00016136659/302021Q1FALSE Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model. For the three months ended December 31, 2020, this line includes a $(0.1) million (reversal of) provision for unfunded commitment reserve. For the three months ended December 31, 2019, provision for unfunded commitment reserve of $0.2 million was recorded in other noninterest expense in the consolidated income statement.us-gaap:AccountingStandardsUpdate201602Memberus-gaap:AccountingStandardsUpdate201613MemberCumulative effect adjustment related to the Company's adoption of ASU 2016-02 and subsequent related ASUs on October 1, 2019.Cumulative effect adjustment related to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020. For additional information, see Note 2, "New Accounting Pronouncements". For the three months ended December 31, 2020, this line includes a $0.1 million decrease in unfunded commitment 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from x to x
Commission File Number 001-36688
Great Western Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware47-1308512
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
225 South Main Avenue57104
Sioux Falls,South Dakota
(Address of principal executive offices)(Zip Code)
(605334-2548
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per share
GWBNew York Stock Exchange
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   No  
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    No  
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 filerAccelerated filerNon-accelerated filer
Smaller reporting companyEmerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
As of 1/28/2021, the number of shares of the registrant’s Common Stock outstanding was 55,105,304.




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


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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 "Company" refers to Great Western Bancorp, Inc., a Delaware corporation, and its consolidated subsidiaries;
"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;
"ACL" refers to allowance for credit 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;
"CARES Act" refers to The Coronavirus Aid, Relief, and Economic Security Act;
"CECL" refers to the current expected credit loss model in ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs;
"COVID-19" or "COVID-19 pandemic" refers to the Coronavirus Disease 2019;
"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" 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;
"LIBOR" refers to London Interbank Offered Rate, and is a benchmark interest rate index for various adjustable rate products;
"NYSE" refers to the New York Stock Exchange;
"PPP" refers to Small Business Administration Paycheck Protection Program;
"RPA" refers to a risk participation agreement;
"Sarbanes-Oxley Act" refers to the Sarbanes-Oxley Act of 2002;
"SBA" refers to Small Business Administration;
"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.
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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:
the severity, magnitude and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, as well as responses to the pandemic by the government, business and consumers, on our operations and personnel, commercial activity and demand across our business and our customers' business;
the disruption of global, national, state and local economies associated with the COVID-19 pandemic, which could affect our liquidity and capital positions, impair the ability of our borrowers to repay outstanding loans, impair collateral values and further increase our allowance for credit losses;
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;
estimates of fair value of certain of the Company's assets and liabilities, which could change in value significantly from period to period;
the impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of the COVID-19 pandemic;
our ability to anticipate interest rate changes and manage interest rate risk;
uncertainty about the discontinued use of the London Inter Bank Offered Rate and transition to an alternative rate;
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 credit losses;
our ability to develop and effectively use the quantitative models we rely upon in our business;
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;
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 impairment of our other intangible assets, or any adjustment of the valuation of our deferred tax assets;
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the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters, social instability and changes in governmental policies;
the effects of adverse weather conditions, particularly on our agricultural borrowers;
the impact of, and changes in applicable laws, regulations and accounting standards, policies and interpretations, including the impact of the Tax Reform Act;
increases in our FDIC insurance premiums, or the collection of special assessments by the FDIC;
legal, compliance and reputational risks, including litigation and regulatory risks;
our ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations and to manage risks associated therewith;
our ability to attract and retain senior management experienced in the banking and financial services industries;
our inability to receive dividends from our Bank and to service debt, pay dividends to our common stockholders and satisfy obligations as they become due;
expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act 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, 2020.
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, 2020. 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.
