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-012019-09-30


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
4
5
6
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9





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) —  —  — 
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) —  —  — 
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) —  —  — 
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 
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.


16



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
—  — 
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 11,029  (23) —  —  11,029  (23)
Residential mortgage-backed securities
28  282,912  (709) 27  —  282,939  (709)
Commercial mortgage-backed securities
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 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.






23





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  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.


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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 —  —  — 
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 —  —  — 
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  10  — 
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 
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 —  —  —  — 
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.


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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 
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 
2018 281,578  275,011  —  6,566 
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