.
The following table is the activity for loan servicing rights and the related valuation allowance for the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Loan servicing rights
 
 
 
 
 
 
 
Beginning of period
$
3,596

 
$
4,906

 
$
4,155

 
$
5,794

Amortization ¹
(259
)
 
(369
)
 
(818
)
 
(1,257
)
End of period
$
3,337

 
$
4,537

 
$
3,337

 
$
4,537

 
 
 
 
 
 
 
 

26-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
 
 
 
 
 
 
 
 
Valuation allowance
 
 
 
 
 
 
 
Beginning of period
$
(10
)
 
$
(3
)
 
$
(81
)
 
$
(13
)
(Additions) / reductions ¹
1

 
(4
)
 
72

 
6

End of period
$
(9
)
 
$
(7
)
 
$
(9
)
 
$
(7
)
Loan servicing rights, net
$
3,328

 
$
4,530

 
$
3,328

 
$
4,530

 
 
 
 
 
 
 
 
Servicing fees received
$
438

 
$
500

 
$
1,310

 
$
1,573

Balance of loans serviced at:
 
 
 
 
 
 
 
Beginning of period
669,767

 
792,779

 
722,461

 
868,865

End of period
641,403

 
759,670

 
641,403

 
759,670

1 Changes to carrying amounts are reported net of loan servicing income on the consolidated statements of comprehensive income for the periods presented.
Amortization of servicing rights is adjusted each quarter based upon analysis of portfolio attributes and factors, including an evaluation of historical prepayment activity and prospective industry consensus data. An independent third party is utilized to calculate the amortization and valuation based upon specific loan characteristics, prepayment speeds generated from a validation model utilizing both empirical and market derived data and discount rates. At June 30, 2018, the constant prepayment rates (CPR) used to calculate the amortization averaged 10.4%. For valuation purposes, an average discount rate of 11.8% was utilized at June 30, 2018. Based on the Company's analysis of mortgage servicing rights, a negligible valuation reserve was recorded at June 30, 2018, and a $0.1 million valuation reserve was recorded at September 30, 2017.
12. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase generally mature overnight following the transaction date. Securities underlying the agreements had an amortized cost of approximately $135.1 million and $139.3 million and fair value of approximately $129.6 million and $137.4 million at June 30, 2018 and September 30, 2017, respectively. In most cases, in alignment with the repurchase agreements in place with our customers, the Company over-collateralizes the agreements at 102% of total funds borrowed to protect the purchaser from changes in market value. Additionally, the Company utilizes held-in-custody procedures to ensure the securities sold under repurchase agreements are unencumbered.
The following tables present the gross obligation by the class of collateral pledged and the remaining contractual maturity of the agreements at June 30, 2018 and September 30, 2017.
 
June 30, 2018
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
 
(dollars in thousands)
Repurchase agreements
 
 
 
 
 
 
 
 
 
Municipal securities
$
3,035

 
$

 
$

 
$

 
$
3,035

Mortgage-backed securities
102,443

 

 

 

 
102,443

Total repurchase agreements
$
105,478

 
$

 
$

 
$

 
$
105,478

 
September 30, 2017
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
 
(dollars in thousands)
Repurchase agreements
 
 
 
 
 
 
 
 
 
Municipal securities
$
3,626

 
$

 
$

 
$

 
$
3,626

Mortgage-backed securities
129,010

 

 

 

 
129,010

Total repurchase agreements
$
132,636

 
$

 
$

 
$

 
$
132,636


27-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

13. FHLB Advances and Other Borrowings
FHLB advances and other borrowings consist of the following at June 30, 2018 and September 30, 2017.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Short-term borrowings:
 
 
 
Notes payable to FHLB, interest rates from 1.25% to 1.27%
$

 
$
512,200

FHLB fed funds advance, interest rate of 2.10% and maturity date in October 2018
160,000

 
75,000

Long-term borrowings:
 
 
 
Notes payable to FHLB, interest rates from 2.28% to 3.66% and maturity dates from March 2020 to July 2023, collateralized by real estate loans, with various call dates at the option of the FHLB
175,000

 
56,000

Total
335,000

 
643,200

Fair value adjustment ¹

 
14

Total FHLB advances and other borrowings
$
335,000

 
$
643,214

1 Adjustment reflects the fair value adjustments related to the FHLB advances and notes payable assumed as part of the HF Financial acquisition.
The Company had a $10.0 million revolving line of credit which expired on July 28, 2018. The line of credit had an interest rate of one month LIBOR plus 200 basis points, with interest payable monthly. The interest rate was 4.09% at June 30, 2018. There were no outstanding advances on this line of credit at June 30, 2018 and September 30, 2017.
As of June 30, 2018 and September 30, 2017, the Company had a borrowing capacity of $1.52 billion and $1.89 billion, respectively, with the Federal Reserve Board Discount Window ("FRB Discount Window"). Principal balances of loans pledged to FRB Discount Window to collateralize the borrowing totaled $1.83 billion at June 30, 2018 and $2.55 billion at September 30, 2017. The Company has secured this line for contingency funding.
As of June 30, 2018 and September 30, 2017, based on its collateral pledged, the additional borrowing capacity of the Company with the FHLB was $1.79 billion and $1.55 billion, respectively.
Principal balances of loans pledged to the FHLB to collateralize notes payable totaled $3.20 billion and $3.71 billion at June 30, 2018 and September 30, 2017, respectively. In second quarter of fiscal year 2018, the Company purchased a letter of credit from the FHLB for $150.0 million which is pledged as collateral on public deposits. This letter of credit is committed until January 29, 2019.
As of June 30, 2018, FHLB advances and other borrowings are due or callable (whichever is earlier) in subsequent fiscal years as follows.
 
Amount
 
(dollars in thousands)
Remaining in 2018
$

2019
160,000

2020
150,000

2021

2022

2023 and thereafter
25,000

Total
$
335,000

14. Subordinated Debentures and Subordinated Notes Payable
Junior Subordinated Deferrable Interest Debentures
The Company has seven trusts which were created or assumed as part of prior acquisitions that as of June 30, 2018 have issued and outstanding in the aggregate 73,400 shares, $1,000 par value, of Company Obligated Mandatorily Redeemable Preferred Securities (the "Preferred Securities"). These seven trusts were established and exist for the sole purpose of issuing Preferred Securities and investing the proceeds in junior subordinated deferrable interest debentures (the "Debentures") issued by the Company. The Debentures constitute the sole assets of the seven trusts. The Preferred Securities provide for cumulative cash distributions calculated at a rate based on three month LIBOR plus a range from 1.48% to 3.35% adjusted quarterly. The Company may, at one or

28-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

more times, defer interest payments on the Debentures for up to 20 consecutive quarters following suspension of dividends on all capital stock, but not beyond the respective maturity date. At the end of any deferral period, all accumulated and unpaid interest must be paid. The Debentures have redemption dates ranging from January 7, 2033 to October 1, 2037; however, the Company has the option to shorten the respective maturity date for all seven Preferred Securities as the call option date has passed. Holders of the Preferred Securities have no voting rights. The Preferred Securities are unsecured and rank junior in priority of the payment to all of the Company's indebtedness and senior to the Company's common and preferred stock. The trusts’ ability to pay amounts due on the Preferred Securities is solely dependent upon the Company making payment on the related Debentures. The Company’s obligation under the Debentures and relevant trust agreements constitute a full, irrevocable, and unconditional guarantee on a subordinated basis by it of the obligations of the trusts under the Preferred Securities.
For regulatory purposes, the Debentures qualify as elements of capital. As of June 30, 2018 and September 30, 2017, $73.6 million and $73.5 million of Debentures were eligible for treatment as Tier 1 capital, respectively.
Relating to the trusts, the Company held as assets $2.5 million in common shares at June 30, 2018 and September 30, 2017 which are included in other assets on the consolidated balance sheets.
Subordinated Notes Payable
In 2015, the Company issued $35.0 million of 4.875% fixed-to-floating rate subordinated notes that mature on August 15, 2025 through a private placement. The notes, which qualify as Tier 2 capital under capital rules in effect at June 30, 2018, have an interest rate of 4.875% per annum, payable semi-annually on each February 15 and August 15, which commenced on February 15, 2016 until August 15, 2020, to but excluding the maturity date or date of earlier redemption, the notes will 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. The notes are subordinated in right of payment to all of the Company's senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Company's subsidiary bank. The Company may elect to redeem the notes (subject to regulatory approval), in whole or in part, on any early redemption date which is any interest payment date on or after August 15, 2020 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization. Unamortized debt issuance costs related to these notes, which are included in Subordinated Debentures and Subordinated Notes Payable, totaled $0.2 million at June 30, 2018 and September 30, 2017. Proceeds from the private placement of subordinated notes repaid outstanding subordinated debt.
Subordinated debentures and subordinated notes payable are summarized as follows.
 
June 30, 2018
 
September 30, 2017
 
Amount Outstanding
 
Common Shares Held in Other Assets
 
Amount Outstanding
 
Common Shares Held in Other Assets
 
(dollars in thousands)
Junior subordinated debentures payable to nonconsolidated trusts
 
 
 
 
 
 
 
GW Statutory Trust IV, variable rate of 2.85%, plus 3 month LIBOR
$
23,093

 
$
693

 
$
23,093

 
$
693

GW Statutory Trust VI, variable rate of 1.48%, plus 3 month LIBOR
30,928

 
928

 
30,928

 
928

SSB Trust II, variable rate of 1.85%, plus 3 month LIBOR
2,062

 
62

 
2,062

 
62

HF Capital Trust III, variable rate of 3.35%, plus 3 month LIBOR
5,155

 
155

 
5,155

 
155

HF Capital Trust IV, variable rate of 3.10%, plus 3 month LIBOR
7,217

 
217

 
7,217

 
217

HF Capital Trust V, variable rate of 1.83%, plus 3 month LIBOR
5,310

 
310

 
5,310

 
310

HF Capital Trust VI, variable rate of 1.65%, plus 3 month LIBOR
2,155

 
155

 
2,155

 
155

Total junior subordinated debentures payable
75,920

 
$
2,520

 
75,920

 
$
2,520

Less: fair value adjustment ¹
(2,341
)
 
 
 
(2,409
)
 
 
Total junior subordinated debentures payable, net of fair value adjustment
73,579

 
 
 
73,511

 
 
 
 
 
 
 
 
 
 
Subordinated notes payable
 
 
 
 
 
 
 
Fixed to floating rate, 4.875% per annum
35,000

 
 
 
35,000

 
 
Less: unamortized debt issuance costs
(153
)
 
 
 
(209
)
 
 
Total subordinated notes payable
34,847

 
 
 
34,791

 
 
Total subordinated debentures and subordinated notes payable
$
108,426

 
 
 
$
108,302

 
 
1 Adjustment reflects the fair value adjustments related to the junior subordinated deferrable interest debentures assumed as part of the HF Financial acquisition.

29-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

15. Income Taxes
The provision for income taxes charged to operations consists of the following for the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Currently paid or payable
 
 
 
 
 
 
 
Federal
$
11,881

 
$
14,334

 
$
32,632

 
$
44,275

State
2,951

 
3,341

 
8,345

 
8,042

Total
14,832

 
17,675

 
40,977

 
52,317

Deferred tax expense
 
 
 
 
 
 
 
Federal
1,302

 
1,033

 
18,141

 
467

State
225

 
(271
)
 
602

 
(77
)
Total
1,527

 
762

 
18,743

 
390

Total provision for income taxes
$
16,359

 
$
18,437

 
$
59,720

 
$
52,707

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate of 24.5% for the three and nine months ended June 30, 2018 and 35% for the three and nine months ended June 30, 2017 to pretax income due to the following.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Income tax expense computed at the statutory rate
$
15,265

 
$
18,725

 
$
43,012

 
$
55,941

Increase (decrease) in income taxes resulting from:
 
 
 
 
 
 
 
State income taxes, net of federal benefit
2,396

 
1,995

 
6,752

 
5,177

Tax exempt interest income
(1,514
)
 
(2,057
)
 
(4,300
)
 
(6,091
)
Impact of enacted federal income tax rate reduction
(115
)
 

 
13,471

 

Other
327

 
(226
)
 
785

 
(2,320
)
Income tax expense, as reported
$
16,359

 
$
18,437

 
$
59,720

 
$
52,707

Net deferred tax assets (liabilities) consist of the following components at June 30, 2018 and September 30, 2017.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Deferred tax assets:
 
 
 
Allowance for loan and lease losses
$
16,210

 
$
23,730

Compensation
3,365

 
6,227

Securities available for sale
8,807

 
3,413

Other real estate owned
336

 
763

Core deposit intangible and other fair value adjustments
4,272

 
6,058

Excess tax basis of FDIC indemnification asset and clawback liability
3,703

 
4,563

Excess tax basis of loans acquired over carrying value
5,500

 
9,417

Other reserves
2,842

 
4,406

Other
4,940

 
6,922

Total deferred tax assets
49,975

 
65,499

Deferred tax liabilities:
 
 
 
Goodwill and other intangibles
(12,652
)
 
(13,784
)
Premises and equipment
(5,615
)
 
(8,828
)
Other
(221
)
 
(487
)
Total deferred tax liabilities
(18,488
)
 
(23,099
)
Net deferred tax assets
$
31,487

 
$
42,400


30-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

At June 30, 2018 and September 30, 2017, the Company had an income tax receivable from the Internal Revenue Service (the "IRS") of $3.2 million and $4.6 million, respectively, which is included in other assets on the consolidated balance sheets. The Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2014.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Reform Act"), was enacted into law. Beginning in 2018, the Tax Reform Act reduces the federal tax rate for corporations from 35% to 21% and changes or limits certain tax deductions. Because of the Company's September 30 fiscal year end, a blended statutory rate of 24.5% is applied to all net income before taxes generated during the current fiscal year. The new blended statutory rate reduced the provision for income taxes by approximately $5.2 million and $15.0 million for the three and nine months ended June 30, 2018, respectively. Another result of the lower corporate tax rate this fiscal year was the Company recording a revaluation discrete tax adjustment of $13.6 million to reduce its net deferred tax assets, which increased the provision for income taxes in the first quarter. The actual impact of the revaluing deferred taxes has varied from the estimated charge to provision of $13.6 million due to uncertainties in our preliminary estimates and the effect of further clarification of the new law, but changes have been immaterial.
The Company adopted new accounting guidance in the second quarter of fiscal year 2018 that allows reclassification of $2.4 million in stranded tax effects that relate to a change in the federal tax rate from accumulated other comprehensive income to retained earnings.
The Bank's effective tax rate for the three and nine months ended June 30, 2018 was 26.3% and 34.1%, respectively, compared to 34.5% and 33.0% for the three and nine months ended June 30, 2017, respectively. Excluding the nonrecurring deferred taxes adjustment related to federal tax reform, the three and nine months ended June 30, 2018 effective tax rates were both 26.3%.
Uncertain tax positions were not significant at June 30, 2018 or September 30, 2017.
16. Employee Benefit Plans
Profit Sharing Plan
The Company participates in a multiple employer 401(k) profit sharing plan ("the 401(k) Plan"). All employees are eligible to participate, beginning with the first day of the month coincident with or immediately following the completion of one year of service and having reached the age of 21. In addition to employee contributions, the Company may contribute discretionary amounts for eligible participants. Contribution rates for participating employees must be equal. The Company contributed $1.5 million and $1.4 million to the 401(k) Plan for the three months ended June 30, 2018 and 2017, respectively, and $4.5 million and $4.3 million for the nine months ended June 30, 2018 and 2017.
Defined Benefit Plan
The Company acquired a noncontributory (cash balance) defined benefit pension plan ("the Pension Plan") from HF Financial which covers former employees of HF Financial and its wholly-owned subsidiaries. Effective July 1, 2015, the Pension Plan was frozen which eliminates future contributions for qualified individuals.
On November 27, 2017, the Company's Board of Directors voted to terminate the Pension Plan effective February 1, 2018. In order to settle its liabilities under the Pension Plan, the Company offered participants the option to receive either an annuity purchased from an insurance carrier or a lump-sum cash payment. Total benefit payments paid by the Company were $5.3 million as part of Pension Plan termination.
The Company completed the transfer of all liabilities and administrative responsibilities under the Pension Plan at the end of fiscal third quarter 2018.
17. Stock-Based Compensation
On September 26, 2014, the Board of Directors adopted, and on October 10, 2014, NAB, at that time our controlling shareholder, approved the Great Western Bancorp, Inc. 2014 Omnibus Incentive Compensation Plan (the “2014 Plan”), the Great Western Bancorp, Inc. 2014 Non-Employee Director Plan (the “2014 Director Plan”), and the Great Western Bancorp, Inc. Executive Incentive Compensation Plan (the “Bonus Plan”), collectively ("the Plans"), which provide for the issuance of restricted share units and performance based share units to certain officers, employees and directors of the Company. On February 22, 2018, our stockholders approved amendments to the 2014 Plan and the 2014 Director Plan to increase the number of shares available for future grants under the Plans. The Plans were primarily established to enhance the Company’s ability to attract, retain and motivate

