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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)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended December 31, 2018
 
 
Or
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                 to

Commission File Number 001-36688


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

225 South Main Avenue
Sioux Falls, South Dakota
 


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No   o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes x    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer   o
Non-accelerated filer o  
Smaller reporting company   o
Emerging growth company o 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No   x
As of February 1, 2019, the number of shares of the registrant’s Common Stock outstanding was 56,938,435.





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

 
 
 
 

2-




EXPLANATORY NOTE
Except as otherwise stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to:
"we," "our," "us" and our "Company" refers to Great Western Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries;
our "Bank" refers to Great Western Bank, a South Dakota banking corporation;
"NAB" refers to National Australia Bank Limited, an Australian public company that was our ultimate parent company prior to our initial public offering in October 2014 and, until July 31, 2015, was our principal stockholder;
our "states" refers to the nine states (Arizona, Colorado, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota) in which we currently conduct our business;
our "footprint" refers to the geographic markets within our states in which we currently conduct our business;
"ALLL" refers to allowance for loan and lease losses;
"ASC" refers to Accounting Standards Codification;
"ASC 310-30 loans" or "purchased credit impaired loans" refers to certain loans that had deteriorated credit quality at acquisition;
"ASU" refers to Accounting Standards Update;
"Capital Rules" or "Basel III" refers to the Basel Committee’s December 2010 final capital framework for strengthening international capital standards;
"CRE" refers to commercial real estate;
"Exchange Act" refers to the Securities Exchange Act of 1934;
"FASB" refers to the Financial Accounting Standards Board;
"FDIC" refers to the Federal Deposit Insurance Corporation;
"FHLB" refers to the Federal Home Loan Bank;
"FRB" or "Federal Reserve" refers to the Board of Governors of the Federal Reserve System;
"FTE" refers to fully-tax equivalent;
"GAAP" or "U.S. GAAP" refers to U.S. generally accepted accounting principles;
"HELOC" refers to home equity lines of credit;
"HF Financial" refers to HF Financial Corporation;
"IRS" refers to the Internal Revenue Service;
"NYSE" refers to the New York Stock Exchange;
"RPA" refers to a risk participation agreement;
"Sarbanes-Oxley Act" refers to the Sarbanes-Oxley Act of 2002;
"SEC" refers to the Securities and Exchange Commission;
"Securities Act" refers to the Securities Act of 1933;
"Tax Reform Act" refers to the Tax Cuts and Jobs Act of 2017; and
"TDR" refer to a troubled debt restructuring.

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 and Section 21E of the Exchange Act. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "anticipates," "believes," "can," "could," "may," "predicts," "potential," "should," "will," "estimate," "plans," "projects," "continuing," "ongoing," "expects," "views," "intends" and similar words or phrases. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" or "Part II, Item 1A. Risk Factors" of this Report or the following:
current and future economic and market conditions in the United States generally or in our states in particular, including the rate of growth and employment levels;
our ability to anticipate interest rate changes and manage interest rate risk;
our ability to achieve loan and deposit growth;
the relative strength or weakness of the commercial, agricultural and real estate markets where our borrowers are located, including without limitation related asset and market prices;
declines in asset prices and the market prices for agricultural products or changes in governmental support programs for the agricultural sector;
our ability to effectively execute our strategic plan and manage our growth;
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan and lease loss;
our ability to develop and effectively use the quantitative models we rely upon in our business;
our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cyber-security, technological changes, vendor problems, business interruption and fraud risks;
fluctuations in the values of our assets and liabilities and off-balance sheet exposures;
unanticipated changes in our liquidity position, including but not limited to changes in our access to sources of liquidity and capital to address our liquidity needs;
possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including the potential negative effects of imposed and proposed tariffs and retaliatory tariffs on products that our customers may import or export, including among others, agricultural products;
possible impairment of our goodwill and other intangible assets, or any adjustment of the valuation of our deferred tax assets;
the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters;
the impact of, and changes in applicable laws, regulations and accounting standards, policies and interpretations, including the impact of the Tax Reform Act;
legal, compliance and reputational risks, including litigation and regulatory risks;
our inability to receive dividends from our Bank and to service debt, pay dividends to our common stockholders and satisfy obligations as they become due;

4-




expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act to maintain an effective system of internal control over financial reporting; and
other risks and uncertainties inherent to our business, including those discussed under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made or to reflect the occurrence of unanticipated events.

5-




PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)
GREAT WESTERN BANCORP, INC.
Consolidated Balance Sheets
(Dollars in Thousands, Except Share and Per Share Data)
 
(Unaudited)
 
 
 
December 31, 2018
 
September 30, 2018
Assets
 
 
 
Cash and due from banks
$
205,635

 
$
168,119

Interest-bearing bank deposits
71,125

 
130,577

Cash and cash equivalents
276,760

 
298,696

Securities available for sale
1,531,916

 
1,385,650

Loans, net of unearned discounts and deferred fees, including $39,626 and $42,627 of loans covered by a FDIC loss share agreement at December 31, 2018 and September 30, 2018, respectively, and $845,345 and $865,386 of loans at fair value under the fair value option at December 31, 2018 and September 30, 2018, respectively, and $4,567 and $5,456 of loans held for sale at December 31, 2018 and September 30, 2018, respectively
9,767,476

 
9,415,924

Allowance for loan and lease losses
(66,193
)
 
(64,540
)
Net loans
9,701,283

 
9,351,384

Premises and equipment, including $1,102 and $1,104 of property held for sale at December 31, 2018 and September 30, 2018, respectively
113,697

 
113,839

Accrued interest receivable
60,129

 
58,948

Other repossessed property, including $46 and $131 of property covered by a FDIC loss share agreement at December 31, 2018 and September 30, 2018, respectively
22,224

