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

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________             
Commission file number 000-18911
____________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________
Montana81-0519541
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
49 Commons LoopKalispell,Montana59901
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueGBCINASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒ Yes    ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ Yes    ☒  No
The number of shares of Registrant’s common stock outstanding on October 15, 2020 was 95,414,850. No preferred shares are issued or outstanding.



TABLE OF CONTENTS
 


 Page
Part I. Financial Information
Item 1 – Financial Statements




ABBREVIATIONS/ACRONYMS

 

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






GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Dollars in thousands, except per share data)September 30,
2020		December 31,
2019
Assets
Cash on hand and in banks$249,245 198,639 
Federal funds sold590 — 
Interest bearing cash deposits520,044 132,322 
Cash and cash equivalents769,879 330,961 
Debt securities, available-for-sale4,125,548 2,575,252 
Debt securities, held-to-maturity193,509 224,611 
Total debt securities4,319,057 2,799,863 
Loans held for sale, at fair value147,937 69,194 
Loans receivable11,618,731 9,512,810 
Allowance for credit losses(164,552)(124,490)
Loans receivable, net11,454,179 9,388,320 
Premises and equipment, net326,925 310,309 
Other real estate owned5,361 5,142 
Accrued interest receivable91,393 56,047 
Deferred tax asset— 2,037 
Core deposit intangible, net58,121 63,286 
Goodwill514,013 456,418 
Non-marketable equity securities10,366 11,623 
Bank-owned life insurance123,095 109,428 
Other assets105,741 81,371 
Total assets$17,926,067 13,683,999 
Liabilities
Non-interest bearing deposits$5,479,311 3,696,627 
Interest bearing deposits8,820,577 7,079,830 
Securities sold under agreements to repurchase965,668 569,824 
Federal Home Loan Bank advances7,318 38,611 
Other borrowed funds32,967 28,820 
Subordinated debentures139,918 139,914 
Accrued interest payable3,951 4,686 
Deferred tax liability17,227 — 
Other liabilities204,041 164,954 
Total liabilities15,670,978 11,723,266 
Commitments and Contingent Liabilities
Stockholders’ Equity
Preferred shares, $0.01 par value per share, 1,000,000 shares authorized, none issued or outstanding
— — 
Common stock, $0.01 par value per share, 117,187,500 shares authorized
954 923 
Paid-in capital1,493,928 1,378,534 
Retained earnings - substantially restricted629,109 541,050 
Accumulated other comprehensive income131,098 40,226 
Total stockholders’ equity2,255,089 1,960,733 
Total liabilities and stockholders’ equity$17,926,067 13,683,999 
Number of common stock shares issued and outstanding95,413,743 92,289,750 
See accompanying notes to unaudited condensed consolidated financial statements.
4


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 Three Months endedNine Months ended
(Dollars in thousands, except per share data)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Interest Income
Investment securities$25,381 21,357 72,228 64,600 
Residential real estate loans11,592 12,156 35,216 34,345 
Commercial loans109,514 97,224 314,541 268,806 
Consumer and other loans11,000 11,658 33,771 33,145 
Total interest income157,487 142,395 455,756 400,896 
Interest Expense
Deposits3,952 6,214 14,120 17,179 
Securities sold under agreements to repurchase886 999 2,783 2,687 
Federal Home Loan Bank advances70 2,035 684 8,937 
Other borrowed funds
173 47 473 123 
Subordinated debentures1,003 1,652 3,705 5,014 
Total interest expense6,084 10,947 21,765 33,940 
Net Interest Income151,403 131,448 433,991 366,956 
Credit loss expense2,869 — 39,165 57 
Net interest income after credit loss expense
148,534 131,448 394,826 366,899 
Non-Interest Income
Service charges and other fees13,404 15,138 38,790 53,178 
Miscellaneous loan fees and charges2,084 1,775 5,051 3,934 
Gain on sale of loans35,516 10,369 73,236 23,929 
Gain on sale of debt securities24 13,811 1,015 14,158 
Other income2,639 1,956 10,071 7,158 
Total non-interest income53,667 43,049 128,163 102,357 
Non-Interest Expense
Compensation and employee benefits64,866 62,509 182,507 167,210 
Occupancy and equipment9,369 8,731 27,945 25,348 
Advertising and promotions2,779 2,719 7,404 7,874 
Data processing5,597 4,466 15,921 12,420 
Other real estate owned186 166 373 496 
Regulatory assessments and insurance1,495 593 3,622 3,726 
Loss on termination of hedging activities— 13,528 — 13,528 
Core deposit intangibles amortization2,612 2,360 7,758 5,919 
Other expenses18,786 15,603 50,229 43,154 
Total non-interest expense105,690 110,675 295,759 279,675 
Income Before Income Taxes96,511 63,822 227,230 189,581 
Federal and state income tax expense18,754 12,212 42,690 36,447 
Net Income$77,757 51,610 184,540 153,134 
Basic earnings per share$0.81 0.57 1.95 1.76 
Diluted earnings per share$0.81 0.57 1.95 1.76 
Dividends declared per share$0.30 0.29 0.88 0.82 
Average outstanding shares - basic95,411,656 90,294,811 94,704,198 86,911,402 
Average outstanding shares - diluted95,442,576 90,449,195 94,747,894 87,082,178 

See accompanying notes to unaudited condensed consolidated financial statements.
5


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 Three Months endedNine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Net Income$77,757 51,610 184,540 153,134 
Other Comprehensive Income, Net of Tax
Unrealized gains on available-for-sale securities
1,693 11,113 123,262 87,442 
Reclassification adjustment for gains included in net income
(24)(13,811)(1,014)(14,166)
Net unrealized gains (losses) on available-for-sale securities
1,669 (2,698)122,248 73,276 
Tax effect(424)684 (30,979)(18,568)
Net of tax amount1,245 (2,014)91,269 54,708 
Unrealized losses on derivatives used for cash flow hedges
(76)(1,393)(532)(7,047)
Reclassification adjustment for losses included in net income
— 10,315 — 10,816 
Net unrealized (losses) gains on derivatives used for cash flow hedges
(76)8,922 (532)3,769 
Tax effect20 (2,261)135 (955)
Net of tax amount(56)6,661 (397)2,814 
Total other comprehensive income, net of tax
1,189 4,647 90,872 57,522 
Total Comprehensive Income$78,946 56,257 275,412 210,656 


























See accompanying notes to unaudited condensed consolidated financial statements.
6


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
Three Months ended September 30, 2020 and 2019
 
(Dollars in thousands, except per share data)Common StockPaid-in CapitalRetained
Earnings
Substantially Restricted		Accumulated
Other Compre-
hensive Income		 
SharesAmountTotal
Balance at July 1, 201986,637,394 $866 1,139,289 503,773 43,448 1,687,376 
Net income— — — 51,610 — 51,610 
Other comprehensive income— — — — 4,647 4,647 
Cash dividends declared ($0.29 per share)
— — — (26,784)— (26,784)
Stock issued in connection with acquisitions
5,473,276 55 229,330 — — 229,385 
Stock issuances under stock incentive plans
69,948 1 (1)— — — 
Stock-based compensation and related taxes
— — 7,167 — — 7,167 
Balance at September 30, 201992,180,618 $922 1,375,785 528,599 48,095 1,953,401 
Balance at July 1, 202095,409,061 $954 1,492,817 580,035 129,909 2,203,715 
Net income— — — 77,757 — 77,757 
Other comprehensive income— — — — 1,189 1,189 
Cash dividends declared ($0.30 per share)
— — — (28,683)— (28,683)
Stock issuances under stock incentive plans
4,682 — — — — — 
Stock-based compensation and related taxes
— — 1,111 — — 1,111 
Balance at September 30, 202095,413,743 $954 1,493,928 629,109 131,098 2,255,089 


















See accompanying notes to unaudited condensed consolidated financial statements.
7



GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
Nine Months ended September 30, 2020 and 2019
 
(Dollars in thousands, except per share data)Common StockPaid-in CapitalRetained
Earnings
Substantially Restricted		Accumulated
Other Compre-
hensive (Loss) Income		 
SharesAmountTotal
Balance at January 1, 201984,521,692 $845 1,051,253 473,183 (9,427)1,515,854 
Net income— — — 153,134 — 153,134 
Other comprehensive income— — — — 57,522 57,522 
Cash dividends declared ($0.82 per share)
— — — (72,260)— (72,260)
Stock issued in connection with acquisitions
7,519,617 75 316,463 — — 316,538 
Stock issuances under stock incentive plans
139,309 2 (2)— — — 
Stock-based compensation and related taxes
— — 8,071 — — 8,071 
Cumulative-effect of accounting changes
— — — (25,458)— (25,458)
Balance at September 30, 201992,180,618 $922 1,375,785 528,599 48,095 1,953,401 
Balance at January 1, 202092,289,750 $923 1,378,534 541,050 40,226 1,960,733 
Net income— — — 184,540 — 184,540 
Other comprehensive income— — — — 90,872 90,872 
Cash dividends declared ($0.88 per share)
— — — (84,134)— (84,134)
Stock issued in connection with acquisitions
3,007,044 30 112,103 — — 112,133 
Stock issuances under stock incentive plans
116,949 1 (1)— — — 
Stock-based compensation and related taxes
— — 3,292 — — 3,292 
Cumulative-effect of accounting changes
— — — (12,347)— (12,347)
Balance at September 30, 202095,413,743 $954 1,493,928 629,109 131,098 2,255,089 











See accompanying notes to unaudited condensed consolidated financial statements.
8


