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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 June 30, 2019
 
☐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 July 17, 2019 was 86,637,394. No preferred shares are issued or outstanding.




TABLE OF CONTENTS
 


 
Page
Part I. Financial Information
 
Item 1 – Financial Statements
 




ABBREVIATIONS/ACRONYMS

 

ALCO – Asset Liability Committee
ALLL or allowance – allowance for loan and lease losses
ASC – Accounting Standards CodificationTM
ASU – Accounting Standards Update
ATM – automated teller machine
Bank – Glacier Bank
CDE – Certified Development Entity
CDFI Fund – Community Development Financial Institutions Fund
CEO – Chief Executive Officer
CFO – Chief Financial Officer
Company – Glacier Bancorp, Inc.
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
FNB – FNB Bancorp and its subsidiary, The First National Bank of Layton
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
GAAP – accounting principles generally accepted in the United States of America
Ginnie Mae – Government National Mortgage Association
Heritage – Heritage Bancorp and its subsidiary, Heritage Bank of Nevada
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
Repurchase agreements – securities sold under agreements to repurchase
ROU - right-of-use
S&P – Standard and Poor’s
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)
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Cash on hand and in banks
$
181,526

 
161,782

Interest bearing cash deposits
49,683

 
42,008

Cash and cash equivalents
231,209

 
203,790

Debt securities, available-for-sale
2,470,634

 
2,571,663

Debt securities, held-to-maturity
252,097

 
297,915

Total debt securities
2,722,731

 
2,869,578

Loans held for sale, at fair value
54,711

 
33,156

Loans receivable
8,841,777

 
8,287,549

Allowance for loan and lease losses
(129,054
)
 
(131,239
)
Loans receivable, net
8,712,723

 
8,156,310

Premises and equipment, net
296,915

 
241,528

Other real estate owned
7,281

 
7,480

Accrued interest receivable
58,567

 
54,408

Deferred tax asset
3,371

 
23,564

Core deposit intangible, net
54,646

 
49,242

Goodwill
330,887

 
289,586

Non-marketable equity securities
23,031

 
27,871

Bank-owned life insurance
93,543

 
82,320

Other assets
86,746

 
76,651

Total assets
$
12,676,361

 
12,115,484

Liabilities
 
 
 
Non-interest bearing deposits
$
3,265,077

 
3,001,178

Interest bearing deposits
6,589,798

 
6,492,589

Securities sold under agreements to repurchase
494,651

 
396,151

Federal Home Loan Bank advances
319,996

 
440,175

Other borrowed funds
14,765

 
14,708

Subordinated debentures
139,912

 
134,051

Accrued interest payable
5,091

 
4,252

Other liabilities
159,695

 
116,526

Total liabilities
10,988,985

 
10,599,630

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
866

 
845

Paid-in capital
1,139,289

 
1,051,253

Retained earnings - substantially restricted
503,773

 
473,183

Accumulated other comprehensive income (loss)
43,448

 
(9,427
)
Total stockholders’ equity
1,687,376

 
1,515,854

Total liabilities and stockholders’ equity
$
12,676,361

 
12,115,484

Number of common stock shares issued and outstanding
86,637,394

 
84,521,692



See accompanying notes to unaudited condensed consolidated financial statements.

4



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months ended
 
Six Months ended
(Dollars in thousands, except per share data)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Interest Income
 
 
 
 
 
 
 
Investment securities
$
21,892

 
22,370

 
43,243

 
42,512

Residential real estate loans
11,410

 
10,149

 
22,189

 
18,934

Commercial loans
88,043

 
75,824

 
171,582

 
141,339

Consumer and other loans
11,040

 
9,372

 
21,487

 
17,996

Total interest income
132,385

 
117,715

 
258,501

 
220,781

Interest Expense
 
 
 
 
 
 
 
Deposits
5,624

 
4,617

 
10,965

 
8,533

Securities sold under agreements to repurchase
886

 
486

 
1,688

 
971

Federal Home Loan Bank advances
3,847

 
2,513

 
6,902

 
4,602

Other borrowed funds
38

 
26

 
76

 
42

Subordinated debentures
1,694

 
1,519

 
3,362

 
2,787

Total interest expense
12,089

 
9,161

 
22,993

 
16,935

Net Interest Income
120,296

 
108,554

 
235,508

 
203,846

Provision for loan losses
—

 
4,718

 
57

 
5,513

Net interest income after provision for loan losses
120,296

 
103,836

 
235,451

 
198,333

Non-Interest Income
 
 
 
 
 
 
 
Service charges and other fees
20,025

 
18,804

 
38,040

 
35,675

Miscellaneous loan fees and charges
1,192

 
2,243

 
2,159

 
3,720

Gain on sale of loans
7,762

 
8,142

 
13,560

 
14,239

Gain (loss) on sale of debt securities
134

 
(56
)
 
347

 
(389
)
Other income
1,721

 
2,695

 
5,202

 
4,669

Total non-interest income
30,834

 
31,828

 
59,308

 
57,914

Non-Interest Expense
 
 
 
 
 
 
 
Compensation and employee benefits
51,973

 
49,023

 
104,701

 
94,744

Occupancy and equipment
8,180

 
7,662

 
16,617

 
14,936

Advertising and promotions
2,767

 
2,530

 
5,155

 
4,700

Data processing
4,062

 
4,241

 
7,954

 
8,208

Other real estate owned
191

 
211

 
330

 
283

Regulatory assessments and insurance
1,848

 
1,329

 
3,133

 
2,535

Core deposit intangibles amortization
1,865

 
1,748

 
3,559

 
2,804

Other expenses
15,284

 
15,051

 
27,551

 
27,212

Total non-interest expense
86,170

 
81,795

 
169,000

 
155,422

Income Before Income Taxes
64,960

 
53,869

 
125,759

 
100,825

Federal and state income tax expense
12,568

 
9,485

 
24,235

 
17,882

Net Income
$
52,392

 
44,384

 
101,524

 
82,943

Basic earnings per share
$
0.61

 
0.53

 
1.19

 
1.00

Diluted earnings per share
$
0.61

 
0.52

 
1.19

 
1.00

Dividends declared per share
$
0.27

 
0.26

 
0.53

 
0.49

Average outstanding shares - basic
85,826,290

 
84,514,257

 
85,191,658

 
82,671,816

Average outstanding shares - diluted
85,858,286

 
84,559,268

 
85,241,238

 
82,734,407


See accompanying notes to unaudited condensed consolidated financial statements.

5



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Net Income
$
52,392

 
44,384

 
101,524

 
82,943

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
29,877

 
(6,696
)
 
76,329

 
(32,407
)
Reclassification adjustment for (gains) losses included in net income
(134
)
 
64

 
(355
)
 
346

Net unrealized gains (losses) on available-for-sale securities
29,743

 
(6,632
)
 
75,974

 
(32,061
)
Tax effect
(7,537
)
 
1,681

 
(19,252
)
 
8,125

Net of tax amount
22,206

 
(4,951
)
 
56,722

 
(23,936
)
Unrealized (losses) gains on derivatives used for cash flow hedges
(3,820
)
 
1,689

 
(5,654
)
 
6,068

Reclassification adjustment for losses included in net income
278

 
577

 
501

 
1,477

Net unrealized (losses) gains on derivatives used for cash flow hedges
(3,542
)
 
2,266

 
(5,153
)
 
7,545

Tax effect
897

 
(574
)
 
1,306

 
(1,912
)
Net of tax amount
(2,645
)
 
1,692

 
(3,847
)
 
5,633

Total other comprehensive income (loss), net of tax
19,561

 
(3,259
)
 
52,875

 
(18,303
)
Total Comprehensive Income
$
71,953

 
41,125

 
154,399

 
64,640

























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 June 30, 2019 and 2018
 
(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 April 1, 2018
84,511,472

 
$
845

 
1,048,860

 
421,342

 
(17,023
)
 
1,454,024

Net income
—

 
—

 
—

 
44,384

 
—

 
44,384

Other comprehensive loss
—

 
—

 
—

 
—

 
(3,259
)
 
(3,259
)
Cash dividends declared ($0.26 per share)
—

 
—

 
—

 
(22,021
)
 
—

 
(22,021
)
Stock issuances under stock incentive plans
5,178

 
—

 
—

 
—

 
—

 
—

Stock-based compensation and related taxes
—

 
—

 
864

 
—

 
—

 
864

Balance at June 30, 2018
84,516,650

 
$
845

 
1,049,724

 
443,705

 
(20,282
)
 
1,473,992

Balance at April 1, 2019
84,588,199

 
$
846

 
1,051,299

 
474,818

 
23,887

 
1,550,850

Net income
—

 
—

 
—

 
52,392

 
—

 
52,392

Other comprehensive income
—

 
—

 
—

 
—

 
19,561

 
19,561

Cash dividends declared ($0.27 per share)
—

 
—

 
—

 
(23,437
)
 
—

 
(23,437
)
Stock issued in connection with acquisitions
2,046,341

 
20

 
87,133

 
—

 
—

 
87,153

Stock issuances under stock incentive plans
2,854

 
—

 
—

 
—

 
—

 
—

Stock-based compensation and related taxes
—

 
—

 
857

 
—

 
—

 
857

Balance at June 30, 2019
86,637,394

 
$
866

 
1,139,289

 
503,773

 
43,448

 
1,687,376













See accompanying notes to unaudited condensed consolidated financial statements.

7



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
Six Months Months ended June 30, 2019 and 2018
 
(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, 2018
78,006,956

 
$
780

 
797,997

 
402,259

 
(1,979
)
 
1,199,057

Net income
—

 
—

 
—

 
82,943

 
—

 
82,943

Other comprehensive loss
—

 
—

 
—

 
—

 
(18,303
)
 
(18,303
)
Cash dividends declared ($0.49 per share)
—

 
—

 
—

 
(41,497
)
 
—

 
(41,497
)
Stock issued in connection with acquisitions
6,432,868

 
64

 
250,743

 
—

 
—

 
250,807

Stock issuances under stock incentive plans
76,826

 
1

 
(1
)
 
—

 
—

 
—

Stock-based compensation and related taxes
—

 
—

 
985

 
—

 
—

 
985

Balance at June 30, 2018
84,516,650

 
$
845

 
1,049,724

 
443,705

 
(20,282
)
 
1,473,992

Balance at January 1, 2019
84,521,692

 
$
845

 
1,051,253

 
473,183

 
(9,427
)
 
1,515,854

Net income
—

 
—

 
—

 
101,524

 
—

 
101,524

Other comprehensive income
—

 
—

 
—

 
—

 
52,875

 
52,875

Cash dividends declared ($0.53 per share)
—

 
—

 
—

 
(45,476
)
 
—

 
(45,476
)
Stock issued in connection with acquisitions
2,046,341

 
20

 
87,133

 
—

 
—

 
87,153

Stock issuances under stock incentive plans
69,361

 
1

 
(1
)
 
—

 
—

 
—

Stock-based compensation and related taxes
—

 
—

 
904

 
—

 
—

 
904

Cumulative-effect of accounting changes
—

 
—

 
—

 
(25,458
)
 
—

 
(25,458
)
Balance at June 30, 2019
86,637,394

 
$
866

 
1,139,289

 
503,773

 
43,448

 
1,687,376















See accompanying notes to unaudited condensed consolidated financial statements.

8



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
Operating Activities
 
 
 
Net income
$
101,524

 
82,943

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
57

 
5,513

Net amortization of debt securities
8,707

 
6,835

Net accretion of purchase accounting adjustments
(2,187
)
 
(1,425
)
Amortization of debt modification costs
825

 
825

Origination of loans held for sale
(353,921
)
 
(415,553
)
Proceeds from loans held for sale
346,144

 
425,484

Gain on sale of loans
(13,560
)
 
(14,239
)
(Gain) loss on sale of debt securities
(347
)
 
389

Bank-owned life insurance income, net
(1,021
)
 
(1,310
)
Stock-based compensation, net of tax benefits
1,850

 
1,868

Depreciation and amortization of premises and equipment
9,011

 
7,544

Gain on sale and write-downs of other real estate owned, net
(334
)
 
(81
)
Amortization of core deposit intangibles
3,559

 
2,804

Amortization of investments in variable interest entities
3,885

 
2,911

Net increase in accrued interest receivable
(3,213
)
 
(4,306
)
Net (increase) decrease in other assets
(6,520
)
 
1,048

Net increase in accrued interest payable
749

 
57

Net decrease in other liabilities
(9,518
)
 
(2,070
)
Net cash provided by operating activities
85,690

 
99,237

Investing Activities
 
 
 
Sales of available-for-sale debt securities
415,093

 
219,855

Maturities, prepayments and calls of available-for-sale debt securities
247,854

 
156,482

Purchases of available-for-sale debt securities
(457,915
)
 
(499,552
)
Maturities, prepayments and calls of held-to-maturity debt securities
32,575

 
26,767

Principal collected on loans
1,364,270

 
1,269,145

Loan originations
(1,675,181
)
 
(1,681,348
)
Net additions to premises and equipment
(11,882
)
 
(11,297
)
Proceeds from sale of other real estate owned
2,440

 
1,693

Proceeds from redemption of non-marketable equity securities
76,948

 
41,393

Purchases of non-marketable equity securities
(71,198
)
 
(40,385
)
Proceeds from bank-owned life insurance
—

 
299

Investments in variable interest entities
(6,451
)
 
(23,072
)
Net cash received from acquisitions
11,307

 
101,268

Net cash used in investing activities
(72,140
)
 
(438,752
)




See accompanying notes to unaudited condensed consolidated financial statements.

9



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
Financing Activities
 
 
 
Net increase in deposits
$
86,429

 
528,881

Net increase (decrease) in securities sold under agreements to repurchase
97,091

 
(30,238
)
Net (decrease) increase in short-term Federal Home Loan Bank advances
(120,000
)
 
40,000

Repayments of long-term Federal Home Loan Bank advances
(987
)
 
(528
)
Net increase (decrease) in other borrowed funds
54

 
(9,850
)
Cash dividends paid
(47,560
)
 
(19,551
)
Tax withholding payments for stock-based compensation
(1,158
)
 
(1,071
)
Net cash provided by financing activities
13,869

 
507,643

Net increase in cash, cash equivalents and restricted cash
27,419

 
168,128

Cash, cash equivalents and restricted cash at beginning of period
203,790

 
200,004

Cash, cash equivalents and restricted cash at end of period
$
231,209

 
368,132

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
22,244

 
16,878

Cash paid during the period for income taxes
21,680

 
12,403

Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Sale and refinancing of other real estate owned
$
7

 
372

Transfer of loans to other real estate owned
1,914

 
1,144

Right-of-use assets obtained in exchange for operating lease liabilities
3,862

 
—

Dividends declared but not paid
23,482

 
22,211

Acquisitions
 
 
 
Fair value of common stock shares issued
87,153

 
250,807

Cash consideration
4

 
16,265

Effective settlement of a pre-existing receivable
—

 
10,054

Fair value of assets acquired
379,155

 
1,549,158

Liabilities assumed
291,998

 
1,383,756

















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 and Arizona 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, 2018. Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results anticipated for the year ending December 31, 2019. The condensed consolidated statement of financial condition of the Company as of December 31, 2018 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 loan and lease losses (“ALLL” or “allowance”); 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 ALLL and real estate valuation estimates, management obtains independent appraisals (new or updated) for significant items. Estimates relating to investment valuations 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. The Bank consists of fifteen bank divisions, a treasury division, an information technology division and a centralized mortgage division. The treasury division includes the Bank’s investment portfolio and wholesale borrowings, the information technology division includes the Bank’s internal data processing, and the centralized mortgage division includes mortgage loan servicing and secondary market sales. 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.

The parent holding company owns non-bank subsidiaries that have issued trust preferred securities as Tier 1 capital instruments. 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.


