GLACIER BANCORP, INC. The following discussion is intended to provide a more comprehensive review of theGlacier 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 2020 Annual Report on Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results: •the risks associated with lending and potential adverse changes of the credit quality of loans in the Company's portfolio; •changes in trade, monetary and fiscal policies and laws, including interest rate policies of theBoard of Governors of theFederal Reserve System or theFederal Reserve Board , which could adversely affect the Company's net interest income and profitability; •changes in the cost and scope of insurance from theFederal Deposit Insurance Corporation ("FDIC") and other third parties; •legislative or regulatory changes, such as the those signaled by theBiden Administration , 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 ofGlacier 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.
48
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFinancial Highlights
At or for the Three Months ended At or for the Nine Months ended
(Dollars in thousands, except per Sep 30, Jun 30, Mar 31, Sep 30, Sep 30, Sep 30,
share and market data) 2021 2021 2021 2020 2021 2020
Operating results
Net income $ 75,619 77,627 80,802 77,757 234,048 184,540
Basic earnings per share $ 0.79 0.81 0.85 0.81 2.45 1.95
Diluted earnings per share $ 0.79 0.81 0.85 0.81 2.45 1.95
Dividends declared per share $ 0.32 0.32 0.31 0.30 0.95 0.88
Market value per share
Closing $ 55.35 55.08 57.08 32.05 55.35 32.05
High $ 56.84 63.05 67.35 38.13 67.35 46.54
Low $ 48.62 52.99 44.55 30.05 44.55 26.66
Selected ratios and other data
Number of common stock shares
outstanding 95,512,659 95,507,234 95,501,819 95,413,743 95,512,659 95,413,743
Average outstanding shares - basic 95,510,772 95,505,877 95,465,801 95,411,656 95,494,211 94,704,198
Average outstanding shares - diluted 95,586,202 95,580,904 95,546,922 95,442,576 95,573,519 94,747,894
Return on average assets (annualized) 1.43 % 1.55 % 1.73 % 1.80 % 1.57 % 1.56 %
Return on average equity (annualized) 12.49 % 13.25 % 14.12 % 13.73 % 13.27 % 11.40 %
Efficiency ratio 50.17 % 49.92 % 46.75 % 48.05 % 48.94 % 49.83 %
Dividend payout ratio 40.51 % 39.51 % 36.47 % 37.04 % 38.78 % 45.13 %
Loan to deposit ratio 65.06 % 67.64 % 70.72 % 82.29 % 65.06 % 82.29 %
Number of full time equivalent
employees 2,978 2,987 2,994 2,946 2,978 2,946
Number of locations 194 194 193 193 194 193
Number of ATMs 250 250 250 250 250 250
The Company reported net income of $75.6 million for the current quarter, a
decrease of $2.2 million , or 3 percent, from the $77.8 million of net income for
the prior year third quarter. Diluted earnings per share for the current quarter
was $0.79 per share, a decrease of 2 percent from the prior year third quarter
diluted earnings per share of $0.81 . The decrease in third quarter earnings over
the prior year was driven by a $21.6 million reduction in the gain on sale of
residential mortgage loans due to record gains in the prior year.
Acquisition
OnOctober 1, 2021 , the Company acquired the outstanding common stock ofAltabancorp , the parent company ofAltabank , based inAmerican Fork, Utah (collectively, "Alta") and the largest community bank inUtah . Alta provides banking services to individuals and businesses inUtah with twenty-five banking offices fromPreston, Idaho toSt. George, Utah . As ofSeptember 30, 2021 , Alta had total assets of$3.648 billion , total loans of$1.901 billion and total deposits of$3.279 billion . Upon closing of the transaction, Alta became the Company's seventeenth Bank division. 49 -------------------------------------------------------------------------------- Financial Condition Analysis
Assets
The following table summarizes the Company's assets as of the dates indicated:
$ Change from
Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30,
(Dollars in thousands) 2021 2021 2020 2020 2021 2020 2020
Cash and cash equivalents $ 348,888 921,207 633,142 769,879 (572,319) (284,254) (420,991)
Debt securities,
available-for-sale 7,390,580 6,147,143 5,337,814 4,125,548 1,243,437 2,052,766 3,265,032
Debt securities,
held-to-maturity 1,128,299 1,024,730 189,836 193,509 103,569 938,463 934,790
Total debt securities 8,518,879 7,171,873 5,527,650 4,319,057 1,347,006 2,991,229 4,199,822
