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Section 1: 10-Q (10-Q)

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 December 31, 2016
 
 
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 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 or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
 
Accelerated filer   o
 
Non-accelerated filer o  
(Do not check if a smaller company)
 
Smaller reporting company   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 February 3, 2017, the number of shares of the registrant’s Common Stock outstanding was 58,756,598.





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” refer to:
Great Western Bancorporation, Inc., an Iowa corporation, and its consolidated subsidiaries, for all periods prior to the Formation Transactions; and
Great Western Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries, for all periods after the completion of the Formation Transactions;
“Great Western” refers to Great Western Bancorporation, Inc. but not its consolidated subsidiaries, for all periods prior to the Formation Transactions, and Great Western Bancorp, Inc. but not its consolidated subsidiaries, for all periods after the completion of the Formation Transactions;
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; and
the “Formation Transactions” means a series of transactions completed on October 17, 2014 and undertaken in preparation for our initial public offering comprised of:
the cash contribution by National Americas Holdings LLC to Great Western Bancorp, Inc. in an amount equal to the total stockholder’s equity of Great Western Bancorporation, Inc.;
the sale by National Americas Investment, Inc. of all outstanding capital stock of Great Western Bancorporation, Inc. to Great Western Bancorp, Inc. for an amount in cash equal to the total stockholder’s equity of Great Western Bancorporation, Inc.; and
the merger of Great Western Bancorporation, Inc. with and into Great Western Bancorp, Inc., with Great Western Bancorp, Inc. continuing as the surviving corporation and succeeding to all the assets, liabilities and business of Great Western Bancorporation, Inc.

3-




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 “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. 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 “Item 1A. Risk Factors” or “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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;
the effect of the current low interest rate environment or changes in market interest rates;
the geographic concentration of our operations, and our concentration on originating business and agribusiness loans;
the relative strength or weakness of the agricultural and commercial credit sectors and of the real estate markets in the markets in which our borrowers are located;
declines in the market prices for agricultural products;
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 attract and retain skilled employees or changes in our management personnel;
our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
changes in the demand for our products and services;
the effectiveness of our risk management and internal disclosure controls and procedures;
fluctuations in the values of our assets and liabilities and off-balance sheet exposures;
our ability to attract and retain customer deposits;
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;
our ability to identify and address cyber-security risks;
any failure or interruption of our information and communications systems;

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our ability to keep pace with technological changes;
our ability to successfully develop and commercialize new or enhanced products and services;
possible impairment of our goodwill and other intangible assets, or any adjustment of the valuation of our deferred tax assets;
the effects of problems encountered by other financial institutions;
the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters;
the effects of the failure of any component of our business infrastructure provided by a third party;
the impact of, and changes in applicable laws, regulations and accounting standards and policies;
market perceptions associated with our separation from NAB and other aspects of our business;
our likelihood of success in, and the impact of, litigation or regulatory actions;
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;
the incremental costs of operating as a standalone public company;
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;
our ability to retain service providers to perform oversight or control functions or services that have otherwise been performed in the past by NAB;
various risks and uncertainties associated with our recently completed acquisition of HF Financial Corp. (“HF Financial”), including, without limitation, our ability to effectively and timely integrate HF Financial’s operations into our operations, our ability to achieve the estimated synergies from the proposed transaction and the effects of the proposed transaction on our future financial condition, operating results, strategy and plans;
damage to our reputation from any of the factors described above; 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, 2016.
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, 2016. 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, whether as a result of new information, future developments or otherwise.

5-




PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)

6-




GREAT WESTERN BANCORP, INC.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
 
(Unaudited)
 
 
 
December 31, 2016
 
September 30, 2016
Assets
 
 
 
Cash and due from banks
$
113,789

 
$
142,152

Interest-bearing bank deposits
156,379

 
382,459

Cash and cash equivalents
270,168

 
524,611

Securities available for sale
1,371,558

 
1,317,386

Loans, net of unearned discounts and deferred fees, including $68,553 and $73,272 of loans covered by FDIC loss share agreements at December 31, 2016 and September 30, 2016, respectively, and $1,078,465 and $1,131,111 of loans and written loan commitments at fair value under the fair value option at December 31, 2016 and September 30, 2016, respectively, and $9,086 and $12,918 of loans held for sale at December 31, 2016 and September 30, 2016, respectively
8,779,107

 
8,682,644

Allowance for loan and lease losses
(66,767
)
 
(64,642
)
Net loans
8,712,340

 
8,618,002

Premises and equipment, including $8,067 and $8,112 of property held for sale at December 31, 2016 and September 30, 2016, respectively
117,484

 
118,506

Accrued interest receivable
49,357

 
49,531

Other repossessed property, including $40 and $106 of property covered by FDIC loss share arrangements at December 31, 2016 and September 30, 2016, respectively
8,093

 
10,282

FDIC indemnification asset
9,887

 
10,777

Goodwill
739,023

 
739,023

Core deposits and other intangibles
10,893

 
11,732

Loan servicing rights
5,278

 
5,781

Cash surrender value of life insurance policies
29,387

 
29,166

Net deferred tax assets
47,321

 
38,346

Other assets
51,828

 
58,037

Total assets
$
11,422,617

 
$
11,531,180

Liabilities and stockholders’ equity
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
1,954,881

 
$
1,880,512

Interest-bearing
6,751,366

 
6,724,278

Total deposits
8,706,247

 
8,604,790

Securities sold under agreements to repurchase
142,741

 
141,688

FHLB advances and other borrowings
711,029

 
871,037

Subordinated debentures and subordinated notes payable
108,178

 
111,873

Fair value of derivatives
17,882

 
81,515

Accrued interest payable
4,592

 
4,074

Accrued expenses and other liabilities
53,310

 
52,812

Total liabilities
9,743,979

 
9,867,789

Stockholders’ equity
 
 
 
Common stock, $0.01 par value, authorized 500,000,000 shares; 58,755,989 shares issued and outstanding at December 31, 2016 and 58,693,304 shares issued and outstanding at September 30, 2016
587

 
587

Additional paid-in capital
1,313,982

 
1,312,347

Retained earnings
371,845

 
344,923

Accumulated other comprehensive income (loss)
(7,776
)
 
5,534

Total stockholders' equity
1,678,638

 
1,663,391

Total liabilities and stockholders' equity
$
11,422,617

 
$
11,531,180

See accompanying notes.

7-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
Three Months Ended December 31,
 
2016
 
2015
Interest and dividend income
 
 
 
Loans
$
101,683

 
$
87,197

Taxable securities
5,878

 
5,987

Nontaxable securities
199

 
12

Dividends on securities
300

 
213

Federal funds sold and other
346

 
75

Total interest and dividend income
108,406

 
93,484

 
 
 
 
Interest expense
 
 
 
Deposits
7,290

 
5,665

Securities sold under agreements to repurchase
115

 
139

FHLB advances and other borrowings
1,271

 
916

Subordinated debentures and subordinated notes payable
1,088

 
807

Total interest expense
9,764

 
7,527

 
 
 
 
Net interest income
98,642

 
85,957

 
 
 
 
Provision for loan and lease losses
7,049

 
3,889

 
 
 
 
Net interest income after provision for loan and lease losses
91,593

 
82,068

 
 
 
 
Noninterest income
 
 
 
Service charges and other fees
12,086

 
10,467

Wealth management fees
2,254

 
1,612

Mortgage banking income, net
2,662

 
1,270

Net gain (loss) on sale of securities

 
(354
)
Net (decrease) in fair value of loans at fair value
(64,001
)
 