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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, 2020September 30, 2020
Assets
Cash and due from banks$228,050 $150,085 
Interest-bearing bank deposits833,746 282,802 
Cash and cash equivalents1,061,796 432,887 
Securities available for sale2,059,615 1,774,626 
Loans, net of unearned discounts and deferred fees, including $611,588 and $655,185 of loans at fair value under the fair value option at December 31, 2020 and September 30, 2020, respectively; and $11,638 and $12,371 of loans held for sale at December 31, 2020 and September 30, 2020, respectively
9,517,876 10,076,142 
Allowance for credit losses ¹(308,794)(149,887)
Net loans9,209,082 9,926,255 
Premises and equipment, including $600 of property held for sale at both December 31, 2020 and September 30, 2020
119,362 119,054 
Accrued interest receivable47,598 54,658 
Other repossessed property18,086 20,034 
Cash surrender value of life insurance policies31,873 31,658 
Net deferred tax assets91,704 47,709 
Other assets175,267 197,558 
Total assets$12,814,383 $12,604,439 
Liabilities and stockholders’ equity
Noninterest-bearing$2,858,455 $2,586,743 
Interest-bearing8,514,863 8,422,036 
Total deposits11,373,318 11,008,779 
Securities sold under agreements to repurchase80,355 65,506 
FHLB advances and other borrowings120,000 195,000 
Subordinated debentures and subordinated notes payable108,866 108,832 
Accrued expenses and other liabilities63,343 63,389 
Total liabilities11,745,882 11,441,506 
Stockholders’ equity
Common stock, $0.01 par value, authorized 500,000,000 shares; 55,105,105 shares issued and outstanding at December 31, 2020 and 55,014,189 shares issued and outstanding at September 30, 2020
550 550 
Additional paid-in capital1,184,281 1,183,647 
Retained earnings(148,769)(57,169)
Accumulated other comprehensive income32,439 35,905 
Total stockholders' equity1,068,501 1,162,933 
Total liabilities and stockholders' equity$12,814,383 $12,604,439 
1 Prior to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, this line represented the allowance for loan and lease losses under the incurred loss model.
See accompanying notes.
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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Income (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
Three Months Ended December 31,
20202019
Interest income
Loans$107,323 $119,431 
Investment securities8,119 11,498 
Federal funds sold and other155 608 
Total interest income115,597 131,537 
Interest expense
Deposits5,992 21,940 
FHLB advances and other borrowings880 3,113 
Subordinated debentures and subordinated notes payable817 1,311 
Total interest expense7,689 26,364 
Net interest income107,908 105,173 
Provision for credit losses ¹11,899 8,103 
Net interest income after provision for credit losses96,009 97,070 
Noninterest income
Service charges and other fees9,624 11,409 
Wealth management fees3,029 2,964 
Mortgage banking income, net4,090 1,612 
Net gain on sale of securities and other assets248  
Derivative interest expense(3,393)(890)
Change in fair value of FVO loans and related derivatives(1,672)(2,124)
Other derivative income898 1,597 
Other1,324 1,165 
Total noninterest income14,148 15,733 
Noninterest expense
Salaries and employee benefits37,554 35,905 
Data processing and communication6,226 5,773 
Occupancy and equipment5,213 5,093 
Professional fees3,915 3,764 
Advertising556 865 
Net loss on repossessed property and other related expenses345 342 
Other3,640 5,188 
Total noninterest expense57,449 56,930 
Income before income taxes52,708 55,873 
Provision for income taxes11,389 12,599 
Net income$41,319 $43,274 
Basic earnings per common share
Weighted average common shares outstanding55,119,909 56,377,631 
Basic earnings per share$0.75 $0.77 
Diluted earnings per common share
Weighted average diluted common shares outstanding55,247,343 56,457,967 
Diluted earnings per share$0.75 $0.77 
Dividends per share
Dividends paid$550 $16,885 
Dividends per share$0.01 $0.30 
1 For the three months ended December 31, 2020, this line includes a $(0.1) million (reversal of) provision for unfunded commitments reserve. For the three months ended December 31, 2019, provision for unfunded commitments reserve of $0.2 million was recorded in other noninterest expense in the consolidated income statement.
See accompanying notes.