Loans receivable
Residential real estate 781,538 734,838 802,508 862,614 46,700 (20,970) (81,076)
Commercial real estate 6,912,569 6,584,322 6,315,895 6,201,817 328,247 596,674 710,752
Other commercial 2,598,616 2,932,419 3,054,817 3,593,322 (333,803) (456,201) (994,706)
Home equity 660,920 648,800 636,405 646,850 12,120 24,515 14,070
Other consumer 340,248 337,669 313,071 314,128 2,579 27,177 26,120
Loans receivable 11,293,891 11,238,048 11,122,696 11,618,731 55,843 171,195 (324,840)
Allowance for credit losses (153,609) (151,448) (158,243) (164,552) (2,161) 4,634 10,943
Loans receivable, net 11,140,282 11,086,600 10,964,453 11,454,179 53,682 175,829 (313,897)
Other assets 1,305,970 1,308,353 1,378,961 1,382,952 (2,383) (72,991) (76,982)
Total assets $ 21,314,019 20,488,033 18,504,206 17,926,067 825,986 2,809,813 3,387,952
Total debt securities of $8.519 billion at September 30, 2021 increased $1.347
billion , or 19 percent, during the current quarter and increased $4.200 billion ,
or 97 percent, from the prior year third quarter. The Company continues to
selectively purchase debt securities with excess liquidity from the increase in
core deposits and SBA forgiveness of PPP loans. Debt securities represented 40
percent of total assets at September 30, 2021 compared to 30 percent of total
assets at December 30, 2020 and 24 percent of total assets at September 30,
2020 .
The loan portfolio of $11.294 billion at September 30, 2021 increased $55.8
million , or 50 basis points, in the current quarter. Excluding the PPP loans,
the loan portfolio increased $382 million , or 14 percent annualized, during the
current quarter with the largest increase in commercial real estate which
increased $328 million .
The loan portfolio decreased $325 million , or 3 percent, from the prior year
third quarter. Excluding the PPP loans, the loan portfolio increased $755
million , or 7 percent, from the prior year third quarter with the largest
increase in commercial real estate loans which increased $711 million , or 11
percent.
50
--------------------------------------------------------------------------------Liabilities
The following table summarizes the Company's liabilities as of the dates
indicated:
$ Change from
Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30,(Dollars in thousands) 2021 2021 2020 2020 2021 2020 2020 Deposits Non-interest bearing deposits$ 6,632,402 6,307,794 5,454,539 5,479,311 324,608 1,177,863 1,153,091 NOW and DDA accounts 4,299,244 4,151,264 3,698,559 3,300,152 147,980 600,685 999,092 Savings accounts 2,502,268 2,346,129 2,000,174 1,864,143 156,139 502,094 638,125 Money market deposit accounts 3,123,425 2,990,021 2,627,336 2,557,294 133,404 496,089 566,131 Certificate accounts 919,852 939,563 978,779 979,857 (19,711) (58,927) (60,005) Core deposits, total 17,477,191 16,734,771 14,759,387 14,180,757 742,420 2,717,804 3,296,434 Wholesale deposits 26,123 26,121 38,142 119,131 2 (12,019) (93,008) Deposits, total 17,503,314 16,760,892 14,797,529 14,299,888 742,422 2,705,785 3,203,426 Securities sold under agreements to repurchase 1,040,939 995,201 1,004,583 965,668 45,738 36,356 75,271Federal Home Loan Bank advances - - - 7,318 - - (7,318) Other borrowed funds 33,671 33,556 33,068 32,967 115 603 704 Subordinated debentures 132,580 132,540 139,959 139,918 40 (7,379) (7,338) Other liabilities 215,899 211,889 222,026 225,219 4,010 (6,127) (9,320) Total liabilities$ 18,926,403 18,134,078 16,197,165 15,670,978 792,325 2,729,238 3,255,425 Core deposits of$17.477 billion as ofSeptember 30, 2021 increased$742 million , or 18 percent annualized, from the prior quarter and increased$3.296 billion , or 23 percent, from the prior year third quarter. Non-interest bearing deposits of$6.632 billion as ofSeptember 30, 2021 increased$325 million , or 5 percent, from the prior quarter and increased$1.153 billion , or 21 percent, from the prior year third quarter. The unprecedented increase in deposits over the prior eighteen months resulted from a number of factors including the PPP loan proceeds deposited by customers, federal stimulus deposits and the increase in customer savings. Non-interest bearing deposits were 38 percent of total core deposits atSeptember 30, 2021 compared to 37 percent of total core deposits atDecember 31, 2020 and 39 percent atSeptember 30, 2020 .