11



On April 30, 2019, the Company completed its acquisition of FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). 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 recent mergers and acquisitions, see Note 13.

On July 31, 2019, the Company completed its acquisition of Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank of Nevada, a community bank based in Reno, Nevada (collectively, “Heritage”). For additional information relating to this subsequent event, see Note 14.

Loans Receivable
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 method. The objective of the interest method is to calculate periodic interest income at a constant effective yield. 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.

The Company’s loan segments, which are based on the purpose of the loan, include residential real estate, commercial, and consumer loans. The Company’s loan classes, a further disaggregation of segments, include residential real estate loans (residential real estate segment), commercial real estate and other commercial loans (commercial segment), and home equity and other consumer loans (consumer segment).

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 impaired loans. For other loans on nonaccrual, interest accruals are resumed on such loans only when they are 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.

The Company considers impaired loans to be the primary credit quality indicator for monitoring the credit quality of the loan portfolio. Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and, therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). Interest income on accruing impaired loans is recognized using the interest method. The Company measures impairment on a loan-by-loan basis in the same manner for each class within the loan portfolio. An insignificant delay or shortfall in the amounts of payments would not cause a loan or lease to be considered impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loan and the borrower, including the length and reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest due.


12



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. A TDR loan is considered an impaired loan and a specific valuation allowance is established when the fair value of the collateral-dependent loan or present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate based on the original contractual rate) is lower than the carrying value of the impaired loan. 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 customers who have the willingness and capacity for debt repayment. In determining whether non-restructured or unimpaired loans issued to a single or related party group of borrowers should continue to accrue interest when the borrower has other loans that are impaired 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.

For additional information relating to loans, see Note 3.

Allowance for Loan and Lease Losses
Based upon management’s analysis of the Company’s loan portfolio, the balance of the ALLL is an estimate of probable credit losses known and inherent within the Bank’s loan portfolio as of the date of the consolidated financial statements. The ALLL is analyzed at the loan class level and is maintained within a range of estimated losses. Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The determination of the ALLL and the related provision for loan losses is a critical accounting estimate that involves management’s judgments about known relevant internal and external environmental factors that affect loan losses. The balance of the ALLL is highly dependent upon management’s evaluations of borrowers’ current and prospective performance, appraisals and other variables affecting the quality of the loan portfolio. Individually significant loans and major lending areas are reviewed periodically to determine potential problems at an early date. Changes in management’s estimates and assumptions are reasonably possible and may have a material impact upon the Company’s consolidated financial statements, results of operations or capital.

Risk characteristics considered in the ALLL analysis applicable to each loan class within the Company's loan portfolio are as follows:

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 class include a large number of borrowers, geographic dispersion of market areas and the loans are originated for relatively smaller amounts.


13



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 category 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 class 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 ALLL consists of a specific valuation allowance component and a general valuation allowance component. The specific component relates to loans that are determined to be impaired and individually evaluated for impairment. The Company measures impairment on a loan-by-loan basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except when it is determined that repayment of the loan is expected to be provided solely by the underlying collateral. For impairment based on expected future cash flows, the Company considers all information available as of a measurement date, including past events, current conditions, potential prepayments, and estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. For alternative ranges of cash flows, the likelihood of the possible outcomes is considered in determining the best estimate of expected future cash flows. The effective interest rate for a loan restructured in a TDR is based on the original contractual rate. For collateral-dependent loans and real estate loans for which foreclosure or a deed-in-lieu of foreclosure is probable, impairment is measured by the fair value of the collateral, less estimated cost to sell. The fair value of the collateral is determined primarily based upon appraisal or evaluation of the underlying real property value.

The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on historical loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors. The historical loss experience is based on the previous twelve quarters loss experience by loan class adjusted for risk characteristics in the existing loan portfolio. The same trends and conditions are evaluated for each class within the loan portfolio; however, the risk characteristics are weighted separately at the individual class level based on the Company’s judgment and experience.


14



The changes in trends and conditions evaluated for each class within the loan portfolio include the following:
•
changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
•
changes in global, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
•
changes in the nature and volume of the portfolio and in the terms of loans;
•
changes in experience, ability, and depth of lending management and other relevant staff;
•
changes in the volume and severity of past due and nonaccrual loans;
•
changes in the quality of the Company’s loan review system;
•
changes in the value of underlying collateral for collateral-dependent loans;
•
the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
•
the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio.

The ALLL is increased by provisions for loan losses which are charged to expense. The portions of loan and overdraft balances determined by management to be uncollectible are charged-off as a reduction of the ALLL and recoveries of amounts previously charged-off are credited as an increase to the ALLL. 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.

At acquisition date, the assets and liabilities of acquired banks are recorded at their estimated fair values which results in no ALLL carried over from acquired banks. Subsequent to acquisition, an allowance will be recorded on the acquired loan portfolios for further credit deterioration, if any.

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.


15



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 Accounting Standards Codification™ (“ASC”) Topic 606 was $38,943,000 and $36,553,000 for the six months ended June 30, 2019 and 2018, 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 June 30, 2019 and December 31, 2018 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.

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 2019
The ASC is the Financial Accounting Standards Board’s (“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 Accounting Standards Updates (“ASU”) that may have had a material effect on the Company’s financial position or results of operations.

ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs. In March 2017, FASB amended ASC Subtopic 310-20 to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments required the premium to be amortized to the earliest call date instead of the maturity date. The amendments did not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018 and any adjustments were to be reflected as of the beginning of the year that includes the interim period. Entities were to apply the amendments on a modified retrospective basis; therefore, a cumulative-effect reduction to retained earnings of $24,102,000 was recognized as of the January 1, 2019 effective date. The Company’s debt securities that were effected by the amendments were primarily in the state and local governments category. The Company’s accounting policies and procedures were updated to reflect the amendments.

ASU 2016-02 - Leases. In February 2016, FASB amended ASC Topic 842 to address several aspects of lease accounting with the significant change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018. The Company has lease agreements for which the amendments required the recognition of a lease liability to make lease payments and an ROU asset which represents its right to use the underlying asset for the lease term. An entity is permitted to elect not to restate its comparative periods in the period of adoption when transitioning to ASC Topic 842 and the Company made this election. In addition, the Company made the following elections related to implementation: 1) to not use hindsight in determining lease terms and in assessing impairment of ROU assets; and 2) to use the practical expedient package, which required no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for existing leases. At the date of adoption, the Company recognized an ROU asset and related lease liability on the Company’s statement of financial condition of $36,178,000 and $38,220,000, respectively. The Company developed new processes to comply with the accounting and disclosure requirements of such amendments and policies and procedures were updated accordingly.


16



Accounting Guidance Pending Adoption at June 30, 2019
The following paragraphs provide descriptions of newly issued but not yet effective ASUs that could have 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 are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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. During the third quarter of 2018, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. 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, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, 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 expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The proposed amendments are effective for public business entities, excluding smaller reporting companies, for the first interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. The ALLL is a material estimate of the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALLL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALLL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The Company will also develop new procedures for determining an allowance for credit losses relating to held-to-maturity debt securities. In addition, the current accounting policy and procedures for other-than-temporary impairment on available-for-sale debt securities will be replaced with an allowance approach. The Company has engaged a third-party vendor solution and is currently in the implementation phase and evaluating the appropriate models, loan pools and assumptions to be utilized. The project team is running parallel models to refine its processes and procedures. For additional information on the ALLL, see Note 3.


17



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:
 
June 30, 2019
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
19,603

 
25

 
(141
)
 
19,487

U.S. government sponsored enterprises
117,911

 
2,039

 
—

 
119,950

State and local governments
671,714

 
28,506

 
(27
)
 
700,193

Corporate bonds
177,812

 
1,895

 
(23
)
 
179,684

Residential mortgage-backed securities
697,041

 
5,432

 
(1,684
)
 
700,789

Commercial mortgage-backed securities
719,436

 
31,294

 
(199
)
 
750,531

Total available-for-sale
2,403,517

 
69,191

 
(2,074
)
 
2,470,634

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
252,097

 
8,597

 
—

 
260,694

Total held-to-maturity
252,097

 
8,597

 
—

 
260,694

Total debt securities
$
2,655,614

 
77,788

 
(2,074
)
 
2,731,328


 
December 31, 2018
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
23,757

 
54

 
(162
)
 
23,649

U.S. government sponsored enterprises
120,670

 
52

 
(514
)
 
120,208

State and local governments
844,636

 
18,936

 
(11,322
)
 
852,250

Corporate bonds
292,052

 
378

 
(1,613
)
 
290,817

Residential mortgage-backed securities
808,537

 
628

 
(16,250
)
 
792,915

Commercial mortgage-backed securities
490,868

 
3,312

 
(2,356
)
 
491,824

Total available-for-sale
2,580,520

 
23,360

 
(32,217
)
 
2,571,663

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
297,915

 
1,380

 
(11,039
)
 
288,256

Total held-to-maturity
297,915

 
1,380

 
(11,039
)
 
288,256

Total debt securities
$
2,878,435

 
24,740

 
(43,256
)
 
2,859,919




18



The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by contractual maturity at June 30, 2019. Actual maturities may differ from expected or contractual maturities since issuers have the right to prepay obligations with or without prepayment penalties.

 
June 30, 2019
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due within one year
$
50,668

 
50,748

 
—

 
—

Due after one year through five years
241,525

 
245,014

 
8,391

 
8,678

Due after five years through ten years
285,233

 
298,290

 
78,886

 
82,526

Due after ten years
409,614

 
425,262

 
164,820

 
169,490

 
987,040

 
1,019,314

 
252,097

 
260,694

Mortgage-backed securities 1
1,416,477

 
1,451,320

 
—

 
—

Total
$
2,403,517

 
2,470,634

 
252,097

 
260,694


______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

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
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Available-for-sale
 
 
 
 
 
 
 
Proceeds from sales and calls of debt securities
$
172,323

 
4,765

 
476,371

 
233,446

Gross realized gains 1
1,347

 
9

 
4,284

 
15

Gross realized losses 1
(1,213
)
 
(73
)
 
(3,929
)
 
(361
)
Held-to-maturity
 
 
 
 
 
 
 
Proceeds from calls of debt securities
2,630

 
13,470

 
32,575

 
28,935

Gross realized gains 1
—

 
10

 
2

 
64

Gross realized losses 1
—

 
(2
)
 
(10
)
 
(107
)

______________________________
1 The gain or loss on the sale or call of each debt security is determined by the specific identification method.


19



Debt securities with an unrealized loss position are summarized as follows:

 
June 30, 2019
 
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
$
5,149

 
(57
)
 
8,790

 
(84
)
 
13,939

 
(141
)
State and local governments
—

 
—

 
5,237

 
(27
)
 
5,237

 
(27
)
Corporate bonds
5,054

 
(4
)
 
13,519

 
(19
)
 
18,573

 
(23
)
Residential mortgage-backed securities
3,169

 
(23
)
 
237,479

 
(1,661
)
 
240,648

 
(1,684
)
Commercial mortgage-backed securities
—

 
—

 
17,956

 
(199
)
 
17,956

 
(199
)
Total available-for-sale
$
13,372

 
(84
)
 
282,981

 
(1,990
)
 
296,353

 
(2,074
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
—

 
—

 
21

 
—

 
21

 
—

Total held-to-maturity
$
—

 
—

 
21

 
—

 
21

 
—

 
 
December 31, 2018
 
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
$
4,287

 
(27
)
 
10,519

 
(135
)
 
14,806

 
(162
)
U.S. government sponsored enterprises
43,400

 
(103
)
 
35,544

 
(411
)
 
78,944

 
(514
)
State and local governments
72,080

 
(922
)
 
232,244

 
(10,400
)
 
304,324

 
(11,322
)
Corporate bonds
119,111

 
(937
)
 
114,800

 
(676
)
 
233,911

 
(1,613
)
Residential mortgage-backed securities
132,405

 
(833
)
 
537,202

 
(15,417
)
 
669,607

 
(16,250
)
Commercial mortgage-backed securities
73,118

 
(402
)
 
86,504

 
(1,954
)
 
159,622

 
(2,356
)
Total available-for-sale
$
444,401

 
(3,224
)
 
1,016,813

 
(28,993
)
 
1,461,214

 
(32,217
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
87,392

 
(2,778
)
 
126,226

 
(8,261
)
 
213,618

 
(11,039
)
Total held-to-maturity
$
87,392

 
(2,778
)
 
126,226

 
(8,261
)
 
213,618

 
(11,039
)


Based on an analysis of its debt securities with unrealized losses as of June 30, 2019 and December 31, 2018, the Company determined that none of such securities had other-than-temporary impairment and the unrealized losses were 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 securities approach maturity. At June 30, 2019, management determined that it did not intend to sell debt securities with unrealized losses, and there was no expected requirement to sell any of its debt securities with unrealized losses before recovery of their amortized cost.


20



Note 3. Loans Receivable, Net

The Company’s loan portfolio is comprised of three segments: residential real estate, commercial, and consumer and other loans. The loan segments are further disaggregated into the following classes: residential real estate, commercial real estate, other commercial, home equity and other consumer loans. The following table presents loans receivable for each portfolio class of loans:
 
At or for the Six Months ended
 
At or for the Year ended
(Dollars in thousands)
June 30,
2019
 
December 31,
2018
Residential real estate loans
$
920,715

 
887,742

Commercial loans
 
 
 
Real estate
4,959,863

 
4,657,561

Other commercial
2,076,605

 
1,911,171

Total
7,036,468

 
6,568,732

Consumer and other loans
 
 
 
Home equity
596,041

 
544,688

Other consumer
288,553

 
286,387

Total
884,594

 
831,075

Loans receivable
8,841,777

 
8,287,549

Allowance for loan and lease losses
(129,054
)
 
(131,239
)
Loans receivable, net
$
8,712,723

 
8,156,310

Net deferred origination (fees) costs included in loans receivable
$
(5,936
)
 
(5,685
)
Net purchase accounting (discounts) premiums included in loans receivable
$
(24,349
)
 
(25,172
)
Weighted-average interest rate on loans (tax-equivalent)
5.19
%
 
4.97
%



21



Allowance for Loan and Lease Losses
The ALLL is a valuation allowance for probable incurred credit losses. The following tables summarize the activity in the ALLL by loan class:
 
Three Months ended June 30, 2019
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
129,786

 
10,711

 
72,328

 
36,849

 
5,880

 
4,018

Provision for loan losses
—

 
(105
)
 
(196
)
 
(829
)
 
(73
)
 
1,203

Charge-offs
(2,859
)
 
(49
)
 
(126
)
 
(358
)
 
(20
)
 
(2,306
)
Recoveries
2,127

 
138

 
441

 
597

 
14

 
937

Balance at end of period
$
129,054

 
10,695

 
72,447

 
36,259

 
5,801

 
3,852

 
 
Three Months ended June 30, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
127,608

 
10,634

 
68,342

 
38,108

 
6,040

 
4,484

Provision for loan losses
4,718

 
258

 
2,774

 
675

 
8

 
1,003

Charge-offs
(2,604
)
 
(44
)
 
(190
)
 
(640
)
 
(7
)
 
(1,723
)
Recoveries
1,842

 
55

 
319

 
521

 
51

 
896

Balance at end of period
$
131,564

 
10,903

 
71,245

 
38,664

 
6,092

 
4,660


 
Six Months ended June 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

Provision for loan losses
57

 
173

 
(344
)
 
(1,744
)
 
(9
)
 
1,981

Charge-offs
(6,200
)
 
(341
)
 
(409
)
 
(1,198
)
 
(28
)
 
(4,224
)
Recoveries
3,958

 
232

 
752

 
1,041

 
27

 
1,906

Balance at end of period
$
129,054

 
10,695

 
72,447

 
36,259

 
5,801

 
3,852


 
Six Months ended June 30, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
129,568

 
10,798

 
68,515

 
39,303

 
6,204

 
4,748

Provision for loan losses
5,513

 
81

 
3,019

 
672

 
(194
)
 