 
23,074

Goodwill
739,023

 
739,023

Cash surrender value of life insurance policies
30,677

 
30,461

Net deferred tax assets
25,951

 
30,132

Other assets
71,981

 
85,601

Total assets
$
12,573,641

 
$
12,116,808

Liabilities and stockholders’ equity
 
 
 
Deposits
 
 
 
Noninterest-bearing
$
1,879,883

 
$
1,842,704

Interest-bearing
8,233,364

 
7,890,795

Total deposits
10,113,247

 
9,733,499

Securities sold under agreements to repurchase
56,649

 
90,907

FHLB advances and other borrowings
410,000

 
275,000

Subordinated debentures and subordinated notes payable
108,510

 
108,468

Accrued expenses and other liabilities
73,227

 
68,383

Total liabilities
10,761,633

 
10,276,257

Stockholders’ equity
 
 
 
Common stock, $0.01 par value, authorized 500,000,000 shares; 56,938,435 shares issued and outstanding at December 31, 2018 and 58,917,147 shares issued and outstanding at September 30, 2018
568

 
589

Additional paid-in capital
1,244,232

 
1,318,457

Retained earnings
584,264

 
553,014

Accumulated other comprehensive (loss)
(17,056
)
 
(31,509
)
Total stockholders' equity
1,812,008

 
1,840,551

Total liabilities and stockholders' equity
$
12,573,641

 
$
12,116,808

See accompanying notes.

6-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
 
Three Months Ended December 31,
 
2018
 
2017
Interest income
 
 
 
Loans
$
122,331

 
$
107,680

Investment securities
9,189

 
7,043

Federal funds sold and other
541

 
231

Total interest income
132,061

 
114,954

Interest expense
 
 
 
Deposits
23,794

 
10,998

FHLB advances and other borrowings
2,003

 
2,164

Subordinated debentures and subordinated notes payable
1,370

 
1,170

Total interest expense
27,167

 
14,332

Net interest income
104,894

 
100,622

Provision for loan and lease losses
5,215

 
4,557

Net interest income after provision for loan and lease losses
99,679

 
96,065

Noninterest income
 
 
 
Service charges and other fees
11,689

 
13,178

Wealth management fees
2,241

 
2,185

Mortgage banking income, net
1,320

 
1,660

Net loss on sale of securities
(513
)
 
(1
)
Net increase (decrease) in fair value of loans at fair value
19,216

 
(8,665
)
Net realized and unrealized (loss) gain on derivatives
(18,317
)
 
7,227

Other
1,084

 
1,090

Total noninterest income
16,720

 
16,674

Noninterest expense
 
 
 
Salaries and employee benefits
34,770

 
32,868

Data processing and communication
5,278

 
6,884

Occupancy and equipment
5,126

 
4,848

Professional fees
3,288

 
4,240

Advertising
938

 
1,059

Net loss recognized on repossessed property and other related expenses
3,063

 
214

Other
4,643

 
4,755

Total noninterest expense
57,106

 
54,868

Income before income taxes
59,293

 
57,871

Provision for income taxes
13,507

 
28,641

Net income
$
45,786

 
$
29,230

Basic earnings per common share
 
 
 
Weighted average common shares outstanding
57,974,858

 
58,902,629

Basic earnings per share
$
0.79

 
$
0.50

Diluted earnings per common share
 
 
 
Weighted average diluted common shares outstanding
58,039,292

 
59,087,729

Diluted earnings per share
$
0.79

 
$
0.49

Dividends per share
 
 
 
Dividends paid
$
14,536

 
$
11,770

Dividends per share
$
0.25

 
$
0.20

See accompanying notes.

7-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
 
Three Months Ended December 31,
 
2018
 
2017
Net income
$
45,786

 
$
29,230

Other comprehensive income (loss), net of tax
 
 
 
Securities available for sale:
 
 
 
Net unrealized holding gain (loss) arising during the period
18,669

 
(8,645
)
Reclassification adjustment for net loss realized in net income
513

 
1

Income tax (expense) benefit
(4,729
)
 
3,283

Net change in unrealized gain (loss) on securities available for sale
14,453

 
(5,361
)
 
 
 
 
Defined benefit pension plan obligation 1:
 
 
 
Net unrealized holding gain arising during the period

 
145

Income tax expense

 
(55
)
Net change in defined benefit pension plan obligation

 
90

Other comprehensive income (loss), net of tax
14,453

 
(5,271
)
Comprehensive income
$
60,239

 
$
23,959

1 The Company's Board of Directors voted to terminate the defined benefit pension plan ("Pension Plan") effective February 1, 2018. Transfer of all Pension Plan assets, liabilities and administrative responsibilities were completed as of September 30, 2018.
See accompanying notes.


8-




GREAT WESTERN BANCORP, INC.
Consolidated Statements 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 (Loss) Income
 
Total
Balance, September 30, 2017
 
 
$
588

 
$
1,314,039

 
$
445,747

 
$
(5,374
)
 
$
1,755,000

Net income
$
29,230

 

 

 
29,230

 

 
29,230

Other comprehensive (loss), net of tax
(5,271
)
 

 

 

 
(5,271
)
 
(5,271
)
Total comprehensive income
$
23,959

 
 
 
 
 
 
 
 
 
 
Stock-based compensation, net of tax
 
 

 
684

 

 

 
684

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.20 per share
 
 

 

 
(11,770
)
 

 
(11,770
)
Balance, December 31, 2017
 
 
$
588

 
$
1,314,723

 
$
463,207

 
$
(10,645
)
 
$
1,767,873

 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
 
 
$
589

 
$
1,318,457

 
$
553,014

 
$
(31,509
)
 
$
1,840,551

Net income
$
45,786

 

 

 
45,786

 

 
45,786

Other comprehensive income, net of tax
14,453

 

 

 

 
14,453

 
14,453

Total comprehensive income
$
60,239

 
 
 
 
 
 
 
 
 
 
Stock-based compensation, net of tax
 
 

 
413

 

 

 
413

Repurchase of common stock
 
 
(21
)
 
(74,638
)
 

 

 
(74,659
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
Common stock, $0.25 per share
 
 

 

 
(14,536
)
 

 
(14,536
)
Balance, December 31, 2018
 
 
$
568

 
$
1,244,232

 
$
584,264

 
$
(17,056
)
 
$
1,812,008

See accompanying notes.