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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended December 31,
20202019
Net income$41,319 $43,274 
Other comprehensive loss, net of tax
Securities available for sale:
Net unrealized holding loss arising during the period(4,352)(8,160)
Reclassification adjustment for net gain realized in net income(248) 
Income tax benefit1,134 2,010 
Other comprehensive loss, net of tax(3,466)(6,150)
Comprehensive income$37,853 $37,124 
See accompanying notes.
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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Stockholders' Equity (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data)
Comprehensive Income (Loss)Common Stock Par ValueAdditional
Paid-in Capital
Retained
Earnings
Accumulated Other Comprehensive IncomeTotal
Balance, October 1, 2019$563 $1,228,714 $657,475 $13,497 $1,900,249 
Net income$43,274 — — 43,274 — 43,274 
Other comprehensive (loss), net of tax(6,150)— — — (6,150)(6,150)
Total comprehensive income$37,124 
Cumulative effect adjustment related to ASU adoption ¹— — (182)— (182)
Stock-based compensation, net of tax— 363 — — 363 
Cash dividends:
Common stock, $0.30 per share
— — (16,885)— (16,885)
Balance, December 31, 2019$563 $1,229,077 $683,682 $7,347 $1,920,669 
Balance, October 1, 2020$550 $1,183,647 $(57,169)$35,905 $1,162,933 
Net income$41,319   41,319  41,319 
Other comprehensive (loss), net of tax(3,466)   (3,466)(3,466)
Total comprehensive income$37,853 
Cumulative effect adjustment related to ASU adoption ²  (132,919) (132,919)
Stock-based compensation, net of tax 1,184   1,184 
Cash dividends:
Common stock, $0.01 per share
 (550)  (550)
Balance, December 31, 2020$550 $1,184,281 $(148,769)$32,439 $1,068,501 
¹ Cumulative effect adjustment related to the Company's adoption of ASU 2016-02 and subsequent related ASUs on October 1, 2019.
2 Cumulative effect adjustment related to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020. For additional information, see Note 2, "New Accounting Pronouncements".
See accompanying notes.

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GREAT WESTERN BANCORP, INC.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Three Months Ended December 31,
20202019
Operating activities
Net income$41,319 $43,274 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization4,778 3,947 
Amortization of FDIC indemnification asset 251 
Net gain on sale of other assets(605) 
Net gain on sale of loans(4,330)(1,814)
Provision for credit losses ¹11,899 8,103 
Provision for loan servicing rights loss 1 
Stock-based compensation1,184 363 
Originations of residential real estate loans held for sale(132,118)(105,185)
Proceeds from sales of residential real estate loans held for sale137,182 108,816 
Proceeds from sale of other assets348  
Net deferred income taxes11 (6,626)
Changes in:
Accrued interest receivable7,060 3,722 
Other assets21,358 (71)
Accrued interest payable and other liabilities510 23,674 
Net cash provided by operating activities88,596 78,455 
Investing activities
Purchase of securities available for sale(487,816)(247,934)
Proceeds from sales of securities available for sale  
Proceeds from maturities of securities available for sale195,585 117,333 
Net decrease in loans528,843 65,253 
Payment of covered losses from FDIC indemnification claims (4)
Purchase of premises and equipment(2,110)(2,033)
Proceeds from sale of repossessed property2,313 4,569 
Purchase of FHLB stock(10)(29,687)
Proceeds from redemption of FHLB stock127 20,342 
Net cash paid in business acquisition (4,711)
Net cash provided by (used in) investing activities236,932 (76,872)
Financing activities
Net increase (decrease) in deposits364,561 (211,780)
Net increase (decrease) in securities sold under agreements to repurchase and other short-term borrowings14,849 (2,703)
Proceeds from FHLB advances and other long-term borrowings 250,000 
Repayments on FHLB advances and other long-term borrowings(75,000)(15,000)
Taxes paid related to net share settlement of equity awards(479)(1,268)
Dividends paid(550)(16,885)
Net cash provided by financing activities303,381 2,364 
Net increase in cash and cash equivalents628,909 3,947 
Cash and cash equivalents, beginning of period432,887 243,474 
Cash and cash equivalents, end of period$1,061,796 $247,421 
Supplemental disclosure of cash flow information
Cash payments for interest$8,741 $26,959 
Cash (receipts from) payments for income taxes$(47)$232 
Supplemental disclosure of noncash investing and financing activities
Loans transferred to repossessed properties$ $(7,295)
1 For the three months ended December 31, 2020, this line includes a $0.1 million (reversal of) provision for unfunded commitments reserve.
