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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________________________________________________
FORM 10-Q
____________________________________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020
 
☐ 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 000-18911
____________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________
Montana 81-0519541
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
49 Commons Loop Kalispell, Montana 59901
(Address of principal executive offices) (Zip Code)
(406) 756-4200
(Registrant’s telephone number, including area code)
 ____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value GBCI NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the 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 ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging 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
The number of shares of Registrant’s common stock outstanding on October 15, 2020 was 95,414,850. No preferred shares are issued or outstanding.



TABLE OF CONTENTS
 


  Page
Part I. Financial Information
Item 1 – Financial Statements
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ABBREVIATIONS/ACRONYMS

 

ACL or allowance – allowance for credit losses
ALCO – Asset Liability Committee
ASC – Accounting Standards CodificationTM
ASU – Accounting Standards Update
ATM – automated teller machine
Bank – Glacier Bank
CARES Act – Coronavirus Aid, Relief, and Economic Security Act
CDE – Certified Development Entity
CDFI Fund – Community Development Financial Institutions Fund
CECL – current expected credit losses
CEO – Chief Executive Officer
CFO – Chief Financial Officer
Company – Glacier Bancorp, Inc.
COVID-19 – coronavirus disease of 2019
DDA – demand deposit account
Fannie Mae – Federal National Mortgage Association
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FHLB – Federal Home Loan Bank
Final Rules – final rules implemented by the federal banking agencies that established a
  new comprehensive regulatory capital framework
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
GAAP – accounting principles generally accepted in the United States of America
GDP – gross domestic product
Ginnie Mae – Government National Mortgage Association
Interest rate locks - residential real estate derivatives for commitments
LIBOR – London Interbank Offered Rate
LIHTC – Low Income Housing Tax Credit
NMTC – New Markets Tax Credit
NOW – negotiable order of withdrawal
NRSRO – Nationally Recognized Statistical Rating Organizations
OCI – other comprehensive income
OREO – other real estate owned
PCD – purchased credit-deteriorated
PPP – Paycheck Protection Program
Repurchase agreements – securities sold under agreements to repurchase
ROU – right-of-use
S&P – Standard and Poor’s
SBA – United States Small Business Administration
SBAZ – State Bank Corp. and its subsidiary, State Bank of Arizona
SEC – United States Securities and Exchange Commission
TBA – to-be-announced
TDR – troubled debt restructuring
VIE – variable interest entity






GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Dollars in thousands, except per share data) September 30,
2020 		December 31,
2019
Assets
Cash on hand and in banks $ 249,245  198,639 
Federal funds sold 590  — 
Interest bearing cash deposits 520,044  132,322 
Cash and cash equivalents 769,879  330,961 
Debt securities, available-for-sale 4,125,548  2,575,252 
Debt securities, held-to-maturity 193,509  224,611 
Total debt securities 4,319,057  2,799,863 
Loans held for sale, at fair value 147,937  69,194 
Loans receivable 11,618,731  9,512,810 
Allowance for credit losses (164,552) (124,490)
Loans receivable, net 11,454,179  9,388,320 
Premises and equipment, net 326,925  310,309 
Other real estate owned 5,361  5,142 
Accrued interest receivable 91,393  56,047 
Deferred tax asset —  2,037 
Core deposit intangible, net 58,121  63,286 
Goodwill 514,013  456,418 
Non-marketable equity securities 10,366  11,623 
Bank-owned life insurance 123,095  109,428 
Other assets 105,741  81,371 
Total assets $ 17,926,067  13,683,999 
Liabilities
Non-interest bearing deposits $ 5,479,311  3,696,627 
Interest bearing deposits 8,820,577  7,079,830 
Securities sold under agreements to repurchase 965,668  569,824 
Federal Home Loan Bank advances 7,318  38,611 
Other borrowed funds 32,967  28,820 
Subordinated debentures 139,918  139,914 
Accrued interest payable 3,951  4,686 
Deferred tax liability 17,227  — 
Other liabilities 204,041  164,954 
Total liabilities 15,670,978  11,723,266 
Commitments and Contingent Liabilities
Stockholders’ Equity
Preferred shares, $0.01 par value per share, 1,000,000 shares authorized, none issued or outstanding
—  — 
Common stock, $0.01 par value per share, 117,187,500 shares authorized
954  923 
Paid-in capital 1,493,928  1,378,534 
Retained earnings - substantially restricted 629,109  541,050 
Accumulated other comprehensive income 131,098  40,226 
Total stockholders’ equity 2,255,089  1,960,733 
Total liabilities and stockholders’ equity $ 17,926,067  13,683,999 
Number of common stock shares issued and outstanding 95,413,743  92,289,750 
See accompanying notes to unaudited condensed consolidated financial statements.
4


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

  Three Months ended Nine Months ended
(Dollars in thousands, except per share data) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Interest Income
Investment securities $ 25,381  21,357  72,228  64,600 
Residential real estate loans 11,592  12,156  35,216  34,345 
Commercial loans 109,514  97,224  314,541  268,806 
Consumer and other loans 11,000  11,658  33,771  33,145 
Total interest income 157,487  142,395  455,756  400,896 
Interest Expense
Deposits 3,952  6,214  14,120  17,179 
Securities sold under agreements to repurchase 886  999  2,783  2,687 
Federal Home Loan Bank advances 70  2,035  684  8,937 
Other borrowed funds
173  47  473  123 
Subordinated debentures 1,003  1,652  3,705  5,014 
Total interest expense 6,084  10,947  21,765  33,940 
Net Interest Income 151,403  131,448  433,991  366,956 
Credit loss expense 2,869  —  39,165  57 
Net interest income after credit loss expense
148,534  131,448  394,826  366,899 
Non-Interest Income
Service charges and other fees 13,404  15,138  38,790  53,178 
Miscellaneous loan fees and charges 2,084  1,775  5,051  3,934 
Gain on sale of loans 35,516  10,369  73,236  23,929 
Gain on sale of debt securities 24  13,811  1,015  14,158 
Other income 2,639  1,956  10,071  7,158 
Total non-interest income 53,667  43,049  128,163  102,357 
Non-Interest Expense
Compensation and employee benefits 64,866  62,509  182,507  167,210 
Occupancy and equipment 9,369  8,731  27,945  25,348 
Advertising and promotions 2,779  2,719  7,404  7,874 
Data processing 5,597  4,466  15,921  12,420 
Other real estate owned 186  166  373  496 
Regulatory assessments and insurance 1,495  593  3,622  3,726 
Loss on termination of hedging activities —  13,528  —  13,528 
Core deposit intangibles amortization 2,612  2,360  7,758  5,919 
Other expenses 18,786  15,603  50,229  43,154 
Total non-interest expense 105,690  110,675  295,759  279,675 
Income Before Income Taxes 96,511  63,822  227,230  189,581 
Federal and state income tax expense 18,754  12,212  42,690  36,447 
Net Income $ 77,757  51,610  184,540  153,134 
Basic earnings per share $ 0.81  0.57  1.95  1.76 
Diluted earnings per share $ 0.81  0.57  1.95  1.76 
Dividends declared per share $ 0.30  0.29  0.88  0.82 
Average outstanding shares - basic 95,411,656  90,294,811  94,704,198  86,911,402 
Average outstanding shares - diluted 95,442,576  90,449,195  94,747,894  87,082,178 

See accompanying notes to unaudited condensed consolidated financial statements.
5


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
  Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Net Income $ 77,757  51,610  184,540  153,134 
Other Comprehensive Income, Net of Tax
Unrealized gains on available-for-sale securities
1,693  11,113  123,262  87,442 
Reclassification adjustment for gains included in net income
(24) (13,811) (1,014) (14,166)
Net unrealized gains (losses) on available-for-sale securities
1,669  (2,698) 122,248  73,276 
Tax effect (424) 684  (30,979) (18,568)
Net of tax amount 1,245  (2,014) 91,269  54,708 
Unrealized losses on derivatives used for cash flow hedges
(76) (1,393) (532) (7,047)
Reclassification adjustment for losses included in net income
—  10,315  —  10,816 
Net unrealized (losses) gains on derivatives used for cash flow hedges
(76) 8,922  (532) 3,769 
Tax effect 20  (2,261) 135  (955)
Net of tax amount (56) 6,661  (397) 2,814 
Total other comprehensive income, net of tax
1,189  4,647  90,872  57,522 
Total Comprehensive Income $ 78,946  56,257  275,412  210,656 


























See accompanying notes to unaudited condensed consolidated financial statements.
6


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
Three Months ended September 30, 2020 and 2019
 
(Dollars in thousands, except per share data) Common Stock Paid-in Capital Retained
Earnings
Substantially Restricted 		Accumulated
Other Compre-
hensive Income 		 
Shares Amount Total
Balance at July 1, 2019 86,637,394  $ 866  1,139,289  503,773  43,448  1,687,376 
Net income —  —  —  51,610  —  51,610 
Other comprehensive income —  —  —  —  4,647  4,647 
Cash dividends declared ($0.29 per share)
—  —  —  (26,784) —  (26,784)
Stock issued in connection with acquisitions
5,473,276  55  229,330  —  —  229,385 
Stock issuances under stock incentive plans
69,948  1  (1) —  —  — 
Stock-based compensation and related taxes
—  —  7,167  —  —  7,167 
Balance at September 30, 2019 92,180,618  $ 922  1,375,785  528,599  48,095  1,953,401 
Balance at July 1, 2020 95,409,061  $ 954  1,492,817  580,035  129,909  2,203,715 
Net income —  —  —  77,757  —  77,757 
Other comprehensive income —  —  —  —  1,189  1,189 
Cash dividends declared ($0.30 per share)
—  —  —  (28,683) —  (28,683)
Stock issuances under stock incentive plans
4,682  —  —  —  —  — 
Stock-based compensation and related taxes
—  —  1,111  —  —  1,111 
Balance at September 30, 2020 95,413,743  $ 954  1,493,928  629,109  131,098  2,255,089 


















See accompanying notes to unaudited condensed consolidated financial statements.
7



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
Nine Months ended September 30, 2020 and 2019
 
(Dollars in thousands, except per share data) Common Stock Paid-in Capital Retained
Earnings
Substantially Restricted 		Accumulated
Other Compre-
hensive (Loss) Income 		 
Shares Amount Total
Balance at January 1, 2019 84,521,692  $ 845  1,051,253  473,183  (9,427) 1,515,854 
Net income —  —  —  153,134  —  153,134 
Other comprehensive income —  —  —  —  57,522  57,522 
Cash dividends declared ($0.82 per share)
—  —  —  (72,260) —  (72,260)
Stock issued in connection with acquisitions
7,519,617  75  316,463  —  —  316,538 
Stock issuances under stock incentive plans
139,309  2  (2) —  —  — 
Stock-based compensation and related taxes
—  —  8,071  —  —  8,071 
Cumulative-effect of accounting changes
—  —  —  (25,458) —  (25,458)
Balance at September 30, 2019 92,180,618  $ 922  1,375,785  528,599  48,095  1,953,401 
Balance at January 1, 2020 92,289,750  $ 923  1,378,534  541,050  40,226  1,960,733 
Net income —  —  —  184,540  —  184,540 
Other comprehensive income —  —  —  —  90,872  90,872 
Cash dividends declared ($0.88 per share)
—  —  —  (84,134) —  (84,134)
Stock issued in connection with acquisitions
3,007,044  30  112,103  —  —  112,133 
Stock issuances under stock incentive plans
116,949  1  (1) —  —  — 
Stock-based compensation and related taxes
—  —  3,292  —  —  3,292 
Cumulative-effect of accounting changes
—  —  —  (12,347) —  (12,347)
Balance at September 30, 2020 95,413,743  $ 954  1,493,928  629,109  131,098  2,255,089 











See accompanying notes to unaudited condensed consolidated financial statements.
8


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019
Operating Activities
Net income $ 184,540  153,134 
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense 39,165  57 
Net amortization of debt securities 10,830  11,687 
Net accretion of purchase accounting adjustments
and deferred loan fees and costs 		(23,369) (2,680)
Amortization of debt modification costs —  4,630 
Origination of loans held for sale (1,393,224) (671,038)
Proceeds from loans held for sale 1,400,697  633,085 
Gain on sale of loans (73,236) (23,929)
Gain on sale of debt securities (1,015) (14,158)
Bank-owned life insurance income, net (2,059) (1,629)
Stock-based compensation, net of tax benefits 2,829  6,554 
Depreciation and amortization of premises and equipment 15,124  13,713 
Gain on sale and write-downs of other real estate owned, net (64) (288)
Amortization of core deposit intangibles 7,758  5,919 
Amortization of investments in variable interest entities 8,244  6,767 
Net increase in accrued interest receivable (33,558) (5,348)
Net increase in other assets (22,729) (367)
Net (decrease) increase in accrued interest payable (861) 61 
Net decrease in other liabilities (5,315) (1,730)
Net cash provided by operating activities 113,757  114,440 
Investing Activities
Sales of available-for-sale debt securities —  711,268 
Maturities, prepayments and calls of available-for-sale debt securities 545,191  457,299 
Purchases of available-for-sale debt securities (1,839,308) (839,835)
Maturities, prepayments and calls of held-to-maturity debt securities 29,530  48,940 
Principal collected on loans 2,978,796  2,497,073 
Loan originations (4,627,653) (2,900,692)
Net additions to premises and equipment (8,140) (14,230)
Proceeds from sale of other real estate owned 2,140  2,960 
Proceeds from redemption of non-marketable equity securities 76,275  115,436 
Purchases of non-marketable equity securities (71,397) (93,397)
Investments in variable interest entities (7,975) (7,956)
Net cash received from acquisitions 43,713  79,334 
Net cash (used in) provided by investing activities (2,878,828) 56,200 




See accompanying notes to unaudited condensed consolidated financial statements.
9


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
  Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019
Financing Activities
Net increase in deposits $ 2,920,429  377,986 
Net increase in securities sold under agreements to repurchase 388,595  161,191 
Net decrease in short-term Federal Home Loan Bank advances (30,000) (285,000)
Proceeds from long-term Federal Home Loan Bank advances 30,000  — 
Repayments of long-term Federal Home Loan Bank advances (31,271) (151,073)
Net increase in other borrowed funds 463  97 
Cash dividends paid (73,999) (70,970)
Tax withholding payments for stock-based compensation (1,023) (277)
Proceeds from stock option exercises 795  — 
Net cash provided by financing activities 3,203,989  31,954 
Net increase in cash, cash equivalents and restricted cash 438,918  202,594 
Cash, cash equivalents and restricted cash at beginning of period 330,961  203,790 
Cash, cash equivalents and restricted cash at end of period $ 769,879  406,384 
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest $ 22,626  33,878 
Cash paid during the period for income taxes 43,944  33,032 
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Sale and refinancing of other real estate owned $ 215  7 
Transfer of loans to other real estate owned 2,062  2,347 
Right-of-use assets obtained in exchange for operating lease liabilities 7,343  3,910 
Dividends declared during the period but not paid 28,799  26,874 
Acquisitions
Fair value of common stock shares issued 112,133  316,538 
Cash consideration 13,721  16,424 
Fair value of assets acquired 745,420  1,190,267 
Liabilities assumed 619,565  1,024,141 













See accompanying notes to unaudited condensed consolidated financial statements.
10


GLACIER BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1. Nature of Operations and Summary of Significant Accounting Policies

General
Glacier Bancorp, Inc. (“Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range of banking services to individuals and businesses in Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada through its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including: 1) retail banking; 2) business banking; 3) real estate, commercial, agriculture and consumer loans; and 4) mortgage origination services. The Company serves individuals, small to medium-sized businesses, community organizations and public entities.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. These interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and they should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results anticipated for the year ending December 31, 2020. The condensed consolidated statement of financial condition of the Company as of December 31, 2019 has been derived from the audited consolidated statements of the Company as of that date.

The Company is a defendant in legal proceedings arising in the normal course of business. In the opinion of management, the disposition of pending litigation will not have a material affect on the Company’s consolidated financial position, results of operations or liquidity.

Material estimates that are particularly susceptible to significant change include: 1) the determination of the allowance for credit losses (“ACL” or “allowance”) on loans; 2) the valuation of debt securities; 3) the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans; and 4) the evaluation of goodwill impairment. For the determination of the ACL on loans and real estate valuation estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to the valuation of debt securities are obtained from independent third parties. Estimates relating to the evaluation of goodwill for impairment are determined based on internal calculations using significant independent party inputs.

Principles of Consolidation
The consolidated financial statements of the Company include the parent holding company and the Bank, which consists of sixteen bank divisions and a corporate division. The corporate division includes the Bank’s investment portfolio, wholesale borrowings and other centralized functions. The Bank divisions operate under separate names, management teams and advisory directors. The Company considers the Bank to be its sole operating segment as the Bank 1) engages in similar bank business activity from which it earns revenues and incurs expenses; 2) the operating results of the Bank are regularly reviewed by the Chief Executive Officer (“CEO”) (i.e., the chief operating decision maker) who makes decisions about resources to be allocated to the Bank; and 3) financial information is available for the Bank. All significant inter-company transactions have been eliminated in consolidation.

The Bank has subsidiary interests in variable interest entities (“VIE”) for which the Bank has both the power to direct the VIE’s significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could potentially be significant to the VIE. These subsidiary interests are included in the Company’s consolidated financial statements. The Bank also has subsidiary interests in VIEs for which the Bank does not have a controlling financial interest and is not the primary beneficiary. These subsidiary interests are not included in the Company’s consolidated financial statements.


11


The parent holding company owns non-bank subsidiaries that have issued trust preferred securities. The trust subsidiaries are not included in the Company’s consolidated financial statements. The Company's investments in the trust subsidiaries are included in other assets on the Company's statements of financial condition.

On February 29, 2020, the Company completed the acquisition of State Bank Corp., the bank holding company for State Bank of Arizona, a community bank based in Lake Havasu City, Arizona (collectively, “SBAZ”). The business combination was accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date. For additional information relating to mergers and acquisitions, see Note 13.

Debt Securities
On January 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses, which significantly changed the allowance for credit loss accounting policies for debt securities. The following debt securities and allowance for credit loss accounting policies are presented under Accounting Standards Codification™ (“ASC”) Topic 326, whereas prior periods are presented as described in the Company’s 2019 Annual Report on Form 10-K.

Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Debt securities held primarily for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in income. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income (“OCI”). Premiums and discounts on debt securities are amortized or accreted into income using a method that approximates the interest method. The objective of the interest method is to calculate periodic interest income at a constant effective yield. The Company does not have any debt securities classified as trading securities. When the Company acquires another entity, it designates all debt securities as available-for-sale at acquisition date and records the debt securities at fair value.

The Company reviews and analyzes the various risks that may be present within the investment portfolio on an ongoing basis, including market risk, credit risk and liquidity risk. Market risk is the risk to an entity’s financial condition resulting from adverse changes in the value of its holdings arising from movements in interest rates, foreign exchange rates, equity prices or commodity prices. The Company assesses the market risk of individual debt securities as well as the investment portfolio as a whole. Credit risk, broadly defined, is the risk that an issuer or counterparty will fail to perform on an obligation. The credit rating of a security is considered the primary credit quality indicator for debt securities. Liquidity risk refers to the risk that a security will not have an active and efficient market in which the security can be sold.

A debt security is investment grade if the issuer has adequate capacity to meet its commitment over the expected life of the investment, i.e., the risk of default is low and full and timely repayment of interest and principal is expected. To determine investment grade status for debt securities, the Company conducts due diligence of the creditworthiness of the issuer or counterparty prior to acquisition and ongoing thereafter consistent with the risk characteristics of the security and the overall risk of the investment portfolio. Credit quality due diligence takes into account the extent to which a security is guaranteed by the U.S. government and other agencies of the U.S. government. The depth of the due diligence is based on the complexity of the structure, the size of the security, and takes into account material positions and specific groups of securities or stratifications for analysis and review of similar risk positions. The due diligence includes consideration of payment performance, collateral adequacy, internal analyses, third party research and analytics, external credit ratings and default statistics.

The Company has acquired debt securities through acquisitions and if the securities have more than insignificant credit deterioration since origination, they are designated as purchased credit-deteriorated (“PCD”) securities. An ACL is determined using the same methodology as with other debt securities. The sum of a security’s purchase price and ACL becomes the initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the debt security is a noncredit discount or premium, which is amortized into interest income over the life of the security. Subsequent changes to the allowance are recorded through credit loss expense.

For additional information relating to debt securities, see Note 2.


12


Allowance for Credit Losses - Available-for-Sale Debt Securities
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more-likely-than-not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through other expense. For the available-for-sale securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In such assessment, the Company considers the extent to which fair value is less than amortized cost, if there are any changes to the investment grade of the security by a rating agency, and if there any adverse conditions that impact the security. If this assessment indicates a credit loss exists, the present value of the cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any estimated credit losses that have not been recorded through an ACL are recognized in OCI.

The Company has elected to exclude accrued interest from the estimate of credit losses for available-for-sale debt securities. As part of its non-accrual policy, the Company charges-off uncollectable interest at the time it is determined to be uncollectable.

Allowance for Credit Losses - Held-to-Maturity Debt Securities
For estimating the allowance for held-to-maturity debt securities that share similar risk characteristics with other securities, such securities are pooled based on major security type. For pools of such securities with similar risk characteristics, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities on those historical credit losses. Expected credit losses on securities in the held-to-maturity portfolio that do not share similar risk characteristics with any of the pools of debt securities are individually measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded amortized cost basis of the securities.

The Company has elected to exclude accrued interest from the estimate of credit losses for held-to-maturity debt securities. As part of its non-accrual policy, the Company charges off uncollectable interest at the time it is determined to be uncollectable.