9-




GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
 
Three Months Ended December 31,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
45,786

 
$
29,230

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,301

 
3,514

Amortization of FDIC indemnification asset
493

 
1,018

Net loss on sale of securities and other assets
2,806

 
518

Net gain on sale of loans
(1,545
)
 
(1,935
)
Provision for loan and lease losses
5,215

 
4,557

Provision for (reversal of) loan servicing rights loss
1

 
(38
)
Stock-based compensation
413

 
684

Originations of residential real estate loans held for sale
(53,012
)
 
(48,476
)
Proceeds from sales of residential real estate loans held for sale
55,446

 
52,110

Net deferred income taxes
(35
)
 
17,226

Changes in:
 
 
 
Accrued interest receivable
(1,181
)
 
(1,641
)
Other assets
29,331

 
2,574

Accrued interest payable and other liabilities
(5,675
)
 
(2,006
)
Net cash provided by operating activities
80,344

 
57,335

Investing activities
 
 
 
Purchase of securities available for sale
(266,964
)
 
(55,865
)
Proceeds from sales of securities available for sale
97,212

 
164

Proceeds from maturities of securities available for sale
40,821

 
47,125

Net increase in loans
(356,927
)
 
(205,929
)
Recovery (payment) of covered losses from FDIC indemnification claims
34

 
(230
)
Purchase of premises and equipment
(2,321
)
 
(1,469
)
Proceeds from sale of premises and equipment
300

 
3,993

Proceeds from sale of repossessed property
809

 
1,956

Purchase of FHLB stock
(20,564
)
 
(17,020
)
Proceeds from redemption of FHLB stock
15,211

 
13,969

Net cash used in investing activities
(492,389
)
 
(213,306
)
Financing activities
 
 
 
Net increase in deposits
379,789

 
46,659

Net decrease in securities sold under agreements to repurchase and other short-term borrowings
(34,258
)
 
(15,752
)
Proceeds from FHLB advances and other long-term borrowings
215,000

 
665,000

Repayments on FHLB advances and other long-term borrowings
(80,000
)
 
(587,200
)
Common stock repurchased
(74,659
)
 

Taxes paid related to net share settlement of equity awards
(1,227
)
 
(3,766
)
Dividends paid
(14,536
)
 
(11,770
)
Net cash provided by financing activities
390,109

 
93,171

Net decrease in cash and cash equivalents
(21,936
)
 
(62,800
)
Cash and cash equivalents, beginning of period
298,696

 
360,396

Cash and cash equivalents, end of period
$
276,760

 
$
297,596

Supplemental disclosure of cash flow information
 
 
 
Cash payments for interest
$
23,614

 
$
12,599

Cash payments for income taxes
$
1,133

 
$
1,117

Supplemental disclosure of noncash investing and financing activities
 
 
 
Loans transferred to repossessed properties
$
(1,981
)
 
$
(3,671
)
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
The Company is a bank holding company organized under the laws of Delaware and is listed on the NYSE under the symbol "GWB". The primary business of the Company is ownership of its wholly-owned subsidiary, Great Western 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 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, 2018, which includes a description of significant accounting policies. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year or any other period.
The accompanying unaudited consolidated financial statements include the accounts and results of operations of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions. The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Changes in Significant Accounting Policies
Pursuant to the Company's adoption of certain ASUs as of October 1, 2018, the following significant accounting policies have been updated from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
Revenue Recognition
We adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" and subsequent related ASUs effective October 1, 2018 using the modified retrospective approach, which establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the Company's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures and in "Note 1. Nature of Operations and Summary of Significant Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Descriptions of our revenue-generating activities that are within the scope of ASC Topic 606, which are presented in our consolidated income statements as components of noninterest income, are as follows:
Service charges and fees on deposit accounts. Service charges on deposit accounts are earned for account maintenance and overdraft, wire and treasury management services. Revenue is recognized at the time the services are performed and is included in service charges and other fees within noninterest income on the consolidated statements of income.
Interchange and merchant services income. Interchange and merchant services income are earned from credit and debit card payment processing through card association networks, merchant services and other card related services. Fees for these services are primarily based on interchange rates set by the networks and transaction volumes and are recognized as transactions are processed and settled with networks on behalf of card holders. These fees are presented net of direct expenses, including reward costs, associated with credit and debit card interchange income in service charges and other fees which are included in noninterest income on the consolidated statements of income.

11-




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

Wealth management and trust fee income. Wealth management and trust fees are earned for asset management, custody and recordkeeping, investment advisory and administrative services. Revenue is recognized as the services are performed. Brokerage charges are recorded as a net reduction in wealth management fees which are included in noninterest income on the consolidated statements of income.
Other noninterest income. Other noninterest income primarily includes such items as letter of credit fees, gains on sale of loans held for sale and servicing fees, none of which are subject to the requirements of ASC Topic 606.
The following table presents total noninterest income segregated between contracts with customers within the scope of ASC Topic 606 and those within the scope of other GAAP Topics. The following additionally presents revenues from customers that are included within noninterest income.
 