(14,901
)
Net realized and unrealized gain on derivatives
58,976

 
9,439

Other
1,930

 
1,111

Total noninterest income
13,907

 
8,644

 
 
 
 
Noninterest expense
 
 
 
Salaries and employee benefits
31,634

 
25,296

Data processing
5,677

 
5,246

Occupancy expenses
4,024

 
3,591

Professional fees
2,835

 
3,108

Communication expenses
1,040

 
934

Advertising
975

 
920

Equipment expense
798

 
904

Net loss (gain) recognized on repossessed property and other related expenses
658

 
(110
)
Amortization of core deposits and other intangibles
839

 
709

Acquisition expenses
710

 

Other
3,347

 
3,622

Total noninterest expense
52,537

 
44,220

Income before income taxes
52,963

 
46,492

Provision for income taxes
16,060

 
16,031

Net income
$
36,903

 
$
30,461

 
 
 
 
Other comprehensive (loss) - change in net unrealized (loss) on securities available for sale (net of deferred income tax benefit of $8,158, and $4,662 for the three months ended December 31, 2016 and 2015, respectively)
(13,310
)
 
(7,607
)
Comprehensive income
$
23,593

 
$
22,854

 
 
 
 
Basic earnings per common share
 
 
 
Weighted average shares outstanding
58,750,522

 
55,253,712

Basic earnings per share
$
0.63

 
$
0.55

 
 
 
 
Diluted earnings per common share
 
 
 
Weighted average shares outstanding
58,991,905

 
55,393,452

Diluted earnings per share
$
0.63

 
$
0.55

 
 
 
 
Dividends per share
 
 
 
Dividends paid
$
9,981

 
$
7,733

Dividends per share
$
0.17

 
$
0.14

See accompanying notes.

8-




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, 2015
 
 
$
552

 
$
1,201,387

 
$
255,089

 
$
2,318

 
$
1,459,346

Net income
$
30,461

 

 

 
30,461

 

 
30,461

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Net change in net unrealized (loss) on securities available for sale
(7,607
)
 

 

 

 
(7,607
)
 
(7,607
)
Total comprehensive income
$
22,854

 
 
 
 
 
 
 
 
 
 
Stock-based compensation, net of tax
 
 

 
1,049

 

 

 
1,049

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.14 per share
 
 

 

 
(7,733
)
 

 
(7,733
)
Balance, December 31, 2015
 
 
$
552

 
$
1,202,436

 
$
277,817

 
$
(5,289
)
 
$
1,475,516

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2016
 
 
$
587

 
$
1,312,347

 
$
344,923

 
$
5,534

 
$
1,663,391

Net income
$
36,903

 

 

 
36,903

 

 
36,903

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
Net change in net unrealized (loss) on securities available for sale
(13,310
)
 

 

 

 
(13,310
)
 
(13,310
)
Total comprehensive income
$
23,593

 
 
 
 
 
 
 
 
 
 
Stock-based compensation, net of tax
 
 

 
1,635

 

 

 
1,635

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.17 per share
 
 

 

 
(9,981
)
 

 
(9,981
)
Balance, December 31, 2016
 
 
$
587

 
$
1,313,982

 
$
371,845

 
$
(7,776
)
 
$
1,678,638


See accompanying notes.

9-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
 
Three months ended
 
December 31, 2016
 
December 31, 2015
Operating activities
 
 
 
Net income
$
36,903

 
$
30,461

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
5,365

 
4,103

Amortization of FDIC indemnification asset
867

 
1,032

Net loss on sale of securities

 
354

Gain on redemption of subordinated debentures
(111
)
 

Net gain on sale of loans
(3,165
)
 
(1,270
)
Net loss on FDIC indemnification asset
211

 
477

Net loss (gain) on sale of premises and equipment
9

 
(8
)
Net loss (gain) from sale/writedowns of repossessed property
658

 
(110
)
Provision for loan and lease losses
7,049

 
3,889

Reversal of provision for loan servicing rights loss
(5
)
 

Stock-based compensation
1,635

 
1,049

Originations of residential real estate loans held for sale
(87,868
)
 
(59,716
)
Proceeds from sales of residential real estate loans held for sale
94,866

 
59,446

Deferred income taxes
(817
)
 
(344
)
Changes in:
 
 
 
Accrued interest receivable
174

 
2,141

Other assets
(524
)
 
4,770

FDIC clawback liability
267

 
238

Accrued interest payable, fair value of derivatives and other liabilities
(62,884
)
 
(6,018
)
Net cash (used in) provided by operating activities
(7,370
)
 
40,494

Investing activities
 
 
 
Purchase of securities available for sale
(144,530
)
 
(59,721
)
Proceeds from maturities of securities available for sale
67,468

 
55,411

Net increase in loans
(105,771
)
 
(204,582
)
(Payment) reimbursement of covered losses from FDIC indemnification claims
(188
)
 
28

Purchase of premises and equipment
(940
)
 
(2,245
)
Proceeds from sale of premises and equipment
1

 
597

Proceeds from sale of repossessed property
2,641

 
1,054

Purchase of FHLB stock
(3,000
)
 
(5,606
)
Proceeds from redemption of FHLB stock
9,512

 
9,090

Net cash used in investing activities
(174,807
)
 
(205,974
)
Financing activities
 
 
 
Net increase in deposits
101,663

 
275,553

Net increase in securities sold under agreements to repurchase
1,053

 
2,600

Proceeds from FHLB advances and other borrowings
74,999

 
75,000

Repayments on FHLB advances and other borrowings
(235,000
)
 
(205,000
)
Redemption of subordinated debentures
(5,000
)
 

Dividends paid
(9,981
)
 
(7,733
)
Net cash (used in) provided by financing activities
(72,266
)
 
140,420

Net decrease in cash and cash equivalents
(254,443
)
 
(25,060
)
Cash and cash equivalents, beginning of period
524,611

 
237,770

Cash and cash equivalents, end of period
$
270,168

 
$
212,710

Supplemental disclosure of cash flow information
 
 
 
Cash payments for interest
$
9,246

 
$
7,092

Cash payments for income taxes
$
10,574

 
$
2,792

Supplemental disclosure of noncash investing and financing activities
 
 
 
Loans transferred to repossessed properties
$
(1,110
)
 
$
(555
)
See accompanying notes.

10-




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, 2016, 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 in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations” (“ASC 805”). The Company recognizes the fair value of the assets acquired and liabilities assumed, immediately expenses transaction costs and accounts for restructuring plans separately from the business combination. There is no separate recognition of the acquired allowance for loan and lease losses on the acquirer’s balance sheet as credit related factors are incorporated directly into the fair value of the loans recorded at the acquisition date. The excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired is recorded as goodwill. Alternatively, a bargain purchase gain is recorded equal to the amount by which the fair value of assets purchased exceeds the fair value of liabilities assumed and consideration paid.
Results of operations of the acquired business are included in the consolidated statements of comprehensive income from the effective date of acquisition.
Use of Estimates
U. S. GAAP requires management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Securities
The Company classifies securities upon purchase in one of three categories: trading, held to maturity, or available for sale. Debt and equity securities held for resale are classified as trading. Debt securities for which the Company has the ability and positive intent to hold until maturity are classified as held to maturity. All other securities are classified as available for sale as they may be sold prior to maturity in response to changes in the Company’s interest rate risk profile, funding needs, demand for collateralized deposits by public entities or other reasons.
Held to maturity securities are stated at amortized cost, which represents actual cost adjusted for premium amortization and discount accretion. Available for sale securities are stated at fair value, with unrealized gains and losses, net of related taxes, included in stockholders’ equity as a component of accumulated other comprehensive income (loss).