Loans Receivable
On January 1, 2020, the Company adopted FASB ASU 2016-13, Financial Instruments - Credit Losses, which significantly changed the loan and allowance for credit loss accounting policies. The following loan and allowance for credit loss accounting policies are presented under ASC Topic 326, whereas prior periods are presented in accordance with the incurred loss model as disclosed in the Company’s 2019 Annual Report on Form 10-K.

The Company’s loan segments or classes are based on the purpose of the loan and consist of residential real estate, commercial real estate, other commercial, home equity, and other consumer loans. Loans that are intended to be held-to-maturity are reported at the unpaid principal balance less net charge-offs and adjusted for deferred fees and costs on originated loans and unamortized premiums or discounts on acquired loans. Fees and costs on originated loans and premiums or discounts on acquired loans are deferred and subsequently amortized or accreted as a yield adjustment over the expected life of the loan utilizing the interest or straight-line methods. The interest method is utilized for loans with scheduled payment terms and the objective is to calculate periodic interest income at a constant effective yield. The straight-line method is utilized for revolving lines of credit or loans with no scheduled payment terms. When a loan is paid off prior to maturity, the remaining fees and costs on originated loans and premiums or discounts on acquired loans are immediately recognized into interest income.

Loans that are thirty days or more past due based on payments received and applied to the loan are considered delinquent. Loans are designated non-accrual and the accrual of interest is discontinued when the collection of the contractual principal or interest is unlikely. A loan is typically placed on non-accrual when principal or interest is due and has remained unpaid for ninety days or more. When a loan is placed on non-accrual status, interest previously accrued but not collected is reversed against current period interest income. Subsequent payments on non-accrual loans are applied to the outstanding principal balance if doubt remains as to the ultimate collectability of the loan. Interest accruals are not resumed on partially charged-off loans. For other loans on non-accrual, interest accruals are resumed on such loans only when the loan is brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.


13


The Company has acquired loans through acquisitions, some of which have experienced more than insignificant credit deterioration since origination. The Company considers all acquired non-accrual loans to be PCD loans. In addition, the Company considers loans accruing ninety days or more past due with estimated credit losses or substandard loans with estimated credit losses to be PCD loans. An ACL is determined using the same methodology as other loans held for investment. The ACL determined on a collective basis is allocated to individual loans. The sum of a loan’s purchase price and ACL becomes the initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ACL are recorded through credit loss expense.

For additional information relating to loans, see Note 3.

Allowance for Credit Losses - Loans Receivable
The allowance for credit losses for loans receivable represents management’s estimate of credit losses over the expected contractual life of the loan portfolio. The estimate is determined based on the amortized cost of the loan portfolio including the loan balance adjusted for charge-offs, recoveries, deferred fees and costs, and loan discount and premiums. Recoveries are included only to the extent that such amounts were previously charged-off. The Company has elected to exclude accrued interest from the estimate of credit losses for loans. Determining the adequacy of the allowance is complex and requires a high degree of judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in those future periods.

The allowance is increased for estimated credit losses which is recorded as expense. The portion of loans and overdraft balances determined by management to be uncollectible are charged-off as a reduction to the allowance and recoveries of amounts previously charged-off increase the allowance. The Company’s charge-off policy is consistent with bank regulatory standards. Consumer loans generally are charged-off when the loan becomes over 120 days delinquent. Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until such time as it is sold.

The expected credit loss estimate process involves procedures to consider the unique characteristics of each of its portfolio segments, which consist of residential real estate, commercial real estate, other commercial, home equity, and other consumer loans. When computing the allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, credit and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. The Company has determined a four consecutive quarter forecasting period is a reasonable and supportable period. Expected credit loss for periods beyond reasonable and supportable forecast periods are determined based on a reversion method which reverts back to historical loss estimate over a four consecutive quarter period on a straight-line basis.

Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and the process for estimating the expected credit losses. The following paragraphs describe the risk characteristics relevant to each portfolio segment.

Residential Real Estate.  Residential real estate loans are secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic conditions within the Company’s market areas that affect the value of the property securing the loans and affect the borrowers' personal incomes. Mitigating risk factors for this loan segment include a large number of borrowers, geographic dispersion of market areas and the loans are originated for relatively smaller amounts.


14


Commercial Real Estate.  Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operation of the property securing the loan and/or the business conducted on the property securing the loan. Credit risk in these loans is impacted by the creditworthiness of a borrower, valuation of the property securing the loan and conditions within the local economies in the Company’s diverse, geographic market areas.

Commercial.  Commercial loans consist of loans to commercial customers for use in financing working capital needs, equipment purchases and business expansions. The loans in this segment are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations across the Company’s diverse, geographic market areas.

Home Equity.  Home equity loans consist of junior lien mortgages and first and junior lien lines of credit (revolving open-end and amortizing closed-end) secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans is impacted by economic conditions within the Company’s market areas that affect the value of the residential property securing the loans and affect the borrowers' personal incomes. Mitigating risk factors for this loan segment are a large number of borrowers, geographic dispersion of market areas and the loans are originated for terms that range from 10 to 15 years.

Other Consumer.  The other consumer loan portfolio consists of various short-term loans such as automobile loans and loans for other personal purposes. Repayment of these loans is primarily dependent on the personal income of the borrowers. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s diverse, geographic market area) and the creditworthiness of a borrower.

The allowance is impacted by loan volumes, delinquency status, credit ratings, historical loss experiences, prepayment speeds, weighted average lives and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance has two basic components: 1) individual loans that do not share similar risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and 2) the expected credit losses for pools of loans that share similar risk characteristics.

Loans that do not Share Similar Risk Characteristics with Other Loans. For a loan that does not share similar risk characteristics with other loans, expected credit loss is measured based on the net realizable value, that is, the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, the expected credit loss is equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral-dependent, that is, when foreclosure is probable or the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. The Company has determined that non-accrual loans do not share similar risk characteristics with other loans and these loans are individually evaluated for estimated allowance for credit losses. The Company, through its credit monitoring process, may also identify other loans that do no share similar risk characteristics and individually evaluate such loans. The starting point for determining the fair value of collateral is to obtain external appraisals or evaluations (new or updated) which are generally obtained annually. The valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales comparison approach, or a combination of the preceding valuation techniques. The Company’s credit department reviews appraisals, giving consideration to the highest and best use of the collateral. The appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. Adjustments may be made to the fair value of the collateral after review and acceptance of the collateral appraisal or evaluation (new or updated).


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Loans that Share Similar Risk Characteristics with other Loans. For estimating the allowance for loans that share similar risk characteristics with other loans, such loans are segregated into loan segments. Loans are designated into loan segments based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the ACL, the Company derives an estimated credit loss assumption from a model that categorizes loan pools based on loan type which is further segregated by the credit quality indicators. This model calculates an expected loss percentage for each loan segment by considering the non-discounted simple annual average historical loss rate of each loan segment (calculated through an “open pool” method), multiplying the loss rate by the amortized loan balance and incorporating that segment’s internally generated prepayment speed assumption and contractually scheduled remaining principal pay downs on a loan level basis. The annual historical loss rates are adjusted over a reasonable economic forecast period by a multiplier that is calculated based upon current national economic forecasts as a proportion of each segment’s historical average loss levels. The Company will then revert from the economic forecast period back to the historical average loss rate in a straight-line basis. After the reversion period, the loans will be assumed to experience their historical loss rate for the remainder of their contractual lives. The model applies the expected loss rate over the projected cash flows at the the individual loan level and then aggregates the losses by loan segment in determining their quantitative allowance. The Company will also include qualitative adjustments to adjust the portfolio over the remaining lives of the loans to the extent the current or future market conditions are believed to vary substantially from historical conditions in regards to:
•lending policies and procedures;
•international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets;
•the nature and volume of the loan portfolio including the terms of the loans;
•the experience, ability, and depth of the lending management and other relevant staff;
•the volume and severity of past due and adversely classified or graded loans and the volume of non-accrual loans;
•the quality of our loan review system;
•the value of underlying collateral for collateralized loans;
•the existence and effect of any concentrations of credit, and changes in the level of concentrations; and
•the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

The Company regularly reviews loans in the portfolio to assess credit quality indicators and to determine the appropriate loan classification and grading in accordance with applicable bank regulations. The primary credit quality indicator for residential and consumer loans is the days past due status, which consists of the following categories: 1) performing loans; 2) 30 to 89 days past due loans; and 3) non-accrual and ninety days or more past due loans. The primary credit quality indicator for commercial loans is the Company’s internal risk rating system, which includes the following categories: 1) pass loans; 2) special mention loans; 3) substandard loans; and 4) doubtful or loss loans. Such credit quality indicators are regularly monitored and incorporated into the Company’s allowance estimate. The following paragraphs further define the internal risk ratings for commercial loans.

Pass Loans. These ratings represent loans that are of acceptable, good or excellent quality with very limited to no risk. Loans that do not have one of the following ratings are considered pass loans.

Special Mention Loans. These ratings represent loans that are assigned special mention per the regulatory definition. Special mention loans are currently protected but are potentially weak. The credit risk may be relatively minor yet constitute an undue and unwarranted risk in light of the circumstances surrounding a specific loan. The rating may be used to identify credit with potential weaknesses that if not corrected may weaken the loan to the point of inadequately protecting the bank’s credit position. Examples include a lack of supervision, inadequate loan agreement, condition, or control of collateral, incomplete, or improper documentation, deviations from lending policy, and adverse trends in operations or economic conditions.

Substandard Loans. This rating represents loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. A loan so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregated amount of substandard loans, does not have to exist in an individual loan classified substandard.


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Doubtful/Loss Loans. A loan classified as doubtful has the characteristics that make collection in full, on the basis of currently existing facts, conditions, and values, highly improbable. The possibility of loss is extremely high, but because of pending factors, which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. Loans are classified as loss when they are deemed to be not collectible and of such little value that continuance as an active asset of the Bank is not warranted. Loans classified as loss must be charged-off. Assignment of this classification does not mean that an asset has absolutely no recovery or salvage value, but that it is not practical or desirable to defer writing off a basically worthless asset, even though partial recovery may be attained in the future.

Restructured Loans
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company periodically enters into restructure agreements with borrowers whereby the loans were previously identified as TDRs. When such circumstances occur, the Company carefully evaluates the facts of the subsequent restructure to determine the appropriate accounting and under certain circumstances it may be acceptable not to account for the subsequently restructured loan as a TDR. When assessing whether a concession has been granted by the Company, any prior forgiveness on a cumulative basis is considered a continuing concession. The Company has made the following types of loan modifications, some of which were considered a TDR:
•reduction of the stated interest rate for the remaining term of the debt;
•extension of the maturity date(s) at a stated rate of interest lower than the current market rate for newly originated debt having similar risk characteristics; and
•reduction of the face amount of the debt as stated in the debt agreements.

The Company recognizes that while borrowers may experience deterioration in their financial condition, many continue to be creditworthy borrowers who have the willingness and capacity for debt repayment. In determining whether non-restructured or performing loans issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are non-performing or are TDRs, the Company on a quarterly or more frequent basis performs an updated and comprehensive assessment of the willingness and capacity of the borrowers to timely and ultimately repay their total debt obligations, including contingent obligations. Such analysis takes into account current financial information about the borrowers and financially responsible guarantors, if any, including for example:
•analysis of global, i.e., aggregate debt service for total debt obligations;
•assessment of the value and security protection of collateral pledged using current market conditions and alternative market assumptions across a variety of potential future situations; and
•loan structures and related covenants.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which includes many provisions that impact the Company and its customers. The banking regulatory agencies have encouraged banks to work with borrowers who have been impacted by the coronavirus disease of 2019 (“COVID-19”) and the CARES Act, along with related regulatory guidance, allows banks to not designate certain modifications as TDRs that otherwise may have been classified as TDRs. In general, in order to qualify for such treatment, the modifications need to be short-term and made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to the modification. The Company has made such modifications to assist borrowers impacted by the COVID-19 pandemic.

The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment. For a TDR that is individually reviewed and not collateral-dependent, the value of the concession can only be measured using the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the ACL is determined by discounting the expected future cash flows at the original interest of the loan.


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Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
The Company maintains a separate allowance for off-balance sheet credit exposures, including unfunded loan commitments, which is included in other liabilities on the Company’s statements of financial condition. The Company estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures and applying the loss factors used in the allowance for credit loss methodology to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan type. No credit loss estimate is reported for off-balance sheet credit exposures that are unconditionally cancellable by the Bank or for unfunded amounts under such arrangements that may be drawn prior to the cancellation of the arrangement.

Leases
The Company leases certain land, premises and equipment from third parties. A lessee lease is classified as an operating lease unless it meets certain criteria (e.g., lease contains option to purchase that Company is reasonably certain to exercise), in which case it is classified as a finance lease. Effective January 1, 2019, operating leases are included in net premises and equipment and other liabilities on the Company’s statements of financial condition and lease expense for lease payments is recognized on a straight-line basis over the lease term. Finance leases are included in net premises and equipment and other borrowed funds on the Company’s statements of financial condition. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. An ROU asset represents the right to use the underlying asset for the lease term and also includes any direct costs and payments made prior to lease commencement and excludes lease incentives. When an implicit rate is not available, an incremental borrowing rate based on the information available at commencement date is used in determining the present value of the lease payments. A lease term may include an option to extend or terminate the lease when it is reasonably certain the option will be exercised. The Company accounts for lease and nonlease components (e.g., common-area maintenance) together as a single combined lease component for all asset classes. Short-term leases of 12 months or less are excluded from accounting guidance; as a result, the lease payments are recognized on a straight-line basis over the lease term and the leases are not reflected on the Company’s statements of financial condition. Renewal and termination options are considered when determining short-term leases. Leases are accounted for on an individual lease level.

Lease improvements incurred at the inception of the lease are recorded as an asset and depreciated over the initial term of the lease and lease improvements incurred subsequently are depreciated over the remaining term of the lease.

The Company also leases certain premises and equipment to third parties. A lessor lease is classified as an operating lease unless it meets certain criteria that would classify it as either a sales-type lease or a direct financing lease. For additional information relating to leases, see Note 4.

Revenue Recognition
The Company recognizes revenue when services or products are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled. The Company’s principal source of revenue is interest income from debt securities and loans. Revenue from contracts with customers within the scope of ASC Topic 606 was $40,184,000 and $54,608,000 for the nine months ended September 30, 2020 and 2019, respectively, and largely consisted of revenue from service charges and other fees from deposits (e.g., overdraft fees, ATM fees, debit card fees). Due to the short-term nature of the Company’s contracts with customers, an insignificant amount of receivables related to such revenue was recorded at September 30, 2020 and December 31, 2019 and there were no impairment losses recognized. Policies specific to revenue from contracts with customers include the following:

Service Charges. Revenue from service charges consists of service charges and fees on deposit accounts under depository agreements with customers to provide access to deposited funds and, when applicable, pay interest on deposits. Service charges on deposit accounts may be transactional or non-transactional in nature. Transactional service charges occur in the form of a service or penalty and are charged upon the occurrence of an event (e.g., overdraft fees, ATM fees, wire transfer fees). Transactional service charges are recognized as services are delivered to and consumed by the customer, or as penalty fees are charged. Non-transactional service charges are charges that are based on a broader service, such as account maintenance fees and dormancy fees, and are recognized on a monthly basis.

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Debit Card Fees. Revenue from debit card fees includes interchange fee income from debit cards processed through card association networks. Interchange fees represent a portion of a transaction amount that the Company and other involved parties retain to compensate themselves for giving the cardholder immediate access to funds. Interchange rates are generally set by the card association networks and are based on purchase volumes and other factors. The Company records interchange fees as services are provided.

Accounting Guidance Adopted in 2020
The ASC is the FASB officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative. The following paragraphs provide descriptions of recently adopted ASU’s that may have had a material effect on the Company’s financial position or results of operations.

ASU 2017-04 - Intangibles - Goodwill and Other. In January 2017, FASB amended ASC Topic 350 to simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, at adoption there was no impact from these amendments to the Company’s financial position and results of operations. In addition, the current accounting policies and processes were not changed, except for the elimination of the Step 2 analysis. For additional information regarding goodwill impairment testing, see Note 5.

ASU 2016-13 - Financial Instruments - Credit Losses. In June 2016, FASB amended ASC Topic 326 to replace the incurred loss model with a methodology that reflects current expected credit losses (“CECL”) over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. The Company adopted the amendments on January 1, 2020 using the modified retrospective approach. The financial statement results and accounting policies beginning January 1, 2020 are presented under ASC Topic 326, whereas prior periods continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of $12,347,000 in retained earnings due to the adoption of the amendments. The transition adjustment included an increase in the ACL on loans of $3,720,000, an increase in the ACL on off-balance sheet credit exposures of $12,817,000, and a corresponding increase in deferred tax assets of $4,190,000. The Company developed internal implementation controls over the development of the ACL model and resulting financial statement disclosures. The Company has adjusted its processes and procedures to calculate the ACL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the prior accounting practice that utilized the incurred loss model. The Company also developed new procedures for determining an ACL related to held-to-maturity debt securities and the accounting policies and procedures for other-than-temporary impairment on available-for-sale debt securities were replaced with an allowance approach. The Company engaged a third-party vendor solution to evaluate the new methodology, including model validation, adjusting assumptions utilized, and to review the accuracy of the financial statement disclosures. For additional information on the allowances for credit losses, see Notes 2 and 3.

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Note 2. Debt Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s debt securities:
  September 30, 2020
(Dollars in thousands) Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
Available-for-sale
U.S. government and federal agency $ 40,082  297  (239) 40,140 
U.S. government sponsored enterprises 9,767  58  —  9,825 
State and local governments 1,192,905  82,509  (38) 1,275,376 
Corporate bonds 347,400  13,647  (23) 361,024 
Residential mortgage-backed securities 1,255,016  21,551  (709) 1,275,858 
Commercial mortgage-backed securities 1,104,252  59,075  (2) 1,163,325 
Total available-for-sale $ 3,949,422  177,137  (1,011) 4,125,548 
Held-to-maturity
State and local governments $ 193,509  13,068  —  206,577 
Total held-to-maturity $ 193,509  13,068  —  206,577 

  December 31, 2019
(Dollars in thousands) Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
Available-for-sale
U.S. government and federal agency $ 20,061  48  (65) 20,044 
U.S. government sponsored enterprises 42,724  953  —  43,677 
State and local governments 679,784  22,694  (80) 702,398 
Corporate bonds 155,665  1,938  (1) 157,602 
Residential mortgage-backed securities 731,766  7,507  (549) 738,724 
Commercial mortgage-backed securities 891,374  22,825  (1,392) 912,807 
Total available-for-sale $ 2,521,374  55,965  (2,087) 2,575,252 
Held-to-maturity
State and local governments $ 224,611  9,785  —  234,396 
Total held-to-maturity $ 224,611  9,785  —  234,396 

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Maturity Analysis
The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by contractual maturity at September 30, 2020. Actual maturities may differ from expected or contractual maturities since some issuers have the right to prepay obligations with or without prepayment penalties.

  September 30, 2020
  Available-for-Sale Held-to-Maturity
(Dollars in thousands) Amortized Cost Fair Value Amortized Cost Fair Value
Due within one year $ 119,874  121,303  —  — 
Due after one year through five years 264,927  277,758  19,543  20,996 
Due after five years through ten years 263,208  277,022  69,924  75,680 
Due after ten years 942,145  1,010,282  104,042  109,901 
1,590,154  1,686,365  193,509  206,577 
Mortgage-backed securities 1
2,359,268  2,439,183  —  — 
Total $ 3,949,422  4,125,548  193,509  206,577 
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

Sales and Calls of Debt Securities
Proceeds from sales and calls of debt securities and the associated gains and losses that have been included in earnings are listed below:
  Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Available-for-sale
Proceeds from sales and calls of debt securities $ 69,304  401,701  184,088  878,072 
Gross realized gains 1
102  14,329  1,206  18,613 
Gross realized losses 1
(78) (518) (192) (4,447)
Held-to-maturity
Proceeds from calls of debt securities 9,280  16,365  29,530  48,940 
Gross realized gains 1
—  —  1  2 
Gross realized losses 1
—  —  —  (10)
______________________________
1 The gain or loss on the sale or call of each debt security is determined by the specific identification method.
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Allowance for Credit Losses - Available-For-Sale Debt Securities
In assessing whether a credit loss existed on available-for-sale debt securities with unrealized losses, the Company compared the present value of cash flows expected to be collected from the debt securities with the amortized cost basis of the debt securities. In addition, the following factors were evaluated individually and collectively in determining the existence of expected credit losses:
•credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSRO” entities such as Standard and Poor’s [“S&P”] and Moody’s);
•severity of the impaired securities;
•adverse conditions, if any, specifically related to the impaired securities, including the industry and geographic area;
•the overall deal and payment structure of the debt securities, including the investor entity’s position within the structure, underlying obligors, financial condition and near-term prospects of the issuer, including specific events which may affect the issuer’s operations or future earnings, and credit support or enhancements; and
•failure of the issuer and underlying obligors, if any, to make scheduled payments of interest and principal.

The following table summarizes available-for-sale debt securities that were in an unrealized loss position for which an ACL has not been recorded, based on the length of time the individual securities have been in an unrealized loss position. The number of available-for-sale debt securities in an unrealized position is also disclosed.