Three Months Ended December 31,
 
2018
 
2017
 
(dollars in thousands)
Noninterest income
 
 
 
Service charges and other fees
$
11,689

 
$
13,178

Wealth management fees
2,241

 
2,185

Other
582

 
649

Noninterest income from contracts with customers within the scope of ASC Topic 606 ¹
14,512

 
16,012

Noninterest income within the scope of other GAAP Topics ²
2,208

 
662

Total noninterest income
$
16,720

 
$
16,674

1 Amounts for periods after October 1, 2018 are presented in accordance with ASC Topic 606, Revenue from Contracts with Customers, except for out of scope amounts. Amounts for periods prior to October 1, 2018 are presented in accordance with ASC Topic 605, Revenue Recognition, and have not been restated to conform with ASC Topic 606, Revenue from Contracts with Customers.
2 The Company presents out of scope noninterest income for the purpose of reconciling noninterest income amounts within the scope of ASC Topic 606 to noninterest income amounts presented on the Company's consolidated statements of income.
At December 31, 2018, the Company does not have any material contract assets, liabilities, or other receivables recorded on its consolidated balance sheets relating to its revenue streams within the scope of ASC Topic 606. Additionally, the Company's contracts generally do not contain terms that require significant judgment to determine the amount of revenue to recognize.
Practical expedients
The Company has elected the practical expedient to exclude the disclosure of unsatisfied performance obligations for contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed. The Company recognizes incremental costs of obtaining those contracts as an expense when incurred.
Subsequent Events
The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. Other than those described below, there were no other material events or transactions that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.
On January 24, 2019, the Board of Directors of the Company declared a dividend of $0.25 per common share payable on February 22, 2019 to stockholders of record as of close of business on February 8, 2019.
2. New Accounting Standards
Accounting Standards Adopted in Fiscal Year 2019
In May 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. The Company adopted the standard effective October 1, 2018 on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.

12-




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

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which contains amendments that clarify 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. Under the current implementation guidance in Topic 805, there are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. ASU 2017-01 amendments provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. ASU 2017-01 provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The Company adopted the standard effective October 1, 2018 on a prospective basis. The adoption did not have an impact on our consolidated financial statements.
In October 2016, the Financial Accounting Standards Board (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. The Company adopted the standard effective October 1, 2018. The adoption did not have an impact 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. The Company adopted the standard effective October 1, 2018 using the modified retrospective transaction approach. There were no cumulative effect adjustments as a result of implementation. The adoption did not have an impact 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. The Company adopted the standard effective October 1, 2018 using the retrospective transaction approach. The adoption did not have an impact on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments, in general, to be measured at fair value with changes in fair value recognized in earnings. It also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires entities to use the "exit price" notion when measuring fair value, requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the measurement category and form on the balance sheet or accompanying notes, clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets, and simplifies the impairment assessment of equity investments without readily determinable fair values. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10), which clarified certain aspects of the guidance issued in ASU 2016-01. The Company adopted the standard and subsequent related ASU effective October 1, 2018. Disclosure requirements were adopted on a prospective basis and there were no cumulative effect adjustments as a result of implementation. The adoption did not have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which implements a more robust framework that clarifies the principles for recognizing revenue and gives greater consistency and comparability in revenue recognition practices. In the new framework, an entity recognizes revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. The new model requires the identification of performance obligations included in the contract with customers, a determination of the transaction price and an allocation of the price to those

13-




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

performance obligations. The entity recognizes revenue when performance obligations are satisfied. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which clarifies guidance pertaining to the identification of performance obligations and the licensing implementation. In May 2016, the FASB issued ASU 2016-11 and 2016-12, which further clarify guidance and provide practical expedients related to the adoption of ASU 2014-09. In December 2016, the FASB issued ASU 2016-20, which made technical corrections and improvements to the previous ASUs issued. The standard permits the use of either the retrospective or cumulative effect transition method. The standard, along with subsequent guidance from FASB, lists several items that are specifically out of scope for ASU 2014-09, including but not limited to core interest income, derivative instruments, investments, and loan origination fees. The Company adopted this standard and subsequent related ASUs October 1, 2018 using the modified retrospective method. Furthermore, the Company prospectively changed the presentation of direct expenses, including reward costs, associated with credit and debit card interchange income previously included in data processing and communication expense which are now netted against interchange income in service charges and other fees, which is included in noninterest income on the consolidated statements of income. Brokerage charges previously included in professional fees are now netted against wealth management fees, which is included in noninterest income on the consolidated statements of income. The net quantitative impact of these presentation changes decreased both revenue and expenses by $1.7 million for the three months ended December 31, 2018; however, these presentation changes did not have an impact on net income. Prior period balances have not been restated to reflect these presentation changes. There were no significant cumulative effect adjustments as a result of implementation as our current revenue recognition policies generally conform with the principals in ASC Topic 606. For additional information, see "Note 1. Nature of Operations and Summary of Significant Policies."
Accounting Standards Not Yet Adopted in Fiscal Year 2019
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes in the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Entities are also allowed to elect to early adopt the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until after their effective date. As ASU 2018-13 only revises disclosure requirements, the Company does not believe this ASU will not have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 is to be applied to all existing hedging relationships on the date of adoption and will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim period, with the effect of adoption reflected as of the beginning of the fiscal year of adoption. The Company is currently evaluating the potential impact of ASU 2017-12 on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which addresses timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires institutions to measure all expected credit losses related to financial assets measured at amortized costs with an expected loss model based on historical experience, current conditions and reasonable and supportable forecasts relevant to affect the collectability of the financial assets, which is referred to as the current expected credit loss (CECL) model. ASU 2016-13 requires enhanced disclosures, including qualitative and quantitative requirements, to help understand significant estimates and judgments used in estimating credit losses, as well as provide additional information about the amounts recorded in the financial statements. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments, Credit Losses, which which made technical corrections and improvements to the previous ASU issued. These ASUs 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 continues to make progress on the implementation plan with focus on the identification and integrity of required data elements to make the necessary changes to our existing credit loss estimation process. The Company is currently evaluating the potential impact on our consolidated financial statements; however, since the magnitude of the anticipated change in the allowance for credit losses will be impacted by economic conditions and trends in the Company’s portfolio at the time of adoption, the quantitative impact cannot yet be reasonably estimated.