11-




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


Trading securities are stated at fair value. Realized and unrealized gains and losses from sales and fair value adjustments of trading securities are included in other noninterest income in the consolidated statements of comprehensive income.
Purchases and sales of securities are recognized on a trade date basis. The cost of securities sold is based on the specific identification method.
Declines in the fair value of investment securities available for sale (with certain exceptions for debt securities noted below) that are deemed to be other-than-temporary are recognized in earnings as a realized loss, and a new cost basis for the securities is established. In evaluating other-than-temporary impairment, management considers the length of time and extent to which the fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Declines in the fair value of debt securities below amortized cost are deemed to be other-than-temporary in circumstances where: (1) the Company has the intent to sell a security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell a security or if it is more likely than not that the Company will be required to sell the security before recovery, an other-than-temporary impairment loss is recognized in earnings equal to the difference between the security’s amortized cost basis and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the other-than-temporary impairment write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in accumulated other comprehensive income (loss).
Interest and dividends, including amortization of premiums and accretion of discounts, are recognized as interest or dividend income when earned. Realized gains and losses on sales (using the specific identification method) and declines in value judged to be other-than-temporary are included in noninterest income in the consolidated statements of comprehensive income.
Loans
The Company’s accounting method for loans differs depending on whether the loans were originated or purchased and, for purchased loans, whether the loans were acquired at a discount related to evidence of credit deterioration since date of origination.
Originated Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their outstanding principal balance, adjusted for charge-offs, the allowance for loan and lease losses, and any unamortized deferred fees or costs. Other fees, not associated with originating a loan are recognized as fee income when earned.
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 generally 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 Company has elected to measure certain long-term loans and written loan commitments at fair value to assist in managing interest rate risk for longer-term loans. Fair value loans are fixed-rate loans having original maturities of 5 years or greater (typically between 5 and 15 years) to our business and agribusiness banking customers to assist them in facilitating their risk management strategies. The fair value option was elected upon the origination or acquisition of these loans and written loan commitments. Interest income is recognized in the same manner on loans reported at fair value as on non-fair value loans, except in regard to origination fees and costs which are recognized immediately upon closing. The changes in fair value of long-term loans and written loan commitments at fair value are reported in noninterest income.
For loans held for sale, loan fees charged or received on origination, net of certain direct loan origination costs, are recognized in income when the related loan is sold. For loans held for investment, loan fees, net of certain direct loan origination costs, are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Company is generally amortizing these amounts over the contractual lives of the loans. Commitment fees are recognized as income when received.
The Company grants commercial, agricultural, consumer, residential real estate, and other loans to customers primarily in Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower. Collateral held varies but includes

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


accounts receivable, inventory, property and equipment, residential real estate, and income-producing commercial and agricultural properties. Government guarantees are also obtained for some loans, which reduces the Company’s risk of loss.
Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value. Loans held for sale include fixed rate single-family residential mortgage loans under contract to be sold in the secondary market. In most cases, loans are carried at cost and sold within 45 days. These loans are sold with the mortgage servicing rights released. Under limited circumstances, buyers may have recourse to return a purchased loan to the Company. Recourse conditions may include early payment default, breach of representation or warranties, or documentation deficiencies.
Fair value of loans held for sale is determined based on prevailing market prices for loans with similar characteristics, sale contract prices, or, for certain portfolios, discounted cash flow analysis. Declines in fair value below cost (and subsequent recoveries) are recognized in net gain on sale of loans. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Gains or losses on sales are recognized upon delivery and included in net gain on sale of loans.
Purchased Loans
Loans acquired (non-impaired and impaired) in a business acquisition are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date.
In determining the acquisition date fair value of purchased loans with evidence of credit deterioration (“purchased impaired loans”), and in subsequent accounting, the Company generally aggregates impaired purchased consumer and certain smaller balance impaired commercial loans into pools of loans with common risk characteristics, while accounting for larger-balance impaired commercial loans individually. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level-yield method.
Management estimates the cash flows expected to be collected at acquisition and at subsequent measurement dates using internal risk models, which incorporate the estimate of key assumptions, such as default rates, loss severity, and prepayment speeds. Subsequent to the acquisition date, decreases in cash flows over those expected at the acquisition date are recognized by recording an allowance for loan and lease losses. Subsequent increases in cash flow over those expected at the acquisition date are recognized as reductions to allowance for loan and lease losses to the extent impairment was previously recognized and thereafter as interest income prospectively.
For purchased loans not deemed impaired at the acquisition date, the difference between the fair value and the unpaid principal balance of the loan at acquisition date is amortized or accreted to interest income using the effective interest method over the remaining period to contractual maturity.
Credit Risk Management
The Company’s strategy for credit risk management includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for all credit exposures. The strategy also emphasizes diversification on a geographic, industry, and customer level; regular credit examinations; and management reviews of loans exhibiting deterioration of credit quality. The credit risk management strategy also includes a credit risk assessment process that performs assessments of compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. Loan decisions are documented with respect to the borrower’s business, purpose of the loan, evaluation of the repayment sources, and the associated risks, evaluation of collateral, covenants and monitoring requirements, and risk rating rationale.
The Company categorizes its loan portfolio into six classes, which is the level at which it develops and documents a systematic methodology to determine the allowance for loan and lease losses. The Company’s six loan portfolio classes are residential real estate, commercial real estate, commercial non real estate, agriculture, consumer and other lending.
The residential real estate lending class includes loans made to consumer customers including residential mortgages, residential construction loans and home equity loans and lines. These loans are typically fixed rate loans secured by residential real estate. Home equity lines are revolving accounts giving the borrower the ability to draw and repay balances repeatedly, up to a maximum commitment, and are secured by residential real estate. Home equity lines typically have variable rate terms which are benchmarked to a prime rate. Historical loss history is the primary factor in determining the allowance for loan and lease losses for the residential real estate lending class. Key risk characteristics relevant to residential real estate lending class loans primarily relate to the borrower’s capacity and willingness to repay and include unemployment rates and other economic factors, and customer payment