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Nine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019
Operating Activities
Net income$184,540 153,134 
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense39,165 57 
Net amortization of debt securities10,830 11,687 
Net accretion of purchase accounting adjustments
and deferred loan fees and costs		(23,369)(2,680)
Amortization of debt modification costs— 4,630 
Origination of loans held for sale(1,393,224)(671,038)
Proceeds from loans held for sale1,400,697 633,085 
Gain on sale of loans(73,236)(23,929)
Gain on sale of debt securities(1,015)(14,158)
Bank-owned life insurance income, net(2,059)(1,629)
Stock-based compensation, net of tax benefits2,829 6,554 
Depreciation and amortization of premises and equipment15,124 13,713 
Gain on sale and write-downs of other real estate owned, net(64)(288)
Amortization of core deposit intangibles7,758 5,919 
Amortization of investments in variable interest entities8,244 6,767 
Net increase in accrued interest receivable(33,558)(5,348)
Net increase in other assets(22,729)(367)
Net (decrease) increase in accrued interest payable(861)61 
Net decrease in other liabilities(5,315)(1,730)
Net cash provided by operating activities113,757 114,440 
Investing Activities
Sales of available-for-sale debt securities— 711,268 
Maturities, prepayments and calls of available-for-sale debt securities545,191 457,299 
Purchases of available-for-sale debt securities(1,839,308)(839,835)
Maturities, prepayments and calls of held-to-maturity debt securities29,530 48,940 
Principal collected on loans2,978,796 2,497,073 
Loan originations(4,627,653)(2,900,692)
Net additions to premises and equipment(8,140)(14,230)
Proceeds from sale of other real estate owned2,140 2,960 
Proceeds from redemption of non-marketable equity securities76,275 115,436 
Purchases of non-marketable equity securities(71,397)(93,397)
Investments in variable interest entities(7,975)(7,956)
Net cash received from acquisitions43,713 79,334 
Net cash (used in) provided by investing activities(2,878,828)56,200 




See accompanying notes to unaudited condensed consolidated financial statements.
9


GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 Nine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019
Financing Activities
Net increase in deposits$2,920,429 377,986 
Net increase in securities sold under agreements to repurchase388,595 161,191 
Net decrease in short-term Federal Home Loan Bank advances(30,000)(285,000)
Proceeds from long-term Federal Home Loan Bank advances30,000 — 
Repayments of long-term Federal Home Loan Bank advances(31,271)(151,073)
Net increase in other borrowed funds463 97 
Cash dividends paid(73,999)(70,970)
Tax withholding payments for stock-based compensation(1,023)(277)
Proceeds from stock option exercises795 — 
Net cash provided by financing activities3,203,989 31,954 
Net increase in cash, cash equivalents and restricted cash438,918 202,594 
Cash, cash equivalents and restricted cash at beginning of period330,961 203,790 
Cash, cash equivalents and restricted cash at end of period$769,879 406,384 
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest$22,626 33,878 
Cash paid during the period for income taxes43,944 33,032 
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Sale and refinancing of other real estate owned$215 7 
Transfer of loans to other real estate owned2,062 2,347 
Right-of-use assets obtained in exchange for operating lease liabilities7,343 3,910 
Dividends declared during the period but not paid28,799 26,874 
Acquisitions
Fair value of common stock shares issued112,133 316,538 
Cash consideration13,721 16,424 
Fair value of assets acquired745,420 1,190,267 
Liabilities assumed619,565 1,024,141 













See accompanying notes to unaudited condensed consolidated financial statements.
10


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

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

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

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

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

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

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


11


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

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

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

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

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

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

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

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


12


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

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

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

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

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

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

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


13


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

For additional information relating to loans, see Note 3.

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

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

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

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

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


14


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

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

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

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

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

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


15


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

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

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

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

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


16


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

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

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

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

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


17


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

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

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

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

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

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

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

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

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

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

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Note 2. Debt Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s debt securities:
 September 30, 2020
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Available-for-sale
U.S. government and federal agency$40,082 297 (239)40,140 
U.S. government sponsored enterprises9,767 58 — 9,825 
State and local governments1,192,905 82,509 (38)1,275,376 
Corporate bonds347,400 13,647 (23)361,024 
Residential mortgage-backed securities1,255,016 21,551 (709)1,275,858 
Commercial mortgage-backed securities1,104,252 59,075 (2)1,163,325 
Total available-for-sale$3,949,422 177,137 (1,011)4,125,548 
Held-to-maturity
State and local governments$193,509 13,068 — 206,577 
Total held-to-maturity$193,509 13,068 — 206,577 

 December 31, 2019
(Dollars in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
Available-for-sale
U.S. government and federal agency$20,061 48 (65)20,044 
U.S. government sponsored enterprises42,724 953 — 43,677 
State and local governments679,784 22,694 (80)702,398 
Corporate bonds155,665 1,938 (1)157,602 
Residential mortgage-backed securities731,766 7,507 (549)738,724 
Commercial mortgage-backed securities891,374 22,825 (1,392)912,807 
Total available-for-sale$2,521,374 55,965 (2,087)2,575,252 
Held-to-maturity
State and local governments$224,611 9,785 — 234,396 
Total held-to-maturity$224,611 9,785 — 234,396 

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

 September 30, 2020
 Available-for-SaleHeld-to-Maturity
(Dollars in thousands)Amortized CostFair ValueAmortized CostFair Value
Due within one year$119,874 121,303 — — 
Due after one year through five years264,927 277,758 19,543 20,996 
Due after five years through ten years263,208 277,022 69,924 75,680 
Due after ten years942,145 1,010,282 104,042 109,901 
1,590,154 1,686,365 193,509 206,577 
Mortgage-backed securities 1
2,359,268 2,439,183 — — 
Total$3,949,422 4,125,548 193,509 206,577 
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

Sales and Calls of Debt Securities
Proceeds from sales and calls of debt securities and the associated gains and losses that have been included in earnings are listed below:
 Three Months endedNine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Available-for-sale
Proceeds from sales and calls of debt securities$69,304 401,701 184,088 878,072 
Gross realized gains 1
102 14,329 1,206 18,613 
Gross realized losses 1
(78)(518)(192)(4,447)
Held-to-maturity
Proceeds from calls of debt securities9,280 16,365 29,530 48,940 
Gross realized gains 1
— — 1 2 
Gross realized losses 1
— — — (10)
______________________________
1 The gain or loss on the sale or call of each debt security is determined by the specific identification method.
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Allowance for Credit Losses - Available-For-Sale Debt Securities
In assessing whether a credit loss existed on available-for-sale debt securities with unrealized losses, the Company compared the present value of cash flows expected to be collected from the debt securities with the amortized cost basis of the debt securities. In addition, the following factors were evaluated individually and collectively in determining the existence of expected credit losses:
•credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSRO” entities such as Standard and Poor’s [“S&P”] and Moody’s);
•severity of the impaired securities;
•adverse conditions, if any, specifically related to the impaired securities, including the industry and geographic area;
•the overall deal and payment structure of the debt securities, including the investor entity’s position within the structure, underlying obligors, financial condition and near-term prospects of the issuer, including specific events which may affect the issuer’s operations or future earnings, and credit support or enhancements; and
•failure of the issuer and underlying obligors, if any, to make scheduled payments of interest and principal.

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

 September 30, 2020
 Number
of
Securities		Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale
U.S. government and federal agency
19 $13,656 (230)663 (9)14,319 (239)
State and local governments11 5,383 (38)— — 5,383 (38)
Corporate bonds6 11,029 (23)— — 11,029 (23)
Residential mortgage-backed securities
28 282,912 (709)27 — 282,939 (709)
Commercial mortgage-backed securities
1 11,035 (2)— — 11,035 (2)
Total available-for-sale
65 $324,015 (1,002)690 (9)324,705 (1,011)
 
 December 31, 2019
 Number
of
Securities		Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale
U.S. government and federal agency
20 $464 — 9,902 (65)10,366 (65)
State and local governments12 19,044 (80)— — 19,044 (80)
Corporate bonds2 7,378 (1)— — 7,378 (1)
Residential mortgage-backed securities
35 85,562 (234)29,038 (315)114,600 (549)
Commercial mortgage-backed securities
19 177,051 (1,293)7,697 (99)184,748 (1,392)
Total available-for-sale
88 $289,499 (1,608)46,637 (479)336,136 (2,087)


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

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

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

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

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

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

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

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

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






23




Note 3. Loans Receivable, Net

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

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

(Dollars in thousands)September 30,
2020		December 31,
2019
Residential real estate$862,614 926,388 
Commercial real estate6,201,817 5,579,307 
Other commercial3,593,322 2,094,254 
Home equity646,850 617,201 
Other consumer314,128 295,660 
Loans receivable11,618,731 9,512,810 
Allowance for credit losses(164,552)(124,490)
Loans receivable, net$11,454,179 9,388,320 
Net deferred origination (fees) costs included in loans receivable$(38,712)(6,964)
Net purchase accounting (discounts) premiums included in loans receivable$(18,063)(21,574)
Accrued interest receivable on loans$65,806 40,962 

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

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

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

 Three Months ended September 30, 2020
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Balance at beginning of period$162,509 9,986 89,104 48,838 9,962 4,619 
Credit loss expense (reversal)2,869 (216)5,208 1,199 (2,526)(796)
Charge-offs(2,630)— (445)(1,598)(99)(488)
Recoveries1,804 35 530 314 93 832 
Balance at end of period$164,552 9,805 94,397 48,753 7,430 4,167 
 