See accompanying notes.
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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. Substantially all of the Company's income is generated from banking operations. 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.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with 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, 2020, 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 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 ASU 2016-13, as amended, as of October 1, 2020, the Company updated its accounting policies related to securities, loans and allowance for credit losses. See "Note 2. New Accounting Standards" for additional information on the adoption of the standard. See "Note 3. Securities Available for Sale" and "Note 4. Loans and Allowance for Credit Losses" for new disclosures and additional policy information.
There were no other significant changes to the Company's accounting policies from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020 that could have a material effect on the Company's consolidated financial statements.
Securities
Purchases and sales of securities are recognized on a trade date basis. The cost of securities sold is based on the specific identification method. The Company classifies securities upon purchase in one of three categories: trading, held to maturity, or available for sale. Debt 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. Interest and dividends, including amortization of premiums and accretion of discounts, are recognized as interest income when earned.
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 on the consolidated statements of income.
Available for sale securities are stated at fair value. For available for sale debt securities in an unrealized loss position, management first evaluates whether (1) the Company has the intent to sell a security; or (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the entire amount of unrealized loss is recognized in the consolidated income statement with a corresponding adjustment to the security's amortized cost basis.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
If neither criteria is met, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Furthermore, securities issued by the U.S. Government or a U.S. Government sponsored enterprise which carry the explicit or implicit guarantee of the U.S. Government are considered "risk-free" and therefore no credit losses are assumed on those securities. If the assessment indicates a credit loss exists, the amortized cost basis is compared to the present value of cash flows expected to be collected from the security; if it is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded. Changes in the allowance for credit losses are recorded as a provision for (reversal of) credit losses in the consolidated income statement. If the assessment indicates a credit loss does not exist, the change in fair value is recorded as unrealized gains and losses, net of related taxes, and is included in stockholders’ equity as a component of accumulated other comprehensive income (loss).
Equity securities are carried at fair value, with changes in fair value reported in the consolidated statements of income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment.
Loans
Originated Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at amortized cost (i.e., outstanding principal balance, adjusted for charge-offs 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. A loan is placed on nonaccrual status when management believes, after considering collection efforts and other factors, the borrower's condition is such that collection of interest is doubtful, which is generally 90 days past due. When loans are placed on nonaccrual status, accrual of interest is discontinued and 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.
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 makes commercial, agricultural, residential real estate, consumer 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 accounts receivable, marketable securities, inventory, equipment and real estate. Personal guarantees of the borrower or related parties and 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.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Loans at Fair Value Under the Fair Value Option ("FVO loans")
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 agri-business 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 Company has also entered into interest rate derivative contracts to convert these long term fixed rate loans to variable rates. These contracts do not quality for hedge accounting and instead these interest rate derivative instruments are recognized as other assets or other liabilities on the consolidated balance sheets and measured at fair value, with changes in fair value reported in change in fair value of FVO loans and related derivatives on the consolidated statements of income. Since each fixed rate loan is paired with an offsetting derivative contract, the impact to net income is minimized. When determined necessary, a credit mark is applied against the valuation of the asset that reflects the borrower's credit worthiness. Changes in the credit mark are included in change in fair value of FVO loans and related derivatives on the consolidated statements of income.
