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 ~~March 31,~~June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________

Commission file number 000-18911

GLACIER BANCORP, INC.

(Exact name of registrant as specified in its charter)

____________________________________________________________

Montana

81-0519541

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

49 Commons Loop

Kalispell,

Montana

59901

(Address of principal executive offices)

(Zip Code)

(406)

756-4200

(Registrant’s telephone number, including area code)

____________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	GBCI	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of Registrant’s common stock outstanding on ~~April 21,~~July 17, 2020 was ~~95,401,293.~~95,409,061. No preferred shares are issued or outstanding.

TABLE OF CONTENTS


			Page
Part I. Financial Information
Item 1 – Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition – ~~March 31,~~June 30, 2020 and December 31, 2019			4
Unaudited Condensed Consolidated Statements of Operations – Three and Six Months ended ~~March 31,~~June 30, 2020 and 2019			5
Unaudited Condensed Consolidated Statements of Comprehensive Income – Three and Six Months ended ~~March 31,~~June 30, 2020 and 2019			6
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity – Three and Six Months ended ~~March 31,~~June 30, 2020 and 2019			7
Unaudited Condensed Consolidated Statements of Cash Flows – ~~Three~~Six Months ended ~~March 31,~~June 30, 2020 and 2019			89
Notes to Unaudited Condensed Consolidated Financial Statements			1011
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			4447
Item 3 – Quantitative and Qualitative Disclosure about Market Risk			7279
Item 4 – Controls and Procedures			7279
Part II. Other Information			7279
Item 1 – Legal Proceedings			7279
Item 1A – Risk Factors			7279
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			7380
Item 3 – Defaults upon Senior Securities			7380
Item 4 – Mine Safety Disclosures			7380
Item 5 – Other Information			7380
Item 6 – Exhibits			7481
Signatures			7582

ABBREVIATIONS/ACRONYMS


ACL or allowance – allowance for credit losses
ALCO – Asset Liability Committee
ASC – Accounting Standards Codification^TM
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)	(Dollars in thousands, except per share data)	March 31, 2020		December 31, 2019	(Dollars in thousands, except per share data)	June 30, 2020		December 31, 2019
Assets	Assets				Assets
Cash on hand and in banks	Cash on hand and in banks	$	204,373	198,639	Cash on hand and in banks	$	212,681	198,639

Interest bearing cash deposits	Interest bearing cash deposits	69,068		132,322	Interest bearing cash deposits	334,929		132,322
Cash and cash equivalents	Cash and cash equivalents	273,441		330,961	Cash and cash equivalents	547,610		330,961
Debt securities, available-for-sale	Debt securities, available-for-sale	3,429,890		2,575,252	Debt securities, available-for-sale	3,533,950		2,575,252
Debt securities, held-to-maturity	Debt securities, held-to-maturity	203,814		224,611	Debt securities, held-to-maturity	203,275		224,611
Total debt securities	Total debt securities	3,633,704		2,799,863	Total debt securities	3,737,225		2,799,863
Loans held for sale, at fair value	Loans held for sale, at fair value	94,619		69,194	Loans held for sale, at fair value	115,345		69,194
Loans receivable	Loans receivable	10,088,206		9,512,810	Loans receivable	11,453,378		9,512,810
Allowance for credit losses	Allowance for credit losses	(150,190)		(124,490)	Allowance for credit losses	(162,509)		(124,490)
Loans receivable, net	Loans receivable, net	9,938,016		9,388,320	Loans receivable, net	11,290,869		9,388,320
Premises and equipment, net	Premises and equipment, net	324,230		310,309	Premises and equipment, net	326,005		310,309
Other real estate owned	Other real estate owned	4,748		5,142	Other real estate owned	4,743		5,142
Accrued interest receivable	Accrued interest receivable	68,525		56,047	Accrued interest receivable	77,363		56,047
Deferred tax asset	Deferred tax asset	—		2,037	Deferred tax asset	—		2,037
Core deposit intangible, net	Core deposit intangible, net	63,346		63,286	Core deposit intangible, net	60,733		63,286
Goodwill	Goodwill	513,355		456,418	Goodwill	513,355		456,418
Non-marketable equity securities	Non-marketable equity securities	30,597		11,623	Non-marketable equity securities	11,592		11,623
Bank-owned life insurance	Bank-owned life insurance	121,685		109,428	Bank-owned life insurance	122,388		109,428
Other assets	Other assets	92,118		81,371	Other assets	99,420		81,371
Total assets	Total assets	$	15,158,384	13,683,999	Total assets	$	16,906,648	13,683,999
Liabilities	Liabilities				Liabilities
Non-interest bearing deposits	Non-interest bearing deposits	$	3,875,848	3,696,627	Non-interest bearing deposits	$	5,043,704	3,696,627
Interest bearing deposits	Interest bearing deposits	7,681,989		7,079,830	Interest bearing deposits	8,337,828		7,079,830
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	580,335		569,824	Securities sold under agreements to repurchase	881,227		569,824
Federal Home Loan Bank advances	Federal Home Loan Bank advances	513,055		38,611	Federal Home Loan Bank advances	37,963		38,611
Other borrowed funds	Other borrowed funds	32,499		28,820	Other borrowed funds	32,546		28,820
Subordinated debentures	Subordinated debentures	139,916		139,914	Subordinated debentures	139,917		139,914
Accrued interest payable	Accrued interest payable	4,713		4,686	Accrued interest payable	4,211		4,686
Deferred tax liability	Deferred tax liability	15,210		—	Deferred tax liability	25,213		—
Other liabilities	Other liabilities	178,175		164,954	Other liabilities	200,324		164,954
Total liabilities	Total liabilities	13,021,740		11,723,266	Total liabilities	14,702,933		11,723,266
Commitments and Contingent Liabilities	Commitments and Contingent Liabilities				Commitments and Contingent Liabilities
Stockholders’ Equity	Stockholders’ Equity				Stockholders’ Equity
Preferred shares, $0.01 par value per share, 1,000,000 shares authorized, none issued or outstanding	Preferred shares, $0.01 par value per share, 1,000,000 shares authorized, none issued or outstanding	—		—	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	Common stock, $0.01 par value per share, 117,187,500 shares authorized	954		923	Common stock, $0.01 par value per share, 117,187,500 shares authorized	954		923
Paid-in capital	Paid-in capital	1,491,651		1,378,534	Paid-in capital	1,492,817		1,378,534
Retained earnings - substantially restricted	Retained earnings - substantially restricted	544,315		541,050	Retained earnings - substantially restricted	580,035		541,050
Accumulated other comprehensive income	Accumulated other comprehensive income	99,724		40,226	Accumulated other comprehensive income	129,909		40,226
Total stockholders’ equity	Total stockholders’ equity	2,136,644		1,960,733	Total stockholders’ equity	2,203,715		1,960,733
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	15,158,384	13,683,999	Total liabilities and stockholders’ equity	$	16,906,648	13,683,999
Number of common stock shares issued and outstanding	Number of common stock shares issued and outstanding	95,408,274		92,289,750	Number of common stock shares issued and outstanding	95,409,061		92,289,750

See accompanying notes to unaudited condensed consolidated financial statements.

GLACIER BANCORP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


		Three Months ended						Three Months ended				Six Months ended
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	March 31, 2020		March 31, 2019	(Dollars in thousands, except per share data)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Interest Income	Interest Income				Interest Income
Investment securities	Investment securities	$	21,014	21,351	Investment securities	$	25,833	21,892	46,847	43,243
Residential real estate loans	Residential real estate loans	11,526		10,779	Residential real estate loans	12,098		11,410	23,624	22,189
Commercial loans	Commercial loans	98,684		83,539	Commercial loans	106,343		88,043	205,027	171,582
Consumer and other loans	Consumer and other loans	11,641		10,447	Consumer and other loans	11,130		11,040	22,771	21,487
Total interest income	Total interest income	142,865		126,116	Total interest income	155,404		132,385	298,269	258,501	��
Interest Expense	Interest Expense				Interest Expense
Deposits	Deposits	5,581		5,341	Deposits	4,587		5,624	10,168	10,965
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	989		802	Securities sold under agreements to repurchase	908		886	1,897	1,688
Federal Home Loan Bank advances	Federal Home Loan Bank advances	346		3,055	Federal Home Loan Bank advances	268		3,847	614	6,902
Other borrowed funds	Other borrowed funds	128		38	Other borrowed funds	172		38	300	76
Subordinated debentures	Subordinated debentures	1,452		1,668	Subordinated debentures	1,250		1,694	2,702	3,362
Total interest expense	Total interest expense	8,496		10,904	Total interest expense	7,185		12,089	15,681	22,993
Net Interest Income	Net Interest Income	134,369		115,212	Net Interest Income	148,219		120,296	282,588	235,508
Credit loss expense	Credit loss expense	22,744		57	Credit loss expense	13,552		—	36,296	57
Net interest income after credit loss expense	Net interest income after credit loss expense	111,625		115,155	Net interest income after credit loss expense	134,667		120,296	246,292	235,451
Non-Interest Income	Non-Interest Income				Non-Interest Income
Service charges and other fees	Service charges and other fees	14,020		18,015	Service charges and other fees	11,366		20,025	25,386	38,040
Miscellaneous loan fees and charges	Miscellaneous loan fees and charges	1,285		967	Miscellaneous loan fees and charges	1,682		1,192	2,967	2,159
Gain on sale of loans	Gain on sale of loans	11,862		5,798	Gain on sale of loans	25,858		7,762	37,720	13,560
Gain on sale of debt securities	Gain on sale of debt securities	863		213	Gain on sale of debt securities	128		134	991	347
Other income	Other income	5,242		3,481	Other income	2,190		1,721	7,432	5,202
Total non-interest income	Total non-interest income	33,272		28,474	Total non-interest income	41,224		30,834	74,496	59,308
Non-Interest Expense	Non-Interest Expense				Non-Interest Expense
Compensation and employee benefits	Compensation and employee benefits	59,660		52,728	Compensation and employee benefits	57,981		51,973	117,641	104,701
Occupancy and equipment	Occupancy and equipment	9,219		8,437	Occupancy and equipment	9,357		8,180	18,576	16,617
Advertising and promotions	Advertising and promotions	2,487		2,388	Advertising and promotions	2,138		2,767	4,625	5,155
Data processing	Data processing	5,282		3,892	Data processing	5,042		4,062	10,324	7,954
Other real estate owned	Other real estate owned	112		139	Other real estate owned	75		191	187	330
Regulatory assessments and insurance	Regulatory assessments and insurance	1,090		1,285	Regulatory assessments and insurance	1,037		1,848	2,127	3,133

Core deposit intangibles amortization	Core deposit intangibles amortization	2,533		1,694	Core deposit intangibles amortization	2,613		1,865	5,146	3,559
Other expenses	Other expenses	11,545		12,267	Other expenses	19,898		15,284	31,443	27,551
Total non-interest expense	Total non-interest expense	91,928		82,830	Total non-interest expense	98,141		86,170	190,069	169,000
Income Before Income Taxes	Income Before Income Taxes	52,969		60,799	Income Before Income Taxes	77,750		64,960	130,719	125,759
Federal and state income tax expense	Federal and state income tax expense	9,630		11,667	Federal and state income tax expense	14,306		12,568	23,936	24,235
Net Income	Net Income	$	43,339	49,132	Net Income	$	63,444	52,392	106,783	101,524
Basic earnings per share	Basic earnings per share	$	0.46	0.58	Basic earnings per share	$	0.67	0.61	1.13	1.19
Diluted earnings per share	Diluted earnings per share	$	0.46	0.58	Diluted earnings per share	$	0.66	0.61	1.13	1.19
Dividends declared per share	Dividends declared per share	$	0.29	0.26	Dividends declared per share	$	0.29	0.27	0.58	0.53
Average outstanding shares - basic	Average outstanding shares - basic	93,287,670		84,549,974	Average outstanding shares - basic	95,405,493		85,826,290	94,346,582	85,191,658
Average outstanding shares - diluted	Average outstanding shares - diluted	93,359,792		84,614,248	Average outstanding shares - diluted	95,430,403		85,858,286	94,395,930	85,241,238

See accompanying notes to unaudited condensed consolidated financial statements.

GLACIER BANCORP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months ended
(Dollars in thousands) March 31,
2020 March 31,
2019
Net Income $ 43,339 49,132
Other Comprehensive Income, Net of Tax
Unrealized gains on available-for-sale securities 80,555 46,452
Reclassification adjustment for gains included in net income (862) (221)
Net unrealized gains on available-for-sale securities 79,693 46,231
Tax effect (20,195) (11,715)
Net of tax amount 59,498 34,516
Unrealized losses on derivatives used for cash flow hedges — (1,834)
Reclassification adjustment for losses included in net income — 223
Net unrealized losses on derivatives used for cash flow hedges — (1,611)
Tax effect — 409
Net of tax amount — (1,202)
Total other comprehensive income, net of tax 59,498 33,314
Total Comprehensive Income $ 102,837 82,446


	Three Months ended				Six Months ended
(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Net Income	$	63,444	52,392	106,783	101,524
Other Comprehensive Income, Net of Tax
Unrealized gains on available-for-sale securities	41,014		29,877	121,569	76,329
Reclassification adjustment for gains included in net income	(128)		(134)	(990)	(355)
Net unrealized gains on available-for-sale securities	40,886		29,743	120,579	75,974
Tax effect	(10,360)		(7,537)	(30,555)	(19,252)
Net of tax amount	30,526		22,206	90,024	56,722
Unrealized losses on derivatives used for cash flow hedges	(456)		(3,820)	(456)	(5,654)
Reclassification adjustment for losses included in net income	—		278	—	501
Net unrealized losses on derivatives used for cash flow hedges	(456)		(3,542)	(456)	(5,153)
Tax effect	115		897	115	1,306
Net of tax amount	(341)		(2,645)	(341)	(3,847)
Total other comprehensive income, net of tax	30,185		19,561	89,683	52,875
Total Comprehensive Income	$	93,629	71,953	196,466	154,399

See accompanying notes to unaudited condensed consolidated financial statements.

GLACIER BANCORP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

Three Months ended ~~March 31,~~June 30, 2020 and 2019


(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	Common Stock						Paid-in Capital	Retained Earnings Substantially Restricted	Accumulated Other Compre- hensive (Loss) Income			(Dollars in thousands, except per share data)	Common Stock							Paid-in Capital	Retained Earnings Substantially Restricted	Accumulated Other Compre- hensive Income
			Shares			Amount									Total	(Dollars in thousands, except per share data)		Shares		Amount				Accumulated Other Compre- hensive Income	Total
Balance at January 1, 2019		84,521,692		$	845		1,051,253	473,183	(9,427)	1,515,854
Balance at April 1, 2019											Balance at April 1, 2019	84,588,199		$	846		1,051,299		474,818		23,887	1,550,850
Net income	Net income	—		—			—	49,132	—	49,132	Net income	—		—			—		52,392		—	52,392
Other comprehensive income	Other comprehensive income	—		—			—	—	33,314	33,314	Other comprehensive income	—		—			—		—		19,561	19,561
Cash dividends declared ($0.26 per share)		—		—			—	(22,039)	—	(22,039)
Cash dividends declared ($0.27 per share)											Cash dividends declared ($0.27 per share)	—		—			—		(23,437)		—	(23,437)
Stock issued in connection with acquisitions											Stock issued in connection with acquisitions	2,046,341		20			87,133		—		—	87,153
Stock issuances under stock incentive plans											Stock issuances under stock incentive plans	2,854		—			—		—		—	—
Stock-based compensation and related taxes											Stock-based compensation and related taxes	—		—			857		—		—	857

Balance at June 30, 2019											Balance at June 30, 2019	86,637,394		$	866		1,139,289		503,773		43,448	1,687,376
Balance at April 1, 2020											Balance at April 1, 2020	95,408,274		$	954		1,491,651		544,315		99,724	2,136,644
Net income											Net income	—		—			—		63,444		—	63,444
Other comprehensive income											Other comprehensive income	—		—			—		—		30,185	30,185
Cash dividends declared ($0.29 per share)											Cash dividends declared ($0.29 per share)	—		—			—		(27,724)		—	(27,724)

Stock issuances under stock incentive plans	Stock issuances under stock incentive plans	66,507		1			(1)	—	—	—	Stock issuances under stock incentive plans	787		—			—		—		—	—
Stock-based compensation and related taxes	Stock-based compensation and related taxes	—		—			47	—	—	47	Stock-based compensation and related taxes	—		—			1,166		—		—	1,166
Cumulative-effect of accounting changes		—		—			—	(25,458)	—	(25,458)
Balance at March 31, 2019		84,588,199		$	846		1,051,299	474,818	23,887	1,550,850
Balance at January 1, 2020		92,289,750		$	923		1,378,534	541,050	40,226	1,960,733
Net income		—		—			—	43,339	—	43,339
Other comprehensive income		—		—			—	—	59,498	59,498
Cash dividends declared ($0.29 per share)		—		—			—	(27,727)	—	(27,727)
Stock issued in connection with acquisitions		3,007,044		30			112,103	—	—	112,133
Stock issuances under stock incentive plans		111,480		1			(1)	—	—	—
Stock-based compensation and related taxes		—		—			1,015	—	—	1,015
Cumulative-effect of accounting changes		—		—			—	(12,347)	—	(12,347)
Balance at March 31, 2020		95,408,274		$	954		1,491,651	544,315	99,724	2,136,644

Balance at June 30, 2020											Balance at June 30, 2020	95,409,061		$	954		1,492,817		580,035		129,909	2,203,715

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~GLACIER BANCORP, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Three Months ended
(Dollars in thousands) March 31,
2020 March 31,
2019
Operating Activities
Net income $ 43,339 49,132
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense 22,744 57
Net amortization of debt securities 3,237 5,379
Net amortization (accretion) of purchase accounting adjustments 324 (1,788)
Amortization of debt modification costs — 412
Origination of loans held for sale (275,256) (145,163)
Proceeds from loans held for sale 268,067 154,756
Gain on sale of loans (11,862) (5,798)
Gain on sale of debt securities (863) (213)
Bank-owned life insurance income, net (656) (497)
Stock-based compensation, net of tax benefits 1,199 1,197
Depreciation and amortization of premises and equipment 4,833 4,574
Gain on sale and write-downs of other real estate owned, net (196) (416)
Amortization of core deposit intangibles 2,533 1,694
Amortization of investments in variable interest entities 2,114 1,644
Net increase in accrued interest receivable (10,690) (2,959)
Net increase in other assets (9,793) (1,636)
Net (decrease) increase in accrued interest payable (99) 457
Net decrease in other liabilities (13,213) (14,525)
Net cash provided by operating activities 25,762 46,307
Investing Activities
Sales of available-for-sale debt securities — 269,616
Maturities, prepayments and calls of available-for-sale debt securities 176,926 120,368
Purchases of available-for-sale debt securities (811,523) (311,281)
Maturities, prepayments and calls of held-to-maturity debt securities 20,250 29,945
Principal collected on loans 810,652 617,236
Loan originations (942,157) (656,930)
Net additions to premises and equipment (940) (3,809)
Proceeds from sale of other real estate owned 1,198 1,208
Proceeds from redemption of non-marketable equity securities 36,244 39,436
Purchases of non-marketable equity securities (51,598) (28,000)
Investments in variable interest entities (2,895) (576)
Net cash received from acquisitions 43,713 —
Net cash (used in) provided by investing activities (720,130) 77,213

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~GLACIER BANCORP, INC.~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~

Three Months ended
(Dollars in thousands) March 31,
2020 March 31,
2019
Financing Activities
Net increase in deposits $ 178,132 94,322
Net increase in securities sold under agreements to repurchase 3,263 93,470
Net increase (decrease) in short-term Federal Home Loan Bank advances 475,000 (285,000)
Repayments of long-term Federal Home Loan Bank advances (547) (896)
Net (decrease) increase in other borrowed funds (5) 27
Cash dividends paid (18,652) (25,562)
Tax withholding payments for stock-based compensation (977) (1,144)
Proceeds from stock option exercises 634 —
Net cash provided by (used in) financing activities 636,848 (124,783)
Net decrease in cash, cash equivalents and restricted cash (57,520) (1,263)
Cash, cash equivalents and restricted cash at beginning of period 330,961 203,790
Cash, cash equivalents and restricted cash at end of period $ 273,441 202,527
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest $ 8,595 10,447
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Sale and refinancing of other real estate owned $ 215 —
Transfer of loans to other real estate owned 465 1,437
Right-of-use assets obtained in exchange for operating lease liabilities 2,241 647
Dividends declared during the period but not paid 27,727 22,039
Acquisitions
Fair value of common stock shares issued 112,133 —
Cash consideration 13,721 —
Fair value of assets acquired 744,109 —
Liabilities assumed 618,255 —

See accompanying notes to unaudited condensed consolidated financial statements.

GLACIER BANCORP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

Six Months ended June 30, 2020 and 2019


(Dollars in thousands, except per share data)	Common Stock						Paid-in Capital	Retained Earnings Substantially Restricted	Accumulated Other Compre- hensive (Loss) Income
		Shares			Amount					Total
Balance at January 1, 2019	84,521,692		$	845		1,051,253	473,183	(9,427)	1,515,854
Net income	—		—			—	101,524	—	101,524
Other comprehensive income	—		—			—	—	52,875	52,875
Cash dividends declared ($0.53 per share)	—		—			—	(45,476)	—	(45,476)
Stock issued in connection with acquisitions	2,046,341		20			87,133	—	—	87,153
Stock issuances under stock incentive plans	69,361		1			(1)	—	—	—
Stock-based compensation and related taxes	—		—			904	—	—	904
Cumulative-effect of accounting changes	—		—			—	(25,458)	—	(25,458)
Balance at June 30, 2019	86,637,394		$	866		1,139,289	503,773	43,448	1,687,376
Balance at January 1, 2020	92,289,750		$	923		1,378,534	541,050	40,226	1,960,733
Net income	—		—			—	106,783	—	106,783
Other comprehensive income	—		—			—	—	89,683	89,683
Cash dividends declared ($0.58 per share)	—		—			—	(55,451)	—	(55,451)
Stock issued in connection with acquisitions	3,007,044		30			112,103	—	—	112,133
Stock issuances under stock incentive plans	112,267		1			(1)	—	—	—
Stock-based compensation and related taxes	—		—			2,181	—	—	2,181
Cumulative-effect of accounting changes	—		—			—	(12,347)	—	(12,347)
Balance at June 30, 2020	95,409,061		$	954		1,492,817	580,035	129,909	2,203,715

See accompanying notes to unaudited condensed consolidated financial statements.