24


 Three Months ended September 30, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Balance at beginning of period$129,054 10,695 72,447 36,259 5,801 3,852 
Credit loss expense (reversal)— (325)(1,480)1,220 (777)1,362 
Charge-offs(5,890)(141)(1,858)(1,399)— (2,492)
Recoveries2,371 8 549 778 17 1,019 
Balance at end of period$125,535 10,237 69,658 36,858 5,041 3,741 

Nine Months ended September 30, 2020
(Dollars in thousands)TotalResidential Real EstateCommercial Real EstateOther CommercialHome EquityOther Consumer
Balance at beginning of period$124,490 10,111 69,496 36,129 4,937 3,817 
Impact of adopting CECL3,720 3,584 10,533 (13,759)3,400 (38)
Acquisitions49 — 49 — — — 
Credit loss expense (reversal)39,165 (3,923)14,084 28,358 (860)1,506 
Charge-offs(7,865)(21)(625)(3,471)(293)(3,455)
Recoveries4,993 54 860 1,496 246 2,337 
Balance at end of period$164,552 9,805 94,397 48,753 7,430 4,167 

Nine Months ended September 30, 2019
(Dollars in thousands)TotalResidential Real EstateCommercial Real EstateOther CommercialHome EquityOther Consumer
Balance at beginning of period$131,239 10,631 72,448 38,160 5,811 4,189 
Credit loss expense (reversal)57 (152)(1,824)(524)(786)3,343 
Charge-offs(12,090)(482)(2,267)(2,597)(28)(6,716)
Recoveries6,329 240 1,301 1,819 44 2,925 
Balance at end of period$125,535 10,237 69,658 36,858 5,041 3,741 
As a result of the adoption of the CECL accounting standard, the Company adjusted the January 1, 2020 ACL balances within each loan segment to reflect the changes from the incurred loss model to the current expected credit loss model which resulted in increases and decreases in each loan segment based on, among other factors, quantitative and qualitative assumptions and the economic forecast to estimate the credit loss expense over the expected life of the loans. During the nine months ended September 30, 2020, primarily as a result of the COVID-19 pandemic, there was a significant increase in the overall ACL and increases and decreases within certain loan segments. In addition, the acquisition of SBAZ resulted in a $4,794,000 increase in the ACL due to the credit loss expense recorded subsequent to the acquisition date. The COVID-19 pandemic significantly adjusted the economic forecast used in the ACL model including a significant increase in national and regional unemployment rates and a significant decrease in the gross domestic product (“GDP”).


25


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

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

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

 September 30, 2020
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Accruing loans 30-59 days past due$9,534 520 2,662 2,782 2,160 1,410 
Accruing loans 60-89 days past due8,097 1,666 2,954 2,263 977 237 
Accruing loans 90 days or more past due
2,952 217 1,426 1,102 80 127 
Non-accrual loans with no ACL32,047 3,213 16,318 9,441 2,804 271 
Non-accrual loans with ACL4,303 275 1,980 1,930 87 31 
Total past due and
  non-accrual loans
56,933 5,891 25,340 17,518 6,108 2,076 
Current loans receivable11,561,798 856,723 6,176,477 3,575,804 640,742 312,052 
Total loans receivable$11,618,731 862,614 6,201,817 3,593,322 646,850 314,128 
 
 December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Accruing loans 30-59 days past due$15,944 3,403 4,946 4,685 1,040 1,870 
Accruing loans 60-89 days past due7,248 749 2,317 1,190 1,902 1,090 
Accruing loans 90 days or more past due
1,412 753 64 143 — 452 
Non-accrual loans30,883 4,715 15,650 6,592 3,266 660 
Total past due and non-accrual loans
55,487 9,620 22,977 12,610 6,208 4,072 
Current loans receivable9,457,323 916,768 5,556,330 2,081,644 610,993 291,588 
Total loans receivable$9,512,810 926,388 5,579,307 2,094,254 617,201 295,660 

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


26


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

 September 30, 2020
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Business assets$5,080 — 84 4,996 — — 
Residential real estate4,201 1,536 658 — 1,954 53 
Other real estate13,572 31 12,880 624 21 16 
Other132 — — 16 — 116 
Total$22,985 1,567 13,622 5,636 1,975 185 

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

 Three Months ended September 30, 2020
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans6 — 5 1 — — 
Pre-modification recorded balance
$7,482 — 6,648 834 — — 
Post-modification recorded balance
$7,482 — 6,648 834 — — 
TDRs that subsequently defaulted
Number of loans— — — — — — 
Recorded balance$— — — — — — 

 Three Months ended September 30, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans6 — 4 2 — — 
Pre-modification recorded balance
$3,168 — 3,067 101 — — 
Post-modification recorded balance
$3,168 — 3,067 101 — — 
TDRs that subsequently defaulted
Number of loans— — — — — — 
Recorded balance$— — — — — — 

27


 Nine Months ended September 30, 2020
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans16 1 10 4 1 — 
Pre-modification recorded balance
$14,945 210 13,392 1,304 39 — 
Post-modification recorded balance
$14,945 210 13,392 1,304 39 — 
TDRs that subsequently defaulted
Number of loans— — — — — — 
Recorded balance$— — — — — — 

 Nine Months ended September 30, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans14 1 5 4 1 3 
Pre-modification recorded balance
$5,261 117 4,102 668 103 271 
Post-modification recorded balance
$5,247 123 4,102 668 103 251 
TDRs that subsequently defaulted
Number of loans1 — — — — 1 
Recorded balance$305 — — — — 305 


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

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


28


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

 September 30, 2020
(Dollars in thousands)TotalPassSpecial MentionSubstandardDoubtful/
Loss
Commercial real estate loans
Term loans by origination year
2020 (year-to-date)$1,023,640 1,018,529 697 4,414 — 
20191,149,893 1,141,014 335 8,544 — 
2018986,619 947,230 1,190 38,199 — 
2017786,907 756,583 — 30,324 — 
2016526,236 507,694 206 18,336 — 
Prior1,581,948 1,546,314 — 35,286 348 
Revolving loans146,574 143,265 691 2,617 1 
Total$6,201,817 6,060,629 3,119 137,720 349 
Other commercial loans
Term loans by origination year
2020 (year-to-date)$1,790,810 1,784,359 606 5,845 — 
2019335,126 330,303 — 4,820 3 
2018281,578 275,011 — 6,566 1 
2017287,150 281,371 — 5,323 456 
2016191,092 188,849 — 2,066 177 
Prior239,070 229,806 — 8,100 1,164 
Revolving loans468,496 453,105 — 14,416 975 
Total$3,593,322 3,542,804 606 47,136 2,776 

29


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

 September 30, 2020
(Dollars in thousands)TotalPerforming30-89 Days Past DueNon-Accrual and 90 Days or More Past Due
Residential real estate loans
Term loans by origination year
2020 (year-to-date)$141,655 141,655 — — 
2019228,558 228,558 — — 
2018129,077 128,043 791 243 
201792,899 92,899 — — 
201665,216 64,382 — 834 
Prior202,810 198,787 1,395 2,628 
Revolving loans2,399 2,399 — — 
Total$862,614 856,723 2,186 3,705 
Home equity loans
Term loans by origination year
2020 (year-to-date)$75 75 — — 
20191,028 992 — 36 
20181,862 1,861 — 1 
20171,745 1,745 — — 
20161,047 1,047 — — 
Prior17,337 15,599 1,059 679 
Revolving loans623,756 619,423 2,078 2,255 
Total$646,850 640,742 3,137 2,971 
Other consumer loans
Term loans by origination year
2020 (year-to-date)$106,569 106,501 56 12 
201975,743 75,340 354 49 
201849,929 49,737 144 48 
201721,930 21,829 62 39 
201612,424 12,278 80 66 
Prior22,250 21,106 932 212 
Revolving loans25,283 25,261 19 3 
Total$314,128 312,052 1,647 429 

30


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

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

The following table disclosed information related to impaired loans:
  
 At or for the Year ended December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Loans with a specific valuation allowance
Recorded balance$5,388 — 5,343 10 — 35 
Unpaid principal balance5,388 — 5,343 10 — 35 
Specific valuation allowance95 — 73 10 — 12 
Average balance10,378 409 6,341 3,490 24 114 
Loans without a specific valuation allowance
Recorded balance89,116 7,804 53,266 21,465 3,745 2,836 
Unpaid principal balance99,355 9,220 57,735 24,758 4,494 3,148 
Average balance93,338 9,879 59,107 18,079 3,486 2,787 
Total
Recorded balance$94,504 7,804 58,609 21,475 3,745 2,871 
Unpaid principal balance104,743 9,220 63,078 24,768 4,494 3,183 
Specific valuation allowance95 — 73 10 — 12 
Average balance103,716 10,288 65,448 21,569 3,510 2,901 

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


Note 4. Leases

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

September 30, 2020December 31, 2019
(Dollars in thousands)Finance
Leases		Operating
Leases		Finance
Leases		Operating
Leases
ROU assets$5,999 6,537 
Accumulated depreciation(212)(917)
Net ROU assets$5,787 47,329 5,620 41,453 
Lease liabilities$5,917 50,089 5,671 43,904 
Weighted-average remaining lease term24 years17 years24 years19 years
Weighted-average discount rate2.6 %3.5 %3.0 %3.7 %

Maturities of lease liabilities consist of the following:
September 30, 2020
(Dollars in thousands)Finance
Leases		Operating
Leases
Maturing within one year$259 4,608 
Maturing one year through two years265 4,431 
Maturing two years through three years270 3,961 
Maturing three years through four years277 3,914 
Maturing four years through five years285 3,869 
Thereafter6,808 48,432 
Total lease payments8,164 69,215 
Present value of lease payments
Short-term214 2,973 
Long-term5,703 47,116 
Total present value of lease payments5,917 50,089 
Difference between lease payments and present value of lease payments$2,247 19,126 