Credit Risk Management
The Company uses several credit quality indicators to manage credit risk in an ongoing manner. 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, loan class type, 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 assigns all non-consumer loans a credit quality risk rating. The Company implemented a more granular risk rating methodology as of October 1, 2020. See the table below for a summary of credit quality risk ratings at December 31, 2020. For information on the credit quality risk ratings in effect before October 1, 2020, see "1. Nature of Operations and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
Credit Quality
Risk Rating Effective
After October 1, 2020
Credit Quality Indicators
PassCommercial loans within this category are not adversely rated, current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low likelihood of loss related to loans in this category.
Special MentionCommercial loans within this category have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company's credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant an adverse classification.
SubstandardCommercial loans within this category are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans in this category are assigned a workout loan officer to closely monitor the relationship.
DoubtfulCommercial loans within this category are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
Revolving lines of credit rated Substandard or Doubtful require a higher level of approval and are reviewed quarterly. Advances are allowed to support the continued operating needs of the borrower for their operation and may include, but not limited to, working capital needs to support inventory, accounts receivable, payroll, tax payments, utilities and other needs to operate the business.
All non-consumer loan risk ratings are monitored by management and updated as deemed appropriate. 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, delinquencies are monitored and standard credit scoring systems are used to assess credit risks of residential real estate and consumer loans.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Troubled Debt Restructurings
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. The Company's TDRs include performing and nonperforming TDRs, which consist of loans that continue to accrue interest at the loan's original interest rate when the Company expects 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 the Company does 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 the loan is moved to a performing status (performing TDR). If the Company does 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 included in the analysis of the allowance for credit 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.
In March 2020, a statement was issued by our banking regulators titled "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until December 31, 2020. In December 2020, the Economic Aid to Hard Hit Small Businesses, Non-Profits, and Ventures Act was enacted, which extended the TDR provisions of the CARES Act to January 1, 2022. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
Allowance for Credit Losses ("ACL")
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, on October 1, 2020, which uses the current expected credit loss model ("CECL") to determine the allowance for credit losses based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and the net investments in leases recognized by a lessor in accordance with Topic 842 on leases. The CECL methodology requires recognition of lifetime expected credit losses that takes into consideration all relevant information, including historical losses, current conditions and reasonable and supportable forecasts of future operating conditions.
Loans that do not share similar risk characteristics and are collateral dependent, primarily large loans on nonaccrual status and those which have undergone a TDR, are evaluated on an individual basis ("individual reserve"). The reserve related to these loans is using the collateral available to repay the loan, most typically the liquidation value of the collateral (less selling costs, if applicable). The Company has chosen to continue to include small, less complex loans within the collective reserve for loans on nonaccrual or with TDR status.
Loans that are not reserved for on an individual basis are measured on a collective, or pooled basis ("collective reserve"). Loans are aggregated into pools (or segments) based on similar risk characteristics including borrower type, collateral, type and expected credit loss patterns. The historical loss experience of the pool is generally the starting point for estimating expected credit losses under the collective reserve methodology. The historical loss experience rate of the loan segment is applied to each loan within the segment over the contractual life of each loan, adjusted for estimated prepayments. Management then determines an appropriate macroeconomic forecast based on the expectation of future conditions, including but not limited to the unemployment rate, which is the most significant factor, gross domestic product and corporate bond spreads, and applies the forecast to models which estimate the change in loss expectations relative to the historical loss rates. These models have been implemented in accordance with the Company's Model Risk Management Policy. Additionally, using its new risk rating system, the Company evaluates if the current credit quality of the portfolio materially differs from the one observed over the historical loss period and applies adjustments to the allowance accordingly. Qualitative adjustments may also be made to expected losses based on current and future conditions that may not be fully captured in the modeling components above, such as but not limited to industry, geographic and borrower concentrations, loans servicing practices and changes in underwriting criteria.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
ASU 2016-13 requires institutions to establish a supportable forecast and reversion period for forecasted operating conditions. Management determined a two-year forecast period would capture the majority of the impact associated with current economic conditions and is short enough to be supportable. Additionally, loss rate forecasts follow a straight-line reversion back to the historical loss rate over one year following the initial forecast period.