GLACIER BANCORP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months ended
(Dollars in thousands)	June 30, 2020		June 30, 2019
Operating Activities
Net income	$	106,783	101,524
Adjustments to reconcile net income to net cash provided by operating activities:
Credit loss expense	36,296		57
Net amortization of debt securities	6,831		8,707
Net amortization (accretion) of purchase accounting adjustments and deferred loan fees and costs	33,329		(2,187)
Amortization of debt modification costs	—		825
Origination of loans held for sale	(847,288)		(353,921)
Proceeds from loans held for sale	849,626		346,144
Gain on sale of loans	(37,720)		(13,560)
Gain on sale of debt securities	(991)		(347)

Bank-owned life insurance income, net	(1,356)		(1,021)
Stock-based compensation, net of tax benefits	1,994		1,850
Depreciation and amortization of premises and equipment	9,907		9,011
Gain on sale and write-downs of other real estate owned, net	(169)		(334)
Amortization of core deposit intangibles	5,146		3,559

Amortization of investments in variable interest entities	4,973		3,885
Net increase in accrued interest receivable	(19,529)		(3,213)
Net increase in other assets	(15,048)		(6,520)
Net (decrease) increase in accrued interest payable	(602)		749
Net increase (decrease) in other liabilities	4,992		(9,518)
Net cash provided by operating activities	137,174		85,690
Investing Activities
Sales of available-for-sale debt securities	—		415,093
Maturities, prepayments and calls of available-for-sale debt securities	341,724		247,854
Purchases of available-for-sale debt securities	(1,042,423)		(457,915)
Maturities, prepayments and calls of held-to-maturity debt securities	20,250		32,575

Principal collected on loans	1,835,968		1,364,270
Loan originations	(3,371,733)		(1,675,181)
Net additions to premises and equipment	(4,861)		(11,882)
Proceeds from sale of other real estate owned	1,523		2,440
Proceeds from redemption of non-marketable equity securities	75,049		76,948
Purchases of non-marketable equity securities	(71,398)		(71,198)

Investments in variable interest entities	(7,321)		(6,451)
Net cash received from acquisitions	43,713		11,307
Net cash used in investing activities	(2,179,509)		(72,140)

See accompanying notes to unaudited condensed consolidated financial statements.

GLACIER BANCORP, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


	Six Months ended
(Dollars in thousands)	June 30, 2020		June 30, 2019
Financing Activities
Net increase in deposits	$	2,001,950	86,429
Net increase in securities sold under agreements to repurchase	304,154		97,091
Net decrease in short-term Federal Home Loan Bank advances	(30,000)		(120,000)
Proceeds from long-term Federal Home Loan Bank advances	30,000		—
Repayments of long-term Federal Home Loan Bank advances	(631)		(987)
Net increase in other borrowed funds	43		54
Cash dividends paid	(46,324)		(47,560)
Tax withholding payments for stock-based compensation	(1,003)		(1,158)
Proceeds from stock option exercises	795		—
Net cash provided by financing activities	2,258,984		13,869
Net increase in cash, cash equivalents and restricted cash	216,649		27,419
Cash, cash equivalents and restricted cash at beginning of period	330,961		203,790
Cash, cash equivalents and restricted cash at end of period	$	547,610	231,209
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	16,282	22,244
Cash paid during the period for income taxes	8,550		21,680
Supplemental Disclosure of Non-Cash Investing and Financing Activities

Sale and refinancing of other real estate owned	$	215	7
Transfer of loans to other real estate owned	791		1,914
Right-of-use assets obtained in exchange for operating lease liabilities	5,253		3,862
Dividends declared during the period but not paid	27,785		23,482
Acquisitions
Fair value of common stock shares issued	112,133		87,153
Cash consideration	13,721		4

Fair value of assets acquired	744,109		379,155
Liabilities assumed	618,255		291,998

See accompanying notes to unaudited condensed consolidated financial statements.

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 ~~three~~six months ended ~~March 31,~~June 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 16 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.

1011

The parent holding company owns non-bank subsidiaries that have issued trust preferred ~~securities as Tier 1 capital instruments.~~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 as of acquisition date.~~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 ~~into~~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 ~~allowance~~ACL is determined using the same methodology as with other debt securities. The sum of a security’s purchase price and ~~allowance for credit losses~~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.

1112

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~~more-likely-than-not that it will be required to sell the security before recovery of its amortized ~~costs~~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 ~~impacts~~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~~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~~charge-offs and adjusted for deferred f~~ees~~fees and costs on originated loans and unamortized premiums or discounts on acquired loans. Fees and costs on originated loans and premiums or discounts on acquired loans are deferred and subsequently amortized or accreted as a yield adjustment over the expected life of the loan utilizing the interest ~~method.~~or straight-line methods. The ~~objective of~~interest method is utilized for loans with scheduled payment terms and the ~~interest method~~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.

1213

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 ~~allowance~~ACL is determined using the same methodology as other loans held for investment. The ~~allowance~~ACL determined on a collective basis is allocated to individual loans. The sum of a loan’s purchase price and ~~allowance for credit losses~~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 ~~allowance~~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 4 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 4 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.

1314

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 2 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,~~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 ~~through obtaining~~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).

1415

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 ~~allowance for credit losses,~~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.

1516

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~~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 which generally include interest only or full deferrals up to six months.

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 ~~allowance for credit loss~~ACL is determined by discounting the expected future cash flows at the original interest of the loan.

1617

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 ~~$14,458,000~~$26,239,000 and ~~$18,446,000~~$38,943,000 for the ~~three~~six months ended ~~March 31,~~June 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 ~~March 31,~~June 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.

1718

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.

1819

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:


		March 31, 2020										June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
Available-for-sale	Available-for-sale						Available-for-sale
U.S. government and federal agency	U.S. government and federal agency	$	44,112	489	(34)	44,567	U.S. government and federal agency	$	42,016	391	(172)	42,235
U.S. government sponsored enterprises	U.S. government sponsored enterprises	31,083		168	—	31,251	U.S. government sponsored enterprises	10,788		75	—	10,863
State and local governments	State and local governments	1,198,841		60,006	(505)	1,258,342	State and local governments	1,198,293		79,406	(147)	1,277,552
Corporate bonds	Corporate bonds	330,982		2,601	(2,399)	331,184	Corporate bonds	374,193		14,389	(207)	388,375
Residential mortgage-backed securities	Residential mortgage-backed securities	771,841		22,907	(15)	794,733	Residential mortgage-backed securities	835,036		22,648	(43)	857,641
Commercial mortgage-backed securities	Commercial mortgage-backed securities	919,460		50,442	(89)	969,813	Commercial mortgage-backed securities	899,167		58,117	—	957,284
Total available-for-sale	Total available-for-sale	$	3,296,319	136,613	(3,042)	3,429,890	Total available-for-sale	$	3,359,493	175,026	(569)	3,533,950
Held-to-maturity	Held-to-maturity						Held-to-maturity
State and local governments	State and local governments	$	203,814	10,221	(5)	214,030	State and local governments	$	203,275	12,608	—	215,883
Total held-to-maturity	Total held-to-maturity	$	203,814	10,221	(5)	214,030	Total held-to-maturity	$	203,275	12,608	—	215,883


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

1920

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 ~~March 31,~~June 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.


		March 31, 2020										June 30, 2020
		Available-for-Sale				Held-to-Maturity					Available-for-Sale		Held-to-Maturity
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value
Due within one year	Due within one year	$	125,320	125,118	—	—	Due within one year	$	144,070	145,977	—	—
Due after one year through five years	Due after one year through five years	280,574		282,188	12,153	12,637	Due after one year through five years	269,452		281,526	17,132	18,339
Due after five years through ten years	Due after five years through ten years	241,013		250,182	72,466	76,544	Due after five years through ten years	261,463		275,179	71,471	76,970
Due after ten years	Due after ten years	958,111		1,007,856	119,195	124,849	Due after ten years	950,305		1,016,343	114,672	120,574
		1,605,018		1,665,344	203,814	214,030		1,625,290		1,719,025	203,275	215,883
Mortgage-backed securities ¹	Mortgage-backed securities ¹	1,691,301		1,764,546	—	—	Mortgage-backed securities ¹	1,734,203		1,814,925	—	—
Total	Total	$	3,296,319	3,429,890	203,814	214,030	Total	$	3,359,493	3,533,950	203,275	215,883

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

Sales and Calls of Debt Securities

Proceeds from sales and calls of debt securities and the associated gains and losses that have been included in earnings are listed below:


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		March 31, 2019	(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Available-for-sale	Available-for-sale				Available-for-sale
Proceeds from sales and calls of debt securities	Proceeds from sales and calls of debt securities	$	77,073	304,048	Proceeds from sales and calls of debt securities	$	37,711	172,323	114,784	476,371
Gross realized gains ¹	Gross realized gains ¹	962		2,937	Gross realized gains ¹	142		1,347	1,104	4,284
Gross realized losses ¹	Gross realized losses ¹	(100)		(2,716)	Gross realized losses ¹	(14)		(1,213)	(114)	(3,929)
Held-to-maturity	Held-to-maturity				Held-to-maturity
Proceeds from calls of debt securities	Proceeds from calls of debt securities	20,250		29,945	Proceeds from calls of debt securities	—		2,630	20,250	32,575
Gross realized gains ¹	Gross realized gains ¹	1		2	Gross realized gains ¹	—		—	1	2
Gross realized losses ¹	Gross realized losses ¹	—		(10)	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.

2021

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 ~~allowance for credit losses~~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.


		March 31, 2020																													June 30, 2020
		Number of Securities	Less than 12 Months							12 Months or More							Total								Number of Securities		Less than 12 Months						12 Months or More	Total
(Dollars in thousands)	(Dollars in thousands)				Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		(Dollars in thousands)	Number of Securities					Fair Value				Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available-for-sale	Available-for-sale														Available-for-sale
U.S. government and federal agency	U.S. government and federal agency	13	$	835		(5)		5,442		(29)		6,277		(34)	U.S. government and federal agency	9					$	4,999		(163)		738		(9)		5,737		(172)

State and local governments	State and local governments	64	38,635			(505)		—		—		38,635		(505)	State and local governments	31			21,080				(147)		—		—		21,080		(147)
Corporate bonds	Corporate bonds	36	137,831			(2,399)		—		—		137,831		(2,399)	Corporate bonds	9			20,148				(207)		—		—		20,148		(207)
Residential mortgage-backed securities	Residential mortgage-backed securities	15	2,855			(15)		27		—		2,882		(15)	Residential mortgage-backed securities	15			17,637				(43)		27		—		17,664		(43)
Commercial mortgage-backed securities		2	4,974			(89)		—		—		4,974		(89)

Total available-for-sale	Total available-for-sale	130	$	185,130		(3,013)		5,469		(29)		190,599		(3,042)	Total available-for-sale	64			$	63,864			(560)		765		(9)		64,629		(569)


	December 31, 2019
	Number of Securities	Less than 12 Months							12 Months or More						Total
(Dollars in thousands)				Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available-for-sale
U.S. government and federal agency	20	$	464		—		9,902		(65)		10,366		(65)

State and local governments	12	19,044			(80)		—		—		19,044		(80)
Corporate bonds	2	7,378			(1)		—		—		7,378		(1)
Residential mortgage-backed securities	35	85,562			(234)		29,038		(315)		114,600		(549)
Commercial mortgage-backed securities	19	177,051			(1,293)		7,697		(99)		184,748		(1,392)
Total available-for-sale	88	$	289,499		(1,608)		46,637		(479)		336,136		(2,087)

2122

With respect to severity, the majority of available-for-sale debt securities with unrealized loss positions at ~~March 31,~~June 30, 2020 have unrealized losses as a percentage of book value of less than 5 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 4 highest credit rating categories. All of the Company’s available-for-sale debt securities with unrealized loss positions at ~~March 31,~~June 30, 2020 have been determined to be investment grade.

As of ~~March 31,~~June 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 ~~$22,632,000~~$18,970,000 at ~~March 31,~~June 30, 2020 and was excluded from the estimate of credit losses.

During the period ended ~~March 31,~~June 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 0 PCD securities, so 0 allowance for credit losses was recorded.

Based on an analysis of its available-for-sale debt securities with unrealized losses as of ~~March 31,~~June 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 ~~March 31,~~June 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, 0 ACL was recorded on available-for-sale debt securities at ~~March 31,~~June 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)	(Dollars in thousands)	March 31, 2020		December 31, 2019	(Dollars in thousands)	June 30, 2020		December 31, 2019
Held-to-maturity	Held-to-maturity				Held-to-maturity
S&P: AAA / Moody’s: Aaa	S&P: AAA / Moody’s: Aaa	$	47,511	65,217	S&P: AAA / Moody’s: Aaa	$	47,360	65,217
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3	S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3	128,616		130,316	S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3	128,281		130,316
S&P: A+, A, A- / Moody’s: A1, A2, A3	S&P: A+, A, A- / Moody’s: A1, A2, A3	27,301		28,689	S&P: A+, A, A- / Moody’s: A1, A2, A3	27,252		28,689

Not rated by either entity	Not rated by either entity	386		389	Not rated by either entity	382		389

Total held-to-maturity	Total held-to-maturity	$	203,814	224,611	Total held-to-maturity	$	203,275	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 4 highest credit rating categories. All of the Company’s held-to-maturity debt securities at ~~March 31,~~June 30, 2020 have been determined to be investment grade.

As of ~~March 31,~~June 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 ~~$2,177,000~~$1,956,000 at ~~March 31,~~June 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, 0 ACL was recorded at ~~March 31,~~June 30, 2020.

2223

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)	(Dollars in thousands)	March 31, 2020		December 31, 2019	(Dollars in thousands)	June 30, 2020		December 31, 2019
Residential real estate	Residential real estate	$	957,830	926,388	Residential real estate	$	903,198	926,388
Commercial real estate	Commercial real estate	5,928,303		5,579,307	Commercial real estate	6,047,692		5,579,307
Other commercial	Other commercial	2,239,878		2,094,254	Other commercial	3,547,249		2,094,254
Home equity	Home equity	652,942		617,201	Home equity	654,392		617,201
Other consumer	Other consumer	309,253		295,660	Other consumer	300,847		295,660
Loans receivable	Loans receivable	10,088,206		9,512,810	Loans receivable	11,453,378		9,512,810
Allowance for credit losses	Allowance for credit losses	(150,190)		(124,490)	Allowance for credit losses	(162,509)		(124,490)
Loans receivable, net	Loans receivable, net	$	9,938,016	9,388,320	Loans receivable, net	$	11,290,869	9,388,320
Net deferred origination (fees) costs included in loans receivable	Net deferred origination (fees) costs included in loans receivable	$	(6,925)	(6,964)	Net deferred origination (fees) costs included in loans receivable	$	(41,811)	(6,964)
Net purchase accounting (discounts) premiums included in loans receivable	Net purchase accounting (discounts) premiums included in loans receivable	$	(19,864)	(21,574)	Net purchase accounting (discounts) premiums included in loans receivable	$	(18,954)	(21,574)
Accrued interest receivable on loans	Accrued interest receivable on loans	$	43,689	40,962	Accrued interest receivable on loans	$	56,415	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 ~~three~~six months ended ~~March 31,~~June 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 March 31, 2020														Three Months ended June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Balance at beginning of period	Balance at beginning of period	$	124,490	10,111	69,496	36,129	4,937	3,817	Balance at beginning of period	$	150,190	9,315	70,848	56,409	7,934	5,684
Impact of adopting CECL		3,720		3,584	10,533	(13,759)	3,400	(38)
Acquisitions		49		—	49	—	—	—

Credit loss expense (reversal)	Credit loss expense (reversal)	22,744		(4,369)	(9,433)	34,133	(508)	2,921	Credit loss expense (reversal)	13,552		662	18,309	(6,974)	2,174	(619)
Charge-offs	Charge-offs	(2,567)		(20)	(30)	(785)	(1)	(1,731)	Charge-offs	(2,668)		(1)	(150)	(1,088)	(193)	(1,236)
Recoveries	Recoveries	1,754		9	470	454	106	715	Recoveries	1,435		10	97	491	47	790
Balance at end of period	Balance at end of period	$	150,190	9,315	71,085	56,172	7,934	5,684	Balance at end of period	$	162,509	9,986	89,104	48,838	9,962	4,619

2324


		Three Months ended March 31, 2019														Three Months ended June 30, 2019
(Dollars in thousands)	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Balance at beginning of period	Balance at beginning of period	$	131,239	10,631	72,448	38,160	5,811	4,189	Balance at beginning of period	$	129,786	10,711	72,328	36,849	5,880	4,018
Credit loss expense (reversal)	Credit loss expense (reversal)	57		278	(148)	(915)	64	778	Credit loss expense (reversal)	—		(105)	(196)	(829)	(73)	1,203
Charge-offs	Charge-offs	(3,341)		(292)	(283)	(840)	(8)	(1,918)	Charge-offs	(2,859)		(49)	(126)	(358)	(20)	(2,306)
Recoveries	Recoveries	1,831		94	311	444	13	969	Recoveries	2,127		138	441	597	14	937
Balance at end of period	Balance at end of period	$	129,786	10,711	72,328	36,849	5,880	4,018	Balance at end of period	$	129,054	10,695	72,447	36,259	5,801	3,852


	Six Months ended June 30, 2020
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Balance at beginning of period	$	124,490	10,111	69,496	36,129	4,937	3,817
Impact of adopting CECL	3,720		3,584	10,533	(13,759)	3,400	(38)
Acquisitions	49		—	49	—	—	—
Credit loss expense (reversal)	36,296		(3,707)	8,876	27,159	1,666	2,302
Charge-offs	(5,235)		(21)	(180)	(1,873)	(194)	(2,967)
Recoveries	3,189		19	330	1,182	153	1,505
Balance at end of period	$	162,509	9,986	89,104	48,838	9,962	4,619


	Six Months ended June 30, 2019
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Balance at beginning of period	$	131,239	10,631	72,448	38,160	5,811	4,189


Credit loss expense (reversal)	57		173	(344)	(1,744)	(9)	1,981
Charge-offs	(6,200)		(341)	(409)	(1,198)	(28)	(4,224)
Recoveries	3,958		232	752	1,041	27	1,906
Balance at end of period	$	129,054	10,695	72,447	36,259	5,801	3,852

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 ~~forecasts~~forecast to estimate the credit loss expense over the expected life of the loans. During the ~~three~~six months ended ~~March 31,~~June 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 ~~the~~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 ~~forecasts~~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”). The changes in the economic ~~forecasts~~forecast necessitated a change in weighting of the historical loss factors and the combined result was a significant increase in losses expected in the other commercial segment while other loan segments remained stable or experienced decreases in expected credit losses.

There were no significant changes in charge-offs during the ~~three~~six months ended ~~March 31,~~June 30, 2020 compared to the same period in the prior year. Nonetheless, the most notable change 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 ~~three~~six months ended ~~March 31,~~June 30, 2020, there have been no significant changes to the types of collateral securing collateral-dependent loans.

During the six month period ended ~~March 31,~~June 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:


		March 31, 2020														June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Accruing loans 30-59 days past due	Accruing loans 30-59 days past due	$	31,688	8,419	9,516	7,791	3,808	2,154	Accruing loans 30-59 days past due	$	11,607	—	2,737	4,904	2,437	1,529
Accruing loans 60-89 days past due	Accruing loans 60-89 days past due	9,687		45	3,311	3,727	1,877	727	Accruing loans 60-89 days past due	13,618		231	8,117	3,905	1,192	173
Accruing loans 90 days or more past due	Accruing loans 90 days or more past due	6,624		701	3,700	1,738	140	345	Accruing loans 90 days or more past due	6,071		206	3,110	2,519	98	138
Non-accrual loans with no ACL	Non-accrual loans with no ACL	25,219		4,126	11,328	6,395	2,953	417	Non-accrual loans with no ACL	30,578		3,774	17,767	5,676	2,971	390
Non-accrual loans with ACL	Non-accrual loans with ACL	2,787		307	2,137	257	50	36	Non-accrual loans with ACL	4,579		469	1,915	2,037	115	43
Total past due and non-accrual loans	Total past due and non-accrual loans	76,005		13,598	29,992	19,908	8,828	3,679	Total past due and non-accrual loans	66,453		4,680	33,646	19,041	6,813	2,273
Current loans receivable	Current loans receivable	10,012,201		944,232	5,898,311	2,219,970	644,114	305,574	Current loans receivable	11,386,925		898,518	6,014,046	3,528,208	647,579	298,574
Total loans receivable	Total loans receivable	$	10,088,206	957,830	5,928,303	2,239,878	652,942	309,253	Total loans receivable	$	11,453,378	903,198	6,047,692	3,547,249	654,392	300,847


	December 31, 2019
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Accruing loans 30-59 days past due	$	15,944	3,403	4,946	4,685	1,040	1,870
Accruing loans 60-89 days past due	7,248		749	2,317	1,190	1,902	1,090
Accruing loans 90 days or more past due	1,412		753	64	143	—	452
Non-accrual loans	30,883		4,715	15,650	6,592	3,266	660
Total past due and non-accrual loans	55,487		9,620	22,977	12,610	6,208	4,072
Current loans receivable	9,457,323		916,768	5,556,330	2,081,644	610,993	291,588
Total loans receivable	$	9,512,810	926,388	5,579,307	2,094,254	617,201	295,660

The Company had $517,000 of interest reversed on non-accrual loans during the six months ended June 30, 2020.