31-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

employees. The Company’s Board of Directors, the Compensation Committee of the Board of Directors ("Compensation Committee"), or executive management upon delegation of the Compensation Committee has exclusive authority to select the employees and others, including directors, to receive the awards and to establish the terms and conditions of each award made pursuant to the Company’s stock-based compensation plans.
Stock units issued under the Company’s restricted and performance based stock plans may not be sold or otherwise transferred until the vesting period has been met and, if applicable, performance objectives have been obtained. During the vesting periods, participants do not have voting rights and dividends are accumulated until the time upon which the award vests. Upon specified events, as defined in the Plans, stock unit awards that have not vested and/or performance hurdles that have not been met will be forfeited.
Based on the substantive terms of each award, restricted and performance-based awards are classified as equity awards and accounted for under the treasury stock method. The fair value of equity-classified awards is based on the market price of the stock on the measurement date and is amortized as compensation expense on a straight-line basis over the vesting or performance period.
Stock compensation is recognized based on the number of awards to vest using actual forfeiture amounts. For performance-based stock awards, an estimate is made of the number of shares expected to vest as a result of actual performance against the performance targets to determine the amount of compensation expense to be recognized. The estimate is reevaluated quarterly and total compensation expense is adjusted for any change in the current period. Stock-based compensation expense is included in salaries and employee benefits expense in the consolidated statements of income. Stock compensation expense was $1.4 million and $4.3 million for the three and nine months ended June 30, 2018, respectively, and $1.4 million and $5.2 million for the three and nine months ended June 30, 2017, respectively. Related income tax benefits recognized were $0.4 million and $1.4 million for the three and nine months ended June 30, 2018, respectively, and $0.5 million and $1.9 million for the three and nine months ended June 30, 2017, respectively.
The following is a summary of the Plans’ restricted share and performance-based stock award activity as of June 30, 2018 and September 30, 2017. The number of performance shares granted in the following table are reflected at the amount of achievement of the pre-established targets.
 
June 30, 2018
 
September 30, 2017
 
Common
Shares
 
Weighted-Average Grant Date Fair Value
 
Common
Shares
 
Weighted-Average Grant Date Fair Value
Restricted Shares
 
 
 
 
 
 
 
Restricted shares, beginning of fiscal year
180,337

 
$
33.06

 
160,335

 
$
26.89

Granted
89,376

 
41.07

 
90,363

 
39.35

Vested
(97,148
)
 
32.08

 
(68,293
)
 
26.97

Forfeited
(8,139
)
 
35.78

 
(2,068
)
 
30.91

Canceled

 

 

 

Restricted shares, end of period
164,426

 
$
37.86

 
180,337

 
$
33.06

Vested, but not issuable at end of period
39,514

 
$
32.90

 
29,287

 
$
30.05

 
 
 
 
 
 
 
 
Performance Shares
 
 
 
 
 
 
 
Performance shares, beginning of fiscal year
133,604

 
$
33.39

 
236,185

 
$
20.28

Granted
54,982

 
29.13

 
137,612

 
39.43

Vested

 

 
(235,055
)
 
18.00

Forfeited
(4,487
)
 
37.94

 
(5,138
)
 
19.80

Canceled

 

 

 

Performance shares, end of period
184,099

 
$
35.61

 
133,604

 
$
33.39

Vested, but not issuable at end of period
5,612

 
$
18.00

 
5,612

 
$
18.00

As of June 30, 2018, there was $6.3 million of unrecognized compensation cost related to nonvested restricted stock awards expected to be recognized over a period of 2.4 years. The fair value of the vested, but not issued stock awards at June 30, 2018, was $1.9 million.

32-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

18. Fair Value Measurements
The Company measures, monitors and discloses certain of its assets and liabilities on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value are as follows.
Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Level 1 inputs are considered to be the most transparent and reliable and Level 3 inputs are considered to be the least transparent and reliable. The Company assumes the use of the principal market to conduct a transaction of each particular asset or liability being measured and then considers the assumptions that market participants would use when pricing the asset or liability. Whenever possible, the Company first looks for quoted prices for identical assets or liabilities in active markets (Level 1 inputs) to value each asset or liability. However, when inputs from identical assets or liabilities on active markets are not available, the Company utilizes market observable data for similar assets and liabilities. The Company maximizes the use of observable inputs and limits the use of unobservable inputs to occasions when observable inputs are not available. The need to use unobservable inputs generally results from the lack of market liquidity of the actual financial instrument or of the underlying collateral. Although in some instances, third party price indications may be available, limited trading activity can challenge the observability of these quotations.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Securities Available for Sale
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and classified as Level 2 securities. Level 2 securities include mortgage-backed, states and political subdivisions, and other securities. Where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Level 3 securities were immaterial at June 30, 2018 and September 30, 2017.
Interest Rate Swaps and Loans
Interest rate swaps are valued by the Company's Swap Dealers using cash flow valuation techniques with observable market data inputs. The fair value of loans accounted for under the fair value option represents the net carrying value of the loan, plus the equal and opposite amount of the value of the swap needed to hedge the interest rate risk and an adjustment for credit risk based on our assessment of existing market conditions for the specific portfolio of loans. This is used due to the strict prepayment penalties put in the loan terms to cover the cost of exiting the hedge of the loans in the case of early prepayment or termination. The adjustment for credit risk on loans accounted for under the fair value option is not significant to the overall fair value of the loans. The fair values estimated by the Company's Swap Dealers use interest rates that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The Company has entered into Collateral Agreements with its Swap Dealers and Futures Clearing Merchant which entitle it to receive collateral to cover market values on derivatives which are in asset position, thus a credit risk adjustment on interest rate swaps is not warranted. The Company regularly enters into interest rate lock commitments on mortgage loans to be held for sale with corresponding forward sales contracts related to these interest rate lock commitments, the fair values of which are calculated by applying observable market values from Fannie Mae TBA pricing to each interest rate lock commitment and forward sales contract, therefore, are classified within Level 2 of the valuation hierarchy. The Company also has back-to-back swaps with loan customers, with corresponding swaps with an outside third party in exact offsetting terms.

33-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2018 and September 30, 2017.
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(dollars in thousands)
As of June 30, 2018
 
 
 
 
 
 
 
U.S. Treasury securities
$
177,535

 
$
177,535

 
$

 
$

Mortgage-backed securities
1,125,150

 

 
1,125,150

 

States and political subdivision securities
69,026

 

 
68,196

 
830

Other
1,000

 

 
1,000

 

Total securities available for sale
$
1,372,711

 
$
177,535

 
$
1,194,346

 
$
830

Derivatives-assets
$
3,646

 
$

 
$
3,646

 
$

Derivatives-liabilities
1,550

 

 
1,550

 

Fair value loans
888,247

 

 
888,247

 

 
 
 
 
 
 
 
 
As of September 30, 2017
 
 
 
 
 
 
 
U.S. Treasury securities
$
228,603

 
$
228,603

 
$

 
$

Mortgage-backed securities
1,065,737

 

 
1,065,737

 

States and political subdivision securities
72,586

 

 
71,517

 
1,069

Other
1,034

 

 
1,034

 

Total securities available for sale
$
1,367,960

 
$
228,603

 
$
1,138,288

 
$
1,069

Derivatives-assets
$

 
$

 
$

 
$

Derivatives-liabilities
17,155

 

 
17,155

 

Fair value loans
1,016,576

 

 
1,016,576

 

The following table presents the changes in Level 3 financial instruments for the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Balance, beginning of period
$
965

 
$
1,224

 
$
1,069

 
$
1,315

Principal paydown
(135
)
 
(155
)
 
(239
)
 
(246
)
Balance, end of period
$
830

 
$
1,069

 
$
830

 
$
1,069

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Other Repossessed Property
Other repossessed property consists of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other repossessed assets. Other repossessed property is recorded initially at fair value of the collateral less estimated selling costs. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further to fair value less selling costs, reflecting a valuation allowance. Fair value measurements may be based upon appraisals, third-party price opinions, or internally developed pricing methods. These measurements are classified as Level 3.
Impaired Loans (Collateral Dependent)
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of the impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor,

34-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

if necessary, to the appraised value and including costs to sell. Because many of these inputs are not observable, the measurements are classified as Level 3.
Mortgage Loans Held for Sale
Fair value of mortgage loans held for sale is based on either quoted prices for the same or similar loans, or values obtained from third parties, or are estimated for portfolios of loans with similar financial characteristics and are therefore considered a Level 2 valuation.
Loan Servicing Rights
Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts (Level 3), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against market data (Level 3).
Property Held for Sale
This real estate property is carried in premises and equipment as property held for sale at fair value based upon the transactional price if available, or the appraised value of the property.
The following tables present the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2018 and September 30, 2017.
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
(dollars in thousands)
As of June 30, 2018
 
 
 
 
 
 
 
Other repossessed property
$
9,051

 
$

 
$

 
$
9,051

Impaired loans
200,093

 

 

 
200,093

Loans held for sale, at lower of cost or fair value
6,805

 

 
6,805

 

Loan servicing rights
3,328

 

 

 
3,328

Property held for sale
1,107

 

 

 
1,107

 
 
 
 
 
 
 
 
As of September 30, 2017
 
 
 
 
 
 
 
Other repossessed property
$
7,728

 
$

 
$

 
$
7,728

Impaired loans
185,388

 

 

 
185,388

Loans held for sale, at lower of cost or fair value
7,456

 

 
7,456

 

Loan servicing rights
4,074

 

 

 
4,074

Property held for sale
5,147

 

 

 
5,147

The valuation techniques and significant unobservable inputs used to measure Level 3 fair value measurements at June 30, 2018 were as follows.
 
Fair Value of Assets / (Liabilities) at June 30, 2018
 
Valuation
Technique(s)
 
Unobservable
Input
 
Range
 
Weighted
Average
 
(dollars in thousands)
Other repossessed property
$
9,051

 
Appraisal value
 
Property specific adjustment
 
N/A
 
N/A
Impaired loans
200,093

 
Appraisal value
 
Property specific adjustment
 
N/A
 
N/A
Loan servicing rights
3,328

 
Discounted cash flows
 
Constant prepayment rate
Discount rate
 
7.9 - 20.2% 10.0 - 15.0%
 
10.4% 11.8%
Property held for sale
1,107

 
Appraisal value
 
Property specific adjustment
 
N/A
 
N/A
Disclosures about Fair Value of Financial Instruments
For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate are assumed to have a fair value that approximates carrying value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument.

35-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

The short maturity of the Company’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following consolidated balance sheet categories: cash and cash equivalents, securities sold under agreements to repurchase, and accrued interest.
Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include premises and equipment, deferred income taxes, goodwill, and core deposit and other intangibles. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial. Fair values for balance sheet instruments as of June 30, 2018 and September 30, 2017 are as follows.
 
 
 
June 30, 2018
 
September 30, 2017
 
Level in Fair Value Hierarchy
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
 
 
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
Level 1
 
$
294,614

 
$
294,614

 
$
360,396

 
$
360,396

Loans, net excluding fair valued loans, loans held for sale and impaired loans
Level 3
 
8,219,986

 
8,102,174

 
7,881,018

 
7,798,134

Accrued interest receivable
Level 2
 
51,979

 
51,979

 
53,176

 
53,176

Cash surrender value of life insurance policies
Level 2
 
30,245

 
30,245

 
29,619

 
29,619

FHLB stock
Level 2
 
25,008

 
25,008

 
37,551

 
37,551

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Deposits
Level 2
 
$
9,585,318

 
$
9,585,693

 
$
8,977,613

 
$
8,978,926

FHLB advances and other borrowings
Level 2
 
335,000

 
336,094

 
643,214

 
645,421

Securities sold under repurchase agreements
Level 2
 
105,478

 
105,478

 
132,636

 
132,636

Accrued interest payable
Level 2
 
7,925

 
7,925

 
4,405

 
4,405

Subordinated debentures and subordinated notes payable
Level 2
 
108,426

 
107,824

 
108,302

 
108,293

The following methods and assumptions were used in estimating the fair value of financial instruments that were not previously disclosed.
Cash and cash equivalents: Due to the short term nature of cash and cash equivalents, the estimated fair value is equal to the carrying value and they are categorized as a Level 1 fair value measurement.
Loans, net excluding fair valued loans and loans held for sale: The fair value of the loan portfolio is estimated using observable inputs including estimated cash flows, and discount rates based on interest rates currently being offered for loans with similar terms, to borrowers of similar credit quality. Loans held for investment are categorized as a Level 3 fair value measurement.
Accrued interest receivable: Due to the nature of accrued interest receivable, the estimated fair value is equal to the carrying value and they are categorized as a Level 2 fair value measurement.
Cash Surrender Value of Life Insurance Policies: Fair value is equal to the cash surrender value of the life insurance policies and are categorized as Level 2 fair value measurement.
FHLB stock: The carrying amount of FHLB stock approximates its fair value as it can only be redeemed with the FHLB at par value. FHLB stock has been categorized as a Level 2 fair value measurement.
Deposits: The estimated fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, NOW, and money market accounts, is equal to the amount payable on demand. The fair value of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits, taking into account the option for early withdrawal. The discount rate is estimated using the rates offered by the Company, at the respective measurement dates, for deposits of similar maturities. Deposits have been categorized as a Level 2 fair value measurement.
FHLB advances and other borrowings: The fair value of FHLB advances and other borrowings is estimated using discounted cash flow analysis, based on current incremental borrowing rates for similar types of borrowing arrangements. In the absence of a

36-




GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)

reasonably precise methodology to determine the fair value of the credit agreement, carrying value has been used to represent fair value. FHLB advances and other borrowings have been categorized as a Level 2 fair value measurement.
Securities sold under repurchase agreements: The Company’s repurchase agreements are overnight transactions that mature the day after the transaction, and as a result of this short-term nature, the estimated fair value equals the carrying value. Securities sold under repurchase agreements have been categorized as a Level 2 fair value measurement.
Accrued interest payable: Due to the nature of accrued interest payable, the estimated fair value is equal to the carrying value and they are categorized as a Level 2 fair value measurement.
Subordinated Debentures and Subordinated Notes Payable: The fair value of subordinated debentures and subordinated notes payable is estimated using discounted cash flow analysis, based on current incremental debt rates. Subordinated debentures and subordinated notes payable have been categorized as a Level 2 fair value measurement.
19. Earnings per Share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding determined for the basic earnings per share calculation plus the dilutive effect of stock compensation using the treasury stock method.
The following information was used in the computation of basic and diluted earnings per share (EPS) for the three and nine months ended June 30, 2018 and 2017.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands, except per share data)
Net income
$
45,874

 
$
35,060

 
$
115,636

 
$
107,125

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
58,948,944

 
58,790,314

 
58,930,963

 
58,776,546

Dilutive effect of stock based compensation
221,114

 
340,318

 
203,672

 
288,856

Weighted average common shares outstanding for diluted earnings per share calculation
59,170,058

 
59,130,632

 
59,134,635

 
59,065,402

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.78

 
$
0.60

 
$
1.96

 
$
1.82

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.78

 
$
0.59

 
$
1.96

 
$
1.81

The Company had no shares of unvested performance stock as of June 30, 2018 and 2017 which were not included in the computation of diluted earnings per common share because performance conditions for vesting had not been met. The Company had no shares of anti-dilutive stock awards outstanding as of June 30, 2018 and 2017.
ITEM 2.
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 elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, previously filed with the SEC. 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” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.
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.
Unless otherwise noted, references to "the current period" or "the current quarter" refer to the fiscal quarter ended June 30, 2018 and references to "the comparable period" or "the comparable quarter" refer to the fiscal quarter ended June 30, 2017.