1,935

Charge-offs
(7,611
)
 
(47
)
 
(1,223
)
 
(2,428
)
 
(19
)
 
(3,894
)
Recoveries
4,094

 
71

 
934

 
1,117

 
101

 
1,871

Balance at end of period
$
131,564

 
10,903

 
71,245

 
38,664

 
6,092

 
4,660



22




The following tables disclose the recorded investment in loans and the balance in the ALLL by loan class:

 
June 30, 2019
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
101,981

 
10,782

 
62,939

 
22,150

 
3,221

 
2,889

Collectively evaluated for impairment
8,739,796

 
909,933

 
4,896,924

 
2,054,455

 
592,820

 
285,664

Total loans receivable
$
8,841,777

 
920,715

 
4,959,863

 
2,076,605

 
596,041

 
288,553

ALLL

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
108

 
—

 
38

 
68

 
—

 
2

Collectively evaluated for impairment
128,946

 
10,695

 
72,409

 
36,191

 
5,801

 
3,850

Total ALLL
$
129,054

 
10,695

 
72,447

 
36,259

 
5,801

 
3,852

 
 
December 31, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
108,788

 
12,685

 
68,837

 
20,975

 
3,497

 
2,794

Collectively evaluated for impairment
8,178,761

 
875,057

 
4,588,724

 
1,890,196

 
541,191

 
283,593

Total loans receivable
$
8,287,549

 
887,742

 
4,657,561

 
1,911,171

 
544,688

 
286,387

ALLL
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
3,223

 
83

 
568

 
2,313

 
39

 
220

Collectively evaluated for impairment
128,016

 
10,548

 
71,880

 
35,847

 
5,772

 
3,969

Total ALLL
$
131,239

 
10,631

 
72,448

 
38,160

 
5,811

 
4,189



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


23



Aging Analysis
The following tables present an aging analysis of the recorded investment in loans by loan class:

 
June 30, 2019
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
19,891

 
208

 
8,069

 
6,325

 
3,340

 
1,949

Accruing loans 60-89 days past due
18,046

 
845

 
12,675

 
2,136

 
1,484

 
906

Accruing loans 90 days or more past due
3,463

 
1,333

 
1,385

 
254

 
229

 
262

Non-accrual loans
41,195

 
5,744

 
23,517

 
7,836

 
2,513

 
1,585

Total past due and non-accrual loans
82,595

 
8,130

 
45,646

 
16,551

 
7,566

 
4,702

Current loans receivable
8,759,182

 
912,585

 
4,914,217

 
2,060,054

 
588,475

 
283,851

Total loans receivable
$
8,841,777

 
920,715

 
4,959,863

 
2,076,605

 
596,041

 
288,553

 
 
December 31, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
24,312

 
5,251

 
9,477

 
4,282

 
3,213

 
2,089

Accruing loans 60-89 days past due
9,255

 
860

 
3,231

 
3,838

 
735

 
591

Accruing loans 90 days or more past due
2,018

 
788

 
—

 
492

 
428

 
310

Non-accrual loans
47,252

 
8,021

 
27,264

 
8,619

 
2,575

 
773

Total past due and non-accrual loans
82,837

 
14,920

 
39,972

 
17,231

 
6,951

 
3,763

Current loans receivable
8,204,712

 
872,822

 
4,617,589

 
1,893,940

 
537,737

 
282,624

Total loans receivable
$
8,287,549

 
887,742

 
4,657,561

 
1,911,171

 
544,688

 
286,387




24



Impaired Loans
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. The following tables disclose information related to impaired loans by loan class:
 
 
At or for the Three or Six Months ended June 30, 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
$
5,638

 
43

 
5,474

 
100

 
—

 
21

Unpaid principal balance
5,640

 
43

 
5,474

 
102

 
—

 
21

Specific valuation allowance
108

 
—

 
38

 
68

 
—

 
2

Average balance - three months
10,850

 
44

 
5,739

 
5,052

 
—

 
15

Average balance - six months
13,632

 
681

 
6,941

 
5,791

 
40

 
179

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
96,343

 
10,739

 
57,465

 
22,050

 
3,221

 
2,868

Unpaid principal balance
113,211

 
12,004

 
68,852

 
25,363

 
3,857

 
3,135

Average balance - three months
92,346

 
10,670

 
58,283

 
17,500

 
3,139

 
2,754

Average balance - six months
91,428

 
10,690

 
58,686

 
16,236

 
3,218

 
2,598

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
101,981

 
10,782

 
62,939

 
22,150

 
3,221

 
2,889

Unpaid principal balance
118,851

 
12,047

 
74,326

 
25,465

 
3,857

 
3,156

Specific valuation allowance
108

 
—

 
38

 
68

 
—

 
2

Average balance - three months
103,196

 
10,714

 
64,022

 
22,552

 
3,139

 
2,769

Average balance - six months
105,060

 
11,371

 
65,627

 
22,027

 
3,258

 
2,777

 
 
At or for the Year ended December 31, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
19,197

 
1,957

 
9,345

 
7,268

 
120

 
507

Unpaid principal balance
19,491

 
2,220

 
9,345

 
7,268

 
120

 
538

Specific valuation allowance
3,223

 
83

 
568

 
2,313

 
39

 
220

Average balance
19,519

 
2,686

 
8,498

 
7,081

 
82

 
1,172

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
89,591

 
10,728

 
59,492

 
13,707

 
3,377

 
2,287

Unpaid principal balance
107,486

 
11,989

 
71,300

 
17,689

 
3,986

 
2,522

Average balance
106,747

 
10,269

 
73,889

 
17,376

 
3,465

 
1,748

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
108,788

 
12,685

 
68,837

 
20,975

 
3,497

 
2,794

Unpaid principal balance
126,977

 
14,209

 
80,645

 
24,957

 
4,106

 
3,060

Specific valuation allowance
3,223

 
83

 
568

 
2,313

 
39

 
220

Average balance
126,266

 
12,955

 
82,387

 
24,457

 
3,547

 
2,920



25




Interest income recognized on impaired loans for the six months ended June 30, 2019 and 2018 was not significant.

Restructured Loans
A restructured loan is considered a troubled debt restructuring 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 TDRs that occurred during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted during the periods presented:

 
Three Months ended June 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
4

 
1

 
—

 
—

 
—

 
3

Pre-modification recorded balance
$
388

 
117

 
—

 
—

 
—

 
271

Post-modification recorded balance
$
374

 
123

 
—

 
—

 
—

 
251

TDRs that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
1

 
—

 
—

 
—

 
—

 
1

Recorded balance
$
305

 
—

 
—

 
—

 
—

 
305


 
Three Months ended June 30, 2018
(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
8

 
1

 
4

 
1

 
2

 
—

Pre-modification recorded balance
$
5,273

 
227

 
4,623

 
171

 
252

 
—

Post-modification recorded balance
$
5,159

 
227

 
4,509

 
171

 
252

 
—

TDRs that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
—

 
—

 
—

 
—

 
—

 
—

Recorded balance
$
—

 
—

 
—

 
—

 
—

 
—



 
Six Months ended June 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
8

 
1

 
1

 
2

 
1

 
3

Pre-modification recorded balance
$
2,093

 
117

 
1,035

 
567

 
103

 
271

Post-modification recorded balance
$
2,079

 
123

 
1,035

 
567

 
103

 
251

TDRs that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
1

 
—

 
—

 
—

 
—

 
1

Recorded balance
$
305

 
—

 
—

 
—

 
—

 
305



26



 
Six Months ended June 30, 2018
(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
20

 
3

 
8

 
7

 
2

 
—

Pre-modification recorded balance
$
21,270

 
666

 
12,901

 
7,451

 
252

 
—

Post-modification recorded balance
$
21,156

 
666

 
12,787

 
7,451

 
252

 
—

TDRs that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
1

 
1

 
—

 
—

 
—

 
—

Recorded balance
$
334

 
334

 
—

 
—

 
—

 
—


The modifications for the TDRs that occurred during the six months ended June 30, 2019 and 2018 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 TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $2,528,000 and $1,313,000 for the six months ended June 30, 2019 and 2018, 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 six months ended June 30, 2019 and 2018. At June 30, 2019 and December 31, 2018, the Company had $1,437,000 and $350,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At June 30, 2019 and December 31, 2018, the Company had $2,011,000 and $698,000, respectively, of OREO secured by residential real estate properties.

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:

 
June 30, 2019
(Dollars in thousands)
Finance Leases
 
Operating Leases
ROU assets
$
951

 
 
Accumulated depreciation
(848
)
 
 
Net ROU assets
$
103

 
41,342

Lease liabilities
$
142

 
43,596

Weighted-average remaining lease term
2 years

 
19 years

Weighted-average discount rate
5.3
%
 
3.7
%



27



Maturities of lease liabilities consist of the following:
 
June 30, 2019
(Dollars in thousands)
Finance Leases
 
Operating Leases
Maturing within one year
$
92

 
3,626

Maturing one year through two years
54

 
3,527

Maturing two years through three years
1

 
3,322

Maturing three years through four years
1

 
3,079

Maturing four years through five years
—

 
3,018

Thereafter
—

 
46,619

Total lease payments
148

 
63,191

Present value of lease payments
 
 
 
Short-term
87

 
2,073

Long-term
55

 
41,523

Total present value of lease payments
142

 
43,596

Difference between lease payments and present value of lease payments
$
6

 
19,595



The components of lease expense consist of the following:
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2019
Finance lease cost
 
 
 
Amortization of ROU assets
$
16

 
32

Interest on lease liabilities
2

 
4

Operating lease cost
997

 
1,910

Short-term lease cost
119

 
228

Variable lease cost
222

 
421

Sublease income
(1
)
 
(3
)
Total lease expense
$
1,355

 
2,592



Supplemental cash flow information related to leases is as follows:
 
Three Months ended
 
Six Months ended
 
June 30, 2019
 
June 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
$
2

 
497

 
4

 
976

Financing cash flows
21

 
N/A

 
42

 
N/A



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


28



Note 5. Goodwill

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

 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Net carrying value at beginning of period
$
289,586

 
289,535

 
289,586

 
177,811

Acquisitions
41,301

 
—

 
41,301

 
111,724

Net carrying value at end of period
$
330,887

 
289,535

 
330,887

 
289,535



The Company performed its annual goodwill impairment test during the third quarter of 2018 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. In recognition there were no events or circumstances that occurred during the first half of 2019 that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value, the Company did not perform interim testing at June 30, 2019. 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 June 30, 2019 and December 31, 2018.

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.


29



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.

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)
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Loans receivable
$
80,466

 
80,123

Accrued interest receivable
161

 
96

Other assets
50,871

 
45,779

Total assets
$
131,498

 
125,998

Liabilities
 
 
 
Other borrowed funds
$
14,623

 
14,527

Accrued interest payable
7

 
1

Other liabilities
39

 
125

Total liabilities
$
14,669

 
14,653




30



Unconsolidated Variable Interest Entities
The Company has equity investments in LIHTC partnerships, both directly and through tax credit funds, with carrying values of $38,669,000 and $35,112,000 as of June 30, 2019 and December 31, 2018, 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 six months ended June 30, 2019 and 2018. Future unfunded contingent commitments related to the Company’s LIHTC investments at June 30, 2019 are as follows:

(Dollars in thousands)
Amount
Years ending December 31,
 
2019
$
7,004

2020
3,042

2021
2,640

2022
7,101

2023
59

Thereafter
641

Total
$
20,487



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
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Amortization expense
$
1,478

 
1,030

 
2,895

 
1,921

Tax credits and other tax benefits recognized
2,009

 
1,423

 
3,967

 
2,663



The Company also owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: 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.

31



Note 7. Securities Sold Under Agreements to Repurchase

The Company’s securities sold under agreements to repurchase (“repurchase agreements”) totaled $494,651,000 and $396,151,000 at June 30, 2019 and December 31, 2018, respectively, and are secured by debt securities with carrying values of $635,554,000 and $511,294,000, 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. The following tables summarize the carrying value of the Company’s repurchase agreements by remaining contractual maturity and category of collateral:

 
June 30, 2019
 
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)
Overnight and Continuous
 
Up to 30 Days
 
Total
Residential mortgage-backed securities
$
295,255

 
—

 
295,255

Commercial mortgage-backed securities
199,396

 
—

 
199,396

Total
$
494,651

 
—

 
494,651


 
December 31, 2018
 
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)
Overnight and Continuous
 
Up to 30 Days
 
Total
Residential mortgage-backed securities
$
328,174

 
—

 
328,174

Commercial mortgage-backed securities
66,339

 
1,638

 
67,977

Total
$
394,513

 
1,638

 
396,151



Note 8. Derivatives and Hedging Activities

Interest Rate Swap Derivatives
As of June 30, 2019, the Company’s interest rate swap derivative financial instruments were designated as cash flow hedges and are summarized as follows:
(Dollars in thousands)
Forecasted
Notional  Amount
 
Variable
Interest Rate 1
 
Fixed
Interest Rate 1
 
Payment Term
Interest rate swap
$
160,000

 
3 month LIBOR
 
3.378
%
 
Oct. 21, 2014 - Oct. 21, 2021
Interest rate swap
100,000

 
3 month LIBOR
 
2.498
%
 
Nov. 30, 2015 - Nov. 30, 2022

______________________________
1 The Company pays the fixed interest rate and the counterparty pays the Company the variable interest rate.

The hedging strategy converts the LIBOR-based variable interest rate on borrowings to a fixed interest rate, thereby protecting the Company from interest rate variability.


32



The interest rate swaps with the $160,000,000 and $100,000,000 notional amounts began their payment terms in October 2014 and November 2015, respectively. The Company designated wholesale deposits and Federal Home Loan Bank (“FHLB”) advances as the cash flow hedge and these hedged items were determined to be fully effective during current and prior periods. The aggregate fair value of the interest rate swaps was recorded in other liabilities with changes recorded in other comprehensive income (“OCI”). The Company expects the hedges to remain highly effective during the remaining terms of the interest rate swaps. Interest expense recorded on the interest rate swaps totaled $3,973,000 and $3,840,000 for the six months ended June 30, 2019 and 2018, respectively, and is reported as a component of interest expense on deposits and FHLB advances. Unless the interest rate swaps are terminated during the next year, the Company expects $1,235,000 of the unrealized loss reported in OCI at June 30, 2019 to be reclassified to interest expense during the next twelve months.

The following table presents the pre-tax gains or losses recorded in OCI and the Company’s statements of operations relating to the interest rate swap derivative financial instruments:
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Interest rate swaps
 
 
 
 
 
 
 
Amount of (loss) gain recognized in OCI
$
(3,820
)
 
1,689

 
(5,654
)
 
6,068

Amount of loss reclassified from OCI to interest expense
(278
)
 
(577
)
 
(501
)
 
(1,477
)


The following table discloses the offsetting of financial assets and interest rate swap derivative assets.

 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Gross Amount of Recognized Assets
 
Gross Amount Offset in the Statements of Financial Position
 
Net Amounts of Assets Presented in the Statements of Financial Position
 
Gross Amount of Recognized Assets
 
Gross Amount Offset in the Statements of Financial Position
 
Net Amounts of Assets Presented in the Statements of Financial Position
Interest rate swaps
$
—

 
—

 
—

 
139

 
(139
)
 
—



The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities.

 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Liabilities Presented in the Statements of Financial Position
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Liabilities Presented in the Statements of Financial Position
Interest rate swaps
$
8,923

 
—

 
8,923

 
3,908

 
(139
)
 
3,769



Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of debt securities totaling $10,189,000 at June 30, 2019. There was no collateral pledged from the counterparty to the Company as of June 30, 2019. There is the possibility that the Company may need to pledge additional collateral in the future if there were declines in the fair value of the interest rate swap derivative financial instruments versus the collateral pledged.