December 31, 2019
(Dollars in thousands) Total Residential
Real Estate Commercial
Real Estate Other
Commercial Home
Equity Other
Consumer
Accruing loans 30-59 days past due $ 15,944 3,403 4,946 4,685 1,040 1,870
Accruing loans 60-89 days past due 7,248 749 2,317 1,190 1,902 1,090
Accruing loans 90 days or more past due 1,412 753 64 143 — 452
Non-accrual loans 30,883 4,715 15,650 6,592 3,266 660
Total past due and non-accrual loans 55,487 9,620 22,977 12,610 6,208 4,072
Current loans receivable 9,457,323 916,768 5,556,330 2,081,644 610,993 291,588
Total loans receivable $ 9,512,810 926,388 5,579,307 2,094,254 617,201 295,660
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:

~~The Company had $49,000 of interest reversed on non-accrual loans during the three months ended March 31, 2020.~~


	June 30, 2020
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
Business assets	$	4,631	—	109	4,522	—	—
Residential real estate	4,937		1,942	891	117	1,932	55
Other real estate	14,310		32	13,415	825	22	16
Other	163		—	—	28	—	135
Total	$	24,041	1,974	14,415	5,492	1,954	206

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 March 31, 2020														Three Months ended June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer	(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
TDRs that occurred during the period	TDRs that occurred during the period								TDRs that occurred during the period
Number of loans	Number of loans	5		—	3	2	—	—	Number of loans	8		1	3	3	1	—
Pre-modification recorded balance	Pre-modification recorded balance	$	7,268	—	6,857	411	—	—	Pre-modification recorded balance	$	1,672	210	1,263	160	39	—
Post-modification recorded balance	Post-modification recorded balance	$	7,268	—	6,857	411	—	—	Post-modification recorded balance	$	1,672	210	1,263	160	39	—
TDRs that subsequently defaulted	TDRs that subsequently defaulted								TDRs that subsequently defaulted
Number of loans	Number of loans	—		—	—	—	—	—	Number of loans	—		—	—	—	—	—
Recorded balance	Recorded balance	$	—	—	—	—	—	—	Recorded balance	$	—	—	—	—	—	—

Three Months ended March 31, 2019
(Dollars in thousands) Total Residential
Real Estate Commercial
Real Estate Other
Commercial Home
Equity Other
Consumer
TDRs that occurred during the period
Number of loans 4 — 1 2 1 —
Pre-modification recorded balance $ 1,705 — 1,035 567 103 —
Post-modification recorded balance $ 1,705 — 1,035 567 103 —
TDRs that subsequently defaulted
Number of loans — — — — — —
Recorded balance $ — — — — — —


	Three Months ended June 30, 2019
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
TDRs that occurred during the period
Number of loans	4		1	—	—	—	3
Pre-modification recorded balance	$	388	117	—	—	—	271
Post-modification recorded balance	$	374	123	—	—	—	251
TDRs that subsequently defaulted
Number of loans	1		—	—	—	—	1
Recorded balance	$	305	—	—	—	—	305

2527


	Six Months ended June 30, 2020
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
TDRs that occurred during the period
Number of loans	13		1	6	5	1	—
Pre-modification recorded balance	$	8,940	210	8,120	571	39	—
Post-modification recorded balance	$	8,940	210	8,120	571	39	—
TDRs that subsequently defaulted
Number of loans	1		—	1	—	—	—
Recorded balance	$	106	—	106	—	—	—


	Six Months ended June 30, 2019
(Dollars in thousands)	Total		Residential Real Estate	Commercial Real Estate	Other Commercial	Home Equity	Other Consumer
TDRs that occurred during the period
Number of loans	8		1	1	2	1	3
Pre-modification recorded balance	$	2,093	117	1,035	567	103	271
Post-modification recorded balance	$	2,079	123	1,035	567	103	251
TDRs that subsequently defaulted
Number of loans	1		—	—	—	—	1
Recorded balance	$	305	—	—	—	—	305

The modifications for the loans designated as TDRs during the ~~three~~six months ended ~~March 31,~~June 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 ~~$568,000~~$904,000 and ~~$1,940,000~~$2,528,000 for the ~~three~~six months ended ~~March 31,~~June 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 ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019. At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had ~~$1,364,000~~$1,001,000 and $1,744,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process. At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had ~~$1,554,000~~$1,896,000 and $1,504,000, respectively, of OREO secured by residential real estate properties.

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.


		March 31, 2020												June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Total		Pass	Special Mention	Substandard	Doubtful/ Loss	(Dollars in thousands)	Total		Pass	Special Mention	Substandard	Doubtful/ Loss
Commercial real estate loans	Commercial real estate loans							Commercial real estate loans
Term loans by origination year	Term loans by origination year							Term loans by origination year
2020 (year-to-date)	2020 (year-to-date)	$	339,688	338,459	—	1,229	—	2020 (year-to-date)	$	659,384	656,332	—	3,052	—
2019	2019	1,177,694		1,170,434	—	7,260	—	2019	1,185,582		1,176,792	—	8,790	—
2018	2018	1,082,524		1,048,933	—	33,591	—	2018	1,037,111		1,003,201	—	33,910	—
2017	2017	823,352		801,190	3,421	18,741	—	2017	809,549		786,960	—	22,589	—
2016	2016	560,146		542,535	—	17,611	—	2016	553,420		534,881	—	18,539	—
Prior	Prior	1,782,598		1,732,836	—	49,352	410	Prior	1,654,405		1,622,710	66	31,256	373
Revolving loans	Revolving loans	162,301		154,117	—	8,182	2	Revolving loans	148,241		146,605	—	1,636	—

Total	Total	$	5,928,303	5,788,504	3,421	135,966	412	Total	$	6,047,692	5,927,481	66	119,772	373
Other commercial loans	Other commercial loans							Other commercial loans
Term loans by origination year	Term loans by origination year							Term loans by origination year
2020 (year-to-date)	2020 (year-to-date)	$	142,965	139,929	—	3,036	—	2020 (year-to-date)	$	1,646,307	1,641,537	—	4,770	—
2019	2019	386,443		380,272	—	6,171	—	2019	359,481		353,800	—	5,679	2
2018	2018	350,710		345,567	—	5,142	1	2018	311,638		305,819	—	5,818	1
2017	2017	340,398		334,937	—	5,020	441	2017	312,198		306,956	—	4,747	495
2016	2016	217,527		214,790	—	2,588	149	2016	201,794		199,013	—	2,582	199
Prior	Prior	220,822		213,739	—	6,513	570	Prior	253,062		243,393	2,767	5,738	1,164
Revolving loans	Revolving loans	581,013		567,842	—	13,060	111	Revolving loans	462,769		450,404	849	10,541	975

Total	Total	$	2,239,878	2,197,076	—	41,530	1,272	Total	$	3,547,249	3,500,922	3,616	39,875	2,836

2629

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:


		March 31, 2020										June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Total		Performing	30-89 Days Past Due	Non-Accrual and 90 Days or More Past Due	(Dollars in thousands)	Total		Performing	30-89 Days Past Due	Non-Accrual and 90 Days or More Past Due
Residential real estate loans	Residential real estate loans						Residential real estate loans
Term loans by origination year	Term loans by origination year						Term loans by origination year
2020 (year-to-date)	2020 (year-to-date)	$	30,716	30,716	—	—	2020 (year-to-date)	$	81,889	81,789	100	—
2019	2019	268,951		266,516	2,250	185	2019	256,534		256,352	—	182
2018	2018	186,895		183,955	2,521	419	2018	156,524		156,280	—	244
2017	2017	126,134		125,673	461	—	2017	107,758		107,652	—	106
2016	2016	83,637		82,608	244	785	2016	73,516		72,483	—	1,033
Prior	Prior	258,882		252,149	2,988	3,745	Prior	224,321		221,306	131	2,884
Revolving loans	Revolving loans	2,615		2,615	—	—	Revolving loans	2,656		2,656	—	—

Total	Total	$	957,830	944,232	8,464	5,134	Total	$	903,198	898,518	231	4,449
Home equity loans	Home equity loans						Home equity loans
Term loans by origination year	Term loans by origination year						Term loans by origination year
2020 (year-to-date)	2020 (year-to-date)	$	—	—	—	—	2020 (year-to-date)	$	—	—	—	—
2019	2019	2,140		2,102	38	—	2019	2,039		2,001	—	38
2018	2018	2,643		2,643	—	—	2018	2,202		2,202	—	—
2017	2017	2,706		2,706	—	—	2017	2,015		2,015	—	—
2016	2016	1,747		1,747	—	—	2016	1,571		1,571	—	—
Prior	Prior	21,116		19,696	696	724	Prior	18,947		17,864	381	702
Revolving loans	Revolving loans	622,590		615,220	4,951	2,419	Revolving loans	627,618		621,926	3,248	2,444

Total	Total	$	652,942	644,114	5,685	3,143	Total	$	654,392	647,579	3,629	3,184
Other consumer loans	Other consumer loans						Other consumer loans
Term loans by origination year	Term loans by origination year						Term loans by origination year
2020 (year-to-date)	2020 (year-to-date)	$	33,081	33,077	4	—	2020 (year-to-date)	$	62,392	62,371	21	—
2019	2019	106,151		105,790	317	44	2019	89,495		89,300	154	41
2018	2018	69,022		68,594	350	78	2018	59,295		59,099	140	56
2017	2017	30,799		30,261	472	66	2017	26,418		25,848	511	59
2016	2016	16,696		16,217	231	248	2016	14,793		14,713	3	77
Prior	Prior	30,219		28,412	1,452	355	Prior	26,035		24,864	839	332
Revolving loans	Revolving loans	23,285		23,223	55	7	Revolving loans	22,419		22,379	34	6

Total	Total	$	309,253	305,574	2,881	798	Total	$	300,847	298,574	1,702	571

2730

Additional Disclosures

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

The following table disclosed the recorded investment in loans and the balance in the allowance separated by loans individually evaluated and collectively evaluated for impairment:


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

The following table disclosed information related to impaired loans:


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

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

2831

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:


		March 31, 2020							December 31, 2019								June 30, 2020				December 31, 2019
(Dollars in thousands)	(Dollars in thousands)	Finance Leases			Operating Leases		Finance Leases		Operating Leases		(Dollars in thousands)	Finance Leases			Operating Leases		Finance Leases		Operating Leases
ROU assets	ROU assets	$	5,618				6,537				ROU assets	$	5,618				6,537
Accumulated depreciation	Accumulated depreciation	(95)					(917)				Accumulated depreciation	(153)					(917)
Net ROU assets	Net ROU assets	$	5,523		43,371		5,620		41,453		Net ROU assets	$	5,465		45,131		5,620		41,453
Lease liabilities	Lease liabilities	$	5,580		45,967		5,671		43,904		Lease liabilities	$	5,559		47,807		5,671		43,904
Weighted-average remaining lease term	Weighted-average remaining lease term	25 years			18 years		24 years		19 years		Weighted-average remaining lease term	24 years			18 years		24 years		19 years
Weighted-average discount rate	Weighted-average discount rate	2.9		%	3.6	%	3.0	%	3.7	%	Weighted-average discount rate	2.9		%	3.6	%	3.0	%	3.7	%

Maturities of lease liabilities consist of the following:


		March 31, 2020						June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Finance Leases		Operating Leases	(Dollars in thousands)	Finance Leases		Operating Leases
Maturing within one year	Maturing within one year	$	250	4,144	Maturing within one year	$	251	4,388
Maturing one year through two years	Maturing one year through two years	257		4,020	Maturing one year through two years	258		4,272
Maturing two years through three years	Maturing two years through three years	262		3,640	Maturing two years through three years	264		3,808
Maturing three years through four years	Maturing three years through four years	268		3,306	Maturing three years through four years	270		3,507
Maturing four years through five years	Maturing four years through five years	276		3,317	Maturing four years through five years	277		3,453
Thereafter	Thereafter	6,727		45,687	Thereafter	6,658		47,744
Total lease payments	Total lease payments	8,040		64,114	Total lease payments	7,978		67,172
Present value of lease payments	Present value of lease payments				Present value of lease payments
Short-term	Short-term	89		2,725	Short-term	92		2,755
Long-term	Long-term	5,491		43,242	Long-term	5,467		45,052
Total present value of lease payments	Total present value of lease payments	5,580		45,967	Total present value of lease payments	5,559		47,807
Difference between lease payments and present value of lease payments	Difference between lease payments and present value of lease payments	$	2,460	18,147	Difference between lease payments and present value of lease payments	$	2,419	19,365

2932

The components of lease expense consist of the following:


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		March 31, 2019	(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Finance lease cost	Finance lease cost				Finance lease cost
Amortization of ROU assets	Amortization of ROU assets	$	57	16	Amortization of ROU assets	$	58	16	115	32
Interest on lease liabilities	Interest on lease liabilities	41		2	Interest on lease liabilities	40		2	81	4
Operating lease cost	Operating lease cost	1,108		913	Operating lease cost	1,191		997	2,299	1,910
Short-term lease cost	Short-term lease cost	90		109	Short-term lease cost	88		119	178	228
Variable lease cost	Variable lease cost	385		199	Variable lease cost	328		222	713	421
Sublease income	Sublease income	(2)		(2)	Sublease income	(1)		(1)	(3)	(3)
Total lease expense	Total lease expense	$	1,679	1,237	Total lease expense	$	1,704	1,355	3,383	2,592

Supplemental cash flow information related to leases is as follows:

Three Months ended

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

(Dollars in thousands)

Finance
Leases

Operating
Leases

Finance
Leases

Operating
Leases

(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

615

479

Operating cash flows

673

497

Financing cash flows

N/A

Financing cash flows

N/A

Six Months ended

June 30, 2020

June 30, 2019

(Dollars in thousands)

Finance
Leases

Operating
Leases

Finance
Leases

Operating
Leases

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows

1,288

976

Financing cash flows

N/A

The Company also leases office space to third parties through operating leases. Rent income from these leases for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019 was not significant.

Note 5. Goodwill

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


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		March 31, 2019	(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Net carrying value at beginning of period	Net carrying value at beginning of period	$	456,418	289,586	Net carrying value at beginning of period	$	513,355	289,586	456,418	289,586
Acquisitions and adjustments	Acquisitions and adjustments	56,937		—	Acquisitions and adjustments	—		41,301	56,937	41,301

Net carrying value at end of period	Net carrying value at end of period	$	513,355	289,586	Net carrying value at end of period	$	513,355	330,887	513,355	330,887

The Company performed its annual goodwill impairment test during the third quarter of 2019 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. During the ~~first~~current quarter, ~~of 2020,~~ the Company considered the impact of the COVID-19 pandemic and the ~~current~~ economic conditions and the Company’s stock price remained significantly above tangible book value, so it was determined that such conditions would not likely reduce the fair value of a reporting unit below its carrying ~~value, and therefore~~value. As a result, the Company did not perform interim testing at ~~March 31,~~June 30, 2020. 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 ~~March 31,~~June 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.

3134

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)	(Dollars in thousands)	March 31, 2020		December 31, 2019	(Dollars in thousands)	June 30, 2020		December 31, 2019
Assets	Assets				Assets
Loans receivable	Loans receivable	$	90,183	84,390	Loans receivable	$	90,183	84,390
Accrued interest receivable	Accrued interest receivable	91		63	Accrued interest receivable	254		63
Other assets	Other assets	54,626		54,692	Other assets	55,537		54,692
Total assets	Total assets	$	144,900	139,145	Total assets	$	145,974	139,145
Liabilities	Liabilities				Liabilities
Other borrowed funds	Other borrowed funds	$	26,919	23,149	Other borrowed funds	$	26,988	23,149
Accrued interest payable	Accrued interest payable	56		36	Accrued interest payable	98		36
Other liabilities	Other liabilities	36		123	Other liabilities	42		123
Total liabilities	Total liabilities	$	27,011	23,308	Total liabilities	$	27,128	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 ~~$42,575,000~~$45,012,000 and $41,521,000 as of ~~March 31,~~June 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 ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019. Future unfunded contingent commitments related to the Company’s LIHTC investments at ~~March 31,~~June 30, 2020 are as follows:


(Dollars in thousands)	(Dollars in thousands)	Amount		(Dollars in thousands)	Amount
Years ending December 31,	Years ending December 31,			Years ending December 31,
2020	2020	$	9,436	2020	$	7,767
2021	2021	9,296		2021	13,154
2022	2022	8,256		2022	8,930
2023	2023	222		2023	1,777
2024	2024	353		2024	398
Thereafter	Thereafter	479		Thereafter	687
Total	Total	$	28,042	Total	$	32,713

3235

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


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		March 31, 2019	(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Amortization expense	Amortization expense	$	1,842	1,417	Amortization expense	$	1,988	1,478	3,830	2,895
Tax credits and other tax benefits recognized	Tax credits and other tax benefits recognized	2,485		1,958	Tax credits and other tax benefits recognized	2,678		2,009	5,163	3,967

The Company also owns the following trust subsidiaries, each of which issued trust preferred ~~securities as Tier 1 capital instruments:~~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”) ~~totaled $580,335,000~~by remaining contractual maturity of the agreements and ~~$569,824,000 at March 31, 2020 and December 31, 2019, respectively, and~~category of collateral:


	Overnight and Continuous
(Dollars in thousands)	June 30, 2020		December 31, 2019



State and local governments	$	670,210	—
Corporate bonds	211,017		—
Residential mortgage-backed securities	—		312,015
Commercial mortgage-backed securities	—		257,809
Total	$	881,227	569,824

The repurchase agreements are secured by debt securities with carrying values of ~~$778,035,000~~$976,567,000 and $711,210,000 at June 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. ~~The following tables summarize the carrying value of the Company’s repurchase agreements by remaining contractual maturity and category of collateral:~~

March 31, 2020
Remaining Contractual Maturity
of the Agreements
(Dollars in thousands) Overnight and Continuous Total
Residential mortgage-backed securities $ 328,722 328,722
Commercial mortgage-backed securities 251,613 251,613
Total $ 580,335 580,335

December 31, 2019
Remaining Contractual Maturity
of the Agreements
(Dollars in thousands) Overnight and Continuous Total
Residential mortgage-backed securities $ 312,015 312,015
Commercial mortgage-backed securities 257,809 257,809
Total $ 569,824 569,824

3336

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~~debentures and were determined to be fully effective during the ~~three~~six months ended ~~March 31, 2020~~.June 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 ~~March 31,~~June 30, 2020, the interest rate caps had a fair value of ~~$799,000~~$300,000 and were reported as other assets on the Company’s statements of financial condition. Changes in fair value were recorded in ~~OCI~~OCI. Interest expense recorded on the interest rate caps totaled $123,000 for the six months ended June 30, 2020 and ~~were insignificant during the current period.~~was reported as a component of interest expense on subordinated debentures.

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 ~~$1,976,000~~$3,973,000 for the ~~three~~six months ended ~~March 31,~~June 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 ~~March 31,~~June 30, 2020 and 2019 was as follows:

~~Three Months ended~~

~~(Dollars in thousands)~~

March 31,
2020

March 31,
2019

~~Interest rate swaps~~

~~Amount of loss recognized in OCI~~

—

~~(1,834)~~

~~Amount of loss reclassified from OCI to net income~~

—

~~(223)~~


	Three Months ended				Six Months ended
(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Amount of loss recognized in OCI	$	(456)	(3,820)	(456)	(5,654)
Amount of loss reclassified from OCI to net income	—		(278)	—	(501)

Residential Real Estate Derivatives

At ~~March 31,~~June 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 ~~March 31,~~June 30, 2020 and December 31, 2019, loan commitments with interest rate lock commitments totaled ~~$306,698,000~~$261,403,000 and $84,803,000, respectively, and the fair value of the related derivatives was included in other assets with corresponding changes recorded in gain on sale of loans. 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 ~~March 31,~~June 30, 2020 and December 31, 2019, TBA commitments were ~~$264,750,000~~$207,500,000 and $82,000,000, respectively, and the fair value of the related derivatives was included in other liabilities with corresponding changes recorded in gain on sale of loans. 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.

3437

Note 9. Other Expenses

Other expenses consists of the following:


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		March 31, 2019	(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Mergers and acquisition expenses	Mergers and acquisition expenses	$	2,791	214	Mergers and acquisition expenses	$	3,728	1,831	6,519	2,045
Consulting and outside services	Consulting and outside services	2,235		1,767	Consulting and outside services	2,319		2,010	4,554	3,777
Telephone	Telephone	1,238		1,175	Telephone	1,313		1,210	2,551	2,385
Debit card expenses	Debit card expenses	1,093		1,869	Debit card expenses	1,197		1,435	2,290	3,304
Business development	Business development	1,048		890	Business development	923		1,123	1,971	2,013
VIE amortization and other expenses					VIE amortization and other expenses	1,045		906	1,886	1,451
Printing and supplies					Printing and supplies	924		786	1,827	1,511
Loan expenses ¹					Loan expenses ¹	4,502		943	1,807	1,802
Employee expenses	Employee expenses	1,043		996	Employee expenses	644		1,405	1,687	2,401
Printing and supplies		903		725
VIE amortization and other expenses		841		545
Postage	Postage	795		833	Postage	833		823	1,628	1,656
Accounting and audit fees	Accounting and audit fees	448		453	Accounting and audit fees	550		472	998	925
Checking and operating expenses					Checking and operating expenses	551		630	908	992
Legal fees	Legal fees	433		307	Legal fees	386		281	819	588
Checking and operating expenses		357		362
ATM expenses	ATM expenses	100		494	ATM expenses	28		519	128	1,013
Loan expenses ¹		(2,695)		859
Other	Other	915		778	Other	955		910	1,870	1,688
Total other expenses	Total other expenses	$	11,545	12,267	Total other expenses	$	19,898	15,284	31,443	27,551

¹ Loan expenses ~~for the three months ended March 31, 2020 includes a decrease in~~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)	(Dollars in thousands)	(Losses) Gains on Available-For-Sale Debt Securities		Losses on Derivatives Used for Cash Flow Hedges	Total	(Dollars in thousands)	(Losses) Gains on Available-For-Sale Debt Securities		Losses on Derivatives Used for Cash Flow Hedges	Total
Balance at January 1, 2019	Balance at January 1, 2019	$	(6,613)	(2,814)	(9,427)	Balance at January 1, 2019	$	(6,613)	(2,814)	(9,427)
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	34,681		(1,369)	33,312	Other comprehensive income (loss) before reclassifications	56,988		(4,222)	52,766
Reclassification adjustments for (gains) losses included in net income	Reclassification adjustments for (gains) losses included in net income	(165)		167	2	Reclassification adjustments for (gains) losses included in net income	(266)		375	109
Net current period other comprehensive income (loss)	Net current period other comprehensive income (loss)	34,516		(1,202)	33,314	Net current period other comprehensive income (loss)	56,722		(3,847)	52,875
Balance at March 31, 2019		$	27,903	(4,016)	23,887
Balance at June 30, 2019						Balance at June 30, 2019	$	50,109	(6,661)	43,448
Balance at January 1, 2020	Balance at January 1, 2020	$	40,226	—	40,226	Balance at January 1, 2020	$	40,226	—	40,226
Other comprehensive income before reclassifications		60,142		—	60,142
Reclassification adjustments for gains included in net income		(644)		—	(644)
Net current period other comprehensive income		59,498		—	59,498
Balance at March 31, 2020		$	99,724	—	99,724
Other comprehensive income (loss) before reclassifications						Other comprehensive income (loss) before reclassifications	90,763		(341)	90,422
Reclassification adjustments for gains included in net income (loss)						Reclassification adjustments for gains included in net income (loss)	(739)		—	(739)
Net current period other comprehensive income (loss)						Net current period other comprehensive income (loss)	90,024		(341)	89,683
Balance at June 30, 2020						Balance at June 30, 2020	$	130,250	(341)	129,909

3538

Note 11. Earnings Per Share

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

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


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	March 31, 2020		March 31, 2019	(Dollars in thousands, except per share data)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Net income available to common stockholders, basic and diluted	Net income available to common stockholders, basic and diluted	$	43,339	49,132	Net income available to common stockholders, basic and diluted	$	63,444	52,392	106,783	101,524
Average outstanding shares - basic	Average outstanding shares - basic	93,287,670		84,549,974	Average outstanding shares - basic	95,405,493		85,826,290	94,346,582	85,191,658
Add: dilutive restricted stock units and stock options	Add: dilutive restricted stock units and stock options	72,122		64,274	Add: dilutive restricted stock units and stock options	24,910		31,996	49,348	49,580
Average outstanding shares - diluted	Average outstanding shares - diluted	93,359,792		84,614,248	Average outstanding shares - diluted	95,430,403		85,858,286	94,395,930	85,241,238
Basic earnings per share	Basic earnings per share	$	0.46	0.58	Basic earnings per share	$	0.67	0.61	1.13	1.19
Diluted earnings per share	Diluted earnings per share	$	0.46	0.58	Diluted earnings per share	$	0.66	0.61	1.13	1.19
Restricted stock units and stock options excluded from the diluted average outstanding share calculation ¹	Restricted stock units and stock options excluded from the diluted average outstanding share calculation ¹	102,094		—	Restricted stock units and stock options excluded from the diluted average outstanding share calculation ¹	143,938		—	121,533	—

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 ~~three~~six month periods ended ~~March 31,~~June 30, 2020 and 2019.