  September 30, 2020
  Number
of
Securities 		Less than 12 Months 12 Months or More Total
(Dollars in thousands) Fair
Value 		Unrealized
Loss 		Fair
Value 		Unrealized
Loss 		Fair
Value 		Unrealized
Loss
Available-for-sale
U.S. government and federal agency
19  $ 13,656  (230) 663  (9) 14,319  (239)
State and local governments 11  5,383  (38) —  —  5,383  (38)
Corporate bonds 6  11,029  (23) —  —  11,029  (23)
Residential mortgage-backed securities
28  282,912  (709) 27  —  282,939  (709)
Commercial mortgage-backed securities
1  11,035  (2) —  —  11,035  (2)
Total available-for-sale
65  $ 324,015  (1,002) 690  (9) 324,705  (1,011)
 
  December 31, 2019
  Number
of
Securities 		Less than 12 Months 12 Months or More Total
(Dollars in thousands) Fair
Value 		Unrealized
Loss 		Fair
Value 		Unrealized
Loss 		Fair
Value 		Unrealized
Loss
Available-for-sale
U.S. government and federal agency
20  $ 464  —  9,902  (65) 10,366  (65)
State and local governments 12  19,044  (80) —  —  19,044  (80)
Corporate bonds 2  7,378  (1) —  —  7,378  (1)
Residential mortgage-backed securities
35  85,562  (234) 29,038  (315) 114,600  (549)
Commercial mortgage-backed securities
19  177,051  (1,293) 7,697  (99) 184,748  (1,392)
Total available-for-sale
88  $ 289,499  (1,608) 46,637  (479) 336,136  (2,087)


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With respect to severity, the majority of available-for-sale debt securities with unrealized loss positions at September 30, 2020 have unrealized losses as a percentage of book value of less than five percent. A substantial portion of such securities were issued by Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Government National Mortgage Association (“Ginnie Mae”) and other agencies of the U.S. government or have credit ratings issued by one or more of the NRSRO entities in the four highest credit rating categories. All of the Company’s available-for-sale debt securities with unrealized loss positions at September 30, 2020 have been determined to be investment grade.

As of September 30, 2020, the Company did not have any available-for-sale debt securities past due. Accrued interest receivable on available-for-sale debt securities totaled $23,491,000 at September 30, 2020 and was excluded from the estimate of credit losses.

During the period ended September 30, 2020, the Company acquired available-for-sale debt securities from the secondary market and through the SBAZ acquisition. Such securities were evaluated and it was determined there were no PCD securities, so no allowance for credit losses was recorded.

Based on an analysis of its available-for-sale debt securities with unrealized losses as of September 30, 2020, the Company determined the decline in value was unrelated to credit loss and was primarily the result of changes in interest rates and market spreads subsequent to acquisition. The fair value of the debt securities is expected to recover as payments are received and the debt securities approach maturity. In addition, as of September 30, 2020, management determined it did not intend to sell available-for-sale debt securities with unrealized losses, and there was no expected requirement to sell such securities before recovery of their amortized cost. As a result, no ACL was recorded on available-for-sale debt securities at September 30, 2020. As part of this determination, the Company considered contractual obligations, regulatory constraints, liquidity, capital, asset/liability management and securities portfolio objectives and whether or not any of the Company’s investment securities were managed by third-party investment funds.

Allowance for Credit Losses - Held-To-Maturity Debt Securities
The Company measured expected credit losses on held-to-maturity debt securities on a collective basis by major security type and NRSRO credit ratings, which is the Company’s primary credit quality indicator for state and local government securities. The estimate of expected credit losses considered historical credit loss information that was adjusted for current conditions as well as reasonable and supportable forecasts. The following table summarizes the amortized cost of held-to-maturity debt securities aggregated by NRSRO credit rating:

(Dollars in thousands) September 30,
2020 		December 31,
2019
Held-to-maturity
S&P: AAA / Moody’s: Aaa
$ 40,735  65,217 
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
125,573  130,316 
S&P: A+, A, A- / Moody’s: A1, A2, A3
27,201  28,689 
Not rated by either entity
—  389 
Total held-to-maturity
$ 193,509  224,611 

The Company’s held-to-maturity debt securities portfolio is primarily comprised of general obligation and revenue bonds with NRSRO ratings in the four highest credit rating categories. All of the Company’s held-to-maturity debt securities at September 30, 2020 have been determined to be investment grade.

As of September 30, 2020, the Company did not have any held-to-maturity debt securities past due. Accrued interest receivable on held-to-maturity debt securities totaled $2,079,000 at September 30, 2020 and was excluded from the estimate of credit losses.

Based on the Company’s evaluation, an insignificant amount of credit losses is expected on the held-to-maturity debt securities portfolio; therefore, no ACL was recorded at September 30, 2020.






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Note 3. Loans Receivable, Net

On January 1, 2020, the Company adopted FASB ASU 2016-13, Financial Instruments - Credit Losses, which significantly changed the loan and allowance for credit loss accounting disclosures. The following loan and allowance for credit loss accounting disclosures are presented in accordance with ASC Topic 326, whereas prior periods are presented in accordance with the incurred loss model as disclosed in the Company’s 2019 Annual Report on Form 10-K.

The following table presents loans receivable for each portfolio segment of loans:

(Dollars in thousands) September 30,
2020 		December 31,
2019
Residential real estate $ 862,614  926,388 
Commercial real estate 6,201,817  5,579,307 
Other commercial 3,593,322  2,094,254 
Home equity 646,850  617,201 
Other consumer 314,128  295,660 
Loans receivable 11,618,731  9,512,810 
Allowance for credit losses (164,552) (124,490)
Loans receivable, net $ 11,454,179  9,388,320 
Net deferred origination (fees) costs included in loans receivable $ (38,712) (6,964)
Net purchase accounting (discounts) premiums included in loans receivable $ (18,063) (21,574)
Accrued interest receivable on loans $ 65,806  40,962 

Substantially all of the Company’s loans receivable are with borrowers in the Company’s geographic market areas. Although the Company has a diversified loan portfolio, a substantial portion of borrowers’ ability to service their obligations is dependent upon the economic performance in the Company’s market areas.

The Company had no significant sales of loans or reclassification of loans held for investment to loans held for sale during the nine months ended September 30, 2020.

Allowance for Credit Losses - Loans Receivable
The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on loans. The following tables summarize the activity in the ACL:

  Three Months ended September 30, 2020
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Balance at beginning of period $ 162,509  9,986  89,104  48,838  9,962  4,619 
Credit loss expense (reversal) 2,869  (216) 5,208  1,199  (2,526) (796)
Charge-offs (2,630) —  (445) (1,598) (99) (488)
Recoveries 1,804  35  530  314  93  832 
Balance at end of period $ 164,552  9,805  94,397  48,753  7,430  4,167 
 
24


  Three Months ended September 30, 2019
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Balance at beginning of period $ 129,054  10,695  72,447  36,259  5,801  3,852 
Credit loss expense (reversal) —  (325) (1,480) 1,220  (777) 1,362 
Charge-offs (5,890) (141) (1,858) (1,399) —  (2,492)
Recoveries 2,371  8  549  778  17  1,019 
Balance at end of period $ 125,535  10,237  69,658  36,858  5,041  3,741 

Nine Months ended September 30, 2020
(Dollars in thousands) Total Residential Real Estate Commercial Real Estate Other Commercial Home Equity Other Consumer
Balance at beginning of period $ 124,490  10,111  69,496  36,129  4,937  3,817 
Impact of adopting CECL 3,720  3,584  10,533  (13,759) 3,400  (38)
Acquisitions 49  —  49  —  —  — 
Credit loss expense (reversal) 39,165  (3,923) 14,084  28,358  (860) 1,506 
Charge-offs (7,865) (21) (625) (3,471) (293) (3,455)
Recoveries 4,993  54  860  1,496  246  2,337 
Balance at end of period $ 164,552  9,805  94,397  48,753  7,430  4,167 

Nine Months ended September 30, 2019
(Dollars in thousands) Total Residential Real Estate Commercial Real Estate Other Commercial Home Equity Other Consumer
Balance at beginning of period $ 131,239  10,631  72,448  38,160  5,811  4,189 
Credit loss expense (reversal) 57  (152) (1,824) (524) (786) 3,343 
Charge-offs (12,090) (482) (2,267) (2,597) (28) (6,716)
Recoveries 6,329  240  1,301  1,819  44  2,925 
Balance at end of period $ 125,535  10,237  69,658  36,858  5,041  3,741 
As a result of the adoption of the CECL accounting standard, the Company adjusted the January 1, 2020 ACL balances within each loan segment to reflect the changes from the incurred loss model to the current expected credit loss model which resulted in increases and decreases in each loan segment based on, among other factors, quantitative and qualitative assumptions and the economic forecast to estimate the credit loss expense over the expected life of the loans. During the nine months ended September 30, 2020, primarily as a result of the COVID-19 pandemic, there was a significant increase in the overall ACL and increases and decreases within certain loan segments. In addition, the acquisition of SBAZ resulted in a $4,794,000 increase in the ACL due to the credit loss expense recorded subsequent to the acquisition date. The COVID-19 pandemic significantly adjusted the economic forecast used in the ACL model including a significant increase in national and regional unemployment rates and a significant decrease in the gross domestic product (“GDP”).


25


The most notable change in charge-offs was in the other consumer loan segment which was primarily driven by deposit overdraft charge-offs which typically experience high charge-off rates and the amounts were comparable to historical trends. During the nine months ended September 30, 2020, there have been no significant changes to the types of collateral securing collateral-dependent loans.

During the nine month period ended September 30, 2020, the Company acquired loans through the SBAZ acquisition. Such loans were evaluated at acquisition date and it was determined there were PCD loans totaling $3,401,000 with an ACL of $49,000. There was also a discount associated with such loans of $13,000, which was attributable to changes in interest rates and other factors such as liquidity as of acquisition date.

Aging Analysis
The following tables present an aging analysis of the amortized cost basis of loans:

  September 30, 2020
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Accruing loans 30-59 days past due $ 9,534  520  2,662  2,782  2,160  1,410 
Accruing loans 60-89 days past due 8,097  1,666  2,954  2,263  977  237 
Accruing loans 90 days or more past due
2,952  217  1,426  1,102  80  127 
Non-accrual loans with no ACL 32,047  3,213  16,318  9,441  2,804  271 
Non-accrual loans with ACL 4,303  275  1,980  1,930  87  31 
Total past due and
  non-accrual loans
56,933  5,891  25,340  17,518  6,108  2,076 
Current loans receivable 11,561,798  856,723  6,176,477  3,575,804  640,742  312,052 
Total loans receivable $ 11,618,731  862,614  6,201,817  3,593,322  646,850  314,128 
 
  December 31, 2019
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Accruing loans 30-59 days past due $ 15,944  3,403  4,946  4,685  1,040  1,870 
Accruing loans 60-89 days past due 7,248  749  2,317  1,190  1,902  1,090 
Accruing loans 90 days or more past due
1,412  753  64  143  —  452 
Non-accrual loans 30,883  4,715  15,650  6,592  3,266  660 
Total past due and non-accrual loans
55,487  9,620  22,977  12,610  6,208  4,072 
Current loans receivable 9,457,323  916,768  5,556,330  2,081,644  610,993  291,588 
Total loans receivable $ 9,512,810  926,388  5,579,307  2,094,254  617,201  295,660 

The Company had $628,000 of interest reversed on non-accrual loans during the nine months ended September 30, 2020.


26


Collateral-Dependent Loans
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by collateral type:

  September 30, 2020
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Business assets $ 5,080  —  84  4,996  —  — 
Residential real estate 4,201  1,536  658  —  1,954  53 
Other real estate 13,572  31  12,880  624  21  16 
Other 132  —  —  16  —  116 
Total $ 22,985  1,567  13,622  5,636  1,975  185 

Restructured Loans
A restructured loan is considered a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The following tables present the loans modified as TDRs that occurred during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted:

  Three Months ended September 30, 2020
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
TDRs that occurred during the period
Number of loans 6  —  5  1  —  — 
Pre-modification recorded balance
$ 7,482  —  6,648  834  —  — 
Post-modification recorded balance
$ 7,482  —  6,648  834  —  — 
TDRs that subsequently defaulted
Number of loans —  —  —  —  —  — 
Recorded balance $ —  —  —  —  —  — 

  Three Months ended September 30, 2019
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
TDRs that occurred during the period
Number of loans 6  —  4  2  —  — 
Pre-modification recorded balance
$ 3,168  —  3,067  101  —  — 
Post-modification recorded balance
$ 3,168  —  3,067  101  —  — 
TDRs that subsequently defaulted
Number of loans —  —  —  —  —  — 
Recorded balance $ —  —  —  —  —  — 

27


  Nine Months ended September 30, 2020
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
TDRs that occurred during the period
Number of loans 16  1  10  4  1  — 
Pre-modification recorded balance
$ 14,945  210  13,392  1,304  39  — 
Post-modification recorded balance
$ 14,945  210  13,392  1,304  39  — 
TDRs that subsequently defaulted
Number of loans —  —  —  —  —  — 
Recorded balance $ —  —  —  —  —  — 

  Nine Months ended September 30, 2019
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
TDRs that occurred during the period
Number of loans 14  1  5  4  1  3 
Pre-modification recorded balance
$ 5,261  117  4,102  668  103  271 
Post-modification recorded balance
$ 5,247  123  4,102  668  103  251 
TDRs that subsequently defaulted
Number of loans 1  —  —  —  —  1 
Recorded balance $ 305  —  —  —  —  305 


The modifications for the loans designated as TDRs during the nine months ended September 30, 2020 and 2019 included one or a combination of the following: an extension of the maturity date, a reduction of the interest rate or a reduction in the principal amount.

In addition to the loans designated as TDRs during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $2,265,000 and $2,982,000 for the nine months ended September 30, 2020 and 2019, respectively, for which OREO was received in full or partial satisfaction of the loans. The majority of such TDRs were in commercial real estate for the nine months ended September 30, 2020 and 2019. At September 30, 2020 and December 31, 2019, the Company had $765,000 and $1,744,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process. At September 30, 2020 and December 31, 2019, the Company had $1,917,000 and $1,504,000, respectively, of OREO secured by residential real estate properties.


28


Credit Quality Indicators
The Company categorizes commercial real estate and other commercial loans into risk categories based on relevant information about the ability of borrowers to service their obligations. The following tables present the amortized cost in commercial real estate and other commercial loans based on the Company’s internal risk rating. The date of a modification, renewal or extension of a loan is considered for the year of origination if the terms of the loan are as favorable to the Company as the terms are for a comparable loan to other borrowers with similar credit risk.

  September 30, 2020
(Dollars in thousands) Total Pass Special Mention Substandard Doubtful/
Loss
Commercial real estate loans
Term loans by origination year
2020 (year-to-date) $ 1,023,640  1,018,529  697  4,414  — 
2019 1,149,893  1,141,014  335  8,544  — 
2018 986,619  947,230  1,190  38,199  — 
2017 786,907  756,583  —  30,324  — 
2016 526,236  507,694  206  18,336  — 
Prior 1,581,948  1,546,314  —  35,286  348 
Revolving loans 146,574  143,265  691  2,617  1 
Total $ 6,201,817  6,060,629  3,119  137,720  349 
Other commercial loans
Term loans by origination year
2020 (year-to-date) $ 1,790,810  1,784,359  606  5,845  — 
2019 335,126  330,303  —  4,820  3 
2018 281,578  275,011  —  6,566  1 
2017 287,150  281,371  —  5,323  456 
2016 191,092  188,849  —  2,066  177 
Prior 239,070  229,806  —  8,100  1,164 
Revolving loans 468,496  453,105  —  14,416  975 
Total $ 3,593,322  3,542,804  606  47,136  2,776 

29


For residential real estate, home equity and other consumer loan segments, the Company evaluates credit quality primarily on the aging status of the loan. The following tables present the amortized cost in residential real estate, home equity and other consumer loans based on payment performance:

  September 30, 2020
(Dollars in thousands) Total Performing 30-89 Days Past Due Non-Accrual and 90 Days or More Past Due
Residential real estate loans
Term loans by origination year
2020 (year-to-date) $ 141,655  141,655  —  — 
2019 228,558  228,558  —  — 
2018 129,077  128,043  791  243 
2017 92,899  92,899  —  — 
2016 65,216  64,382  —  834 
Prior 202,810  198,787  1,395  2,628 
Revolving loans 2,399  2,399  —  — 
Total $ 862,614  856,723  2,186  3,705 
Home equity loans
Term loans by origination year
2020 (year-to-date) $ 75  75  —  — 
2019 1,028  992  —  36 
2018 1,862  1,861  —  1 
2017 1,745  1,745  —  — 
2016 1,047  1,047  —  — 
Prior 17,337  15,599  1,059  679 
Revolving loans 623,756  619,423  2,078  2,255 
Total $ 646,850  640,742  3,137  2,971 
Other consumer loans
Term loans by origination year
2020 (year-to-date) $ 106,569  106,501  56  12 
2019 75,743  75,340  354  49 
2018 49,929  49,737  144  48 
2017 21,930  21,829  62  39 
2016 12,424  12,278  80  66 
Prior 22,250  21,106  932  212 
Revolving loans 25,283  25,261  19  3 
Total $ 314,128  312,052  1,647  429 

30


Additional Disclosures
The implementation of FASB ASU 2016-13, Financial Instruments - Credit Losses significantly changed disclosures related to loans and, as a result, certain disclosures are no longer required. The following tables represent disclosures for the prior period that are no longer required as of January 1, 2020, but are included in this Form 10-Q since the Company is required to disclose comparative information.

The following table disclosed the recorded investment in loans and the balance in the allowance separated by loans individually evaluated and collectively evaluated for impairment:
 
  December 31, 2019
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Loans receivable
Individually evaluated for impairment
$ 94,504  7,804  58,609  21,475  3,745  2,871 
Collectively evaluated for impairment
9,418,306  918,584  5,520,698  2,072,779  613,456  292,789 
Total loans receivable $ 9,512,810  926,388  5,579,307  2,094,254  617,201  295,660 
Allowance for loan and lease losses
Individually evaluated for impairment
$ 95  —  73  10  —  12 
Collectively evaluated for impairment
124,395  10,111  69,423  36,119  4,937  3,805 
Total allowance for loan and lease losses
$ 124,490  10,111  69,496  36,129  4,937  3,817 

The following table disclosed information related to impaired loans:
  
  At or for the Year ended December 31, 2019
(Dollars in thousands) Total Residential
Real Estate 		Commercial
Real Estate 		Other
Commercial 		Home
Equity 		Other
Consumer
Loans with a specific valuation allowance
Recorded balance $ 5,388  —  5,343  10  —  35 
Unpaid principal balance 5,388  —  5,343  10  —  35 
Specific valuation allowance 95  —  73  10  —  12 
Average balance 10,378  409  6,341  3,490  24  114 
Loans without a specific valuation allowance
Recorded balance 89,116  7,804  53,266  21,465  3,745  2,836 
Unpaid principal balance 99,355  9,220  57,735  24,758  4,494  3,148 
Average balance 93,338  9,879  59,107  18,079  3,486  2,787 
Total
Recorded balance $ 94,504  7,804  58,609  21,475  3,745  2,871 
Unpaid principal balance 104,743  9,220  63,078  24,768  4,494  3,183 
Specific valuation allowance 95  —  73  10  —  12 
Average balance 103,716  10,288  65,448  21,569  3,510  2,901 

Interest income recognized on impaired loans for the year ended December 31, 2019 was not significant.
31


Note 4. Leases

The Company leases certain land, premises and equipment from third parties. Effective January 1, 2019, ROU assets for operating and finance leases are included in net premises and equipment and lease liabilities are included in other liabilities and other borrowed funds, respectively, on the Company’s statements of financial condition. The following table summarizes the Company’s leases:

September 30, 2020 December 31, 2019
(Dollars in thousands) Finance
Leases 		Operating
Leases 		Finance
Leases 		Operating
Leases
ROU assets $ 5,999  6,537 
Accumulated depreciation (212) (917)
Net ROU assets $ 5,787  47,329  5,620  41,453 
Lease liabilities $ 5,917  50,089  5,671  43,904 
Weighted-average remaining lease term 24 years 17 years 24 years 19 years
Weighted-average discount rate 2.6  % 3.5  % 3.0  % 3.7  %

Maturities of lease liabilities consist of the following:
September 30, 2020
(Dollars in thousands) Finance
Leases 		Operating
Leases
Maturing within one year $ 259  4,608 
Maturing one year through two years 265  4,431 
Maturing two years through three years 270  3,961 
Maturing three years through four years 277  3,914 
Maturing four years through five years 285  3,869 
Thereafter 6,808  48,432 
Total lease payments 8,164  69,215 
Present value of lease payments
Short-term 214  2,973 
Long-term 5,703  47,116 
Total present value of lease payments 5,917  50,089 
Difference between lease payments and present value of lease payments $ 2,247  19,126 

32


The components of lease expense consist of the following:

Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Finance lease cost
Amortization of ROU assets $ 59  16  174  48 
Interest on lease liabilities 40  2  121  6 
Operating lease cost 1,254  1,057  3,553  2,967 
Short-term lease cost 88  102  266  330 
Variable lease cost 264  236  977  657 
Sublease income (2) (2) (5) (5)
Total lease expense $ 1,703  1,411  5,086  4,003 

Supplemental cash flow information related to leases is as follows:
Three Months ended
September 30, 2020 September 30, 2019
(Dollars in thousands) Finance
Leases 		Operating
Leases 		Finance
Leases 		Operating
Leases
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows $ 40  706  2  565 
Financing cash flows 23  N/A 21  N/A

Nine Months ended
September 30, 2020 September 30, 2019
(Dollars in thousands) Finance
Leases 		Operating
Leases 		Finance
Leases 		Operating
Leases
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows $ 121  1,994  6  1,541 
Financing cash flows 67  N/A 63  N/A

The Company also leases office space to third parties through operating leases. Rent income from these leases for the nine months ended September 30, 2020 and 2019 was not significant.