37-




Tax Equivalent Presentation
All references to net interest income, net interest margin, interest income on non ASC 310-30 loans, yield on non ASC 310-30 loans and the related non-GAAP adjusted measure of each item are presented on a fully-tax equivalent ("FTE") basis unless otherwise noted. In fiscal year 2018, the enacted Tax Reform Act reduced the federal tax rate for corporations from 35% to 21%. Because of the Company's September 30 fiscal year end, a blended statutory rate of 24.5% was applied to all FTE non-GAAP adjusted measures beginning December 31, 2017.
Overview
We are a full-service regional bank holding company focused on relationship-based business and agribusiness banking. We serve our customers through 173 branches in attractive markets in nine states: Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota.
Our bank was established more than 80 years ago and we have achieved strong market positions by developing and maintaining extensive local relationships in the communities we serve. By leveraging our business and agribusiness focus, presence in attractive markets, highly efficient operating model and robust approach to risk management, we have achieved significant and profitable growth—both organically and through disciplined acquisitions. We provide financial results based on a fiscal year ending September 30 as a single reportable segment.
The principal sources of our revenues and cash flows are: (i) interest and fees earned on loans made or held by our bank; (ii) interest on fixed income investments held by our bank; (iii) fees on wealth management services; (iv) service charges on deposit accounts maintained at our bank; (v) gain on the sale of loans held for sale (vi) gains on sales of securities; and (vii) merchant and card fees. Our principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) salaries and employee benefits; (iii) data processing costs primarily associated with maintaining our bank's loan and deposit functions; (iv) occupancy expenses for maintaining our bank's facilities; (v) professional fees; (vi) business development; (vii) FDIC insurance assessments; and (viii) other real estate owned expenses. The largest component contributing to our net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposit accounts and other borrowings). One of management's principal functions is to manage the spread between interest earned on earning assets and interest paid on interest-bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.
Due to the Tax Cuts and Jobs Act of 2017, a blended statutory federal tax rate of 24.5% was applied to net income before taxes generated during fiscal year 2018, compared to 35% for fiscal year 2017. The Company's tax equivalent adjustment to net interest income and net interest margin was $1.7 million and $4.9 million for the three and nine month periods ended June 30, 2018, compared to $2.2 million and $6.5 million for the prior comparable periods in fiscal year 2017, on a consistent asset base. This change reduced net interest margin and adjusted net interest margin by approximately 3 basis points for the three month period and 2 basis points for the nine month period ended June 30, 2018 and increased our efficiency ratio by a negligible amount for the same periods. For more information on our net interest margin, adjusted net interest margin and efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
Correction of Prior Period Balances
The consolidated statements of income have been revised to correct an immaterial classification error in loan interest income and noninterest income related to credit card interchange income for all periods presented. The reclassification had no effect on net income, earnings per share, retained earnings or capital ratios for all periods presented; however, our net interest margin and adjusted net interest margin were reduced by six to eight basis points compared to what was originally reported for the prior comparable periods. Periods not presented herein will be revised, as applicable, as they are included in future filings. For more information on the reclassification of credit card interchange income, see "—Notes to the Consolidated Financial Statements, Nature of Operations and Summary of Significant Policies" section. For more information on our efficiency ratio, net interest margin and adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.

38-




Highlights for the Three and Nine Months ended June 30, 2018
Net income was $45.9 million, or $0.78 per diluted share, for the third quarter of fiscal year 2018, compared to $35.1 million, or $0.59 per diluted share, for the third quarter of fiscal year 2017, an increase of $10.8 million, or 30.8%. Compared to the third quarter of fiscal year 2017, total revenue (non-FTE) for the third quarter of fiscal year 2018 grew by 8.2%, provision for loan and lease losses were reduced by 39.4% and noninterest expenses grew by 5.4%. Total revenue (non-FTE) is the sum of net interest income (non-FTE) and noninterest income. Net income was $115.6 million, or $1.96 per diluted share, for the first nine months of fiscal year 2018, compared to $107.1 million, or $1.81 per diluted share, for the same period in fiscal year 2017. Our efficiency ratio was reduced to 45.8% for the quarter ending June 30, 2018, from 46.7% for the quarter ending June 30, 2017. For more information on our efficiency ratio, including a reconciliation to the most directly comparable GAAP financial measure, 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 3.97%, 3.92% and 3.92%, respectively, for the quarters ended June 30, 2018, March 31, 2018 and June 30, 2017. Adjusted net interest margin, which reflects the realized gain (loss) on interest rate swaps, was 3.94%, 3.86% and 3.79%, respectively, for the same periods. 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 increased by 5 basis point and 15 basis points, respectively, compared to the same quarter in fiscal year 2017. Net interest margin increased between the two periods primarily due to a 32 basis point increase in the yield on interest-earning assets, driven by higher average loan balances as a proportion of interest earning assets and improving loan yields, offset by a 28 basis point increase in the cost of interest-bearing deposits and moderate increases in the cost of borrowings. A $2.5 million reduction in the current quarter of the cost of interest rate swaps compared to the same quarter in fiscal year 2017 is the primary driver of the more pronounced increase in adjusted net interest margin compared to net interest margin. For more information on our adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
Total loans were $9.38 billion at June 30, 2018 compared to $8.97 billion at September 30, 2017. The net growth of $0.41 billion, or 4.6%, occurred primarily within the commercial real estate ("CRE") segment of the loan portfolio, which grew $0.40 billion, including strong growth in owner-occupied CRE and construction loans.
Deposits were $9.59 billion at June 30, 2018, an increase of $0.61 billion, or 6.8%, compared to $8.98 billion at September 30, 2017, which was primarily due to the increase in interest-bearing deposits of $0.67 billion, or 9.4%, which included a $0.29 billion increase in brokered deposits and a $0.22 billion increase in public deposits.
At June 30, 2018, loans graded "Watch" were $276.0 million, a decrease of $35.6 million, or 11.4%, compared to September 30, 2017 while loans graded "Substandard" were $268.0 million, an increase of $35.2 million, or 15.1%, over the same period. Nonaccrual loans, including ASC 310-30 loans, were $127.3 million as of June 30, 2018. Total nonaccrual loans decreased by $11.0 million compared to September 30, 2017, primarily driven by charge offs and transfers to other repossessed property. Total other repossessed property balances were $10.2 million as of June 30, 2018, an increase of $1.2 million, or 13.8%, compared to September 30, 2017 due to transfers into other repossessed property.
Provision for loan and lease losses was $3.5 million for the third quarter of fiscal year 2018, compared to $5.8 million for the same quarter of fiscal year 2017. The provision was lower due to a higher amount of specific reserve balances in the prior comparable quarter. Net charge-offs for the third quarter of fiscal year 2018 were $4.0 million, or 0.17% of average total loans on an annualized basis, with the majority of net charge-offs concentrated in the CRE and agricultural segments of the loan portfolio, bringing fiscal year-to-date net charge-offs to $11.8 million, or 0.17% of average total loans on an annualized basis. For the comparable periods in fiscal year 2017, net charge-offs were $4.3 million, or 0.20% of average total loans on an annualized basis for the third quarter of fiscal year 2017, bringing fiscal year-to-date net charge-offs to $17.3 million, or 0.27% of average total loans on an annualized basis. The ratio of ALLL to total loans was 0.69% at June 30, 2018, a decrease from 0.71% at September 30, 2017. The balance of the ALLL increased to $64.7 million at June 30, 2018 from $63.5 million at September 30, 2017.
Tier 1 capital, total capital and Tier 1 leverage ratios were 11.8%, 12.8% and 10.6%, respectively, at June 30, 2018, compared to 11.4%, 12.5% and 10.3%, respectively, at September 30, 2017. In addition, our Common Equity Tier 1 ratio was 11.0% and 10.7% at June 30, 2018 and September 30, 2017, respectively. Our tangible common equity to tangible assets ratio was 9.5% at June 30, 2018 and 9.2% at September 30, 2017. 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.

39-




Key Factors Affecting Our Business and Financial Statements
As discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, our business, financial condition and results of operations are impacted by several key factors, including economic conditions, interest rates, asset quality, banking laws and regulations, competition, operational efficiency, goodwill and amortization of other intangible assets and loans and interest rate swaps accounted for at fair value.  There have been no material changes to these factors except as otherwise supplemented within this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 and within our Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2018 and December 31, 2017, respectively.
Results of Operations—Three and Nine Month Periods Ended June 30, 2018 and 2017
Overview
The following table highlights certain key financial and performance information for the three and nine month periods ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands, except share and per share amounts)
Operating Data:
 
 
 
 
 
 
 
Interest income (FTE)
$
126,146

 
$
110,713

 
$
361,514

 
$
327,929

Interest expense
19,745

 
11,671

 
50,756

 
31,928

Noninterest income
18,939

 
17,327

 
54,355

 
48,474

Noninterest expense
57,863

 
54,922

 
171,875

 
161,312

Provision for loan and lease losses
3,515

 
5,796

 
12,972

 
16,854

Net income
45,874

 
35,060

 
115,636

 
107,125

Adjusted net income ¹
45,874

 
35,060

 
129,222

 
107,565

Common shares outstanding
58,911,563

 
58,761,597

 
58,911,563

 
58,761,597

Weighted average diluted common shares outstanding
59,170,058

 
59,130,632

 
59,134,635

 
59,065,402

Earnings per common share - diluted
$
0.78

 
$
0.59

 
$
1.96

 
$
1.81

Adjusted earnings per common share - diluted ¹
0.78

 
0.59

 
2.19

 
1.82

 
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
Net interest margin (FTE) ¹ ²
3.97
%
 
3.92
%
 
3.93
%
 
3.89
%
Adjusted net interest margin (FTE) ¹ ²
3.94
%
 
3.79
%
 
3.87
%
 
3.73
%
Return on average total assets ²
1.55
%
 
1.25
%
 
1.32
%
 
1.26
%
Return on average common equity ²
10.2
%
 
8.2
%
 
8.7
%
 
8.5
%
Return on average tangible common equity ¹ ²
17.7
%
 
14.8
%
 
15.2
%
 
15.5
%
Efficiency ratio ¹
45.8
%
 
46.7
%
 
46.7
%
 
46.3
%
1 This is a non-GAAP financial measure we believe is helpful to interpreting our financial results. For more information on this non-GAAP financial measure, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
2 Annualized for all partial-year periods.

40-




Net Interest Income
The following table presents net interest income, net interest margin and adjusted net interest margin for the three and nine month periods ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Net interest income:
 
 
 
 
 
 
 
Total interest income (FTE)
$
126,146

 
$
110,713

 
$
361,514

 
$
327,929

Less: Total interest expense
19,745

 
11,671

 
50,756

 
31,928

Net interest income (FTE)
$
106,401

 
$
99,042

 
$
310,758

 
$
296,001

 
 
 
 
 
 
 
 
Net interest margin (FTE) and adjusted net interest margin (FTE) ¹
 
 
 
 
 
 
 
Average interest-earning assets
10,748,078

 
10,124,404

 
10,577,420

 
10,185,187

Average interest-bearing liabilities
10,039,113

 
9,485,260

 
9,897,046

 
9,556,764

Net interest margin (FTE)
3.97
%
 
3.92
%
 
3.93
%
 
3.89
%
Adjusted net interest margin (FTE) ¹
3.94
%
 
3.79
%
 
3.87
%
 
3.73
%
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.
Net interest income was $106.4 million for the third quarter of fiscal year 2018, compared to $99.0 million for the same quarter in fiscal year 2017, an increase of $7.4 million, or 7.4%. Net interest income was $310.8 million for the first nine months of fiscal year 2018, compared to $296.0 million for the same period in fiscal year 2017, an increase of $14.8 million, or 5.0%. The increase in net interest income for both periods was primarily attributable to higher loan interest income driven by 7.3% and 5.5%, respectively, of growth in average loans outstanding between the periods combined with an 30 and 22 basis point increase, respectively, in the yield on loans, partially offset by higher interest expense associated with interest-bearing deposits and borrowings.
Net interest margin was 3.97% and 3.92% for the third quarter of fiscal year 2018 and 2017, respectively, an increase of 5 basis points, while adjusted net interest margin was 3.94% and 3.79%, respectively, an increase of 15 basis points. Net interest margin was 3.93% and 3.89% for the first nine months of fiscal year 2018 and 2017, respectively, an increase of 4 basis points, while the adjusted net interest margin was 3.87% and 3.73%, respectively, an increase of 14 basis points. The increases in net interest margin for both three and nine month periods were primarily due to the yield on interest-earning assets which increased by 32 and 27 basis points, respectively, driven by higher average loan balances as a proportion of earning assets and improving loan yields, partially offset by a 28 and 22 basis point increase, respectively, in the cost of interest-bearing deposits and moderate increases in the cost of borrowings. A $2.5 million and $6.7 million, respectively, reduction in the cost of interest rate swaps between the three and nine month comparable periods is the primary driver of the more pronounced increase in adjusted net interest margin compared to net interest margin. For more information on our adjusted net interest margin, including a reconciliation to the most directly comparable GAAP financial measure, see "—Non-GAAP Financial Measures" section.
The following tables present 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 the current and comparable three and nine month periods, respectively. Loans on nonaccrual status that had interest accrued as of the date of nonaccrual is 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 $789.8 million at June 30, 2018 and $715.1 million at June 30, 2017, are typically entered at lower interest rate arrangements than comparable non-exempt loans and securities. The amount of interest income reflected in the following table 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. ASC 310-30 loans represent loans accounted for in accordance with ASC 310-30 Accounting for Purchased Loans that were credit impaired at the time we acquired them. Non ASC 310-30 loans represent loans we have originated and loans we have acquired that were not credit impaired at the time we acquired them.

41-




 
For the three months ended:
 
June 30, 2018
 
June 30, 2017
 
Average Balance
 
Interest (FTE)
 
Yield / Cost ¹
 
Average Balance
 
Interest (FTE)
 
Yield / Cost ¹
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing bank deposits
$
90,868

 
$
424

 
1.87
%
 
$
62,187

 
$
163

 
1.05
%
Investment securities
1,357,808

 
7,471

 
2.21
%
 
1,398,370

 
6,803

 
1.95
%
Non ASC 310-30 loans, net ²
9,220,931

 
114,489

 
4.98
%
 
8,550,349

 
100,878

 
4.73
%
ASC 310-30 loans, net
78,471

 
3,762

 
19.23
%
 
113,498

 
2,869

 
10.14
%
Loans, net
9,299,402

 
118,251

 
5.10
%
 
8,663,847

 
103,747

 
4.80
%
Total interest-earning assets
10,748,078

 
126,146

 
4.71
%
 
10,124,404

 
110,713

 
4.39
%
Noninterest-earning assets
1,152,724

 
 
 
 
 
1,154,295

 
 
 
 
Total assets
$
11,900,802

 
$
126,146

 
4.25
%
 
$
11,278,699

 
$
110,713

 
3.94
%
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
$
1,793,784

 
 
 
 
 
$
1,815,407

 
 
 
 
Interest-bearing deposits
6,101,679

 
$
11,705

 
0.77
%
 
5,849,998

 
$
7,172

 
0.49
%
Time deposits
1,578,253

 
4,755

 
1.21
%
 
1,289,402

 
2,306

 
0.72
%
Total deposits
9,473,716

 
16,460

 
0.70
%
 
8,954,807

 
9,478

 
0.42
%
Securities sold under agreements to repurchase
99,897

 
80

 
0.32
%
 
118,373

 
86

 
0.29
%
FHLB advances and other borrowings
357,102

 
1,883

 
2.11
%
 
303,846

 
994

 
1.31
%
Subordinated debentures and subordinated notes payable
108,398

 
1,322

 
4.89
%
 
108,234

 
1,113

 
4.13
%
Total borrowings
565,397

 
3,285

 
2.33
%
 
530,453

 
2,193

 
1.66
%
Total interest-bearing liabilities
10,039,113

 
$
19,745

 
0.79
%
 
9,485,260

 
$
11,671

 
0.49
%
Noninterest-bearing liabilities
65,623

 
 
 
 
 
77,979

 
 
 
 
Stockholders' equity
1,796,066

 
 
 
 
 
1,715,460

 
 
 
 
Total liabilities and stockholders' equity
$
11,900,802

 
 
 
 
 
$
11,278,699

 
 
 
 
Net interest spread
 
 
 
 
3.46
%
 
 
 
 
 
3.45
%
Net interest income and net interest margin (FTE) ¹
 
 
$
106,401

 
3.97
%
 
 
 
$
99,042

 
3.92
%
Less: Tax equivalent adjustment
 
 
$
1,729

 
 
 
 
 
$
2,154

 
 
Net interest income and net interest margin - ties to Statements of Comprehensive Income
 
 
$
104,672

 
3.91
%
 
 
 
$
96,888

 
3.84
%
 1 Annualized for all partial-year periods.
 2 Interest income includes $0.9 million and $0.7 million for the third quarter of fiscal year 2018 and 2017, respectively, resulting from accretion of ASC 310-20 loan marks associated with acquired loans.