The low levels of borrowings, including wholesale deposits and
51
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Stockholders' Equity
The following table summarizes the stockholders' equity balances as of the dates
indicated:
$ Change from
(Dollars in thousands, Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30,
except per share data) 2021 2021 2020 2020 2021 2020 2020
Common equity $ 2,309,957 2,263,513 2,163,951 2,123,991 46,444 146,006 185,966
Accumulated other
comprehensive income 77,659 90,442 143,090 131,098 (12,783) (65,431) (53,439)
Total stockholders' equity 2,387,616 2,353,955 2,307,041 2,255,089 33,661 80,575 132,527
Goodwill and core deposit
intangible, net (562,058) (564,546) (569,522) (572,134) 2,488 7,464 10,076
Tangible stockholders'
equity $ 1,825,558 1,789,409 1,737,519 1,682,955 36,149 88,039 142,603
Stockholders' equity to total
assets 11.20 % 11.49 % 12.47 % 12.58 %
Tangible stockholders' equity
to total tangible assets 8.80 % 8.98 % 9.69 % 9.70 %
Book value per common share $ 25.00 24.65 24.18 23.63 0.35 0.82 1.37
Tangible book value per common
share $ 19.11 18.74 18.21 17.64 0.37 0.90 1.47
Tangible stockholders' equity of $1.826 billion at September 30, 2021 increased
$36.1 million , or 2 percent, from the prior quarter and increased $143 million ,
or 8 percent, from the prior year third quarter and was due to earnings
retention that more than offset the decrease in other comprehensive income. The
current year decrease in both the stockholders' equity to total assets ratio and
the tangible stockholders' equity to tangible assets was the result of the
$2.991 billion increase in debt securities driven primarily by the significant
influx of deposits during the current year. Tangible book value per common share
of $19.11 at the current quarter end increased $0.37 per share, or 2 percent,
from the prior quarter and increased $1.47 per share, or 8 percent, from a year
ago.
Cash Dividend
On September 30, 2021 , the Company's Board of Directors declared a quarterly
cash dividend of $0.32 per share. The dividend was payable October 21, 2021 to
shareholders of record on October 12, 2021 . The dividend was the 146th
consecutive dividend. Future cash dividends will depend on a variety of factors,
including net income, capital, asset quality, general economic conditions and
regulatory considerations.
52--------------------------------------------------------------------------------
Operating Results for Three Months Ended
Compared to
Income Summary
The following table summarizes income for the periods indicated:
Three Months ended $ Change from
Sep 30, Jun 30, Mar 31, Sep 30, Jun 30, Mar 31, Sep 30,
(Dollars in thousands) 2021 2021 2021 2020 2021 2021 2020
Net interest income
Interest income $ 166,741 159,956 161,552 157,487 6,785 5,189 9,254
Interest expense 4,128 4,487 4,740 6,084 (359) (612) (1,956)
Total net interest income 162,613 155,469 156,812 151,403 7,144 5,801 11,210
Non-interest income
Service charges and other fees 15,154 13,795 12,792 13,404 1,359 2,362 1,750
Miscellaneous loan fees and charges 2,592 2,923 2,778 2,084 (331) (186) 508
Gain on sale of loans 13,902 16,106 21,624 35,516 (2,204) (7,722) (21,614)
(Loss) gain on sale of investments (168) (61) 284 24 (107) (452) (192)
Other income 3,335 2,759 2,643 2,639 576 692 696
Total non-interest income 34,815 35,522 40,121 53,667 (707) (5,306) (18,852)
Total income $ 197,428 190,991 196,933 205,070 6,437 495 (7,642)
Net interest margin (tax-equivalent) 3.39 % 3.44 % 3.74 % 3.92 %
Net Interest Income
The current quarter net interest income of $163 million increased $7.1 million ,
or 5 percent, over the prior quarter and increased $11.2 million , or 7 percent,
from the prior year third quarter. The current quarter interest income of $167
million increased $6.8 million , or 4 percent, compared to the prior quarter and
increased $9.3 million , or 6 percent, over the prior year third quarter due to
an increase in interest income from the PPP loans and debt securities. The
interest income (which included deferred fees and deferred costs) from the PPP
loans was $12.9 million in the current quarter and $10.3 million in the prior
quarter and $9.3 million in the prior year third quarter. Excluding the PPP
loans, net interest income was $150 million in the current quarter compared to
$145 million in the prior quarter and $142 million in the prior year third
quarter.
The current quarter interest expense of $4.1 million decreased $359 thousand , or
8 percent, over the prior quarter and decreased $2.0 million , or 32 percent,
over the prior year third quarter primarily as result of a decrease in deposit
rates. During the current quarter, the total cost of funding (including
non-interest bearing deposits) of 9 basis points declined 1 basis points from
the prior quarter and declined 7 basis points from the prior year third quarter
with both decreases driven by a decrease in rates in deposits and borrowings.