The following table describes the Company’s eight loan portfolio pools, which is the level at which it develops and documents a systematic methodology to determine the allowance for credit losses.
Loan SegmentCompositionCollateralPrimary Source of RepaymentKey Risk Characteristics
Construction and development 1
Commercial and residential construction loansSecured by commercial and residential real estateCash flowsIndustry and geography of borrower's business, purpose of the loan, repayment sources, borrower's capacity and financial performance, loan covenants, guarantees and nature of pledged collateral
Owner-occupied CRESmall and middle market businessesSecured by commercial real estate
Non-owner-occupied CRE
Multifamily residential real estate
AgricultureAgri-business operating and real estate loansSecured by operating assets, agricultural real estate, and guarantees of ownersCash flowsGeography of the borrower's operations, commodity type and prices and weather patterns, purpose of the loan, repayment sources, borrower's debt capacity and financial performance, loan covenants, guarantees and nature of pledged collateral
Commercial non-real estateSmall and middle market businesses and loans made to public sectorSecured by business assets and guarantees of ownersCash flowsIndustry and geography of the borrower's business, purpose of the loan, repayment sources, borrower's debt capacity and financial performance, loan covenants, guarantees and nature of pledged collateral
Residential real estateResidential mortgages and home equity loans and linesSecured by residential real estateBorrower's incomeBorrower's capacity and willingness to repay, unemployment rates and other economic factors, and customer repayment history
Consumer and otherConsumer loans and all other loan relationships that do not fit within categories above, including consumer and commercial credit cards and consumer deposit account overdraftsSecured by automobiles, unsecured
1 Residential real estate construction loans are included in the construction and development segment until construction is completed, after which the loan is moved to the residential real estate loan segment.
Changes to the allowance for credit losses are made by charges to the provision for credit losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans deemed to be uncollectible are charged off against the allowance for credit losses. Recoveries of amounts previously charged-off are credited to the allowance for credit losses.
Unfunded Commitments and Unfunded Commitments Reserve
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 accrued expenses and other liabilities on the consolidated balance sheets with changes in fair value recorded in other interest income in the consolidated statements of income. All other unfunded loan commitments are generally related to providing credit facilities to customers and are not considered derivatives.
The unfunded commitments reserve ("unfunded reserve") presents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. An unfunded reserve is not recognized for commitments unconditionally cancellable by the Company, which includes credit cards, warehouse lines of credit and other revolving lines which are deemed to be unconditionally cancellable and is recorded in accrued expenses and other liabilities on the consolidated balance sheet. Changes to the unfunded reserve are recognized in provision for credit losses in the consolidated statements of income. The unfunded reserve is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). Loss rates are estimated by utilizing the same loss rates calculated for the collective reserve of the allowance for credit losses. The Company's change in unfunded commitments reserve from the incurred loss methodology to the current expected credit loss methodology was immaterial as of the date of adoption and therefore no provision was recognized.
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GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
Accrued Interest Receivable
Upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, the Company has elected the following:
Accrued interest receivable balances are presented separately within the consolidated balance sheets,
Accrued interest receivable balances are excluded from amortized cost of financing receivables and related disclosure requirements, and
Uncollectible accrued interest receivable is written off by reversing interest income, generally upon becoming 90 days past due.
Accordingly, we do not recognize an allowance for credit losses on accrued interest receivable.
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 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 27, 2021, the Board of Directors of the Company declared a dividend of $0.01 per common share payable on February 26, 2021 to stockholders of record as of close of business on February 12, 2021.
2. New Accounting Standards
Accounting Standards Adopted in Fiscal Year 2021
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs, which address recording of estimated lifetime credit losses on loans, including funded and unfunded commitments, and other financial instruments held by financial institutions and other organizations. ASU 2016-13, as amended, requires institutions to measure all expected credit losses related to financial assets measured at amortized cost 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 CECL model. ASU 2016-13, as amended, 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.