32


The components of lease expense consist of the following:

Three Months endedNine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Finance lease cost
Amortization of ROU assets$59 16 174 48 
Interest on lease liabilities40 2 121 6 
Operating lease cost1,254 1,057 3,553 2,967 
Short-term lease cost88 102 266 330 
Variable lease cost264 236 977 657 
Sublease income(2)(2)(5)(5)
Total lease expense$1,703 1,411 5,086 4,003 

Supplemental cash flow information related to leases is as follows:
Three Months ended
September 30, 2020September 30, 2019
(Dollars in thousands)Finance
Leases		Operating
Leases		Finance
Leases		Operating
Leases
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows$40 706 2 565 
Financing cash flows23 N/A21 N/A

Nine Months ended
September 30, 2020September 30, 2019
(Dollars in thousands)Finance
Leases		Operating
Leases		Finance
Leases		Operating
Leases
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows$121 1,994 6 1,541 
Financing cash flows67 N/A63 N/A

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

Note 5. Goodwill

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

Three Months endedNine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Net carrying value at beginning of period$513,355 330,887 456,418 289,586 
Acquisitions and adjustments658 125,535 57,595 166,836 
Net carrying value at end of period$514,013 456,422 514,013 456,422 


33


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

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

Note 6. Variable Interest Entities

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

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

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

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


34


The following table summarizes the carrying amounts of the consolidated VIEs’ assets and liabilities included in the Company’s statements of financial condition and are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have no recourse to the general credit of the Company.
(Dollars in thousands)September 30,
2020		December 31,
2019
Assets
Loans receivable$90,183 84,390 
Accrued interest receivable457 63 
Other assets55,863 54,692 
Total assets$146,503 139,145 
Liabilities
Other borrowed funds$27,050 23,149 
Accrued interest payable167 36 
Other liabilities47 123 
Total liabilities$27,264 23,308 

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

(Dollars in thousands)Amount
Years ending December 31,
2020$7,608 
202114,883 
202214,165 
20235,277 
2024427 
Thereafter812 
Total$43,172 


35


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

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

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

Note 7. Securities Sold Under Agreements to Repurchase

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

Overnight and Continuous
(Dollars in thousands)September 30,
2020		December 31,
2019
State and local governments$742,753 — 
Corporate bonds222,915 — 
Residential mortgage-backed securities— 312,015 
Commercial mortgage-backed securities— 257,809 
Total$965,668 569,824 

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


Note 8. Derivatives and Hedging Activities

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

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

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

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

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

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



Note 9. Other Expenses

Other expenses consists of the following:
 Three Months endedNine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Consulting and outside services4,050 1,938 8,604 5,715 
Mergers and acquisition expenses$792 2,058 7,311 4,103 
Loan expenses 1
4,060 924 5,867 2,726 
Telephone1,314 1,216 3,865 3,601 
Debit card expenses1,414 1,699 3,704 5,003 
VIE amortization and other expenses1,510 1,427 3,396 2,878 
Business development1,139 1,176 3,110 3,189 
Printing and supplies877 735 2,704 2,246 
Postage851 831 2,479 2,487 
Employee expenses560 1,245 2,247 3,646 
Accounting and audit fees455 365 1,453 1,290 
Checking and operating expenses355 361 1,263 1,353 
Legal fees206 338 1,025 926 
ATM expenses245 299 373 1,312 
Other958 991 2,828 2,679 
Total other expenses$18,786 15,603 50,229 43,154 
______________________________
1 Loan expenses include credit loss expense for off-balance sheet credit exposures.

Note 10. Accumulated Other Comprehensive Income

The following table illustrates the activity within accumulated other comprehensive income by component, net of tax:
 
(Dollars in thousands)(Losses) Gains on Available-For-Sale Debt SecuritiesLosses on Derivatives Used for Cash Flow HedgesTotal
Balance at January 1, 2019$(6,613)(2,814)(9,427)
Other comprehensive income (loss) before reclassifications65,284 (5,261)60,023 
Reclassification adjustments for (gains) losses included in net income(10,576)8,075 (2,501)
Net current period other comprehensive income54,708 2,814 57,522 
Balance at September 30, 2019$48,095 — 48,095 
Balance at January 1, 2020$40,226 — 40,226 
Other comprehensive income (loss) before reclassifications92,027 (397)91,630 
Reclassification adjustments for gains included in net income (loss)(758)— (758)
Net current period other comprehensive income (loss)91,269 (397)90,872 
Balance at September 30, 2020$131,495 (397)131,098 

38


Note 11. Earnings Per Share

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

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

 Three Months endedNine Months ended
(Dollars in thousands, except per share data)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Net income available to common stockholders, basic and diluted
$77,757 51,610 184,540 153,134 
Average outstanding shares - basic95,411,656 90,294,811 94,704,198 86,911,402 
Add: dilutive restricted stock units and stock options
30,920 154,384 43,696 170,776 
Average outstanding shares - diluted95,442,576 90,449,195 94,747,894 87,082,178 
Basic earnings per share$0.81 0.57 1.95 1.76 
Diluted earnings per share$0.81 0.57 1.95 1.76 
Restricted stock units and stock options excluded from the diluted average outstanding share calculation 1
93,253 4,037 78,605 1,360 
______________________________
1 Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock unit or the exercise price of a stock option exceeds the market price of the Company’s stock.

Note 12. Fair Value of Assets and Liabilities

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

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


39


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

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

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

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

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

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

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

40


The following tables disclose the fair value measurement of assets measured at fair value on a recurring basis:
  
  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Fair Value
September 30,
2020		Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Debt securities, available-for-sale
U.S. government and federal agency$40,140 — 40,140 — 
U.S. government sponsored enterprises9,825 — 9,825 — 
State and local governments1,275,376 — 1,275,376 — 
Corporate bonds361,024 — 361,024 — 
Residential mortgage-backed securities1,275,858 — 1,275,858 — 
Commercial mortgage-backed securities1,163,325 — 1,163,325 — 
Loans held for sale, at fair value147,937 — 147,937 — 
Interest rate caps182 — 182 — 
Interest rate lock commitment14,967 — 14,967 — 
Total assets measured at fair value
  on a recurring basis
$4,288,634 — 4,288,634 — 
TBA hedge$1,344 — 1,344 — 
Total liabilities measured at fair value on a recurring basis
$1,344 — 1,344 — 

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Fair Value December 31, 2019Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Debt securities, available-for-sale
U.S. government and federal agency$20,044 — 20,044 — 
U.S. government sponsored enterprises43,677 — 43,677 — 
State and local governments702,398 — 702,398 — 
Corporate bonds157,602 — 157,602 — 
Residential mortgage-backed securities738,724 — 738,724 — 
Commercial mortgage-backed securities912,807 — 912,807 — 
Loans held for sale, at fair value
69,194 — 69,194 — 
Interest rate lock commitment
1,852 — 1,852 — 
Total assets measured at fair value on a recurring basis
$2,646,298 — 2,646,298 — 
TBA hedge$236 — 236 — 
Total liabilities measured at fair value on a recurring basis
$236 — 236 — 

41


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

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

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

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

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

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Fair Value
September 30,
2020		Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Other real estate owned$297 — — 297 
Collateral-dependent loans, net of ACL2,284 — — 2,284 
Total assets measured at fair value
  on a non-recurring basis
$2,581 — — 2,581 



42


  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Fair Value December 31, 2019Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Other real estate owned$1,983 — — 1,983 
Collateral-dependent loans, net of ACL23 — — 23 
Total assets measured at fair value
  on a non-recurring basis
$2,006 — — 2,006 

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

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

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


43


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

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Carrying Amount
September 30,
2020		Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Financial assets
Cash and cash equivalents$769,879 769,879 — — 
Debt securities, held-to-maturity193,509 — 206,577 — 
Loans receivable, net of ACL11,454,179 — — 11,619,887 
Total financial assets$12,417,567 769,879 206,577 11,619,887 
Financial liabilities
Term deposits$1,098,988 — 1,104,273 — 
FHLB advances7,318 — 7,537 — 
Repurchase agreements and
  other borrowed funds
998,635 — 998,635 — 
Subordinated debentures139,918 — 119,318 — 
Total financial liabilities$2,244,859 — 2,229,763 — 

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Carrying Amount December 31, 2019Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Financial assets
Cash and cash equivalents$330,961 330,961 — — 
Debt securities, held-to-maturity224,611 — 234,396 — 
Loans receivable, net of ACL9,388,320 — — 9,438,121 
Total financial assets$9,943,892 330,961 234,396 9,438,121 
Financial liabilities
Term deposits$1,011,798 — 1,017,505 — 
FHLB advances38,611 — 38,787 — 
Repurchase agreements and
  other borrowed funds
598,644 — 598,644 — 
Subordinated debentures139,914 — 124,094 — 
Total financial liabilities$1,788,967 — 1,779,030 — 








44


Note 13. Mergers and Acquisitions

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

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

(Dollars in thousands)SBAZ
February 29,
2020
Fair value of consideration transferred
Fair value of Company shares issued$112,133 
Cash consideration13,721 
Total fair value of consideration transferred125,854 
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents57,434 
Debt securities142,174 
Loans receivable, net of ACL451,653 
Core deposit intangible 1
2,593 
Accrued income and other assets33,971 
Total identifiable assets acquired687,825 
Liabilities assumed
Deposits603,289 
Borrowings
10,904 
Accrued expenses and other liabilities5,373 
Total liabilities assumed619,566 
Total identifiable net assets68,259 
Goodwill recognized$57,595 
______________________________
1 The core deposit intangible for the acquisition was determined to have an estimated life of 10 years.