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


history. These risk characteristics, among others, are reflected in the environmental factors considered in determining the allowance for loan and lease losses.
The commercial real estate lending class includes loans made to small and middle market businesses, including multifamily properties. Loans in this class are secured by commercial real estate. Historical loss history and updated loan-to-value information on collateral-dependent loans are the primary factors in determining the allowance for loan and lease losses for the commercial real estate lending class. Key risk characteristics relevant to the commercial real estate lending class include the industry and geography of the borrower’s business, purpose of the loan, repayment sources, borrower’s debt capacity and financial performance, loan covenants, and nature of pledged collateral. We consider these risk characteristics in assigning risk ratings and estimating environmental factors considered in determining the allowance for loan and lease losses.
The commercial non real estate lending class includes loans made to small and middle market businesses, and loans made to public sector customers. Loans in this class are generally secured by business assets and guaranteed by owners; cashflows are most often our primary source of repayment. Historical loss history and updated loan-to-value information on collateral-dependent loans are the primary factors in determining the allowance for loan and lease losses for the commercial non real estate lending class. Key risk characteristics relevant to the commercial non real estate lending class include the industry and geography of the borrower’s business, purpose of the loan, repayment sources, borrower’s debt capacity and financial performance, loan covenants, and nature of pledged collateral. We consider these risk characteristics in assigning risk ratings and estimating environmental factors considered in determining the allowance for loan and lease losses.
The agriculture lending class includes loans made to agricultural individuals and businesses. Loans in this class are generally secured by operating assets and guaranteed by owners; cashflows are most often our primary source of repayment. Historical loss history and updated loan-to-value information on collateral-dependent loans are the primary factors in determining the allowance for loan and lease losses for the agriculture lending class. Key risk characteristics relevant to the agriculture lending class include the geography of the borrower’s operations, commodity prices and weather patterns, purpose of the loan, repayment sources, borrower’s debt capacity and financial performance, loan covenants, and nature of pledged collateral. We consider these risk characteristics in assigning risk ratings and estimating environmental factors considered in determining the allowance for loan and lease losses.
The consumer lending class includes loans made to consumer customers including loans secured by automobiles and other installment loans, and the other lending class includes credit card loans and unsecured revolving credit lines. Historical loss history is the primary factor in determining the allowance for loan and lease losses for the consumer and other lending classes. Key risk characteristics relevant to loans in the consumer and other lending classes primarily relate to the borrower’s capacity and willingness to repay and include unemployment rates and other economic factors, and customer payment and overall credit history. These risk characteristics, among others, are reflected in the environmental factors considered in determining the allowance for loan and lease losses.
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 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.
Troubled Debt Restructurings (“TDRs”)
Loans modified under troubled debt restructurings involve granting a concession to a borrower who is experiencing financial difficulty. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection, which generally would not otherwise be considered. Our TDRs include performing and nonperforming TDRs, which consist of loans that continue to accrue interest at the loan's original interest rate as we expect to collect the remaining principal and interest on the loan, and nonaccrual TDRs, which include loans that are in a nonaccrual status and are no longer accruing interest, as we do not expect to collect the full amount of principal and interest owed from the borrower on these loans. At the time of modification (except for loans on nonaccrual status), a TDR is classified as nonperforming TDR until a six-month payment history of principal and interest payments, in accordance with the terms of the loan modification, is sustained, at which time we move the loan to a performing status (performing TDR). If we do not expect to collect all principal and interest on the loan, the modified loan is classified as a nonaccrual TDR. All TDRs are accounted for as impaired loans and are

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


included in our analysis of the allowance for loan and lease losses. A TDR that has been renewed for a borrower who is no longer experiencing financial difficulty and which yields a market rate of interest at the time of a renewal is no longer considered a TDR.
Allowance for Loan and Lease Losses (“ALLL”) and Unfunded Commitments
The Company maintains an allowance for loan and lease losses at a level management believes is appropriate to reserve for credit losses inherent in our loan portfolio. 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 is 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.
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, which is reflected in the consolidated statements of comprehensive 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 the loan is well secured and in the process of collection. 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 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 Company maintains an ALLL for acquired impaired loans accounted for under ASC 310-30, resulting from decreases in expected cash flows arising from the periodic revaluation of these loans. Any decrease in expected cash flows in the individual loan pool is generally recognized in the current provision for loan and lease losses. Any increase in expected cash flows is generally not recognized immediately but is instead reflected as an adjustment to the related loan or pool's yield on a prospective basis once any previously recorded provision for loan and lease loss has been recognized.
For acquired nonimpaired loans accounted for under ASC 310-20, the Company utilizes methods to estimate the required allowance for loan and lease losses similar to originated loans; the required reserve is compared to the net carrying value of each acquired nonimpaired loan (by class) to determine if a provision is required.
Unfunded residential mortgage loan commitments entered into in connection with mortgage loans to be held for sale are considered derivatives and are recorded at fair value and included in other liabilities on the consolidated balance sheets with changes in fair value recorded in other interest income. All other unfunded loan commitments are generally related to providing credit facilities to customers and are not considered derivatives. For purchased loans, the fair value of the unfunded credit commitments is considered in determination of the fair value of the loans recorded at the date of acquisition. Reserves for credit exposure on all other unfunded credit commitments are recorded in other liabilities on the consolidated balance sheets. We maintain a reserve for unfunded commitments at a level we believe to be sufficient to absorb estimated probable losses related to unfunded credit facilities.

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


FDIC Indemnification Asset and Clawback Liability
In conjunction with a Federal Deposit Insurance Corporation (“FDIC”) assisted transaction of TierOne Bank in 2010, the Company entered into two loss share agreements with the FDIC, one covering certain single family residential mortgage loans with the claim period ending June 2020 and one covering commercial loans and other assets, in which the claim period ended in June 2015. The agreements cover a portion of realized losses on loans, foreclosed real estate and certain other assets. The Company has recorded assets on the consolidated balance sheets (i.e. indemnification assets) representing estimated future amounts recoverable from the FDIC.
Fair values of loans covered by the loss sharing agreements at the acquisition date were estimated based on projected cash flows available based on the expected probability of default, default timing and loss given default, the expected reimbursement rates (generally 80%) from the FDIC and other relevant terms of the loss sharing agreements. The initial fair value was established by discounting these expected cash flows with a market discount rate for instruments with like maturity and risk characteristics.
The loss share assets are measured separately from the related loans and foreclosed real estate and recorded as an FDIC indemnification asset on the consolidated balance sheets because they are not contractually embedded in the loans and are not transferable with the loans should the Company choose to dispose of them. Subsequent to the acquisition date, reimbursements received from the FDIC for actual incurred losses reduce the carrying amount of the loss share assets. Reductions to expected losses on covered assets, to the extent such reductions to expected losses are the result of an improvement to the actual or expected cash flows from the covered assets, also reduce the carrying amount of the loss share assets. The rate of accretion of the indemnification asset discount included in interest income slows to mirror the accelerated accretion of the loan discount. Additional expected losses on covered assets, to the extent such expected losses result in the recognition of an allowance for loan and lease losses, increase the carrying amount of the loss share assets. A related increase in the value of the indemnification asset up to the amount covered by the FDIC is calculated based on the reimbursement rates from the FDIC and is included in other noninterest income. The corresponding loan accretion or amortization is recorded as a component of interest income on the consolidated statements of comprehensive income. Although these assets are contractual receivables from the FDIC, there are no contractual interest rates.
As part of the loss sharing agreements, the Company also assumed a liability (“FDIC Clawback Liability”) to be paid within 45 days subsequent to the maturity or termination of the loss sharing agreements that is contingent upon actual losses incurred over the life of the agreements relative to expected losses considered in the consideration paid at acquisition date and the amount of losses reimbursed to the Company under the loss sharing agreements. The liability was recorded at fair value as of the acquisition date. The fair value was based on a discounted cash flow calculation that considered the formula defined in the loss sharing agreements and projected losses. The difference between the fair value at acquisition date and the projected losses is amortized through other noninterest expense. As projected losses and reimbursements are updated, as described above, the FDIC Clawback Liability is adjusted and a gain or loss is recorded in other noninterest expense.
Goodwill
Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business acquisitions. Goodwill is evaluated annually for impairment. The Company performs its impairment evaluation as of June 30 of each fiscal year. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill are not recognized in the consolidated financial statements. No goodwill impairment was recognized during the three months ended December 31, 2016 and 2015.
Core Deposits and Other Intangibles
Intangible assets consist of core deposits, brand intangible, customer relationships, and other intangibles. Core deposits represent the identifiable intangible value assigned to core deposit bases arising from purchase acquisitions. Brand intangible represents the value associated with the Bank charter. Customer relationships intangible represents the identifiable intangible value assigned to customer relationships arising from a purchase acquisition. Other intangibles represent contractual franchise arrangements under which the franchiser grants the franchisee the right to perform certain functions within a designated geographical area. The methods and lives used to amortize intangible assets are as follows:

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


Intangible
Method
 
Years
Core deposit
Straight-line or effective yield
 
5 - 10
Brand intangible
Straight-line
 
15
Customer relationships
Straight-line
 
8.5
Other intangibles
Straight-line
 
1.25 - 9.33

Intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. No intangible asset impairments were recognized during the periods ended December 31, 2016 and 2015.
Loan Servicing Rights
The loan servicing rights asset recognized as part of the HF Financial acquisition was initially recorded at fair value. These servicing rights have subsequently been accounted for using the lower of cost or fair value method. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income using key assumptions such as prepayment speeds and discount rate. The asset is amortized into mortgage banking income, net on the consolidated statements of comprehensive income in proportion to and over the period of estimated net servicing income.
Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to noninterest income. If the Company determines the impairment to be permanent, the valuation is written off against the loan servicing rights, which results in a new amortized balance. Changes in the valuation allowance are reported in mortgage banking income, net in the consolidated statements of comprehensive income. The fair value of loan servicing rights is subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Estimating future cash flows on the underlying mortgages is a difficult analysis and requires judgment based on the best information available. Based on the Company's analysis of loan servicing rights, a valuation allowance of $0.0 million was recorded at December 31, 2016 and 2015, respectively.
Servicing fee income, which is reported in noninterest income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding balance or a fixed amount per loan and are recorded as income as earned. The amortization of loan servicing rights is netted against mortgage banking income, net in the consolidated statements of comprehensive income.
Bank Owned Life Insurance (“BOLI”)
BOLI represents life insurance policies on the lives of certain Company officers or former officers for which the Company is the beneficiary. The carrying amount of bank owned life insurance consists of the initial premium paid plus increases in cash value less the carrying amount associated with any death benefits received. Death benefits paid in excess of the applicable carrying amount are recognized as income, which is exempt from income taxes.
Derivatives
The Company maintains an overall interest rate risk management strategy that permits the use of derivative instruments to modify exposure to interest rate risk. The Company enters into interest rate swap contracts to offset the interest rate risk associated with borrowers who lock in long-term fixed rates (greater than or equal to 5 years to maturity) through a fixed rate loan. Generally, under these swaps, the Company agrees with various swap counterparties to exchange the difference between fixed-rate and floating-rate interest amounts based upon notional principal amounts. These contracts do not qualify for hedge accounting. These interest rate derivative instruments are recognized as assets and liabilities on the consolidated balance sheets and measured at fair value, with changes in fair value reported in net realized and unrealized gain (loss) on derivatives. Since each fixed rate loan is paired with an offsetting derivative contract, the impact to net income is minimized. The Company also has back to back swaps with loan customers where the Company enters into an interest rate swap with loan customers to provide a facility to mitigate the interest rate risk associated with offering a fixed rate and simultaneously enters into a swap with an outside third party that is matched in exact offsetting terms. The back to back swaps are recorded at fair value and recognized as assets and liabilities, depending on the rights or obligations under the contract, in fair value of derivatives on the consolidated balance sheet, with changes in fair value reported in net realized and unrealized gain (loss) on derivatives.

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


The Company enters into forward interest rate lock commitments on mortgage loans to be held for sale, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding. The Company also has corresponding forward sales contracts related to these interest rate lock commitments. Both the mortgage loan commitments and the related sales contracts are considered derivatives and are recorded at fair value with changes in fair value recorded in noninterest income.
Stock Based Compensation
Restricted and performance-based stock units/awards are classified as equity awards and accounted for under the treasury stock method. Compensation expense for non-vested stock units/awards is based on the fair value of the award on the measurement date, which, for the Company, is the date of the grant and is recognized ratably over the vesting or performance period of the award. The fair value of non-vested stock units/awards is generally the market price of the Company's stock on the date of grant.
Income Taxes
Income taxes are allocated pursuant to a tax-sharing arrangement, whereby the Company will pay federal and state income taxes as if it were filing on a stand-alone basis. Income tax expense includes two components: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over income. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Tax benefits related to uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term "more likely than not" means a likelihood of more than 50 percent; the terms "examined" and "upon examination" also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.
The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company-put presumptively beyond reach of the Company and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at amounts at which the securities were financed, plus accrued interest.
Defined Benefit Plan
The Company assumed plan sponsorship of the HF Financial Corp. Pension Plan as part of the HF Financial acquisition. Defined benefit pension obligation and related costs are calculated using actuarial concepts and measurements. Three critical assumptions, the discount rate, the expected long-term rate of return on plan assets, and mortality rates are important elements of expense and/or benefit obligation measurements. Other assumptions involve employee demographic factors such as retirement patterns and turnover. The Company evaluates all assumptions annually. For the pension valuation performed as of September 30, 2016, mortality assumptions were based on the RP-2014 mortality tables and the MP 2015 projection scales.
The discount rate enables the Company to state expected future benefit payments as a present value on the measurement date. The Company determined the discount rate for the pension valuation as of September 30, 2016 by utilizing the standard duration index

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


from the Citi Pension Discount Curve and Liability Index. A lower discount rate increases the present value of benefit obligations and increases pension expense.
To determine expected long-term rate of return on defined benefit pension plan assets, the Company considers the current asset allocation of the defined benefit pension plan, as well as historical and expected returns on each asset class. A lower expected rate of return on defined pension plan assets will increase pension expense.
The Company recognizes the over- or under-funded status of a plan as an other asset or other liability in the consolidated balance sheets as measured by the difference between the fair value of the plan assets and the projected benefit obligation. When recorded, unrecognized prior service costs and actuarial gains and losses are recognized as a component of accumulated other comprehensive income (loss).
Revenue Recognition
The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. Certain specific policies related to service charges and other fees include the following:
Deposit Service Charges
Service charges on deposit accounts are primarily fees related to customer overdraft events and not sufficient funds fees, net of any refunded fees, and are recognized as transactions occur and services are provided. Service charges on deposit accounts also relate to monthly fees based on minimum balances, and are earned as transactions occur and services are provided.
Interchange Fees
Interchange fees include interchange income from consumer debit card transactions processed through card association networks. Interchange income is a fee paid by a merchant bank to the card-issuing bank through the interchange network. Interchange fees are set by the card association networks and are based on cardholder purchase volumes.
Wealth Management Fees
Wealth management fees include commission income from financial planning, investment management and insurance operations.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income (loss) consists entirely of unrealized appreciation (depreciation) on available for sale securities.
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 January 26, 2017, the board of directors of the Company declared a dividend of $0.17 per common share payable on February 21, 2017 to stockholders of record as of close of business on February 10, 2017.
2. New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2017-04 on our consolidated financial statements.
In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment provides a screen to determine when an integrated set of assets and activities (a "set") is not a business. The screen requires that when substantially all of

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


the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The amendment also provides a more robust framework to use in determining when a set of assets and activities is a business. ASU 2017-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the potential impact of ASU 2017-01 on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which addresses diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2016-18 on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests held through Related Parties that are under Common Control, which alters how a decision maker needs to consider indirect interests in a variable interest entity held through an entity under common control and simplifies that analysis to require consideration of only an entity’s proportionate indirect interest in a VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, Consolidations (Topic 810): Amendments to the Consolidation Analysis, which was not effective for the Company in the current fiscal year. ASU 2016-17 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2016-17 on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Equity Transfers of Assets Other Than Inventory, which addresses improvement in accounting for income tax consequences of intra-equity transfers of assets other than inventory. This update requires that an entity recognize the income tax consequences of the intra-equity transfer of an asset other than inventory when the transfer occurs. The update eliminates the exception for an intra-equity transfer for assets other than inventory. ASU 2016-16 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendment requires the use of a modified retrospective transaction approach through a cumulative effect adjustment directly to retained earnings as of the beginning of adoption. The Company is currently evaluating the potential impact of ASU 2016-16 on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in presentations and classification in the statement of cash flows. The eight specific cash flow issues addressed include: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The amendment requires the use of the retrospective transaction approach for adoption. The Company is currently evaluating the potential impact of ASU 2016-15 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 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. The ASU 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. The ASU 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 is currently evaluating the potential impact of ASU 2016-13 on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Based Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which addresses several aspects of the accounting for share-based payment