42-




 
For the nine months ended:
 
June 30, 2018
 
June 30, 2017
 
Average Balance
 
Interest (FTE) ¹
 
Yield / Cost ²
 
Average Balance
 
Interest (FTE) ¹
 
Yield / Cost ²
 
(dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest bearing bank deposits
$
71,915

 
$
882

 
1.64
%
 
$
146,209

 
$
728

 
0.67
%
Investment securities
1,379,713

 
21,526

 
2.09
%
 
1,386,190

 
19,719

 
1.90
%
Non ASC 310-30 loans, net ³
9,042,253

 
329,416

 
4.87
%
 
8,532,650

 
299,960

 
4.70
%
ASC 310-30 loans, net
83,539

 
9,690

 
15.51
%
 
120,138

 
7,522

 
8.37
%
Loans, net
9,125,792

 
339,106

 
4.97
%
 
8,652,788

 
307,482

 
4.75
%
Total interest-earning assets
10,577,420

 
361,514

 
4.57
%
 
10,185,187

 
327,929

 
4.30
%
Noninterest-earning assets
1,161,618

 
 
 
 
 
1,150,838

 
 
 
 
Total assets
$
11,739,038

 
$
361,514

 
4.12
%
 
$
11,336,025

 
$
327,929

 
3.87
%
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
$
1,808,110

 
 
 
 
 
$
1,810,880

 
 
 
 
Interest-bearing deposits
5,972,877

 
$
29,486

 
0.66
%
 
5,673,929

 
$
18,060

 
0.43
%
Time deposits
1,386,921

 
10,630

 
1.02
%
 
1,307,908

 
6,536

 
0.67
%
Total deposits
9,167,908

 
40,116

 
0.59
%
 
8,792,717

 
24,596

 
0.37
%
Securities sold under agreements to repurchase
110,959

 
259

 
0.31
%
 
124,249

 
298

 
0.32
%
FHLB advances and other borrowings
509,822

 
6,682

 
1.75
%
 
530,668

 
3,735

 
0.94
%
Subordinated debentures and subordinated notes payable
108,357

 
3,699

 
4.56
%
 
109,130

 
3,299

 
4.04
%
Total borrowings
729,138

 
10,640

 
1.95
%
 
764,047

 
7,332

 
1.28
%
Total interest-bearing liabilities
9,897,046

 
$
50,756

 
0.69
%
 
9,556,764

 
$
31,928

 
0.45
%
Noninterest-bearing liabilities
66,225

 
 
 
 
 
89,770

 
 
 
 
Stockholders' equity
1,775,767

 
 
 
 
 
1,689,491

 
 
 
 
Total liabilities and stockholders' equity
$
11,739,038

 
 
 
 
 
$
11,336,025

 
 
 
 
Net interest spread
 
 
 
 
3.43
%
 
 
 
 
 
3.42
%
Net interest income and net interest margin (FTE) ¹
 
 
$
310,758

 
3.93
%
 
 
 
$
296,001

 
3.89
%
Less: Tax equivalent adjustment
 
 
$
4,910

 
 
 
 
 
$
6,477

 
 
Net interest income and net interest margin - ties to Statements of Comprehensive Income
 
 
$
305,848

 
3.87
%
 
 
 
$
289,524

 
3.80
%
 1 Annualized for all partial-year periods.
 2 Interest income includes $2.1 million and $3.0 million for the first nine months of fiscal year 2018 and 2017, respectively, resulting from accretion of ASC 310-20 loan marks associated with acquired loans.
Interest Income
The following table presents interest income for the three and nine month periods ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Interest income:
 
 
 
 
 
 
 
Loans (FTE)
$
118,251

 
$
103,747

 
$
339,106

 
$
307,482

Investment securities
7,471

 
6,803

 
21,526

 
19,719

Federal funds sold and other
424

 
163

 
882

 
728

Total interest income (FTE)
126,146

 
110,713

 
361,514

 
327,929

Less: Tax equivalent adjustment
1,729

 
2,154

 
4,910

 
6,477

Total interest income (GAAP)
$
124,417

 
$
108,559

 
$
356,604

 
$
321,452


43-




Total interest income consists primarily of interest income on loans and interest income on our investment portfolio. Total interest income was $126.1 million for the third quarter of fiscal year 2018, compared to $110.7 million for the same quarter of fiscal year 2017, an increase of $15.4 million, or 13.9%. Total interest income was $361.5 million for the first nine months of fiscal year 2018, compared to $327.9 million for the same period in fiscal year 2017, an increase of $33.6 million, or 10.2%. Significant components of interest income are described in further detail below.
Loans. Interest income on all loans increased to $118.3 million in third quarter of fiscal year 2018 from $103.7 million in the same quarter in fiscal year 2017, an increase of $14.6 million, or 14.0%. Interest income on all loans increased to $339.1 million for the first nine months of fiscal year 2018 from $307.5 million for the first nine months of fiscal year 2017, an increase of $31.6 million, or 10.3%. The increases for both periods were primarily attributable to higher loan interest income driven by growth of 7.3% and 5.5%, respectively, in average loans outstanding between the periods and increasing benchmark interest rates, which favorably impact the contractual interest rates on variable and adjustable rate loans. For the third quarter and the first nine months of fiscal year 2018, interest income on ASC 310-30 loans, which are purchased credit impaired loans with a different income recognition model, increased $0.9 million and $2.2 million, respectively, primarily driven by accelerated accretion of interest income in one pool of purchased credit impaired loans in fiscal year 2018.
Our yield on loans is affected by market interest rates, the level of adjustable-rate loan indices, interest rate floors and caps, customer repayment activity, the level of loans held for sale, portfolio mix, and the level of nonaccrual loans. The average tax equivalent yield on non-ASC 310-30 loans was 4.98% for the third quarter of fiscal year 2018, an increase of 25 basis points compared to the same quarter in fiscal year 2017. The average tax equivalent yield on non ASC 310-30 loans was 4.87% for the first nine months of fiscal year 2018, a 17 basis point increase compared to the same period in fiscal year 2017. Adjusted for the current realized gain (loss) on derivatives we use to manage interest rate risk on certain of our loans at fair value, which we believe represents the underlying economics of the transactions, the adjusted yield on non ASC 310-30 loans was 4.94% for the third quarter of fiscal year 2018, a 36 basis point an increase compared to the same quarter in fiscal year 2017. The adjusted yield on non ASC 310-30 loans was 4.80% for the first nine months of fiscal year 2018, a 28 basis point increase over the prior comparable period. Starting in the first quarter of fiscal year 2016 and continuing through the third quarter of 2018 we have begun to benefit from a period-over-period increase in LIBOR rates which has reduced the net cost of pay fixed, receive floating interest rate swaps the Company utilizes related to certain fixed rate loans and benchmark rate hikes which have raised interest rates on many of our floating and variable rate loans.
The average duration, net of interest rate swaps, of the loan portfolio was 1.3 years as of June 30, 2018. Approximately 47%, or $4.43 billion, of the portfolio is comprised of fixed rate loans, of which $888.2 million of loans are fixed rate loans with 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. Of the remaining floating and variable rate loans in the portfolio, approximately 46% are indexed to Wall Street Journal Prime, 28% to 5-year Treasuries and the balance to various other indices. Approximately 1% of our total loans' rates are floored, with an average interest rate floor 70 bps above market rates.
Loan-related fee income of $1.0 million is included in interest income for both the third quarter of fiscal year 2018 and 2017. Loan-related fee income of $3.9 million is included in interest income for the first nine months of fiscal year 2018 compared to $3.0 million for the same period in fiscal year 2017. 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 $0.5 million and $1.5 million for the third quarter of fiscal years 2018 and 2017, respectively, and $2.2 million and $3.5 million for the first nine months of fiscal years 2018 and 2017, respectively, is included as a reduction to interest income.
Investment Portfolio. The carrying value of investment securities and FHLB stock was $1.40 billion as of June 30, 2018. Interest income on investments includes income earned on investment securities and FHLB stock. Interest income on investments was $7.5 million for the third quarter of fiscal year 2018, an increase of $0.7 million, or 9.8%, from $6.8 million in the third quarter of fiscal year 2017, driven by a yield increase to 2.21% from 1.95%, partially offset by a decrease in average balances over the same period. Interest income on investments increased by $1.8 million, or 9.2%, to $21.5 million in the first nine months of fiscal years 2018 from $19.7 million in the same period of fiscal year 2017, primarily due to a yield increase to 2.09% from 1.90% partially offset with a slight decrease in average balances over the same period.
The weighted average life of the investment portfolio was 3.8 years and 3.6 years at June 30, 2018 and September 30, 2017, respectively. Average investments represented 12.6% and 13.8% of total average interest-earning assets for the third quarters of fiscal years 2018 and 2017, respectively and 13.0% and 13.6% for the first nine months of fiscal years 2018 and 2017, respectively.

44-




Interest Expense
The following table presents interest expense for the three and nine month periods ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Interest expense
 
 
 
 
 
 
 
Deposits
$
16,460

 
$
9,478

 
$
40,116

 
$
24,596

FHLB advances and other borrowings
1,963

 
1,080

 
6,941

 
4,033

Subordinated debentures and subordinated notes payable
1,322

 
1,113

 
3,699

 
3,299

Total interest expense
$
19,745

 
$
11,671

 
$
50,756

 
$
31,928

Total interest expense increased $8.0 million, or 69.2%, to $19.7 million in the third quarter of fiscal year 2018 from $11.7 million in the same quarter in fiscal year 2017. Total interest expense increased $18.8 million, or 59.0%, to $50.8 million in the first nine months of fiscal year 2018 from $31.9 million in the same period in fiscal year 2017. Significant components of interest expense are described in further detail below.
Deposits. Interest expense on deposits, consisting of interest-bearing accounts and time deposits, was $16.5 million and $9.5 million for the third quarter of fiscal year 2018 and 2017, respectively, an increase of $7.0 million, or 73.7%. Interest expense on deposits was $40.1 million and $24.6 million for the first nine months of fiscal year 2018 and 2017, respectively, an increase of $15.5 million, or 63.1%. The increases for both periods were a result of growth in average interest-bearing deposits outstanding and increasing benchmark interest rates in the cost of deposits, which increased to 0.70% for the third quarter of fiscal year 2018 from 0.42% for the same quarter of fiscal year 2017. Average deposit balances increased to $9.47 billion for the current quarter in fiscal year 2018, from $8.95 billion for the comparable quarter in fiscal year 2017, an increase of $0.52 billion, or 5.8%. The cost of deposits increased to 0.59% for the first nine months of fiscal year 2018 from 0.37% for the same period in fiscal year 2017.
Average non-interest-bearing demand account balances decreased to 18.9% of average total deposits for the third quarter of fiscal year 2018 from 20.3% for the comparable quarter in fiscal year 2017. Total average other liquid accounts, consisting of money market and savings accounts, decreased to 64.4% of total average deposits for the third quarter of fiscal year 2018, compared to 65.3% of total average deposits for the comparable quarter in fiscal year 2017, while time deposit accounts increased to 16.7% of average total deposits for the third quarter of fiscal year 2018, compared to 14.4% in the comparable quarter in fiscal year 2017. We continue our strategy of focusing on cost-effective transaction accounts as well as our focus on gathering business deposits, which are typically transaction accounts by nature.
FHLB Advances and Other Borrowings. Interest expense on FHLB advances and other borrowings was $2.0 million for the third quarter of fiscal year 2018, an increase of $0.9 million, or 81.8%, compared to $1.1 million for the comparable quarter in 2017, reflecting a weighted average cost of 2.11% and 1.31%, respectively, for the same periods. Our average balance for FHLB advances and other borrowings was $357.1 million in the current quarter of fiscal year 2018 compared to $303.8 million in the same quarter in fiscal year 2017, an increase of $53.3 million, or 17.5%. Interest expense on FHLB advances and other borrowings was $6.9 million for the first nine months of fiscal year 2018 and $4.0 million for the same period in fiscal year 2017, representing a weighted average cost of 1.75% and 0.94%, respectively, for the same periods. Average FHLB advances and other borrowings as a proportion of total average interest-bearing liabilities were 5.2% for the first nine months of fiscal year 2018, compared to 5.6% for the comparable period in fiscal year 2017. The average rate paid on FHLB advances is impacted by market rates and the various terms and repricing frequency of the specific outstanding borrowings in each year. The weighted average contractual rate paid on our FHLB advances was 2.32% and 1.36% at June 30, 2018 and 2017, respectively, and the average tenor was 14 and 5 months for the same periods.
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 June 30, 2018, we had pledged $3.20 billion of loans to the FHLB, against which we had borrowed $335.0 million.

45-




Subordinated Debentures and Subordinated Notes Payable. Interest expense on our outstanding subordinated debentures and subordinated notes payable was $1.3 million in third quarter of fiscal year 2018 and $1.1 million in the comparable quarter in fiscal year 2017. Interest expense on our outstanding subordinated debentures and subordinated notes payable was $3.7 million and $3.3 million for the first nine months of fiscal years 2018 and 2017, respectively. The weighted average contractual rate on outstanding subordinated notes was 4.88% at both June 30, 2018 and September 30, 2017.
Securities Sold Under Agreements to Repurchase. Securities sold under agreements to repurchase represent retail repurchase agreements with customers and represent a small portion of our overall funding profile. The interest expense associated with this class of liabilities remained largely consistent between the current quarter and comparable quarter.
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 the current and comparable quarter, nine month periods 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.
 
Current Quarter vs Comparable Quarter
 
Current 9 month period vs Comparable 9 month period
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
 
(dollars in thousands)
Increase (decrease) in interest income:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
97

 
$
164

 
$
261

 
$
(509
)
 
$
663

 
$
154

Investment securities
(202
)
 
870

 
668

 
(92
)
 
1,899

 
1,807

Non ASC 310-30 loans
8,160

 
5,451

 
13,611

 
18,320

 
11,136

 
29,456

ASC 310-30 loans
(1,089
)
 
1,982

 
893

 
(2,806
)
 
4,974

 
2,168

Loans
7,071

 
7,433

 
14,504

 
15,514

 
16,110

 
31,624

Total increase
6,966

 
8,467

 
15,433

 
14,913

 
18,672

 
33,585

Increase (decrease) in interest expense:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
321

 
4,212

 
4,533

 
997

 
10,429

 
11,426

Time deposits
603

 
1,846

 
2,449

 
416

 
3,678

 
4,094

Securities sold under agreements to repurchase
(15
)
 
9

 
(6
)
 
(31
)
 
(8
)
 
(39
)
FHLB advances and other borrowings
198

 
691

 
889

 
(152
)
 
3,099

 
2,947

Subordinated debentures and subordinated notes payable
2

 
207

 
209

 
(24
)
 
424

 
400

Total increase
1,109

 
6,965

 
8,074

 
1,206

 
17,622

 
18,828

Increase in net interest income (FTE)
$
5,857

 
$
1,502

 
$
7,359

 
$
13,707

 
$
1,050

 
$
14,757

Provision for Loan and Lease Losses
We recognized provision for loan and lease losses of $3.5 million for the third quarter of fiscal year 2018 compared to a provision for loan and lease losses of $5.8 million for the comparable quarter in fiscal year 2017, a decrease of $2.3 million, or 39.4% between the periods. The provision was lower due to a higher amount of specific reserve balances in the comparable quarter. Provision for loan losses was $13.0 million for the first nine months of fiscal year 2018 compared to $16.9 million for the comparable period in fiscal year 2017, a decrease of $3.9 million, or 23.0%, between the periods. The decrease in provision was mostly driven by a lower level of charge-offs recognized between the periods. We recorded a negligible net impairment in provision for ASC 310-30 loans for the third quarter of fiscal year 2018, compared to a net improvement in provision of $0.1 million for the comparable quarter in fiscal year 2017. We recorded $0.1 million net improvement in provision for ASC 310-30 loans for the first nine months of fiscal year 2018 compared to a net improvement of $1.0 million for the same period in fiscal year 2017.