Note 5. Goodwill

The following schedule discloses the changes in the carrying value of goodwill:

Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Net carrying value at beginning of period $ 513,355  330,887  456,418  289,586 
Acquisitions and adjustments 658  125,535  57,595  166,836 
Net carrying value at end of period $ 514,013  456,422  514,013  456,422 


33


The Company performed its annual goodwill impairment test during the third quarter of 2020 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. Changes in the economic environment, operations of the aggregated reporting units, or other factors could result in the decline in the fair value of the aggregated reporting units which could result in a goodwill impairment in the future. Accumulated impairment charges were $40,159,000 as of September 30, 2020 and December 31, 2019.

For additional information on goodwill related to acquisitions, see Note 13.

Note 6. Variable Interest Entities

A VIE is a partnership, limited liability company, trust or other legal entity that meets one of the following criteria: 1) the entity’s equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; 2) the holders of the equity investment at risk, as a group, lack the characteristics of a controlling financial interest; and 3) the voting rights of some holders of the equity investment at risk are disproportionate to their obligation to absorb losses or receive returns, and substantially all of the activities are conducted on behalf of the holder of equity investment at risk with disproportionately few voting rights. A VIE must be consolidated by the Company if it is deemed to be the primary beneficiary, which is the party involved with the VIE that has both: 1) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and 2) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company’s VIEs are regularly monitored to determine if any reconsideration events have occurred that could cause the primary beneficiary status to change. A previously unconsolidated VIE is consolidated when the Company becomes the primary beneficiary. A previously consolidated VIE is deconsolidated when the Company ceases to be the primary beneficiary or the entity is no longer a VIE.

Consolidated Variable Interest Entities
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax Credits (“NMTC”). The NMTC program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvements through the development of successful businesses in these communities. The NMTC is available to investors over seven years and is subject to recapture if certain events occur during such period. The maximum exposure to loss in the CDEs is the amount of equity invested and credit extended by the Company. However, the Company has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. The Company has evaluated the variable interests held by the Company in each CDE (NMTC) investment and determined the Company does not individually meet the characteristics of a primary beneficiary; however, the related-party group does meet the criteria as a group and substantially all of the activities of the CDEs either involve or are conducted on behalf of the Company. As a result, the Company is the primary beneficiary of the CDEs and their assets, liabilities, and results of operations are included in the Company’s consolidated financial statements. The primary activities of the CDEs are recognized in commercial loans interest income and other borrowed funds interest expense on the Company’s statements of operations and the federal income tax credit allocations from the investments are recognized in the Company’s statements of operations as a component of income tax expense. Such related cash flows are recognized in loans originated, principal collected on loans and change in other borrowed funds.

The Bank is also the sole member of certain tax credit funds that make direct investments in qualified affordable housing projects (e.g., Low-Income Housing Tax Credit [“LIHTC”] partnerships). As such, the Company is the primary beneficiary of these tax credit funds and their assets, liabilities, and results of operations are included in the Company’s consolidated financial statements.


34


The following table summarizes the carrying amounts of the consolidated VIEs’ assets and liabilities included in the Company’s statements of financial condition and are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have no recourse to the general credit of the Company.
(Dollars in thousands) September 30,
2020 		December 31,
2019
Assets
Loans receivable $ 90,183  84,390 
Accrued interest receivable 457  63 
Other assets 55,863  54,692 
Total assets $ 146,503  139,145 
Liabilities
Other borrowed funds $ 27,050  23,149 
Accrued interest payable 167  36 
Other liabilities 47  123 
Total liabilities $ 27,264  23,308 

Unconsolidated Variable Interest Entities
The Company has equity investments in LIHTC partnerships, both directly and through tax credit funds, with carrying values of $43,730,000 and $41,521,000 as of September 30, 2020 and December 31, 2019, respectively. The LIHTCs are indirect federal subsidies to finance low-income housing and are used in connection with both newly constructed and renovated residential rental buildings. Once a project is placed in service, it is generally eligible for the tax credit for ten years. To continue generating the tax credit and to avoid tax credit recapture, a LIHTC building must satisfy specific low-income housing compliance rules for a full fifteen years. The maximum exposure to loss in the VIEs is the amount of equity invested and credit extended by the Company. However, the Company has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. The Company has evaluated the variable interests held by the Company in each LIHTC investment and determined that the Company does not have controlling financial interests in such investments, and is not the primary beneficiary. The Company reports the investments in the unconsolidated LIHTCs as other assets on the Company’s statements of financial condition. There were no impairment losses on the Company’s LIHTC investments during the nine months ended September 30, 2020 and 2019. Future unfunded contingent commitments related to the Company’s LIHTC investments at September 30, 2020 are as follows:

(Dollars in thousands) Amount
Years ending December 31,
2020 $ 7,608 
2021 14,883 
2022 14,165 
2023 5,277 
2024 427 
Thereafter 812 
Total $ 43,172 


35


The Company has elected to use the proportional amortization method, and more specifically the practical expedient method, for the amortization of all eligible LIHTC investments and amortization expense is recognized as a component of income tax expense. The following table summarizes the amortization expense and the amount of tax credits and other tax benefits recognized for qualified affordable housing project investments during the periods presented.

Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Amortization expense
$ 1,936  1,609  5,766  4,504 
Tax credits and other tax benefits recognized
2,608  2,202  7,771  6,169 

The Company also owns the following trust subsidiaries, each of which issued trust preferred securities: Glacier Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation Trust I, First Company Statutory Trust 2001, First Company Statutory Trust 2003, FNB (UT) Statutory Trust I and FNB (UT) Statutory Trust II. The trust subsidiaries have no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the securities held by third parties. The trust subsidiaries are not included in the Company’s consolidated financial statements because the sole asset of each trust subsidiary is a receivable from the Company, even though the Company owns all of the voting equity shares of the trust subsidiaries, has fully guaranteed the obligations of the trust subsidiaries and may have the right to redeem the third party securities under certain circumstances. The Company reports the trust preferred securities issued to the trust subsidiaries as subordinated debentures on the Company’s statements of financial condition.

Note 7. Securities Sold Under Agreements to Repurchase

The following table summarizes the carrying value of the Company’s securities sold under agreements to repurchase (“repurchase agreements”) by remaining contractual maturity of the agreements and category of collateral:

Overnight and Continuous
(Dollars in thousands) September 30,
2020 		December 31,
2019
State and local governments $ 742,753  — 
Corporate bonds 222,915  — 
Residential mortgage-backed securities —  312,015 
Commercial mortgage-backed securities —  257,809 
Total $ 965,668  569,824 

The repurchase agreements are secured by debt securities with carrying values of $1,096,781,000 and $711,210,000 at September 30, 2020 and December 31, 2019, respectively. Securities are pledged to customers at the time of the transaction in an amount at least equal to the outstanding balance and are held in custody accounts by third parties. The fair value of collateral is continually monitored and additional collateral is provided as deemed appropriate.
36


Note 8. Derivatives and Hedging Activities

Cash Flow Hedges
The Company is exposed to certain risks relating to its ongoing operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate caps and interest rate swaps have been entered into to manage interest rate risk associated with variable rate borrowings.

Interest Rate Cap Derivatives. In March 2020, the Company purchased interest rate caps designated as cash flow hedges with notional amounts totaling $130,500,000 on its variable rate subordinated debentures and were determined to be fully effective during the nine months ended September 30, 2020. The interest rate caps require receipt of variable amounts from the counterparty when interest rates rise above the strike price in the contracts. The strike prices in the five year term contracts range from 1.5 percent to 2 percent 3 month LIBOR. At September 30, 2020, the interest rate caps had a fair value of $183,000 and were reported as other assets on the Company’s statements of financial condition. Changes in fair value were recorded in OCI. Amortization recorded on the interest rate caps totaled $84,000 and was reported as a component of interest expense on subordinated debentures for the nine months ended September 30, 2020.

Interest Rate Swap Derivatives. In September 2019, the Company implemented a balance sheet strategy to increase its net interest income and net interest margin. The strategy included early termination of the Company’s pay-fixed interest rate swaps with notional amounts totaling $260,000,000. A $9,997,000 loss was recognized on the early termination of the pay-fixed interest rate swaps and was reported in loss on termination of hedging activities on the Company’s statements of operations. The Company recognized interest rate swaps as other assets or liabilities at fair value in the statements of financial condition, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allowed the Company to settle all interest rate swap agreements held with a single counterparty on a net basis, and to offset net interest rate swap derivative positions with related collateral, where applicable. Changes in fair value were recorded in OCI. The Company designated wholesale deposits and Federal Home Loan Bank (“FHLB”) advances for the cash flow hedge and these hedged items were determined to be fully effective during all periods. Interest expense recorded on the interest rate swaps totaled $0 and $5,532,000 for the nine months ended September 30, 2020 and 2019, respectively, and was reported as a component of interest expense on deposits and FHLB advances.

The effect of cash flow hedge accounting on OCI for the periods ending September 30, 2020 and 2019 was as follows:

Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Amount of loss recognized in OCI
$ (76) (1,393) (532) (7,047)
Amount of loss reclassified from OCI to net income
—  (10,315) —  (10,816)

Residential Real Estate Derivatives
At September 30, 2020, the Company had residential real estate derivatives for commitments (“interest rate locks”) to fund certain residential real estate loans to be sold into the secondary market. At September 30, 2020 and December 31, 2019, loan commitments with interest rate lock commitments totaled $408,859,000 and $84,803,000, respectively. At September 30, 2020 and December 31, 2019, the fair value of the related derivatives on the interest rate lock commitments was $14,967,000 and $1,852,000, respectively, and was included in other assets with corresponding changes recorded in gain on sale of loans. The Company enters into free-standing derivatives to mitigate interest rate risk for most residential real estate loans to be sold. These derivatives include forward commitments to sell to-be-announced (“TBA”) securities which are used to economically hedge the interest rate risk associated with such loans and unfunded commitments. At September 30, 2020 and December 31, 2019, TBA commitments were $353,750,000 and $82,000,000, respectively. At September 30, 2020 and December 31, 2019, the fair value of the related derivatives on the TBA securities was $1,344,000 and $236,000, respectively, and was included in other liabilities with corresponding changes recorded in gain on sale of loans. The Company doesn’t enter into a commitment to sell these loans to an investor until the loan is funded and is ready to be delivered to the investor. Due to the forward sales commitments being short-term in nature, the corresponding derivatives are not significant. For all other residential real estate loans to be sold, the Company enters into “best efforts” forward sales commitments for the future delivery of loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. Forward sales commitments on a “best efforts” basis are not designated in hedge relationships until the loan is funded.
37



Note 9. Other Expenses

Other expenses consists of the following:
  Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Consulting and outside services 4,050  1,938  8,604  5,715 
Mergers and acquisition expenses $ 792  2,058  7,311  4,103 
Loan expenses 1
4,060  924  5,867  2,726 
Telephone 1,314  1,216  3,865  3,601 
Debit card expenses 1,414  1,699  3,704  5,003 
VIE amortization and other expenses 1,510  1,427  3,396  2,878 
Business development 1,139  1,176  3,110  3,189 
Printing and supplies 877  735  2,704  2,246 
Postage 851  831  2,479  2,487 
Employee expenses 560  1,245  2,247  3,646 
Accounting and audit fees 455  365  1,453  1,290 
Checking and operating expenses 355  361  1,263  1,353 
Legal fees 206  338  1,025  926 
ATM expenses 245  299  373  1,312 
Other 958  991  2,828  2,679 
Total other expenses $ 18,786  15,603  50,229  43,154 
______________________________
1 Loan expenses include credit loss expense for off-balance sheet credit exposures.

Note 10. Accumulated Other Comprehensive Income

The following table illustrates the activity within accumulated other comprehensive income by component, net of tax:
 
(Dollars in thousands) (Losses) Gains on Available-For-Sale Debt Securities Losses on Derivatives Used for Cash Flow Hedges Total
Balance at January 1, 2019 $ (6,613) (2,814) (9,427)
Other comprehensive income (loss) before reclassifications 65,284  (5,261) 60,023 
Reclassification adjustments for (gains) losses included in net income (10,576) 8,075  (2,501)
Net current period other comprehensive income 54,708  2,814  57,522 
Balance at September 30, 2019 $ 48,095  —  48,095 
Balance at January 1, 2020 $ 40,226  —  40,226 
Other comprehensive income (loss) before reclassifications 92,027  (397) 91,630 
Reclassification adjustments for gains included in net income (loss) (758) —  (758)
Net current period other comprehensive income (loss) 91,269  (397) 90,872 
Balance at September 30, 2020 $ 131,495  (397) 131,098 

38


Note 11. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period presented. Diluted earnings per share is computed by including the net increase in shares as if dilutive outstanding restricted stock units were vested and stock options were exercised, using the treasury stock method.

Basic and diluted earnings per share has been computed based on the following:

  Three Months ended Nine Months ended
(Dollars in thousands, except per share data) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Net income available to common stockholders, basic and diluted
$ 77,757  51,610  184,540  153,134 
Average outstanding shares - basic 95,411,656  90,294,811  94,704,198  86,911,402 
Add: dilutive restricted stock units and stock options
30,920  154,384  43,696  170,776 
Average outstanding shares - diluted 95,442,576  90,449,195  94,747,894  87,082,178 
Basic earnings per share $ 0.81  0.57  1.95  1.76 
Diluted earnings per share $ 0.81  0.57  1.95  1.76 
Restricted stock units and stock options excluded from the diluted average outstanding share calculation 1
93,253  4,037  78,605  1,360 
______________________________
1 Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit or the exercise price of a stock option exceeds the market price of the Company’s stock.

Note 12. Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
 
Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Transfers in and out of Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. There were no transfers between fair value hierarchy levels during the nine month periods ended September 30, 2020 and 2019.


39


Recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2020.

Debt securities, available-for-sale. The fair value for available-for-sale debt securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest rates, volatilities, market spreads, prepayments, defaults, recoveries, cumulative loss projections, and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. Where Level 1 or Level 2 inputs are not available, such securities are classified as Level 3 within the hierarchy.

Fair value determinations of available-for-sale debt securities are the responsibility of the Company’s corporate accounting and treasury departments. The Company obtains fair value estimates from independent third party vendors on a monthly basis. The vendors’ pricing system methodologies, procedures and system controls are reviewed to ensure they are appropriately designed and operating effectively. The Company reviews the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review includes the extent to which markets for debt securities are determined to have limited or no activity, or are judged to be active markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the appropriateness of the underlying assumptions about risk that a market participant would use in active markets, with adjustments for limited or inactive markets. In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect orderly transactions, or are non-binding indications. In assessing credit risk, the Company reviews payment performance, collateral adequacy, third party research and analyses, credit rating histories and issuers’ financial statements. For those markets determined to be inactive or limited, the valuation techniques used are models for which management has verified that discount rates are appropriately adjusted to reflect illiquidity and credit risk.

Loans held for sale, at fair value. Loans held for sale measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors. Loans held for sale measured at fair value are classified within Level 2. Included in gain on sale of loans were net gains of $3,435,000 and net gains of $993,000 for the nine month periods ended September 30, 2020 and 2019, respectively, from the changes in fair value of loans held for sale measured at fair value. Electing to measure loans held for sale at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Loan interest rate lock commitments. Fair value estimates for loan interest rate lock commitments were based upon the estimated sales price, origination fees, direct costs, interest rate changes, etc. and were obtained from an independent third party. The components of the valuation were observable or could be corroborated by observable market data and, therefore, were classified within Level 2 of the valuation hierarchy.

Forward commitments to sell TBA securities. Forward commitments to sell TBA securities are used to economically hedge the interest rate risk associated with certain loan commitments. The fair value estimates for the TBA commitments were based upon the estimated sale of the TBA hedge obtained from an independent third party. The components of the valuation were observable or could be corroborated by observable market data and, therefore, were classified within Level 2 of the valuation hierarchy.

Interest rate cap derivative financial instruments. Fair value estimates for interest rate cap derivative financial instruments were based upon the discounted cash flows of known payments plus the option value of each caplet which incorporates market rate forecasts and implied market volatilities. The components of the valuation were observable or could be corroborated by observable market data and, therefore, were classified within Level 2 of the valuation hierarchy. The Company also obtained and compared the reasonableness of the pricing from independent third party valuations.

40


The following tables disclose the fair value measurement of assets measured at fair value on a recurring basis:
  
    Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands) Fair Value
September 30,
2020 		Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
Debt securities, available-for-sale
U.S. government and federal agency $ 40,140  —  40,140  — 
U.S. government sponsored enterprises 9,825  —  9,825  — 
State and local governments 1,275,376  —  1,275,376  — 
Corporate bonds 361,024  —  361,024  — 
Residential mortgage-backed securities 1,275,858  —  1,275,858  — 
Commercial mortgage-backed securities 1,163,325  —  1,163,325  — 
Loans held for sale, at fair value 147,937  —  147,937  — 
Interest rate caps 182  —  182  — 
Interest rate lock commitment 14,967  —  14,967  — 
Total assets measured at fair value
  on a recurring basis
$ 4,288,634  —  4,288,634  — 
TBA hedge $ 1,344  —  1,344  — 
Total liabilities measured at fair value on a recurring basis
$ 1,344  —  1,344  — 

    Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands) Fair Value December 31, 2019 Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
Debt securities, available-for-sale
U.S. government and federal agency $ 20,044  —  20,044  — 
U.S. government sponsored enterprises 43,677  —  43,677  — 
State and local governments 702,398  —  702,398  — 
Corporate bonds 157,602  —  157,602  — 
Residential mortgage-backed securities 738,724  —  738,724  — 
Commercial mortgage-backed securities 912,807  —  912,807  — 
Loans held for sale, at fair value
69,194  —  69,194  — 
Interest rate lock commitment
1,852  —  1,852  — 
Total assets measured at fair value on a recurring basis
$ 2,646,298  —  2,646,298  — 
TBA hedge $ 236  —  236  — 
Total liabilities measured at fair value on a recurring basis
$ 236  —  236  — 

41


Non-recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2020.

Other real estate owned. OREO is initially recorded at fair value less estimated cost to sell, establishing a new cost basis. OREO is subsequently accounted for at lower of cost or fair value less estimated cost to sell. Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the fair value hierarchy.

Collateral-dependent loans, net of ACL. Fair value estimates of collateral-dependent loans that are individually reviewed are based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent individually reviewed loans are classified within Level 3 of the fair value hierarchy.

The Company’s credit department reviews appraisals for OREO and collateral-dependent loans, giving consideration to the highest and best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables. Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The Company also considers other factors and events in the environment that may affect the fair value. The appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains appraisals or evaluations (new or updated) annually.

The following tables disclose the fair value measurement of assets with a recorded change during the period resulting from re-measuring the assets at fair value on a non-recurring basis:

    Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands) Fair Value
September 30,
2020 		Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
Other real estate owned $ 297  —  —  297 
Collateral-dependent loans, net of ACL 2,284  —  —  2,284 
Total assets measured at fair value
  on a non-recurring basis
$ 2,581  —  —  2,581 



42


    Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands) Fair Value December 31, 2019 Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
Other real estate owned $ 1,983  —  —  1,983 
Collateral-dependent loans, net of ACL 23  —  —  23 
Total assets measured at fair value
  on a non-recurring basis
$ 2,006  —  —  2,006 

Non-recurring Measurements Using Significant Unobservable Inputs (Level 3)
The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

  Fair Value
September 30,
2020 		Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands) Valuation Technique Unobservable Input
Range
(Weighted-Average) 1
Other real estate owned
$ 297  Sales comparison approach Selling costs
8.0% - 10.0% (9.0%)
Collateral-dependent
  loans, net of ACL
$ 943  Cost approach Selling costs
10.0% - 10.0% (10.0%)
45  Sales comparison approach Selling costs
10.0% - 10.0% (10.0%)
1,296  Combined approach Selling costs
10.0% - 10.0% (10.0%)
$ 2,284 

  Fair Value December 31, 2019 Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands) Valuation Technique Unobservable Input
Range
(Weighted-Average) 1
Other real estate owned
$ 1,983  Sales comparison approach Selling costs
6.0% - 10.0% (7.3%)
Adjustment to comparables
0.0% - 11.1% (4.5%)
Collateral-dependent
  loans, net of ACL
$ 9  Cost approach Selling costs
10.0% - 10.0% (10.0%)
14  Sales comparison approach Adjustment to comparables
0.0% - 0.0% (0.0%)
$ 23 
______________________________
1 The range for selling cost inputs represents reductions to the fair value of the assets.


43


Fair Value of Financial Instruments
The following tables present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s financial instruments not carried at fair value. Receivables and payables due in one year or less, equity securities without readily determinable fair values and deposits with no defined or contractual maturities are excluded.

    Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands) Carrying Amount
September 30,
2020 		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
Financial assets
Cash and cash equivalents $ 769,879  769,879  —  — 
Debt securities, held-to-maturity 193,509  —  206,577  — 
Loans receivable, net of ACL 11,454,179  —  —  11,619,887 
Total financial assets $ 12,417,567  769,879  206,577  11,619,887 
Financial liabilities
Term deposits $ 1,098,988  —  1,104,273  — 
FHLB advances 7,318  —  7,537  — 
Repurchase agreements and
  other borrowed funds
998,635  —  998,635  — 
Subordinated debentures 139,918  —  119,318  — 
Total financial liabilities $ 2,244,859  —  2,229,763  — 

    Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands) Carrying Amount December 31, 2019 Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 		Significant
Other
Observable
Inputs
(Level 2) 		Significant
Unobservable
Inputs
(Level 3)
Financial assets
Cash and cash equivalents $ 330,961  330,961  —  — 
Debt securities, held-to-maturity 224,611  —  234,396  — 
Loans receivable, net of ACL 9,388,320  —  —  9,438,121 
Total financial assets $ 9,943,892  330,961  234,396  9,438,121 
Financial liabilities
Term deposits $ 1,011,798  —  1,017,505  — 
FHLB advances 38,611  —  38,787  — 
Repurchase agreements and
  other borrowed funds
598,644  —  598,644  — 
Subordinated debentures 139,914  —  124,094  — 
Total financial liabilities $ 1,788,967  —  1,779,030  — 








44


Note 13. Mergers and Acquisitions

On February 29, 2020, the Company acquired 100 percent of the outstanding common stock of State Bank Corp. and its wholly-owned subsidiary, State Bank of Arizona, a community bank based in Lake Havasu City, Arizona. SBAZ has been merged into The Foothills Bank division of Glacier Bank. SBAZ provides banking services to individuals and businesses in Arizona with locations in Bullhead City, Cottonwood, Kingman, Lake Havasu City, Phoenix, Prescott Valley and Prescott. The preliminary value of the SBAZ acquisition was $125,854,000 and resulted in the Company issuing 3,007,044 shares of its common stock and paying $13,721,000 in cash in exchange for all of SBAZ’s outstanding common stock shares. The fair value of the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the February 29, 2020 acquisition date. The excess of the preliminary fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and SBAZ. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange.