14-




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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessees recognize the assets and liabilities arising from leases on the balance sheet and disclosing key information about leasing arrangements. Lessees will be required to recognize an obligation for future lease payments measured on a discounted basis and a related right-of-use asset. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, Revenue from Contracts with Customers. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which made technical corrections and improvements to the previous ASU issued. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which allows lessors to exclude sales tax from consideration of the contract through a policy election and clarifies treatment of certain lessor costs and variable payments for contracts with lease and nonlease components. These ASUs will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has a project team working on the implementation plan and is currently reviewing all existing lease agreements for which the amended guidance is to be applied, and is in the process of determining which practical expedients will be elected for transition. The Company expects to adopt the amended guidance in October 2019 and is currently evaluating the potential impact on our consolidated financial statements.
3. Securities Available for Sale
The amortized cost and approximate fair value of investments in securities, all of which are classified as available for sale according to management’s intent, are summarized as follows.
 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
(dollars in thousands)
As of December 31, 2018
 
 
 
 
 
 
 
U.S. Treasury securities
$
95,459

 
$
311

 
$
(470
)
 
$
95,300

Mortgage-backed securities:
 
 
 
 
 
 
 
Government National Mortgage Association
484,242

 
1,086

 
(13,150
)
 
472,178

Federal Home Loan Mortgage Corporation
354,333

 
1,443

 
(4,010
)
 
351,766

Federal National Mortgage Association
187,903

 
149

 
(3,688
)
 
184,364

Small Business Assistance Program
366,143

 
661

 
(3,547
)
 
363,257

States and political subdivision securities
65,452

 
32

 
(1,414
)
 
64,070

Other
1,006

 

 
(25
)
 
981

Total
$
1,554,538

 
$
3,682

 
$
(26,304
)
 
$
1,531,916

 
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated
Fair Value
 
(dollars in thousands)
As of September 30, 2018
 
 
 
 
 
 
 
U.S. Treasury securities
$
168,394

 
$

 
$
(1,222
)
 
$
167,172

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

 
35

 
(16,335
)
 
426,158

Federal Home Loan Mortgage Corporation
297,380

 

 
(7,055
)
 
290,325

Federal National Mortgage Association
188,192

 

 
(6,081
)
 
182,111

Small Business Assistance Program
260,458

 

 
(9,345
)
 
251,113

States and political subdivision securities
69,566

 
4

 
(1,795
)
 
67,775

Other
1,006

 

 
(10
)
 
996

Total
$
1,427,454

 
$
39

 
$
(41,843
)
 
$
1,385,650


15-




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

The amortized cost and approximate fair value of debt securities available for sale as of December 31, 2018 and September 30, 2018, 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, 2018
 
September 30, 2018
 
Amortized 
Cost
Estimated
Fair Value
 
Amortized 
Cost
Estimated
Fair Value
 
(dollars in thousands)
Due in one year or less
$
39,574

$
39,291

 
$
111,842

$
111,221

Due after one year through five years
112,480

111,590

 
114,920

113,069

Due after five years through ten years
8,735

8,367

 
11,076

10,535

Due after ten years
122

122

 
122

122

 
160,911

159,370

 
237,960

234,947

Mortgage-backed securities
1,392,621

1,371,565

 
1,188,488

1,149,707

Securities without contractual maturities
1,006

981

 
1,006

996

Total
$
1,554,538

$
1,531,916

 
$
1,427,454

$
1,385,650

Proceeds from sales of securities available for sale were $97.2 million and $0.2 million for the three months ended December 31, 2018 and 2017, respectively. No gross gains (pre-tax) were realized on the sales for the three months ended December 31, 2018 and 2017 using the specific identification method. Gross losses (pre-tax) of $0.5 million and $0.0 million were realized on the sales for the three months ended December 31, 2018 and 2017, respectively, using the specific identification method. The Company recognized no other-than-temporary impairment for the three months ended December 31, 2018 and 2017.
Securities with an estimated fair value of approximately $765.4 million and $787.4 million at December 31, 2018 and September 30, 2018, respectively, were pledged as collateral on public deposits, securities sold under agreements to repurchase, and for other purposes as required by contractual obligation or law. The counterparties do not have the right to sell or pledge the securities the Company has pledged as collateral.
As detailed in the following tables, certain investments in debt securities, which are approximately 72% and 98% of the Company’s investment portfolio at estimated fair value at December 31, 2018 and September 30, 2018, respectively, are reported in the consolidated financial statements at an amount less than their amortized cost. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, implicit or explicit government guarantees, and information obtained from regulatory filings, management believes the declines in fair value of these securities are temporary. As the Company does not intend to sell the securities and it is not more-likely-than-not the Company will be required to sell the securities before the recovery of their amortized cost basis, which may be maturity, the Company does not consider the securities to be other-than-temporarily impaired at December 31, 2018 or September 30, 2018.
The following table presents the Company’s gross unrealized losses and approximate fair value in investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated
Fair Value
Unrealized
Losses
 
Estimated
Fair Value
Unrealized
Losses
 
Estimated
Fair Value
Unrealized
Losses
 
(dollars in thousands)
As of December 31, 2018
 
 
 
 
 
 
 
 
U.S. Treasury securities
$

$

 
$
45,942

$
(470
)
 
$
45,942

$
(470
)
Mortgage-backed securities
212,770

(1,244
)
 
793,251

(23,151
)
 
1,006,021

(24,395
)
States and political subdivision securities
5,753

(35
)
 
51,634

(1,379
)
 
57,387

(1,414
)
Other
981

(25
)
 


 
981

(25
)
Total
$
219,504

$
(1,304
)
 
$
890,827

$
(25,000
)
 
$
1,110,331

$
(26,304
)

16-




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

 
Less than 12 months
 
12 months or more
 
Total
 
Estimated
Fair Value
Unrealized
Losses
 
Estimated
Fair Value
Unrealized
Losses
 
Estimated
Fair Value
Unrealized
Losses
 
(dollars in thousands)
As of September 30, 2018
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
167,172

$
(1,222
)
 
$

$

 
$
167,172

$
(1,222
)
Mortgage-backed securities
416,677

(8,427
)
 
709,387

(30,389
)
 
1,126,064

(38,816
)
States and political subdivision securities
23,534

(250
)
 
42,282

(1,545
)
 
65,816

(1,795
)
Other
996

(10
)
 


 
996

(10
)
Total
$
608,379

$
(9,909
)
 
$
751,669

$
(31,934
)
 
$
1,360,048

$
(41,843
)
As of December 31, 2018 and September 30, 2018, the Company had 327 and 390 securities, respectively, in an unrealized loss position.
4. Loans
The following table presents the composition of loans as of December 31, 2018 and September 30, 2018.
 