46-




 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Provision for loan and lease losses, non ASC 310-30 loans *
$
3,505

 
$
5,850

 
$
13,105

 
$
17,860

Provision for (reduction in) loan and lease losses, ASC 310-30 loans
10

 
(54
)
 
(133
)
 
(1,006
)
Provision for loan and lease losses, total
$
3,515

 
$
5,796

 
$
12,972

 
$
16,854

* 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.
Total Credit-Related Charges
We recognized other credit-related charges during the third quarter of fiscal year 2018 that were lower than the comparable quarter in fiscal year 2017 and were lower in the first nine months of fiscal year 2018 compared to the same period in fiscal year 2017. We believe that the following table, which summarizes each component of the total credit-related charges incurred during the current and comparable quarter and the current and comparable nine month periods, is helpful to understanding the overall impact on our quarterly results of operations. Net other repossessed property charges includes other repossessed property operating costs, valuation adjustments and (loss) gain 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 expected credit losses in the portfolio.
 
 
For the three months ended:
 
For the nine months ended:
Item
Included within F/S Line Item(s):
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
(Dollars in thousands)
Provision for loan and lease losses
Provision for loan and lease losses
$
3,515

 
$
5,796

 
$
12,972

 
$
16,854

Net other repossessed property charges
Net loss on repossessed property and other related expenses
305

 
152

 
1,519

 
1,208

Reversal of interest income on nonaccrual loans
Interest income on loans
216

 
332

 
1,126

 
233

Loan fair value adjustment related to credit
Net increase (decrease) in fair value of loans at fair value
(123
)
 
(293
)
 
197

 
(4
)
Total
 
$
3,913

 
$
5,987

 
$
15,814

 
$
18,291

Noninterest Income
The following table presents noninterest income for the three and nine month periods ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Noninterest income
 
 
 
 
 
 
 
Service charges and other fees
$
12,655

 
$
14,572

 
$
37,879

 
$
41,983

Wealth management fees
2,242

 
2,433

 
6,761

 
7,116

Mortgage banking income, net
1,352

 
1,828

 
4,178

 
6,130

Net gain on sale of securities
15

 

 
6

 
44

Other
1,952

 
1,522

 
6,801

 
4,878

Subtotal, product and service fees
18,216

 
20,355

 
55,625

 
60,151

Net (decrease) increase in fair value of loans at fair value
(7,370
)
 
6,060

 
(30,872
)
 
(63,158
)
Net realized and unrealized gain on derivatives
8,093

 
(9,088
)
 
29,602

 
51,481

Subtotal, loans at fair value and related derivatives
723

 
(3,028
)
 
(1,270
)
 
(11,677
)
Total noninterest income
$
18,939

 
$
17,327

 
$
54,355

 
$
48,474


47-




Our noninterest income is comprised of the various fees we charge our customers for products and services we provide and the impact of changes in fair value of loans for which we have elected the fair value treatment and realized and unrealized gains (losses) on the related interest rate swaps we utilize to manage interest rate risk on these loans. While we are required under U.S. GAAP to present both components within total noninterest income, we believe it is helpful to analyze the two broader components of noninterest income separately to better understand the underlying performance of the business.
Noninterest income was $18.9 million for the third quarter of fiscal year 2018, compared to $17.3 million for the comparable quarter in fiscal year 2017, an increase of $1.6 million, or 9.3%. Noninterest income was $54.4 million for the first nine months of fiscal year 2018, compared to $48.5 million for the comparable period in fiscal year 2017, an increase of $5.9 million, or 12.1%. Significant components of noninterest income are described in further detail below.
Product and Service Fees. We recognized $18.2 million of noninterest income related to product and service fees in the third quarter of fiscal year 2018, a decrease of $2.2 million, or 10.5%, compared to the same quarter in fiscal year 2017. The decrease was due to a $1.9 million decrease in service charges and other fees and a $0.5 million decrease in mortgage banking income, partially offset by a $0.4 million increase in other income. The decrease in service charges and other fees reflects the impact of the "Durbin Amendment" limit on debit card interchange income that became effective in July 2017 while the increase in other income was primarily driven by a gain on the sale of stock shares held in the current quarter.
Noninterest income related to product and service fees was $55.6 million for the first nine months of fiscal year 2018 compared to $60.2 million for the same period in fiscal year 2017, a decrease of $4.6 million, or 7.5%. The decrease was due to a $4.1 million decrease in service charges and other fees and a $2.0 million decrease in mortgage banking income, partially offset by a $1.9 million increase in other income. The decrease in service charges and other fees was primarily driven by the impact of the "Durbin Amendment" limit on debit card interchange income. The decrease in mortgage banking income was due to fewer originations sold in the period, while the increase in other income was due to a gain on the sale of stock shares and a sign on bonus for a new contract offset by an estimated breakage cost of an existing contract included in noninterest expense.
Loans at fair value and related derivatives. As discussed in "—Analysis of Financial Condition—Derivatives," changes in the fair value of loans for which we have elected the fair value treatment and realized and unrealized gains and losses on the related derivatives are recognized within noninterest income. For the third quarter of fiscal year 2018, these items accounted for $0.7 million of noninterest income compared to $(3.0) million for the same quarter in fiscal year 2017. The change was driven by a $2.5 million reduction in the current cost of interest rate swaps due to changes in the interest rate environment and a $1.4 million increase in swap fees, partially offset by a net unfavorable change in the credit risk adjustment of $0.2 million. For the first nine months of fiscal year 2018, these items accounted for $(1.3) million of noninterest income compared to $(11.7) million for the same period in fiscal year 2017. The change was driven by a $6.7 million reduction in the current cost of interest rate swaps and a $3.9 million increase in swap fees combined with a net unfavorable change in the credit risk adjustment of $0.2 million. We believe that the current realized loss on the derivatives economically offsets the interest income earned on the related loans. We present elsewhere the adjusted net interest income and adjusted net interest margin reflecting the metrics we use to manage the business.
Noninterest Expense
The following table presents noninterest expense for the three and nine month periods ended June 30, 2018 and 2017.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(dollars in thousands)
Noninterest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
35,122

 
$
32,868

 
$
101,661

 
$
96,872

Data processing and communication
7,177

 
7,370

 
23,251

 
20,965

Occupancy and equipment
4,974

 
4,866

 
15,112

 
14,812

Professional fees
4,297

 
4,141

 
12,564

 
10,535

Advertising
1,260

 
1,059

 
3,441

 
3,029

Net loss on repossessed property and other related expenses
305

 
152

 
1,519

 
1,208

Amortization of core deposits and other intangibles
416

 
538

 
1,268

 
1,927

Acquisition expenses

 

 

 
710

Other
4,312

 
3,928

 
13,059

 
11,254

Total noninterest expense
$
57,863

 
$
54,922

 
$
171,875

 
$
161,312


48-




Our noninterest expense consists primarily of salaries and employee benefits, data processing and communication, occupancy and equipment, professional fees and advertising expenses. Noninterest expense was $57.9 million in the third quarter of fiscal year 2018 compared to $54.9 million for the same quarter in fiscal year 2017, an increase of $3.0 million, or 5.4%. This increase was attributable to a $2.3 million increase in salaries and employee benefits primarily due to living wage increases in response to federal tax reform and annual merit increases compared to the comparable period.
Noninterest expense was $171.9 million for the first nine months of fiscal year 2018 compared to $161.3 million for the same period in fiscal year 2017, an increase of $10.6 million, or 6.5%. The increase was primarily driven by a $4.8 million increase in salaries and employee benefits due to the living wage increases and annual merit increases mentioned previously, a $2.3 million increase in data processing and communication expense primarily driven by an estimated breakage cost on an existing contract, a $2.0 million increase in professional fees driven by an increase in our FDIC assessment and a $1.8 million increase in other expenses, partially offset by a decrease in acquisition expenses of $0.7 million.
Our efficiency ratio was 45.8% and 46.7% for the three month periods ending June 30, 2018 and 2017, respectively. Our efficiency ratio was 46.7% and 46.3% for the first nine month periods ending June 30, 2018 and 2017, respectively. 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 $16.4 million for the third quarter of fiscal year 2018 represents an effective tax rate of 26.3%, compared to a provision of $18.4 million or an effective tax rate of 34.5% for the comparable quarter of fiscal year 2017. The provision for income taxes of $59.7 million for the first nine months of fiscal year 2018 represents an effective tax rate of 34.1%, compared to a provision of $52.7 million or an effective tax rate of 33.0% for the comparable period in fiscal year 2017. Excluding the deferred taxes revaluation as a result of the Tax Reform Act of 2017, the effective tax rate was 26.3% for the first nine months of fiscal year 2018.
Return on Assets and Equity
The following table presents our return on average total assets, return on average common equity and average common equity to average assets ratio for the dates presented.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Return on average total assets
1.55
%
 
1.25
%
 
1.32
%
 
1.26
%
Return on average common equity
10.2
%
 
8.2
%
 
8.7
%
 
8.5
%
Average common equity to average assets ratio
15.1
%
 
15.2
%
 
15.1
%
 
14.9
%

49-




Analysis of Financial Condition
The following table highlights certain key financial and performance information as of the dates indicated.
 
As of
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Balance Sheet and Other Information:
 
 
 
Total assets
$
12,009,048

 
$
11,690,011

Loans ³
9,379,819

 
8,968,553

Allowance for loan and lease losses
64,688

 
63,503

Deposits
9,585,318

 
8,977,613

Stockholders' equity
1,816,741

 
1,755,000

Tangible common equity ¹
1,069,612

 
1,006,603

Tier 1 capital ratio
11.8
%
 
11.4
%
Total capital ratio
12.8
%
 
12.5
%
Tier 1 leverage ratio
10.6
%
 
10.3
%
Common equity tier 1 ratio
11.0
%
 
10.7
%
Tangible common equity / tangible assets ¹
9.5
%
 
9.2
%
Book value per share - GAAP
$
30.84

 
$
29.83

Tangible book value per share ¹
$
18.16

 
$
17.11

Nonaccrual loans / total loans
1.36
%
 
1.54
%
Net charge-offs (recoveries) / average total loans ²
0.17
%
 
0.26
%
Allowance for loan and lease losses / total loans
0.69
%
 
0.71
%
 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.
 ² Annualized for partial-year periods, except for September 30, 2017, which was for the twelve month period.
 ³ Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and loans in process.
Our total assets were $12.01 billion at June 30, 2018, compared with $11.69 billion at September 30, 2017, an increase of $0.32 billion, or 2.7%. The increase in total assets during the first nine months of fiscal year 2018 was principally attributable to an increase in net loans of $0.41 billion, or 4.6%, since September 30, 2017, partially offset by a decrease in cash and cash equivalents of $0.07 billion for the same period. At June 30, 2018, loans were $9.38 billion, compared to $8.97 billion at September 30, 2017. Net loan growth was primarily driven by growth in CRE, agriculture and commercial non-real estate segments of the loan portfolio, partially offset by a reduction in residential real estate loans. During the first nine months of fiscal year 2018, total deposits increased by $0.61 billion, or 6.8%. The growth was primarily driven by growth in interest-bearing deposits, which included a $0.29 billion increase in brokered deposits, a $0.22 billion increase in public deposits and a $0.16 billion increase in consumer deposits, partially offset by a $0.06 decrease in commercial deposits.

50-




Loan Portfolio
The following table presents our loan portfolio by category at each of the dates indicated.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Unpaid principal balance:
 
 
 
Commercial real estate ¹
 
 
 
Originated
$
4,122,857

 
$
3,628,235

Acquired
406,589

 
496,570

Total
4,529,446

 
4,124,805

Agriculture ¹
 
 
 
Originated
2,072,112

 
1,990,648

Acquired
104,206

 
131,490

Total
2,176,318

 
2,122,138

Commercial non-real estate ¹
 
 
 
Originated
1,705,735

 
1,670,349

Acquired
45,092

 
48,565

Total
1,750,827

 
1,718,914

Residential real estate
 
 
 
Originated
689,813

 
724,906

Acquired
168,035

 
207,986

Total
857,848

 
932,892

Consumer
 
 
 
Originated
44,471

 
56,467

Acquired
6,946

 
10,092

Total
51,417

 
66,559

Other lending
 
 
 
Originated
44,187

 
43,132

Acquired

 
75

Total
44,187

 
43,207

Total originated
8,679,175

 
8,113,737

Total acquired
730,868

 
894,778

Total unpaid principal balance
9,410,043

 
9,008,515

Less: Unamortized discount on acquired loans
(19,850
)
 
(29,121
)
Less: Unearned net deferred fees and costs and loans in process
(10,374
)
 
(10,841
)
Total loans
9,379,819

 
8,968,553

Allowance for loan and lease losses
(64,688
)
 
(63,503
)
Loans, net
$
9,315,131

 
$
8,905,050

 1 Unpaid principal balance for commercial non-real estate, agriculture and commercial real estate loans includes fair value adjustments associated with long-term fixed-rate loans where we have entered into interest rate swaps to hedge our interest rate risk.
During the first nine months of fiscal year 2018, total loans increased by 4.6%, or $411.3 million. The growth was primarily focused in CRE, agriculture and commercial non-real estate segments of the loan portfolio, which grew $404.6 million, $54.2 million, and $31.9 million, respectively, offset by a reduction of $75.0 million in residential estate loans. Over the same time period, consumer and other loan balances remained generally stable.

51-




The following table presents an analysis of the unpaid principal balance of our loan portfolio at June 30, 2018, by borrower and collateral type and by each of the six major geographic areas we use to manage our markets.
 
June 30, 2018
 
South 
Dakota
 
Iowa / 
Kansas /
Missouri
 
Nebraska
 
Arizona
 
Colorado
 
North Dakota / Minnesota
 
Other ²
 
Total
%
 
(dollars in thousands)
Commercial real estate ¹
$
1,048,871

 
$
1,200,442

 
$
847,007

 
$
539,139

 
$
698,974

 
$
208,196

 
$
(13,183
)
 
$
4,529,446

48.1
%
Agriculture ¹
692,271

 
391,260

 
153,694

 
764,222

 
181,295

 
3,118

 
(9,542
)
 
2,176,318

23.1
%
Commercial non-real estate ¹
329,435

 
817,318

 
354,659

 
67,391

 
128,874

 
7,309

 
45,841

 
1,750,827

18.6
%
Residential real estate
206,614

 
255,614

 
193,346

 
25,036

 
134,475

 
17,732

 
25,031

 
857,848

9.1
%
Consumer
20,920

 
15,986

 
11,317

 
730

 
1,025

 
675

 
764

 
51,417

0.6
%
Other lending

 

 

 

 

 

 
44,187

 
44,187

0.5
%
Total
$
2,298,111

 
$
2,680,620

 
$
1,560,023

 
$
1,396,518

 
$
1,144,643

 
$
237,030

 
$
93,098

 
$
9,410,043

100.0
%
% by location
24.4
%
 
28.5
%
 
16.6
%
 
14.8
%
 
12.2
%
 
2.5
%
 
1.0
%
 
100.0
%
 
 1 Unpaid principal balance for commercial non-real estate, agriculture and commercial real estate loans includes fair value adjustments associated with long-term fixed-rate loans where we have entered into interest rate swaps to hedge our interest rate risk.
 2 Balances in this column represent acquired workout loans and certain other loans managed by our staff, commercial and consumer credit card loans, fair value adjustments related to acquisitions and loans for which we have elected the fair value option, which could result in a negative carrying amount in the event of a net negative fair value adjustment.
The following table presents additional detail regarding our agriculture, CRE and residential real estate loans at June 30, 2018.
 