33



Residential Real Estate Derivatives
At June 30, 2019, 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 June 30, 2019 and December 31, 2018, loan commitments with interest rate lock commitments totaled $130,591,000 and $59,974,000, respectively, and the fair value of the related derivatives was included in other assets with corresponding changes recorded in gain on sale of loans. It has been the Company’s practice to enter into “best efforts” forward sales commitments for the future delivery of residential real estate 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. Due to the forward sales commitments being short-term in nature, the corresponding derivatives are not significant. The Company also enters into free-standing derivatives to mitigate the interest rate risk associated with certain residential real estate loans to be sold. These derivatives include forward commitments to sell to-be-announced securities (“TBA”) which are used to economically hedge the interest rate risk associated with certain residential real estate loans held for sale and unfunded commitments. At June 30, 2019 and December 31, 2018, TBA commitments were $94,750,000 and $40,750,000, respectively, and the fair value of the related derivatives was included in other liabilities with corresponding changes recorded in gain on sale of loans.

Note 9. Other Expenses

Other expenses consists of the following:
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Consulting and outside services
$
2,010

 
1,795

 
3,777

 
3,174

Debit card expenses
1,435

 
1,148

 
3,304

 
2,788

Employee expenses
1,405

 
1,142

 
2,401

 
1,933

Telephone
1,210

 
1,142

 
2,385

 
2,163

Mergers and acquisition expenses
1,831

 
2,926

 
2,045

 
4,762

Business development
1,123

 
642

 
2,013

 
1,110

Loan expenses
943

 
984

 
1,802

 
1,788

Postage
823

 
776

 
1,656

 
1,555

Printing and supplies
786

 
792

 
1,511

 
1,483

VIE amortization and other expenses
906

 
938

 
1,451

 
1,412

ATM expenses
519

 
345

 
1,013

 
634

Checking and operating expenses
630

 
354

 
992

 
467

Accounting and audit fees
472

 
393

 
925

 
811

Legal fees
281

 
467

 
588

 
781

Other
910

 
1,207

 
1,688

 
2,351

Total other expenses
$
15,284

 
15,051

 
27,551

 
27,212




34



Note 10. Accumulated Other Comprehensive Income (Loss)

The following table illustrates the activity within accumulated other comprehensive income (loss) by component, net of tax:
 
(Dollars in thousands)
Gains (Losses) on Available-For-Sale Debt Securities
 
Losses on Derivatives Used for Cash Flow Hedges
 
Total
Balance at January 1, 2018
$
5,031

 
(7,010
)
 
(1,979
)
Other comprehensive (loss) income before reclassifications
(24,195
)
 
4,530

 
(19,665
)
Reclassification adjustments for losses included in net income
259

 
1,103

 
1,362

Net current period other comprehensive (loss) income
(23,936
)
 
5,633

 
(18,303
)
Balance at June 30, 2018
$
(18,905
)
 
(1,377
)
 
(20,282
)
Balance at January 1, 2019
$
(6,613
)
 
(2,814
)
 
(9,427
)
Other comprehensive income (loss) before reclassifications
56,988

 
(4,222
)
 
52,766

Reclassification adjustments for (gains) losses included in net income
(266
)
 
375

 
109

Net current period other comprehensive income (loss)
56,722

 
(3,847
)
 
52,875

Balance at June 30, 2019
$
50,109

 
(6,661
)
 
43,448



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 awards 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
 
Six Months ended
(Dollars in thousands, except per share data)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Net income available to common stockholders, basic and diluted
$
52,392

 
44,384

 
101,524

 
82,943

Average outstanding shares - basic
85,826,290

 
84,514,257

 
85,191,658

 
82,671,816

Add: dilutive restricted stock awards and stock options
31,996

 
45,011

 
49,580

 
62,591

Average outstanding shares - diluted
85,858,286

 
84,559,268

 
85,241,238

 
82,734,407

Basic earnings per share
$
0.61

 
0.53

 
1.19

 
1.00

Diluted earnings per share
$
0.61

 
0.52

 
1.19

 
1.00



There were no restricted stock awards and stock options excluded from the diluted average outstanding share calculation for the three and six months ended June 30, 2019 and 2018. Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock award or the exercise price of a stock option exceeds the market price of the Company’s stock.


35



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 six month periods ended June 30, 2019 and 2018.

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 June 30, 2019.

Debt securities, available-for-sale: 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 $593,000 and net losses $21,000 for the six month periods ended June 30, 2019 and 2018, 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.


36



Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments are based upon the estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the Fed Funds Effective Swap Rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares the reasonableness of the pricing from an independent third party.

The following tables disclose the fair value measurement of assets and liabilities measured at fair value on a recurring basis:
  
 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value June 30, 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
$
19,487

 
—

 
19,487

 
—

U.S. government sponsored enterprises
119,950

 
—

 
119,950

 
—

State and local governments
700,193

 
—

 
700,193

 
—

Corporate bonds
179,684

 
—

 
179,684

 
—

Residential mortgage-backed securities
700,789

 
—

 
700,789

 
—

Commercial mortgage-backed securities
750,531

 
—

 
750,531

 
—

Loans held for sale, at fair value
54,711

 
—

 
54,711

 
—

Total assets measured at fair value on a recurring basis
$
2,525,345

 
—

 
2,525,345

 
—

Interest rate swaps
$
8,923

 
—

 
8,923

 
—

Total liabilities measured at fair value on a recurring basis
$
8,923

 
—

 
8,923

 
—


 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value December 31, 2018
 
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
$
23,649

 
—

 
23,649

 
—

U.S. government sponsored enterprises
120,208

 
—

 
120,208

 
—

State and local governments
852,250

 
—

 
852,250

 
—

Corporate bonds
290,817

 
—

 
290,817

 
—

Residential mortgage-backed securities
792,915

 
—

 
792,915

 
—

Commercial mortgage-backed securities
491,824

 
—

 
491,824

 
—

Loans held for sale, at fair value
33,156

 
—

 
33,156

 
—

Total assets measured at fair value on a recurring basis
$
2,604,819

 
—

 
2,604,819

 
—

Interest rate swaps
$
3,769

 
—

 
3,769

 
—

Total liabilities measured at fair value on a recurring basis
$
3,769

 
—

 
3,769

 
—



37



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 June 30, 2019.

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 impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired 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 June 30, 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
$
662

 
—

 
—

 
662

Collateral-dependent impaired loans, net of ALLL
36

 
—

 
—

 
36

Total assets measured at fair value on a non-recurring basis
$
698

 
—

 
—

 
698



38



 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value December 31, 2018
 
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
$
1,011

 
—

 
—

 
1,011

Collateral-dependent impaired loans, net of ALLL
6,985

 
—

 
—

 
6,985

Total assets measured at fair value on a non-recurring basis
$
7,996

 
—

 
—

 
7,996



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 June 30, 2019
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average) 1
Other real estate owned
$
662

 
Sales comparison approach
 
Selling costs
 
8.0% - 8.0% (8.0%)
Collateral-dependent impaired loans, net of ALLL
$
36

 
Sales comparison approach
 
Selling costs
 
10.0% - 17.0% (15.5%)

 
Fair Value December 31, 2018
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average) 1
Other real estate owned
$
1,011

 
Sales comparison approach
 
Selling costs
 
8.0% - 15.0% (9.2%)
Collateral-dependent impaired loans, net of ALLL
$
2,384

 
Sales comparison approach
 
Selling costs
 
8.0% - 20.0% (9.9%)
 
4,601

 
Combined approach
 
Selling costs
 
10.0% - 10.0% (10.0%)
 
$
6,985

 
 
 
 
 
 

______________________________
1 The range for selling cost inputs represents reductions to the fair value of the assets.


39



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 June 30, 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
$
231,209

 
231,209

 
—

 
—

Debt securities, held-to-maturity
252,097

 
—

 
260,694

 
—

Loans receivable, net of ALLL
8,712,723

 
—

 
—

 
8,685,282

Total financial assets
$
9,196,029

 
231,209

 
260,694

 
8,685,282

Financial liabilities
 
 
 
 
 
 
 
Term deposits
$
1,042,574

 
—

 
1,045,760

 
—

FHLB advances
319,996

 
—

 
320,360

 
—

Repurchase agreements and other borrowed funds
509,416

 
—

 
509,416

 
—

Subordinated debentures
139,912

 
—

 
126,867

 
—

Total financial liabilities
$
2,011,898

 
—

 
2,002,403

 
—


 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Carrying Amount December 31, 2018
 
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
$
203,790

 
203,790

 
—

 
—

Debt securities, held-to-maturity
297,915

 
—

 
288,256

 
—

Loans receivable, net of ALLL
8,156,310

 
—

 
—

 
8,079,112

Total financial assets
$
8,658,015

 
203,790

 
288,256

 
8,079,112

Financial liabilities
 
 
 
 
 
 
 
Term deposits
$
1,070,208

 
—

 
1,069,777

 
—

FHLB advances
440,175

 
—

 
439,615

 
—

Repurchase agreements and other borrowed funds
410,859

 
—

 
410,859

 
—

Subordinated debentures
134,051

 
—

 
120,302

 
—

Total financial liabilities
$
2,055,293

 
—

 
2,040,553

 
—




40



Note 13. Mergers and Acquisitions

On April 30, 2019, the Company acquired 100 percent of the outstanding common stock of FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah. FNB provides banking services to individuals and businesses throughout Utah with locations in Layton, Bountiful, Clearfield and Draper. The acquisition expands the Company’s presence in Utah and sets the stage for future growth. The branches of FNB, along with the Bank’s branches operating in Utah, will operate as a new division of the Bank under the name “First Community Bank Utah, division of Glacier Bank.” The preliminary value of the FNB acquisition was $87,157,000 and resulted in the Company issuing 2,046,341 shares of its common stock. 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 April 30, 2019 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 FNB. 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 FNB were recorded on the Company’s consolidated statements of financial condition at their preliminary estimated fair values as of the April 30, 2019 acquisition date and FNB’s 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 FNB acquisition. The Company is continuing to obtain information to determine the fair values of the acquired assets and liabilities.

(Dollars in thousands)
FNB April 30, 2019
Fair value of consideration transferred
 
Fair value of Company shares issued
$
87,153

Cash consideration
4

Total fair value of consideration transferred
87,157

Recognized amounts of identifiable assets acquired and liabilities assumed
 
Identifiable assets acquired
 
Cash and cash equivalents
11,311

Debt securities
47,247

Loans receivable
245,485

Core deposit intangible 1
8,963

Accrued income and other assets
24,848

Total identifiable assets acquired
337,854

Liabilities assumed
 
Deposits
274,646

Borrowings 2
7,273

Accrued expenses and other liabilities
10,079

Total liabilities assumed
291,998

Total identifiable net assets
45,856

Goodwill recognized
$
41,301

______________________________
1 The core deposit intangible for this acquisition was determined to have an estimated life of 10 years.
2 Borrowings assumed with the acquisition include Tier 1 subordinated debentures of $5,864,000.


41



The preliminary fair values of the FNB assets acquired include loans with preliminary fair values of $245,485,000 and the gross principal and contractual interest due under the FNB contracts was $248,226,000. The Company evaluated the principal and contractual interest due at the acquisition date and determined that an insignificant amount was not expected to be collectible.

The Company incurred $1,283,000 of expenses in connection with the FNB acquisition during the six months ended June 30, 2019. 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 retention and severance expenses.

Total income consisting of net interest income and non-interest income of the acquired operations of FNB was approximately $3,259,000 and net income was approximately $696,000 from April 30, 2019 to June 30, 2019. The following unaudited pro forma summary presents consolidated information of the Company as if the FNB acquisition had occurred on January 1, 2018:
 
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Net interest income and non-interest income
$
152,673

 
144,649

 
300,916

 
270,231

Net income
50,155

 
45,854

 
100,896

 
85,697



Note 14. Subsequent Event

On July 31, 2019, the Company acquired the outstanding common stock of Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank of Nevada, a community bank based in Reno, Nevada. Heritage provides banking services to individuals and businesses throughout northern Nevada with locations in Carson City, Gardnerville, Reno and Sparks. Heritage will operate as a new division of the Bank under its existing name and management team. As of June 30, 2019, Heritage had total assets of $842,434,000, gross loans of $612,049,000 and total deposits of $717,136,000. Its net interest income, non-interest income and net income for the three and six months ended June 30, 2019 and 2018 were not significant to the Company’s results of operations. The initial accounting for the Heritage acquisition has not been completed because the fair value of financial assets, financial liabilities and goodwill has not yet been determined.


42



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 Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”), 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, including 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.


43



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 Six Months ended
(Dollars in thousands, except per share and market data)
Jun 30,
2019
 
Mar 31,
2019
 
Jun 30,
2018
 
Jun 30,
2019
 
Jun 30,
2018
Operating results
 
 
 
 
 
 
 
 
 
Net income
$
52,392

 
49,132

 
44,384

 
101,524

 
82,943

Basic earnings per share
$
0.61

 
0.58

 
0.53

 
1.19

 
1.00

Diluted earnings per share
$
0.61

 
0.58

 
0.52

 
1.19

 
1.00

Dividends declared per share
$
0.27

 
0.26

 
0.26

 
0.53

 
0.49

Market value per share
 
 
 
 
 
 
 
 
 
Closing
$
40.55

 
40.07

 
38.68

 
40.55

 
38.68

High
$
43.44

 
45.47

 
41.47

 
45.47

 
41.47

Low
$
38.65

 
37.58

 
35.77

 
37.58

 
35.77

Selected ratios and other data
 
 
 
 
 
 
 
 
 
Number of common stock shares outstanding
86,637,394

 
84,588,199

 
84,516,650

 
86,637,394

 
84,516,650

Average outstanding shares - basic
85,826,290

 
84,549,974

 
84,514,257

 
85,191,658

 
82,671,816

Average outstanding shares - diluted
85,858,286

 
84,614,248

 
84,559,268

 
85,241,238

 
82,734,407

Return on average assets (annualized)
1.69
%
 
1.67
%
 
1.53
%
 
1.68
%
 
1.52
%
Return on average equity (annualized)
12.82
%
 
13.02
%
 
12.07
%
 
12.91
%
 
11.99
%
Efficiency ratio
54.50
%
 
55.37
%
 
55.44
%
 
54.93
%
 
56.54
%
Dividend payout ratio
44.26
%
 
44.83
%
 
49.06
%
 
44.54
%
 
49.00
%
Loan to deposit ratio
90.27
%
 
87.14
%
 
84.92
%
 
90.27
%
 
84.92
%
Number of full time equivalent employees
2,703

 
2,634

 
2,605

 
2,703

 
2,605

Number of locations
175

 
169

 
167

 
175

 
167

Number of ATMs
228

 
222

 
221

 
228

 
221


The Company reported net income of $52.4 million for the current quarter, an increase of $8.0 million, or 18 percent, from the $44.4 million of net income for the prior year second quarter. Diluted earnings per share for the current quarter was $0.61 per share, an increase of 17 percent from the prior year second quarter diluted earnings per share of $0.52. Included in the current quarter was $1.8 million of acquisition-related expenses.

Net income for the first six months ended June 30, 2019 was $101.5 million, an increase of $18.6 million, or 22 percent, from the $82.9 million of net income for the first six months of the prior year. Diluted earnings per share for the first half of the current year was $1.19 per share, an increase of $0.19, or 19 percent, from the diluted earnings per share of $1.00 for the same period in the prior year.