The assets and liabilities of SBAZ were recorded on the Company’s consolidated statements of financial condition at their preliminary estimated fair values as of the acquisition date and the results of operations have been included in the Company’s consolidated statements of operations since that date. The following table discloses the preliminary fair value estimates of the consideration transferred, the total identifiable net assets acquired and the resulting goodwill arising from the SBAZ acquisition. The Company is continuing to obtain information to determine the fair values of assets acquired and liabilities assumed.

(Dollars in thousands) SBAZ
February 29,
2020
Fair value of consideration transferred
Fair value of Company shares issued $ 112,133 
Cash consideration 13,721 
Total fair value of consideration transferred 125,854 
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents 57,434 
Debt securities 142,174 
Loans receivable, net of ACL 451,653 
Core deposit intangible 1
2,593 
Accrued income and other assets 33,971 
Total identifiable assets acquired 687,825 
Liabilities assumed
Deposits 603,289 
Borrowings
10,904 
Accrued expenses and other liabilities 5,373 
Total liabilities assumed 619,566 
Total identifiable net assets 68,259 
Goodwill recognized $ 57,595 
______________________________
1 The core deposit intangible for the acquisition was determined to have an estimated life of 10 years.


45


The preliminary fair values of the SBAZ assets acquired include loans with preliminary fair values of $451,702,000. The gross principal and contractual interest due under the SBAZ contracts was $452,510,000. The Company evaluated the loans at the acquisition date and determined there were PCD loans of $3,401,000 with an ACL of $49,000.

The Company incurred $4,167,000 of expenses in connection with the SBAZ acquisition during the nine months ended September 30, 2020. Mergers and acquisition expenses are included in other expense in the Company's consolidated statements of operations and consist of third-party costs and employee severance expenses.

Total income consisting of net interest income and non-interest income of the acquired operations of SBAZ was approximately $21,144,000 and net income was approximately $3,921,000 from February 29, 2020 to September 30, 2020. The following unaudited pro forma summary presents consolidated information of the Company as if the SBAZ acquisition had occurred on January 1, 2019:
Three Months ended Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019 		September 30,
2020 		September 30,
2019
Net interest income and non-interest income $ 205,070  182,185  567,406  491,830 
Net income 77,757  54,000  183,429  159,601 

46


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Glacier Bancorp, Inc.’s (“Company”) operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as applicable, in this report and the Company’s 2019 Annual Report on Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results:
•the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio;
•changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System or the Federal Reserve Board, which could adversely affect the Company’s net interest income and profitability;
•changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation (“FDIC”) and other third parties;
•legislative or regulatory changes, such as the recently adopted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) addressing the economic effects of the coronavirus disease of 2019 (“COVID-19”), as well as increased banking and consumer protection regulation that adversely affect the Company’s business, both generally and as a result of the Company exceeding $10 billion in total consolidated assets;
•ability to complete pending or prospective future acquisitions;
•costs or difficulties related to the completion and integration of acquisitions;
•the goodwill the Company has recorded in connection with acquisitions could become impaired, which may have an adverse impact on earnings and capital;
•reduced demand for banking products and services;
•the reputation of banks and the financial services industry could deteriorate, which could adversely affect the Company's ability to obtain and maintain customers;
•competition among financial institutions in the Company's markets may increase significantly;
•the risks presented by continued public stock market volatility, which could adversely affect the market price of the Company’s common stock and the ability to raise additional capital or grow the Company through acquisitions;
•the projected business and profitability of an expansion or the opening of a new branch could be lower than expected;
•consolidation in the financial services industry in the Company’s markets resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;
•dependence on the Chief Executive Officer (“CEO”), the senior management team and the Presidents of Glacier Bank (“Bank”) divisions;
•material failure, potential interruption or breach in security of the Company’s systems and technological changes which could expose us to new risks (e.g., cybersecurity), fraud or system failures;
•natural disasters, including fires, floods, earthquakes, and other unexpected events;
•the Company’s success in managing risks involved in the foregoing; and
•the effects of any reputational damage to the Company resulting from any of the foregoing.

Forward-looking statements speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

47


MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Highlights
  At or for the Three Months ended At or for the Nine Months ended
(Dollars in thousands, except per share and market data)
Sep 30,
2020 		Jun 30,
2020 		Mar 31,
2020 		Sep 30,
2019 		Sep 30,
2020 		Sep 30,
2019
Operating results
Net income $ 77,757  63,444  43,339  51,610  184,540  153,134 
Basic earnings per share $ 0.81  0.67  0.46  0.57  1.95  1.76 
Diluted earnings per share $ 0.81  0.66  0.46  0.57  1.95  1.76 
Dividends declared per share $ 0.30  0.29  0.29  0.29  0.88  0.82 
Market value per share
Closing $ 32.05  35.29  34.01  40.46  32.05  40.46 
High $ 38.13  46.54  46.10  42.61  46.54  45.47 
Low $ 30.05  30.30  26.66  37.70  26.66  37.58 
Selected ratios and other data
Number of common stock shares outstanding
95,413,743 95,409,061 95,408,274 92,180,618 95,413,743 92,180,618
Average outstanding shares - basic 95,411,656 95,405,493 93,287,670 90,294,811 94,704,198 86,911,402
Average outstanding shares - diluted 95,442,576 95,430,403 93,359,792 90,449,195 94,747,894 87,082,178
Return on average assets (annualized) 1.80  % 1.57  % 1.25  % 1.55  % 1.56  % 1.63  %
Return on average equity (annualized) 13.73  % 11.68  % 8.52  % 10.92  % 11.40  % 12.17  %
Efficiency ratio 49.16  % 49.29  % 52.55  % 65.95  % 50.21  % 58.82  %
Dividend payout ratio 37.04  % 43.28  % 63.04  % 50.88  % 45.13  % 46.59  %
Loan to deposit ratio 82.29  % 86.45  % 88.10  % 88.71  % 82.29  % 88.71  %
Number of full time equivalent employees
2,946 2,954 2,955 2,802 2,946 2,802
Number of locations 193 192 192 182 193 182
Number of ATMs 250 251 247 238 250 238

The Company reported net income of $77.8 million for the current quarter, an increase of $26.2 million, or 51 percent, from the $51.6 million of net income for the prior year third quarter. Diluted earnings per share for the current quarter was $0.81 per share, an increase of 42 percent from the prior year third quarter diluted earnings per share of $0.57. Included in the current quarter was $793 thousand of acquisition-related expenses.

Net income for the nine months ended September 30, 2020 was $185 million, an increase of $31.4 million, or 21 percent, from the $153 million net income from the first nine months of the prior year. Diluted earnings per share for the first nine months of the current year was $1.95 per share, an increase of 11 percent, from the diluted earnings per share of $1.76 for the same period last year.

The Company continues to navigate through the COVID-19 pandemic to ensure the safety of its employees and customers along with monitoring credit quality and protecting shareholder value. The Company’s geographic footprint has experienced varying levels of exposure and impact from COVID-19 and the Company’s pandemic team remains flexible in responding to the changing conditions in all the markets that it serves.

In order to meet the needs of customers impacted by the pandemic, during the second quarter of 2020 the Company modified 3,054 loans in the amount of $1.515 billion primarily with short-term payment deferrals under six months. The majority of these modified loan deferral periods expired and the loans returned to regular payment status with only $466 million loans, or 5 percent, remaining deferred as of September 30, 2020.

48


In addition, the Company originated SBA Payroll Protection Program (“PPP”) loans for businesses in its communities. The Company originated 16,090 PPP loans in the amount of $1.472 billion during the current year. During the current quarter, these loans provided an additional $9.3 million of interest income (including net deferred fees and costs) and $438 thousand of deferred compensation costs for a total increase in income of $9.8 million ($7.3 million net of tax).

Recent Acquisition
On February 29, 2020, the Company completed the acquisition of State Bank Corp., the parent company of State Bank of Arizona, a community bank based in Lake Havasu City, Arizona (collectively, “SBAZ”). SBAZ provides banking services to individuals and businesses in Arizona with ten banking offices located in Bullhead City, Cottonwood, Kingman, Lake Havasu City, Phoenix, Prescott Valley and Prescott. Upon closing of the transaction, SBAZ merged into the Company's Foothills Bank division, which expanded the Company's footprint in Arizona to cover all major markets in the state and be a leading community bank in Arizona. During the current quarter, the Company also completed the system core conversion for SBAZ. The business combinations were accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition dates. For additional information relating to recent mergers and acquisitions, see Note 13 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

The following table discloses the preliminary fair value estimates of selected classifications of assets and liabilities acquired:

(Dollars in thousands) State Bank Corp.
February 29, 2020
Total assets $ 745,420 
Debt securities 142,174 
Loans receivable 451,702 
Non-interest bearing deposits 141,620 
Interest bearing deposits 461,669 
Borrowings
10,904 

49


Financial Condition Analysis

Assets
The following table summarizes the Company’s assets as of the dates indicated: 
$ Change from
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019
Cash and cash equivalents $ 769,879  547,610  330,961  406,384  222,269  438,918  363,495 
Debt securities, available-for-sale
4,125,548  3,533,950  2,575,252  2,459,036  591,598  1,550,296  1,666,512 
Debt securities, held-to-maturity
193,509  203,275  224,611  234,992  (9,766) (31,102) (41,483)
Total debt securities
4,319,057  3,737,225  2,799,863  2,694,028  581,832  1,519,194  1,625,029 
Loans receivable
Residential real estate 862,614  903,198  926,388  936,877  (40,584) (63,774) (74,263)
Commercial real estate
6,201,817  6,047,692  5,579,307  5,548,174  154,125  622,510  653,643 
Other commercial 3,593,322  3,547,249  2,094,254  2,145,257  46,073  1,499,068  1,448,065 
Home equity 646,850  654,392  617,201  615,781  (7,542) 29,649  31,069 
Other consumer 314,128  300,847  295,660  294,999  13,281  18,468  19,129 
Loans receivable 11,618,731  11,453,378  9,512,810  9,541,088  165,353  2,105,921  2,077,643 
Allowance for credit losses
(164,552) (162,509) (124,490) (125,535) (2,043) (40,062) (39,017)
Loans receivable, net
11,454,179  11,290,869  9,388,320  9,415,553  163,310  2,065,859  2,038,626 
Other assets 1,382,952  1,330,944  1,164,855  1,202,827  52,008  218,097  180,125 
Total assets $ 17,926,067  16,906,648  13,683,999  13,718,792  1,019,419  4,242,068  4,207,275 

Total debt securities of $4.319 billion at September 30, 2020 increased $582 million, or 16 percent, during the current quarter and increased $1.625 billion, or 60 percent, from the prior year third quarter. The Company continues to purchase debt securities with the excess liquidity produced from the increase in core deposits. Debt securities represented 24 percent of total assets at September 30, 2020 compared to 20 percent at December 31, 2019 and 20 percent of total assets at September 30, 2019.

The loan portfolio of $11.619 billion increased $165 million, or 1 percent, during the current quarter with the largest increase in commercial real estate which increased $154 million, or 3 percent. Excluding the PPP loans and the SBAZ acquisition, the loan portfolio increased $178 million, or 2 percent, since the prior year third quarter with the largest increase in commercial real estate loans which increased $318 million, or 6 percent.
50


Liabilities
The following table summarizes the Company’s liabilities as of the dates indicated:
$ Change from
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019
Deposits
Non-interest bearing deposits
$ 5,479,311  5,043,704  3,696,627  3,772,766  435,607  1,782,684  1,706,545 
NOW and DDA accounts
3,300,152  3,113,863  2,645,404  2,592,483  186,289  654,748  707,669 
Savings accounts
1,864,143  1,756,503  1,485,487  1,472,465  107,640  378,656  391,678 
Money market deposit accounts
2,557,294  2,403,641  1,937,141  1,940,517  153,653  620,153  616,777 
Certificate accounts
979,857  995,536  958,501  955,765  (15,679) 21,356  24,092 
Core deposits, total
14,180,757  13,313,247  10,723,160  10,733,996  867,510  3,457,597  3,446,761 
Wholesale deposits
119,131  68,285  53,297  134,629  50,846  65,834  (15,498)
Deposits, total
14,299,888  13,381,532  10,776,457  10,868,625  918,356  3,523,431  3,431,263 
Securities sold under agreements to repurchase
965,668  881,227  569,824  558,752  84,441  395,844  406,916 
Federal Home Loan Bank advances
7,318  37,963  38,611  8,707  (30,645) (31,293) (1,389)
Other borrowed funds 32,967  32,546  28,820  14,808  421  4,147  18,159 
Subordinated debentures 139,918  139,917  139,914  139,913  1  4  5 
Deferred tax liability 17,227  25,213  —  —  (7,986) 17,227  17,227 
Other liabilities 207,992  204,535  169,640  174,586  3,457  38,352  33,406 
Total liabilities $ 15,670,978  14,702,933  11,723,266  11,765,391  968,045  3,947,712  3,905,587 

Core deposits of $14.181 billion as of September 30, 2020 increased $868 million, or 7 percent, from the prior quarter. Excluding the SBAZ acquisition, core deposits increased $2.843 billion, or 26 percent, from the prior year third quarter, with non-interest bearing deposits increasing $1.565 billion, or 41 percent. The current year significant increase in deposits was attributable to a number of factors including the PPP loan proceeds deposited by customers, and the increase in customer savings rate. Non-interest bearing deposits were 39 percent of total core deposits at September 30, 2020 compared to 35 percent of total core deposits at September 30, 2019.

Federal Home Loan Bank (“FHLB”) advances of $7.3 million at September 30, 2020 decreased $31 million from the prior quarter and decreased $1.4 million from the prior year third quarter. The low level of FHLB advances was the result of the significant increase in core deposits which funded loans and debt security growth. FHLB advances will continue to fluctuate as necessary for balance sheet growth and to supplement liquidity needs of the Company.



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Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated: 
$ Change from
(Dollars in thousands, except per share data)
Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019
Common equity $ 2,123,991  2,073,806  1,920,507  1,905,306  50,185  203,484  218,685 
Accumulated other comprehensive income
131,098  129,909  40,226  48,095  1,189  90,872  83,003 
Total stockholders’ equity
2,255,089  2,203,715  1,960,733  1,953,401  51,374  294,356  301,688 
Goodwill and core deposit intangible, net
(572,134) (574,088) (519,704) (522,274) 1,954  (52,430) (49,860)
Tangible stockholders’ equity
$ 1,682,955  1,629,627  1,441,029  1,431,127  53,328  241,926  251,828 

Stockholders’ equity to total assets
12.58  % 13.03  % 14.33  % 14.24  %
Tangible stockholders’ equity to total tangible assets
9.70  % 9.98  % 10.95  % 10.84  %
Book value per common share
$ 23.63  23.10  21.25  21.19  0.53  2.38  2.44 
Tangible book value per common share
$ 17.64  17.08  15.61  15.53  0.56  2.03  2.11 

Tangible stockholders’ equity of $1.683 billion at September 30, 2020 increased $53 million, or 3 percent, from the prior quarter and was primarily the result of earnings retention. Tangible stockholders’ equity increased $252 million over the prior year third quarter, which was the result of $112 million of Company stock issued for the acquisitions of SBAZ and an increase in other comprehensive income and earnings retention. These increases more than offset the increase in goodwill and core deposit intangible associated with the acquisition. The current year decrease in both the stockholder’s equity to total assets ratio and the tangible stockholders’ equity to total tangible assets ratio was primarily the result of adding $1.448 billion of PPP loans. Tangible book value per common share of $17.64 at the current quarter end increased $0.56 per share from the prior quarter and increased $2.11 per share from a year ago. For additional information on the current expected credit loss (“CECL”) accounting standard, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Cash Dividend
On September 30, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.30 per share. The dividend was payable October 22, 2020 to shareholders of record on October 13, 2020. The dividend was the 142nd consecutive dividend. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

S&P MidCap 400® Index
During the second quarter of 2020, Standard and Poor’s [“S&P”] Dow Jones Indices selected the Company to transition from the S&P SmallCap 600® to the S&P MidCap 400® effective prior to the opening trading on Monday, June 22, 2020. The S&P MidCap 400® index consists of 400 companies that are chosen with regard to market capitalization, liquidity and industry representation.
52


Operating Results for Three Months Ended September 30, 2020 
Compared to June 30, 2020, and March 31, 2020

Income Summary
The following table summarizes income for the periods indicated: 

  Three Months ended $ Change from
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Mar 31,
2020 		Sep 30,
2019 		Jun 30,
2020 		Mar 31,
2020 		Sep 30,
2019
Net interest income
Interest income $ 157,487 155,404 142,865 142,395 2,083  14,622  15,092 
Interest expense 6,084 7,185 8,496 10,947 (1,101) (2,412) (4,863)
Total net interest income 151,403 148,219 134,369 131,448 3,184  17,034  19,955 
Non-interest income
Service charges and other fees
13,404 11,366 14,020 15,138 2,038  (616) (1,734)
Miscellaneous loan fees and charges
2,084 1,682 1,285 1,775 402  799  309 
Gain on sale of loans 35,516 25,858 11,862 10,369 9,658  23,654  25,147 
Gain on sale of investments 24 128 863 13,811 (104) (839) (13,787)
Other income 2,639 2,190 5,242 1,956 449  (2,603) 683 
Total non-interest income
53,667 41,224 33,272 43,049 12,443  20,395  10,618 
Total income $ 205,070 189,443  167,641 174,497 15,627  37,429  30,573 
Net interest margin (tax-equivalent)
3.92  % 4.12  % 4.36  % 4.42  %

Net Interest Income
The current quarter net interest income of $151 million increased $3.2 million, or 2 percent, over the prior quarter and increased $20.0 million, or 15 percent, from the prior year third quarter. The current quarter interest income of $157 million increased $2.1 million, or 1 percent, compared to the prior quarter which was driven by an increase in income from commercial loans primarily from the PPP loans. The current quarter interest income increased $15.1 million, or 11 percent, over prior year third quarter and was due to an increase in income from commercial loans and an increase in income on debt securities. Included in interest income was interest from the PPP loans of $9.3 million in the current quarter and $7.3 million in the prior quarter.

The current quarter interest expense of $6.1 million decreased $1.1 million, or 15 percent, over the prior quarter primarily as result of a decrease in deposit rates and borrowing interest rates. Current quarter interest expense decreased $4.9 million, or 44 percent, over prior year third quarter which was due to the decrease in higher cost borrowings and a decrease in deposit rates. During the current quarter, the total cost of funding (including non-interest bearing deposits) declined 5 basis points to 16 basis points compared to 21 basis points for the prior quarter primarily as a result of a decrease in rates on both deposits and borrowings. The total cost of funding decreased 23 basis points from the prior year third quarter and was attributable to a decrease in rates and a shift from higher cost borrowings to low cost deposits.

The Company’s net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the current quarter was 3.92 percent compared to 4.12 percent in the prior quarter. The core net interest margin, excluding 2 basis points of discount accretion, 1 basis point of non-accrual interest, and 13 basis points of interest income from the PPP loans, was 4.02 percent compared to 4.21 in the prior quarter and 4.35 percent in the prior year third quarter. The Company experienced a 19 basis points decrease in the core net interest margin during the current quarter from decreased yields on loans and debt securities which were partially offset by the decrease in the cost of funding. The core net interest margin decreased 33 basis points from the prior year third quarter primarily from a decrease in earning asset yields, primarily loan yields, that outpaced the decrease in the total cost of funding.

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Non-interest Income
Non-interest income for the current quarter totaled $53.7 million which was an increase of $12.4 million, or 30 percent, over the prior quarter and an increase of $10.6 million, or 25 percent, over the same quarter last year. Service charges and other fees of $13.4 million for the current quarter increased $2.0 million, or 18 percent, from the prior quarter. Service charges and other fees decreased $1.7 million from the prior year third quarter due to the decreased overdraft activity. Gain on the sale of loans of $35.5 million for the current quarter increased $9.7 million, or 37 percent, compared to the prior quarter and increased $25.1 million, or 242 percent, from the prior year third quarter due to the significant increase in refinance activity driven by the decrease in interest rates.

During the prior year third quarter, the Company terminated $260 million notional pay-fixed interest rate swaps and corresponding debt along with the sale of $308 million of available-for-sale debt securities. Sale of the investment securities resulted in a gain of $13.8 million in the prior year third quarter. Offsetting the gain was a $10 million loss recognized on the early termination of the interest swaps and a $3.5 million write-off of deferred prepayment penalties on FHLB borrowings.