The measurement of expected losses under CECL is applicable to financial assets measured at amortized cost, including loan receivables and debt securities held to maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit and other similar instruments). In addition, CECL requires debt securities available for sale with an unrealized loss to be recognized as allowance for credit loss rather than as a write-down of the securities amortized cost basis when management intends to sell or believes that it is not more-likely-than-not that they will be required to sell the securities prior to recovery of the securities amortized cost to be recognized as allowance for credit loss rather than as a write-down of the securities amortized cost basis . The CECL standard does not apply to the loan portfolio accounted for using the fair value option.
The Company identified eight loan portfolio segments for which a model has been established to estimate credit losses. The historical data sets of these segments were identified, populated and validated. Each segment contains loans which have similar risk characteristics. Not unlike the incurred loss model, each segment is split into loans that are individually assessed and those that are collectively assessed.
The Company adopted the standard on October 1, 2020, and applied the standard's provisions under the modified retrospective approach. Upon adoption of the standard, the Company recorded a $177.3 million increase to the ACL, of which $1.5 million related to the transfer of discounts on previously acquired loans and $175.8 million related to changes from the incurred loss model to the CECL model, which resulted in a cumulative effect adjustment decrease of $132.9 million (after-tax) to retained earnings. The tax effect resulted in a $42.9 million increase in deferred tax assets. In addition, the Company has elected the 5 year CECL transition for regulatory capital ratios, resulting in an add-back of $129.5 million to common equity tier 1 capital as of December 31, 2020.
16-


GREAT WESTERN BANCORP, INC.
Notes to Consolidated Financial Statements (Unaudited)
The following table presents the composition of loans and allowance by portfolio segment as of September 30, 2020, as adjusted at September 30, 2020 and October 1, 2020.
Reported Balance September 30,
2020
Reclassifications ¹ Unamortized Discounts, Unearned Net Deferred Fees and Net Loans in Process Included in Amortized Cost ²Adjusted Balance September 30,
2020
Adoption of ASU 2016-13, as amended ³Adjusted Balance October 1, 2020
(dollars in thousands)
Loans:
Construction and developmentn/a ⁴$512,539 $(2,895)$509,644 $ $509,644 
Owner-occupied CREn/a ⁴ 1,420,061 (2,667)1,417,394 36 1,417,430 
Non-owner-occupied CREn/a ⁴ 2,902,612 (8,232)2,894,380 1,497 2,895,877 
Multifamily residential real estaten/a ⁴ 536,828 (2,845)533,983 (8)533,975 
Total commercial real estate5,274,941 (5,274,941)    
Agriculture1,724,350  (1,654)1,722,696 55 1,722,751 
Commercial non-real estate2,181,656  (16,618)2,165,038 (85)2,164,953 
Residential real estate830,102 (97,099)(2,191)730,812 23 730,835 
Consumer and other 100,553 1,642 102,195 (20)102,175 
Consumer63,206 (63,206)    
Other37,347 (37,347)    
Ending balance10,111,602  (35,460)10,076,142 1,498 10,077,640 
Less: Unamortized discount
on acquired loans
(8,215) 8,215    
            Unearned net deferred fees and
costs and net loans in process
(27,245) 27,245    
Total$10,076,142 $— $— $10,076,142 $1,498 $10,077,640 
Allowance:
Construction and developmentn/a ⁴$(7,012)$ $(7,012)$(11,963)$(18,975)
Owner-occupied CREn/a ⁴(20,530) (20,530)(4,298)(24,828)
Non-owner-occupied CREn/a ⁴(50,965) (50,965)(98,986)(149,951)
Multifamily residential real estaten/a ⁴(6,726) (6,726)(2,681)(9,407)
Total commercial real estate(84,496)84,496 — — — — 
Agriculture(27,018)  (27,018)(24,360)(51,378)
Commercial non-real estate(27,599)  (27,599)(32,938)(60,537)
Residential real estate(8,202)737  (7,465)(2,595)(10,060)
Consumer and other(2,572)  (2,572)532 (2,040)
Total$(149,887)$ $ $(149,887)$(177,289)$(327,176)