44



Recent Acquisition
On April 30, 2019, the Company completed the acquisition of FNB Bancorp, the holding company for The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). 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 regarding acquisition, 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)
FNB April 30, 2019
Total assets
$
379,155

Debt securities
47,247

Loans receivable
245,485

Non-interest bearing deposits
93,647

Interest bearing deposits
180,999

Borrowings
7,273


Financial Condition Analysis

Assets
The following table summarizes the Company’s assets as of the dates indicated: 
 
 
 
 
 
 
 
 
 
$ Change from
(Dollars in thousands)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
Cash and cash equivalents
$
231,209

 
202,527

 
203,790

 
368,132

 
28,682

 
27,419

 
(136,923
)
Debt securities, available-for-sale
2,470,634

 
2,522,322

 
2,571,663

 
2,177,352

 
(51,688
)
 
(101,029
)
 
293,282

Debt securities, held-to-maturity
252,097

 
255,572

 
297,915

 
620,409

 
(3,475
)
 
(45,818
)
 
(368,312
)
Total debt securities
2,722,731

 
2,777,894

 
2,869,578

 
2,797,761

 
(55,163
)
 
(146,847
)
 
(75,030
)
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
920,715

 
884,732

 
887,742

 
835,382

 
35,983

 
32,973

 
85,333

Commercial real estate
4,959,863

 
4,686,082

 
4,657,561

 
4,384,781

 
273,781

 
302,302

 
575,082

Other commercial
2,076,605

 
1,909,452

 
1,911,171

 
1,940,435

 
167,153

 
165,434

 
136,170

Home equity
596,041

 
562,381

 
544,688

 
511,043

 
33,660

 
51,353

 
84,998

Other consumer
288,553

 
283,423

 
286,387

 
277,031

 
5,130

 
2,166

 
11,522

Loans receivable
8,841,777

 
8,326,070

 
8,287,549

 
7,948,672

 
515,707

 
554,228

 
893,105

Allowance for loan and lease losses
(129,054
)
 
(129,786
)
 
(131,239
)
 
(131,564
)
 
732

 
2,185

 
2,510

Loans receivable, net
8,712,723

 
8,196,284

 
8,156,310

 
7,817,108

 
516,439

 
556,413

 
895,615

Other assets
1,009,698

 
897,074

 
885,806

 
914,643

 
112,624

 
123,892

 
95,055

Total assets
$
12,676,361

 
12,073,779

 
12,115,484

 
11,897,644

 
602,582

 
560,877

 
778,717



45



Total debt securities of $2.723 billion at June 30, 2019 decreased $55.2 million, or 2 percent, during the current quarter and decreased $75.0 million, or 3 percent, from the prior year second quarter. Debt securities represented 21 percent of total assets at June 30, 2019 compared to 24 percent of total assets at December 31, 2018 and June 30, 2018.

The loan portfolio of $8.842 billion increased $270 million, or 13 percent annualized, during the current quarter excluding the FNB acquisition. The loan category with the largest increase was other commercial loans which increased $114 million, or 6 percent. Excluding the acquisition, the loan portfolio increased $648 million, or 8 percent, since June 30, 2018, with the largest increase in commercial real estate loans, which increased $397 million, or 9 percent.

Liabilities
The following table summarizes the Company’s liabilities as of the dates indicated:
 
 
 
 
 
 
 
 
 
$ Change from
(Dollars in thousands)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
Deposits
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
$
3,265,077

 
3,051,119

 
3,001,178

 
2,914,885

 
213,958

 
263,899

 
350,192

NOW and DDA accounts
2,487,806

 
2,383,806

 
2,391,307

 
2,354,214

 
104,000

 
96,499

 
133,592

Savings accounts
1,412,046

 
1,373,544

 
1,346,790

 
1,330,637

 
38,502

 
65,256

 
81,409

Money market deposit accounts
1,647,372

 
1,689,962

 
1,684,284

 
1,723,681

 
(42,590
)
 
(36,912
)
 
(76,309
)
Certificate accounts
897,625

 
896,731

 
901,484

 
927,608

 
894

 
(3,859
)
 
(29,983
)
Core deposits, total
9,709,926

 
9,395,162

 
9,325,043

 
9,251,025

 
314,764

 
384,883

 
458,901

Wholesale deposits
144,949

 
192,953

 
168,724

 
172,550

 
(48,004
)
 
(23,775
)
 
(27,601
)
Deposits, total
9,854,875

 
9,588,115

 
9,493,767

 
9,423,575

 
266,760

 
361,108

 
431,300

Securities sold under agreements to repurchase
494,651

 
489,620

 
396,151

 
361,515

 
5,031

 
98,500

 
133,136

Federal Home Loan Bank advances
319,996

 
154,683

 
440,175

 
395,037

 
165,313

 
(120,179
)
 
(75,041
)
Other borrowed funds
14,765

 
14,738

 
14,708

 
9,917

 
27

 
57

 
4,848

Subordinated debentures
139,912

 
134,048

 
134,051

 
134,058

 
5,864

 
5,861

 
5,854

Other liabilities
164,786

 
141,725

 
120,778

 
99,550

 
23,061

 
44,008

 
65,236

Total liabilities
$
10,988,985

 
10,522,929

 
10,599,630

 
10,423,652

 
466,056

 
389,355

 
565,333


Excluding the acquisition, core deposits of $9.710 billion as of June 30, 2019 increased $110 million, or 2 percent annualized, from the prior quarter and increased $184 million, or 2 percent, from the prior year second quarter. Non-interest bearing deposits organically increased $120 million, or 4 percent, over the prior quarter and increased $257 million, or 9 percent, over the prior year second quarter.

Federal Home Loan Bank (“FHLB”) advances of $320 million at June 30, 2019, increased $165 million over the prior quarter and decreased $75.0 million over the prior year second quarter. FHLB advances and wholesale deposits will continue to fluctuate to supplement liquidity needs during the year.


46



Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated: 
 
 
 
 
 
 
 
 
 
$ Change from
(Dollars in thousands, except per share data)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
Common equity
$
1,643,928

 
1,526,963

 
1,525,281

 
1,494,274

 
116,965

 
118,647

 
149,654

Accumulated other comprehensive income (loss)
43,448

 
23,887

 
(9,427
)
 
(20,282
)
 
19,561

 
52,875

 
63,730

Total stockholders’ equity
1,687,376

 
1,550,850

 
1,515,854

 
1,473,992

 
136,526

 
171,522

 
213,384

Goodwill and core deposit intangible, net
(385,533
)
 
(337,134
)
 
(338,828
)
 
(342,243
)
 
(48,399
)
 
(46,705
)
 
(43,290
)
Tangible stockholders’ equity
$
1,301,843

 
1,213,716

 
1,177,026

 
1,131,749

 
88,127

 
124,817

 
170,094

Stockholders’ equity to total assets
13.31
%
 
12.84
%
 
12.51
%
 
12.39
%
 
 
 
 
 
 
Tangible stockholders’ equity to total tangible assets
10.59
%
 
10.34
%
 
9.99
%
 
9.79
%
 
 
 
 
 
 
Book value per common share
$
19.48

 
18.33

 
17.93

 
17.44

 
1.15

 
1.55

 
2.04

Tangible book value per common share
$
15.03

 
14.35

 
13.93

 
13.39

 
0.68

 
1.10

 
1.64


Tangible stockholders’ equity of $1.302 billion at June 30, 2019 increased $88.1 million compared to the prior quarter which was the result of $87.1 million of Company stock issued for the acquisition of FNB, earnings retention and an increase in other comprehensive income; such increases more than offset the increase in goodwill and core deposits associated with the acquisition. Tangible stockholders’ equity increased $170 million over the prior year second quarter which was the result of earnings retention, an increase in other comprehensive income, and the impact from the FNB acquisition which was offset by a decrease of $25.5 million from the cumulative-effect adjustments related to the adoption of new accounting standards. Tangible book value per common share of $15.03 at current quarter end increased $0.68 per share from the prior quarter and increased $1.64 per share from a year ago. For additional information on the new accounting standards, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Cash Dividends
On June 25, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.27 per share. The dividend was payable July 18, 2019 to shareholders of record on July 9, 2019. The dividend was the 137th consecutive quarterly dividend. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.



47



Operating Results for Three Months Ended June 30, 2019 
Compared to March 31, 2019, and June 30, 2018

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

 
Three Months ended
 
$ Change from
(Dollars in thousands)
Jun 30,
2019
 
Mar 31,
2019
 
Jun 30,
2018
 
Mar 31,
2019
 
Jun 30,
2018
Net interest income
 
 
 
 
 
 
 
 
 
Interest income
$
132,385

 
126,116

 
117,715

 
6,269

 
14,670

Interest expense
12,089

 
10,904

 
9,161

 
1,185

 
2,928

Total net interest income
120,296

 
115,212

 
108,554

 
5,084

 
11,742

Non-interest income
 
 
 
 
 
 
 
 
 
Service charges and other fees
20,025

 
18,015

 
18,804

 
2,010

 
1,221

Miscellaneous loan fees and charges
1,192

 
967

 
2,243

 
225

 
(1,051
)
Gain on sale of loans
7,762

 
5,798

 
8,142

 
1,964

 
(380
)
Gain (loss) on sale of investments
134

 
213

 
(56
)
 
(79
)
 
190

Other income
1,721

 
3,481

 
2,695

 
(1,760
)
 
(974
)
Total non-interest income
30,834

 
28,474

 
31,828

 
2,360

 
(994
)
Total income
$
151,130

 
143,686

 
140,382

 
7,444

 
10,748

Net interest margin (tax-equivalent)
4.33
%
 
4.34
%
 
4.17
%
 
 
 
 

Net Interest Income
The current quarter net interest income of $120 million increased $5.1 million, or 4 percent, over the prior quarter and increased $11.7 million, or 11 percent, from the prior year second quarter. The increase in net interest income over the prior quarter and prior year second quarter was primarily driven by an increase in interest income on commercial loans. Interest income on commercial loans increased $4.5 million, or 5 percent, from the prior quarter and increased $12.2 million, or 16 percent, from the prior year second quarter.

The current quarter interest expense of $12.1 million increased $1.2 million, or 11 percent, over the prior quarter which was driven by the increase in FHLB advances which supplemented the liquidity needs during the current quarter. The current quarter interest expense increased $3.0 million, or 32 percent, from the prior year second quarter and was primarily due to the increased amount of deposits and borrowings. The total cost of funding (including non-interest bearing deposits) for the current quarter was 45 basis points compared to 43 basis points for the prior quarter and 36 basis points for the prior year second quarter.

The Company’s net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the current quarter was 4.33 percent compared to 4.34 percent in the prior quarter. The yield on loans increased 2 basis points and was offset by the 2 basis points increase in funding cost related to the increased short-term borrowings while the cost of core deposits remained unchanged. The current quarter net interest margin included 5 basis points of discount accretion on acquired loans compared to 6 basis points in the prior quarter. The current quarter also included 1 basis point from the recovery of interest on loans previously placed on non-accrual compared to 2 basis points in the prior quarter. Excluding the 5 basis points from discount accretion and 1 basis point from non-accrual interest, the core net interest margin was 4.27 percent compared to 4.26 in the prior quarter and 4.11 percent in the prior year ago second quarter. The current quarter net interest margin increased 16 basis points over the prior year second quarter net interest margin of 4.17 percent. The increase in the margin from the prior year second quarter resulted from the remix of earning assets to higher yielding loans and the increased yields on the loan portfolio which more than offset the increase in funding costs.


48



Non-interest Income
Non-interest income for the current quarter totaled $30.8 million which was an increase of $2.4 million, or 8 percent, over the prior quarter and a decrease of $994 thousand, or 3 percent, over the same quarter last year. Service charges and other fees of $20.0 million for the current quarter increased $2.0 million, or 11 percent, from the prior quarter due primarily to seasonality. Service charges and other fees for the current quarter increased $1.2 million, or 6 percent, from the prior year second quarter which was due to the increased number of accounts driven by organic growth. Gain on the sale of loans of $7.8 million, increased $2.0 million, or 34 percent, compared to the prior quarter as a result of seasonality.

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
 
 
Three Months ended
 
$ Change from
(Dollars in thousands)
Jun 30,
2019
 
Mar 31,
2019
 
Jun 30,
2018
 
Mar 31,
2019
 
Jun 30,
2018
Compensation and employee benefits
$
51,973

 
52,728

 
49,023

 
(755
)
 
2,950

Occupancy and equipment
8,180

 
8,437

 
7,662

 
(257
)
 
518

Advertising and promotions
2,767

 
2,388

 
2,530

 
379

 
237

Data processing
4,062

 
3,892

 
4,241

 
170

 
(179
)
Other real estate owned
191

 
139

 
211

 
52

 
(20
)
Regulatory assessments and insurance
1,848

 
1,285

 
1,329

 
563

 
519

Core deposit intangibles amortization
1,865

 
1,694

 
1,748

 
171

 
117

Other expenses
15,284

 
12,267

 
15,051

 
3,017

 
233

Total non-interest expense
$
86,170

 
82,830

 
81,795

 
3,340

 
4,375


Total non-interest expense of $86.2 million for the current quarter increased $3.3 million, or 4 percent, over the prior quarter and increased $4.4 million, or 5 percent, over the prior year second quarter. Compensation and employee benefits increased by $2.9 million, or 6 percent, from the prior year second quarter due to the acquisition and an increased number of employees driven by organic growth. Occupancy and equipment expense increased $518 thousand or 7 percent, over the prior year second quarter as a result of the current year acquisition and general cost increases. Other expenses of $15.3 million, increased $3.0 million, or 25 percent, from the prior quarter and was primarily attributable to acquisition-related expenses. Acquisition-related expenses were $1.8 million during the current quarter compared to $214 thousand in the prior quarter and $2.9 million in the prior year second quarter.


49



Efficiency Ratio
The current quarter efficiency ratio was 54.50 percent, an 87 basis points improvement from the prior quarter efficiency ratio of 55.37 percent and was driven by controlling operating costs combined with the increase in net interest income. The current quarter efficiency ratio improved 94 basis points from the prior year second quarter efficiency ratio of 55.44 percent and was driven by the increase in net interest income that more than offset the increased operating costs as a result of the Company’s growth.

Provision for Loan Losses 
The following table summarizes the provision for loan losses, net charge-offs and select ratios relating to the provision for loan losses for the previous eight quarters:
(Dollars in thousands)
Provision
for Loan
Losses
 
Net
Charge-Offs
 
Allowance for Loan and Lease 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
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
%
Third quarter 2018
3,194

 
2,223

 
1.63
%
 
0.31
%
 
0.61
%
Second quarter 2018
4,718

 
762

 
1.66
%
 
0.50
%
 
0.71
%
First quarter 2018
795

 
2,755

 
1.66
%
 
0.59
%
 
0.64
%
Fourth quarter 2017
2,886

 
2,894

 
1.97
%
 
0.57
%
 
0.68
%
Third quarter 2017
3,327

 
3,628

 
1.99
%
 
0.45
%
 
0.67
%

Net charge-offs for the current quarter were $732 thousand compared to $1.5 million for the prior quarter and $762 thousand from the same quarter last year. There was no current quarter provision for loan losses compared to $57 thousand in the prior quarter and $4.7 million in the prior year second quarter. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the level of the loan loss provision. 

The determination of the allowance for loan and lease losses (“ALLL” or “allowance”) and the related provision for loan losses is a critical accounting estimate that involves management’s judgments about current environmental factors which affect loan losses, such factors including economic conditions, changes in collateral values, net charge-offs, and other factors discussed below in “Additional Management’s Discussion and Analysis.”