The Company's net interest margin as a percentage of earning assets, on a
tax-equivalent basis, for the current quarter was 3.39 percent compared to 3.44
percent in the prior quarter and 3.92 in the prior year third quarter. The core
net interest margin, excluding 2 basis points of discount accretion, 2 basis
point from non-accrual interest and 18 basis points increase from the PPP loans,
was 3.17 percent compared to 3.33 in the prior quarter and 4.02 percent in the
prior year third quarter. The core net interest margin decreased 16 basis points
in the current quarter and decreased 85 basis points from the prior third
quarter due to a decrease in earning asset yields. Earning asset yields have
decreased due to the combined impact of the significant increase in the debt
securities and the lower yields on both core loans and debt securities. Debt
securities comprised 42.5 percent of the earning assets during the current
quarter compared to 39.4 percent in the prior quarter and 26.5 percent in the
prior year third quarter.
53
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Non-interest Income
Non-interest income for the current quarter totaled $34.8 million which was a
decrease of $707 thousand , or 2 percent, over the prior quarter and a decrease
of $18.9 million , or 35 percent, over the same quarter last year. Service
charges and other fees increased $1.4 million from the prior quarter and
increased $1.8 million from the prior year third quarter as a result of
increased customer accounts and transaction activity.
Gain on the sale of loans of $13.9 million for the current quarter decreased
$2.2 million , or 14 percent, compared to the prior quarter and decreased $21.6
million , or 61 percent, from the prior year third quarter. The current quarter
mortgage activity was lower than prior periods, but still remained at
historically strong levels.
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
Three Months ended $ Change from
Sep 30, Jun 30, Mar 31, Sep 30, Jun 30, Mar 31, Sep 30,
(Dollars in thousands) 2021 2021 2021 2020 2021 2021 2020
Compensation and employee benefits $ 66,364 64,109 62,468 64,866 2,255 3,896 1,498
Occupancy and equipment 9,412 9,208 9,515 9,369 204 (103) 43
Advertising and promotions 3,236 2,906 2,371 2,779 330 865 457
Data processing 5,135 5,661 5,206 5,597 (526) (71) (462)
Other real estate owned 142 48 12 186 94 130 (44)
Regulatory assessments and
insurance 2,011 1,702 1,879 1,495 309 132 516
Core deposit intangibles
amortization 2,488 2,488 2,488 2,612 - - (124)
Other expenses 15,320 13,960 12,646 16,469 1,360 2,674 (1,149)
Total non-interest expense $ 104,108 100,082 96,585 103,373 4,026 7,523 735
Total non-interest expense of $104 million for the current quarter increased
$4.0 million , or 4 percent, over the prior quarter and increased $735 thousand ,
or 71 basis points, over the prior year third quarter. Compensation and employee
benefits increased $2.3 million , or 4 percent, from the prior quarter and
increased $1.5 million from the prior year third quarter.
Other expenses of $15.3 million , increased $1.4 million , or 10 percent, from the
prior quarter and decreased $1.1 million , or 7 percent, from the prior year
third quarter. Current quarter other expenses included acquisition-related
expenses of $472 thousand compared to $1.1 million in the prior quarter and $793
thousand in the prior year third quarter.
Efficiency Ratio
The efficiency ratio was 50.17 percent in the current quarter and 49.92 percent
in the prior quarter and 48.05 in the prior year third quarter. Excluding the
impact from the PPP loans, the efficiency ratio would have been 53.59 percent in
the current quarter compared to 53.53 percent in the prior quarter. Excluding
the impact of PPP loans, the current quarter efficiency ratio was an increase of
308 basis points from the prior year third quarter efficiency ratio of 50.51
percent which was primarily driven by the decrease in the gain on sale of loans
in the current quarter.