20-




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


transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Earlier application is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently planning to implement ASU 2016-09 in fiscal year 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires that lessees recognize the assets and liabilities arising from leases on the balance sheet. ASU 2015-16 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.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2016-01 on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14 which deferred the effective date of ASU No. 2014-09 to annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU No. 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 No. 2016-10, which clarifies guidance pertaining to the identification of performance obligations and the licensing implementation. In May 2016, the FASB issued ASU Nos. 2016-11 and 2016-12, which further clarify guidance and provide practical expedients related to the adoption of ASU No. 2014-09. In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements to Topic 606, which provides additional clarification and improvements for the following areas: loan guarantee fees, contract costs-impairment testing, provision for losses on construction-type and production-type contracts, cost capitalization guidance, and disclosure requirements. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the potential impact of these standards on our consolidated financial statements.
3. Acquisition Activity
On May 16, 2016, the Company acquired by merger 100% of HF Financial, the holding company of Home Federal Bank. Under terms of the agreement, HF Financial's stockholders had the right to receive for each share of HF Financial common stock, at their election (but subject to proration in the event cash or stock is oversubscribed), either (i) 0.6500 share of the Company's common stock, or (ii) $19.50 in cash. The total consideration was prorated as necessary to ensure that 24.29% of the total outstanding shares of HF Financial common stock were exchanged for cash and 75.71% of the total outstanding shares of HF Financial common stock were exchanged for shares of the Company's common stock. Total merger consideration of $142.0 million was paid by the Company in the acquisition, which resulted in goodwill of $41.2 million, as shown in the table below. With this acquisition, the Company expanded its presence in South Dakota and into North Dakota and Minnesota through the addition of 23 bank offices and experienced in-market teams. The following summarizes consideration paid and an allocation of purchase price to net assets acquired.
 
Number of Shares
 
Amount
 
 
 
(dollars in thousands)
Equity consideration:
 
 
 
Common stock issued
3,448,119

 
$
107,478

Non-equity consideration:
 
 
 
Cash
 
 
34,487

Total consideration paid
 
 
141,965

Fair value of net assets acquired including identifiable intangible assets
 
 
100,749

Goodwill
 
 
$
41,216


21-




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


As of the acquisition date, goodwill of $41.2 million arose from the acquisition arose as a result of consideration in excess of net assets acquired. No goodwill is expected to be deductible for income tax purposes. The fair value of intangible assets created in the acquisition was $14.5 million related to core deposits and other intangible assets and loan servicing rights. During the fourth quarter of 2016, the Company obtained additional information regarding the valuation of the deferred tax assets, which resulted in an increase in goodwill recognized in the transaction of $0.6 million. There were no adjustments to current period income statement as a result of the adjustment.
The following table summarizes the assets acquired and liabilities assumed which were recorded on the consolidated balance sheet as of the date of merger of HF Financial:
 
 
Fair Value
 
 
(dollars in thousands)
Identifiable assets acquired:
 
 
Cash and cash equivalents
 
$
18,818

Investment securities
 
165,052

Loans
 
863,741

Premises and equipment
 
19,220

Accrued interest receivable
 
4,117

Other repossessed property
 
4

Intangible assets
 
7,877

Loan servicing rights
 
6,573

Other assets
 
36,076

Total identifiable assets acquired
 
$
1,121,478

 
 
 
Liabilities assumed:
 
 
Deposits
 
$
863,121

FHLB advances and other borrowings
 
115,881

Subordinated debentures
 
21,110

Other liabilities
 
20,617

Total liabilities assumed
 
1,020,729

Fair value of net identifiable assets acquired
 
100,749

Net purchase price
 
141,965

Goodwill
 
$
41,216

The Company accounted for the aforementioned business combination under the acquisition method in accordance with ASC Topic 805, Business Combinations. Accordingly, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of acquisition. The foregoing purchase price allocations on the acquisition are preliminary and will be finalized upon the receipt of final valuations on certain assets and liabilities. Upon receipt of final fair value estimates, which must be within one year of the acquisition date, the Company will make any final adjustments to the purchase price allocation and retrospectively adjust any goodwill recorded. Material adjustments to acquisition date estimated fair values would be recorded in the reporting period in which the adjustment amounts are determined. Determining the fair value of assets and liabilities, particularly illiquid assets and liabilities, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair value. Fair value adjustments based on updated estimates could materially affect the goodwill recorded on the acquisition. The Company may incur losses on the acquired loans that are materially different from losses the Company originally projected.
The results of the merged HF Financial operations are presented within the Company’s consolidated financial statements from the acquisition date. The disclosure of HF Financial's post-acquisition revenue and net income is not practical due to the combining of HF Financial’s operations with and into the Company as of the acquisition date. Acquisition-related transaction expenses associated with the HF Financial acquisition totaled $0.7 million and $0.0 million for the three months ended December 31, 2016 and 2015, respectively.

22-




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


Supplemental pro forma information (unaudited)
The following unaudited pro forma combined results of operations of the Company and HF Financial presents results as if the acquisition had been completed as of the beginning of each period indicated. The unaudited pro forma combined results of operations are presented solely for information purposes and are not intended to represent or be indicative of the consolidated results of operations that the Company would have reported had this transaction been completed as of the dates and for the periods presented, nor are they necessarily indicative of future results. In particular, no adjustments have been made to eliminate the amount of HF Financial's provision for loan and lease losses incurred prior to the acquisition date that would not have been necessary had the acquired loans been recorded at fair value as of the beginning of each period indicated. In accordance with Article 11 of SEC Regulation S-X, transaction costs directly attributable to the acquisition have been excluded.
 
Three Months Ended December 31,
 
2016
 
2015
 
(Unaudited, dollars in thousands, except per share data)
Net interest income
$
98,642

 
$
95,443

Net income
36,903

 
31,939

Basic earnings per share
0.63

 
0.58

Fully diluted earnings per share
0.63

 
0.58

In the acquisition, the Company acquired $863.7 million of loans at fair value, net of $28.5 million, or 3.30%, estimated discount to the outstanding principal balance. Of the total loans acquired, management identified $65.4 million that were considered to be credit impaired and are accounted for under ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management's estimate of expected total cash payments and fair value of the loans as of acquisition date for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.
 
Amount
 
(Unaudited, dollars in thousands)
Contractually required principal and interest
$
83,710

Non-accretable difference
(28,516
)
Cash flows expected to be collected
55,194

Accretable yield
(3,662
)
Total purchased credit impaired loans acquired
$
51,532

The following table presents the acquired loan data for the HF Financial acquisition.
 