December 31,
 
September 30,
 
2018
 
2018
 
(dollars in thousands)
Commercial real estate
$
4,910,301

 
$
4,629,330

Agriculture
2,234,735

 
2,182,688

Commercial non-real estate
1,713,760

 
1,699,987

Residential real estate
845,262

 
837,569

Consumer
47,704

 
49,689

Other
44,130

 
46,487

Ending balance
9,795,892

 
9,445,750

Less: Unamortized discount on acquired loans
(16,673
)
 
(18,283
)
Unearned net deferred fees and costs and loans in process
(11,743
)
 
(11,543
)
Total
$
9,767,476

 
$
9,415,924

The loan segments above include loans covered by a FDIC loss sharing agreement totaling $39.6 million and $42.6 million as of December 31, 2018 and September 30, 2018, respectively, residential real estate loans held for sale totaling $4.6 million and $5.5 million at December 31, 2018 and September 30, 2018, respectively, and $845.3 million and $865.4 million of loans accounted for at fair value at December 31, 2018 and September 30, 2018, respectively.
Unearned net deferred fees and costs totaled $14.1 million and $13.0 million as of December 31, 2018 and September 30, 2018, respectively.
Loans in process represent loans that have been funded as of the balance sheet dates but not classified into a loan category and loan payments received as of the balance sheet dates that have not been applied to individual loan accounts. Loans in process totaled $(2.4) million and $(1.5) million at December 31, 2018 and September 30, 2018, respectively.
Loans guaranteed by agencies of the U.S. government totaled $165.3 million and $168.6 million at December 31, 2018 and September 30, 2018, respectively.
Principal balances of residential real estate loans sold totaled $53.9 million and $50.2 million for the three months ended December 31, 2018 and 2017, respectively.
Nonaccrual
Interest income on loans is accrued daily on the outstanding balances. Accrual of interest is discontinued when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that collection of interest is doubtful, which is usually at 90 days past due. Generally, when loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest.

17-




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

The following table presents the Company’s nonaccrual loans at December 31, 2018 and September 30, 2018, excluding ASC 310-30 loans. Loans greater than 90 days past due and still accruing interest as of December 31, 2018 and September 30, 2018, were $0.0 million and $0.2 million, respectively.
 
December 31,
 
September 30,
 
2018
 
2018
 
(dollars in thousands)
Nonaccrual loans
 
 
 
Commercial real estate
$
20,138

 
$
22,871

Agriculture
107,456

 
107,198

Commercial non-real estate
5,487

 
6,887

Residential real estate
3,230

 
3,549

Consumer
149

 
61

Total
$
136,460

 
$
140,566

Credit Quality Information
The Company assigns all non-consumer loans a credit quality risk rating. These ratings are Pass, Watch, Substandard, Doubtful, and Loss. Loans with a Pass and Watch rating represent those loans not classified on the Company’s rating scale for problem credits, with loans with a Watch rating being monitored and updated at least quarterly by management. Substandard loans are those where a well-defined weakness has been identified that may put full collection of contractual debt at risk. Doubtful loans are those where a well-defined weakness has been identified and a loss of contractual debt is probable. Substandard and doubtful loans are monitored and updated monthly. All loan risk ratings are updated and monitored on a continuous basis. The Company generally does not risk rate residential real estate or consumer loans unless a default event such as bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of consumer loans.
The following table presents the composition of the loan portfolio by internally assigned grade as of December 31, 2018 and September 30, 2018. 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 $845.3 million at December 31, 2018 and $865.4 million at September 30, 2018.
As of December 31, 2018
Commercial Real Estate
 
Agriculture
 
Commercial
Non-Real Estate
 
Residential Real Estate ¹
 
Consumer ¹
 
Other
 
Total
 
(dollars in thousands)
Credit Risk Profile by Internally Assigned Grade
 
 
 
 
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
4,402,459

 
$
1,680,216

 
$
1,425,431

 
$
791,093

 
$
47,019

 
$
44,130

 
$
8,390,348

Watchlist
49,439

 
221,762

 
20,961

 
3,878

 
216

 

 
296,256

Substandard
36,578

 
142,592

 
20,367

 
6,454

 
269

 

 
206,260

Doubtful
63

 
1

 
1,199

 
121

 

 

 
1,384

Loss

 

 

 

 

 

 

Ending balance
4,488,539

 
2,044,571

 
1,467,958

 
801,546

 
47,504

 
44,130

 
8,894,248

Loans covered by a FDIC loss sharing agreement

 

 

 
39,626

 

 

 
39,626

Total
$
4,488,539

 
$
2,044,571

 
$
1,467,958

 
$
841,172

 
$
47,504

 
$
44,130

 
$
8,933,874

1 The Company generally does not risk rate residential real estate or consumer loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.