3639

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 ~~March 31,~~June 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 ~~$1,432,000~~$3,236,000 and net ~~losses~~gains of ~~$1,000~~$593,000 for the ~~three~~six month periods ended ~~March 31,~~June 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.

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.

3740

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								Fair Value Measurements At the End of the Reporting Period Using
(Dollars in thousands)	(Dollars in thousands)	Fair Value March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	(Dollars in thousands)	Fair Value June 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	Debt securities, available-for-sale						Debt securities, available-for-sale
U.S. government and federal agency	U.S. government and federal agency	$	44,567	—	44,567	—	U.S. government and federal agency	$	42,235	—	42,235	—
U.S. government sponsored enterprises	U.S. government sponsored enterprises	31,251		—	31,251	—	U.S. government sponsored enterprises	10,863		—	10,863	—
State and local governments	State and local governments	1,258,342		—	1,258,342	—	State and local governments	1,277,552		—	1,277,552	—
Corporate bonds	Corporate bonds	331,184		—	331,184	—	Corporate bonds	388,375		—	388,375	—
Residential mortgage-backed securities	Residential mortgage-backed securities	794,733		—	794,733	—	Residential mortgage-backed securities	857,641		—	857,641	—
Commercial mortgage-backed securities	Commercial mortgage-backed securities	969,813		—	969,813	—	Commercial mortgage-backed securities	957,284		—	957,284	—
Loans held for sale, at fair value	Loans held for sale, at fair value	94,619		—	94,619	—	Loans held for sale, at fair value	115,345		—	115,345	—
Interest rate caps	Interest rate caps	799		—	799	—	Interest rate caps	300		—	300	—
Total assets measured at fair value on a recurring basis	Total assets measured at fair value on a recurring basis	$	3,525,308	—	3,525,308	—	Total assets measured at fair value on a recurring basis	$	3,649,595	—	3,649,595	—


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

Total assets measured at fair value on a recurring basis	$	2,644,446	—	2,644,446	—

3841

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 ~~March 31,~~June 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								Fair Value Measurements At the End of the Reporting Period Using
(Dollars in thousands)	(Dollars in thousands)	Fair Value March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	(Dollars in thousands)	Fair Value June 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	Other real estate owned	$	150	—	—	150	Other real estate owned	$	150	—	—	150
Collateral-dependent loans, net of ACL	Collateral-dependent loans, net of ACL	1,818		—	—	1,818	Collateral-dependent loans, net of ACL	2,272		—	—	2,272
Total assets measured at fair value on a non-recurring basis	Total assets measured at fair value on a non-recurring basis	$	1,968	—	—	1,968	Total assets measured at fair value on a non-recurring basis	$	2,422	—	—	2,422

3942


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

Non-recurring Measurements Using Significant Unobservable Inputs (Level 3)

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

Fair Value
~~March 31,~~June 30,
2020

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in thousands)

Valuation Technique

Unobservable Input

Range

(Weighted-Average) ¹

Other real estate owned

150

Sales comparison approach

Selling costs

10.0% - 10.0% (10.0%)

Collateral-dependent

loans, net of ACL

~~297~~976

Cost approach

Selling costs

10.0% - 10.0% (10.0%)

~~225~~

~~Sales comparison approach~~

~~Selling costs~~

~~10.0% - 10.0% (10.0%)~~

1,296

Combined approach

Selling costs

10.0% - 10.0% (10.0%)

~~1,818~~2,272


	Fair Value December 31, 2019		Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)				Valuation Technique		Unobservable Input		Range (Weighted-Average) ¹

Other real estate owned	$	1,983	Sales comparison approach		Selling costs		6.0% - 10.0% (7.3%)
					Adjustment to comparables		0.0% - 11.1% (4.5%)




Collateral-dependent loans, net of ACL	$	9	Cost approach		Selling costs		10.0% - 10.0% (10.0%)


	14		Sales comparison approach		Adjustment to comparables		0.0% - 0.0% (0.0%)





	$	23

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

4043

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								Fair Value Measurements At the End of the Reporting Period Using
(Dollars in thousands)	(Dollars in thousands)	Carrying Amount March 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	(Dollars in thousands)	Carrying Amount June 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	Financial assets						Financial assets
Cash and cash equivalents	Cash and cash equivalents	$	273,441	273,441	—	—	Cash and cash equivalents	$	547,610	547,610	—	—
Debt securities, held-to-maturity	Debt securities, held-to-maturity	203,814		—	214,030	—	Debt securities, held-to-maturity	203,275		—	215,883	—
Loans receivable, net of ACL	Loans receivable, net of ACL	9,938,016		—	—	9,833,567	Loans receivable, net of ACL	11,290,869		—	—	11,444,388
Total financial assets	Total financial assets	$	10,415,271	273,441	214,030	9,833,567	Total financial assets	$	12,041,754	547,610	215,883	11,444,388
Financial liabilities	Financial liabilities						Financial liabilities
Term deposits	Term deposits	$	1,088,161	—	1,096,573	—	Term deposits	$	1,063,821	—	1,069,748	—
FHLB advances	FHLB advances	513,055		—	513,309	—	FHLB advances	37,963		—	38,219	—
Repurchase agreements and other borrowed funds	Repurchase agreements and other borrowed funds	612,834		—	612,834	—	Repurchase agreements and other borrowed funds	913,773		—	913,773	—
Subordinated debentures	Subordinated debentures	139,916		—	88,924	—	Subordinated debentures	139,917		—	100,750	—
Total financial liabilities	Total financial liabilities	$	2,353,966	—	2,311,640	—	Total financial liabilities	$	2,155,474	—	2,122,490	—


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

4144

Note 13. Mergers and Acquisitions

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

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


(Dollars in thousands)	SBAZ February 29, 2020
Fair value of consideration transferred
Fair value of Company shares issued	$	112,133
Cash consideration	13,721

Total fair value of consideration transferred	125,854
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents	57,434
Debt securities	142,174
Loans receivable, net of ACL	451,653
Core deposit intangible ¹	2,593
Accrued income and other assets	33,318
Total identifiable assets acquired	687,172
Liabilities assumed
Deposits	603,289
Borrowings	10,904
Accrued expenses and other liabilities	4,062
Total liabilities assumed	618,255
Total identifiable net assets	68,917
Goodwill recognized	$	56,937

¹ The core deposit intangible for the acquisition was determined to have an estimated life of 10 years.

4245

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 ~~$2,530,000~~$3,819,000 of expenses in connection with the SBAZ acquisition during the ~~three~~six months ended ~~March 31,~~June 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 ~~$2,579,000~~$10,944,000 and net loss was approximately ~~$3,474,000~~$47,000 from February 29, 2020 to ~~March 31,~~June 30, 2020. The following unaudited pro forma summary presents consolidated information of the Company as if the SBAZ acquisition had occurred on January 1, 2019:


		Three Months ended						Three Months ended			Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		March 31, 2019	(Dollars in thousands)	June 30, 2020		June 30, 2019	June 30, 2020	June 30, 2019
Net interest income and non-interest income	Net interest income and non-interest income	$	172,893	151,065	Net interest income and non-interest income	$	189,443	158,580	362,336	309,645
Net income	Net income	42,228		50,956	Net income	63,444		54,645	105,672	105,601

4346

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, ~~for the year ended December 31, 2019 (the “2019 Annual Report”),~~ the following factors, among others, could cause actual results to differ materially from the anticipated results:

•the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio;

•changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System or the Federal Reserve Board, which could adversely affect the Company’s net interest income and profitability;

•changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation (“FDIC”) and other third parties;

•legislative or regulatory changes, 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.

4447

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Highlights

At or for the Three Months ended
(Dollars in thousands, except per share and market data) Mar 31,
2020 Dec 31,
2019 Mar 31,
2019
Operating results
Net income $ 43,339 57,410 49,132
Basic earnings per share $ 0.46 0.62 0.58
Diluted earnings per share $ 0.46 0.62 0.58
Dividends declared per share ¹
$ 0.29 0.49 0.26
Market value per share
Closing $ 34.01 45.99 40.07
High $ 46.10 46.51 45.47
Low $ 26.66 38.99 37.58
Selected ratios and other data
Number of common stock shares outstanding 95,408,274 92,289,750 84,588,199
Average outstanding shares - basic 93,287,670 92,243,133 84,549,974
Average outstanding shares - diluted 93,359,792 92,365,021 84,614,248
Return on average assets (annualized) 1.25 % 1.67 % 1.67 %
Return on average equity (annualized) 8.52 % 11.61 % 13.02 %
Efficiency ratio 52.55 % 54.90 % 55.37 %
Dividend payout ratio 63.04 % 79.03 % 44.83 %
Loan to deposit ratio 88.10 % 88.92 % 87.14 %
Number of full time equivalent employees 2,955 2,826 2,634
Number of locations 192 181 169
Number of ATMs 247 248 222

¹~~Includes a special dividend declared of $0.20 per share for the three months ended December 31, 2019.~~


	At or for the Three Months ended											At or for the Six Months ended
(Dollars in thousands, except per share and market data)	Jun 30, 2020			Mar 31, 2020		Jun 30, 2019		Jun 30, 2020		Jun 30, 2019
Operating results
Net income	$	63,444		43,339		52,392		106,783		101,524
Basic earnings per share	$	0.67		0.46		0.61		1.13		1.19
Diluted earnings per share	$	0.66		0.46		0.61		1.13		1.19
Dividends declared per share	$	0.29		0.29		0.27		0.58		0.53
Market value per share
Closing	$	35.29		34.01		40.55		35.29		40.55
High	$	46.54		46.10		43.44		46.54		45.47
Low	$	30.30		26.66		38.65		26.66		37.58
Selected ratios and other data
Number of common stock shares outstanding	95,409,061			95,408,274		86,637,394		95,409,061		86,637,394
Average outstanding shares - basic	95,405,493			93,287,670		85,826,290		94,346,582		85,191,658
Average outstanding shares - diluted	95,430,403			93,359,792		85,858,286		94,395,930		85,241,238
Return on average assets (annualized)	1.57		%	1.25	%	1.69	%	1.42	%	1.68	%
Return on average equity (annualized)	11.68		%	8.52	%	12.82	%	10.15	%	12.91	%
Efficiency ratio	49.29		%	52.55	%	54.50	%	50.81	%	54.93	%
Dividend payout ratio	43.28		%	63.04	%	44.26	%	51.33	%	44.54	%
Loan to deposit ratio	86.45		%	88.10	%	90.27	%	86.45	%	90.27	%
Number of full time equivalent employees	2,954			2,955		2,703		2,954		2,703
Number of locations	192			192		175		192		175
Number of ATMs	251			247		228		251		228

The Company reported net income of ~~$43.3~~$63.4 million for the current quarter, ~~a decrease~~an increase of ~~$5.8~~$11.1 million, or 1221 percent, from the ~~$49.1~~$52.4 million of net income for the prior year ~~first~~second quarter. Diluted earnings per share for the current quarter was ~~$0.46~~$0.66 per share, ~~a decrease~~an increase of 218 percent from the prior year ~~first~~second quarter diluted earnings per share of ~~$0.58.~~$0.61. Included in the current quarter was $3.7 million of acquisition-related expenses.

~~In response to~~Net income for the ~~rapidly changing COVID-19 pandemic, our Bank division Presidents,~~six months ended June 30, 2020 was $106.8 million, an increase of $5.3 million, or 5 percent, from the ~~Company's executive and senior management team, and all~~$101.5 million net income from the front line staff have stepped up to lead the Company and the communities they serve through these uncertain times. The Company seeks to provide the best possible service for customers, while protecting employees and shareholder value. The Company believes it is well positioned to mitigate the potential financial impactfirst six months of the ~~COVID-19 pandemic with a strong liquidity and capital position. While~~prior year. Diluted earnings per share for the ~~full impact~~first half of the ~~pandemic is unknown at this time,~~current year was $1.13 per share, a decrease of 5 percent, from the ~~Company expects~~diluted earnings per share of $1.19 for the ~~strength of the Company and leadership team will ensure continued long-term success.~~same period last year.

The Company ~~has implemented several measures~~continues to ~~manage~~navigate through the COVID-19 pandemic ~~including:~~

•~~launched a~~to ensure the safety of its employees and customers along with monitoring credit quality and protecting shareholder value. The Company’s pandemic team remains flexible in responding to the changing conditions in all the markets that ~~addresses the daily impact to our business;~~it serves.

•In order to meet the needs of customers impacted by the pandemic, the Company has contacted customers to assess their needs and provide funding, flexible repayment options or modifications as ~~necessary;~~necessary. During the current quarter, the Company modified 3,054 loans in the amount of $1.515 billion primarily with short-term payment deferrals under six months.

•~~designated a “command center” that supports employees so they can work with customers to provide Paycheck Protection Program (“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.

4548

~~As a result of the Company’s efforts to support its customers,~~In addition, the Company ~~had approved 8,775~~originated U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans for businesses in its communities. The Company funded 15,291 PPP loans in the amount of ~~$1.088~~$1.427 billion during the current quarter. These loans provided an additional $7.3 million of interest income (including net deferred fees and ~~modified 1,688 loans~~costs) during the current quarter and $8.4 million of deferred compensation costs for a total increase in ~~the amount~~income of ~~$716~~$15.7 million as($11.7 million net of ~~April 21, 2020. The Company will continue to support its customers and assist the government in deploying funding for customers under future approved plans.~~tax).

The Company's ~~first quarter~~ net income results for the first six months were significantly impacted by the adoption of the current expected credit losses (“CECL”) accounting standard. The Company chose to adopt the standard on January 1, 2020, rather than delay the adoption as allowed by the CARES Act, since the Company was operationally prepared and already internally reporting under CECL. As a result, the following items impacted the ~~results in the~~ first ~~quarter~~half of 2020:

•a $12.3 million reduction in retained earnings upon adoption of the standard;

•a ~~$19.1~~$37.6 million credit loss expense ~~as a result of~~related to the COVID-19 pandemic; and

•an additional $4.8 million credit loss expense due to the State Bank Corp. acquisition.

~~The~~During the current quarter, ~~results were also impacted by~~S&P Dow Jones Indices selected the ~~following items:~~

•~~acquisition-related expenses~~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 ~~$2.8 million;~~400 companies that are chosen with regard to market capitalization, liquidity and

•~~a gain of $2.4 million on the sale of a former branch building.~~ industry representation.

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”). 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)	SBAZ February 29 2020
Total assets	$	744,109
Debt securities	142,174
Loans receivable	451,702
Non-interest bearing deposits	141,620
Interest bearing deposits	461,669
Borrowings	10,904

4649

Financial Condition Analysis

Assets

The following table summarizes the Company’s assets as of the dates indicated:


						$ Change from									$ Change from
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019	Mar 31, 2019	Dec 31, 2019	Mar 31, 2019	(Dollars in thousands)	Jun 30, 2020		Mar 31, 2020	Dec 31, 2019	Jun 30, 2019	Mar 31, 2020	Dec 31, 2019	Jun 30, 2019
Cash and cash equivalents	Cash and cash equivalents	$	273,441	330,961	202,527	(57,520)	70,914	Cash and cash equivalents	$	547,610	273,441	330,961	231,209	274,169	216,649	316,401
Debt securities, available-for-sale	Debt securities, available-for-sale	3,429,890		2,575,252	2,522,322	854,638	907,568	Debt securities, available-for-sale	3,533,950		3,429,890	2,575,252	2,470,634	104,060	958,698	1,063,316
Debt securities, held-to-maturity	Debt securities, held-to-maturity	203,814		224,611	255,572	(20,797)	(51,758)	Debt securities, held-to-maturity	203,275		203,814	224,611	252,097	(539)	(21,336)	(48,822)
Total debt securities	Total debt securities	3,633,704		2,799,863	2,777,894	833,841	855,810	Total debt securities	3,737,225		3,633,704	2,799,863	2,722,731	103,521	937,362	1,014,494
Loans receivable	Loans receivable							Loans receivable
Residential real estate	Residential real estate	957,830		926,388	884,732	31,442	73,098	Residential real estate	903,198		957,830	926,388	920,715	(54,632)	(23,190)	(17,517)
Commercial real estate	Commercial real estate	5,928,303		5,579,307	4,686,082	348,996	1,242,221	Commercial real estate	6,047,692		5,928,303	5,579,307	4,959,863	119,389	468,385	1,087,829
Other commercial	Other commercial	2,239,878		2,094,254	1,909,452	145,624	330,426	Other commercial	3,547,249		2,239,878	2,094,254	2,076,605	1,307,371	1,452,995	1,470,644
Home equity	Home equity	652,942		617,201	562,381	35,741	90,561	Home equity	654,392		652,942	617,201	596,041	1,450	37,191	58,351
Other consumer	Other consumer	309,253		295,660	283,423	13,593	25,830	Other consumer	300,847		309,253	295,660	288,553	(8,406)	5,187	12,294
Loans receivable	Loans receivable	10,088,206		9,512,810	8,326,070	575,396	1,762,136	Loans receivable	11,453,378		10,088,206	9,512,810	8,841,777	1,365,172	1,940,568	2,611,601
Allowance for credit losses	Allowance for credit losses	(150,190)		(124,490)	(129,786)	(25,700)	(20,404)	Allowance for credit losses	(162,509)		(150,190)	(124,490)	(129,054)	(12,319)	(38,019)	(33,455)
Loans receivable, net	Loans receivable, net	9,938,016		9,388,320	8,196,284	549,696	1,741,732	Loans receivable, net	11,290,869		9,938,016	9,388,320	8,712,723	1,352,853	1,902,549	2,578,146
Other assets	Other assets	1,313,223		1,164,855	897,074	148,368	416,149	Other assets	1,330,944		1,313,223	1,164,855	1,009,698	17,721	166,089	321,246
Total assets	Total assets	$	15,158,384	13,683,999	12,073,779	1,474,385	3,084,605	Total assets	$	16,906,648	15,158,384	13,683,999	12,676,361	1,748,264	3,222,649	4,230,287

Total debt securities of ~~$3.634~~$3.737 billion at ~~March 31,~~June 30, 2020 increased ~~$834~~$104 million, or 303 percent, during the current quarter and increased ~~$856 million,~~$1.014 billion, or 3137 percent, from the prior year ~~first~~second quarter. ~~The current quarter increase in debt securities was the result of acquiring $142 million of debt securities with the SBAZ acquisition and purchasing $723 million of~~ ~~municipal and corporate bonds in March. These additional securities provide a low-risk, stable earnings stream.~~ Debt securities represented 2422 percent of total assets at ~~March 31,~~June 30, 2020 compared to 20 percent at December 31, 2019 and 2321 percent of total assets at ~~March 31,~~June 30, 2019.

~~The~~Excluding $1.427 billion of the PPP loans, the loan portfolio of ~~$10.088~~$11.453 billion ~~increased $124~~decreased $61.6 million, or 61 basis points, during the current quarter. Excluding the PPP loans, the notable changes during the current quarter included other commercial loans which decreased $119 million, or 5 percent, ~~annualized, during~~and commercial real estate which increased $119 million or 2 percent. Excluding the PPP loans, the current ~~quarter excluding the~~year SBAZ ~~acquisition, with the largest increase in other commercial loans which increased $100 million. Excluding the current year~~ acquisition and the prior year ~~acquisitions~~acquisition of Heritage Bank of Nevada, ~~and The First National Bank of Layton,~~ the loan portfolio increased ~~$450~~$118 million, or 51 percent, since the prior year ~~first~~second quarter with the largest increase in ~~other~~ commercial real estate loans ~~which~~which increased ~~$201~~$204 million, or 114 percent.

4750

Liabilities

The following table summarizes the Company’s liabilities as of the dates indicated:


						$ Change from									$ Change from
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019	Mar 31, 2019	Dec 31, 2019	Mar 31, 2019	(Dollars in thousands)	Jun 30, 2020		Mar 31, 2020	Dec 31, 2019	Jun 30, 2019	Mar 31, 2020	Dec 31, 2019	Jun 30, 2019
Deposits	Deposits							Deposits
Non-interest bearing deposits	Non-interest bearing deposits	$	3,875,848	3,696,627	3,051,119	179,221	824,729	Non-interest bearing deposits	$	5,043,704	3,875,848	3,696,627	3,265,077	1,167,856	1,347,077	1,778,627
NOW and DDA accounts	NOW and DDA accounts	2,860,563		2,645,404	2,383,806	215,159	476,757	NOW and DDA accounts	3,113,863		2,860,563	2,645,404	2,487,806	253,300	468,459	626,057
Savings accounts	Savings accounts	1,578,062		1,485,487	1,373,544	92,575	204,518	Savings accounts	1,756,503		1,578,062	1,485,487	1,412,046	178,441	271,016	344,457
Money market deposit accounts	Money market deposit accounts	2,155,203		1,937,141	1,689,962	218,062	465,241	Money market deposit accounts	2,403,641		2,155,203	1,937,141	1,647,372	248,438	466,500	756,269
Certificate accounts	Certificate accounts	1,025,237		958,501	896,731	66,736	128,506	Certificate accounts	995,536		1,025,237	958,501	897,625	(29,701)	37,035	97,911
Core deposits, total	Core deposits, total	11,494,913		10,723,160	9,395,162	771,753	2,099,751	Core deposits, total	13,313,247		11,494,913	10,723,160	9,709,926	1,818,334	2,590,087	3,603,321
Wholesale deposits	Wholesale deposits	62,924		53,297	192,953	9,627	(130,029)	Wholesale deposits	68,285		62,924	53,297	144,949	5,361	14,988	(76,664)
Deposits, total	Deposits, total	11,557,837		10,776,457	9,588,115	781,380	1,969,722	Deposits, total	13,381,532		11,557,837	10,776,457	9,854,875	1,823,695	2,605,075	3,526,657
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	580,335		569,824	489,620	10,511	90,715	Securities sold under agreements to repurchase	881,227		580,335	569,824	494,651	300,892	311,403	386,576
Federal Home Loan Bank advances	Federal Home Loan Bank advances	513,055		38,611	154,683	474,444	358,372	Federal Home Loan Bank advances	37,963		513,055	38,611	319,996	(475,092)	(648)	(282,033)
Other borrowed funds	Other borrowed funds	32,499		28,820	14,738	3,679	17,761	Other borrowed funds	32,546		32,499	28,820	14,765	47	3,726	17,781
Subordinated debentures	Subordinated debentures	139,916		139,914	134,048	2	5,868	Subordinated debentures	139,917		139,916	139,914	139,912	1	3	5
Deferred tax liability	Deferred tax liability	15,210		—	—	15,210	15,210	Deferred tax liability	25,213		15,210	—	—	10,003	25,213	25,213
Other liabilities	Other liabilities	182,888		169,640	141,725	13,248	41,163	Other liabilities	204,535		182,888	169,640	164,786	21,647	34,895	39,749
Total liabilities	Total liabilities	$	13,021,740	11,723,266	10,522,929	1,298,474	2,498,811	Total liabilities	$	14,702,933	13,021,740	11,723,266	10,988,985	1,681,193	2,979,667	3,713,948

Core deposits of ~~$11.495~~$13.313 billion as of ~~March 31,~~June 30, 2020 increased ~~$168 million~~$1.818 billion or 616 percent, ~~annualized,~~ from the prior quarter ~~excluding~~and was primarily the ~~acquisition~~result of ~~SBAZ with non-interest bearing deposits increasing $37.6 million, or 4 percent annualized, during~~ the ~~current quarter.~~PPP loan proceeds deposited by customers, increased customer savings rate, and federal stimulus deposits. Excluding current and prior year acquisitions, core deposits increased ~~$500 million,~~$2.278 billion, or 523 percent, from the prior year ~~first~~second quarter, with non-interest bearing deposits increasing ~~$293 million,~~$1.341 billion, or 1041 percent. Non-interest bearing deposits were 38 percent of total core deposits at June 30, 2020 compared to 34 percent of total core deposits at ~~March 31, 2020, an increase of 2 percent from 32 percent of total core deposits at March 31,~~June 30, 2019.