45


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

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

Total income consisting of net interest income and non-interest income of the acquired operations of SBAZ was approximately $21,144,000 and net income was approximately $3,921,000 from February 29, 2020 to September 30, 2020. The following unaudited pro forma summary presents consolidated information of the Company as if the SBAZ acquisition had occurred on January 1, 2019:
Three Months endedNine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019		September 30,
2020		September 30,
2019
Net interest income and non-interest income$205,070 182,185 567,406 491,830 
Net income77,757 54,000 183,429 159,601 

46


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

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

FORWARD-LOOKING STATEMENTS

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

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

47


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

Financial Highlights
 At or for the Three Months endedAt or for the Nine Months ended
(Dollars in thousands, except per share and market data)
Sep 30,
2020		Jun 30,
2020		Mar 31,
2020		Sep 30,
2019		Sep 30,
2020		Sep 30,
2019
Operating results
Net income$77,757 63,444 43,339 51,610 184,540 153,134 
Basic earnings per share$0.81 0.67 0.46 0.57 1.95 1.76 
Diluted earnings per share$0.81 0.66 0.46 0.57 1.95 1.76 
Dividends declared per share$0.30 0.29 0.29 0.29 0.88 0.82 
Market value per share
Closing$32.05 35.29 34.01 40.46 32.05 40.46 
High$38.13 46.54 46.10 42.61 46.54 45.47 
Low$30.05 30.30 26.66 37.70 26.66 37.58 
Selected ratios and other data
Number of common stock shares outstanding
95,413,74395,409,06195,408,27492,180,61895,413,74392,180,618
Average outstanding shares - basic95,411,65695,405,49393,287,67090,294,81194,704,19886,911,402
Average outstanding shares - diluted95,442,57695,430,40393,359,79290,449,19594,747,89487,082,178
Return on average assets (annualized)1.80 %1.57 %1.25 %1.55 %1.56 %1.63 %
Return on average equity (annualized)13.73 %11.68 %8.52 %10.92 %11.40 %12.17 %
Efficiency ratio49.16 %49.29 %52.55 %65.95 %50.21 %58.82 %
Dividend payout ratio37.04 %43.28 %63.04 %50.88 %45.13 %46.59 %
Loan to deposit ratio82.29 %86.45 %88.10 %88.71 %82.29 %88.71 %
Number of full time equivalent employees
2,9462,9542,9552,8022,9462,802
Number of locations193192192182193182
Number of ATMs250251247238250238

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

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

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

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

48


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

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

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

(Dollars in thousands)State Bank Corp.
February 29, 2020
Total assets$745,420 
Debt securities142,174 
Loans receivable451,702 
Non-interest bearing deposits141,620 
Interest bearing deposits461,669 
Borrowings
10,904 

49


Financial Condition Analysis

Assets
The following table summarizes the Company’s assets as of the dates indicated: 
$ Change from
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019
Cash and cash equivalents$769,879 547,610 330,961 406,384 222,269 438,918 363,495 
Debt securities, available-for-sale
4,125,548 3,533,950 2,575,252 2,459,036 591,598 1,550,296 1,666,512 
Debt securities, held-to-maturity
193,509 203,275 224,611 234,992 (9,766)(31,102)(41,483)
Total debt securities
4,319,057 3,737,225 2,799,863 2,694,028 581,832 1,519,194 1,625,029 
Loans receivable
Residential real estate862,614 903,198 926,388 936,877 (40,584)(63,774)(74,263)
Commercial real estate
6,201,817 6,047,692 5,579,307 5,548,174 154,125 622,510 653,643 
Other commercial3,593,322 3,547,249 2,094,254 2,145,257 46,073 1,499,068 1,448,065 
Home equity646,850 654,392 617,201 615,781 (7,542)29,649 31,069 
Other consumer314,128 300,847 295,660 294,999 13,281 18,468 19,129 
Loans receivable11,618,731 11,453,378 9,512,810 9,541,088 165,353 2,105,921 2,077,643 
Allowance for credit losses
(164,552)(162,509)(124,490)(125,535)(2,043)(40,062)(39,017)
Loans receivable, net
11,454,179 11,290,869 9,388,320 9,415,553 163,310 2,065,859 2,038,626 
Other assets1,382,952 1,330,944 1,164,855 1,202,827 52,008 218,097 180,125 
Total assets$17,926,067 16,906,648 13,683,999 13,718,792 1,019,419 4,242,068 4,207,275 

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

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


Liabilities
The following table summarizes the Company’s liabilities as of the dates indicated:
$ Change from
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019
Deposits
Non-interest bearing deposits
$5,479,311 5,043,704 3,696,627 3,772,766 435,607 1,782,684 1,706,545 
NOW and DDA accounts
3,300,152 3,113,863 2,645,404 2,592,483 186,289 654,748 707,669 
Savings accounts
1,864,143 1,756,503 1,485,487 1,472,465 107,640 378,656 391,678 
Money market deposit accounts
2,557,294 2,403,641 1,937,141 1,940,517 153,653 620,153 616,777 
Certificate accounts
979,857 995,536 958,501 955,765 (15,679)21,356 24,092 
Core deposits, total
14,180,757 13,313,247 10,723,160 10,733,996 867,510 3,457,597 3,446,761 
Wholesale deposits
119,131 68,285 53,297 134,629 50,846 65,834 (15,498)
Deposits, total
14,299,888 13,381,532 10,776,457 10,868,625 918,356 3,523,431 3,431,263 
Securities sold under agreements to repurchase
965,668 881,227 569,824 558,752 84,441 395,844 406,916 
Federal Home Loan Bank advances
7,318 37,963 38,611 8,707 (30,645)(31,293)(1,389)
Other borrowed funds32,967 32,546 28,820 14,808 421 4,147 18,159 
Subordinated debentures139,918 139,917 139,914 139,913 1 4 5 
Deferred tax liability17,227 25,213 — — (7,986)17,227 17,227 
Other liabilities207,992 204,535 169,640 174,586 3,457 38,352 33,406 
Total liabilities$15,670,978 14,702,933 11,723,266 11,765,391 968,045 3,947,712 3,905,587 

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

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



51


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

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

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

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

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


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

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

 Three Months ended$ Change from
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Mar 31,
2020		Sep 30,
2019		Jun 30,
2020		Mar 31,
2020		Sep 30,
2019
Net interest income
Interest income$157,487155,404142,865142,3952,083 14,622 15,092 
Interest expense6,0847,1858,49610,947(1,101)(2,412)(4,863)
Total net interest income151,403148,219134,369131,4483,184 17,034 19,955 
Non-interest income
Service charges and other fees
13,40411,36614,02015,1382,038 (616)(1,734)
Miscellaneous loan fees and charges
2,0841,6821,2851,775402 799 309 
Gain on sale of loans35,51625,85811,86210,3699,658 23,654 25,147 
Gain on sale of investments2412886313,811(104)(839)(13,787)
Other income2,6392,1905,2421,956449 (2,603)683 
Total non-interest income
53,66741,22433,27243,04912,443 20,395 10,618 
Total income$205,070189,443 167,641174,49715,627 37,429 30,573 
Net interest margin (tax-equivalent)
3.92 %4.12 %4.36 %4.42 %

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

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

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

53


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

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

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
 
 Three Months ended$ Change from
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Mar 31,
2020		Sep 30,
2019		Jun 30,
2020		Mar 31,
2020		Sep 30,
2019
Compensation and employee benefits
$64,866 57,981 59,660 62,509 6,885 5,206 2,357 
Occupancy and equipment9,369 9,357 9,219 8,731 12 150 638 
Advertising and promotions2,779 2,138 2,487 2,719 641 292 60 
Data processing5,597 5,042 5,282 4,466 555 315 1,131 
Other real estate owned186 75 112 166 111 74 20 
Regulatory assessments and insurance
1,495 1,037 1,090 593 458 405 902 
Loss on termination of hedging activities
— — — 13,528 — — (13,528)
Core deposit intangibles amortization
2,612 2,613 2,533 2,360 (1)79 252 
Other expenses18,786 19,898 11,545 15,603 (1,112)7,241 3,183 
Total non-interest expense$105,690 98,141 91,928 110,675 7,549 13,762 (4,985)

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

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


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

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

Credit Loss Expense
The following table summarizes credit loss expense, net charge-offs and select ratios relating to credit loss expense for the previous eight quarters:
(Dollars in thousands)Credit
Loss
Expense		Net
Charge-Offs		Allowance for
Credit Losses
as a Percent
of Loans		Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans		Non-Performing
Assets to
Total Sub-sidiary Assets
Third quarter 2020$2,869 $826 1.42 %0.15 %0.25 %
Second quarter 202013,552 1,233 1.42 %0.22 %0.27 %
First quarter 202022,744 813 1.49 %0.41 %0.26 %
Fourth quarter 2019— 1,045 1.31 %0.24 %0.27 %
Third quarter 2019— 3,519 1.32 %0.31 %0.40 %
Second quarter 2019— 732 1.46 %0.43 %0.41 %
First quarter 201957 1,510 1.56 %0.44 %0.42 %
Fourth quarter 20181,246 2,542 1.58 %0.41 %0.47 %