50



Operating Results For Six Months ended June 30, 2019
Compared to June 30, 2018
 
Income Summary
The following table summarizes revenue for the periods indicated:

 
Six Months ended
 
$ Change
 
% Change
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
Net interest income
 
 
 
 
 
 
 
Interest income
$
258,501

 
$
220,781

 
$
37,720

 
17
 %
Interest expense
22,993

 
16,935

 
6,058

 
36
 %
Total net interest income
235,508

 
203,846

 
31,662

 
16
 %
Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
38,040

 
35,675

 
2,365

 
7
 %
Miscellaneous loan fees and charges
2,159

 
3,720

 
(1,561
)
 
(42
)%
Gain on sale of loans
13,560

 
14,239

 
(679
)
 
(5
)%
Gain (loss) on sale of investments
347

 
(389
)
 
736

 
(189
)%
Other income
5,202

 
4,669

 
533

 
11
 %
Total non-interest income
59,308

 
57,914

 
1,394

 
2
 %
Total income
$
294,816

 
$
261,760

 
$
33,056

 
13
 %
Net interest margin (tax-equivalent)
4.33
%
 
4.14
%
 
 
 
 

Net Interest Income
Net interest income for the the first six months of 2019 increased $31.7 million, or 16 percent, from the first six months of 2018 and was primarily attributable to a $30.2 million increase in interest income from commercial loans. Interest expense of $23.0 million for the first half of 2019 increased $6.1 million, or 36 percent over the prior year same period as a result of increased deposits and borrowings combined with interest rate increases. The total funding cost (including non-interest bearing deposits) for 2019 was 44 basis points compared to 36 basis points for 2018.

The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the first six months of 2019 was 4.33 percent, a 19 basis points increase from the net interest margin of 4.14 percent for the first half of 2018. The increase in the margin was principally due to a shift in earning assets to higher yielding loans along with an increase in yields on the loan portfolio combined with relatively stable cost of funds.

Non-interest Income
Non-interest income of $59.3 million for the first six months of 2019 increased $1.4 million, or 2 percent, over the same period last year. Service charges and other fees of $38.0 million for 2019 increased $2.4 million, or 7 percent, from the prior year as a result of an increased number of deposit accounts from organic growth and acquisitions.


51



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

 
Six Months ended
 
$ Change
 
% Change
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
Compensation and employee benefits
$
104,701

 
$
94,744

 
$
9,957

 
11
 %
Occupancy and equipment
16,617

 
14,936

 
1,681

 
11
 %
Advertising and promotions
5,155

 
4,700

 
455

 
10
 %
Data processing
7,954

 
8,208

 
(254
)
 
(3
)%
Other real estate owned
330

 
283

 
47

 
17
 %
Regulatory assessments and insurance
3,133

 
2,535

 
598

 
24
 %
Core deposit intangible amortization
3,559

 
2,804

 
755

 
27
 %
Other expenses
27,551

 
27,212

 
339

 
1
 %
Total non-interest expense
$
169,000

 
$
155,422

 
$
13,578

 
9
 %

Total non-interest expense of $169 million for the first half of 2019 increased $13.6 million, or 9 percent, over the prior year first half. Compensation and employee benefits for the first six months of 2019 increased $10.0 million, or 11 percent, from the same period last year due to the increased number of employees from acquisitions and organic growth combined with annual salary increases. Occupancy and equipment expense for the first half of 2019 increased $1.7 million, or 11 percent from the prior year as a result of increased cost from acquisitions and general cost increases.

Efficiency Ratio
The efficiency ratio of 54.93 percent for the first six months of 2019 improved 161 basis points from the prior year first six months efficiency ratio of 56.54 percent and was driven by the increase in net interest income that more than offset the increased operating costs.

Provision for Loan Losses
The provision for loan losses was $57 thousand for the first half of 2019, a decrease of $4.7 million from the same period in the prior year. Net charge-offs during the first half of 2019 were $2.2 million compared to $3.5 million during the same period in 2018.


52



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 and are carried at cost less impairment.

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:

 
June 30, 2019
 
December 31, 2018
 
June 30, 2018
(Dollars in thousands)
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
19,487

 
1
%
 
$
23,649

 
1
%
 
$
28,093

 
1
%
U.S. government sponsored enterprises
119,950

 
4
%
 
120,208

 
4
%
 
119,360

 
4
%
State and local governments
700,193

 
26
%
 
852,250

 
30
%
 
653,918

 
23
%
Corporate bonds
179,684

 
7
%
 
290,817

 
10
%
 
318,422

 
12
%
Residential mortgage-backed securities
700,789

 
26
%
 
792,915

 
28
%
 
886,348

 
32
%
Commercial mortgage-backed securities
750,531

 
27
%
 
491,824

 
17
%
 
171,211

 
6
%
Total available-for-sale
2,470,634

 
91
%
 
2,571,663

 
90
%
 
2,177,352

 
78
%
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
252,097

 
9
%
 
297,915

 
10
%
 
620,409

 
22
%
Total held-to-maturity
252,097

 
9
%
 
297,915

 
10
%
 
620,409

 
22
%
Total debt securities
$
2,722,731

 
100
%
 
$
2,869,578

 
100
%
 
$
2,797,761

 
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 are primarily short, weighted-average life U.S. agency guaranteed residential mortgage pass-through securities.  To a lesser extent, mortgage-backed securities also consist of short, weighted-average life U.S. agency guaranteed residential collateralized mortgage obligations and U.S. agency guaranteed commercial mortgage-backed securities. 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 Standard and Poor’s [“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.


53



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.

 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
S&P: AAA / Moody’s: Aaa
$
226,786

 
234,373

 
299,275

 
296,027

S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
528,391

 
548,351

 
643,023

 
640,736

S&P: A+, A, A- / Moody’s: A1, A2, A3
148,495

 
157,295

 
163,041

 
167,779

S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3
4,208

 
4,398

 
4,208

 
4,382

Not rated by either entity
14,884

 
15,420

 
31,954

 
30,532

Below investment grade
1,047

 
1,050

 
1,050

 
1,050

Total
$
923,811

 
960,887

 
1,142,551

 
1,140,506


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.

 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
General obligation - unlimited
$
540,277

 
563,171

 
657,051

 
658,062

General obligation - limited
138,290

 
144,110

 
173,973

 
177,275

Revenue
228,576

 
235,928

 
290,106

 
283,939

Certificate of participation
10,989

 
11,924

 
14,174

 
14,463

Other
5,679

 
5,754

 
7,247

 
6,767

Total
$
923,811

 
960,887

 
1,142,551

 
1,140,506


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

 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Michigan
$
138,909

 
145,478

 
144,378

 
147,386

Washington
128,843

 
134,297

 
179,691

 
179,808

Texas
119,588

 
123,912

 
157,978

 
157,706

Montana
95,882

 
102,276

 
109,106

 
111,492

California
41,980

 
42,951

 
50,145

 
48,623

All other states
398,609

 
411,973

 
501,253

 
495,491

Total
$
923,811

 
960,887

 
1,142,551

 
1,140,506



54



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 June 30, 2019. 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
$
3

 
2.90
%
 
$
2,776

 
2.31
%
 
$
8,171

 
2.43
%
 
$
8,537

 
3.08
%
 
$
—

 
—
%
 
$
19,487

 
2.70
%
U.S. government sponsored enterprises
—

 
—
%
 
82,985

 
2.69
%
 
36,965

 
3.14
%
 
—

 
—
%
 
—

 
—
%
 
119,950

 
2.83
%
State and local governments
4,246

 
2.36
%
 
26,068

 
2.86
%
 
253,154

 
3.49
%
 
416,725

 
4.00
%
 
—

 
—
%
 
700,193

 
3.76
%
Corporate bonds
46,499

 
2.77
%
 
133,185

 
3.47
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
179,684

 
3.28
%
Residential mortgage-backed securities
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
700,789

 
2.59
%
 
700,789

 
2.59
%
Commercial mortgage-backed securities
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
750,531

 
3.17
%
 
750,531

 
3.17
%
Total available- for-sale
50,748

 
2.74
%
 
245,014

 
3.13
%
 
298,290

 
3.42
%
 
425,262

 
3.98
%
 
1,451,320

 
2.89
%
 
2,470,634

 
3.16
%
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local governments
—

 
—
%
 
8,391

 
2.33
%
 
78,886

 
2.61
%
 
164,820

 
2.87
%
 
—

 
—
%
 
252,097

 
2.77
%
Total held-to-maturity
—

 
—
%
 
8,391

 
2.33
%
 
78,886

 
2.61
%
 
164,820

 
2.87
%
 
—

 
—
%
 
252,097

 
2.77
%
Total debt securities
$
50,748

 
2.74
%
 
$
253,405

 
3.10
%
 
$
377,176

 
3.24
%
 
$
590,082

 
3.66
%
 
$
1,451,320

 
2.89
%
 
$
2,722,731

 
3.12
%
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

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

Other-Than-Temporary Impairment on Securities Analysis
Debt securities. In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing, management considers contractual constraints, liquidity, capital, asset/liability management and securities portfolio objectives. For debt securities with limited or inactive markets, the impact of macroeconomic conditions in the U.S. upon fair value estimates includes higher risk-adjusted discount rates and changes in credit ratings provided by NRSRO. S&P, Moody's and Fitch have all issued stable outlooks of U.S. government long-term debt and have similar credit ratings and outlooks with respect to certain long-term debt instruments issued by Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and other U.S. government agencies linked to the long-term U.S. debt.


55



All debt securities with an unrealized loss position at June 30, 2019 were purchased prior to 2019. The following table summarizes those securities and the fair market value and unrealized gain or loss at December 31, 2018 is also presented for the same securities.

 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Unrealized
Loss as a
Percent of
Fair Value
 
Fair Value
 
Unrealized
Loss
 
Unrealized
Loss as a
Percent of
Fair Value
Temporarily impaired securities purchased prior to 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
13,939

 
$
(141
)
 
(1
)%
 
$
16,315

 
$
(104
)
 
(1
)%
State and local governments
5,258

 
(27
)
 
(1
)%
 
5,093

 
(357
)
 
(7
)%
Corporate bonds
18,573

 
(23
)
 
—
 %
 
18,384

 
(220
)
 
(1
)%
Residential mortgage-backed securities
240,648

 
(1,684
)
 
(1
)%
 
262,733

 
(7,898
)
 
(3
)%
Commercial mortgage-backed securities
17,956

 
(199
)
 
(1
)%
 
18,738

 
(819
)
 
(4
)%
Total
$
296,374

 
$
(2,074
)
 
(1
)%
 
$
321,263

 
$
(9,398
)
 
(3
)%

With respect to severity, the following table provides the number of debt securities and amount of unrealized loss in the identified ranges of unrealized loss as a percent of book value at June 30, 2019:
(Dollars in thousands)
Number of
Debt
Securities
 
Unrealized
Loss
0.1% to 5.0%
131

 
$
(2,074
)

With respect to the valuation history of the impaired debt securities, the Company identified 112 securities which have been continuously impaired for the twelve months ending June 30, 2019. The valuation history of such securities in the prior year(s) was also reviewed to determine the number of months in the prior year(s) in which the identified securities were in an unrealized loss position.

The following table provides details of the 112 debt securities which have been continuously impaired for the twelve months ended June 30, 2019, including the most notable loss for any one bond in each category.

(Dollars in thousands)
Number of
Debt
Securities
 
Unrealized
Loss for
12 Months
Or More
 
Most
Notable
Loss
U.S. government and federal agency
14

 
$
(84
)
 
$
(19
)
State and local governments
7

 
(27
)
 
(13
)
Corporate bonds
4

 
(19
)
 
(11
)
Residential mortgage-backed securities
82

 
(1,661
)
 
(216
)
Commercial mortgage-backed securities
5

 
(199
)
 
(72
)
Total
112

 
$
(1,990
)
 
 








56



Based on the Company's analysis of its impaired debt securities as of June 30, 2019, the Company determined that none of such securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate changes and market spreads subsequent to acquisition. A substantial portion of the debt securities with unrealized losses at June 30, 2019 were issued by Fannie Mae, 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 impaired debt securities at June 30, 2019 have been determined by the Company to be investment grade.

Equity securities. 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 June 30, 2019, 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 and classes, 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:

 
June 30, 2019
 
December 31, 2018
 
June 30, 2018
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Residential real estate loans
$
920,715

 
11
 %
 
$
887,742

 
11
 %
 
$
835,382

 
11
 %
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Real estate
4,959,863

 
57
 %
 
4,657,561

 
57
 %
 
4,384,781

 
56
 %
Other commercial
2,076,605

 
24
 %
 
1,911,171

 
23
 %
 
1,940,435

 
25
 %
Total
7,036,468

 
81
 %
 
6,568,732

 
80
 %
 
6,325,216

 
81
 %
Consumer and other loans
 
 
 
 
 
 
 
 
 
 
 
Home equity
596,041

 
7
 %
 
544,688

 
7
 %
 
511,043

 
6
 %
Other consumer
288,553

 
3
 %
 
286,387

 
4
 %
 
277,031

 
4
 %
Total
884,594

 
10
 %
 
831,075

 
11
 %
 
788,074

 
10
 %
Loans receivable
8,841,777

 
102
 %
 
8,287,549

 
102
 %
 
7,948,672

 
102
 %
ALLL
(129,054
)
 
(2
)%
 
(131,239
)
 
(2
)%
 
(131,564
)
 
(2
)%
Loans receivable, net
$
8,712,723

 
100
 %
 
$
8,156,310

 
100
 %
 
$
7,817,108

 
100
 %


57



Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
 
 
At or for the Six Months ended
 
At or for the Three Months ended
 
At or for the Year ended
 
At or for the Six Months ended
(Dollars in thousands)
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
June 30,
2018
Other real estate owned
$
7,281

 
8,125

 
7,480

 
13,616

Accruing loans 90 days or more past due
 
 
 
 
 
 
 
Residential real estate
1,333

 
998

 
788

 
1,050

Commercial
1,639

 
1,232

 
492

 
11,200

Consumer and other
491

 
221

 
738

 
501

Total
3,463

 
2,451

 
2,018

 
12,751

Non-accrual loans
 
 
 
 
 
 
 
Residential real estate
5,744

 
6,219

 
8,021

 
6,851

Commercial
31,353

 
30,862

 
35,883

 
48,138

Consumer and other
4,098

 
3,188

 
3,348

 
3,181

Total
41,195

 
40,269

 
47,252

 
58,170

Total non-performing assets
$
51,939

 
50,845

 
56,750

 
84,537

Non-performing assets as a percentage of subsidiary assets
0.41
%
 
0.42
%
 
0.47
%
 
0.71
%
ALLL as a percentage of non-performing loans
289
%
 
304
%
 
266
%
 
186
%
Accruing loans 30-89 days past due
$
37,937

 
36,894

 
33,567

 
39,650

Accruing troubled debt restructurings
$
25,019

 
24,468

 
25,833

 
34,991

Non-accrual troubled debt restructurings
$
6,041

 
6,747

 
10,660

 
18,380

U.S. government guarantees included in non-performing assets
$
2,785

 
2,649

 
4,811

 
7,265

Interest income 1
$
1,057

 
512

 
2,340

 
1,409

______________________________
1 
Amounts 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 $51.9 million at June 30, 2019 increased $1.1 million, or 2 percent, over the prior quarter and decreased $32.6 million, or 39 percent, over the prior year second quarter. Non-performing assets as a percentage of subsidiary assets at June 30, 2019 was 0.41 percent, a decrease of 1 basis point from the prior quarter, and a decrease of 30 basis points from the prior year second quarter. Early stage delinquencies (accruing loans 30-89 days past due) of $37.9 million at June 30, 2019 increased $1.0 million from the prior quarter and decreased $1.7 million from the prior year second quarter. Early stage delinquencies as a percentage of loans at June 30, 2019 was 0.43 percent, which was a decrease of 1 basis point from prior quarter and a decrease of 7 basis points from prior year second quarter.



58



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. The Company evaluates the level of its non-performing loans, the values of the underlying real estate and other collateral, and related trends in internal and external environmental factors and net charge-offs in determining the adequacy of the ALLL. 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 and impaired loans, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Impaired Loans
Loans are designated impaired when, based upon current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement and therefore, the Company has serious doubts as to the ability of such borrowers to fulfill the contractual obligation. Impaired loans include non-performing loans (i.e., non-accrual loans and accruing loans ninety days or more past due) and accruing loans under ninety days past due where it is probable payments will not be received according to the loan agreement (e.g., troubled debt restructuring). Impaired loans totaled $102 million and $109 million as of June 30, 2019 and December 31, 2018, respectively. The ALLL includes specific valuation allowances of $108 thousand and $3.2 million of impaired loans as of June 30, 2019 and December 31, 2018, respectively.