~~Wholesale deposits of $62.9 million at March 31, 2020 increased $9.6 million from prior quarter and decreased $130 million from the prior year first quarter.~~ Federal Home Loan Bank (“FHLB”) advances of ~~$513~~$38.0 million at ~~March 31,~~June 30, 2020 ~~increased $474~~decreased $475 million from the prior quarter and ~~increased $358~~ decreased $282 million from the prior year ~~first quarter, such increases~~second quarter. These decreases were ~~to supplement~~ the ~~current quarter deposit growth used to fund~~result of the ~~asset growth, including~~significant increase in core deposits that more than funded the ~~additional investment purchases. Wholesale deposits~~loans and debt security growth. FHLB advances will continue to fluctuate as necessary for ~~balance~~balance sheet growth and to supplement liquidity needs of the Company.

During March ~~of the current quarter,~~2020, the Company purchased interest rate caps with a notional amount of $131 million (tied to 3 month LIBOR) to limit interest expense on the Company’s trust preferred subordinated debt. The interest rate caps effectively convert the variable interest expense on the debt to a fixed rate of 3.93 percent when 3 month LIBOR exceeds 1.88 percent at anytime during the five-year term of the interest rate caps.

4851

Stockholders’ Equity

The following table summarizes the stockholders’ equity balances as of the dates indicated:


						$ Change from									$ Change from
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	Mar 31, 2020		Dec 31, 2019	Mar 31, 2019	Dec 31, 2019	Mar 31, 2019	(Dollars in thousands, except per share data)	Jun 30, 2020		Mar 31, 2020	Dec 31, 2019	Jun 30, 2019	Mar 31, 2020	Dec 31, 2019	Jun 30, 2019
Common equity	Common equity	$	2,036,920	1,920,507	1,526,963	116,413	509,957	Common equity	$	2,073,806	2,036,920	1,920,507	1,643,928	36,886	153,299	429,878
Accumulated other comprehensive income	Accumulated other comprehensive income	99,724		40,226	23,887	59,498	75,837	Accumulated other comprehensive income	129,909		99,724	40,226	43,448	30,185	89,683	86,461
Total stockholders’ equity	Total stockholders’ equity	2,136,644		1,960,733	1,550,850	175,911	585,794	Total stockholders’ equity	2,203,715		2,136,644	1,960,733	1,687,376	67,071	242,982	516,339
Goodwill and core deposit intangible, net	Goodwill and core deposit intangible, net	(576,701)		(519,704)	(337,134)	(56,997)	(239,567)	Goodwill and core deposit intangible, net	(574,088)		(576,701)	(519,704)	(385,533)	2,613	(54,384)	(188,555)
Tangible stockholders’ equity	Tangible stockholders’ equity	$	1,559,943	1,441,029	1,213,716	118,914	346,227	Tangible stockholders’ equity	$	1,629,627	1,559,943	1,441,029	1,301,843	69,684	188,598	327,784


Stockholders’ equity to total assets	Stockholders’ equity to total assets	14.10		%	14.33	%	12.84	%			Stockholders’ equity to total assets	13.03		%	14.10	%	14.33	%	13.31	%
Tangible stockholders’ equity to total tangible assets	Tangible stockholders’ equity to total tangible assets	10.70		%	10.95	%	10.34	%			Tangible stockholders’ equity to total tangible assets	9.98		%	10.70	%	10.95	%	10.59	%
Book value per common share	Book value per common share	$	22.39		21.25		18.33		1.14	4.06	Book value per common share	$	23.10		22.39		21.25		19.48		0.71	1.85	3.62
Tangible book value per common share	Tangible book value per common share	$	16.35		15.61		14.35		0.74	2.00	Tangible book value per common share	$	17.08		16.35		15.61		15.03		0.73	1.47	2.05

Tangible stockholders’ equity of ~~$1.560~~$1.630 billion at ~~March 31,~~June 30, 2020 increased ~~$119~~$70 million, or 84 percent, ~~compared to~~from the prior quarter and was primarily the result of earnings retention and an increase in other comprehensive income. Tangible stockholders’ equity increased $328 million over the prior year second quarter which was the result of ~~$112~~$342 million of Company stock issued for the ~~acquisition~~acquisitions of SBAZ and Heritage Bank of Nevada, an increase in other comprehensive income and earnings ~~retention; such~~retention. These increases more than offset the increase in goodwill and core ~~deposits~~deposit intangible associated with the ~~acquisition~~acquisitions. The current quarter decrease in both the stockholder’s equity to total assets ratio and the ~~$12.3 million decrease~~tangible stockholders’ equity to total tangible assets ratio was the result of adding $1.427 billion in the PPP loans. Both ratios would have increased if the PPP loans were excluded from ~~the adoption of the CECL accounting standard.~~total assets. Tangible book value per common share of ~~$16.35~~$17.08 at current quarter end increased ~~$0.74~~$0.73 per share from the prior quarter and increased ~~$2.00~~$2.05 per share from a year ago.For additional information on the CECL accounting standard, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Cash Dividend

On ~~March 25,~~June 24, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.29 per share. The dividend was payable ~~April~~July 16, 2020 to shareholders of record on ~~April~~July 7, 2020. The dividend was the ~~140th~~141st consecutive dividend. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

4952

Operating Results for Three Months Ended ~~March 31,~~June 30, 2020

Compared to ~~December~~March 31, ~~2019,~~2020, and ~~March 31,~~June 30, 2019

Income Summary

The following table summarizes income for the periods indicated:


		Three Months ended									$ Change from									Three Months ended			$ Change from
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020			Dec 31, 2019		Mar 31, 2019		Dec 31, 2019	Mar 31, 2019		(Dollars in thousands)	Jun 30, 2020			Mar 31, 2020		Jun 30, 2019			Mar 31, 2020	Jun 30, 2019
Net interest income	Net interest income											Net interest income
Interest income	Interest income	$	142,865		145,281		126,116		(2,416)	16,749		Interest income	$	155,404		142,865		132,385			12,539	23,019
Interest expense	Interest expense	8,496			8,833		10,904		(337)	(2,408)		Interest expense	7,185			8,496		12,089			(1,311)	(4,904)
Total net interest income	Total net interest income	134,369			136,448		115,212		(2,079)	19,157		Total net interest income	148,219			134,369		120,296			13,850	27,923
Non-interest income	Non-interest income											Non-interest income
Service charges and other fees	Service charges and other fees	14,020			14,756		18,015		(736)	(3,995)		Service charges and other fees	11,366			14,020		20,025			(2,654)	(8,659)
Miscellaneous loan fees and charges	Miscellaneous loan fees and charges	1,285			1,379		967		(94)	318		Miscellaneous loan fees and charges	1,682			1,285		1,192			397	490
Gain on sale of loans	Gain on sale of loans	11,862			10,135		5,798		1,727	6,064		Gain on sale of loans	25,858			11,862		7,762			13,996	18,096
Gain on sale of investments	Gain on sale of investments	863			257		213		606	650		Gain on sale of investments	128			863		134			(735)	(6)
Other income	Other income	5,242			1,890		3,481		3,352	1,761		Other income	2,190			5,242		1,721			(3,052)	469
Total non-interest income	Total non-interest income	33,272			28,417		28,474		4,855	4,798		Total non-interest income	41,224			33,272		30,834			7,952	10,390
Total income	Total income	$	167,641		164,865		143,686		2,776	23,955		Total income	$	189,443		167,641		151,130			21,802	38,313
Net interest margin (tax-equivalent)	Net interest margin (tax-equivalent)	4.36		%	4.45	%	4.34	%				Net interest margin (tax-equivalent)	4.12		%	4.36	%	4.33	%

Net Interest Income

The current quarter net interest income of ~~$134~~$148 million ~~decreased $2.1~~increased $13.9 million, or 210 percent, over the prior quarter and increased ~~$19.2~~$27.9 million, or 1723 percent, from the prior year ~~first~~second quarter. The current quarter interest income of ~~$143~~$155 million ~~decreased $2.4~~increased $12.5 million, or 29 percent, over the prior quarter which was driven ~~primarily~~ by ~~a decrease~~an increase debt security income and an increase in ~~loan interest rates.~~income from the PPP loans. The current quarter interest income ~~increased $16.7~~increased $23.0 million, or 1317 percent, over prior year ~~first~~second quarter and was ~~attributable to~~due to an increase in ~~interest~~ income onfrom commercial loans ~~due to~~and an increase in ~~loans, which increased $15.1 million, or 18 percent, from the prior year first quarter.~~income on debt securities.

The current quarter ~~interest~~interest expense of ~~$8.5~~$7.2 million decreased ~~$337 thousand,~~$1.3 million, or 415 percent, over the prior quarter primarily as a result of a decrease in deposit and borrowing interest rates. Current quarter interest expense decreased ~~$2.4~~$4.9 million, or 2241 percent, over prior year ~~first~~ second quarter which was ~~due~~ due to the decrease in higher cost FHLB advances. During the current quarter, the total cost of funding (including non-interest bearing deposits) declined 18 basis ~~point~~points to 2921 basis points compared to 3029 basis points for the prior quarter primarily as a result of a decrease in rates on both deposits and 43borrowings. The total cost of funding decreased 24 basis points ~~for~~from the prior year ~~first quarter.~~second quarter of 45 basis points 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 ~~4.36~~4.12 percent compared to ~~4.45~~4.36 percent in the prior ~~quarter.~~ quarter. The core net interest margin, excluding ~~$1.2 million, or 4~~3 basis points of discount accretion, 1 basis point of non-accrual interest income reversals, and ~~$655 thousand, or 2~~11 basis points of ~~non-accrual interest recoveries,~~ income from the PPP loans was ~~4.30~~4.21 percent compared to ~~4.33~~4.30 in the prior quarter and ~~4.26~~4.27 percent in the prior year ~~first~~second quarter. The Company experienced a 39 basis points decrease in the core net interest margin during the current quarter from decreased yields on loans that more than offset the increase in yields on debt securities and the decrease in the cost of funding. The core net interest margin ~~increased 4~~decreased6 basis points from the prior year ~~first~~second quarter primarily from a decrease in earning asset yields, primarily loan yields, that were more than the ~~result of a~~ decrease in funding ~~cost and reduced reliance on higher cost wholesale funding.~~costs.

5053

Non-interest Income

Non-interest income for the current quarter totaled ~~$33.3~~$41.2 million which was an increase of ~~$4.9~~$8.0 million, or 1724 percent, over the prior quarter and an increase of ~~$4.8~~$10.4 million, or 1734 percent, over the same quarter last year. Service charges and other fees of ~~$14.0~~$11.4 million for the current quarter decreased ~~$4.0~~$2.7 million, or 2219 percent, from the prior ~~year first~~ quarter as a result of decreased overdraft activity as customers received federal stimulus funds and had decreased activity during the second quarter of 2020. Service charges and other fees decreased $8.7 million from the prior year second quarter due to the ~~Company's~~ decrease in overdraft activity and the decrease in interchange fees as a result of the Durbin ~~Amendment that more than offset the increased transaction activity.~~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 ~~$11.9~~$25.9 million for the current quarter increased ~~$1.7~~$14.0 million, or 17118 percent, compared to the prior quarter and increased ~~$6.1~~$18.1 million, or ~~105~~233 percent, from the prior year ~~first~~second quarter ~~principally~~ due to the ~~increased~~ significant increase in refinance activity driven by the decrease in interest rates. Other income of ~~$5.2~~$2.2 million ~~increased $3.4~~decreased $3.1 million, or 58 percent, from the prior quarter ~~and increased $1.8 million from the prior year first quarter,~~ primarily as a result of a $2.4 million gain on the sale of a former branch building in the ~~current~~prior quarter.

Non-interest Expense

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


		Three Months ended						$ Change from						Three Months ended			$ Change from
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019	Mar 31, 2019	Dec 31, 2019	Mar 31, 2019		(Dollars in thousands)	Jun 30, 2020		Mar 31, 2020	Jun 30, 2019		Mar 31, 2020	Jun 30, 2019
Compensation and employee benefits	Compensation and employee benefits	$	59,660	55,543	52,728	4,117	6,932		Compensation and employee benefits	$	57,981	59,660	51,973		(1,679)	6,008
Occupancy and equipment	Occupancy and equipment	9,219		9,149	8,437	70	782		Occupancy and equipment	9,357		9,219	8,180		138	1,177
Advertising and promotions	Advertising and promotions	2,487		2,747	2,388	(260)	99		Advertising and promotions	2,138		2,487	2,767		(349)	(629)
Data processing	Data processing	5,282		4,972	3,892	310	1,390		Data processing	5,042		5,282	4,062		(240)	980
Other real estate owned	Other real estate owned	112		609	139	(497)	(27)		Other real estate owned	75		112	191		(37)	(116)
Regulatory assessments and insurance	Regulatory assessments and insurance	1,090		45	1,285	1,045	(195)		Regulatory assessments and insurance	1,037		1,090	1,848		(53)	(811)

Core deposit intangibles amortization	Core deposit intangibles amortization	2,533		2,566	1,694	(33)	839		Core deposit intangibles amortization	2,613		2,533	1,865		80	748
Other expenses	Other expenses	11,545		19,621	12,267	(8,076)	(722)		Other expenses	19,898		11,545	15,284		8,353	4,614
Total non-interest expense	Total non-interest expense	$	91,928	95,252	82,830	(3,324)	9,098		Total non-interest expense	$	98,141	91,928	86,170		6,213	11,971

Total non-interest expense of ~~$92.0~~$98.1 million for the current quarter ~~decreased $3.3~~increased $6.2 million, or 37 percent, over the prior quarter and increased ~~$9.1~~$12.0 million, or 1114 percent, over the prior year ~~first~~second quarter. Compensation and employee benefits ~~increased~~decreased by ~~$4.1~~$1.7 million, or 73 percent, from the prior quarter and included a decrease of $8.4 million from deferring compensation on originating the PPP loans with offsetting increases in commission expense and increases in compensation expense as result of increased employees from the SBAZ ~~acquisition and annual salary increases and benefit adjustments.~~acquisition. Compensation and employee benefits increased ~~$6.9~~$6.0 million, or 1312 percent, from the prior year ~~first~~second quarter primarily due to an increased number of employees driven by ~~current~~acquisitions and ~~prior year acquisitions.~~organic growth which more than offset the impact from originating the PPP loans. Occupancy and equipment expense increased ~~$782 thousand,~~$1.2 million, or 914 percent, over the prior year ~~first~~second quarter primarily as a result of increased costs from acquisitions. Data processing expense increased ~~$310~~$980 thousand, or 624 percent, over the prior ~~quarter and increased $1.4 million, or 36 percent, over the prior~~ year ~~first~~second quarter as a result of the current and prior year ~~acquisitions.~~acquisitions along with general cost increases. Regulatory assessment and insurance ~~increased $1.0 million~~decreased $811 thousand from the prior year second quarter ~~as a result~~primarily due to an accrual adjustment for the State of ~~a decrease in~~Montana regulatory semi-annual assessment which was waived for the ~~amount~~first half of Small Bank Assessment credits applied by the FDIC. The Company received $530 thousand of Small Bank Assessment credits during the current quarter compared to $1.3 million in the prior quarter. Regulatory assessment and insurance decreased $195 thousand, or 15 percent, over prior year first quarter and was driven by the current quarter FDIC credits which offset the increased cost from organic and acquisition growth. 2020. Other expenses of ~~$11.5~~$19.9 million, ~~decreased $8.1~~increased $8.4 million, or 4172 percent, from the prior quarter and was largely due to a ~~$3.6~~$6.9 million ~~decrease~~increase in expense related to unfunded loan commitments. In the current quarter, there was a ~~$1.6~~$3.4 million ~~decrease in acquisition-related expenses and smaller decreases in several other categories.~~expense related to unfunded loan commitments compared to the prior quarter which had a $3.5 million reversal of expense related to unfunded loan commitments. The current quarter ~~decrease~~unfunded loan commitment expense reflects changes in the economic forecast related to COVID-19. Other expenses increased $4.6 million, or 30 percent, from the prior year second quarter and was due to the increase in expense related to unfunded loan commitments ~~was driven by a decreased loss rate on certain portfolio categories, primarily construction loans.~~ and $1.9 million increase in acquisition-related expenses. Other expenses included acquisition-related expenses of ~~$2.8~~$3.7 million in the current quarter compared to ~~$4.4~~$2.8 million in the prior quarter and ~~$214 thousand~~$1.8 million in the prior year ~~first~~second quarter.

5154

Efficiency Ratio

The current quarter efficiency ratio was ~~52.55~~49.29 percent. Excluding the $15.7 million impact from the PPP loans, the efficiency ratio would have been 55.73 percent, which was a ~~235~~318 basis points ~~decrease~~increase from the prior quarter efficiency ratio of ~~54.90~~52.55 percent ~~which~~and was primarily due to ~~controlling costs, a decrease~~an increase in ~~expense~~expenses related to unfunded loan commitments and increases in compensation that were greater than the increase in ~~non-interest income. The~~gain on sale of loans. Excluding the impact of the PPP loans, the current quarter efficiency ratio ~~decreased 282~~increased 123 basis points from the prior year ~~first~~second quarter efficiency ratio of ~~55.37~~54.50 percent which was driven by the increased compensation costs and decreases in service fee income from the Durbin Amendment that outpaced the increases in commercial loan interest income and gain on sale of ~~loans which more than offset decreases in service fee income from the Durbin amendment and and increased operating costs.~~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)	(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		(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
Second quarter 2020												Second quarter 2020	$	13,552	$	1,233	1.42	%	0.22	%	0.27	%
First quarter 2020	First quarter 2020	$	22,744	$	813	1.49	%	0.41	%	0.26	%	First quarter 2020	22,744		813		1.49	%	0.41	%	0.26	%
Fourth quarter 2019	Fourth quarter 2019	—		1,045		1.31	%	0.24	%	0.27	%	Fourth quarter 2019	—		1,045		1.31	%	0.24	%	0.27	%
Third quarter 2019	Third quarter 2019	—		3,519		1.32	%	0.31	%	0.40	%	Third quarter 2019	—		3,519		1.32	%	0.31	%	0.40	%
Second quarter 2019	Second quarter 2019	—		732		1.46	%	0.43	%	0.41	%	Second quarter 2019	—		732		1.46	%	0.43	%	0.41	%
First quarter 2019	First quarter 2019	57		1,510		1.56	%	0.44	%	0.42	%	First quarter 2019	57		1,510		1.56	%	0.44	%	0.42	%
Fourth quarter 2018	Fourth quarter 2018	1,246		2,542		1.58	%	0.41	%	0.47	%	Fourth quarter 2018	1,246		2,542		1.58	%	0.41	%	0.47	%
Third quarter 2018	Third quarter 2018	3,194		2,223		1.63	%	0.31	%	0.61	%	Third quarter 2018	3,194		2,223		1.63	%	0.31	%	0.61	%
Second quarter 2018		4,718		762		1.66	%	0.50	%	0.71	%

Net charge-offs for the current quarter were ~~$813 thousand~~$1.2 million compared to ~~$1.0 million~~$813 thousand for the prior quarter and ~~$1.5 million~~$732 thousand from the same quarter last year. ~~The current quarter credit loss expense was $22.7 million compared to $57 thousand in the prior year first quarter.~~ 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.”

Operating Results for Six Months Ended June 30, 2020

Compared to June 30, 2019

Income Summary


	Six Months ended
(Dollars in thousands)	Jun 30, 2020			Jun 30, 2019			$ Change		% Change
Net interest income
Interest income	$	298,269		$	258,501		$	39,768	15	%
Interest expense	15,681			22,993			(7,312)		(32)	%
Total net interest income	282,588			235,508			47,080		20	%
Non-interest income
Service charges and other fees	25,386			38,040			(12,654)		(33)	%
Miscellaneous loan fees and charges	2,967			2,159			808		37	%
Gain on sale of loans	37,720			13,560			24,160		178	%
Gain on sale of investments	991			347			644		186	%
Other income	7,432			5,202			2,230		43	%
Total non-interest income	74,496			59,308			15,188		26	%
	$	357,084		$	294,816		$	62,268	21	%
Net interest margin (tax-equivalent)	4.23		%	4.33		%

Net Interest Income

Net-interest income of $283 million for the first half of 2020 increased $47.1 million, or 20 percent, over the first half of 2019. Interest income of $298 million for the first six months of 2020 increased $39.8 million, or 15 percent, from the first six months of 2019 and was primarily attributable to a $33.4 million increase in income from commercial loans. Interest expense of $15.7 million for the first six months of 2020 decreased $7.3 million, or 32 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 six months of 2020 was 25 basis points compared to 44 basis points for the first six months of 2019.

The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the first six months of 2020 was 4.23 percent, a 10 basis points decrease from the net interest margin of 4.33 percent for the first six months of 2019. The core net interest margin, excluding 3 basis points of discount accretion and 6 basis points of income from the PPP loans was 4.26 which was the same as the prior year first half core margin. The Company has benefited this year with a reduction in higher cost FHLB advances and decreases in interest rates that has lowered the cost of funds, the combination of which offset the decrease in yields on the earning assets.

Non-interest Income

Non-interest income of $74.5 million for the first six months of 2020 increased $15.2 million, or 26 percent, over the same period last year. Service charges and other fees of $25.4 million for 2020 year to date decreased $12.7 million, or 33 percent, from the same period prior year as a result of a decrease in overdraft activity and the impact of the Durbin Amendment. Gain on the sale of loans of $37.7 million for the first six months of 2020, increased $24.2 million, or 178 percent, compared to the prior year as a result of increased refinance activity. Other income increased $2.2 million from the prior year and was the result of a gain of $2.4 million on the sale of a former branch building in the first quarter of 2020.