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

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















55





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

Income Summary
Nine Months ended
(Dollars in thousands)Sep 30,
2020		Sep 30,
2019		$ Change% Change
Net interest income
Interest income$455,756 $400,896 $54,860 14 %
Interest expense21,765 33,940 (12,175)(36)%
Total net interest income433,991 366,956 67,035 18 %
Non-interest income
Service charges and other fees38,790 53,178 (14,388)(27)%
Miscellaneous loan fees and charges5,051 3,934 1,117 28 %
Gain on sale of loans73,236 23,929 49,307 206 %
Gain on sale of investments1,015 14,158 (13,143)(93)%
Other income10,071 7,158 2,913 41 %
Total non-interest income128,163 102,357 25,806 25 %
Total income$562,154 $469,313 $92,841 20 %
Net interest margin (tax-equivalent)4.12 %4.36 %

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

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

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



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

Nine Months ended
(Dollars in thousands)Sep 30,
2020		Sep 30,
2019		$ Change% Change
Compensation and employee benefits$182,507 $167,210 $15,297 9 %
Occupancy and equipment27,945 25,348 2,597 10 %
Advertising and promotions7,404 7,874 (470)(6)%
Data processing15,921 12,420 3,501 28 %
Other real estate owned373 496 (123)(25)%
Regulatory assessments and insurance3,622 3,726 (104)(3)%
Loss on termination of hedging activities— 13,528 (13,528)(100)%
Core deposit intangibles amortization7,758 5,919 1,839 31 %
Other expenses50,229 43,154 7,075 16 %
Total non-interest expense$295,759 $279,675 $16,084 6 %

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

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

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

57


ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

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

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

September 30, 2020December 31, 2019September 30, 2019
(Dollars in thousands)Carrying AmountPercentCarrying AmountPercentCarrying AmountPercent
Available-for-sale
U.S. government and federal agency$40,140 1 %$20,044 1 %$147,434 5 %
U.S. government sponsored enterprises9,825 1 %43,677 1 %67,189 3 %
State and local governments1,275,376 29 %702,398 25 %613,865 23 %
Corporate bonds361,024 8 %157,602 6 %147,383 5 %
Residential mortgage-backed securities1,275,858 30 %738,724 26 %767,253 28 %
Commercial mortgage-backed securities1,163,325 26 %912,807 33 %715,912 27 %
Total available-for-sale
4,125,548 95 %2,575,252 92 %2,459,036 91 %
Held-to-maturity
State and local governments193,509 5 %224,611 8 %234,992 9 %
Total held-to-maturity193,509 5 %224,611 8 %234,992 9 %
Total debt securities$4,319,057 100 %$2,799,863 100 %$2,694,028 100 %

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

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

58


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

September 30, 2020December 31, 2019
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
S&P: AAA / Moody’s: Aaa
$355,351 386,927 251,101 259,690 
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
910,314 966,159 523,150 539,758 
S&P: A+, A, A- / Moody’s: A1, A2, A3
107,568 115,407 113,275 120,048 
S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa33,217 3,245 3,217 3,302 
Not rated by either entity
9,964 10,215 13,451 13,795 
Below investment grade
— — 201 201 
Total
$1,386,414 1,481,953 904,395 936,794 

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

September 30, 2020December 31, 2019
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
General obligation - unlimited
$598,871 642,518 445,584 465,066 
General obligation - limited
137,821 144,919 119,884 124,939 
Revenue630,456 673,690 325,331 332,354 
Certificate of participation
15,199 16,599 8,003 8,815 
Other
4,067 4,227 5,593 5,620 
Total
$1,386,414 1,481,953 904,395 936,794 

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

September 30, 2020December 31, 2019
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
New York$187,681 204,225 14,701 14,870 
Texas143,709 154,138 112,397 121,641 
Michigan140,018 148,274 141,131 116,581 
California128,744 144,328 23,482 24,406 
Washington108,527 114,678 116,458 146,538 
All other states
677,735 716,310 496,226 512,758 
Total
$1,386,414 1,481,953 904,395 936,794 

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

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

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


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

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

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

 September 30, 2020December 31, 2019September 30, 2019
(Dollars in thousands)AmountPercentAmountPercentAmountPercent
Residential real estate$862,614 8 %$926,388 10 %$936,877 10 %
Commercial real estate6,201,817 54 %5,579,307 59 %5,548,174 59 %
Other commercial3,593,322 31 %2,094,254 22 %2,145,257 23 %
Home equity646,850 6 %617,201 7 %615,781 6 %
Other consumer314,128 3 %295,660 3 %294,999 3 %
Loans receivable11,618,731 102 %9,512,810 101 %9,541,088 101 %
Allowance for credit losses(164,552)(2)%(124,490)(1)%(125,535)(1)%
Loans receivable, net$11,454,179 100 %$9,388,320 100 %$9,415,553 100 %

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Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
 
At or for the Nine Months endedAt or for the Six Months endedAt or for the Year endedAt or for the Nine Months ended
(Dollars in thousands)September 30,
2020		June 30,
2020		December 31,
2019		September 30,
2019
Other real estate owned$5,361 4,743 5,142 7,148 
Accruing loans 90 days or more past due
Residential real estate217 206 753 1,212 
Commercial real estate1,426 3,110 64 4,350 
Other commercial1,102 2,519 143 1,045 
Home equity80 98 — 681 
Other consumer127 138 452 624 
Total2,952 6,071 1,412 7,912 
Non-accrual loans
Residential real estate3,488 4,243 4,715 5,295 
Commercial real estate18,298 19,682 15,650 23,781 
Other commercial11,371 7,713 6,592 2,876 
Home equity2,891 3,086 3,266 766 
Other consumer302 433 660 7,299 
Total36,350 35,157 30,883 40,017 
Total non-performing assets$44,663 45,971 37,437 55,077 
Non-performing assets as a percentage of subsidiary assets
0.25 %0.27 %0.27 %0.40 %
Allowance for credit losses as a percentage of non-performing loans
419 %394 %385 %262 %
Accruing loans 30-89 days past due$17,631 25,225 23,192 29,954 
Accruing troubled debt restructurings$39,999 41,759 34,055 32,949 
Non-accrual troubled debt restructurings$7,579 8,204 3,346 6,723 
U.S. government guarantees included in non-performing assets
$4,411 3,305 1,786 3,000 
Interest income 1
$1,296 851 1,603 1,544 
______________________________
1Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

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

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

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

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

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

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

At or for the Nine Months endedAt or for the Six Months endedAt or for the Year endedAt or for the Nine Months ended
(Dollars in thousands)September 30,
2020		June 30,
2020		December 31,
2019		September 30,
2019
Balance at beginning of period$5,142 5,142 7,480 7,480 
Acquisitions307 307 — — 
Additions2,062 791 2,349 2,347 
Capital improvements141 72 63 — 
Write-downs(189)(60)(766)(271)
Sales(2,102)(1,509)(3,984)(2,408)
Balance at end of period$5,361 4,743 5,142 7,148 

63


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

September 30, 2020
(Dollars in thousands)Number of
PPP Loans		Amount of
PPP Loans		Total Loans
Receivable, Net of PPP Loans		PPP Loans (Amount) as a Percent of Total Loans
Receivable, Net of PPP Loans
Residential real estate— $— 862,614 — %
Commercial real estate and other commercial
Real estate rental and leasing1,221 64,647 3,361,074 1.92 %
Accommodation and food services1,502 160,295 644,627 24.87 %
Healthcare1,928 288,612 826,809 34.91 %
Manufacturing830 80,483 193,216 41.65 %
Retail and wholesale trade1,672 168,837 471,115 35.84 %
Construction2,297 214,652 774,069 27.73 %
Other6,640 470,891 2,075,812 22.68 %
Home equity and other consumer— — 960,978 — %
Total16,090 $1,448,417 10,170,314 14.24 %

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


COVID-19 Bank Loan Modifications

September 30, 2020June 30, 2020
(Dollars in thousands)Total Loans Receivable, Net of PPP LoansAmount of Unexpired Original Loan ModificationsAmount of
Re-deferral Loan Modifications		Amount of
Remaining Loan
Modifications		Loan Modifications (Amount) as a Percent of Total Loans
Receivable, Net of PPP Loans		Amount of
Remaining Loan
Modifications		Loan Modifications (Amount) as a Percent of Total Loans
Receivable, Net of PPP Loans
Residential real estate$862,614 28,571 — 28,571 3.31 %$66,395 7.35 %
Commercial real estate
and other commercial
Real estate rental
and leasing		3,361,074 163,103 43,735 206,838 6.15 %587,609 18.11 %
Accommodation and
food services		644,627 69,328 12,854 82,182 12.75 %395,882 61.41 %
Healthcare826,809 29,136 14,117 43,253 5.23 %126,808 16.01 %
Manufacturing193,216 15,263 3,296 18,559 9.61 %49,338 24.41 %
Retail and wholesale
trade		471,115 13,299 2,554 15,853 3.36 %46,623 9.78 %
Construction774,069 13,337 1,188 14,525 1.88 %38,751 5.06 %
Other2,075,812 23,146 27,442 50,588 2.44 %192,060 9.40 %
Home equity and other
consumer		960,978 5,767 — 5,767 0.60 %11,326 1.19 %
Total$10,170,314 360,950 105,186 466,136 4.58 %$1,514,792 15.11 %

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

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


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


September 30, 2020
(Dollars in thousands)Enhanced Monitoring Loans Receivable, Net of PPP LoansPercent of
Total Loans Receivable, Net of PPP Loans		Amount of Unexpired Original
Loan Modifications		Amount of
Re-deferral Loan Modifications		Amount of
Remaining Loan
Modifications		Loan Modifications (Amount) as a Percent of Enhanced Monitoring Loans
Receivable, Net of PPP Loans
Hotel and motel$422,500 4.15 %44,091 6,679 50,770 12.02 %
Restaurant138,944 1.37 %12,977 6,175 19,152 13.78 %
Travel and tourism19,726 0.19 %4,605 397 5,002 25.36 %
Gaming14,500 0.14 %1,101 — 1,101 7.59 %
Oil and gas22,178 0.22 %1,474 — 1,474 6.65 %
Total$617,848 6.08 %64,248 13,251 77,499 12.54 %