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
 
  Three Months ended $ Change from
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Mar 31,
2020 		Sep 30,
2019 		Jun 30,
2020 		Mar 31,
2020 		Sep 30,
2019
Compensation and employee benefits
$ 64,866  57,981  59,660  62,509  6,885  5,206  2,357 
Occupancy and equipment 9,369  9,357  9,219  8,731  12  150  638 
Advertising and promotions 2,779  2,138  2,487  2,719  641  292  60 
Data processing 5,597  5,042  5,282  4,466  555  315  1,131 
Other real estate owned 186  75  112  166  111  74  20 
Regulatory assessments and insurance
1,495  1,037  1,090  593  458  405  902 
Loss on termination of hedging activities
—  —  —  13,528  —  —  (13,528)
Core deposit intangibles amortization
2,612  2,613  2,533  2,360  (1) 79  252 
Other expenses 18,786  19,898  11,545  15,603  (1,112) 7,241  3,183 
Total non-interest expense $ 105,690  98,141  91,928  110,675  7,549  13,762  (4,985)

Total non-interest expense of $106 million for the current quarter increased $7.5 million, or 8 percent, over the prior quarter and decreased $5.0 million, or 5 percent, over the prior year third quarter. Compensation and employee benefits increased by $6.9 million, or 12 percent, from the prior quarter which was primarily driven by the decrease in deferring compensation on originating the PPP loans which was $438 thousand in the current quarter compared to $8.4 million in the prior quarter. Compensation and employee benefits increased $2.4 million, or 4 percent, from the prior year third quarter primarily due to an increased number of employees driven by acquisitions and organic growth which more than offset the decrease from the $5.4 million of stock compensation expense in the prior year third quarter related to the Heritage Bancorp acquisition. Occupancy and equipment expense increased $638 thousand, or 7 percent, over the prior year third quarter primarily as a result of increased costs from acquisitions. Data processing expense increased $555 thousand, or 11 percent, over the prior quarter and increased $1.1 million, or 25 percent over the prior year third quarter as a result of the increased cost from acquisitions along with increased investment in technology infrastructure. Regulatory assessment and insurance increased $458 thousand from the prior quarter primarily due to an accrual adjustment in the prior quarter for waiver of the State of Montana regulatory semi-annual assessment for the first half of 2020. Regulatory assessment and insurance increased $902 thousand from the prior year third quarter quarter primarily due to $1.3 million in Small Bank Assessment credits applied in the prior year third quarter. The prior year loss on termination of hedging activities included $3.5 million write-off of the remaining unamortized deferred prepayment penalties on FHLB debt and a $10 million loss on the termination of pay-fixed interest rate swaps with notional amount of $260 million in the prior year third quarter.

Other expenses of $18.8 million, decreased $1.1 million, or 6 percent, from the prior quarter primarily due to a decrease in acquisition-related expenses. Other expenses increased $3.2 million, or 20 percent, over the prior year third quarter and was driven primarily from an increase in expense related to unfunded loan commitments. Current quarter other expenses included acquisition-related expenses of $793 thousand compared to $3.7 million in the prior quarter and $2.1 million in the prior year third quarter. Expense related to unfunded loan commitments was $2.3 million in the current quarter compared to $3.4 million
54


in the prior quarter and no expense in the prior year third quarter. Also included in the current quarter other expenses was $1.9 million for third party consulting regarding improvements in technology, product and service offerings.

Efficiency Ratio
The efficiency ratio was 49.16 percent in the current quarter and 49.29 percent in the prior quarter. Excluding the impact from the PPP loans, the efficiency ratio would have been 51.67 percent in the current quarter, which was a 406 basis points decrease from the prior quarter efficiency ratio of 55.73 percent and was primarily due to the increase in gain on sale of loans. The prior year third quarter efficiency was 65.95 and excluding the impact from the termination of the cash flow hedges and the accelerated stock compensation expense, the efficiency ratio would have been 54.41 percent. Excluding these adjustments, the current quarter efficiency ratio decreased 274 basis points from the prior year third quarter efficiency ratio which was also driven by the increased gain on sale of loans.

Credit Loss Expense
The following table summarizes credit loss expense, net charge-offs and select ratios relating to credit loss expense for the previous eight quarters:
(Dollars in thousands) Credit
Loss
Expense 		Net
Charge-Offs 		Allowance for
Credit Losses
as a Percent
of Loans 		Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans 		Non-Performing
Assets to
Total Sub-sidiary Assets
Third quarter 2020 $ 2,869  $ 826  1.42  % 0.15  % 0.25  %
Second quarter 2020 13,552  1,233  1.42  % 0.22  % 0.27  %
First quarter 2020 22,744  813  1.49  % 0.41  % 0.26  %
Fourth quarter 2019 —  1,045  1.31  % 0.24  % 0.27  %
Third quarter 2019 —  3,519  1.32  % 0.31  % 0.40  %
Second quarter 2019 —  732  1.46  % 0.43  % 0.41  %
First quarter 2019 57  1,510  1.56  % 0.44  % 0.42  %
Fourth quarter 2018 1,246  2,542  1.58  % 0.41  % 0.47  %

Net charge-offs for the current quarter were $826 thousand compared to $1.2 million for the prior quarter and $3.5 million from the same quarter last year. Loan portfolio growth, composition, average loan size, credit quality considerations, economic forecasts and other environmental factors will continue to determine the level of the credit loss expense. 

The determination of the allowance for credit losses (“ACL” or “allowance”) on loans and the related credit loss expense is a critical accounting estimate that involves management’s judgments about the loan portfolio that impact credit losses. For additional information on the allowance, see the Allowance For Credit Losses section under “Additional Management’s Discussion and Analysis.”















55





Operating Results for Nine Months Ended September 30, 2020
Compared to September 30, 2019

Income Summary
Nine Months ended
(Dollars in thousands) Sep 30,
2020 		Sep 30,
2019 		$ Change % Change
Net interest income
Interest income $ 455,756  $ 400,896  $ 54,860  14  %
Interest expense 21,765  33,940  (12,175) (36) %
Total net interest income 433,991  366,956  67,035  18  %
Non-interest income
Service charges and other fees 38,790  53,178  (14,388) (27) %
Miscellaneous loan fees and charges 5,051  3,934  1,117  28  %
Gain on sale of loans 73,236  23,929  49,307  206  %
Gain on sale of investments 1,015  14,158  (13,143) (93) %
Other income 10,071  7,158  2,913  41  %
Total non-interest income 128,163  102,357  25,806  25  %
Total income $ 562,154  $ 469,313  $ 92,841  20  %
Net interest margin (tax-equivalent) 4.12  % 4.36  %

Net Interest Income
Net-interest income of $434 million for the first nine months of 2020 increased $67.0 million, or 18 percent, over the first nine months of 2019. Interest income of $456 million for the first nine months of 2020 increased $54.9 million, or 14 percent, from the first nine months of 2019 and was primarily attributable to a $45.7 million increase in income from commercial loans, including $16.6 million from the PPP loans. Interest expense of $21.8 million for the first nine months of 2020 decreased $12.2 million, or 36 percent over the prior year same period primarily as a result of decreased higher cost FHLB advances and the decrease in the cost of deposits and borrowings. The total funding cost (including non-interest bearing deposits) for the first nine months of 2020 was 22 basis points, which decreased 20 basis points, or 48 percent, compared to 42 basis points for the first nine months of 2019.

The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the first nine months of 2020 was 4.12 percent, a 24 basis points decrease from the net interest margin of 4.36 percent for the first nine months of 2019. The core net interest margin, excluding 3 basis points of discount accretion, 1 basis point of non-accrual interest, and 9 basis points of interest income from the PPP loans was 4.17 compared to a core margin of 4.29 percent in the prior year first nine months. Although the Company was successful in reducing the cost of funding, it was not enough to outpace the decrease in yields on loans and debt securities driven by the current interest rate environment.

Non-interest Income
Non-interest income of $128 million for the first nine months of 2020 increased $25.8 million, or 25 percent, over the same period last year. Service charges and other fees of $38.8 million for 2020 year-to-date decreased $14.4 million, or 27 percent, from the same period prior year as a result of a decrease in overdraft activity and the impact of the Durbin Amendment. As of July 1, 2019, the Company became subject to the Durbin Amendment which established limits on the amount of interchange fees that can be charged to merchants for debit card processing. Gain on the sale of loans of $73.2 million for the first nine months of 2020, increased $49.3 million, or 206 percent, compared to the prior year as a result significant increase in refinance activity driven by the decrease in interest rates. Other income increased $2.9 million from the prior year and was primarily the result of a gain of $2.4 million on the sale of a former branch building in the first quarter of 2020.
56



Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:

Nine Months ended
(Dollars in thousands) Sep 30,
2020 		Sep 30,
2019 		$ Change % Change
Compensation and employee benefits $ 182,507  $ 167,210  $ 15,297  9  %
Occupancy and equipment 27,945  25,348  2,597  10  %
Advertising and promotions 7,404  7,874  (470) (6) %
Data processing 15,921  12,420  3,501  28  %
Other real estate owned 373  496  (123) (25) %
Regulatory assessments and insurance 3,622  3,726  (104) (3) %
Loss on termination of hedging activities —  13,528  (13,528) (100) %
Core deposit intangibles amortization 7,758  5,919  1,839  31  %
Other expenses 50,229  43,154  7,075  16  %
Total non-interest expense $ 295,759  $ 279,675  $ 16,084  6  %

Total non-interest expense of $296 million for the first nine months of 2020 increased $16.1 million, or 6 percent, over the prior year same period. Compensation and employee benefits for the first nine months of 2020 increased $15.3 million, or 9 percent, from the same period last year due to the increased number of employees from acquisitions and organic growth and annual salary increases which more than offset the $8.9 million deferral of compensation cost from the PPP loans in the current year and the $5.4 million of stock compensation expense in the prior year from the Heritage Bancorp acquisition. Occupancy and equipment expense for the first nine months of 2020 increased $2.6 million, or 10 percent from the prior year primarily from increased cost from acquisitions. Data processing expense for the first nine months of 2020 increased $3.5 million, or 28 percent, from the prior year as a result of the increased costs from acquisitions along with increased investment in technology infrastructure. Other expenses of $50.2 million, increased $7.1 million, or 16 percent, from the prior year and was primarily driven by an increase in expense related to unfunded loan commitments and an increase in acquisition-related expenses. Acquisition-related expenses were $7.3 million in the current year first nine months compared to $4.1 million in the prior year first nine months. In the current year-to-date period, there was $2.1 million of expense related to unfunded loan commitments which was primarily attributable to the economic forecast related to COVID-19.

Efficiency Ratio
The efficiency ratio was 50.21 percent for the first nine months of 2020. Excluding the impact from the PPP loans, the efficiency ratio would have been 53.30 percent. The prior year first nine months efficiency ratio was 58.82 and excluding the impact from the termination of the cash flow hedges and the accelerated stock compensation expense, the efficiency ratio would have been 54.74 percent. Excluding these adjustments, the current year efficiency ratio decreased 144 basis points from the prior year efficiency ratio which was driven by the increased gain on sale of loans and increase in net interest income that more than offset the decrease in service fee income from the Durbin Amendment and increases in compensation expense.

Credit Loss Expense
The credit loss expense was $39.2 million for the first nine months of 2020, an increase of $39.1 million from the same period in the prior year, this increase was primarily attributable to changes in the economic forecast related to COVID-19. Net charge-offs during the first nine months of 2020 were $2.9 million compared to $5.8 million during the same period in 2019.

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ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Activity
The Company’s investment securities primarily consist of debt securities classified as available-for-sale or held-to-maturity. Non-marketable equity securities consist of capital stock issued by the FHLB of Des Moines.

Debt Securities
Debt securities classified as available-for-sale are carried at estimated fair value and debt securities classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale debt securities are reflected as an adjustment to other comprehensive income. The Company’s debt securities are summarized below:

September 30, 2020 December 31, 2019 September 30, 2019
(Dollars in thousands) Carrying Amount Percent Carrying Amount Percent Carrying Amount Percent
Available-for-sale
U.S. government and federal agency $ 40,140  1  % $ 20,044  1  % $ 147,434  5  %
U.S. government sponsored enterprises 9,825  1  % 43,677  1  % 67,189  3  %
State and local governments 1,275,376  29  % 702,398  25  % 613,865  23  %
Corporate bonds 361,024  8  % 157,602  6  % 147,383  5  %
Residential mortgage-backed securities 1,275,858  30  % 738,724  26  % 767,253  28  %
Commercial mortgage-backed securities 1,163,325  26  % 912,807  33  % 715,912  27  %
Total available-for-sale
4,125,548  95  % 2,575,252  92  % 2,459,036  91  %
Held-to-maturity
State and local governments 193,509  5  % 224,611  8  % 234,992  9  %
Total held-to-maturity 193,509  5  % 224,611  8  % 234,992  9  %
Total debt securities $ 4,319,057  100  % $ 2,799,863  100  % $ 2,694,028  100  %

The Company’s debt securities are primarily comprised of state and local government securities and mortgage-backed securities. State and local government securities are largely exempt from federal income tax and the Company’s federal statutory income tax rate of 21 percent is used in calculating the tax-equivalent yields on the tax-exempt securities. Mortgage-backed securities largely consists of short, weighted-average life U.S. agency guaranteed residential and commercial mortgage pass-through securities and to a lesser extent, short, weighted-average life U.S. agency guaranteed residential collateralized mortgage obligations. Combined, the mortgage-backed securities provide the Company with ongoing liquidity as scheduled and pre-paid principal is received on the securities.

State and local government securities carry different risks that are not as prevalent in other security types. The Company evaluates the investment grade quality of its securities in accordance with regulatory guidance. Investment grade securities are those where the issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely payment of principal and interest are expected. In assessing credit risk, the Company may use credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSRO” entities such as S&P and Moody’s) as support for the evaluation; however, they are not solely relied upon. There have been no significant differences in the Company’s internal evaluation of the creditworthiness of any issuer when compared with the ratings assigned by the NRSROs.

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The following table stratifies the state and local government securities by the associated NRSRO ratings. The highest issued rating was used to categorize the securities in the table for those securities where the NRSRO ratings were not at the same level.

September 30, 2020 December 31, 2019
(Dollars in thousands) Amortized
Cost 		Fair
Value 		Amortized
Cost 		Fair
Value
S&P: AAA / Moody’s: Aaa
$ 355,351  386,927  251,101  259,690 
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
910,314  966,159  523,150  539,758 
S&P: A+, A, A- / Moody’s: A1, A2, A3
107,568  115,407  113,275  120,048 
S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3 3,217  3,245  3,217  3,302 
Not rated by either entity
9,964  10,215  13,451  13,795 
Below investment grade
—  —  201  201 
Total
$ 1,386,414  1,481,953  904,395  936,794 

State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following table stratifies the state and local government securities by the associated security type.

September 30, 2020 December 31, 2019
(Dollars in thousands) Amortized
Cost 		Fair
Value 		Amortized
Cost 		Fair
Value
General obligation - unlimited
$ 598,871  642,518  445,584  465,066 
General obligation - limited
137,821  144,919  119,884  124,939 
Revenue 630,456  673,690  325,331  332,354 
Certificate of participation
15,199  16,599  8,003  8,815 
Other
4,067  4,227  5,593  5,620 
Total
$ 1,386,414  1,481,953  904,395  936,794 

The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.

September 30, 2020 December 31, 2019
(Dollars in thousands) Amortized
Cost 		Fair
Value 		Amortized
Cost 		Fair
Value
New York $ 187,681  204,225  14,701  14,870 
Texas 143,709  154,138  112,397  121,641 
Michigan 140,018  148,274  141,131  116,581 
California 128,744  144,328  23,482  24,406 
Washington 108,527  114,678  116,458  146,538 
All other states
677,735  716,310  496,226  512,758 
Total
$ 1,386,414  1,481,953  904,395  936,794 

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The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity debt securities by contractual maturity at September 30, 2020. Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.
One Year or Less After One through Five Years After Five through Ten Years After Ten Years
Mortgage-Backed Securities 1
Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Available-for-sale
U.S. government and federal agency
$ 73  0.49  % $ 2,641  1.47  % $ 13,089  1.63  % $ 24,337  1.63  % $ —  —  % $ 40,140  1.59  %
U.S. government sponsored enterprises
8,022  1.07  % 1,803  0.95  % —  —  % —  —  % —  —  % 9,825  1.08  %
State and local governments
6,248  2.15  % 34,628  2.60  % 248,555  3.59  % 985,945  3.36  % —  —  % 1,275,376  3.45  %
Corporate bonds
106,960  3.29  % 238,686  3.32  % 15,378  3.76  % —  —  % —  —  % 361,024  3.51  %
Residential mortgage-backed securities
—  —  % —  —  % —  —  % —  —  % 1,275,858  1.48  % 1,275,858  1.90  %
Commercial mortgage-backed securities
—  —  % —  —  % —  —  % —  —  % 1,163,325  2.57  % 1,163,325  2.82  %
Total available-for-sale
121,303  3.09  % 277,758  3.20  % 277,022  3.50  % 1,010,282  3.32  % 2,439,183  1.99  % 4,125,548  2.87  %
Held-to-maturity
State and local governments
—  —  % 19,543  2.63  % 69,924  2.78  % 104,042  3.10  % —  —  % 193,509  2.88  %
Total held-to-maturity
—  —  % 19,543  2.63  % 69,924  2.78  % 104,042  3.10  % —  —  % 193,509  2.88  %
Total debt
  securities
$ 121,303  3.09  % $ 297,301  3.16  % $ 346,946  3.35  % $ 1,114,324  3.30  % $ 2,439,183  1.99  % $ 4,319,057  2.87  %
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

Based on an analysis of its available-for-sale debt securities with unrealized losses as of September 30, 2020, the Company determined their decline in value was unrelated to credit loss and was primarily the result of interest rate changes and market spreads subsequent to acquisition. The fair value of the debt securities is expected to recover as payments are received and the debt securities approach maturity. In addition, the Company determined an insignificant amount of credit losses is expected on the held-to-maturity debt securities portfolio; therefore, no ACL has been recognized at September 30, 2020.

For additional information on debt securities, see Note 2 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”


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Equity securities
Non-marketable equity securities primarily consist of capital stock issued by the FHLB of Des Moines and are carried at cost less impairment. The Company also has an insignificant amount of marketable equity securities that are included in other assets on the Company’s statements of financial condition.

Non-marketable equity securities and marketable equity securities without readily determinable fair values are evaluated for impairment whenever events or circumstances suggest the carrying value may not be recoverable. Based on the Company’s evaluation of its investments in non-marketable equity securities and marketable equity securities without readily determinable fair values as of September 30, 2020, the Company determined that none of such securities were impaired.

Lending Activity
The Company focuses its lending activities primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family; 2) commercial lending, including agriculture and public entities; and 3) installment lending for consumer purposes (e.g., home equity, automobile, etc.). Supplemental information regarding the Company’s loan portfolio and credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification” included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The regulatory classification of loans is based primarily on the type of collateral for the loans. Loan information included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the Company’s loan segments, which are based on the purpose of the loan, unless otherwise noted as a regulatory classification. The following table summarizes the Company’s loan portfolio as of the dates indicated:

  September 30, 2020 December 31, 2019 September 30, 2019
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Residential real estate $ 862,614  8  % $ 926,388  10  % $ 936,877  10  %
Commercial real estate 6,201,817  54  % 5,579,307  59  % 5,548,174  59  %
Other commercial 3,593,322  31  % 2,094,254  22  % 2,145,257  23  %
Home equity 646,850  6  % 617,201  7  % 615,781  6  %
Other consumer 314,128  3  % 295,660  3  % 294,999  3  %
Loans receivable 11,618,731  102  % 9,512,810  101  % 9,541,088  101  %
Allowance for credit losses (164,552) (2) % (124,490) (1) % (125,535) (1) %
Loans receivable, net $ 11,454,179  100  % $ 9,388,320  100  % $ 9,415,553  100  %

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Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
 
At or for the Nine Months ended At or for the Six Months ended At or for the Year ended At or for the Nine Months ended
(Dollars in thousands) September 30,
2020 		June 30,
2020 		December 31,
2019 		September 30,
2019
Other real estate owned $ 5,361  4,743  5,142  7,148 
Accruing loans 90 days or more past due
Residential real estate 217  206  753  1,212 
Commercial real estate 1,426  3,110  64  4,350 
Other commercial 1,102  2,519  143  1,045 
Home equity 80  98  —  681 
Other consumer 127  138  452  624 
Total 2,952  6,071  1,412  7,912 
Non-accrual loans
Residential real estate 3,488  4,243  4,715  5,295 
Commercial real estate 18,298  19,682  15,650  23,781 
Other commercial 11,371  7,713  6,592  2,876 
Home equity 2,891  3,086  3,266  766 
Other consumer 302  433  660  7,299 
Total 36,350  35,157  30,883  40,017 
Total non-performing assets $ 44,663  45,971  37,437  55,077 
Non-performing assets as a percentage of subsidiary assets
0.25  % 0.27  % 0.27  % 0.40  %
Allowance for credit losses as a percentage of non-performing loans
419  % 394  % 385  % 262  %
Accruing loans 30-89 days past due $ 17,631  25,225  23,192  29,954 
Accruing troubled debt restructurings $ 39,999  41,759  34,055  32,949 
Non-accrual troubled debt restructurings $ 7,579  8,204  3,346  6,723 
U.S. government guarantees included in non-performing assets
$ 4,411  3,305  1,786  3,000 
Interest income 1
$ 1,296  851  1,603  1,544 
______________________________
1Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

Non-performing assets of $44.7 million at September 30, 2020 decreased $1.3 million, or 3 percent, over the prior quarter and decreased $10.4 million, or 19 percent, over the prior year third quarter. Non-performing assets as a percentage of subsidiary assets at September 30, 2020 was 0.25 percent. Excluding the government guaranteed PPP loans, the non-performing assets as a percentage of subsidiary assets at September 30, 2020 was 0.27 percent, a decrease of 3 basis points from the prior quarter, and a decrease of 13 basis points from the prior year third quarter. Early stage delinquencies (accruing loans 30-89 days past due) of $17.6 million at September 30, 2020 decreased $7.6 million from the prior quarter and decreased $12.3 million from the prior year third quarter. Early stage delinquencies as a percentage of loans at September 30, 2020 was 0.15 percent, which was a decrease of 7 basis points from prior quarter and a 16 basis points decrease from prior year third quarter. Excluding PPP loans, early stage delinquencies as a percentage of loans at September 30, 2020 was 0.17 percent, which was a decrease of 8 basis points from prior quarter and a 14 basis points decrease from prior year third quarter.