June 30, 2018
 
(dollars in thousands)
Construction and development
$
733,612

Owner-occupied CRE
1,360,969

Non-owner-occupied CRE
2,123,002

Multifamily residential real estate
311,863

Commercial real estate
4,529,446

Agriculture real estate
997,835

Agriculture operating loans
1,178,483

Agriculture
2,176,318

Commercial non-real estate
1,750,827

Home equity lines of credit
242,921

Closed-end first lien
456,587

Closed-end junior lien
37,882

Residential construction
120,458

Residential real estate
857,848

Consumer
51,417

Other
44,187

Total unpaid principal balance
$
9,410,043

Commercial Real Estate. CRE includes owner-occupied CRE, non-owner-occupied CRE, construction and development lending, and multi-family residential real estate. While CRE lending will remain 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 March 31, 2018, we were ranked the sixth-largest farm lender bank in the United States measured by total dollar volume of farm loans. We consider agriculture lending one of our core competencies. We target a 20% to 30% portfolio composition for agriculture loans 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. While our

52-




borrowers have experienced volatile commodity prices over recent years, we believe there continues to typically be strong secondary sources of repayment and low borrower leverage for the agriculture loan portfolio. Continued pressure on commodity prices, including through recently imposed and proposed tariffs on the export of agricultural products, 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.
Commercial Non-Real Estate. Commercial non-real estate, or business lending, represents one of our core competencies. We believe that providing a tailored range of integrated products and services, including lending, to small- and medium-enterprise customers is the business at which we excel and through which we can generate favorable returns for our stockholders. We offer a number of different products including working capital and other shorter-term lines of credit, fixed-rate loans and variable rate loans with interest rate swaps over a wide range of terms, and variable-rate loans with varying terms. Our bank's direct exposure to energy-related borrowers is less than 2.0% of total loans.
Residential Real Estate. Residential real estate lending reflects 1-to-4-family real estate construction loans, closed-end first-lien mortgages (primarily single-family long-term first mortgages resulting from acquisitions of other banks), closed-end junior-lien mortgages and home equity lines of credit, or HELOCs. Our closed-end first-lien mortgages include a small percentage of single-family first mortgages that we originate and do not subsequently sell into the secondary market, including some jumbo products, adjustable-rate mortgages and rural home mortgages. Conversely, a large percentage of our total single-family first mortgage originations are sold into the secondary market in order to meet our interest rate risk management objectives.
Consumer. Our consumer lending offering comprises a relatively small portion of our total loan portfolio, and predominantly reflects small-balance secured and unsecured products marketed by our retail branches.
Other Lending. Other lending includes all other loan relationships that do not fit within the categories above, primarily consumer and commercial credit cards, customer deposit account overdrafts, and lease receivables.
The following table presents the maturity distribution of our loan portfolio as of June 30, 2018. The maturity dates were determined based on the contractual maturity date of the loan.
 
1 Year or Less
 
>1 Through 5
Years
 
>5 Years
 
Total
 
(dollars in thousands)
Maturity distribution:
 
 
 
 
 
 
 
Commercial real estate
$
469,368

 
$
1,996,124

 
$
2,063,954

 
$
4,529,446

Agriculture
1,065,884

 
696,761

 
413,673

 
2,176,318

Commercial non-real estate
817,916

 
476,084

 
456,827

 
1,750,827

Residential real estate
204,544

 
294,548

 
358,756

 
857,848

Consumer
8,131

 
34,920

 
8,366

 
51,417

Other lending
44,187

 

 

 
44,187

Total
$
2,610,030

 
$
3,498,437

 
$
3,301,576

 
$
9,410,043

The following table presents the distribution, as of June 30, 2018, of our loans that were due after one year between fixed and variable interest rates.
 
Fixed
 
Variable
 
Total
 
(dollars in thousands)
Maturity distribution:
 
 
 
 
 
Commercial real estate
$
1,993,685

 
$
2,066,393

 
$
4,060,078

Agriculture
851,949

 
258,485

 
1,110,434

Commercial non-real estate
597,502

 
335,409

 
932,911

Residential real estate
225,254

 
428,050

 
653,304

Consumer
34,327

 
8,959

 
43,286

Total
$
3,702,717

 
$
3,097,296

 
$
6,800,013


53-




Other Repossessed Property
In the normal course of business, we obtain title to parcels of 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 asset at an acceptable price in a timely manner. Our total other repossessed property carrying value was $10.2 million as of June 30, 2018, an increase of $1.2 million, or 13.8%, compared to September 30, 2017, primarily due to transfers into other repossessed property during the current period.
The following table presents our other repossessed property balances for the period indicated.
 
Three Months Ended June 30, 2018
 
Nine Months Ended June 30, 2018
 
(dollars in thousands)
Beginning balance
$
16,726

 
$
8,985

Additions to other repossessed property
183

 
11,188

Valuation adjustments and other
(472)

 
(997)

Sales
(6,216)

 
(8,955)

Ending balance
$
10,221

 
$
10,221

Investments
The following table presents the amortized cost of each category of our investment portfolio at the dates indicated.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
U.S. Treasury securities
$
178,774

 
$
228,039

Mortgage-backed securities:
 
 
 
Government National Mortgage Association
445,376

 
511,457

Federal Home Loan Mortgage Corporation
250,832

 
169,147

Federal National Mortgage Association
194,515

 
170,247

Small Business Assistance Program
267,428

 
224,005

States and political subdivision securities
70,509

 
73,041

Other
1,006

 
1,006

Total
$
1,408,440

 
$
1,376,942

We have historically invested 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 portfolio serves as a means to collateralize FHLB borrowings and public funds deposits, to earn net spread income on excess deposits and to maintain liquidity and balance interest rate risk. Since September 30, 2017, the fair value of the portfolio has increased by $4.8 million, or 0.3%.
The following table presents the aggregate amortized cost of each investment category of the investment portfolio and the weighted average yield for each investment category for each maturity period held at June 30, 2018. 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 weighted-average yield ("WA Yield") on these assets is presented in the following table based on the contractual rate, as opposed to a tax equivalent yield concept.

54-




 
June 30, 2018
 
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)
U.S. Treasury securities
$
109,794

1.59
%
 
$
68,980

1.67
%
 
$

%
 
$

%
 
$

%
 
$

%
 
$
178,774

1.62
%
Mortgage-backed securities

%
 

%
 

%
 

%
 
1,158,151

2.27
%
 

%
 
1,158,151

2.27
%
States and political subdivision securities ¹ ²
11,133

1.32
%
 
47,465

1.58
%
 
11,789

1.89
%
 
122

5.00
%
 

%
 

%
 
70,509

1.60
%
Other

%
 

%
 

%
 

%
 

%
 
1,006

%
 
1,006

%
Total
$
120,927

1.57
%
 
$
116,445

1.63
%
 
$
11,789

1.89
%
 
$
122

5.00
%
 
$
1,158,151

2.27
%
 
$
1,006

%
 
$
1,408,440

2.15
%
 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.
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 at 90 days past due. 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. Our collection policies related to delinquent and charged-off loans are highly focused on individual relationships, and we believe that these policies are in compliance with all applicable laws and regulations.
The following table presents the dollar amount of nonaccrual loans, other repossessed property, restructured performing loans and accruing loans over 90 days past due, at the end of the dates indicated. We entered into loss-sharing agreements with the FDIC related to certain assets (loans and other repossessed property) acquired from TierOne Bank on June 4, 2010. Loans covered by a FDIC loss-sharing agreement are generally pooled with other similar loans and are accreting purchase discount into income each period. Subject to compliance with the applicable loss-sharing agreement, we are indemnified by the FDIC at a rate of 80% for any future credit losses for single-family real estate loans and other repossessed property covered by the FDIC loss-sharing agreement through June 4, 2020. Our commercial loss-sharing agreement with the FDIC expired in 2015.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Nonaccrual loans ¹
 
 
 
Commercial real estate ³
$
29,910

 
$
14,912

Agriculture ³
81,512

 
100,504

Commercial non-real estate ³
9,152

 
13,674

Residential real estate
 
 
 
Loans covered by a FDIC loss-sharing agreement
3,230

 
4,893

Loans not covered by a FDIC loss-sharing agreement
3,455

 
4,206

Total
6,685

 
9,099

Consumer ³
56

 
123

Total nonaccrual loans covered by a FDIC loss-sharing agreement
3,230

 
4,893

Total nonaccrual loans not covered by a FDIC loss-sharing agreement
124,085

 
133,419

Total nonaccrual loans
127,315

 
138,312

Other repossessed property
10,221

 
8,985

Total nonperforming assets
137,536

 
147,297

Restructured performing loans
36,758

 
32,490

Total nonperforming and restructured assets
$
174,294

 
$
179,787

 
 
 
 
 
 
 
 
Accruing loans 90 days or more past due
$
60

 
$
1,859

Nonperforming restructured loans included in total nonaccrual loans
$
64,361

 
$
71,334

 
 
 
 

55-




 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Percent of total assets
 
 
 
Nonaccrual loans ¹
 
 
 
Loans not covered by a FDIC loss-sharing agreement
1.03
%
 
1.14
%
Total
1.06
%
 
1.18
%
Other repossessed property
0.09
%
 
0.08
%
Nonperforming assets ²
1.15
%
 
1.26
%
Nonperforming and restructured assets ²
1.45
%
 
1.54
%
 1 Includes nonperforming restructured loans
 2 Includes nonaccrual loans, which includes nonperforming restructured loans.
 3 Loans not covered by a FDIC loss-sharing agreement
At June 30, 2018 and September 30, 2017, our nonperforming assets were 1.15% and 1.26%, respectively, of total assets. Nonaccrual loans were $127.3 million as of June 30, 2018, with $3.2 million of the balance covered by a FDIC loss-sharing agreement, which represented a total decrease in nonaccrual loans of $11.0 million, or 8.0%, compared to September 30, 2017. Total other repossessed property balances were $10.2 million as of June 30, 2018, an increase of $1.2 million, or 13.8%, compared to September 30, 2017.
We recognized approximately $0.9 million of interest income on loans that were on nonaccrual for the first nine months of fiscal year 2018. Excluding loans covered by a FDIC loss-sharing agreement, we had average nonaccrual loans (calculated as a two-point average) of $128.8 million outstanding during the first nine months of fiscal year 2018. Based on the average loan portfolio yield for these loans for the first nine months of fiscal year 2018, we estimate that interest income would have been $4.7 million higher during this period had these loans been accruing.
We consistently monitor all loans internally rated “watch” or worse because that rating indicates we have identified some potential weakness emerging; but loans rated “watch” will not necessarily become problem loans or become impaired. Aside from the loans on the watch list, we do not believe we have any potential problem loans that are not already identified as nonaccrual, past due or restructured as it is our policy to promptly reclassify loans as soon as we become aware of doubts as to the borrowers’ ability to meet repayment terms.
When we grant concessions to borrowers that we would not otherwise grant if not for the borrowers’ financial difficulties, such as reduced interest rates or extensions of loan periods, we consider these modifications troubled debt restructurings ("TDRs").

56-




The following table outlines total TDRs, split between performing and nonperforming loans, at each of the dates indicated.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Commercial real estate
 
 
 
Performing TDRs
$
612

 
$
1,121

Nonperforming TDRs
2,623

 
5,351

Total
3,235

 
6,472

Agriculture
 
 
 
Performing TDRs
32,203

 
22,678

Nonperforming TDRs
57,685

 
59,633

Total
89,888

 
82,311

Commercial non-real estate
 
 
 
Performing TDRs
3,564

 
8,369

Nonperforming TDRs
3,792

 
5,641

Total
7,356

 
14,010

Residential real estate
 
 
 
Performing TDRs
299

 
311

Nonperforming TDRs
261

 
688

Total
560

 
999

Consumer
 
 
 
Performing TDRs
80

 
11

Nonperforming TDRs

 
21

Total
80

 
32

Total performing TDRs
36,758

 
32,490

Total nonperforming TDRs
64,361

 
71,334

Total TDRs
$
101,119

 
$
103,824

As of June 30, 2018, total performing TDRs increased $4.3 million, or 13.2%, compared to September 30, 2017, mainly due to the addition of a relationship in the agriculture portfolio during the period. Total nonperforming TDRs decreased $6.9 million, or 9.7%, compared to September 30, 2017 primarily driven by paydowns and transfers to other repossessed property.
The following table presents nonaccrual loans, TDRs, and other repossessed property covered by the remaining loss-sharing agreement; a rollforward of the allowance for loan and lease losses for loans covered by the remaining loss-sharing agreement; a rollforward of allowance for loan and lease losses for ASC 310-30 loans covered by the remaining loss-sharing agreement; and a rollforward of other repossessed property covered by the remaining loss-sharing agreement at and for the periods presented.
 
At and for the nine months ended June 30, 2018
 
At and for the fiscal year ended September 30, 2017
 
(dollars in thousands)
Assets covered by a FDIC loss-sharing agreement
 
 
 
Nonaccrual loans ¹
$
3,230

 
$
4,893

TDRs
162

 
191

Other repossessed property
131

 

Allowance for loan and lease losses, loans covered by a FDIC loss-sharing agreement
 
 
 
Balance at beginning of period
$
196

 
$
907

Additional impairment recorded
273

 
196

Recoupment of previously-recorded impairment
(302
)
 
(892
)
Charge-offs
(11
)
 
(15
)
Balance at end of period
$
156

 
$
196

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

 
$
106

Additions to other repossessed property
131

 
14

Sales

 
(120
)
Balance at end of period
$
131

 
$

 1 Includes nonperforming restructured loans.

57-




Allowance for Loan and Lease Losses
We establish an allowance for the inherent risk of probable losses within our loan portfolio. The allowance for loan and lease losses is management’s best estimate of probable credit losses that are incurred in the loan portfolio. We determine the allowance for loan and lease losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies and other credit risk indicators, which is an inherently subjective process. We consider the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. In addition, we consider concentration risks associated with the various loan portfolios and current economic conditions that might impact the portfolio. All of these estimates are susceptible to significant change. Changes to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses. Loans deemed to be uncollectible are charged off against the allowance for loan and lease losses. Recoveries of amounts previously charged-off are credited to the allowance for loan and lease losses.
Our allowance for loan and lease losses consists of two components. For non-impaired loans, we calculate a weighted average ratio of 12-, 36- and 60-month historical realized losses by collateral type; adjust as necessary for our interpretation of current economic conditions, environmental factors and current portfolio trends including credit quality, concentrations, aging of the portfolio and/or significant policy and underwriting changes not entirely covered by the calculated historical loss rates; and apply the loss rates to outstanding loan balances in each collateral category. We calculate the weighted average ratio of 12-, 36- and 60-month historical realized losses for each collateral type by dividing the average net annual charge-offs by the average outstanding loans of such type subject to the calculation for each of the 12-, 36- and 60-month periods, then averaging those three results. For impaired loans, we estimate our exposure for each individual relationship, given the current payment status of the loan and the value of the underlying collateral as supported by third party appraisals, broker’s price opinions, and/or the borrower’s financial statements and internal valuation assessments, each adjusted for liquidation costs. Any shortfall between the liquidation value of the underlying collateral and the recorded investment value of the loan is considered the required specific reserve amount. Actual losses in any period may exceed allowance amounts. We evaluate and adjust our allowance for loan and lease losses, and the allocation of the allowance between loan categories, each month.
The following table presents an analysis of our allowance for loan and lease losses, including provisions for loan and lease losses, charge-offs and recoveries, for the periods indicated.
 
At and for the nine months ended June 30, 2018
 
At and for the fiscal year ended September 30, 2017
 
(dollars in thousands)
Allowance for loan and lease losses:
 
 
 
Balance at beginning of period
$
63,503

 
$
64,642

Provision charged to expense
13,105

 
22,210

Recoupment of ASC 310-30 loans
(133
)
 
(671
)
Charge-offs:
 
 
 
Commercial real estate
(3,268
)
 
(2,043
)
Agriculture
(4,959
)
 
(7,853
)
Commercial non-real estate
(3,176
)
 
(12,576
)
Residential real estate
(442
)
 
(809
)
Consumer
(176
)
 
(196
)
Other lending
(1,491
)
 
(2,403
)
Total charge-offs
(13,512
)
 
(25,880
)
Recoveries:
 
 
 
Commercial real estate
326

 
485

Agriculture
275

 
415

Commercial non-real estate
349

 
652

Residential real estate
216

 
507

Consumer
90

 
102

Other lending
469

 
1,041

Total recoveries
1,725

 
3,202

Net loan charge-offs
(11,787
)
 
(22,678
)
Balance at end of period
$
64,688

 
$
63,503

Average total loans for the period ¹
$
9,125,792

 
$
8,695,672

Total loans at period end ¹
$
9,379,819

 
$
8,968,553


58-




 
At and for the nine months ended June 30, 2018
 
At and for the fiscal year ended September 30, 2017
 
(dollars in thousands)
Ratios
 
 
 
Net charge-offs to average total loans ³
0.17
%
 
0.26
%
Allowance for loan and lease losses to:
 
 
 
Total loans
0.69
%
 
0.71
%
Nonaccruing loans ²
52.13
%
 
47.60
%
 1 Loans include unpaid principal balance net of unamortized discount on acquired loans and unearned net deferred fees and costs and loans in process.
 2 Nonaccruing loans excludes loans covered by a FDIC loss-sharing agreement.
 3 Annualized for partial-year periods
In the first nine months of fiscal year 2018, net charge-offs were $11.8 million, or 0.17% of average total loans on an annualized basis, comprised of $13.5 million of charge-offs and $1.7 million of recoveries. For fiscal year 2017, net charge-offs were $22.7 million, or 0.26%, of average total loans.
At June 30, 2018, the allowance for loan and lease losses was 0.69% of our total loan portfolio, a 2 basis point decrease compared to 0.71% at September 30, 2017. The balance of the ALLL increased to $64.7 million from $63.5 million over the same period.
Additionally, a portion of our loans which are carried at fair value, totaling $888.2 million at June 30, 2018 and $1.02 billion at September 30, 2017, respectively, have no associated allowance for loan and lease losses, but rather have a fair value adjustment related to credit risk included within their carrying value, thus driving the overall ratio of allowance for loan and lease losses to total loans lower. The amount of fair value adjustment related to credit risk on these loans was $7.4 million and $8.3 million at June 30, 2018 and September 30, 2017, respectively, or 0.08% and 0.09% of total loans, respectively. Finally, total purchase discount remaining on all acquired loans equates to 0.21% and 0.32% of total loans at June 30, 2018 and September 30, 2017, respectively.
The following table presents management’s historical allocation of the allowance for loan and lease losses by loan category, in both dollars and percentage of our total allowance for loan and lease losses, to specific loans in those categories at the dates indicated.
 