18-




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

As of September 30, 2018
Commercial Real Estate
 
Agriculture
 
Commercial
Non-Real Estate
 
Residential Real Estate ¹
 
Consumer ¹
 
Other
 
Total
 
(dollars in thousands)
Credit Risk Profile by Internally Assigned Grade
 
 
 
 
 
 
 
 
 
 
 
 
 
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
4,108,314

 
$
1,610,291

 
$
1,401,418

 
$
779,610

 
$
48,979

 
$
46,487

 
$
7,995,099

Watchlist
53,150

 
239,392

 
19,503

 
4,548

 
322

 

 
316,915

Substandard
41,184

 
137,205

 
20,117

 
6,366

 
159

 

 
205,031

Doubtful
93

 
2

 
2,277

 
37

 

 

 
2,409

Loss

 

 

 

 

 

 

Ending balance
4,202,741

 
1,986,890

 
1,443,315

 
790,561

 
49,460

 
46,487

 
8,519,454

Loans covered by a FDIC loss sharing agreement

 

 

 
42,627

 

 

 
42,627

Total
$
4,202,741

 
$
1,986,890

 
$
1,443,315

 
$
833,188

 
$
49,460

 
$
46,487

 
$
8,562,081

1 The Company generally does not risk rate residential real estate or consumer loans unless a default event such as a bankruptcy or extended nonperformance takes place. Alternatively, standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.
Past Due Loans
The following table presents the Company’s past due loans at December 31, 2018 and September 30, 2018. 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 $845.3 million at December 31, 2018 and $865.4 million at September 30, 2018.
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total Financing Receivables
 
(dollars in thousands)
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
495

 
$
554

 
$
6,734

 
$
7,783

 
$
4,480,756

 
$
4,488,539

Agriculture
1,186

 
1,498

 
59,003

 
61,687

 
1,982,884

 
2,044,571

Commercial non-real estate
1,777

 
168

 
3,160

 
5,105

 
1,462,853

 
1,467,958

Residential real estate
2,387

 
831

 
1,522

 
4,740

 
796,806

 
801,546

Consumer
67

 
43

 
111

 
221

 
47,283

 
47,504

Other

 

 

 

 
44,130

 
44,130

Ending balance
5,912

 
3,094

 
70,530

 
79,536

 
8,814,712

 
8,894,248

Loans covered by a FDIC loss sharing agreement
1,641

 
284

 
313

 
2,238

 
37,388

 
39,626

Total
$
7,553

 
$
3,378

 
$
70,843

 
$
81,774

 
$
8,852,100

 
$
8,933,874

 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or Greater Past Due
 
Total
Past Due
 
Current
 
Total Financing Receivables
 
(dollars in thousands)
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
920

 
$
551

 
$
9,135

 
$
10,606

 
$
4,192,135

 
$
4,202,741

Agriculture
1,243

 
2,042

 
51,579

 
54,864

 
1,932,026

 
1,986,890

Commercial non-real estate
551

 
16

 
4,068

 
4,635

 
1,438,680

 
1,443,315

Residential real estate
913

 
200

 
1,747

 
2,860

 
787,701

 
790,561

Consumer
83

 
47

 
1

 
131

 
49,329

 
49,460

Other

 

 

 

 
46,487

 
46,487

Ending balance
3,710

 
2,856

 
66,530

 
73,096

 
8,446,358

 
8,519,454

Loans covered by a FDIC loss sharing agreement
30

 
233

 
471

 
734

 
41,893

 
42,627

Total
$
3,740

 
$
3,089

 
$
67,001

 
$
73,830

 
$
8,488,251

 
$
8,562,081


19-




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

Impaired Loans
The following table presents the Company’s impaired loans. This table excludes purchased credit impaired loans and loans measured at fair value with changes in fair value reported in earnings of $845.3 million at December 31, 2018 and $865.4 million at September 30, 2018.
 
December 31, 2018
 
September 30, 2018
 
Recorded Investment
Unpaid Principal Balance
Related Allowance
 
Recorded Investment
Unpaid Principal Balance
Related Allowance
 
(dollars in thousands)
Impaired loans:
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
$
20,599

$
20,643

$
2,436

 
$
25,136

$
25,223

$
3,668

Agriculture
67,549

85,860

12,872

 
60,053

76,874

9,590

Commercial non-real estate
13,383

16,164

2,498

 
14,177

17,241

4,508

Residential real estate
3,603

4,213

2,042

 
4,509

5,153

2,210

Consumer
265

270

154

 
160

165

61

Total impaired loans with an allowance recorded
105,399

127,150

20,002

 
104,035

124,656

20,037

With no allowance recorded:
 
 
 
 
 
 
 
Commercial real estate
15,698

55,645


 
15,764

58,141


Agriculture
74,997

78,213


 
77,172

80,355


Commercial non-real estate
8,845

17,991


 
8,905

18,047


Residential real estate
3,213

5,642


 
2,177

4,574


Consumer

116


 
1

118


Total impaired loans with no allowance recorded
102,753

157,607


 
104,019

161,235


Total impaired loans
$
208,152

$
284,757

$
20,002

 
$
208,054

$
285,891

$
20,037

The following table presents the average recorded investment on impaired loans and interest income recognized on impaired loans for the three months ended December 31, 2018 and 2017.
 
Three Months Ended
 
December 31, 2018
 
December 31, 2017
 
Average Recorded Investment
Interest Income Recognized While on Impaired Status
 
Average Recorded Investment
Interest Income Recognized While on Impaired Status
 
(dollars in thousands)
Commercial real estate
$
38,599

$
352

 
$
54,379

$
1,576

Agriculture
139,885

999

 
123,832

982

Commercial non-real estate
22,655

366

 
31,888

451

Residential real estate
6,751

89

 
7,767

165

Consumer
213

5

 
269

4

Total
$
208,103

$
1,811

 
$
218,135

$
3,178

Valuation adjustments made to repossessed properties totaled $1.8 million and $0.0 million for the three months ended December 31, 2018 and 2017, respectively. The adjustments are included in net loss recognized on repossessed property and other related expenses in noninterest expense.
Troubled Debt Restructurings
Included in certain loan categories in the impaired loans are 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 $9.9 million and $9.2 million at December 31, 2018 and September 30, 2018, respectively. There were $0.6 million of commitments to lend additional funds to borrowers whose loans were modified in a TDR as of December 31, 2018 and $0.3 million commitments to lend additional funds to borrowers whose loans were modified in a TDR as of September 30, 2018.