June 30, 2020
(Dollars in thousands)Amount of
Remaining Loan
Modifications		Percent of Loans Receivable, Net of PPP LoansLoan Modifications (Amount) as a Percent of Enhanced Monitoring Loans
Receivable, Net of PPP Loans
Hotel and motel$300,747 4.20 %71.34 %
Restaurant76,632 1.50 %50.91 %
Travel and tourism7,845 0.21 %37.79 %
Gaming9,214 0.15 %60.95 %
Oil and gas6,013 0.23 %26.43 %
Total$400,451 6.29 %63.49 %

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




66


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

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

 September 30, 2020December 31, 2019September 30, 2019
(Dollars in thousands)ACLPercent of ACL in
Category		Percent of
Loans in
Category		ACLPercent of ACL in
Category		Percent
of Loans in
Category		ACLPercent of ACL in
Category		Percent
of Loans in
Category
Residential real estate
$9,805 6 %7 %$10,111 8 %10 %$10,237 8 %10 %
Commercial real estate
94,397 57 %53 %69,496 56 %59 %69,658 56 %58 %
Other commercial48,753 30 %31 %36,129 29 %22 %36,858 29 %22 %
Home equity7,430 5 %6 %4,937 4 %6 %5,041 4 %7 %
Other consumer4,167 2 %3 %3,817 3 %3 %3,741 3 %3 %
Total$164,552 100 %100 %$124,490 100 %100 %$125,535 100 %100 %

67


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

At or for the Nine Months endedAt or for the Six Months endedAt or for the Year endedAt or for the Nine Months ended
(Dollars in thousands)September 30,
2020		June 30,
2020		December 31,
2019		September 30,
2019
Balance at beginning of period$124,490 124,490 131,239 131,239 
Impact of adopting CECL3,720 3,720 — — 
Acquisitions49 49 — — 
Credit loss expense39,165 36,296 57 57 
Charge-offs
Residential real estate(21)(21)(608)(482)
Commercial real estate(625)(180)(2,460)(2,266)
Other commercial(3,471)(1,873)(4,189)(2,598)
Home equity(293)(194)(90)(28)
Other consumer(3,455)(2,967)(7,831)(6,716)
Total charge-offs(7,865)(5,235)(15,178)(12,090)
Recoveries
Residential real estate54 19 251 240 
Commercial real estate860 330 2,212 1,301 
Other commercial1,496 1,182 2,181 1,819 
Home equity246 153 79 44 
Other consumer2,337 1,505 3,649 2,925 
Total recoveries4,993 3,189 8,372 6,329 
Net charge-offs(2,872)(2,046)(6,806)(5,761)
Balance at end of period$164,552 162,509 124,490 125,535 
ACL as a percentage of total loans
1.42 %1.42 %1.31 %1.32 %
Net charge-offs as a percentage of total loans0.03 %0.02 %0.07 %0.06 %

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


68


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

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

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

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

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

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

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


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

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

 Loans Receivable, by Loan Type% Change from
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019
Custom and owner occupied construction
$166,195 $177,172 $143,479 $147,626 (6)%16 %13 %
Pre-sold and spec construction
157,242 161,964 180,539 207,596 (3)%(13)%(24)%
Total residential construction
323,437 339,136 324,018 355,222 (5)%— %(9)%
Land development96,814 94,667 101,592 103,090 2 %(5)%(6)%
Consumer land or lots122,019 120,015 125,759 128,668 2 %(3)%(5)%
Unimproved land64,770 63,459 62,563 71,467 2 %4 %(9)%
Developed lots for operative builders
30,871 26,647 17,390 13,782 16 %78 %124 %
Commercial lots62,445 60,563 46,408 64,904 3 %35 %(4)%
Other construction537,105 477,922 478,368 443,947 12 %12 %21 %
Total land, lot, and other construction
914,024 843,273 832,080 825,858 8 %10 %11 %
Owner occupied1,889,512 1,855,994 1,667,526 1,666,211 2 %13 %13 %
Non-owner occupied2,259,062 2,238,586 2,017,375 2,023,262 1 %12 %12 %
Total commercial real estate
4,148,574 4,094,580 3,684,901 3,689,473 1 %13 %12 %
Commercial and industrial2,308,710 2,342,081 991,580 1,009,310 (1)%133 %129 %
Agriculture747,145 714,227 701,363 718,255 5 %7 %4 %
1st lien1,256,111 1,227,514 1,186,889 1,208,096 2 %6 %4 %
Junior lien43,355 47,121 53,571 53,931 (8)%(19)%(20)%
Total 1-4 family1,299,466 1,274,635 1,240,460 1,262,027 2 %5 %3 %
Multifamily residential359,030 343,870 342,498 350,622 4 %5 %2 %
Home equity lines of credit651,546 655,492 617,900 612,775 (1)%5 %6 %
Other consumer191,761 181,402 174,643 171,633 6 %10 %12 %
Total consumer843,307 836,894 792,543 784,408 1 %6 %8 %
States and political subdivisions617,624 581,673 533,023 471,599 6 %16 %31 %
Other205,351 198,354 139,538 174,755 4 %47 %18 %
Total loans receivable, including loans held for sale
11,766,668 11,568,723 9,582,004 9,641,529 2 %23 %22 %
Less loans held for sale 1
(147,937)(115,345)(69,194)(100,441)28 %114 %47 %
Total loans receivable$11,618,731 $11,453,378 $9,512,810 $9,541,088 1 %22 %22 %
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
70


The following table summarizes the Company’s non-performing assets by regulatory classification:

 
Non-performing Assets,
by Loan Type		Non-
Accrual
Loans		Accruing
Loans 90  Days or
More Past Due		OREO
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019		Sep 30,
2020		Sep 30,
2020		Sep 30,
2020
Custom and owner occupied construction
$249 440 185 283 249 — — 
Pre-sold and spec construction— — 743 1,219 — — — 
Total residential construction
249 440 928 1,502 249 — — 
Land development450 659 852 1,006 202 — 248 
Consumer land or lots223 427 330 828 61 — 162 
Unimproved land417 663 1,181 8,781 270 — 147 
Commercial lots682 529 529 575 153 — 529 
Total land, lot and other construction
1,772 2,278 2,892 11,190 686 — 1,086 
Owner occupied9,077 9,424 4,608 8,251 7,338 — 1,739 
Non-owner occupied4,879 5,482 8,229 9,271 4,879 — — 
Total commercial real estate
13,956 14,906 12,837 17,522 12,217 — 1,739 
Commercial and industrial8,571 5,039 5,297 6,135 7,614 396 561 
Agriculture8,972 11,087 2,288 3,469 7,011 1,961 — 
1st lien6,559 7,634 8,671 9,420 4,698 217 1,644 
Junior lien986 746 569 669 815 171 — 
Total 1-4 family7,545 8,380 9,240 10,089 5,513 388 1,644 
Multifamily residential— 92 201 206 — — — 
Home equity lines of credit2,903 3,048 2,618 3,553 2,550 80 273 
Other consumer407 412 837 1,098 241 108 58 
Total consumer3,310 3,460 3,455 4,651 2,791 188 331 
Other288 289 299 313 269 19 — 
Total$44,663 45,971 37,437 55,077 36,350 2,952 5,361 


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

 Accruing 30-89 Days Delinquent 
Loans, by Loan Type		% Change from
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019
Custom and owner occupied construction
$448 $— $637 $49 n/m(30)%814 %
Pre-sold and spec construction— — 148 8 n/m(100)%(100)%
Total residential construction
448 — 785 57 n/m(43)%686 %
Land development— — — 1,282 n/mn/m(100)%
Consumer land or lots220 248 672 836 (11)%(67)%(74)%
Unimproved land381 411 558 8 (7)%(32)%4,663 %
Developed lots for operative builders
— — 2 — n/m(100)%n/m
Commercial lots— 153 — — (100)%n/mn/m
Total land, lot and other construction
601 812 1,232 2,268 (26)%(51)%(74)%
Owner occupied3,163 1,512 3,052 2,949 109 %4 %7 %
Non-owner occupied1,157 966 1,834 1,286 20 %(37)%(10)%
Total commercial real estate
4,320 2,478 4,886 4,235 74 %(12)%2 %
Commercial and industrial2,354 4,127 2,036 12,780 (43)%16 %(82)%
Agriculture2,795 12,084 4,298 1,290 (77)%(35)%117 %
1st lien2,589 656 4,711 2,521 295 %(45)%3 %
Junior lien738 160 624 715 361 %18 %3 %
Total 1-4 family3,327 816 5,335 3,236 308 %(38)%3 %
Multifamily residential— — — 149 n/mn/m(100)
Home equity lines of credit2,200 3,330 2,352 4,162 (34)%(6)%(47)%
Other consumer789 739 1,187 1,388 7 %(34)%(43)%
Total consumer2,989 4,069 3,539 5,550 (27)%(16)%(46)%
States and political subdivisions— 124 — — (100)n/mn/m
Other797 715 1,081 389 11 %(26)%105 %
Total$17,631 $25,225 $23,192 $29,954 (30)%(24)%(41)%
______________________________
n/m - not measurable