Non-interest Expense

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


	Six Months ended
(Dollars in thousands)	Jun 30, 2020		Jun 30, 2019		$ Change		% Change
Compensation and employee benefits	$	117,641	$	104,701	$	12,940	12	%
Occupancy and equipment	18,576		16,617		1,959		12	%
Advertising and promotions	4,625		5,155		(530)		(10)	%
Data processing	10,324		7,954		2,370		30	%
Other real estate owned	187		330		(143)		(43)	%
Regulatory assessments and insurance	2,127		3,133		(1,006)		(32)	%
Core deposit intangibles amortization	5,146		3,559		1,587		45	%
Other expenses	31,443		27,551		3,892		14	%
Total non-interest expense	$	190,069	$	169,000	$	21,069	12	%

Total non-interest expense of $190 million for the first six months of 2020 increased $21.1 million, or 12 percent, over the prior year same period. Compensation and employee benefits for the first six months of 2020 increased $12.9 million, or 12 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 deferral of compensation cost from the PPP loans. Occupancy and equipment expense for the first six months of 2020 increased $2.0 million, or 12 percent from the prior year primarily from increased cost from acquisitions. Data processing expense for the first six months of 2020 increased $2.4 million, or 30 percent, from the prior year as a result of recent acquisitions along with general cost increases. Regulatory assessments and insurance decreased $1.0 million from the prior year primarily as a result of the State of Montana waiving the first semi-annual regulatory assessment of 2020 and Small Bank Assessment credits applied by the FDIC in the first quarter of 2020. Other expenses of $31.4 million, increased $3.9 million, or 14 percent, from the prior year and was primarily driven by an increase in acquisition-related expenses which were $6.5 million in the current year first half compared to $2.0 million in the prior year first half.

Efficiency Ratio

The efficiency ratio was 50.81 percent for the six months of 2020. Excluding the $15.7 million impact from the PPP loans, the efficiency ratio would have been 54.21 percent, which was an improvement of 71 basis points from the prior year efficiency ratio of 54.93 percent which was the result of increases in gain on sale of loans and commercial loan interest income that more than offset the decreases in service fee income from the Durbin Amendment and increases in compensation expenses.

Credit Loss Expense

The credit loss expense was $36.3 million for the first six months of 2020, an increase of $36.2 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 six months of 2020 were $2.0 million compared to $2.2 million during the same period in 2019.

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:


		March 31, 2020						December 31, 2019								March 31, 2019					June 30, 2020						December 31, 2019	June 30, 2019
(Dollars in thousands)	(Dollars in thousands)	Carrying Amount		Percent		Carrying Amount		Percent		Carrying Amount		Percent		(Dollars in thousands)	Carrying Amount		Percent		Carrying Amount		Percent		Carrying Amount		Percent
Available-for-sale	Available-for-sale													Available-for-sale
U.S. government and federal agency	U.S. government and federal agency	$	44,567	1	%	$	20,044	1	%	$	21,521	1	%	U.S. government and federal agency	$	42,235	1	%	$	20,044	1	%	$	19,487	1	%
U.S. government sponsored enterprises	U.S. government sponsored enterprises	31,251		1	%	43,677		1	%	106,457		4	%	U.S. government sponsored enterprises	10,863		1	%	43,677		1	%	119,950		4	%
State and local governments	State and local governments	1,258,342		34	%	702,398		25	%	725,191		26	%	State and local governments	1,277,552		34	%	702,398		25	%	700,193		26	%
Corporate bonds	Corporate bonds	331,184		9	%	157,602		6	%	218,548		8	%	Corporate bonds	388,375		10	%	157,602		6	%	179,684		7	%
Residential mortgage-backed securities	Residential mortgage-backed securities	794,733		22	%	738,724		26	%	825,048		30	%	Residential mortgage-backed securities	857,641		23	%	738,724		26	%	700,789		26	%
Commercial mortgage-backed securities	Commercial mortgage-backed securities	969,813		27	%	912,807		33	%	625,557		22	%	Commercial mortgage-backed securities	957,284		26	%	912,807		33	%	750,531		27	%
Total available-for-sale	Total available-for-sale	3,429,890		94	%	2,575,252		92	%	2,522,322		91	%	Total available-for-sale	3,533,950		95	%	2,575,252		92	%	2,470,634		91	%
Held-to-maturity	Held-to-maturity													Held-to-maturity
State and local governments	State and local governments	203,814		6	%	224,611		8	%	255,572		9	%	State and local governments	203,275		5	%	224,611		8	%	252,097		9	%
Total held-to-maturity	Total held-to-maturity	203,814		6	%	224,611		8	%	255,572		9	%	Total held-to-maturity	203,275		5	%	224,611		8	%	252,097		9	%
Total debt securities	Total debt securities	$	3,633,704	100	%	$	2,799,863	100	%	$	2,777,894	100	%	Total debt securities	$	3,737,225	100	%	$	2,799,863	100	%	$	2,722,731	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 Standard and Poor’s [“S&P”] and Moody’s) as support for the evaluation; however, they are not solely relied upon. There have been no significant differences in the Company’s internal evaluation of the creditworthiness of any issuer when compared with the ratings assigned by the NRSROs.

5358

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.


		March 31, 2020				December 31, 2019					June 30, 2020		December 31, 2019
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value
S&P: AAA / Moody’s: Aaa	S&P: AAA / Moody’s: Aaa	$	387,218	410,343	251,101	259,690	S&P: AAA / Moody’s: Aaa	$	385,131	415,953	251,101	259,690
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3	S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3	883,814		923,168	523,150	539,758	S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3	883,833		937,058	523,150	539,758
S&P: A+, A, A- / Moody’s: A1, A2, A3	S&P: A+, A, A- / Moody’s: A1, A2, A3	117,569		124,529	113,275	120,048	S&P: A+, A, A- / Moody’s: A1, A2, A3	116,767		124,248	113,275	120,048
S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3	S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3	3,217		3,279	3,217	3,302	S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3	3,217		3,259	3,217	3,302
Not rated by either entity	Not rated by either entity	10,637		10,853	13,451	13,795	Not rated by either entity	12,420		12,717	13,451	13,795
Below investment grade	Below investment grade	200		200	201	201	Below investment grade	200		200	201	201
Total	Total	$	1,402,655	1,472,372	904,395	936,794	Total	$	1,401,568	1,493,435	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.


		March 31, 2020				December 31, 2019					June 30, 2020		December 31, 2019
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value
General obligation - unlimited	General obligation - unlimited	$	638,959	670,543	445,584	465,066	General obligation - unlimited	$	628,333	670,680	445,584	465,066
General obligation - limited	General obligation - limited	146,978		153,223	119,884	124,939	General obligation - limited	146,111		153,082	119,884	124,939
Revenue	Revenue	596,507		627,494	325,331	332,354	Revenue	607,164		648,293	325,331	332,354
Certificate of participation	Certificate of participation	10,677		11,551	8,003	8,815	Certificate of participation	15,872		17,164	8,003	8,815
Other	Other	9,534		9,561	5,593	5,620	Other	4,088		4,216	5,593	5,620
Total	Total	$	1,402,655	1,472,372	904,395	936,794	Total	$	1,401,568	1,493,435	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.


		March 31, 2020				December 31, 2019					June 30, 2020		December 31, 2019
(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value	(Dollars in thousands)	Amortized Cost		Fair Value	Amortized Cost	Fair Value
New York	New York	$	158,378	168,613	14,701	14,870	New York	$	160,617	176,472	14,701	14,870
Texas	Texas	157,729		166,907	112,397	121,641	Texas	156,241		166,450	112,397	121,641
Michigan	Michigan	149,776		155,672	141,131	116,581	Michigan	143,008		151,033	141,131	116,581
California	California	128,984		139,168	23,482	24,406	California	128,048		143,490	23,482	24,406
Washington	Washington	117,643		122,943	116,458	146,538	Washington	114,808		120,726	116,458	146,538
All other states	All other states	690,145		719,069	496,226	512,758	All other states	698,846		735,264	496,226	512,758
Total	Total	$	1,402,655	1,472,372	904,395	936,794	Total	$	1,401,568	1,493,435	904,395	936,794

5459

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 ~~March 31,~~June 30, 2020. Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.


		One Year or Less						After One through Five Years						After Five through Ten Years						After Ten Years											Mortgage-Backed Securities ¹									Total									One Year or Less									After One through Five Years							After Five through Ten Years	After Ten Years	Mortgage-Backed Securities ¹	Total
(Dollars in thousands)	(Dollars in thousands)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount				Yield		(Dollars in thousands)		Amount			Yield			Amount			Yield				Amount			Yield			Amount			Yield			Amount			Yield			Amount		Yield
Available-for-sale	Available-for-sale																											Available-for-sale
U.S. government and federal agency	U.S. government and federal agency	$	624	1.99	%	$	1,630	1.14	%	$	14,044	2.48	%	$	28,269	1.57	%	$	—	—	%	$	44,567			1.85	%	U.S. government and federal agency		$	504		2.03	%		$	1,640		1.13		%		$	12,970		1.47	%		$	27,121		1.62	%		$	—		—	%		$	42,235	1.59	%
U.S. government sponsored enterprises	U.S. government sponsored enterprises	15,424		4.00	%	14,325		1.60	%	1,502		2.08	%	—		—	%	—		—	%	31,251				7.69	%	U.S. government sponsored enterprises		8,042			1.12	%		2,821			0.95		%		—			—	%		—			—	%		—			—	%		10,863		1.08	%
State and local governments	State and local governments	4,255		2.85	%	39,864		2.62	%	234,636		3.56	%	979,587		3.49	%	—		—	%	1,258,342				3.47	%	State and local governments		3,697			2.48	%		39,239			2.65		%		245,394			3.56	%		989,222			3.46	%		—			—	%		1,277,552		3.45	%
Corporate bonds	Corporate bonds	104,815		3.71	%	226,369		4.09	%	—		—	%	—		—	%	—		—	%	331,184				3.97	%	Corporate bonds		133,734			3.26	%		237,826			3.63		%		16,815			3.98	%		—			—	%		—			—	%		388,375		3.51	%
Residential mortgage-backed securities	Residential mortgage-backed securities	—		—	%	—		—	%	—		—	%	—		—	%	794,733		2.36	%	794,733				2.36	%	Residential mortgage-backed securities		—			—	%		—			—		%		—			—	%		—			—	%		857,641			1.90	%		857,641		1.90	%
Commercial mortgage-backed securities	Commercial mortgage-backed securities	—		—	%	—		—	%	—		—	%	—		—	%	969,813		2.83	%	969,813				2.83	%	Commercial mortgage-backed securities		—			—	%		—			—		%		—			—	%		—			—	%		957,284			2.82	%		957,284		2.82	%
Total available- for-sale		125,118		3.71	%	282,188		3.75	%	250,182		3.50	%	1,007,856		3.44	%	1,764,546		2.62	%	3,429,890				3.06	%
Total available-for-sale																								Total available-for-sale	145,977				3.12		%	281,526			3.45		%	275,179				3.48		%	1,016,343			3.41		%	1,814,925			2.38		%	3,533,950			2.87		%
Held-to-maturity	Held-to-maturity																								Held-to-maturity
State and local governments	State and local governments	—		—	%	12,153		2.38	%	72,466		2.70	%	119,195		3.01	%	—		—	%	203,814				2.86	%	State and local governments		—			—	%		17,132			2.47		%		71,471			2.72	%		114,672			3.04	%		—			—	%		203,275		2.88	%
Total held-to-maturity	Total held-to-maturity	—		—	%	12,153		2.38	%	72,466		2.70	%	119,195		3.01	%	—		—	%	203,814				2.86	%	Total held-to-maturity		—			—	%		17,132			2.47		%		71,471			2.72	%		114,672			3.04	%		—			—	%		203,275		2.88	%
Total debt securities	Total debt securities	$	125,118	3.71	%	$	294,341	3.69	%	$	322,648	3.32	%	$	1,127,051	3.39	%	$	1,764,546	2.62	%	$	3,633,704			3.05	%	Total debt securities		$	145,977		3.12	%		$	298,658		3.39		%		$	346,650		3.32	%		$	1,131,015		3.37	%		$	1,814,925		2.38	%		$	3,737,225	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 ~~March 31,~~June 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 ~~March 31,~~June 30, 2020.

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

5560

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 ~~March 31,~~June 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:


		March 31, 2020						December 31, 2019								March 31, 2019					June 30, 2020						December 31, 2019	June 30, 2019
(Dollars in thousands)	(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Residential real estate	Residential real estate	$	957,830	10	%	$	926,388	10	%	$	884,732	11	%	Residential real estate	$	903,198	8	%	$	926,388	10	%	$	920,715	11	%
Commercial real estate	Commercial real estate	5,928,303		60	%	5,579,307		59	%	4,686,082		57	%	Commercial real estate	6,047,692		54	%	5,579,307		59	%	4,959,863		57	%
Other commercial	Other commercial	2,239,878		23	%	2,094,254		22	%	1,909,452		23	%	Other commercial	3,547,249		31	%	2,094,254		22	%	2,076,605		24	%
Home equity	Home equity	652,942		6	%	617,201		7	%	562,381		7	%	Home equity	654,392		6	%	617,201		7	%	596,041		7	%
Other consumer	Other consumer	309,253		3	%	295,660		3	%	283,423		4	%	Other consumer	300,847		3	%	295,660		3	%	288,553		3	%
Loans receivable	Loans receivable	10,088,206		102	%	9,512,810		101	%	8,326,070		102	%	Loans receivable	11,453,378		102	%	9,512,810		101	%	8,841,777		102	%
Allowance for credit losses	Allowance for credit losses	(150,190)		(2)	%	(124,490)		(1)	%	(129,786)		(2)	%	Allowance for credit losses	(162,509)		(2)	%	(124,490)		(1)	%	(129,054)		(2)	%
Loans receivable, net	Loans receivable, net	$	9,938,016	100	%	$	9,388,320	100	%	$	8,196,284	100	%	Loans receivable, net	$	11,290,869	100	%	$	9,388,320	100	%	$	8,712,723	100	%

5661

Non-performing Assets

The following table summarizes information regarding non-performing assets at the dates indicated:


		At or for the Three Months ended			At or for the Year ended		At or for the Three Months ended			At or for the Six Months ended			At or for the Three Months ended		At or for the Year ended		At or for the Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020			December 31, 2019		March 31, 2019		(Dollars in thousands)	June 30, 2020			March 31, 2020		December 31, 2019		June 30, 2019
Other real estate owned	Other real estate owned	$	4,748		5,142		8,125		Other real estate owned	$	4,743		4,748		5,142		7,281
Accruing loans 90 days or more past due	Accruing loans 90 days or more past due								Accruing loans 90 days or more past due
Residential real estate	Residential real estate	701			753		998		Residential real estate	206			701		753		1,333
Commercial real estate	Commercial real estate	3,700			64		234		Commercial real estate	3,110			3,700		64		1,385
Other commercial	Other commercial	1,738			143		998		Other commercial	2,519			1,738		143		254
Home equity	Home equity	140			—		115		Home equity	98			140		—		229
Other consumer	Other consumer	345			452		106		Other consumer	138			345		452		262
Total	Total	6,624			1,412		2,451		Total	6,071			6,624		1,412		3,463
Non-accrual loans	Non-accrual loans								Non-accrual loans
Residential real estate	Residential real estate	4,433			4,715		6,219		Residential real estate	4,243			4,433		4,715		5,744
Commercial real estate	Commercial real estate	13,465			15,650		24,096		Commercial real estate	19,682			13,465		15,650		23,517
Other commercial	Other commercial	6,652			6,592		6,766		Other commercial	7,713			6,652		6,592		2,513
Home equity	Home equity	3,003			3,266		2,454		Home equity	3,086			3,003		3,266		1,585
Other consumer	Other consumer	453			660		734		Other consumer	433			453		660		7,836
Total	Total	28,006			30,883		40,269		Total	35,157			28,006		30,883		41,195
Total non-performing assets	Total non-performing assets	$	39,378		37,437		50,845		Total non-performing assets	$	45,971		39,378		37,437		51,939
Non-performing assets as a percentage of subsidiary assets	Non-performing assets as a percentage of subsidiary assets	0.26		%	0.27	%	0.42	%	Non-performing assets as a percentage of subsidiary assets	0.27		%	0.26	%	0.27	%	0.41	%
Allowance for credit losses as a percentage of non-performing loans	Allowance for credit losses as a percentage of non-performing loans	434		%	385	%	304	%	Allowance for credit losses as a percentage of non-performing loans	394		%	434	%	385	%	289	%
Accruing loans 30-89 days past due	Accruing loans 30-89 days past due	$	41,375		23,192		36,894		Accruing loans 30-89 days past due	$	25,225		41,375		23,192		37,937
Accruing troubled debt restructurings	Accruing troubled debt restructurings	$	44,371		34,055		24,468		Accruing troubled debt restructurings	$	41,759		44,371		34,055		25,019
Non-accrual troubled debt restructurings	Non-accrual troubled debt restructurings	$	6,911		3,346		6,747		Non-accrual troubled debt restructurings	$	8,204		6,911		3,346		6,041
U.S. government guarantees included in non-performing assets	U.S. government guarantees included in non-performing assets	$	3,204		1,786		2,649		U.S. government guarantees included in non-performing assets	$	3,305		3,204		1,786		2,785
Interest income ¹	Interest income ¹	$	353		1,603		512		Interest income ¹	$	851		353		1,603		1,057

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 ~~$39.4~~$46.0 million at ~~March 31,~~June 30, 2020 increased ~~$1.9~~$6.6 million, or 517 percent, over the prior quarter and decreased ~~$11.5~~$6.0 million, or 2311 percent, over the prior year ~~first~~second quarter.Non-performing assets as a percentage of subsidiary assets at ~~March 31,~~June 30, 2020 was ~~0.26~~0.27 percent. Excluding the government guaranteed PPP loans, the non-performing assets as a ~~decrease~~percentage of 1subsidiary assets at June 30, 2020 was 0.30 percent at June 30, 2020, anincrease of 4 basis ~~point~~points from the prior quarter, and a decrease of 1611 basis points from the prior year ~~first~~second quarter. Early stage delinquencies (accruing loans 30-89 days past due) of ~~$41.4~~$25.2 million at ~~March 31,~~June 30, 2020 ~~increased $18.2~~decreased $16.2 million from the prior quarter and ~~increased $4.5~~decreased $12.7 million from the prior year ~~first~~second quarter. Early stage delinquencies as a percentage of loans at ~~March 31,~~June 30, 2020 was ~~0.41~~0.22 percent, which was ~~an increase~~a decrease of 1719 basis points from prior quarter and a 321 basis points decrease from prior year ~~first~~second quarter.

5762

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 ~~$51.3~~$50.0 million and $37.4 million at ~~March 31,~~June 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~~Bank to not designate certain modifications as ~~TDRS~~TDRs that otherwise may have been classified as TDRs. ~~As of April 21, 2020,~~For additional information on modifications related to the ~~Company had modified 1,688 of such loans in~~COVID-19 pandemic, see the ~~amount of $716 million~~COVID-19 Total Loan Modifications and ~~modifications generally included interest only or full deferrals up to six months.~~PPP Loans section 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 ~~$568~~$904 thousand. The fair value of the loan collateral acquired in foreclosure during 2020 was ~~$465~~$791 thousand. The following table sets forth the changes in OREO for the periods indicated:


		At or for the Three Months ended		At or for the Year ended	At or for the Three Months ended		At or for the Six Months ended		At or for the Three Months ended	At or for the Year ended	At or for the Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020		December 31, 2019	March 31, 2019	(Dollars in thousands)	June 30, 2020		March 31, 2020	December 31, 2019	June 30, 2019
Balance at beginning of period	Balance at beginning of period	$	5,142	7,480	7,480	Balance at beginning of period	$	5,142	5,142	7,480	7,480
Acquisitions	Acquisitions	307		—	—	Acquisitions	307		307	—	—
Additions	Additions	465		2,349	1,437	Additions	791		465	2,349	1,914
Capital improvements	Capital improvements	51		63	—	Capital improvements	72		51	63	—
Write-downs	Write-downs	(60)		(766)	(56)	Write-downs	(60)		(60)	(766)	(144)
Sales	Sales	(1,157)		(3,984)	(736)	Sales	(1,509)		(1,157)	(3,984)	(1,969)
Balance at end of period	Balance at end of period	$	4,748	5,142	8,125	Balance at end of period	$	4,743	4,748	5,142	7,281

COVID-19 Total Loan Modifications and PPP Loans

The following table summarizes information regarding COVID-19 loan modifications and PPP loans:


	June 30, 2020
(Dollars in thousands)	Number of Loan Modifi-cations	Amount of Loan Modifi-cations		Number of PPP Loans	Amount of PPP Loans		Loans Receivable, Net of PPP Loans		Loan Modifi-cations (Amount) as a Percent of Loans Receivable, Net of PPP Loans		PPP Loans (Amount) as a Percent of Loans Receivable, Net of PPP Loans
Residential real estate	227	$	66,395	—	$	—	$	903,198	7.35	%	—	%
Commercial real estate and other commercial
Real estate rental and leasing	607	587,609		1,072	62,382		3,244,073		18.11	%	1.92	%
Accommodation and food services	413	395,882		1,373	144,036		644,648		61.41	%	22.34	%
Healthcare	264	126,808		1,752	263,259		792,272		16.01	%	33.23	%
Manufacturing	134	49,338		728	69,370		202,151		24.41	%	34.32	%
Retail and wholesale trade	159	46,623		1,532	159,433		476,841		9.78	%	33.44	%
Construction	122	38,751		2,045	193,606		765,539		5.06	%	25.29	%
Other	580	192,060		6,789	534,660		2,042,671		9.40	%	26.17	%
Home equity and other consumer	548	11,326		—	—		955,239		1.19	%	—	%
Total	3,054	$	1,514,792	15,291	$	1,426,746	$	10,026,632	15.11	%	14.23	%

In response to the COVID-19 pandemic, the Company modified 3,054 loans in the amount of $1.515 billion during the current quarter. These modifications were primarily short-term payment deferrals under six months.

The PPP loan originations generated $53.6 million of SBA processing fees, or an average of 3.75 percent, and $8.4 million of deferred compensation costs for total net deferred fees of $45.2 million. Net deferred fees remaining on the PPP loans at June 30, 2020 were $40.6 million, which will be recognized into interest income over the life of the loans, generally two years, or when the loans are forgiven by the SBA.