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 the debt 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’s TDR loans of $31.1 million and $36.5 million as of June 30, 2019 and December 31, 2018, respectively, are considered impaired loans.

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 2019 was $2.5 million. The fair value of the loan collateral acquired in foreclosure during 2019 was $1.9 million. The following table sets forth the changes in OREO for the periods indicated:

 
At or for the Six Months ended
 
At or for the Three Months ended
 
At or for the Year ended
 
At or for the Six Months ended
(Dollars in thousands)
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
June 30,
2018
Balance at beginning of period
$
7,480

 
7,480

 
14,269

 
14,269

Acquisitions
—

 
—

 
187

 
187

Additions
1,914

 
1,437

 
4,924

 
1,144

Capital improvements
—

 
—

 
21

 
—

Write-downs
(144
)
 
(56
)
 
(2,727
)
 
(56
)
Sales
(1,969
)
 
(736
)
 
(9,194
)
 
(1,928
)
Balance at end of period
$
7,281

 
8,125

 
7,480

 
13,616



59



Allowance for Loan and Lease Losses
Determining the adequacy of the ALLL involves a high degree of judgment and is inevitably imprecise as the risk of loss is difficult to quantify. The ALLL methodology is designed to reasonably estimate the probable loan and lease losses within the Company’s loan portfolio. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolio, economic conditions nationally and in the local markets in which the Company operates, trends and changes in collateral values, delinquencies, non-performing assets, net charge-offs and credit-related policies and personnel. Although the Company continues to actively monitor economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the Company’s loan portfolio may adversely affect the credit risk and potential for loss to the Company.

The ALLL evaluation is well documented and approved by the Company’s Board. In addition, the policy and procedures for determining the balance of the ALLL are reviewed annually by the Company’s Board, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies.

At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The allowance consists of a specific valuation allowance component and a general valuation allowance component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. The general valuation allowance component relates to probable credit losses inherent in the balance of the loan portfolio based on historical loss experience, adjusted for changes in trends and conditions of qualitative or environmental factors.

The Bank divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit administration for further review and approval. The Company’s credit administration also determines the estimated general valuation allowance and reviews and approves the overall ALLL. The credit administration of the Company exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of the Company’s loans collectively evaluated for impairment as of each evaluation date. The Company’s credit administration documents its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the provision for loan losses and credit quality should generally move in the same direction.

The Company’s model includes fifteen bank divisions with separate management teams providing substantial local oversight to the lending and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended, a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance that further problem credits will not arise and additional loan losses incurred.

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 impaired loans is necessary to support management’s evaluation of the ALLL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit quality.

No assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL amount, or that subsequent evaluations of the loan portfolio applying management’s judgment about then current factors, including economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result in enhanced provisions for loan losses.


60



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

 
June 30, 2019
 
December 31, 2018
 
June 30, 2018
(Dollars in thousands)
ALLL
 
Percent of ALLL in
Category
 
Percent of
Loans in
Category
 
ALLL
 
Percent
of  ALLL in
Category
 
Percent
of Loans in
Category
 
ALLL
 
Percent
of  ALLL in
Category
 
Percent
of Loans in
Category
Residential real estate
$
10,695

 
8
%
 
10
%
 
$
10,631

 
8
%
 
11
%
 
$
10,903

 
8
%
 
11
%
Commercial real estate
72,447

 
56
%
 
56
%
 
72,448

 
55
%
 
56
%
 
71,245

 
54
%
 
55
%
Other commercial
36,259

 
28
%
 
24
%
 
38,160

 
29
%
 
23
%
 
38,664

 
29
%
 
24
%
Home equity
5,801

 
5
%
 
7
%
 
5,811

 
5
%
 
7
%
 
6,092

 
5
%
 
6
%
Other consumer
3,852

 
3
%
 
3
%
 
4,189

 
3
%
 
3
%
 
4,660

 
4
%
 
4
%
Total
$
129,054

 
100
%
 
100
%
 
$
131,239

 
100
%
 
100
%
 
$
131,564

 
100
%
 
100
%

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

 
At or for the Six Months ended
 
At or for the Three Months ended
 
At or for the Year ended
 
At or for the Six Months ended
(Dollars in thousands)
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
June 30,
2018
Balance at beginning of period
$
131,239

 
131,239

 
129,568

 
129,568

Provision for loan losses
57

 
57

 
9,953

 
5,513

Charge-offs
 
 
 
 
 
 
 
Residential real estate
(341
)
 
(292
)
 
(728
)
 
(47
)
Commercial loans
(1,607
)
 
(1,123
)
 
(8,514
)
 
(3,651
)
Consumer and other loans
(4,252
)
 
(1,926
)
 
(8,565
)
 
(3,913
)
Total charge-offs
(6,200
)
 
(3,341
)
 
(17,807
)
 
(7,611
)
Recoveries
 
 
 
 
 
 
 
Residential real estate
232

 
94

 
87

 
71

Commercial loans
1,793

 
755

 
5,045

 
2,051

Consumer and other loans
1,933

 
982

 
4,393

 
1,972

Total recoveries
3,958

 
1,831

 
9,525

 
4,094

Net charge-offs
(2,242
)
 
(1,510
)
 
(8,282
)
 
(3,517
)
Balance at end of period
$
129,054

 
129,786

 
131,239

 
131,564

ALLL as a percentage of total loans
1.46
%
 
1.56
%
 
1.58
%
 
1.66
%
Net charge-offs as a percentage of total loans
0.03
%
 
0.02
%
 
0.10
%
 
0.04
%

The ALLL as a percent of total loans outstanding at June 30, 2019 was 1.46 percent, which was a 10 basis points decrease compared to the prior quarter and a decrease of 20 basis points from a year ago. The decrease was attributable to stabilizing credit quality and the addition of loans from the FNB acquisition which were added to the portfolio on a fair value basis and as a result did not require an allowance at acquisition date. The Company’s ALLL of $129 million is considered adequate to absorb probable and incurred losses from any class of its loan portfolio. For the periods ended June 30, 2019 and 2018, the Company believes the ALLL 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. During 2019, net charge-offs exceeded the provision for loan losses by $2.2 million. During the same period in 2018, provision for loan losses exceeded net charge-offs by $2.0 million.

61




The Company provides commercial services to individuals, small to medium-sized businesses, community organizations and public entities from 175 locations, including 157 branches, across Montana, Idaho, Utah, Washington, Wyoming, Colorado and Arizona. 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.

Overall, the economic environment and housing markets throughout the Company’s footprint continue to show positive signs of improvement. Home prices continue to increase in all of the states within the Company’s footprint and all of the seven states continue to remain above the United States average. Three of the top ten states for house price appreciation belong to states in the Company’s footprint. Home ownership in the United States is at 64 percent, which is still approximately 5 percent less than the peak before the most recent financial crisis. The Federal Reserve Bank of Philadelphia’s composite state coincident indices projects positive growth throughout the Company’s footprint. The first quarter of 2019 was the eighth consecutive quarter the United States economy grew at or above 2.0 percent. All states in the Company’s footprint have unemployment rates below 5 percent, which reflects the Federal Reserve’s definition of full employment. Crude oil prices remain volatile, base metal prices began a downward trend in 2018 and natural gas prices, outside of winter spikes, have remained fairly stable over the last 18 months. Most agriculture commodities within the Company’s footprint remain relatively stable. The tourism industry and related lodging activity continues to be a source of strength for locations where the Company’s markets include national parks and similar recreational areas. In general, the Company sees positive signs in the various economic indices; however, given the significant recession experienced during the late 2000s and the current lack of housing supply within the Company’s footprint, the Company is cautiously optimistic about the housing market. The Company will continue to actively monitor the economy’s impact on its lending portfolio.

In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s construction loan portfolio (i.e., regulatory classification), including residential construction and land, lot and other construction loans, the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current information, including appraisals or evaluations (new or updated) of the underlying collateral, expected cash flows and the timing thereof, as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the construction loan. Construction loans were 13 percent and 13 percent of the Company’s total loan portfolio and accounted for 24 percent and 21 percent of the Company’s non-accrual loans at June 30, 2019 and December 31, 2018, respectively. Collateral securing construction loans includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (e.g., multi-acre parcels and individual lots, with and without shorelines).

The Company’s ALLL consisted of the following components as of the dates indicated: 

(Dollars in thousands)
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
June 30,
2018
Specific valuation allowance
$
108

 
702

 
3,223

 
2,252

General valuation allowance
128,946

 
129,084

 
128,016

 
129,312

Total ALLL
$
129,054

 
129,786

 
131,239

 
131,564


During 2019, the ALLL decreased by $2.2 million, the net result of a $3.1 million decrease in the specific valuation allowance and a $930 thousand increase in the general valuation allowance. The specific valuation allowance decreased as the result of a $13.6 million decrease in loans individually evaluated for impairment with a specific impairment. The increase in the general valuation allowance since the prior year end was a result of changes in qualitative or environmental factors and an increase of $313 million in loans collectively evaluated for impairment, excluding the current year acquisition.

For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 3 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

62



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 and classes 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)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
Custom and owner occupied construction
$
140,186

 
$
126,820

 
$
126,595

 
$
138,171

 
11
 %
 
11
 %
 
1
 %
Pre-sold and spec construction
171,464

 
135,137

 
121,938

 
96,008

 
27
 %
 
41
 %
 
79
 %
Total residential construction
311,650

 
261,957

 
248,533

 
234,179

 
19
 %
 
25
 %
 
33
 %
Land development
120,052

 
126,417

 
137,814

 
108,641

 
(5
)%
 
(13
)%
 
11
 %
Consumer land or lots
128,544

 
125,818

 
127,775

 
110,846

 
2
 %
 
1
 %
 
16
 %
Unimproved land
74,244

 
75,113

 
83,579

 
72,150

 
(1
)%
 
(11
)%
 
3
 %
Developed lots for operative builders
14,117

 
16,171

 
17,061

 
12,708

 
(13
)%
 
(17
)%
 
11
 %
Commercial lots
57,447

 
35,511

 
34,096

 
27,661

 
62
 %
 
68
 %
 
108
 %
Other construction
453,782

 
454,965

 
520,005

 
478,037

 
—
 %
 
(13
)%
 
(5
)%
Total land, lot, and other construction
848,186

 
833,995

 
920,330

 
810,043

 
2
 %
 
(8
)%
 
5
 %
Owner occupied
1,418,190

 
1,367,530

 
1,343,563

 
1,302,737

 
4
 %
 
6
 %
 
9
 %
Non-owner occupied
1,780,988

 
1,662,390

 
1,605,960

 
1,495,532

 
7
 %
 
11
 %
 
19
 %
Total commercial real estate
3,199,178

 
3,029,920

 
2,949,523

 
2,798,269

 
6
 %
 
8
 %
 
14
 %
Commercial and industrial
1,024,828

 
922,124

 
907,340

 
909,688

 
11
 %
 
13
 %
 
13
 %
Agriculture
697,893

 
641,146

 
646,822

 
661,218

 
9
 %
 
8
 %
 
6
 %
1st lien
1,154,221

 
1,102,920

 
1,108,227

 
1,072,917

 
5
 %
 
4
 %
 
8
 %
Junior lien
53,055

 
54,964

 
56,689

 
64,821

 
(3
)%
 
(6
)%
 
(18
)%
Total 1-4 family
1,207,276

 
1,157,884

 
1,164,916

 
1,137,738

 
4
 %
 
4
 %
 
6
 %
Multifamily residential
278,539

 
268,156

 
247,457

 
218,061

 
4
 %
 
13
 %
 
28
 %
Home equity lines of credit
592,355

 
557,895

 
539,938

 
500,036

 
6
 %
 
10
 %
 
18
 %
Other consumer
167,964

 
163,568

 
165,865

 
164,288

 
3
 %
 
1
 %
 
2
 %
Total consumer
760,319

 
721,463

 
705,803

 
664,324

 
5
 %
 
8
 %
 
14
 %
States and political subdivisions
454,085

 
398,848

 
404,671

 
419,025

 
14
 %
 
12
 %
 
8
 %
Other
114,534

 
119,966

 
125,310

 
149,915

 
(5
)%
 
(9
)%
 
(24
)%
Total loans receivable, including loans held for sale
8,896,488

 
8,355,459

 
8,320,705

 
8,002,460

 
6
 %
 
7
 %
 
11
 %
Less loans held for sale 1
(54,711
)
 
(29,389
)
 
(33,156
)
 
(53,788
)
 
86
 %
 
65
 %
 
2
 %
Total loans receivable
$
8,841,777

 
$
8,326,070

 
$
8,287,549

 
$
7,948,672

 
6
 %
 
7
 %
 
11
 %
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.

63



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)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Jun 30,
2019
Jun 30,
2019
Jun 30,
2019
Custom and owner occupied construction
$
283

 
—

 
—

 
48

 
—

 
283

 
—

Pre-sold and spec construction
1,261

 
456

 
463

 
492

 
1,261

 
—

 
—

Total residential construction
1,544

 
456

 
463

 
540

 
1,261

 
283

 
—

Land development
1,272

 
2,272

 
2,166

 
7,564

 
672

 
—

 
600

Consumer land or lots
1,075

 
1,126

 
1,428

 
1,593

 
615

 
—

 
460

Unimproved land
8,864

 
9,222

 
9,338

 
9,962

 
7,332

 
—

 
1,532

Developed lots for operative builders
—

 
67

 
68

 
126

 
—

 
—

 
—

Commercial lots
575

 
663

 
1,046

 
1,059

 
—

 
—

 
575

Other construction
241

 
111

 
120

 
155

 
—

 
131

 
110

Total land, lot and other construction
12,027

 
13,461

 
14,166

 
20,459

 
8,619

 
131

 
3,277

Owner occupied
6,998

 
7,229

 
5,940

 
12,891

 
5,207

 
219

 
1,572

Non-owner occupied
7,198

 
7,368

 
10,567

 
15,337

 
7,198

 
—

 
—

Total commercial real estate
14,196

 
14,597

 
16,507

 
28,228

 
12,405

 
219

 
1,572

Commercial and industrial
5,690

 
3,893

 
3,914

 
7,692

 
5,358

 
118

 
214

Agriculture
4,228

 
4,488

 
7,040

 
10,497

 
3,192

 
886

 
150

1st lien
10,211

 
10,279

 
10,290

 
9,725

 
7,077

 
1,383

 
1,751

Junior lien
592

 
582

 
565

 
3,257

 
520

 
—

 
72

Total 1-4 family
10,803

 
10,861

 
10,855

 
12,982

 
7,597

 
1,383

 
1,823

Multifamily residential
—

 
—

 
—

 
634

 
—

 
—

 
—

Home equity lines of credit
2,474

 
2,288

 
2,770

 
3,112

 
2,104

 
182

 
188

Other consumer
597

 
453

 
456

 
393

 
352

 
188

 
57

Total consumer
3,071

 
2,741

 
3,226

 
3,505

 
2,456

 
370

 
245

Other
380

 
348

 
579

 
—

 
307

 
73

 
—

Total
$
51,939

 
50,845

 
56,750

 
84,537

 
41,195

 
3,463

 
7,281




64



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)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
Custom and owner occupied construction
$
49