72


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

 Net Charge-Offs (Recoveries),
Year-to-Date Period Ending,
By Loan Type		Charge-OffsRecoveries
(Dollars in thousands)Sep 30,
2020		Jun 30,
2020		Dec 31,
2019		Sep 30,
2019		Sep 30,
2020		Sep 30,
2020
Custom and owner occupied construction
$(9)— 98 — — 9 
Pre-sold and spec construction(19)(12)(18)(12)— 19 
Total residential construction(28)(12)80 (12)— 28 
Land development(63)(50)(30)(25)— 63 
Consumer land or lots(217)(17)(138)(160)7 224 
Unimproved land(489)(287)(311)(271)— 489 
Developed lots for operative builders
— — (18)(18)— — 
Commercial lots(5)(3)(6)(4)— 5 
Other construction— — (142)(142)— — 
Total land, lot and other construction
(774)(357)(645)(620)7 781 
Owner occupied(82)(49)(479)(35)52 134 
Non-owner occupied246 115 2,015 1,861 295 49 
Total commercial real estate164 66 1,536 1,826 347 183 
Commercial and industrial740 576 1,472 1,066 1,317 577 
Agriculture309 33 21 (32)315 6 
1st lien(27)— (12)189 21 48 
Junior lien(169)(129)(303)(254)28 197 
Total 1-4 family(196)(129)(315)(65)49 245 
Multifamily residential(244)(43)— — — 244 
Home equity lines of credit79 24 19 (25)310 231 
Other consumer233 161 603 380 445 212 
Total consumer312 185 622 355 755 443 
Other2,589 1,727 4,035 3,243 5,075 2,486 
Total$2,872 2,046 6,806 5,761 7,865 4,993 



73


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

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

September 30, 2020December 31, 2019September 30, 2019
(Dollars in thousands)AmountPercentAmountPercentAmountPercent
Non-interest bearing deposits$5,479,311 38 %$3,696,627 34 %$3,772,766 35 %
NOW and DDA accounts3,300,152 23 %2,645,404 25 %2,592,483 24 %
Savings accounts1,864,143 13 %1,485,487 14 %1,472,465 13 %
Money market deposit accounts2,557,294 18 %1,937,141 18 %1,940,517 18 %
Certificate accounts979,857 7 %958,501 9 %955,765 9 %
Wholesale deposits119,131 1 %53,297 — %134,629 1 %
Total interest bearing deposits8,820,577 62 %7,079,830 66 %7,095,859 65 %
Total deposits$14,299,888 100 %$10,776,457 100 %$10,868,625 100 %

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

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

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

74


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

The following table provides information relating to significant short-term borrowings, which consists of borrowings that mature within one year of period end:
At or for the Nine Months endedAt or for the Year ended
(Dollars in thousands)September 30,
2020		December 31,
2019
Repurchase agreements
Amount outstanding at end of period$965,668 569,824 
Weighted interest rate on outstanding amount0.40 %0.74 %
Maximum outstanding at any month-end$965,668 569,824 
Average balance$720,593 470,351 
Weighted-average interest rate0.51 %0.79 %

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

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

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

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

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

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

(Dollars in thousands)September 30,
2020		December 31,
2019
FHLB advances
Borrowing capacity$2,606,534 2,360,599 
Amount utilized(7,318)(38,589)
Amount available$2,599,216 2,322,010 
FRB discount window
Borrowing capacity$1,300,146 1,061,872 
Amount utilized— — 
Amount available$1,300,146 1,061,872 
Unsecured lines of credit available$635,000 230,000 
Unencumbered debt securities
U.S. government and federal agency$40,140 19,540 
U.S. government sponsored enterprises9,825 7,416 
State and local governments137,222 527,348 
Corporate bonds107,843 157,602 
Residential mortgage-backed securities1,062,492 210,356 
Commercial mortgage-backed securities956,345 401,849 
Total unencumbered debt securities$2,313,867 1,324,111 

76


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

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

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

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

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

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

77


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

 Nine Months ended
(Dollars in thousands)September 30,
2020		September 30,
2019
Income Before Income Taxes$227,230 189,581 
Federal and state income tax expense42,690 36,447 
Net Income$184,540 153,134 
Effective tax rate 1
18.8 %19.2 %
Income from tax-exempt debt securities, municipal loans and leases$45,378 36,879 
Benefits from federal income tax credits$9,626 7,947 
______________________________
1The current and prior year’s low effective income tax rates are due to income from tax-exempt debt securities, municipal loans and leases and benefits from federal income tax credits.

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

Following is a list of expected federal income tax credits to be received in the years indicated.
 
(Dollars in thousands)New
Markets
Tax Credits		Low-Income
Housing
Tax Credits		Debt
Securities
Tax Credits		Total
2020$5,351 8,435 794 14,580 
20215,642 10,031 736 16,409 
20224,993 11,146 673 16,812 
20234,398 11,167 640 16,205 
20242,466 11,032 604 14,102 
Thereafter720 47,686 905 49,311 
$23,570 99,497 4,352 127,419 

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Average Balance Sheet
The following schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yields; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rates; 3) net interest and dividend income and interest rate spread; and 4) net interest margin (tax-equivalent).
Three Months ended Nine Months ended
 September 30, 2020September 30, 2020
(Dollars in thousands)Average
Balance		Interest and
Dividends		Average
Yield/
Rate		Average
Balance		Interest and
Dividends		Average
Yield/
Rate
Assets
Residential real estate loans$1,010,503 $11,592 4.59 %$1,013,072 $35,216 4.63 %
Commercial loans 1
9,636,631 110,847 4.58 %8,896,708 318,435 4.78 %
Consumer and other loans957,284 11,000 4.57 %947,372 33,771 4.76 %
Total loans 2
11,604,418 133,439 4.57 %10,857,152 387,422 4.77 %
Tax-exempt investment securities 3
1,379,577 13,885 4.03 %1,237,779 37,542 4.04 %
Taxable investment securities 4
2,809,545 14,568 2.07 %2,380,184 43,070 2.41 %
Total earning assets15,793,540 161,892 4.08 %14,475,115 468,034 4.32 %
Goodwill and intangibles572,759 562,533 
Non-earning assets794,165 760,758 
Total assets$17,160,464 $15,798,406 
Liabilities
Non-interest bearing deposits$5,171,984 $— — %$4,528,500 $— — %
NOW and DDA accounts3,218,536 642 0.08 %2,971,702 2,244 0.10 %
Savings accounts1,804,438 166 0.04 %1,670,722 580 0.05 %
Money market deposit accounts2,453,659 1,161 0.19 %2,262,781 4,025 0.24 %
Certificate accounts981,385 1,936 0.78 %986,807 6,940 0.94 %
Total core deposits13,630,002 3,905 0.11 %12,420,512 13,789 0.15 %
Wholesale deposits 5
86,852 47 0.22 %70,880 332 0.63 %
FHLB advances21,273 70 1.30 %103,700 684 0.87 %
Repurchase agreements and other borrowed funds
1,049,002 2,062 0.78 %892,418 6,960 1.04 %
Total interest bearing liabilities
14,787,129 6,084 0.16 %13,487,510 21,765 0.22 %
Other liabilities120,294 149,423 
Total liabilities14,907,423 13,636,933 
Stockholders’ Equity
Common stock954 947 
Paid-in capital1,493,353 1,467,623 
Retained earnings622,099 586,963 
Accumulated other comprehensive income
136,635 105,940 
Total stockholders’ equity2,253,041 2,161,473 
Total liabilities and stockholders’ equity
$17,160,464 $15,798,406 
Net interest income (tax-equivalent)$155,808 $446,269 
Net interest spread (tax-equivalent)3.92 %4.10 %
Net interest margin (tax-equivalent)3.92 %4.12 %
______________________________
1Includes tax effect of $1.3 million and $3.9 million on tax-exempt municipal loan and lease income for the three and nine months ended September 30, 2020, respectively.
2Total loans are gross of the allowance for credit losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period.
3Includes tax effect of $2.8 million and $7.6 million on tax-exempt debt securities income for the three and nine months ended September 30, 2020, respectively.
4Includes tax effect of $266 thousand and $798 thousand on federal income tax credits for the three and nine months ended September 30, 2020, respectively.
5Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.
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Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest earning assets and interest bearing liabilities (“volume”) and the yields earned and paid on such assets and liabilities (“rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.
Nine Months ended
2020 vs. 2019
 Increase (Decrease) Due to:
(Dollars in thousands)VolumeRateNet
Interest income
Residential real estate loans$2,260 (1,389)871 
Commercial loans (tax-equivalent)79,812 (33,646)46,166 
Consumer and other loans3,016 (2,390)626 
Investment securities (tax-equivalent)19,872 (10,698)9,174 
Total interest income104,960 (48,123)56,837 
Interest expense
NOW and DDA accounts742 (1,536)(794)
Savings accounts151 (328)(177)
Money market deposit accounts1,140 (790)350 
Certificate accounts569 (278)291 
Wholesale deposits(1,694)(1,035)(2,729)
FHLB advances(6,280)(1,973)(8,253)
Repurchase agreements and other borrowed funds
3,877 (4,740)(863)
Total interest expense(1,495)(10,680)(12,175)
Net interest income (tax-equivalent)$106,455 (37,443)69,012 

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

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

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

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


Item 4. Controls and Procedures

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

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


PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings

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


Item 1A. Risk Factors

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

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


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


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

(a)Not Applicable

(b)Not Applicable

(c)Not Applicable


Item 3. Defaults upon Senior Securities

(a)Not Applicable

(b)Not Applicable


Item 4. Mine Safety Disclosures

Not Applicable


Item 5. Other Information

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

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


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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

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

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

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


84