Fair Value of Acquired Loans at Acquisition Date
 
Gross Contractual Amounts Receivable at Acquisition Date
 
Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
 
(Unaudited, dollars in thousands)
Acquired receivables subject to ASC 310-30
$
51,532

 
$
83,710

 
$
28,516

Acquired receivables not subject to ASC 310-30
812,209

 
998,255

 
9,572


23-




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


4. 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 December 31, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
227,265

 
$
1,417

 
$
(15
)
 
$
228,667

Mortgage-backed securities:
 
 
 
 
 
 
 
Government National Mortgage Association
633,330

 
485

 
(8,123
)
 
625,692

Federal National Mortgage Association
281,741

 

 
(3,179
)
 
278,562

Small Business Assistance Program
167,328

 
283

 
(1,653
)
 
165,958

States and political subdivision securities
68,410

 
2

 
(1,808
)
 
66,604

Corporate debt securities
4,998

 
24

 

 
5,022

Other
1,013

 
40

 

 
1,053

Total
$
1,384,085

 
$
2,251

 
$
(14,778
)
 
$
1,371,558

 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
 
(dollars in thousands)
As of September 30, 2016
 
 
 
 
 
 
 
U.S. Treasury securities
$
227,007

 
$
3,973

 
$

 
$
230,980

U.S. Agency securities

 

 

 

Mortgage-backed securities:
 
 
 
 
 
 
 
Government National Mortgage Association
664,529

 
3,172

 
(1,922
)
 
665,779

Federal National Mortgage Association
212,452

 
1,324

 

 
213,776

Small Business Assistance Program
142,921

 
2,362

 

 
145,283

States and political subdivision securities
55,525

 
123

 
(164
)
 
55,484

Corporate debt securities
4,998

 
24

 

 
5,022

Other
1,013

 
49

 

 
1,062

Total
$
1,308,445

 
$
11,027

 
$
(2,086
)
 
$
1,317,386

The amortized cost and approximate fair value of debt securities available for sale as of December 31, 2016 and September 30, 2016, 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.
 
December 31, 2016
 
September 30, 2016
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
 
(dollars in thousands)
Due in one year or less
$
5,182

 
$
5,173

 
$
3,706

 
$
3,709

Due after one year through five years
274,901

 
275,386

 
265,253

 
269,242

Due after five years through ten years
20,468

 
19,612

 
18,449

 
18,413

Due after ten years
122

 
122

 
122

 
122


300,673

 
300,293

 
287,530

 
291,486

Mortgage-backed securities
1,082,399

 
1,070,212

 
1,019,902

 
1,024,838

Securities without contractual maturities
1,013

 
1,053

 
1,013

 
1,062

Total
$
1,384,085

 
$
1,371,558

 
$
1,308,445

 
$
1,317,386


24-




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


Proceeds from sales of securities available for sale were $0.0 million for the three months ended December 31, 2016 and 2015, respectively. Gross gains (pre-tax) of $0.0 million and gross losses (pre-tax) of $0.0 million were realized on the sales for the three months ended December 31, 2016 and 2015, respectively, using the specific identification method. The Company recognized no other-than-temporary impairment for the three months ended December 31, 2016. The Company recognized an other-than-temporary impairment in net loss on sale of securities in the consolidated statements of comprehensive income of $0.4 million on two security holdings attributable to credit for the three months ended December 31, 2015.
Securities with an estimated fair value of approximately $952.0 million and $971.3 million at December 31, 2016 and September 30, 2016, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by 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 76% and 25% of the Company’s investment portfolio at December 31, 2016 and September 30, 2016, 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 that 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 December 31, 2016 or September 30, 2016.
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:
 
 
 
 
 
December 31, 2016
 
 
 
 
 
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)
U.S. Treasury securities
$

 
$

 
$
9,463

 
$
(15
)
 
$
9,463

 
$
(15
)
Mortgage-backed securities
320,099

 
(4,424
)
 
643,908

 
(8,531
)
 
964,007

 
(12,955
)
States and political subdivision securities
63,813

 
(1,808
)
 

 

 
63,813

 
(1,808
)
Total
$
383,912

 
$
(6,232
)
 
$
653,371

 
$
(8,546
)
 
$
1,037,283

 
$
(14,778
)
 
 
 
 
 
September 30, 2016
 
 
 
 
 
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)
U.S. Treasury securities
$

 
$

 
$

 
$

 
$

 
$

Mortgage-backed securities
$
17,528

 
$
(6
)
 
$
284,995

 
$
(1,916
)
 
$
302,523

 
$
(1,922
)
States and political subdivision securities
27,933

 
(164
)
 

 

 
27,933

 
(164
)
Total
$
45,461

 
$
(170
)
 
$
284,995

 
$
(1,916
)
 
$
330,456

 
$
(2,086
)
As of December 31, 2016 and September 30, 2016, the Company had 297 and 110 securities, respectively, in an unrealized loss position.

25-




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


The components of accumulated other comprehensive income (loss) from net unrealized gains (losses) on securities available for sale for the three months ended December 31, 2016 and 2015, are as follows:
 
Three Months Ended
December 31,
 
2016
 
2015
 
(dollars in thousands)
Beginning balance accumulated other comprehensive income
$
5,534

 
$
2,318

Net unrealized holding (loss) arising during the period
(21,468
)
 
(11,915
)
Reclassification adjustment for net gain (loss) realized in net income

 
(354
)
Net change in unrealized (loss) before income taxes
(21,468
)
 
(12,269
)
Income tax benefit
8,158

 
4,662

Net change in unrealized (loss) on securities after taxes
(13,310
)
 
(7,607
)
Ending balance accumulated other comprehensive (loss)
$
(7,776
)
 
$
(5,289
)
5. Loans
The composition of loans as of December 31, 2016 and September 30, 2016, is as follows:
 
December 31, 2016
 
September 30, 2016
 
(dollars in thousands)
Residential real estate
$
1,008,325

 
$
1,020,958

Commercial real estate
3,852,104

 
3,754,107

Commercial non real estate
1,643,986

 
1,673,166

Agriculture
2,206,263

 
2,168,937

Consumer
71,795

 
76,273

Other
47,569

 
42,477

Ending balance
8,830,042

 
8,735,918

Less: Unamortized discount on acquired loans
(37,304
)
 
(39,947
)
Unearned net deferred fees and costs and loans in process
(13,631
)
 
(13,327
)
Total
$
8,779,107

 
$
8,682,644

The loan breakouts above include loans covered by FDIC loss sharing agreements totaling $68.6 million and $73.3 million as of December 31, 2016 and September 30, 2016, respectively, residential real estate loans held for sale totaling $9.1 million and $12.9 million at December 31, 2016 and September 30, 2016, respectively, and $1.08 billion and $1.13 billion of loans and written loan commitments accounted for at fair value at December 31, 2016 and September 30, 2016, respectively.
Unearned net deferred fees and costs totaled $9.2 million and $8.6 million as of December 31, 2016 and September 30, 2016, 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 $4.4 million and $4.7 million at December 31, 2016 and September 30, 2016, respectively.
Loans guaranteed by agencies of the U.S. government totaled $148.5 million and $120.0 million at December 31, 2016 and September 30, 2016, respectively.
Principal balances of residential real estate loans sold totaled $91.7 million and $58.2 million for the three months ended December 31, 2016 and 2015, respectively.

26-




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


Nonaccrual
The following table presents the Company’s nonaccrual loans at December 31, 2016 and September 30, 2016, excluding ASC 310-30 loans. Loans greater than 90 days past due and still accruing interest as of December 31, 2016 and September 30, 2016, were $0.1 million and $2.0 million, respectively.
 