June 30, 2018
 
September 30, 2017
 
Amount
 
Percent
 
Amount
 
Percent
 
(dollars in thousands)
Allocation of allowance for loan and lease losses:
 
 
 
 
 
 
 
Commercial real estate
$
17,685

 
27.3
%
 
$
16,941

 
26.7
%
Agriculture
25,289

 
39.1
%
 
25,757

 
40.6
%
Commercial non-real estate
15,860

 
24.6
%
 
14,114

 
22.2
%
Residential real estate
4,553

 
7.0
%
 
5,347

 
8.4
%
Consumer
287

 
0.4
%
 
329

 
0.5
%
Other lending
1,014

 
1.6
%
 
1,015

 
1.6
%
Total
$
64,688

 
100.0
%
 
$
63,503

 
100.0
%
Management will continue to evaluate the loan portfolio and assess economic conditions in order to determine future allowance levels and the amount of loan and lease loss provisions. We review the appropriateness of our allowance for loan and lease losses on a monthly basis. Management monitors closely all past due and restructured loans in assessing the appropriateness of its allowance for loan and lease losses. In addition, we follow procedures for reviewing and grading all substantial commercial and agriculture relationships at least annually. Based predominantly upon the review and grading process, we determine the appropriate level of the allowance in response to our assessment of the probable risk of loss inherent in our loan portfolio. Management makes additional loan and lease loss provisions when the results of its problem loan assessment methodology or overall allowance appropriateness test indicate additional provisions are required.
The review of problem loans is an ongoing process during which management may determine that additional charge-offs are required or additional loans should be placed on nonaccrual status. We have also recorded an allowance for unfunded lending-related commitments that represents our estimate of incurred losses on the portion of lending commitments that borrowers have not advanced. The balance of the allowance for unfunded lending-related commitments was $0.5 million at June 30, 2018 and September 30, 2017.

59-




Deposits
We obtain funds from depositors by offering consumer and business interest-bearing accounts and term time deposits. At June 30, 2018 and September 30, 2017, our total deposits were $9.59 billion and $8.98 billion, respectively, representing an increase of $0.61 billion, or 6.8%, which was primarily concentrated in public deposit and brokered CD accounts. Our accounts are federally insured by the FDIC up to the legal maximum.
The following table presents the balances and weighted average cost of our deposit portfolio at the following dates.
 
June 30, 2018
 
September 30, 2017
 
Amount
 
Weighted Avg. Cost
 
Amount
 
Weighted Avg. Cost
 
(dollars in thousands)
Non-interest-bearing demand
$
1,793,293

 
%
 
$
1,856,126

 
%
NOW accounts, money market and savings
6,146,508

 
0.88
%
 
5,847,432

 
0.55
%
Time certificates, $250,000 or more
372,034

 
1.70
%
 
273,365

 
1.16
%
Other time certificates
1,273,483

 
1.07
%
 
1,000,690

 
0.78
%
Total
$
9,585,318

 
0.77
%
 
$
8,977,613

 
0.48
%
At June 30, 2018 and September 30, 2017, we had $1.01 billion and $725.4 million, respectively, in brokered deposits, an increase of $288.6 million, or 39.8%, as a result of deposit funding being more cost effective during the current quarter.
Municipal public deposits constituted $1.06 billion and $843.5 million of our deposit portfolio at June 30, 2018, and September 30, 2017, respectively, of which $736.7 million and $533.3 million, respectively, were required to be collateralized. Our top 10 depositors were responsible for 10.9% and 8.5%of our total deposits at June 30, 2018 and September 30, 2017, respectively.
The following table presents deposits by region.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
South Dakota
$
2,346,727

 
$
2,231,857

Iowa / Kansas / Missouri
2,813,278

 
2,561,315

Nebraska
2,499,720

 
2,521,631

Arizona
407,230

 
377,610

Colorado
1,168,429

 
1,153,058

North Dakota / Minnesota
49,282

 
51,527

Corporate and other
300,652

 
80,615

Total deposits
$
9,585,318

 
$
8,977,613

We fund a portion of our assets with time deposits that have balances greater than $250,000 and that have maturities generally in excess of six months. At June 30, 2018 and September 30, 2017, our time deposits greater than $250,000 totaled $372.0 million and $273.4 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 June 30, 2018.
 
Greater than $250,000
 
Less than or equal to $250,000
 
(dollars in thousands)
Remaining maturity:
 
 
 
Three months or less
$
69,745

 
$
436,160

Over three through six months
69,975

 
177,566

Over six through twelve months
103,867

 
299,394

Over twelve months
128,447

 
360,363

Total
$
372,034

 
$
1,273,483

Percent of total deposits
3.9
%
 
13.3
%
At June 30, 2018 and September 30, 2017, the average remaining maturity of all time deposits was approximately 11 and 14 months, respectively. The average time deposits amount per account was approximately $36,774 and $27,870 at June 30, 2018 and September 30, 2017, respectively.

60-




Derivatives
In 2017, we began a new program of selling interest swaps directly to customers. These interest rate swaps sales are used to enable customers to achieve a long-term fixed rate by selling the customer a long-term variable rate loan indexed to LIBOR plus a credit spread whereby the Bank enters into an interest rate swap with our customer where the customer pays a fixed rate of interest set at the time of origination on the interest rate swap and then the customer receives a floating rate equal to the rate paid on the loan, thus resulting in a fixed rate of interest over the life of the interest rate swap. We 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.
Beginning in the second quarter of fiscal year 2018, the Company entered into risk participation agreements ("RPA"s) with some of its derivative counterparties to assume the credit exposure related to interest rate derivative contracts. The Company's loan customer enters into an interest rate swap directly with a derivative counterparty and the Company agrees 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 $37.4 million as of June 30, 2018. 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 $0.8 million at June 30, 2018 based on the fair value of the underlying swaps.
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 agribusiness 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 current realized gain (loss) on derivatives are not offsetting amounts within noninterest income. To ensure the correlation of movements in fair value between the interest rate swap and the related loan, we pass on all economic costs associated with our interest rate swap activity resulting from loan customer prepayments (partial or full) to the customer.
Short-Term Borrowings
Our primary sources of short-term borrowings include securities sold under repurchase agreements and certain FHLB advances maturing within 12 months. The following table presents certain information with respect to only our borrowings with original maturities less than 12 months at and for the periods noted.
 
At and for the Nine Months Ended June 30, 2018
 
At and for the Fiscal Year Ended September 30, 2017
 
(dollars in thousands)
Short-term borrowings:
 
 
 
Securities sold under agreements to repurchase
$
105,478

 
$
132,636

FHLB advances
160,000

 
587,200

Total short-term borrowings
$
265,478

 
$
719,836

 
 
 
 
Maximum amount outstanding at any month-end during the period
$
808,325

 
$
719,836

Average amount outstanding during the period
$
520,756

 
$
352,395

Weighted average rate for the period
1.32
%
 
0.70
%
Weighted average rate as of date indicated
0.96
%
 
1.24
%
We had a $10.0 million revolving line of credit with a large national bank, which expired July 28, 2018, at an interest rate of one month LIBOR plus 200 basis points. At June 30, 2018, we did not have any advances on the line of credit.

61-




Other Borrowings
In addition to FHLB short-term advances, we also have FHLB long-term borrowings of $175.0 million and $56.0 million outstanding as of June 30, 2018 and September 30, 2017.
We have outstanding $75.9 million of junior subordinated debentures to affiliated trusts in connection with the issuance of trust preferred securities by such trusts as of June 30, 2018 and September 30, 2017. We are permitted under applicable laws and regulations to count these trust preferred securities as part of our Tier 1 capital.
We issued $35.0 million of fixed-to-floating rate subordinated notes that mature on August 15, 2025 through a private placement. The notes, which qualify as Tier 2 capital under capital rules in effect at June 30, 2018, have an interest rate of 4.875% per annum, payable semi-annually on each February 15 and August 15, commencing on February 15, 2016 until August 15, 2020. During the third quarter of fiscal year 2018, we incurred $1.3 million in interest expense on all outstanding subordinated debentures and notes compared to $1.1 million in the same period in fiscal year 2017. During the first nine months of fiscal year 2018 and 2017, interest expense on all outstanding subordinated debentures and notes was $3.7 million and $3.3 million, 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 June 30, 2018. Customer deposit obligations categorized as “not determined” include noninterest-bearing demand accounts, NOW accounts, money market and savings accounts with no stated maturity date.
 
Less Than 1 Year
 
1 to 2 Years
 
2 to 5 Years
 
>5 Years
 
Not Determined
 
Total
 
(dollars in thousands)
Contractual Obligations:
 
 
 
 
 
 
 
 
 
 
 
Customer deposits
$
1,131,602

 
$
270,374

 
$
217,102

 
$
1,334

 
$
7,964,906

 
$
9,585,318

Securities sold under agreement to repurchase
105,478

 

 

 

 

 
105,478

FHLB advances and other borrowings
160,000

 
150,000

 

 
25,000

 

 
335,000

Subordinated debentures

 

 

 
75,920

 

 
75,920

Subordinated notes payable

 

 

 
35,000

 

 
35,000

Operating leases, net of sublease income
5,239

 
4,539

 
8,757

 
6,629

 

 
25,164

Accrued interest payable
7,925

 

 

 

 

 
7,925

Interest on FHLB advances
4,447

 
3,549

 
2,745

 
81

 

 
10,822

Interest on subordinated notes payable
3,455

 
3,455

 
10,364

 
39,615

 

 
56,889

Interest on subordinated debentures
1,706

 
1,706

 
5,119

 
3,631

 

 
12,162

Other Commitments:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit—non-credit card
$
1,254,564

 
$
156,602

 
$
539,790

 
$
251,091

 
$

 
$
2,202,047

Commitments to extend credit—credit card
219,617

 

 

 

 

 
219,617

Letters of credit
69,050

 

 

 

 

 
69,050

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.

62-




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.
 
June 30, 2018
 
September 30, 2017
 
(dollars in thousands)
Commitments to extend credit
$
2,421,664

 
$
2,515,653

Letters of credit
69,050

 
70,186

Total
$
2,490,714

 
$
2,585,839

Liquidity
Liquidity refers to our ability to maintain resources that are adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost.
Our liquidity risk is managed through a comprehensive framework of policies and limits overseen by our bank’s asset and liability committee. We continuously monitor and make adjustments to our liquidity position by adjusting the balance between sources and uses of funds as we deem appropriate. Our primary measures of liquidity include monthly cash flow analyses under ordinary business activities and conditions and under situations simulating a severe run on our bank. We also monitor our bank’s deposit to loan ratio to ensure high quality funding is available to support our strategic lending growth objectives, and have internal management targets for the FDIC’s liquidity ratio, net short-term non-core funding dependence ratio and non-core liabilities to total assets ratio. The results of these measures and analyses are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. We also acquire brokered deposits when the cost of funds is advantageous to other funding sources.
Great Western Bancorp, Inc. Our primary source of liquidity is cash obtained from dividends paid 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 June 30, 2018, our holding company had $56.7 million of cash. During the third quarter of fiscal year 2018, we declared and paid a dividend of $0.25 per common share. The outstanding amounts under our private placement subordinated capital notes were $35.0 million at June 30, 2018. 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.
Great Western Bank. Our bank maintains sufficient liquidity by maintaining minimum levels of excess cash reserves (measured on a daily basis), a sufficient amount of unencumbered, highly liquid assets and access to contingent funding with the FHLB. At June 30, 2018, our bank had cash of $294.6 million and $1.37 billion of highly-liquid securities held in our investment portfolio, of which $901.1 million were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. The balance could be sold to meet liquidity requirements. Our bank has a letter of credit from the FHLB, which is pledged as collateral on public deposits, for $150.0 million. Our bank had $335.0 million in FHLB borrowings at June 30, 2018, with additional available lines of $1.79 billion. Our bank also had an additional borrowing capacity of $1.52 billion with the FRB Discount Window. Our bank primarily uses liquidity to meet loan requests and commitments (including commitments under letters of credit), to accommodate outflows in deposits and to take advantage of interest rate market opportunities. At June 30, 2018, we had a total of $2.49 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.

63-




The following table presents our regulatory capital ratios at June 30, 2018 and the standards for both well-capitalized depository institutions and minimum capital requirements. Our capital ratios exceeded applicable regulatory requirements as of that date.
 
Actual
 
 
 
 
 
Capital
Amount
 
Ratio
 
Minimum Capital Requirement Ratio
 
Well Capitalized Ratio
 
(dollars in thousands)
Great Western Bancorp, Inc.
 
 
 
 
 
 
 
Tier 1 capital
$
1,179,947

 
11.8
%
 
6.0
%
 
8.0
%
Total capital
1,280,118

 
12.8
%
 
8.0
%
 
10.0
%
Tier 1 leverage
1,179,947

 
10.6
%
 
4.0
%
 
5.0
%
Common equity Tier 1
1,106,367

 
11.0
%
 
6.375
%
 
6.5
%
Risk-weighted assets
10,031,721

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Great Western Bank
 
 
 
 
 
 
 
Tier 1 capital
$
1,150,666

 
11.5
%
 
6.0
%
 
8.0
%
Total capital
1,215,837

 
12.1
%
 
8.0
%
 
10.0
%
Tier 1 leverage
1,150,666

 
10.3
%
 
4.0
%
 
5.0
%
Common equity Tier 1
1,150,666

 
11.5
%
 
6.375
%
 
6.5
%
Risk-weighted assets
10,029,221

 
 
 
 
 
 
At June 30, 2018 and September 30, 2017, our Tier 1 capital included an aggregate of $73.6 million and $73.5 million, respectively, of trust preferred securities issued by our subsidiaries. At June 30, 2018, our Tier 2 capital included $64.7 million of the allowance for loan and lease losses and $35.0 million of private placement subordinated capital notes. At September 30, 2017, our Tier 2 capital included $63.5 million of the allowance for loan and lease losses and $35.0 million of private placement subordinated capital notes. Our total risk-weighted assets were $10.03 billion at June 30, 2018.
Non-GAAP Financial Measures
We rely on certain non-GAAP measures in making financial and operational decisions about our business. We believe that each of the non-GAAP measures presented is helpful in highlighting trends in our business, financial condition and results of operations which might not otherwise be apparent when relying solely on our financial results calculated in accordance with U.S. generally accepted accounting principles, or GAAP. We disclose net interest income and related ratios and analysis on a taxable-equivalent basis, which may also be considered non-GAAP financial measures. We believe this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison of net interest income arising from taxable and tax-exempt sources. In addition, certain performance measures, including the efficiency ratio and net interest margin utilize net interest income on a taxable-equivalent basis.
In particular, we evaluate our profitability and performance based on our adjusted net income, adjusted earnings per common share, tangible net income and return on average tangible common equity. Our adjusted net income and adjusted earnings per common share exclude the after-tax effect of items with a significant impact to net income that we do not believe to be recurring in nature, (e.g., one-time acquisition expenses as well as the effect of revaluation of deferred taxes). Our tangible net income and return on average tangible common equity exclude the effects of amortization expense relating to intangible assets and related tax effects from the acquisition of us by NAB and our acquisitions of other institutions. We believe these measures help highlight trends associated with our financial condition and results of operations by providing net income and return information excluding significant nonrecurring items (for adjusted net income and adjusted earnings per share) and based on our cash payments and receipts during the applicable period (for tangible net income and return on average tangible common equity).
We also evaluate our profitability and performance based on our adjusted net interest income, adjusted net interest margin, adjusted interest income on non ASC 310-30 loans and adjusted yield on non ASC 310-30 loans. We adjust each of these four measures to include the current realized gain (loss) of derivatives we use to manage interest rate risk on certain of our loans, which we believe economically offsets the interest income earned on the loans. Similarly, we evaluate our operational efficiency based on our efficiency ratio, which excludes the effect of amortization of core deposit and other intangibles (a non-cash expense item) and includes the tax benefit associated with our tax-advantaged loans.