 
$
282

 
$
1,661

 
$
1,525

 
(83
)%
 
(97
)%
 
(97
)%
Pre-sold and spec construction
219

 
553

 
887

 
721

 
(60
)%
 
(75
)%
 
(70
)%
Total residential construction
268

 
835

 
2,548

 
2,246

 
(68
)%
 
(89
)%
 
(88
)%
Land development
1,990

 
—

 
228

 
728

 
n/m

 
773
 %
 
173
 %
Consumer land or lots
206

 
510

 
200

 
471

 
(60
)%
 
3
 %
 
(56
)%
Unimproved land
658

 
685

 
579

 
1,450

 
(4
)%
 
14
 %
 
(55
)%
Developed lots for operative builders
—

 
4

 
122

 
—

 
(100
)%
 
(100
)%
 
n/m

Commercial lots
—

 
331

 
203

 
—

 
(100
)%
 
(100
)%
 
n/m

Other construction
—

 
1,234

 
4,170

 
—

 
(100
)%
 
(100
)%
 
n/m

Total land, lot and other construction
2,854

 
2,764

 
5,502

 
2,649

 
3
 %
 
(48
)%
 
8
 %
Owner occupied
5,322

 
4,463

 
2,981

 
3,571

 
19
 %
 
79
 %
 
49
 %
Non-owner occupied
11,700

 
6,604

 
1,245

 
8,414

 
77
 %
 
840
 %
 
39
 %
Total commercial real estate
17,022

 
11,067

 
4,226

 
11,985

 
54
 %
 
303
 %
 
42
 %
Commercial and industrial
3,006

 
4,070

 
3,374

 
5,745

 
(26
)%
 
(11
)%
 
(48
)%
Agriculture
3,125

 
5,709

 
6,455

 
5,288

 
(45
)%
 
(52
)%
 
(41
)%
1st lien
2,776

 
7,179

 
5,384

 
5,132

 
(61
)%
 
(48
)%
 
(46
)%
Junior lien
1,302

 
583

 
118

 
989

 
123
 %
 
1,003
 %
 
32
 %
Total 1-4 family
4,078

 
7,762

 
5,502

 
6,121

 
(47
)%
 
(26
)%
 
(33
)%
Multifamily residential
1,598

 
—

 
—

 
—

 
n/m

 
n/m

 
n/m

Home equity lines of credit
3,931

 
2,925

 
3,562

 
3,940

 
34
 %
 
10
 %
 
—
 %
Other consumer
1,683

 
1,357

 
1,650

 
1,665

 
24
 %
 
2
 %
 
1
 %
Total consumer
5,614

 
4,282

 
5,212

 
5,605

 
31
 %
 
8
 %
 
—
 %
States and political subdivisions
—

 
—

 
229

 
—

 
n/m

 
(100
)%
 
n/m

Other
372

 
405

 
519

 
11

 
(8
)%
 
(28
)%
 
3,282
 %
Total
$
37,937

 
$
36,894

 
$
33,567

 
$
39,650

 
3
 %
 
13
 %
 
(4
)%
______________________________
n/m - not measurable



65



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)
Jun 30,
2019
 
Mar 31,
2019
 
Dec 31,
2018
 
Jun 30,
2018
 
Jun 30,
2019
 
Jun 30,
2019
Pre-sold and spec construction
$
(6
)
 
(4
)
 
(352
)
 
(344
)
 
—

 
6

Land development
15

 
23

 
(116
)
 
(107
)
 
42

 
27

Consumer land or lots
(2
)
 
(20
)
 
(146
)
 
(92
)
 
37

 
39

Unimproved land
(54
)
 
(9
)
 
(445
)
 
(144
)
 
—

 
54

Developed lots for operative builders
(18
)
 
—

 
33

 
33

 
—

 
18

Commercial lots
(3
)
 
(2
)
 
1

 
4

 
—

 
3

Other construction
(32
)
 
—

 
(19
)
 
—

 
9

 
41

Total land, lot and other construction
(94
)
 
(8
)
 
(692
)
 
(306
)
 
88

 
182

Owner occupied
139

 
75

 
1,320

 
1,000

 
226

 
87

Non-owner occupied
7

 
30

 
853

 
(4
)
 
130

 
123

Total commercial real estate
146

 
105

 
2,173

 
996

 
356

 
210

Commercial and industrial
37

 
(4
)
 
2,449

 
1,471

 
555

 
518

Agriculture
(32
)
 
14

 
16

 
44

 
67

 
99

1st lien
56

 
198

 
577

 
(193
)
 
298

 
242

Junior lien
(222
)
 
(52
)
 
(371
)
 
(34
)
 
29

 
251

Total 1-4 family
(166
)
 
146

 
206

 
(227
)
 
327

 
493

Multifamily residential
—

 
—

 
(649
)
 
(6
)
 
—

 
—

Home equity lines of credit
(11
)
 
(5
)
 
(97
)
 
(38
)
 
13

 
24

Other consumer
313

 
223

 
261

 
111

 
470

 
157

Total consumer
302

 
218

 
164

 
73

 
483

 
181

Other
2,055

 
1,043

 
4,967

 
1,816

 
4,324

 
2,269

Total
$
2,242

 
1,510

 
8,282

 
3,517

 
6,200

 
3,958





66



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:

 
June 30, 2019
 
December 31, 2018
 
June 30, 2018
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Non-interest bearing deposits
$
3,265,077

 
33
%
 
$
3,001,178

 
32
%
 
$
2,914,885

 
31
%
NOW and DDA accounts
2,487,806

 
25
%
 
2,391,307

 
25
%
 
2,354,214

 
25
%
Savings accounts
1,412,046

 
14
%
 
1,346,790

 
14
%
 
1,330,637

 
14
%
Money market deposit accounts
1,647,372

 
17
%
 
1,684,284

 
18
%
 
1,723,681

 
18
%
Certificate accounts
897,625

 
9
%
 
901,484

 
9
%
 
927,608

 
10
%
Wholesale deposits
144,949

 
2
%
 
168,724

 
2
%
 
172,550

 
2
%
Total interest bearing deposits
6,589,798

 
67
%
 
6,492,589

 
68
%
 
6,508,690

 
69
%
Total deposits
$
9,854,875

 
100
%
 
$
9,493,767

 
100
%
 
$
9,423,575

 
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.

67



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 Six Months ended
 
At or for the Year ended
(Dollars in thousands)
June 30,
2019
 
December 31,
2018
Repurchase agreements
 
 
 
Amount outstanding at end of period
$
494,651

 
396,151

Weighted interest rate on outstanding amount
0.84
%
 
0.87
%
Maximum outstanding at any month-end
$
493,290

 
408,754

Average balance
$
424,505

 
383,791

Weighted-average interest rate
0.80
%
 
0.59
%

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 1 capital up to a certain limit. The Company also has subordinated debt that qualifies as Tier 2 capital. The subordinated debentures outstanding as of June 30, 2019 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 un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. The Company does not anticipate any material losses as a result of these transactions.

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.”


68



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)
June 30,
2019
 
December 31,
2018
FHLB advances
 
 
 
Borrowing capacity
$
2,293,958

 
2,103,860

Amount utilized
(323,762
)
 
(444,749
)
Amount available
$
1,970,196

 
1,659,111

FRB discount window
 
 
 
Borrowing capacity
$
938,540

 
875,936

Amount utilized
—

 
—

Amount available
$
938,540

 
875,936

Unsecured lines of credit available
$
230,000

 
230,000

Unencumbered debt securities
 
 
 
U.S. government and federal agency
$
19,487

 
23,649

U.S. government sponsored enterprises
98,599

 
108,952

State and local governments
508,239

 
618,613

Corporate bonds
179,684

 
290,817

Residential mortgage-backed securities
161,755

 
220,653

Commercial mortgage-backed securities
268,666

 
273,439

Total unencumbered debt securities
$
1,236,430

 
1,536,123



69



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 86,637,394 have been issued as of June 30, 2019. The Company also has the capacity to issue 1,000,000 shares of preferred stock of which none have been issued as of June 30, 2019. 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 implemented final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rules implemented certain regulatory amendments 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 and substantially amended the regulatory risk-based capital rules applicable to the Company. 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 June 30, 2019, 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 June 30, 2019:
 
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 actual regulatory ratios
14.30
%
 
13.05
%
 
13.05
%
 
11.22
%
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
%

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, 4.63 percent in Colorado and 4.9 percent in Arizona. Washington and Wyoming do not impose a corporate income tax.

Income tax expense for the six months ended June 30, 2019 and 2018 was $24.2 million and $17.9 million, respectively. The Company’s effective tax rate for the six months ended June 30, 2019 and 2018 was 19.3 percent and 17.7 percent, respectively. The 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. Income from tax-exempt debt securities, loans and leases was $24.6 million and $28.0 million for the six months ended June 30, 2019 and 2018, respectively. Benefits from federal income tax credits were $4.8 million and $3.7 million for the six months ended June 30, 2019 and 2018, respectively.


70



The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of 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 $18.8 million in Qualified Zone Academy and 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
2019
$
4,153

 
6,792

 
850

 
11,795

2020
4,475

 
7,619

 
813

 
12,907

2021
4,712

 
7,407

 
759

 
12,878

2022
3,944

 
7,329

 
695

 
11,968

2023
3,348

 
7,218

 
663

 
11,229

Thereafter
1,416

 
30,532

 
1,565

 
33,513

 
$
22,048

 
66,897

 
5,345

 
94,290


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).


71



 
Three Months ended
 
Six Months ended
 
June 30, 2019
 
June 30, 2019
(Dollars in thousands)
Average
Balance
 
Interest and
Dividends
 
Average
Yield/
Rate
 
Average
Balance
 
Interest and
Dividends
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Residential real estate loans
$
938,467

 
$
11,410

 
4.86
%
 
$
927,953

 
$
22,189

 
4.78
%
Commercial loans 1
6,803,541

 
89,191

 
5.26
%
 
6,664,637

 
173,804

 
5.26
%
Consumer and other loans
868,733

 
11,040

 
5.10
%
 
853,954

 
21,487

 
5.07
%
Total loans 2
8,610,741

 
111,641

 
5.20
%
 
8,446,544

 
217,480

 
5.19
%
Tax-exempt investment securities 3
957,177

 
9,982

 
4.17
%
 
958,864

 
19,932

 
4.16
%
Taxable investment securities 4
1,911,173

 
14,246

 
2.98
%
 
1,878,606

 
27,975

 
2.98
%
Total earning assets
11,479,091

 
135,869

 
4.75
%
 
11,284,014

 
265,387

 
4.74
%
Goodwill and intangibles
351,466

 
 
 
 
 
344,752

 
 
 
 
Non-earning assets
584,459

 
 
 
 
 
552,583

 
 
 
 
Total assets
$
12,415,016

 
 
 
 
 
$
12,181,349

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
$
3,084,404

 
$
—

 
—
%
 
$
3,014,476

 
$
—

 
—
%
NOW and DDA accounts
2,394,505

 
985

 
0.17
%
 
2,357,920

 
1,946

 
0.17
%
Savings accounts
1,389,548

 
253

 
0.07
%
 
1,374,759

 
487

 
0.07
%
Money market deposit accounts
1,662,545

 
1,125

 
0.27
%
 
1,676,348

 
2,135

 
0.26
%
Certificate accounts
902,134

 
2,222

 
0.99
%
 
903,562

 
4,236

 
0.95
%
Total core deposits
9,433,136

 
4,585

 
0.19
%
 
9,327,065

 
8,804

 
0.19
%
Wholesale deposits 5
162,495

 
1,039

 
2.56
%
 
165,909

 
2,161

 
2.63
%
FHLB advances
476,204

 
3,847

 
3.20
%
 
414,830

 
6,902

 
3.31
%
Repurchase agreements and other borrowed funds
593,990

 
2,618

 
1.77
%
 
575,262

 
5,126

 
1.80
%
Total interest bearing liabilities
10,665,825

 
12,089

 
0.45
%
 
10,483,066

 
22,993

 
0.44
%
Other liabilities
109,480

 
 
 
 
 
112,793

 
 
 
 
Total liabilities
10,775,305

 
 
 
 
 
10,595,859

 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
860

 
 
 
 
 
853

 
 
 
 
Paid-in capital
1,110,138

 
 
 
 
 
1,080,861

 
 
 
 
Retained earnings
500,015

 
 
 
 
 
485,898

 
 
 
 
Accumulated other comprehensive income
28,698

 
 
 
 
 
17,878

 
 
 
 
Total stockholders’ equity
1,639,711

 
 
 
 
 
1,585,490

 
 
 
 
Total liabilities and stockholders’ equity
$
12,415,016

 
 
 
 
 
$
12,181,349

 
 
 
 
Net interest income (tax-equivalent)
 
 
$
123,780

 
 
 
 
 
$
242,394

 
 
Net interest spread (tax-equivalent)
 
 
 
 
4.30
%
 
 
 
 
 
4.30
%
Net interest margin (tax-equivalent)
 
 
 
 
4.33
%
 
 
 
 
 
4.33
%
 
______________________________
1 
Includes tax effect of $1.1 million and $2.2 million on tax-exempt municipal loan and lease income for the three and six months ended June 30, 2019, respectively.
2 
Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period.
3 
Includes tax effect of $2.0 million and $4.1 million on tax-exempt debt securities income for the three and six months ended June 30, 2019, respectively.
4 
Includes tax effect of $294 thousand and $587 thousand on federal income tax credits for the three and six months ended June 30, 2019, respectively.
5 
Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.

72



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.
 
Year ended June 30,
 
2019 vs. 2018
 
Increase (Decrease) Due to:
(Dollars in thousands)
Volume
 
Rate
 
Net
Interest income
 
 
 
 
 
Residential real estate loans
$
2,245

 
1,010

 
3,255

Commercial loans (tax-equivalent)
19,774

 
10,722

 
30,496

Consumer and other loans
2,755

 
736

 
3,491

Investment securities (tax-equivalent)
(771
)
 
347

 
(424
)
Total interest income
24,003

 
12,815

 
36,818

Interest expense
 
 
 
 
 
NOW and DDA accounts
163

 
(44
)
 
119

Savings accounts
41

 
23

 
64

Money market deposit accounts
(13
)
 
572

 
559

Certificate accounts
(17
)
 
1,342

 
1,325

Wholesale deposits
173

 
192

 
365

FHLB advances
2,803

 
(503
)
 
2,300

Repurchase agreements and other borrowed funds
435

 
891

 
1,326

Total interest expense
3,585

 
2,473

 
6,058

Net interest income (tax-equivalent)
$
20,418

 
10,342

 
30,760


Net interest income (tax-equivalent) increased $30.8 million for the six months ended June 30, 2019 compared to the same period in 2018. The interest income for the first six months of 2019 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. Furthermore, increases in interest rates on existing variable rate loans and new loans also increased the loan interest income. Total interest expense increased from the prior year primarily from increased balances of both FHLB advances and deposits, coupled with interest rate increases in 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.


73



Item 3.
Quantitative and Qualitative Disclosure about Market Risk

The Company’s assessment of market risk as of June 30, 2019 indicates there are no material changes in the quantitative and qualitative disclosures from those in the 2018 Annual Report.


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 June 30, 2019. 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 second quarter of 2019, 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 Company believes there have been no material changes from risk factors previously disclosed in the 2018 Annual Report. The risks and uncertainties described in the 2018 Annual Report should be carefully reviewed. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that the Company does not currently know about or that the Company currently believes are immaterial, or that the Company has not predicted, may also harm its business operations or adversely affect the Company. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition, operating results or liquidity could be adversely affected.


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

(a)
Not Applicable

(b)
Not Applicable

(c)
Not Applicable



74



Item 3.
Defaults upon Senior Securities

(a)
Not Applicable

(b)
Not Applicable


Item 4.
Mine Safety Disclosures

Not Applicable


Item 5.
Other Information

(a)
Not Applicable

(b)
Not Applicable


Item 6. Exhibits
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

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

75



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.
 
 
 
 
August 2, 2019
/s/ Randall M. Chesler
 
 
Randall M. Chesler
 
 
President and CEO
 
 
 
 
August 2, 2019
/s/ Ron J. Copher
 
 
Ron J. Copher
 
 
Executive Vice President and CFO
 



76