Higher Risk Industries

The Company has certain industries for which it has identified as higher risk. The following table summarizes information regarding these higher risk loans:


	June 30, 2020
(Dollars in thousands)	Loans Receivable, Net of PPP Loans		Percent of Total Loans Receivable, Net of PPP Loans		Average Loan-To- Value on Loans Receivable, Net of PPP Loans		Amount of Loan Modifi-cations		Loan Modifi-cations as a Percent of Loans Receivable, Net of PPP Loans		Amount of PPP Loans
Hotel and motel	$	421,569	4.20	%	50.75	%	$	300,747	71.34	%	$	36,933
Restaurant	150,515		1.50	%	68.97	%	76,632		50.91	%	93,853
Travel and tourism	20,758		0.21	%	52.66	%	7,845		37.79	%	9,969
Gaming	15,118		0.15	%	72.13	%	9,214		60.95	%	1,084
Oil and gas	22,748		0.23	%	57.61	%	6,013		26.43	%	24,315
Total	$	630,708	6.29	%			$	400,451	63.49	%	$	166,154

Excluding the PPP loans, the Company has $631 million, or 6 percent, of its loan portfolio with direct exposure to higher risk industries, requiring enhanced monitoring. The Company modified 63 percent of the higher risk loans which accounted for 26 percent of the total loan modifications during the current quarter. The Company also originated $166 million in PPP loans to support these customers which was 12 percent of the total PPP loans originated during the current quarter. Although there is limited exposure, the Company is conducting enhanced portfolio reviews and monitoring for potential credit deterioration related to the COVID-19 pandemic.

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:


		March 31, 2020										December 31, 2019												March 31, 2019										June 30, 2020						December 31, 2019	June 30, 2019
(Dollars in thousands)	(Dollars in thousands)	ACL		Percent of ACL in Category		Percent of Loans in Category		ACL		Percent of ACL in Category		Percent of Loans in Category		ACL		Percent of ACL in Category		Percent of Loans in Category		(Dollars in thousands)	ACL		Percent of ACL in Category			Percent of Loans in Category		ACL		Percent of ACL in Category		Percent of Loans in Category		ACL		Percent of ACL in Category		Percent of Loans in Category
Residential real estate	Residential real estate	$	9,315	6	%	10	%	$	10,111	8	%	10	%	$	10,711	8	%	11	%	Residential real estate	$	9,986	6		%	8	%	$	10,111	8	%	10	%	$	10,695	8	%	10	%
Commercial real estate	Commercial real estate	71,085		47	%	59	%	69,496		56	%	59	%	72,328		56	%	56	%	Commercial real estate	89,104		55		%	53	%	69,496		56	%	59	%	72,447		56	%	56	%
Other commercial	Other commercial	56,172		38	%	22	%	36,129		29	%	22	%	36,849		28	%	23	%	Other commercial	48,838		30		%	31	%	36,129		29	%	22	%	36,259		28	%	24	%
Home equity	Home equity	7,934		5	%	6	%	4,937		4	%	6	%	5,880		5	%	7	%	Home equity	9,962		6		%	6	%	4,937		4	%	6	%	5,801		5	%	7	%
Other consumer	Other consumer	5,684		4	%	3	%	3,817		3	%	3	%	4,018		3	%	3	%	Other consumer	4,619		3		%	2	%	3,817		3	%	3	%	3,852		3	%	3	%
Total	Total	$	150,190	100	%	100	%	$	124,490	100	%	100	%	$	129,786	100	%	100	%	Total	$	162,509	100		%	100	%	$	124,490	100	%	100	%	$	129,054	100	%	100	%

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


		At or for the Three Months ended			At or for the Year ended		At or for the Three Months ended			At or for the Six Months ended			At or for the Three Months ended		At or for the Year ended		At or for the Six Months ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020			December 31, 2019		March 31, 2019		(Dollars in thousands)	June 30, 2020			March 31, 2020		December 31, 2019		June 30, 2019
Balance at beginning of period	Balance at beginning of period	$	124,490		131,239		131,239		Balance at beginning of period	$	124,490		124,490		131,239		131,239
Impact of adopting CECL	Impact of adopting CECL	3,720			—		—		Impact of adopting CECL	3,720			3,720		—		—
Acquisitions	Acquisitions	49			—		—		Acquisitions	49			49		—		—
Credit loss expense	Credit loss expense	22,744			57		57		Credit loss expense	36,296			22,744		57		57
Charge-offs	Charge-offs								Charge-offs
Residential real estate	Residential real estate	(20)			(608)		(292)		Residential real estate	(21)			(20)		(608)		(341)
Commercial real estate	Commercial real estate	(30)			(2,460)		(283)		Commercial real estate	(180)			(30)		(2,460)		(409)
Other commercial	Other commercial	(785)			(4,189)		(840)		Other commercial	(1,873)			(785)		(4,189)		(1,198)
Home equity	Home equity	(1)			(90)		(8)		Home equity	(194)			(1)		(90)		(28)
Other consumer	Other consumer	(1,731)			(7,831)		(1,918)		Other consumer	(2,967)			(1,731)		(7,831)		(4,224)
Total charge-offs	Total charge-offs	(2,567)			(15,178)		(3,341)		Total charge-offs	(5,235)			(2,567)		(15,178)		(6,200)
Recoveries	Recoveries								Recoveries
Residential real estate	Residential real estate	9			251		94		Residential real estate	19			9		251		232
Commercial real estate	Commercial real estate	470			2,212		312		Commercial real estate	330			470		2,212		752
Other commercial	Other commercial	454			2,181		443		Other commercial	1,182			454		2,181		1,041
Home equity	Home equity	106			79		13		Home equity	153			106		79		27
Other consumer	Other consumer	715			3,649		969		Other consumer	1,505			715		3,649		1,906
Total recoveries	Total recoveries	1,754			8,372		1,831		Total recoveries	3,189			1,754		8,372		3,958
Net charge-offs	Net charge-offs	(813)			(6,806)		(1,510)		Net charge-offs	(2,046)			(813)		(6,806)		(2,242)
Balance at end of period	Balance at end of period	$	150,190		124,490		129,786		Balance at end of period	$	162,509		150,190		124,490		129,054
ACL as a percentage of total loans	ACL as a percentage of total loans	1.49		%	1.31	%	1.56	%	ACL as a percentage of total loans	1.42		%	1.49	%	1.31	%	1.46	%
Net charge-offs as a percentage of total loans	Net charge-offs as a percentage of total loans	0.01		%	0.07	%	0.02	%	Net charge-offs as a percentage of total loans	0.02		%	0.01	%	0.07	%	0.03	%

The Company’s adoption of the CECL accounting standard resulted in a $3.7 million increase in the allowance for credit losses. The ~~allowance as~~current quarter credit loss expense was $13.6 million, a ~~percentage~~decrease of ~~total loans outstanding at March 31, 2020 was 1.49 percent, which was an 18 basis point increase compared to~~$9.2 million from the prior ~~quarter.~~quarter credit loss expense of $22.7 million. The increase in the ~~allowance~~ACL during the ~~current quarter~~first six months was primarily attributable to the Company recognizing ~~$19.1~~$37.6 million of credit loss expense related to the COVID-19 pandemic and an additional $4.8 million of credit loss expense related to the SBAZ acquisition. The ACL as a percentage of total loans outstanding at June 30, 2020 was 1.42 percent, which was a 7 basis points decrease compared to the prior quarter. The decrease was the result of originating $1.427 billion of government guaranteed PPP loans for which no ACL was recorded. Excluding the PPP loans, the ACL as percentage of loans was 1.62 percent, a 13 basis points increase over the prior quarter and was primarily the result of changes in the economic forecast related to the COVID-19 pandemic. The Company’s ACL of ~~$150~~$163 million is considered adequate to absorb the estimated credit losses from any segment of its loan portfolio. For the periods ended ~~March 31,~~June 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.

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 ~~allowance for credit losses~~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 192 locations, including 174 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.”

6067

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								Loans Receivable, by Loan Type								% Change from
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019		Mar 31, 2019		Dec 31, 2019		Mar 31, 2019			(Dollars in thousands)	Jun 30, 2020		Mar 31, 2020		Dec 31, 2019		Jun 30, 2019		Mar 31, 2020		Dec 31, 2019		Jun 30, 2019
Custom and owner occupied construction	Custom and owner occupied construction	$	172,238	$	143,479	$	126,820	20	%	36	%		Custom and owner occupied construction	$	177,172	$	172,238	$	143,479	$	140,186	3	%	23	%	26	%
Pre-sold and spec construction	Pre-sold and spec construction	180,799		180,539		135,137		—	%	34	%		Pre-sold and spec construction	161,964		180,799		180,539		171,464		(10)	%	(10)	%	(6)	%
Total residential construction	Total residential construction	353,037		324,018		261,957		9	%	35	%		Total residential construction	339,136		353,037		324,018		311,650		(4)	%	5	%	9	%
Land development	Land development	101,644		101,592		126,417		—	%	(20)	%		Land development	94,667		101,644		101,592		120,052		(7)	%	(7)	%	(21)	%
Consumer land or lots	Consumer land or lots	121,082		125,759		125,818		(4)	%	(4)	%		Consumer land or lots	120,015		121,082		125,759		128,544		(1)	%	(5)	%	(7)	%
Unimproved land	Unimproved land	65,355		62,563		75,113		4	%	(13)	%		Unimproved land	63,459		65,355		62,563		74,244		(3)	%	1	%	(15)	%
Developed lots for operative builders	Developed lots for operative builders	32,661		17,390		16,171		88	%	102	%		Developed lots for operative builders	26,647		32,661		17,390		14,117		(18)	%	53	%	89	%
Commercial lots	Commercial lots	59,023		46,408		35,511		27	%	66	%		Commercial lots	60,563		59,023		46,408		57,447		3	%	31	%	5	%
Other construction	Other construction	453,403		478,368		454,965		(5)	%	—	%		Other construction	477,922		453,403		478,368		453,782		5	%	—	%	5	%
Total land, lot, and other construction	Total land, lot, and other construction	833,168		832,080		833,995		—	%	—	%		Total land, lot, and other construction	843,273		833,168		832,080		848,186		1	%	1	%	(1)	%
Owner occupied	Owner occupied	1,813,284		1,667,526		1,367,530		9	%	33	%		Owner occupied	1,855,994		1,813,284		1,667,526		1,418,190		2	%	11	%	31	%
Non-owner occupied	Non-owner occupied	2,200,664		2,017,375		1,662,390		9	%	32	%		Non-owner occupied	2,238,586		2,200,664		2,017,375		1,780,988		2	%	11	%	26	%
Total commercial real estate	Total commercial real estate	4,013,948		3,684,901		3,029,920		9	%	32	%		Total commercial real estate	4,094,580		4,013,948		3,684,901		3,199,178		2	%	11	%	28	%
Commercial and industrial	Commercial and industrial	1,151,817		991,580		922,124		16	%	25	%		Commercial and industrial	2,342,081		1,151,817		991,580		1,024,828		103	%	136	%	129	%
Agriculture	Agriculture	694,444		701,363		641,146		(1)	%	8	%		Agriculture	714,227		694,444		701,363		697,893		3	%	2	%	2	%
1st lien	1st lien	1,213,232		1,186,889		1,102,920		2	%	10	%		1st lien	1,227,514		1,213,232		1,186,889		1,154,221		1	%	3	%	6	%
Junior lien	Junior lien	49,071		53,571		54,964		(8)	%	(11)	%		Junior lien	47,121		49,071		53,571		53,055		(4)	%	(12)	%	(11)	%
Total 1-4 family	Total 1-4 family	1,262,303		1,240,460		1,157,884		2	%	9	%		Total 1-4 family	1,274,635		1,262,303		1,240,460		1,207,276		1	%	3	%	6	%
Multifamily residential	Multifamily residential	352,379		342,498		268,156		3	%	31	%		Multifamily residential	343,870		352,379		342,498		278,539		(2)	%	—	%	23	%
Home equity lines of credit	Home equity lines of credit	656,953		617,900		557,895		6	%	18	%		Home equity lines of credit	655,492		656,953		617,900		592,355		—	%	6	%	11	%
Other consumer	Other consumer	180,832		174,643		163,568		4	%	11	%		Other consumer	181,402		180,832		174,643		167,964		—	%	4	%	8	%
Total consumer	Total consumer	837,785		792,543		721,463		6	%	16	%		Total consumer	836,894		837,785		792,543		760,319		—	%	6	%	10	%
States and political subdivisions	States and political subdivisions	566,953		533,023		398,848		6	%	42	%		States and political subdivisions	581,673		566,953		533,023		454,085		3	%	9	%	28	%
Other	Other	116,991		139,538		119,966		(16)	%	(2)	%		Other	198,354		116,991		139,538		114,534		70	%	42	%	73	%
Total loans receivable, including loans held for sale	Total loans receivable, including loans held for sale	10,182,825		9,582,004		8,355,459		6	%	22	%		Total loans receivable, including loans held for sale	11,568,723		10,182,825		9,582,004		8,896,488		14	%	21	%	30	%
Less loans held for sale ¹	Less loans held for sale ¹	(94,619)		(69,194)		(29,389)		37	%	222	%		Less loans held for sale ¹	(115,345)		(94,619)		(69,194)		(54,711)		22	%	67	%	111	%
Total loans receivable	Total loans receivable	$	10,088,206	$	9,512,810	$	8,326,070	6	%	21	%		Total loans receivable	$	11,453,378	$	10,088,206	$	9,512,810	$	8,841,777	14	%	20	%	30	%

¹ Loans held for sale are primarily 1st lien 1-4 family loans.

6168

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	Non-performing Assets, by Loan Type						Non- Accrual Loans	Accruing Loans 90 Days or More Past Due	OREO
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019	Mar 31, 2019	Mar 31, 2020	Mar 31, 2020	Mar 31, 2020					Jun 30, 2020	Mar 31, 2020	Dec 31, 2019	Jun 30, 2019	Jun 30, 2020	Jun 30, 2020	Jun 30, 2020
Custom and owner occupied construction	Custom and owner occupied construction	$	188	185	—	188	—	—	Custom and owner occupied construction	$		188		185	283	440	—	—
Pre-sold and spec construction	Pre-sold and spec construction	96		743	456	96	—	—	Pre-sold and spec construction	—		96		743	1,261	—	—	—
Total residential construction	Total residential construction	284		928	456	284	—	—	Total residential construction	440		284		928	1,544	440	—	—
Land development	Land development	1,432		852	2,272	1,184	—	248	Land development	659		1,432		852	1,272	411	—	248
Consumer land or lots	Consumer land or lots	471		330	1,126	124	186	161	Consumer land or lots	427		471		330	1,075	239	26	162
Unimproved land	Unimproved land	680		1,181	9,222	404	—	276	Unimproved land	663		680		1,181	8,864	387	—	276
Developed lots for operative builders		—		—	67	—	—	—

Commercial lots	Commercial lots	529		529	663	—	—	529	Commercial lots	529		529		529	575	—	—	529
Other construction	Other construction	—		—	111	—	—	—	Other construction	—		—		—	241	—	—	—
Total land, lot and other construction	Total land, lot and other construction	3,112		2,892	13,461	1,712	186	1,214	Total land, lot and other construction	2,278		3,112		2,892	12,027	1,037	26	1,215
Owner occupied	Owner occupied	5,269		4,608	7,229	3,717	107	1,445	Owner occupied	9,424		5,269		4,608	6,998	7,770	209	1,445
Non-owner occupied	Non-owner occupied	5,133		8,229	7,368	4,983	150	—	Non-owner occupied	5,482		5,133		8,229	7,198	5,482	—	—
Total commercial real estate	Total commercial real estate	10,402		12,837	14,597	8,700	257	1,445	Total commercial real estate	14,906		10,402		12,837	14,196	13,252	209	1,445
Commercial and industrial	Commercial and industrial	5,438		5,297	3,893	4,724	525	189	Commercial and industrial	5,039		5,438		5,297	5,690	4,609	265	165
Agriculture	Agriculture	7,263		2,288	4,488	2,658	4,605	—	Agriculture	11,087		7,263		2,288	4,228	6,288	4,799	—
1st lien	1st lien	8,410		8,671	10,279	6,155	701	1,554	1st lien	7,634		8,410		8,671	10,211	5,426	401	1,807
Junior lien	Junior lien	640		569	582	601	39	—	Junior lien	746		640		569	592	567	179	—
Total 1-4 family	Total 1-4 family	9,050		9,240	10,861	6,756	740	1,554	Total 1-4 family	8,380		9,050		9,240	10,803	5,993	580	1,807
Multifamily residential	Multifamily residential	402		201	—	95	—	307	Multifamily residential	92		402		201	—	92	—	—
Home equity lines of credit	Home equity lines of credit	2,617		2,618	2,288	2,464	153	—	Home equity lines of credit	3,048		2,617		2,618	2,474	2,879	80	89
Other consumer	Other consumer	520		837	453	329	152	39	Other consumer	412		520		837	597	290	100	22
Total consumer	Total consumer	3,137		3,455	2,741	2,793	305	39	Total consumer	3,460		3,137		3,455	3,071	3,169	180	111

Other	Other	290		299	348	284	6	—	Other	289		290		299	380	277	12	—
Total	Total	$	39,378	37,437	50,845	28,006	6,624	4,748	Total	$	45,971	39,378		37,437	51,939	35,157	6,071	4,743

6269

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								Accruing 30-89 Days Delinquent Loans, by Loan Type								% Change from
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019		Mar 31, 2019		Dec 31, 2019		Mar 31, 2019			(Dollars in thousands)	Jun 30, 2020		Mar 31, 2020		Dec 31, 2019		Jun 30, 2019		Mar 31, 2020		Dec 31, 2019		Jun 30, 2019
Custom and owner occupied construction	Custom and owner occupied construction	$	2,176	$	637	$	282	242	%	672	%		Custom and owner occupied construction	$	—	$	2,176	$	637	$	49	(100)	%	(100)	%	(100)	%
Pre-sold and spec construction	Pre-sold and spec construction	328		148		553		122	%	(41)	%		Pre-sold and spec construction	—		328		148		219		(100)	%	(100)	%	(100)	%
Total residential construction	Total residential construction	2,504		785		835		219	%	200	%		Total residential construction	—		2,504		785		268		(100)	%	(100)	%	(100)	%
Land development	Land development	840		—		—		n/m		n/m			Land development	—		840		—		1,990		(100)		n/m		(100)	%
Consumer land or lots	Consumer land or lots	321		672		510		(52)	%	(37)	%		Consumer land or lots	248		321		672		206		(23)	%	(63)	%	20	%
Unimproved land	Unimproved land	934		558		685		67	%	36	%		Unimproved land	411		934		558		658		(56)	%	(26)	%	(38)	%
Developed lots for operative builders	Developed lots for operative builders	—		2		4		(100)	%	(100)	%		Developed lots for operative builders	—		—		2		—		n/m		(100)	%	n/m
Commercial lots	Commercial lots	216		—		331		n/m		(35)	%		Commercial lots	153		216		—		—		(29)	%	n/m		n/m
Other construction		—		—		1,234		n/m		(100)	%

Total land, lot and other construction	Total land, lot and other construction	2,311		1,232		2,764		88	%	(16)	%		Total land, lot and other construction	812		2,311		1,232		2,854		(65)	%	(34)	%	(72)	%
Owner occupied	Owner occupied	3,235		3,052		4,463		6	%	(28)	%		Owner occupied	1,512		3,235		3,052		5,322		(53)	%	(50)	%	(72)	%
Non-owner occupied	Non-owner occupied	4,764		1,834		6,604		160	%	(28)	%		Non-owner occupied	966		4,764		1,834		11,700		(80)	%	(47)	%	(92)	%
Total commercial real estate	Total commercial real estate	7,999		4,886		11,067		64	%	(28)	%		Total commercial real estate	2,478		7,999		4,886		17,022		(69)	%	(49)	%	(85)	%
Commercial and industrial	Commercial and industrial	6,122		2,036		4,070		201	%	50	%		Commercial and industrial	4,127		6,122		2,036		3,006		(33)	%	103	%	37	%
Agriculture	Agriculture	6,210		4,298		5,709		44	%	9	%		Agriculture	12,084		6,210		4,298		3,125		95	%	181	%	287	%
1st lien	1st lien	7,419		4,711		7,179		57	%	3	%		1st lien	656		7,419		4,711		2,776		(91)	%	(86)	%	(76)	%
Junior lien	Junior lien	795		624		583		27	%	36	%		Junior lien	160		795		624		1,302		(80)	%	(74)	%	(88)	%
Total 1-4 family	Total 1-4 family	8,214		5,335		7,762		54	%	6	%		Total 1-4 family	816		8,214		5,335		4,078		(90)	%	(85)	%	(80)	%

Multifamily residential													Multifamily residential	—		—		—		1,598		n/m		n/m		(100)
Home equity lines of credit	Home equity lines of credit	5,549		2,352		2,925		136	%	90	%		Home equity lines of credit	3,330		5,549		2,352		3,931		(40)	%	42	%	(15)	%
Other consumer	Other consumer	1,456		1,187		1,357		23	%	7	%		Other consumer	739		1,456		1,187		1,683		(49)	%	(38)	%	(56)	%
Total consumer	Total consumer	7,005		3,539		4,282		98	%	64	%		Total consumer	4,069		7,005		3,539		5,614		(42)	%	15	%	(28)	%