20-




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

The following table presents the recorded value of the Company’s TDR balances as of December 31, 2018 and September 30, 2018.
 
December 31, 2018
 
September 30, 2018
 
Accruing
Nonaccrual
 
Accruing
Nonaccrual
 
(dollars in thousands)
Commercial real estate
$
2,033

$
3,080

 
$
2,649

$
2,616

Agriculture
11,097

73,358

 
13,248

73,741

Commercial non-real estate
2,581

641

 
3,420

656

Residential real estate
356

133

 
389

143

Consumer
98

67

 
77


Total
$
16,165

$
77,279

 
$
19,783

$
77,156

TDRs are generally restructured through either a rate modification, term extension, payment modification or due to a bankruptcy. During the three months ended December 31, 2018, there was one accruing consumer loan that was restructured with a pre-modification recorded investment of $0.1 million and a post-modification recorded investment of $0.1 million. There were no accruing loans that were restructured during the three months ended December 31, 2017. There were no nonaccruing loans that were restructured during the three months ended December 31, 2018 and 2017.
The following table presents loans that were modified as TDRs within the previous 12 months and for which there was a payment default for the three months ended December 31, 2018 and 2017, respectively.
 
Three Months Ended December 31,
 
2018
 
2017
 
Number of Loans
Recorded Investment
 
Number of Loans
Recorded Investment
 
(dollars in thousands)
Commercial real estate

$

 
1

$
3,230

Agriculture
1

633

 


Commercial non-real estate


 


Residential real estate


 


Consumer
1

67

 


Total
2

$
700

 
1

$
3,230

For purposes of the table above, a loan is considered to be in payment default once it is 90 days or more contractually past due under the modified terms. The table includes loans that experienced a payment default during the period, but may be performing in accordance with the modified terms as of the balance sheet date. There were $0.0 million and $0.5 million for the three months ended December 31, 2018 and 2017, respectively, of loans removed from TDR status as they were restructured at market terms and are performing.
5. Allowance for Loan and Lease Losses
The allowance for loan and lease losses is determined based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The Company considers the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. In addition, consideration is given to concentration risks associated with the various loan portfolios and current economic conditions that might impact the portfolio. The Company also considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry, or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions and macroeconomic factors, such as changes in unemployment rates, gross domestic product, and consumer bankruptcy filings.
Changes to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans that are 90 days or more past due are put on nonaccrual status unless a repayment is eminent. Loans deemed to be uncollectible are charged off against the allowance for loan and lease losses. Recoveries of amounts previously charged-off are credited to the allowance for loan and lease losses.
The allowance for loan and lease losses consist of reserves for probable losses that have been identified related to specific borrowing relationships that are individually evaluated for impairment ("specific reserve"), as well as probable losses inherent in our loan portfolio that are not specifically identified ("collective reserve").

21-




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

The specific reserve relates to impaired loans. A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. Specific reserves are determined on a loan-by-loan basis based on management’s best estimate of the Company's exposure, given the current payment status of the loan, the present value of expected payments, and the value of any underlying collateral. Impaired loans also include loans modified in troubled debt restructurings. Generally, the impairment related to troubled debt restructurings is measured based on the fair value of the collateral, less cost to sell, or the present value of expected payments relative to the unpaid principal balance. If the impaired loan is identified as collateral dependent, then the fair value of the collateral method of measuring the amount of the impairment is utilized. This method requires obtaining an independent appraisal of the collateral and reducing the appraised value by applying a discount factor to the appraised value, if necessary, and including costs to sell.
Management’s estimate for collective reserves reflects losses incurred in the loan portfolio as of the consolidated balance sheet reporting date. Incurred loss estimates primarily are based on historical loss experience and portfolio mix. Incurred loss estimates may be adjusted for qualitative factors such as current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and/or significant policy and underwriting changes.
The following tables present the Company’s allowance for loan and lease losses roll forward for the three months ended December 31, 2018 and 2017.
Three Months Ended December 31, 2018
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Beginning balance October 1, 2018
$
16,777

 
$
28,121

 
$
13,610

 
$
4,749

 
$
257

 
$
1,026

 
$
64,540

Charge-offs
(871
)
 
(1,261
)
 
(1,361
)
 
(332
)
 
(249
)
 
(145
)
 
(4,219
)
Recoveries
97

 
158

 
123

 
162

 
85

 
32

 
657

Provision
787

 
4,767

 
(279
)
 
(25
)
 
337

 
13

 
5,600

(Improvement) impairment of ASC 310-30 loans
(442
)
 

 

 
57

 

 

 
(385
)
Ending balance December 31, 2018
$
16,348

 
$
31,785

 
$
12,093

 
$
4,611

 
$
430

 
$
926

 
$
66,193

Three Months Ended December 31, 2017
Commercial Real Estate
 
Agriculture
 
Commercial Non-Real Estate
 
Residential Real Estate
 
Consumer
 
Other
 
Total
 
(dollars in thousands)
Beginning balance October 1, 2017
$
16,941

 
$
25,757

 
$
14,114

 
$
5,347

 
$
329

 
$
1,015

 
$
63,503

Charge-offs
(329
)
 
(2,198
)
 
(1,239
)
 
(255
)
 
(54
)
 
(534
)
 
(4,609
)
Recoveries
148

 
47

 
121

 
90

 
22

 
144

 
572

Provision
(755
)
 
1,144

 
3,438

 
330

 
10

 
437

 
4,604

(Improvement) of ASC 310-30 loans
(10
)
 

 

 
(37
)