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Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to management, including updated appraisals or evaluations (new or updated), the Company believes the value of the underlying real estate collateral is adequate to minimize significant charge-offs or losses to the Company. Through pro-active credit administration, the Company works closely with its borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company. With very limited exceptions, the Company does not disburse additional funds on non-performing loans. Instead, the Company proceeds to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.

For additional information on accounting policies relating to non-performing assets, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Restructured Loans
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service their obligations as modified. The Company discourages the use of the multiple loan strategy when restructuring loans regardless of whether or not the loans are designated as TDRs. The Company has TDR loans of $47.6 million and $37.4 million at September 30, 2020 and December 31, 2019, respectively.

On March 27, 2020, the CARES Act was signed into law which includes many provisions that impact the Company and its customers. The banking regulatory agencies have encouraged banks to work with borrowers who have been impacted by the COVID-19 pandemic, and the CARES Act, along with related regulatory guidance, allows the Bank to not designate certain modifications as TDRs that otherwise may have been classified as TDRs. For additional information on modifications related to the COVID-19 pandemic, see the PPP and COVID-19 Bank Loan Modifications sections under “Additional Management’s Discussion and Analysis.”

Other Real Estate Owned
The book value of loans prior to the acquisition of collateral and transfer of the loans into other real estate owned (“OREO”) during 2020 was $2,265 thousand. The fair value of the loan collateral acquired in foreclosure during 2020 was $2,062 thousand. The following table sets forth the changes in OREO for the periods indicated:

At or for the Nine Months ended At or for the Six Months ended At or for the Year ended At or for the Nine Months ended
(Dollars in thousands) September 30,
2020 		June 30,
2020 		December 31,
2019 		September 30,
2019
Balance at beginning of period $ 5,142  5,142  7,480  7,480 
Acquisitions 307  307  —  — 
Additions 2,062  791  2,349  2,347 
Capital improvements 141  72  63  — 
Write-downs (189) (60) (766) (271)
Sales (2,102) (1,509) (3,984) (2,408)
Balance at end of period $ 5,361  4,743  5,142  7,148 

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PPP and COVID-19 Bank Loan Modifications
The following table summarizes information regarding PPP loans:

September 30, 2020
(Dollars in thousands) Number of
PPP Loans 		Amount of
PPP Loans 		Total Loans
Receivable, Net of PPP Loans 		PPP Loans (Amount) as a Percent of Total Loans
Receivable, Net of PPP Loans
Residential real estate —  $ —  862,614  —  %
Commercial real estate and other commercial
Real estate rental and leasing 1,221  64,647  3,361,074  1.92  %
Accommodation and food services 1,502  160,295  644,627  24.87  %
Healthcare 1,928  288,612  826,809  34.91  %
Manufacturing 830  80,483  193,216  41.65  %
Retail and wholesale trade 1,672  168,837  471,115  35.84  %
Construction 2,297  214,652  774,069  27.73  %
Other 6,640  470,891  2,075,812  22.68  %
Home equity and other consumer —  —  960,978  —  %
Total 16,090  $ 1,448,417  10,170,314  14.24  %

The PPP loan originations generated $55.2 million of SBA processing fees, or an average of 3.75 percent, and $8.9 million of deferred compensation costs for total net deferred fees of $46.3 million. Net deferred fees remaining on the PPP loans at September 30, 2020 were $36.1 million, which will be recognized into interest income over the life of the loans, generally two years, or when the loans are forgiven in whole or part by the SBA. The Company has actively been working with its customers to submit applications to the SBA for forgiveness of the loans and the Company started receiving forgiveness payments in the fourth quarter of 2020.
64


COVID-19 Bank Loan Modifications

September 30, 2020 June 30, 2020
(Dollars in thousands) Total Loans Receivable, Net of PPP Loans Amount of Unexpired Original Loan Modifications Amount of
Re-deferral Loan Modifications 		Amount of
Remaining Loan
Modifications 		Loan Modifications (Amount) as a Percent of Total Loans
Receivable, Net of PPP Loans 		Amount of
Remaining Loan
Modifications 		Loan Modifications (Amount) as a Percent of Total Loans
Receivable, Net of PPP Loans
Residential real estate $ 862,614  28,571  —  28,571  3.31  % $ 66,395  7.35  %
Commercial real estate
and other commercial
Real estate rental
and leasing 		3,361,074  163,103  43,735  206,838  6.15  % 587,609  18.11  %
Accommodation and
food services 		644,627  69,328  12,854  82,182  12.75  % 395,882  61.41  %
Healthcare 826,809  29,136  14,117  43,253  5.23  % 126,808  16.01  %
Manufacturing 193,216  15,263  3,296  18,559  9.61  % 49,338  24.41  %
Retail and wholesale
trade 		471,115  13,299  2,554  15,853  3.36  % 46,623  9.78  %
Construction 774,069  13,337  1,188  14,525  1.88  % 38,751  5.06  %
Other 2,075,812  23,146  27,442  50,588  2.44  % 192,060  9.40  %
Home equity and other
consumer 		960,978  5,767  —  5,767  0.60  % 11,326  1.19  %
Total $ 10,170,314  360,950  105,186  466,136  4.58  % $ 1,514,792  15.11  %

In response to COVID-19, the Company modified 3,054 loans in the amount of $1.515 billion during the second quarter of 2020. These modifications were primarily short-term payment deferrals under six months. During the third quarter of 2020, the majority of the modified loan deferral periods expired, and the loans returned to regular payment status. During the current quarter, the re-deferral rate was 9.12 percent for modified loans whose original deferral period had expired, with no industry category exceeding 20 percent. As of September 30, 2020, $466 million of the modifications, or 4.58 percent of the $10.170 billion of loans, net of the PPP loans, remain in the deferral period, a reduction of $1.049 billion from the $1.515 billion of loan modifications at the end of the prior quarter.

In addition to the Bank loan modifications presented above, the state of Montana created the Montana Loan Deferment Program for only Montana-based businesses and was implemented only in the third quarter. Cares Act Funds were used to provide interest payments upfront and directly to lenders on behalf of participating borrowers to convert existing commercial loans to interest only status, resulting in the deferral of principal and interest for a period of six to twelve months. None of the interest payments are required to be repaid by the borrowers, thus providing a grant to the borrowers. This program was unique to Montana, had minimal qualification requirements, and required that participating lenders modify eligible loans to conform to the program in order for borrowers to qualify for the grant. As of September 30, 2020, the Company had $237 million in eligible loans benefiting from this grant program, which was 2.33 percent of total loans receivable, net of PPP loans. Given the unique nature of the Montana only grant program, the $237 million was not included in the Bank loan modifications presented above.
65


COVID-19 Higher Risk Industries - Enhanced Monitoring
The Company has certain industries for which it has identified as higher risk. The following table summarizes information regarding these higher risk loans:


September 30, 2020
(Dollars in thousands) Enhanced Monitoring Loans Receivable, Net of PPP Loans Percent of
Total Loans Receivable, Net of PPP Loans 		Amount of Unexpired Original
Loan Modifications 		Amount of
Re-deferral Loan Modifications 		Amount of
Remaining Loan
Modifications 		Loan Modifications (Amount) as a Percent of Enhanced Monitoring Loans
Receivable, Net of PPP Loans
Hotel and motel $ 422,500  4.15  % 44,091  6,679  50,770  12.02  %
Restaurant 138,944  1.37  % 12,977  6,175  19,152  13.78  %
Travel and tourism 19,726  0.19  % 4,605  397  5,002  25.36  %
Gaming 14,500  0.14  % 1,101  —  1,101  7.59  %
Oil and gas 22,178  0.22  % 1,474  —  1,474  6.65  %
Total $ 617,848  6.08  % 64,248  13,251  77,499  12.54  %

June 30, 2020
(Dollars in thousands) Amount of
Remaining Loan
Modifications 		Percent of Loans Receivable, Net of PPP Loans Loan Modifications (Amount) as a Percent of Enhanced Monitoring Loans
Receivable, Net of PPP Loans
Hotel and motel $ 300,747  4.20  % 71.34  %
Restaurant 76,632  1.50  % 50.91  %
Travel and tourism 7,845  0.21  % 37.79  %
Gaming 9,214  0.15  % 60.95  %
Oil and gas 6,013  0.23  % 26.43  %
Total $ 400,451  6.29  % 63.49  %

Excluding the PPP loans, the Company has $618 million, or 6 percent, of its total loan portfolio with direct exposure to industries for which it has identified as higher risk, requiring enhanced monitoring. As of September 30, 2020, $77.5 million have modifications, which was a reduction of $323 million, or 81 percent, from the $400 million of modifications at the end of the prior quarter. During the current quarter the re-deferral rate was 3.94 percent for modified loans whose original deferral period had expired, with no industry category exceeding 15 percent. The Company continues to conduct enhanced portfolio reviews and monitoring for potential credit deterioration.




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Allowance for Credit Losses - Loans Receivable
On January 1, 2020, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments - Credit Losses, which significantly changed the allowance for credit loss accounting policies. The following allowance for credit loss discussion was presented under Accounting Standards Codification™ (“ASC”) Topic 326, whereas prior periods are presented in accordance with the incurred loss model as disclosed in the Company’s 2019 Annual Report on Form 10-K.

The following table summarizes the allocation of the ACL as of the dates indicated:

  September 30, 2020 December 31, 2019 September 30, 2019
(Dollars in thousands) ACL Percent of ACL in
Category 		Percent of
Loans in
Category 		ACL Percent of ACL in
Category 		Percent
of Loans in
Category 		ACL Percent of ACL in
Category 		Percent
of Loans in
Category
Residential real estate
$ 9,805  6  % 7  % $ 10,111  8  % 10  % $ 10,237  8  % 10  %
Commercial real estate
94,397  57  % 53  % 69,496  56  % 59  % 69,658  56  % 58  %
Other commercial 48,753  30  % 31  % 36,129  29  % 22  % 36,858  29  % 22  %
Home equity 7,430  5  % 6  % 4,937  4  % 6  % 5,041  4  % 7  %
Other consumer 4,167  2  % 3  % 3,817  3  % 3  % 3,741  3  % 3  %
Total $ 164,552  100  % 100  % $ 124,490  100  % 100  % $ 125,535  100  % 100  %

67


The following table summarizes the ACL experience for the periods indicated:

At or for the Nine Months ended At or for the Six Months ended At or for the Year ended At or for the Nine Months ended
(Dollars in thousands) September 30,
2020 		June 30,
2020 		December 31,
2019 		September 30,
2019
Balance at beginning of period $ 124,490  124,490  131,239  131,239 
Impact of adopting CECL 3,720  3,720  —  — 
Acquisitions 49  49  —  — 
Credit loss expense 39,165  36,296  57  57 
Charge-offs
Residential real estate (21) (21) (608) (482)
Commercial real estate (625) (180) (2,460) (2,266)
Other commercial (3,471) (1,873) (4,189) (2,598)
Home equity (293) (194) (90) (28)
Other consumer (3,455) (2,967) (7,831) (6,716)
Total charge-offs (7,865) (5,235) (15,178) (12,090)
Recoveries
Residential real estate 54  19  251  240 
Commercial real estate 860  330  2,212  1,301 
Other commercial 1,496  1,182  2,181  1,819 
Home equity 246  153  79  44 
Other consumer 2,337  1,505  3,649  2,925 
Total recoveries 4,993  3,189  8,372  6,329 
Net charge-offs (2,872) (2,046) (6,806) (5,761)
Balance at end of period $ 164,552  162,509  124,490  125,535 
ACL as a percentage of total loans
1.42  % 1.42  % 1.31  % 1.32  %
Net charge-offs as a percentage of total loans 0.03  % 0.02  % 0.07  % 0.06  %

The current quarter credit loss expense was $2.9 million, a decrease of $10.7 million from the prior quarter credit loss expense of $13.6 million. The current year-to-date credit loss expense was $39.2 million and primarily attributable to credit loss expense related to COVID-19 and an additional $4.8 million of credit loss expense related to the SBAZ acquisition. The allowance for credit losses (“ACL”) as a percentage of total loans outstanding at September 30, 2020 was 1.42 percent which remained unchanged compared to the prior quarter. Excluding the PPP loans, the ACL as percentage of loans was 1.62 percent which also remained unchanged compared to the prior quarter. The Company’s ACL of $165 million is considered adequate to absorb the estimated credit losses from any segment of its loan portfolio. For the periods ended September 30, 2020 and 2019, the Company believes the ACL is commensurate with the risk in the Company’s loan portfolio and is directionally consistent with the change in the quality of the Company’s loan portfolio.


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While the Company has incorporated its estimate of the impact of the COVID-19 pandemic into its calculation of the allowance based on assumptions and forecasts that existed as of the reporting period end, the uncertainty of the current economic environment remains volatile and the Company cannot predict whether additional credit losses will be sustained as a result of the COVID-19 pandemic if assumptions and forecasts change in the future.

At the end of each quarter, the Company analyzes its loan portfolio and maintains an ACL at a level that is appropriate and determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Determining the adequacy of the ACL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The ACL methodology is designed to reasonably estimate the probable credit losses within the Company’s loan portfolio. Accordingly, the ACL is maintained within a range of estimated losses. The determination of the ACL on loans, including credit loss expense and net charge-offs, is a critical accounting estimate that involves management’s judgments about the loan portfolio that impact credit losses, including the credit risk inherent in the loan portfolio, economic forecasts nationally and in the local markets in which the Company operates, trends and changes in collateral values, delinquencies, non-performing assets, net charge-offs, credit-related policies and personnel, and other environmental factors.

In determining the allowance, the loan portfolio is separated into pools of loans that share similar risk characteristics which are the Company’s loan segments. The Company then derives estimated loss assumptions from its model by loan segment which is further segregated by the credit quality indicators. The loss assumptions are then applied to each segment of loan to estimate the ACL on the pooled loans. For any loans that do not share similar risk characteristics, the estimated credit losses are determined on an individual loan basis and such loans primarily consist of non-accrual loans. An estimated credit loss is recorded on individually reviewed loans when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted at the loans original effective interest rate) is less than the amortized cost of the loan.

The Company provides commercial banking services to individuals, small to medium-sized businesses, community organizations and public entities from 193 locations, including 175 branches, across Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada. The states in which the Company operates have diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the changes in the global, national, and local economies are not uniform across the Company’s geographic locations. The geographic dispersion of these market areas helps to mitigate the risk of credit loss. The Company’s model of sixteen bank divisions with separate management teams is also a significant benefit in mitigating and managing the Company’s credit risk. This model provides substantial local oversight to the lending and credit management function and requires multiple reviews of larger loans before credit is extended.

The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This continuous process of identifying non-performing loans is necessary to support management’s evaluation of the ACL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit quality. The ACL evaluation is well documented and approved by the Company’s Board. In addition, the policy and procedures for determining the balance of the ACL are reviewed annually by the Company’s Board, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies.

Although the Company continues to actively monitor economic trends and regulatory developments, no assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ACL amount, or that subsequent evaluations of the loan portfolio applying management’s judgment about then current factors will not require significant changes in the ACL. Under such circumstances, additional credit loss expense could result.

For additional information regarding the ACL, its relation to credit loss expense and risk related to asset quality, see Note 3 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”
69


Loans by Regulatory Classification
Supplemental information regarding identification of the Company’s loan portfolio and credit quality based on regulatory classification is provided in the following tables. The regulatory classification of loans is based primarily on the type of collateral for the loans. There may be differences when compared to loan tables and loan amounts appearing elsewhere which reflect the Company’s internal loan segments which are based on the purpose of the loan.

The following table summarizes the Company’s loan portfolio by regulatory classification:

  Loans Receivable, by Loan Type % Change from
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019
Custom and owner occupied construction
$ 166,195  $ 177,172  $ 143,479  $ 147,626  (6) % 16  % 13  %
Pre-sold and spec construction
157,242  161,964  180,539  207,596  (3) % (13) % (24) %
Total residential construction
323,437  339,136  324,018  355,222  (5) % —  % (9) %
Land development 96,814  94,667  101,592  103,090  2  % (5) % (6) %
Consumer land or lots 122,019  120,015  125,759  128,668  2  % (3) % (5) %
Unimproved land 64,770  63,459  62,563  71,467  2  % 4  % (9) %
Developed lots for operative builders
30,871  26,647  17,390  13,782  16  % 78  % 124  %
Commercial lots 62,445  60,563  46,408  64,904  3  % 35  % (4) %
Other construction 537,105  477,922  478,368  443,947  12  % 12  % 21  %
Total land, lot, and other construction
914,024  843,273  832,080  825,858  8  % 10  % 11  %
Owner occupied 1,889,512  1,855,994  1,667,526  1,666,211  2  % 13  % 13  %
Non-owner occupied 2,259,062  2,238,586  2,017,375  2,023,262  1  % 12  % 12  %
Total commercial real estate
4,148,574  4,094,580  3,684,901  3,689,473  1  % 13  % 12  %
Commercial and industrial 2,308,710  2,342,081  991,580  1,009,310  (1) % 133  % 129  %
Agriculture 747,145  714,227  701,363  718,255  5  % 7  % 4  %
1st lien 1,256,111  1,227,514  1,186,889  1,208,096  2  % 6  % 4  %
Junior lien 43,355  47,121  53,571  53,931  (8) % (19) % (20) %
Total 1-4 family 1,299,466  1,274,635  1,240,460  1,262,027  2  % 5  % 3  %
Multifamily residential 359,030  343,870  342,498  350,622  4  % 5  % 2  %
Home equity lines of credit 651,546  655,492  617,900  612,775  (1) % 5  % 6  %
Other consumer 191,761  181,402  174,643  171,633  6  % 10  % 12  %
Total consumer 843,307  836,894  792,543  784,408  1  % 6  % 8  %
States and political subdivisions 617,624  581,673  533,023  471,599  6  % 16  % 31  %
Other 205,351  198,354  139,538  174,755  4  % 47  % 18  %
Total loans receivable, including loans held for sale
11,766,668  11,568,723  9,582,004  9,641,529  2  % 23  % 22  %
Less loans held for sale 1
(147,937) (115,345) (69,194) (100,441) 28  % 114  % 47  %
Total loans receivable $ 11,618,731  $ 11,453,378  $ 9,512,810  $ 9,541,088  1  % 22  % 22  %
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
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The following table summarizes the Company’s non-performing assets by regulatory classification:

 
Non-performing Assets,
by Loan Type 		Non-
Accrual
Loans 		Accruing
Loans 90  Days or
More Past Due 		OREO
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Sep 30,
2020 		Sep 30,
2020 		Sep 30,
2020
Custom and owner occupied construction
$ 249  440  185  283  249  —  — 
Pre-sold and spec construction —  —  743  1,219  —  —  — 
Total residential construction
249  440  928  1,502  249  —  — 
Land development 450  659  852  1,006  202  —  248 
Consumer land or lots 223  427  330  828  61  —  162 
Unimproved land 417  663  1,181  8,781  270  —  147 
Commercial lots 682  529  529  575  153  —  529 
Total land, lot and other construction
1,772  2,278  2,892  11,190  686  —  1,086 
Owner occupied 9,077  9,424  4,608  8,251  7,338  —  1,739 
Non-owner occupied 4,879  5,482  8,229  9,271  4,879  —  — 
Total commercial real estate
13,956  14,906  12,837  17,522  12,217  —  1,739 
Commercial and industrial 8,571  5,039  5,297  6,135  7,614  396  561 
Agriculture 8,972  11,087  2,288  3,469  7,011  1,961  — 
1st lien 6,559  7,634  8,671  9,420  4,698  217  1,644 
Junior lien 986  746  569  669  815  171  — 
Total 1-4 family 7,545  8,380  9,240  10,089  5,513  388  1,644 
Multifamily residential —  92  201  206  —  —  — 
Home equity lines of credit 2,903  3,048  2,618  3,553  2,550  80  273 
Other consumer 407  412  837  1,098  241  108  58 
Total consumer 3,310  3,460  3,455  4,651  2,791  188  331 
Other 288  289  299  313  269  19  — 
Total $ 44,663  45,971  37,437  55,077  36,350  2,952  5,361 


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The following table summarizes the Company’s accruing loans 30-89 days past due by regulatory classification:

  Accruing 30-89 Days Delinquent 
Loans, by Loan Type 		% Change from
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019
Custom and owner occupied construction
$ 448  $ —  $ 637  $ 49  n/m (30) % 814  %
Pre-sold and spec construction —  —  148  8  n/m (100) % (100) %
Total residential construction
448  —  785  57  n/m (43) % 686  %
Land development —  —  —  1,282  n/m n/m (100) %
Consumer land or lots 220  248  672  836  (11) % (67) % (74) %
Unimproved land 381  411  558  8  (7) % (32) % 4,663  %
Developed lots for operative builders
—  —  2  —  n/m (100) % n/m
Commercial lots —  153  —  —  (100) % n/m n/m
Total land, lot and other construction
601  812  1,232  2,268  (26) % (51) % (74) %
Owner occupied 3,163  1,512  3,052  2,949  109  % 4  % 7  %
Non-owner occupied 1,157  966  1,834  1,286  20  % (37) % (10) %
Total commercial real estate
4,320  2,478  4,886  4,235  74  % (12) % 2  %
Commercial and industrial 2,354  4,127  2,036  12,780  (43) % 16  % (82) %
Agriculture 2,795  12,084  4,298  1,290  (77) % (35) % 117  %
1st lien 2,589  656  4,711  2,521  295  % (45) % 3  %
Junior lien 738  160  624  715  361  % 18  % 3  %
Total 1-4 family 3,327  816  5,335  3,236  308  % (38) % 3  %
Multifamily residential —  —  —  149  n/m n/m (100)
Home equity lines of credit 2,200  3,330  2,352  4,162  (34) % (6) % (47) %
Other consumer 789  739  1,187  1,388  7  % (34) % (43) %
Total consumer 2,989  4,069  3,539  5,550  (27) % (16) % (46) %
States and political subdivisions —  124  —  —  (100) n/m n/m
Other 797  715  1,081  389  11  % (26) % 105  %
Total $ 17,631  $ 25,225  $ 23,192  $ 29,954  (30) % (24) % (41) %
______________________________
n/m - not measurable


72


The following table summarizes the Company’s charge-offs and recoveries by regulatory classification:

  Net Charge-Offs (Recoveries),
Year-to-Date Period Ending,
By Loan Type 		Charge-Offs Recoveries
(Dollars in thousands) Sep 30,
2020 		Jun 30,
2020 		Dec 31,
2019 		Sep 30,
2019 		Sep 30,
2020 		Sep 30,
2020
Custom and owner occupied construction
$ (9) —  98  —  —  9 
Pre-sold and spec construction (19) (12) (18) (12) —  19 
Total residential construction (28) (12) 80  (12) —  28 
Land development (63) (50) (30) (25) —  63 
Consumer land or lots (217) (17) (138) (160) 7  224 
Unimproved land (489) (287) (311) (271) —  489 
Developed lots for operative builders
—  —  (18) (18) —  — 
Commercial lots (5) (3) (6) (4) —  5 
Other construction —  —  (142) (142) —  — 
Total land, lot and other construction
(774) (357) (645) (620) 7  781 
Owner occupied (82) (49) (479) (35) 52  134 
Non-owner occupied 246  115  2,015  1,861  295  49 
Total commercial real estate 164  66  1,536  1,826  347  183 
Commercial and industrial 740  576  1,472  1,066  1,317  577 
Agriculture 309  33  21  (32) 315  6 
1st lien (27) —  (12) 189  21  48 
Junior lien (169) (129) (303) (254) 28  197 
Total 1-4 family (196) (129) (315) (65) 49  245 
Multifamily residential (244) (43) —  —  —  244 
Home equity lines of credit 79  24  19  (25) 310  231 
Other consumer 233  161  603  380  445  212 
Total consumer 312  185  622  355  755  443 
Other 2,589  1,727  4,035  3,243  5,075  2,486 
Total $ 2,872  2,046  6,806  5,761  7,865  4,993 



73


Sources of Funds
The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The Company also obtains funds from repayment of loans and debt securities, securities sold under agreements to repurchase (“repurchase agreements”), wholesale deposits, advances from FHLB and other borrowings. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities, match maturities of longer-term assets or manage interest rate risk.