64-




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.
Reconciliations for each of these non-GAAP financial measures to the closest GAAP financial measures are included in the following tables. Each of the non-GAAP measures presented should be considered in context with our GAAP financial results included in this filing.
 
At or for the nine months ended:
 
At or for the three months ended:
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
(Dollars in thousands except share and per share amounts)
Adjusted net income and adjusted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income - GAAP
$
115,636

 
$
107,125

 
$
45,874

 
$
40,532

 
$
29,230

 
$
37,662

 
$
35,060

Add: Acquisition expenses, net of tax

 
440

 

 

 

 

 

Add: Deferred taxes revaluation
13,586

 

 

 

 
13,586

 

 

Adjusted net income
$
129,222

 
$
107,565

 
$
45,874

 
$
40,532

 
$
42,816

 
$
37,662

 
$
35,060

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average diluted common shares outstanding
59,134,635

 
59,065,402

 
59,170,058

 
59,146,117

 
59,087,729

 
59,914,144

 
59,130,632

Earnings per common share - diluted
$
1.96

 
$
1.81

 
$
0.78

 
$
0.69

 
$
0.49

 
$
0.64

 
$
0.59

Adjusted earnings per common share - diluted
$
2.19

 
$
1.82

 
$
0.78

 
$
0.69

 
$
0.72

 
$
0.64

 
$
0.59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible net income and return on average tangible common equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income - GAAP
$
115,636

 
$
107,125

 
$
45,874

 
$
40,532

 
$
29,230

 
$
37,662

 
$
35,060

Add: Amortization of intangible assets, net of tax
1,117

 
1,663

 
366

 
376

 
376

 
380

 
488

Tangible net income
$
116,753

 
$
108,788

 
$
46,240

 
$
40,908

 
$
29,606

 
$
38,042

 
$
35,548

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average common equity
$
1,775,767

 
$
1,689,491

 
$
1,796,066

 
$
1,770,117

 
$
1,761,127

 
$
1,740,429

 
$
1,715,460

Less: Average goodwill and other intangible assets
747,718

 
749,667

 
747,294

 
747,716

 
748,144

 
748,571

 
749,074

Average tangible common equity
$
1,028,049

 
$
939,824

 
$
1,048,772

 
$
1,022,401

 
$
1,012,983

 
$
991,858

 
$
966,386

Return on average common equity *
8.7
%
 
8.5
%
 
10.2
%
 
9.3
%
 
6.6
%
 
8.6
%
 
8.2
%
Return on average tangible common equity **
15.2
%
 
15.5
%
 
17.7
%
 
16.2
%
 
11.6
%
 
15.2
%
 
14.8
%
* Calculated as net income - GAAP divided by average common equity. Annualized for partial-year periods.
** Calculated as tangible net income divided by average tangible common equity. Annualized for partial-year periods.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income and adjusted net interest margin (fully-tax equivalent basis):
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income - GAAP
$
305,848

 
$
289,524

 
$
104,672

 
$
100,553

 
$
100,622

 
$
99,672

 
$
96,888

Add: Tax equivalent adjustment
4,910

 
6,477

 
1,729

 
1,616

 
1,565

 
2,122

 
2,154

Net interest income (FTE)
310,758

 
296,001

 
106,401

 
102,169

 
102,187

 
101,794

 
99,042

Add: Current realized derivative gain (loss)
(4,946
)
 
(11,681
)
 
(830
)
 
(1,640
)
 
(2,476
)
 
(2,714
)
 
(3,320
)
Adjusted net interest income (FTE)
$
305,812

 
$
284,320

 
$
105,571

 
$
100,529

 
$
99,711

 
$
99,080

 
$
95,722

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets
$
10,577,420

 
$
10,185,187

 
$
10,748,078

 
$
10,571,300

 
$
10,412,882

 
$
10,283,401

 
$
10,124,404

Net interest margin (FTE) *
3.93
%
 
3.89
%
 
3.97
%
 
3.92
%
 
3.89
%
 
3.93
%
 
3.92
%
Adjusted net interest margin (FTE) **
3.87
%
 
3.73
%
 
3.94
%
 
3.86
%
 
3.80
%
 
3.82
%
 
3.79
%
* Calculated as net interest income (FTE) divided by average interest earning assets. Annualized for partial-year periods.
** Calculated as adjusted net interest income (FTE) divided by average interest earning assets. Annualized for partial-year periods.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

65-




 
At or for the nine months ended:
 
At or for the three months ended:
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
(Dollars in thousands except share and per share amounts)
Adjusted interest income and adjusted yield (fully-tax equivalent basis), on non ASC 310-30 loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income - GAAP
$
324,506

 
$
293,483

 
$
112,760

 
$
106,811

 
$
104,935

 
$
102,998

 
$
98,724

Add: Tax equivalent adjustment
4,910

 
6,477

 
1,729

 
1,616

 
1,565

 
2,122

 
2,154

Interest income (FTE)
329,416

 
299,960

 
114,489

 
108,427

 
106,500

 
105,120

 
100,878

Add: Current realized derivative gain (loss)
(4,946
)
 
(11,681
)
 
(830
)
 
(1,640
)
 
(2,476
)
 
(2,714
)
 
(3,320
)
Adjusted interest income (FTE)
$
324,470

 
$
288,279

 
$
113,659

 
$
106,787

 
$
104,024

 
$
102,406

 
$
97,558

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average non ASC 310-30 loans
$
9,042,253

 
$
8,532,650

 
$
9,220,931

 
$
9,064,899

 
$
8,840,929

 
$
8,728,514

 
$
8,550,349

Yield (FTE) *
4.87
%
 
4.70
%
 
4.98
%
 
4.85
%
 
4.78
%
 
4.78
%
 
4.73
%
Adjusted yield (FTE) **
4.80
%
 
4.52
%
 
4.94
%
 
4.78
%
 
4.67
%
 
4.65
%
 
4.58
%
* Calculated as interest income (FTE) divided by average loans. Annualized for partial-year periods.
** Calculated as adjusted interest income (FTE) divided by average loans. Annualized for partial-year periods.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Efficiency ratio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenue - GAAP
$
360,203

 
$
337,998

 
$
123,611

 
$
119,295

 
$
117,296

 
$
114,412

 
$
114,215

Add: Tax equivalent adjustment
4,910

 
6,477

 
1,729

 
1,616

 
1,565

 
2,122

 
2,154

Total revenue (FTE)
$
365,113

 
$
344,475

 
$
125,340

 
$
120,911

 
$
118,861

 
$
116,534

 
$
116,369

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense
$
171,875

 
$
161,312

 
$
57,863

 
$
59,144

 
$
54,868

 
$
55,332

 
$
54,922

Less: Amortization of intangible assets
1,268

 
1,927

 
416

 
426

 
426

 
430

 
538

Tangible noninterest expense
$
170,607

 
$
159,385

 
$
57,447

 
$
58,718

 
$
54,442

 
$
54,902

 
$
54,384

Efficiency ratio *
46.7
%
 
46.3
%
 
45.8
%
 
48.6
%
 
45.8
%
 
47.1
%
 
46.7
%
* Calculated as the ratio of tangible noninterest expense to total revenue (FTE).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity and tangible common equity to tangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity
$
1,816,741

 
$
1,732,983

 
$
1,816,741

 
$
1,788,698

 
$
1,767,873

 
$
1,755,000

 
$
1,732,983

Less: Goodwill and other intangible assets
747,129

 
748,828

 
747,129

 
747,545

 
747,971

 
748,397

 
748,828

Tangible common equity
$
1,069,612

 
$
984,155

 
$
1,069,612

 
$
1,041,153

 
$
1,019,902

 
$
1,006,603

 
$
984,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
12,009,048

 
$
11,466,184

 
$
12,009,048

 
$
11,992,317

 
$
11,806,581

 
$
11,690,011

 
$
11,466,184

Less: Goodwill and other intangible assets
747,129

 
748,828

 
747,129

 
747,545

 
747,971

 
748,397

 
748,828

Tangible assets
$
11,261,919

 
$
10,717,356

 
$
11,261,919

 
$
11,244,772

 
$
11,058,610

 
$
10,941,614

 
$
10,717,356

Tangible common equity to tangible assets
9.5
%
 
9.2
%
 
9.5
%
 
9.3
%
 
9.2
%
 
9.2
%
 
9.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible book value per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity
$
1,816,741

 
$
1,732,983

 
$
1,816,741

 
$
1,788,698

 
$
1,767,873

 
$
1,755,000

 
$
1,732,983

Less: Goodwill and other intangible assets
747,129

 
748,828

 
747,129

 
747,545

 
747,971

 
748,397

 
748,828

Tangible common equity
$
1,069,612

 
$
984,155

 
$
1,069,612

 
$
1,041,153

 
$
1,019,902

 
$
1,006,603

 
$
984,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common shares outstanding
58,911,563

 
58,761,597

 
58,911,563

 
58,896,189

 
58,896,189

 
58,834,066

 
58,761,597

Book value per share - GAAP
$
30.84

 
$
29.49

 
$
30.84

 
$
30.37

 
$
30.02

 
$
29.83

 
$
29.49

Tangible book value per share
$
18.16

 
$
16.75

 
$
18.16

 
$
17.68

 
$
17.32

 
$
17.11

 
$
16.75


66-




Impact of Inflation and Changing Prices
Our financial statements included in this report 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 Pronouncements" in the accompanying "Notes to Unaudited Consolidated Financial Statements" included in this report for a discussion of new accounting pronouncements and their expected impact on our financial statements.
Critical Accounting Policies and the Impact of Accounting Estimates
There have been no material changes to our critical accounting policies and accounting estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 2018, there have been no material changes in the quantitative and qualitative information about market risk provided pursuant to Item 305 of Regulation S-K as presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
Evaluation of Interest Rate Risk
We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least monthly and compare these results against a scenario with no changes in interest rates. Our net interest income simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments on and off balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in our assets, such as floors and caps, (7) the effect of our interest rate swaps, and (8) overall growth and repayment rates and product mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.
Potential changes to our adjusted net interest income (i.e., GAAP net interest income plus current realized gain or loss on derivatives) in hypothetical rising and declining rate scenarios calculated as of June 30, 2018 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points and (2) gradual shifts downward of 100 basis points over 12 months and gradual shifts upward of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results. In a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than 0%. For the immediate-shift scenarios, we assume short-term rates follow a forward yield curve throughout the forecast period that is dictated by the instantaneously shocked yield curve from the as of date. In the gradual-shift scenarios, we take each rate across the yield curve from the as of date and shock it by 1/12th of the total change in rates each month for twelve months.

67-




 
Estimated Increase (Decrease) in Annualized Adjusted Net Interest Income for the Quarter Ended June 30, 2018
Change in Market Interest Rates as of June 30, 2018
Twelve Months Ending June 30, 2018
 
Twelve Months Ending June 30, 2019
Immediate Shifts
 
 
 
+400 basis points
10.11
 %
 
16.25
 %
+300 basis points
7.60
 %
 
12.24
 %
+200 basis points
5.09
 %
 
8.22
 %
+100 basis points
2.55
 %
 
4.15
 %
-100 basis points
(3.87
)%
 
(5.83
)%
 
 
 
 
Gradual Shifts
 
 
 
+400 basis points
2.13
 %
 
 
+300 basis points
1.61
 %
 
 
+200 basis points
1.09
 %
 
 
+100 basis points
0.55
 %
 
 
-100 basis points
(1.16
)%
 
 
We primarily use interest rate swaps to ensure that long-term fixed-rate loans are effectively re-priced as short-term rates change, which we believe would allow us to achieve these results.  The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts, such as a flattening or steepening of the yield curve or changes in interest rate spreads, would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.
For more information on our adjusted net interest income, including a reconciliation to the most directly comparable GAAP financial measures, see "—Non-GAAP Financial Measures" above.
ITEM 4.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Changes in Internal Control over Financial Reporting.  During the most recently completed fiscal quarter, there was no change made in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

68-




PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are a party to various litigation and regulatory matters incidental to the conduct of our business. We establish reserves for such matters when potential losses become probable and can be reasonably estimated. We believe the ultimate resolution of existing litigation and regulatory matters will not have a material adverse effect on our financial condition, results of operations or cash flows. However, changes in circumstances or additional information could result in additional accruals or resolution of these matters in excess of established accruals, which could adversely affect our financial condition, results of operations or cash flows, potentially materially.
ITEM 1A.
RISK FACTORS
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. See “PART I - Item 1A. - Risk Factors” of the Annual Report on Form 10-K of Great Western Bancorp, Inc., for the fiscal year ended September 30, 2017 (the “2017 Form 10-K”), which includes a detailed discussion of our risk factors. Other than as noted below, our risk factors have not changed significantly from those disclosed in our 2017 Form 10-K. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in our 2017 Form 10-K could materially affect our business, consolidated financial condition or future results of operations and the actual outcome of matters as to which forward-looking statements are made. The risk factors described in our 2017 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, consolidated financial condition and/or future results of operations.
Changes in U.S. trade policies and other factors beyond the Company’s control may adversely impact our business, financial condition and results of operations.
Following the U.S. presidential election in 2016, there has been discussion and dialogue regarding potential changes to U.S. trade policies, legislation, treaties and tariffs, including trade policies and tariffs affecting China, the European Union, Canada and Mexico and retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed, and additional tariffs and retaliation tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export, including among others, agricultural products, could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact their revenues, financial results and ability to service debt; which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate our business, results of operations and financial condition could be materially and adversely impacted in the future. It remains unclear what the U.S. Administration or foreign governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international trade agreements and policies. A trade war or other governmental action related to tariffs or international trade agreements or policies has the potential to negatively impact ours and/or our customers costs, demand for our customers products, and/or the U.S. economy or certain sectors thereof and, thus, adversely impact our business, financial condition and results of operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Equity Securities
None.
Purchases of Equity Securities
We did not repurchase any of our common stock during the third quarter of fiscal year 2018.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

69-




ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS
EX - 10.1
Employment Agreement, dated as of June 15, 2018, between Great Western Bancorp, Inc. and Karlyn M. Knieriem (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Great Western Bancorp, Inc. on July 25, 2018 (File No. 001-36688))
EX - 11.1
Statement regarding Computation of Per Share Earnings (included as Note 19 to the registrant's unaudited consolidated financial statements)
EX - 31.1
Rule 13a-14(a) Certification of Chief Executive Officer of Great Western Bancorp, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
EX - 31.2
Rule 13a-14(a) Certification of Chief Financial Officer of Great Western Bancorp, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
EX - 32.1
Section 1350 Certification of Chief Executive Officer of Great Western Bancorp, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
EX - 32.2
Section 1350 Certification of Chief Financial Officer of Great Western Bancorp, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Great Western Bancorp, Inc.

Date: August 7, 2018
By:    ______/s/_Peter Chapman_________________
Name: Peter Chapman
Title: Chief Financial Officer and Executive Vice President
(Principal Financial Officer and Authorized Officer)



71-




INDEX TO EXHIBITS
Number
 
Description
 
 
 
10.1***
Employment Agreement, dated as of June 15, 2018, between Great Western Bancorp, Inc. and Karlyn M. Knieriem (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Great Western Bancorp, Inc. on July 25, 2018 (File No. 001-36688))
 
 
11.1
Statement regarding Computation of Per Share Earnings (included as Note 19 to the registrant's unaudited consolidated financial statements)
 
 
Rule 13a-14(a) Certification of Chief Executive Officer of Great Western Bancorp, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Rule 13a-14(a) Certification of Chief Financial Officer of Great Western Bancorp, Inc. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
 
 
Section 1350 Certification of Chief Executive Officer of Great Western Bancorp, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
 
 
Section 1350 Certification of Chief Financial Officer of Great Western Bancorp, Inc. in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
 
 
101.INS**
XBRL Instance Document
 
 
101.SCH**
XBRL Taxonomy Extension Schema Document
 
 
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
* Filed herewith
 
** Furnished, not filed
 
*** Indicates management contract or compensatory plan


72-