States and political subdivisions													States and political subdivisions	124		—		—		—		n/m		n/m		n/m
Other	Other	1,010		1,081		405		(7)	%	149	%		Other	715		1,010		1,081		372		(29)	%	(34)	%	92	%
Total	Total	$	41,375	$	23,192	$	36,894	78	%	12	%		Total	$	25,225	$	41,375	$	23,192	$	37,937	(39)	%	9	%	(34)	%

n/m - not measurable

6370

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


		Net Charge-Offs (Recoveries), Year-to-Date Period Ending, By Loan Type								Charge-Offs		Recoveries	Net Charge-Offs (Recoveries), Year-to-Date Period Ending, By Loan Type				Charge-Offs	Recoveries
(Dollars in thousands)	(Dollars in thousands)	Mar 31, 2020		Dec 31, 2019	Mar 31, 2019	Mar 31, 2020	Mar 31, 2020	(Dollars in thousands)	Jun 30, 2020		Mar 31, 2020		Dec 31, 2019	Jun 30, 2019	Jun 30, 2020	Jun 30, 2020
Custom and owner occupied construction	Custom and owner occupied construction	$	—	98	—	—	—	Custom and owner occupied construction	$	—	—		98	—	—	—
Pre-sold and spec construction	Pre-sold and spec construction	(6)		(18)	(4)	—	6	Pre-sold and spec construction	(12)		(6)		(18)	(6)	—	12
Total residential construction	Total residential construction	(6)		80	(4)	—	6	Total residential construction	(12)		(6)		80	(6)	—	12
Land development	Land development	(275)		(30)	23	—	275	Land development	(50)		(275)		(30)	15	—	50
Consumer land or lots	Consumer land or lots	3		(138)	(20)	7	4	Consumer land or lots	(17)		3		(138)	(2)	7	24
Unimproved land	Unimproved land	(37)		(311)	(9)	—	37	Unimproved land	(287)		(37)		(311)	(54)	—	287
Developed lots for operative builders	Developed lots for operative builders	—		(18)	—	—	—	Developed lots for operative builders	—		—		(18)	(18)	—	—
Commercial lots	Commercial lots	(1)		(6)	(2)	—	1	Commercial lots	(3)		(1)		(6)	(3)	—	3
Other construction	Other construction	—		(142)	—	—	—	Other construction	—		—		(142)	(32)	—	—
Total land, lot and other construction	Total land, lot and other construction	(310)		(645)	(8)	7	317	Total land, lot and other construction	(357)		(310)		(645)	(94)	7	364
Owner occupied	Owner occupied	(16)		(479)	75	30	46	Owner occupied	(49)		(16)		(479)	139	30	79
Non-owner occupied	Non-owner occupied	(20)		2,015	30	—	20	Non-owner occupied	115		(20)		2,015	7	150	35
Total commercial real estate	Total commercial real estate	(36)		1,536	105	30	66	Total commercial real estate	66		(36)		1,536	146	180	114
Commercial and industrial	Commercial and industrial	61		1,472	(4)	404	343	Commercial and industrial	576		61		1,472	37	1,034	458
Agriculture	Agriculture	36		21	14	37	1	Agriculture	33		36		21	(32)	37	4
1st lien	1st lien	14		(12)	198	21	7	1st lien	—		14		(12)	56	21	21
Junior lien	Junior lien	(110)		(303)	(52)	1	111	Junior lien	(129)		(110)		(303)	(222)	27	156
Total 1-4 family	Total 1-4 family	(96)		(315)	146	22	118	Total 1-4 family	(129)		(96)		(315)	(166)	48	177
Multifamily residential	Multifamily residential	(43)		—	—	—	43	Multifamily residential	(43)		(43)		—	—	—	43
Home equity lines of credit	Home equity lines of credit	(103)		19	(5)	—	103	Home equity lines of credit	24		(103)		19	(11)	166	142
Other consumer	Other consumer	88		603	223	151	63	Other consumer	161		88		603	313	281	120
Total consumer	Total consumer	(15)		622	218	151	166	Total consumer	185		(15)		622	302	447	262

Other	Other	1,222		4,035	1,043	1,916	694	Other	1,727		1,222		4,035	2,055	3,482	1,755
Total	Total	$	813	6,806	1,510	2,567	1,754	Total	$	2,046	813		6,806	2,242	5,235	3,189

6471

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:


		March 31, 2020						December 31, 2019								March 31, 2019					June 30, 2020						December 31, 2019	June 30, 2019
(Dollars in thousands)	(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Non-interest bearing deposits	Non-interest bearing deposits	$	3,875,848	34	%	$	3,696,627	34	%	$	3,051,119	32	%	Non-interest bearing deposits	$	5,043,704	38	%	$	3,696,627	34	%	$	3,265,077	33	%
NOW and DDA accounts	NOW and DDA accounts	2,860,563		25	%	2,645,404		25	%	2,383,806		25	%	NOW and DDA accounts	3,113,863		23	%	2,645,404		25	%	2,487,806		25	%
Savings accounts	Savings accounts	1,578,062		14	%	1,485,487		14	%	1,373,544		14	%	Savings accounts	1,756,503		13	%	1,485,487		14	%	1,412,046		14	%
Money market deposit accounts	Money market deposit accounts	2,155,203		18	%	1,937,141		18	%	1,689,962		18	%	Money market deposit accounts	2,403,641		18	%	1,937,141		18	%	1,647,372		17	%
Certificate accounts	Certificate accounts	1,025,237		9	%	958,501		9	%	896,731		9	%	Certificate accounts	995,536		7	%	958,501		9	%	897,625		9	%
Wholesale deposits	Wholesale deposits	62,924		—	%	53,297		—	%	192,953		2	%	Wholesale deposits	68,285		1	%	53,297		—	%	144,949		2	%
Total interest bearing deposits	Total interest bearing deposits	7,681,989		66	%	7,079,830		66	%	6,536,996		68	%	Total interest bearing deposits	8,337,828		62	%	7,079,830		66	%	6,589,798		67	%
Total deposits	Total deposits	$	11,557,837	100	%	$	10,776,457	100	%	$	9,588,115	100	%	Total deposits	$	13,381,532	100	%	$	10,776,457	100	%	$	9,854,875	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.

6572

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 Three Months ended			At or for the Year ended			At or for the Six Months ended			At or for the Year ended
(Dollars in thousands)	(Dollars in thousands)	March 31, 2020			December 31, 2019		(Dollars in thousands)	June 30, 2020			December 31, 2019
Repurchase agreements	Repurchase agreements						Repurchase agreements
Amount outstanding at end of period	Amount outstanding at end of period	$	580,335		569,824		Amount outstanding at end of period	$	881,227		569,824
Weighted interest rate on outstanding amount	Weighted interest rate on outstanding amount	0.63		%	0.74	%	Weighted interest rate on outstanding amount	0.49		%	0.74	%
Maximum outstanding at any month-end	Maximum outstanding at any month-end	$	580,335		569,824		Maximum outstanding at any month-end	$	881,227		569,824
Average balance	Average balance	$	542,822		470,351		Average balance	$	641,785		470,351
Weighted-average interest rate	Weighted-average interest rate	0.73		%	0.79	%	Weighted-average interest rate	0.59		%	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 ~~March 31,~~June 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 ~~quarter,~~year, the Company’s acquisition of SBAZ resulted in total consolidated assets exceeding $15 billion; accordingly, trust preferred securities are now ~~excluded from~~included in Tier 12 capital. The Company also has subordinated debt that qualifies as Tier 2 capital. The subordinated debentures outstanding as of ~~March 31,~~June 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 ~~March 31,~~June 30, 2020 and determined its ACL of ~~$10.4~~$13.8 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.”

6673

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)	(Dollars in thousands)	March 31, 2020		December 31, 2019	(Dollars in thousands)	June 30, 2020		December 31, 2019
FHLB advances	FHLB advances				FHLB advances
Borrowing capacity	Borrowing capacity	$	2,321,194	2,360,599	Borrowing capacity	$	2,665,832	2,360,599
Amount utilized	Amount utilized	(513,041)		(38,589)	Amount utilized	(37,958)		(38,589)
Amount available	Amount available	$	1,808,153	2,322,010	Amount available	$	2,627,874	2,322,010
FRB discount window	FRB discount window				FRB discount window
Borrowing capacity	Borrowing capacity	$	1,254,170	1,061,872	Borrowing capacity	$	1,187,601	1,061,872
Amount utilized	Amount utilized	—		—	Amount utilized	—		—
Amount available	Amount available	$	1,254,170	1,061,872	Amount available	$	1,187,601	1,061,872
Unsecured lines of credit available	Unsecured lines of credit available	$	380,000	230,000	Unsecured lines of credit available	$	445,000	230,000
Unencumbered debt securities	Unencumbered debt securities				Unencumbered debt securities
U.S. government and federal agency	U.S. government and federal agency	$	44,060	19,540	U.S. government and federal agency	$	41,731	19,540
U.S. government sponsored enterprises	U.S. government sponsored enterprises	31,251		7,416	U.S. government sponsored enterprises	10,863		7,416
State and local governments	State and local governments	974,179		527,348	State and local governments	233,570		527,348
Corporate bonds	Corporate bonds	331,183		157,602	Corporate bonds	154,529		157,602
Residential mortgage-backed securities	Residential mortgage-backed securities	155,617		210,356	Residential mortgage-backed securities	643,660		210,356
Commercial mortgage-backed securities	Commercial mortgage-backed securities	409,914		401,849	Commercial mortgage-backed securities	759,066		401,849
Total unencumbered debt securities	Total unencumbered debt securities	$	1,946,204	1,324,111	Total unencumbered debt securities	$	1,843,419	1,324,111

6774

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 ~~95,408,274~~95,409,061 have been issued as of ~~March 31,~~June 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 ~~March 31,~~June 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 ~~March 31,~~June 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 ~~March 31,~~June 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)			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	Glacier Bank	14.13	%	12.99	%	12.99	%	11.86	%	Glacier Bank	14.43	%	13.20	%	13.20	%	10.41	%
Minimum capital requirements	Minimum capital requirements	8.00	%	6.00	%	4.50	%	4.00	%	Minimum capital requirements	8.00	%	6.00	%	4.50	%	4.00	%
Minimum capital requirements plus capital conservation buffer	Minimum capital requirements plus capital conservation buffer	10.50	%	8.50	%	7.00	%	N/A		Minimum capital requirements plus capital conservation buffer	10.50	%	8.50	%	7.00	%	N/A
Well capitalized requirements	Well capitalized requirements	10.00	%	8.00	%	6.50	%	5.00	%	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). After two years, 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.

6875

~~Income tax expense for~~The following table summarizes information relevant to the ~~three months ended March 31, 2020~~Company’s federal and ~~2019 was $9.6 million and $11.7 million, respectively. The Company’s effective tax rate for the three months ended March 31, 2020 and 2019 was 18.2 percent and 19.2 percent, respectively.~~ state income taxes:


	Six Months ended
(Dollars in thousands)	June 30, 2020			June 30, 2019
Income Before Income Taxes	$	130,719		125,759
Federal and state income tax expense	23,936			24,235
Net Income	$	106,783		101,524
Effective tax rate ¹	18.3		%	19.3	%
Income from tax-exempt debt securities, municipal loans and leases	$	29,021		12,459
Benefits from federal income tax credits	$	5,862		4,774

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. Income from tax-exempt debt securities, loans and leases was $12.5 million and $12.1 million for the three months ended March 31, 2020 and 2019, respectively. Benefits from federal income tax credits were $2.5 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively.

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 ~~$18.1~~$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)	(Dollars in thousands)	New Markets Tax Credits		Low-Income Housing Tax Credits	Debt Securities Tax Credits	Total	(Dollars in thousands)	New Markets Tax Credits		Low-Income Housing Tax Credits	Debt Securities Tax Credits	Total
2020	2020	$	5,351	8,399	794	14,544	2020	$	5,351	8,399	794	14,544
2021	2021	5,642		9,474	736	15,852	2021	5,642		9,569	736	15,947
2022	2022	4,993		9,805	673	15,471	2022	4,993		10,088	673	15,754
2023	2023	4,398		9,706	640	14,744	2023	4,398		10,013	640	15,051
2024	2024	2,466		9,556	604	12,626	2024	2,466		9,863	604	12,933
Thereafter	Thereafter	720		37,830	905	39,455	Thereafter	720		39,887	905	41,512
		$	23,570	84,770	4,352	112,692		$	23,570	87,819	4,352	115,741

6976

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										Three Months ended											Three Months ended				Six Months ended
		March 31, 2020										March 31, 2019											June 30, 2020				June 30, 2020
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Interest and Dividends		Average Yield/ Rate		Average Balance		Interest and Dividends		Average Yield/ Rate		(Dollars in thousands)	Average Balance		Interest and Dividends		Average Yield/ Rate		Average Balance		Interest and Dividends		Average Yield/ Rate
Assets	Assets													Assets
Residential real estate loans	Residential real estate loans	$	980,647	$	11,526	4.70	%	$	917,324	$	10,779	4.70	%	Residential real estate loans	$	1,048,095	$	12,098	4.62	%	$	1,014,371	$	23,624	4.66	%
Commercial loans ¹	Commercial loans ¹	7,809,482		99,956		5.15	%	6,524,190		84,613		5.26	%	Commercial loans ¹	9,235,881		107,632		4.69	%	8,522,681		207,588		4.90	%
Consumer and other loans	Consumer and other loans	926,924		11,641		5.05	%	839,011		10,447		5.05	%	Consumer and other loans	957,798		11,130		4.67	%	942,361		22,771		4.86	%
Total loans ²	Total loans ²	9,717,053		123,123		5.10	%	8,280,525		105,839		5.18	%	Total loans ²	11,241,774		130,860		4.68	%	10,479,413		253,983		4.87	%
Tax-exempt investment securities ³	Tax-exempt investment securities ³	930,601		9,409		4.04	%	960,569		9,950		4.14	%	Tax-exempt investment securities ³	1,401,603		14,248		4.07	%	1,166,102		23,657		4.06	%
Taxable investment securities ⁴	Taxable investment securities ⁴	2,059,581		13,772		2.67	%	1,845,677		13,729		2.98	%	Taxable investment securities ⁴	2,266,707		14,730		2.60	%	2,163,144		28,502		2.64	%
Total earning assets	Total earning assets	12,707,235		146,304		4.63	%	11,086,771		129,518		4.74	%	Total earning assets	14,910,084		159,838		4.31	%	13,808,659		306,142		4.46	%
Goodwill and intangibles	Goodwill and intangibles	539,431						337,963						Goodwill and intangibles	575,296						557,363
Non-earning assets	Non-earning assets	690,338						520,353						Non-earning assets	797,403						743,871
Total assets	Total assets	$	13,937,004					$	11,945,087					Total assets	$	16,282,783					$	15,109,893
Liabilities	Liabilities													Liabilities
Non-interest bearing deposits	Non-interest bearing deposits	$	3,672,959	$	—	—	%	$	2,943,770	$	—	—	%	Non-interest bearing deposits	$	4,733,485	$	—	—	%	$	4,203,222	$	—	—	%
NOW and DDA accounts	NOW and DDA accounts	2,675,152		915		0.14	%	2,320,928		961		0.17	%	NOW and DDA accounts	3,018,706		687		0.09��	%	2,846,928		1,602		0.11	%
Savings accounts	Savings accounts	1,518,809		239		0.06	%	1,359,807		234		0.07	%	Savings accounts	1,687,448		175		0.04	%	1,603,129		414		0.05	%
Money market deposit accounts	Money market deposit accounts	2,031,799		1,624		0.32	%	1,690,305		1,010		0.24	%	Money market deposit accounts	2,300,787		1,240		0.22	%	2,166,293		2,864		0.27	%
Certificate accounts	Certificate accounts	965,908		2,595		1.08	%	905,005		2,014		0.90	%	Certificate accounts	1,013,188		2,408		0.96	%	989,548		5,003		1.02	%
Total core deposits	Total core deposits	10,864,627		5,373		0.20	%	9,219,815		4,219		0.19	%	Total core deposits	12,753,614		4,510		0.14	%	11,809,120		9,883		0.17	%
Wholesale deposits ⁵	Wholesale deposits ⁵	57,110		208		1.46	%	169,361		1,122		2.69	%	Wholesale deposits ⁵	68,503		77		0.46	%	62,806		285		0.91	%
FHLB advances	FHLB advances	108,672		346		1.26	%	352,773		3,055		3.46	%	FHLB advances	182,061		268		0.58	%	145,366		614		0.84	%
Repurchase agreements and other borrowed funds	Repurchase agreements and other borrowed funds	712,787		2,569		1.45	%	556,325		2,508		1.83	%	Repurchase agreements and other borrowed funds	913,744		2,330		1.03	%	813,266		4,899		1.21	%
Total interest bearing liabilities	Total interest bearing liabilities	11,743,196		8,496		0.29	%	10,298,274		10,904		0.43	%	Total interest bearing liabilities	13,917,922		7,185		0.21	%	12,830,558		15,681		0.25	%
Other liabilities	Other liabilities	147,361						116,143						Other liabilities	180,935						164,148
Total liabilities	Total liabilities	11,890,557						10,414,417						Total liabilities	14,098,857						12,994,706
Stockholders’ Equity	Stockholders’ Equity													Stockholders’ Equity
Common stock	Common stock	933						846						Common stock	954						944
Paid-in capital	Paid-in capital	1,417,004						1,051,261						Paid-in capital	1,492,230						1,454,617
Retained earnings	Retained earnings	562,951						471,626						Retained earnings	575,455						569,203
Accumulated other comprehensive income	Accumulated other comprehensive income	65,559						6,937						Accumulated other comprehensive income	115,287						90,423
Total stockholders’ equity	Total stockholders’ equity	2,046,447						1,530,670						Total stockholders’ equity	2,183,926						2,115,187
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	13,937,004					$	11,945,087					Total liabilities and stockholders’ equity	$	16,282,783					$	15,109,893
Net interest income (tax-equivalent)	Net interest income (tax-equivalent)			$	137,808					$	118,614			Net interest income (tax-equivalent)			$	152,653					$	290,461
Net interest spread (tax-equivalent)	Net interest spread (tax-equivalent)					4.34	%					4.31	%	Net interest spread (tax-equivalent)					4.10	%					4.21	%
Net interest margin (tax-equivalent)	Net interest margin (tax-equivalent)					4.36	%					4.34	%	Net interest margin (tax-equivalent)					4.12	%					4.23	%

¹Includes tax effect of $1.3 million and ~~$1.1~~$2.6 million on tax-exempt municipal loan and lease income for the three and six months ended ~~March 31,~~June 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 ~~$1.9~~$2.9 million and ~~$2.0~~$4.8 million on tax-exempt debt securities income for the three and six months ended ~~March 31,~~June 30, 2020, respectively.

⁴Includes tax effect of $266 thousand and ~~$293~~$532 thousand on federal income tax credits for the three and six months ended ~~March 31,~~June 30, 2020, respectively.

⁵Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.

7077

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.


		Three Months ended								Six Months ended
		2020 vs. 2019								2020 vs. 2019
		Increase (Decrease) Due to:								Increase (Decrease) Due to:
(Dollars in thousands)	(Dollars in thousands)	Volume		Rate	Net	(Dollars in thousands)	Volume		Rate	Net
Interest income	Interest income					Interest income
Residential real estate loans	Residential real estate loans	$	744	3	747	Residential real estate loans	$	2,066	(631)	1,435
Commercial loans (tax-equivalent)	Commercial loans (tax-equivalent)	17,795		(2,452)	15,343	Commercial loans (tax-equivalent)	49,683		(15,899)	33,784
Consumer and other loans	Consumer and other loans	1,223		(29)	1,194	Consumer and other loans	2,355		(1,071)	1,284
Investment securities (tax-equivalent)	Investment securities (tax-equivalent)	1,553		(2,051)	(498)	Investment securities (tax-equivalent)	8,303		(4,051)	4,252
Total interest income	Total interest income	21,315		(4,529)	16,786	Total interest income	62,407		(21,652)	40,755
Interest expense	Interest expense					Interest expense
NOW and DDA accounts	NOW and DDA accounts	159		(205)	(46)	NOW and DDA accounts	417		(762)	(345)
Savings accounts	Savings accounts	31		(26)	5	Savings accounts	84		(158)	(74)
Money market deposit accounts	Money market deposit accounts	217		397	614	Money market deposit accounts	639		91	730
Certificate accounts	Certificate accounts	160		421	581	Certificate accounts	429		338	767
Wholesale deposits	Wholesale deposits	(739)		(175)	(914)	Wholesale deposits	(1,338)		(537)	(1,875)
FHLB advances	FHLB advances	(2,103)		(606)	(2,709)	FHLB advances	(4,470)		(1,818)	(6,288)
Repurchase agreements and other borrowed funds	Repurchase agreements and other borrowed funds	742		(681)	61	Repurchase agreements and other borrowed funds	2,161		(2,388)	(227)
Total interest expense	Total interest expense	(1,533)		(875)	(2,408)	Total interest expense	(2,078)		(5,234)	(7,312)
Net interest income (tax-equivalent)	Net interest income (tax-equivalent)	$	22,848	(3,654)	19,194	Net interest income (tax-equivalent)	$	64,485	(16,418)	48,067

Net interest income ~~(tax-equivalent)~~(tax-equivalent) increased ~~$19.2~~$48.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020 compared to the same period in 2019. The interest income for the first ~~three~~six 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.~~portfolio which included increases from the PPP loans. Total interest expense decreased from the prior year primarily from decreased balances of FHLB ~~advances.~~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.

7178

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company’s assessment of market risk as of ~~March 31,~~June 30, 2020 indicates there are no material changes in the quantitative and qualitative disclosures from those in the Company’s 2019 Annual ~~Report.~~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 ~~March 31,~~June 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 ~~first~~second 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.

7279

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

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 ~~all~~the federal, state, and local levels ~~are rapidly taking~~continue to take steps to address ~~and remediate~~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 ~~includes many provisions that will impact us and our customers. For example, the CARES Act includes~~included $350 billion in stimulus for small businesses under the so-called “Paycheck Protection ~~Program” of the U.S. Small Business Administration (“SBA”~~Program,” along with direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) ~~and an additional $500 billion~~ for the U.S. Department of Treasury to make loans to distressed American businesses. The various banking agencies have strongly encouraged banks to work with borrowers impacted by the COVID-19 pandemic, and the CARES Act authorizes banks to elect to suspend GAAP for certain loan modifications that would otherwise be classified as a TDR (which, in part, allows banks to provide immediate relief to their impacted borrowers). To ease the financial impacts of the COVID-19 pandemic, these agencies have further encouraged banks to consider offering responsible small-dollar loans to their consumers and small businesses affected by the pandemic.

many eligible Americans. The initial amounts available under the ~~PPP~~Paycheck Protection Program were quickly exhausted in less than two weeks, ~~leaving many pending loan applications in limbo as~~which prompted Congress ~~negotiated~~to negotiate additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care ~~Enhancement~~Enforcement Act was signed into law to replenish funding to the ~~PPP~~Paycheck Protection Program and to provide other spending for hospitals and virus testing. ~~In part,~~Further, on July 3, 2020 the ~~bill included an additional $320 billion~~President extended the deadline for potential borrowers to ~~make new loans under the PPP, and set aside $30 billion of the loans~~apply for ~~banks and credit unions with $10 billion to $50 billion in assets, and another $30 billion for even smaller institutions.~~Paycheck Protection Program funds until August 8, 2020. The bill also included $60 billion in loans and grants under the Economic Industry Disaster Loan program, and made farms and ranches eligible for loans. The SBA resumed accepting applications under the PPP on April 27, 2020.

The CARES Act also provides for direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans, subject to certain income thresholds. These economic impact payments will typically range from $1,200 to $3,400 and are designed to provide a level of financial relief to those most impacted by the COVID-19 pandemic. We anticipate that many of our customers will receive these economic impact payments, which the IRS intends to distribute via direct deposit to their accounts or by mailing paper checks. Overall, the legislative and regulatory landscape surrounding the COVID-19 pandemic is rapidly changing, and ~~we cannot~~neither the Company nor the Bank can predict with certainty the impact it will have on our operations or business.

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)

7481

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.

~~May 8,~~July 31, 2020			/s/ Randall M. Chesler
			Randall M. Chesler
			President and CEO

~~May 8,~~July 31, 2020			/s/ Ron J. Copher
			Ron J. Copher
			Executive Vice President and CFO

7582


	March 31, 2020
	Remaining Contractual Maturity of the Agreements
(Dollars in thousands)	Overnight and Continuous		Total




Residential mortgage-backed securities	$	328,722	328,722
Commercial mortgage-backed securities	251,613		251,613
Total	$	580,335	580,335