Deposits
The Company has several deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include non-interest bearing deposit accounts and interest bearing deposit accounts such as NOW, DDA, savings, money market deposits, fixed rate certificates of deposit with maturities ranging from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. These deposits are obtained primarily from individual and business residents in the Bank’s geographic market areas. Wholesale deposits are obtained through various programs and include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts. The Company’s deposits are summarized below:

September 30, 2020 December 31, 2019 September 30, 2019
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Non-interest bearing deposits $ 5,479,311  38  % $ 3,696,627  34  % $ 3,772,766  35  %
NOW and DDA accounts 3,300,152  23  % 2,645,404  25  % 2,592,483  24  %
Savings accounts 1,864,143  13  % 1,485,487  14  % 1,472,465  13  %
Money market deposit accounts 2,557,294  18  % 1,937,141  18  % 1,940,517  18  %
Certificate accounts 979,857  7  % 958,501  9  % 955,765  9  %
Wholesale deposits 119,131  1  % 53,297  —  % 134,629  1  %
Total interest bearing deposits 8,820,577  62  % 7,079,830  66  % 7,095,859  65  %
Total deposits $ 14,299,888  100  % $ 10,776,457  100  % $ 10,868,625  100  %

Securities Sold Under Agreements to Repurchase, Federal Home Loan Bank Advances and Other Borrowings
The Company borrows money through repurchase agreements. This process involves the selling of one or more of the securities in the Company’s investment portfolio and simultaneously entering into an agreement to repurchase the same securities at an agreed upon later date, typically overnight. A rate of interest is paid for the agreed period of time. The Bank enters into repurchase agreements with local municipalities, and certain customers, and has adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities. In addition to retail repurchase agreements, the Company periodically enters into wholesale repurchase agreements as additional funding sources. The Company has not entered into reverse repurchase agreements.

The Bank is a member of the FHLB of Des Moines, which is one of eleven banks that comprise the FHLB system.  The Bank is required to maintain a certain level of activity-based stock in order to borrow or to engage in other transactions with the FHLB of Des Moines. Additionally, the Bank is subject to a membership capital stock requirement that is based upon an annual calibration tied to the total assets of the Bank. The borrowings are collateralized by eligible categories of loans and debt securities (principally, securities which are obligations of, or guaranteed by, the U.S. government and its agencies), provided certain standards related to credit-worthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rates and range of maturities. The Bank’s maximum amount of FHLB advances is limited to the lesser of a fixed percentage of the Bank’s total assets or the discounted value of eligible collateral. FHLB advances fluctuate to meet seasonal and other withdrawals of deposits and to expand lending or investment opportunities of the Company.

Additionally, the Company has other sources of secured and unsecured borrowing lines from various sources that may be used from time to time.

74


Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-term borrowings are accompanied by increased risks managed by the Bank’s Asset Liability Committee (“ALCO”) such as rate increases or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term borrowing sources include FHLB advances, federal funds purchased and retail and wholesale repurchase agreements. The Company also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank (“FRB”). FHLB advances and certain other short-term borrowings may be renewed as long-term borrowings to decrease certain risks such as liquidity or interest rate risk; however, the reduction in risks are weighed against the increased cost of funds and other risks.

The following table provides information relating to significant short-term borrowings, which consists of borrowings that mature within one year of period end:
At or for the Nine Months ended At or for the Year ended
(Dollars in thousands) September 30,
2020 		December 31,
2019
Repurchase agreements
Amount outstanding at end of period $ 965,668  569,824 
Weighted interest rate on outstanding amount 0.40  % 0.74  %
Maximum outstanding at any month-end $ 965,668  569,824 
Average balance $ 720,593  470,351 
Weighted-average interest rate 0.51  % 0.79  %

Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed or acquired financing subsidiaries for the purpose of issuing trust preferred securities that entitle the investor to receive cumulative cash distributions thereon. Subordinated debentures were issued in conjunction with the trust preferred securities and the terms of the subordinated debentures and trust preferred securities are the same. For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital at September 30, 2020. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 require that if a depository institution holding company exceeds $15 billion due to an acquisition, then trust preferred securities are to be excluded from Tier 1 capital beginning in the period in which the transaction occurred. During the current year, the Company’s acquisition of SBAZ resulted in total consolidated assets exceeding $15 billion; accordingly, trust preferred securities are now included in Tier 2 capital. The Company also has subordinated debt that qualifies as Tier 2 capital. The subordinated debentures outstanding as of September 30, 2020 were $140 million, including fair value adjustments from acquisitions.

Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments to obtain funding and to extend credit, such as letters of credit and unfunded loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. The Company assessed the off-balance sheet credit exposures as of September 30, 2020 and determined its ACL of $16.1 million was adequate to absorb the estimated credit losses.

Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity. The Company does not anticipate any material losses as a result of these transactions. For additional information regarding the Company’s interests in unconsolidated variable interest entities (“VIE”), see Note 6 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

75


Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. Effective liquidity management entails three elements:
1.assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to funds exist to meet those needs at the appropriate time;
2.providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse circumstances ranging from high probability/low severity events to low probability/high severity; and
3.balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.

The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Bank’s ALCO meets regularly to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management reports of liquid assets (e.g., debt securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured, including off-balance sheet funding sources. The Company evaluates its potential funding needs across alternative scenarios and maintains contingency funding plans consistent with the Company’s access to diversified sources of contingent funding.

The following table identifies certain liquidity sources and capacity available to the Company as of the dates indicated:

(Dollars in thousands) September 30,
2020 		December 31,
2019
FHLB advances
Borrowing capacity $ 2,606,534  2,360,599 
Amount utilized (7,318) (38,589)
Amount available $ 2,599,216  2,322,010 
FRB discount window
Borrowing capacity $ 1,300,146  1,061,872 
Amount utilized —  — 
Amount available $ 1,300,146  1,061,872 
Unsecured lines of credit available $ 635,000  230,000 
Unencumbered debt securities
U.S. government and federal agency $ 40,140  19,540 
U.S. government sponsored enterprises 9,825  7,416 
State and local governments 137,222  527,348 
Corporate bonds 107,843  157,602 
Residential mortgage-backed securities 1,062,492  210,356 
Commercial mortgage-backed securities 956,345  401,849 
Total unencumbered debt securities $ 2,313,867  1,324,111 

76


Capital Resources
Maintaining capital strength continues to be a long-term objective of the Company. Abundant capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard the funds of depositors. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. The Company has the capacity to issue 117,187,500 shares of common stock of which 95,413,743 have been issued as of September 30, 2020. The Company also has the capacity to issue 1,000,000 shares of preferred stock of which none have been issued as of September 30, 2020. Conversely, the Company may decide to utilize a portion of its strong capital position, as it has done in the past, to repurchase shares of its outstanding common stock, depending on market price and other relevant considerations.

The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The federal banking agencies issued final rules (“Final Rules”) that established a comprehensive regulatory capital framework based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rules require the Company to hold a 2.5 percent capital conservation buffer designed to absorb losses during periods of economic stress. As of September 30, 2020, management believes the Company and Bank meet all capital adequacy requirements to which they are subject and there are no conditions or events subsequent to this date that management believes have changed the Company’s or Bank’s risk-based capital category.

The following table illustrates the Bank’s regulatory capital ratios and the Federal Reserve’s capital adequacy guidelines as of September 30, 2020:
Total Capital (To Risk-Weighted Assets) Tier 1 Capital (To Risk-Weighted Assets) Common Equity Tier 1 (To Risk-Weighted Assets) Leverage Ratio/
Tier 1 Capital (To Average Assets)
Glacier Bank
14.35  % 13.12  % 13.12  % 10.08  %
Minimum capital requirements
8.00  % 6.00  % 4.50  % 4.00  %
Minimum capital requirements plus capital conservation buffer
10.50  % 8.50  % 7.00  % N/A
Well capitalized requirements
10.00  % 8.00  % 6.50  % 5.00  %

On January 1, 2020, the Company adopted the CECL accounting standard that requires management’s estimate of credit losses over the expected contractual lives of the Company's relevant financial assets. On March 27, 2020, in response to the COVID-19 pandemic, federal banking regulators issued an interim final rule to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). The Company has elected to utilize the five-year transition period. During the two-year delay, the Company will add back to Common Tier 1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in ACL (i.e., quarterly transitional amounts). Starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of Common Tier 1 capital evenly over the three-year period.

Federal and State Income Taxes
The Company files a consolidated federal income tax return using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations. The federal statutory corporate income tax rate is 21 percent.

Under Montana, Idaho, Utah, Colorado and Arizona law, financial institutions are subject to a corporation income tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 6.925 percent in Idaho, 4.95 percent in Utah, 4.5 percent in Colorado and 4.9 percent in Arizona. Washington, Wyoming and Nevada do not impose a corporate income tax.

77


The following table summarizes information relevant to the Company’s federal and state income taxes:

  Nine Months ended
(Dollars in thousands) September 30,
2020 		September 30,
2019
Income Before Income Taxes $ 227,230  189,581 
Federal and state income tax expense 42,690  36,447 
Net Income $ 184,540  153,134 
Effective tax rate 1
18.8  % 19.2  %
Income from tax-exempt debt securities, municipal loans and leases $ 45,378  36,879 
Benefits from federal income tax credits $ 9,626  7,947 
______________________________
1The current and prior year’s low effective income tax rates are due to income from tax-exempt debt securities, municipal loans and leases and benefits from federal income tax credits.

The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund (“CDFI Fund”) of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has equity investments in Low-Income Housing Tax Credits (“LIHTC”) which are indirect federal subsidies used to finance the development of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance period. The Company has investments of $25.9 million in Qualified School Construction bonds whereby the Company receives quarterly federal income tax credits in lieu of taxable interest income. The federal income tax credits on these debt securities are subject to federal and state income tax.

Following is a list of expected federal income tax credits to be received in the years indicated.
 
(Dollars in thousands) New
Markets
Tax Credits 		Low-Income
Housing
Tax Credits 		Debt
Securities
Tax Credits 		Total
2020 $ 5,351  8,435  794  14,580 
2021 5,642  10,031  736  16,409 
2022 4,993  11,146  673  16,812 
2023 4,398  11,167  640  16,205 
2024 2,466  11,032  604  14,102 
Thereafter 720  47,686  905  49,311 
$ 23,570  99,497  4,352  127,419 

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Average Balance Sheet
The following schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yields; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rates; 3) net interest and dividend income and interest rate spread; and 4) net interest margin (tax-equivalent).
Three Months ended Nine Months ended
  September 30, 2020 September 30, 2020
(Dollars in thousands) Average
Balance 		Interest and
Dividends 		Average
Yield/
Rate 		Average
Balance 		Interest and
Dividends 		Average
Yield/
Rate
Assets
Residential real estate loans $ 1,010,503  $ 11,592  4.59  % $ 1,013,072  $ 35,216  4.63  %
Commercial loans 1
9,636,631  110,847  4.58  % 8,896,708  318,435  4.78  %
Consumer and other loans 957,284  11,000  4.57  % 947,372  33,771  4.76  %
Total loans 2
11,604,418  133,439  4.57  % 10,857,152  387,422  4.77  %
Tax-exempt investment securities 3
1,379,577  13,885  4.03  % 1,237,779  37,542  4.04  %
Taxable investment securities 4
2,809,545  14,568  2.07  % 2,380,184  43,070  2.41  %
Total earning assets 15,793,540  161,892  4.08  % 14,475,115  468,034  4.32  %
Goodwill and intangibles 572,759  562,533 
Non-earning assets 794,165  760,758 
Total assets $ 17,160,464  $ 15,798,406 
Liabilities
Non-interest bearing deposits $ 5,171,984  $ —  —  % $ 4,528,500  $ —  —  %
NOW and DDA accounts 3,218,536  642  0.08  % 2,971,702  2,244  0.10  %
Savings accounts 1,804,438  166  0.04  % 1,670,722  580  0.05  %
Money market deposit accounts 2,453,659  1,161  0.19  % 2,262,781  4,025  0.24  %
Certificate accounts 981,385  1,936  0.78  % 986,807  6,940  0.94  %
Total core deposits 13,630,002  3,905  0.11  % 12,420,512  13,789  0.15  %
Wholesale deposits 5
86,852  47  0.22  % 70,880  332  0.63  %
FHLB advances 21,273  70  1.30  % 103,700  684  0.87  %
Repurchase agreements and other borrowed funds
1,049,002  2,062  0.78  % 892,418  6,960  1.04  %
Total interest bearing liabilities
14,787,129  6,084  0.16  % 13,487,510  21,765  0.22  %
Other liabilities 120,294  149,423 
Total liabilities 14,907,423  13,636,933 
Stockholders’ Equity
Common stock 954  947 
Paid-in capital 1,493,353  1,467,623 
Retained earnings 622,099  586,963 
Accumulated other comprehensive income
136,635  105,940 
Total stockholders’ equity 2,253,041  2,161,473 
Total liabilities and stockholders’ equity
$ 17,160,464  $ 15,798,406 
Net interest income (tax-equivalent) $ 155,808  $ 446,269 
Net interest spread (tax-equivalent) 3.92  % 4.10  %
Net interest margin (tax-equivalent) 3.92  % 4.12  %
______________________________
1Includes tax effect of $1.3 million and $3.9 million on tax-exempt municipal loan and lease income for the three and nine months ended September 30, 2020, respectively.
2Total loans are gross of the allowance for credit losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period.
3Includes tax effect of $2.8 million and $7.6 million on tax-exempt debt securities income for the three and nine months ended September 30, 2020, respectively.
4Includes tax effect of $266 thousand and $798 thousand on federal income tax credits for the three and nine months ended September 30, 2020, respectively.
5Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.
79


Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest earning assets and interest bearing liabilities (“volume”) and the yields earned and paid on such assets and liabilities (“rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.
Nine Months ended
2020 vs. 2019
  Increase (Decrease) Due to:
(Dollars in thousands) Volume Rate Net
Interest income
Residential real estate loans $ 2,260  (1,389) 871 
Commercial loans (tax-equivalent) 79,812  (33,646) 46,166 
Consumer and other loans 3,016  (2,390) 626 
Investment securities (tax-equivalent) 19,872  (10,698) 9,174 
Total interest income 104,960  (48,123) 56,837 
Interest expense
NOW and DDA accounts 742  (1,536) (794)
Savings accounts 151  (328) (177)
Money market deposit accounts 1,140  (790) 350 
Certificate accounts 569  (278) 291 
Wholesale deposits (1,694) (1,035) (2,729)
FHLB advances (6,280) (1,973) (8,253)
Repurchase agreements and other borrowed funds
3,877  (4,740) (863)
Total interest expense (1,495) (10,680) (12,175)
Net interest income (tax-equivalent) $ 106,455  (37,443) 69,012 

Net interest income (tax-equivalent) increased $69.0 million for the nine months ended September 30, 2020 compared to the same period in 2019. The interest income for the first nine months of 2020 increased over the same period last year primarily from increased loan growth in all categories, with the largest increase in the Company’s commercial loan portfolio which included increases from the PPP loans. Total interest expense decreased from the prior year primarily from decreased balances of FHLB advances and a decrease in rates on both borrowings and deposits.

Effect of inflation and changing prices
GAAP often requires the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of the Company are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.

80


Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company’s assessment of market risk as of September 30, 2020 indicates there are no material changes in the quantitative and qualitative disclosures from those in the Company’s 2019 Annual Report on Form 10-K.


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of September 30, 2020. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the third quarter of 2020, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.


PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.


Item 1A. Risk Factors

The following risk factor represents material updates and additions to the risk factors previously disclosed in the Company’s 2019 Annual Report on Form 10-K. The risks and uncertainties described in the 2019 Annual Report on Form 10-K should be carefully reviewed. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect the Company. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results or liquidity could be adversely affected.

The effects of the COVID-19 pandemic could adversely affect our customers’ future results of operations and/or the market price of our stock.
The COVID-19 pandemic continues to rapidly evolve, as do federal, state and local efforts to address it. Both the direct effects of the pandemic and the resulting United States governmental responses are of an unprecedented scope as it impacts both the health and the economy of our country and the world at large. No one can predict the extent or duration of the pandemic, or its effect on the markets that we serve. Further, the ongoing efforts and impact of the government in mitigating the health and the economic effects of the pandemic cannot currently be predicted, whether on our business or as to the economy as a whole. The pandemic has thus far resulted in significant volatility in international and United States markets, which could adversely affect the market price of our stock. To date, the pandemic has resulted in significant business disruption and volatility in the international and domestic markets, which has adversely affected the market price of our stock and stocks in general.


81


The Company believes it is well positioned to mitigate the potential financial impact of the COVID-19 pandemic with a strong liquidity and capital position. The Company has implemented several measures to manage through the pandemic, including:
•launched a pandemic team that addresses the daily impact to our business;
•contacted customers to assess their needs and provide funding, flexible repayment options or modifications as necessary;
•designated a “command center” that supports employees so they can work with customers to provide the PPP loans;
•increased monitoring of credit quality and portfolio risk for industries determined to have elevated risk; and
•developed safety measures for the health of our employees including elimination of unnecessary business travel, social distancing precautions, additional wellness and education programs, and preventative cleaning practices.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Not Applicable

(b)Not Applicable

(c)Not Applicable


Item 3. Defaults upon Senior Securities

(a)Not Applicable

(b)Not Applicable


Item 4. Mine Safety Disclosures

Not Applicable


Item 5. Other Information

The following legislation represents material updates and additions to the Supervision and Regulation section previously disclosed in the Company’s 2019 Annual Report on Form 10-K.

COVID-19 Legislation and Regulation
Governments at the federal, state, and local levels continue to take steps to address the impact of the COVID-19 pandemic. On March 27, 2020 the historic $2 trillion federal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act was signed into law, which included $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program,” along with direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans. The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, which prompted Congress to negotiate additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care Enforcement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. Further, on July 3, 2020 the President extended the deadline for potential borrowers to apply for Paycheck Protection Program funds until August 8, 2020. The legislative and regulatory landscape surrounding the COVID-19 pandemic is rapidly changing, and neither the Company nor the Bank can predict with certainty the impact it will have on our operations or business.


82


Item 6. Exhibits
 



101.INS        XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101.SCH    XBRL Taxonomy Extension Schema Document

101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

101.LAB    XBRL Taxonomy Extension Labels Linkbase Document

101.PRE        XBRL Taxonomy Extension Presentation Linkbase Document

104        Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  GLACIER BANCORP, INC.
October 30, 2020 /s/ Randall M. Chesler
Randall M. Chesler
President and CEO
October 30, 2020 /s/ Ron J. Copher
Ron J. Copher
Executive Vice President and CFO


84
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