December 31, 2016
 
September 30, 2016
Nonaccrual loans
(dollars in thousands)
Residential real estate
$
5,602

 
$
5,962

Commercial real estate
13,399

 
13,870

Commercial non real estate
28,203

 
27,280

Agriculture
65,032

 
66,301

Consumer
190

 
223

Total
$
112,426

 
$
113,636

Credit Quality Information
The composition of the loan portfolio by internally assigned grade is as follows as of December 31, 2016 and September 30, 2016. 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 $1.08 billion at December 31, 2016 and $1.13 billion at September 30, 2016:
As of December 31, 2016
Residential Real Estate
 
Commercial Real Estate
 
Commercial Non Real Estate
 
Agriculture
 
Consumer
 
Other
 
Total
Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
912,174

 
$
3,432,849

 
$
1,056,226

 
$
1,541,184

 
$
70,709

 
$
47,569

 
$
7,060,711

Watchlist
5,175

 
66,334

 
40,372

 
222,682

 
110

 

 
334,673

Substandard
10,150

 
52,111

 
41,328

 
145,573

 
356

 

 
249,518

Doubtful
95

 
140

 
360

 
206

 
19

 

 
820

Ending balance
927,594

 
3,551,434

 
1,138,286

 
1,909,645

 
71,194

 
47,569

 
7,645,722

Loans covered by FDIC loss sharing agreements
68,553

 

 

 

 

 

 
68,553

Total
$
996,147

 
$
3,551,434

 
$
1,138,286

 
$
1,909,645

 
$
71,194

 
$
47,569

 
$
7,714,275

As of September 30, 2016
Residential Real Estate
 
Commercial Real Estate
 
Commercial Non Real Estate
 
Agriculture
 
Consumer
 
Other
 
Total
Credit Risk Profile by Internally Assigned Grade
(dollars in thousands)
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
919,224

 
$
3,276,048

 
$
1,093,913

 
$
1,514,344

 
$
75,065

 
$
42,477

 
$
6,921,071

Watchlist
4,741

 
81,148

 
37,283

 
204,326

 
110

 

 
327,608

Substandard
10,885

 
57,415

 
42,319

 
130,569

 
417

 

 
241,605

Doubtful
130

 
147

 
395

 
630

 

 

 
1,302

Ending balance
934,980

 
3,414,758

 
1,173,910

 
1,849,869

 
75,592

 
42,477

 
7,491,586

Loans covered by FDIC loss sharing agreements
73,272

 

 

 

 

 

 
73,272

Total
$
1,008,252

 
$
3,414,758

 
$
1,173,910

 
$
1,849,869

 
$
75,592

 
$
42,477

 
$
7,564,858


27-




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


Past Due Loans
The following table presents the Company’s past due loans at December 31, 2016 and September 30, 2016. 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 $1.08 billion at December 31, 2016 and $1.13 billion at September 30, 2016.
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total Past Due
 
Current
 
Total Financing Receivables
As of December 31, 2016
(dollars in thousands)
Residential real estate
$
1,866

 
$
271

 
$
2,026

 
$
4,163

 
$
923,431

 
$
927,594

Commercial real estate
4,839

 
454

 
5,366

 
10,659

 
3,540,775

 
3,551,434

Commercial non real estate
1,105

 
5,668

 
12,210

 
18,983

 
1,119,303

 
1,138,286

Agriculture
6,378

 
146

 
8,598

 
15,122

 
1,894,523

 
1,909,645

Consumer
184

 
24

 
31

 
239

 
70,955

 
71,194

Other

 

 

 

 
47,569

 
47,569

Ending balance
14,372

 
6,563

 
28,231

 
49,166

 
7,596,556

 
7,645,722

Loans covered by FDIC loss sharing agreements
1,042

 
512

 
466

 
2,020

 
66,533

 
68,553

Total
$
15,414

 
$
7,075

 
$
28,697

 
$
51,186

 
$
7,663,089

 
$
7,714,275

 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total Past Due
 
Current
 
Total Financing Receivables
As of September 30, 2016
(dollars in thousands)
Residential real estate
$
828

 
$
548

 
$
2,063

 
$
3,439

 
$
931,541

 
$
934,980

Commercial real estate
1,765

 
1,959

 
3,745

 
7,469

 
3,407,289

 
3,414,758

Commercial non real estate
1,588

 
5,515

 
9,594

 
16,697

 
1,157,213

 
1,173,910

Agriculture
(26
)
 
709

 
11,549

 
12,232

 
1,837,637

 
1,849,869

Consumer
209

 
20

 
28

 
257

 
75,335

 
75,592

Other

 

 

 

 
42,477

 
42,477

Ending balance
4,364

 
8,751

 
26,979

 
40,094

 
7,451,492

 
7,491,586

Loans covered by FDIC loss sharing agreements
1,404

 
1,173

 
367

 
2,944

 
70,328

 
73,272

Total
$
5,768

 
$
9,924

 
$
27,346

 
$
43,038

 
$
7,521,820

 
$
7,564,858

Impaired Loans
The following table presents the Company’s impaired loans. This table excludes loans covered by FDIC loss sharing agreements:
 
December 31, 2016
 
September 30, 2016
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
Impaired loans:
(dollars in thousands)
With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
5,941

 
$
6,595

 
$
2,944

 
$
6,244

 
$
6,886

 
$
3,000

Commercial real estate
20,794

 
23,304

 
2,471

 
29,965

 
32,349

 
3,846

Commercial non real estate
37,168

 
39,894

 
7,220

 
34,526

 
35,283

 
6,475

Agriculture
83,901

 
93,789

 
13,553

 
71,501

 
80,842

 
12,278

Consumer
345

 
355

 
78

 
383

 
393

 
87

Total impaired loans with an allowance recorded
148,149

 
163,937

 
26,266

 
142,619

 
155,753

 
25,686

 
 
 
 
 
 
 
 
 
 
 
 

28-




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


 
December 31, 2016
 
September 30, 2016
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
Impaired loans:
(dollars in thousands)
With no allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
3,806

 
5,499

 

 
4,120

 
5,807

 

Commercial real estate
29,245

 
31,187

 

 
24,040

 
24,660

 

Commercial non real estate
10,407

 
11,935

 

 
15,299

 
16,469

 

Agriculture
28,703

 
30,755

 

 
30,339

 
31,907

 

Consumer
7

 
7

 

 
12

 
12

 

Total impaired loans with no allowance recorded
72,168

 
79,383

 

 
73,810

 
78,855

 

Total impaired loans
$
220,317

 
$
243,320

 
$
26,266

 
$
216,429

 
$
234,608

 
$
25,686

The average recorded investment on impaired loans and interest income recognized on impaired loans for the three months ended December 31, 2016 and 2015, respectively, are as follows:
 
Three Months Ended December 31, 2016
 
Three Months Ended December 31, 2015
 
Average Recorded Investment
 
Interest Income Recognized while on Impaired Status
 
Average Recorded Investment
 
Interest Income Recognized while on Impaired Status
 
(dollars in thousands)
Residential real estate
$
10,056

 
$
114

 
$
12,334

 
$
149

Commercial real estate
52,022

 
670

 
74,411

 
1,469

Commercial non real estate
48,700

 
422

 
56,171

 
356

Agriculture
107,222

 
1,867

 
77,324

 
2,439

Consumer
374

 
15

 
276

 
17

Total
$
218,374

 
$
3,088

 
$
220,516

 
$
4,430

Valuation adjustments made to repossessed properties for the three months ended December 31, 2016 and 2015, totaled $0.4 million and $0.0 million, respectively. The adjustments are included 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 $7.9 million and $9.3 million at December 31, 2016 and September 30, 2016, respectively. Commitments to lend additional funds to borrowers whose loans were modified in a TDR were $2.1 million and $0.9 million as of December 31, 2016 and September 30, 2016, respectively.
The following table presents the recorded value of the Company’s TDR balances as of December 31, 2016 and September 30, 2016:
 
December 31, 2016
 
September 30, 2016
 
Accruing