54
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Provision for Credit Losses for Loans
The following table summarizes provision for credit losses for loans, net
charge-offs and select ratios relating to provision for credit losses for the
previous eight quarters:
Accruing
Allowance for Loans 30-89
Provision for Credit Losses Days Past Due Non-Performing
Credit Losses on Net Charge-Offs as a Percent as a Percent of Assets to
(Dollars in thousands) Loans (Recoveries) of Loans Loans Total Sub-sidiary Assets
Third quarter 2021 $ 2,313 $ 152 1.36 % 0.23 % 0.24 %
Second quarter 2021 (5,723) (725) 1.35 % 0.11 % 0.26 %
First quarter 2021 489 2,286 1.39 % 0.40 % 0.19 %
Fourth quarter 2020 (1,528) 4,781 1.42 % 0.20 % 0.19 %
Third quarter 2020 2,869 826 1.42 % 0.15 % 0.25 %
Second quarter 2020 13,552 1,233 1.42 % 0.22 % 0.27 %
First quarter 2020 22,744 813 1.49 % 0.41 % 0.26 %
Fourth quarter 2019 - 1,045 1.31 % 0.24 % 0.27 %
The current quarter provision for credit loss expense for loans was $2.3 million
which was an increase of $8.0 million from the prior quarter provision for
credit loss benefit of $5.7 million and a $556 thousand decrease from the prior
year third quarter provision for credit loss expense of $2.9 million . The
increase in provision for credit losses for loans in the current quarter
compared to the prior quarter was primarily driven by organic loan growth in the
current quarter.
Net charge-offs for the current quarter were $152 thousand compared to net
recoveries of $725 thousand for the prior quarter and net charge-offs $826
thousand from the same quarter last year. Loan portfolio growth, composition,
average loan size, credit quality considerations, economic forecasts and other
environmental factors will continue to determine the level of the provision for
credit losses for loans.
The determination of the allowance for credit losses ("ACL" or "allowance") on
loans and the related provision for credit losses is a critical accounting
estimate that involves management's judgments about the loan portfolio that
impact credit losses. For additional information on the allowance, see the
Allowance For Credit Losses section under "Additional Management's Discussion
and Analysis."
55
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Operating Results for Nine Months Ended September 30, 2021
Compared to September 30, 2020
Income Summary
The following table summarizes income for the periods indicated:
Nine Months ended
Sep 30, Sep 30,
(Dollars in thousands) 2021 2020 $ Change % Change
Net interest income
Interest income $ 488,249 455,756 32,493 7 %
Interest expense 13,355 21,765 (8,410) (39) %
Total net interest income 474,894 433,991 40,903 9 %
Non-interest income
Service charges and other fees 41,741 38,790 2,951 8 %
Miscellaneous loan fees and charges 8,293 5,051 3,242 64 %
Gain on sale of loans 51,632 73,236 (21,604) (29) %
Gain on sale of debt securities 55 1,015 (960) (95) %
Other income 8,737 10,071 (1,334) (13) %
Total non-interest income 110,458 128,163 (17,705) (14) %
Total income $ 585,352 562,154 23,198 4 %
Net interest margin (tax-equivalent) 3.52 % 4.12 %
Net Interest Income
Net-interest income of $475 million for the first nine months of 2021 increased
$40.9 million , or 9 percent, over the same period in 2020. Interest income of
$488 million for the first nine months of the current year increased $32.5
million , or 7 percent, from the prior year and was primarily attributable to a
$25.4 million increase in income from commercial loans, including $20.1 million
from the PPP loans. Additionally, interest income on debt securities increased
$14.2 million , or 20 percent, over the prior year which resulted from the
increased volume of debt securities. Interest expense of $13.4 million for the
first nine months of 2021 decreased $8.4 million , or 39 percent over the prior
year primarily as a result of a decrease in the cost of deposits. The total
funding cost (including non-interest bearing deposits) for the first nine months
of 2021 was 10 basis points, which decreased 12 basis points compared to 22
basis points in first nine months of 2020.
The net interest margin as a percentage of earning assets, on a tax-equivalent
basis, during the first nine months of 2021 was 3.52 percent, a 60 basis points
decrease from the net interest margin of 4.12 percent for the same period in the
prior year. The core net interest margin, excluding 3 basis points of discount
accretion, 1 basis point of non-accrual interest and 13 basis points increase
from the PPP loans, was 3.35 which was an 85 basis point decrease from the core
margin of 4.20 percent in the prior year. Although the Company was successful in
reducing the total cost of funding, it was not enough to outpace the lower
yields on core loans and debt securities driven by the current interest rate
environment and the shift in the earning asset mix to lower yielding debt
securities.
56
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Non-interest Income
Non-interest income of $110 million for the first nine months of 2021 decreased
$17.7 million , or 14 percent, over the same period last year. Service charges
and other fees of $41.7 million for the first nine months of 2021 increased $3.0
million , or 8 percent, from prior year as a result of additional fees from
increased customer accounts and transaction activity. Miscellaneous loan fees
and charges of $8.3 million increased $3.2 million , or 64 percent, driven by
increases in loan servicing income and credit card interchange fees due to
increased activity. Gain on the sale of loans of $51.6 million for the first
nine months of 2021 decreased $21.6 million , or 29 percent, compared to the same
period last year which was the result of the anticipated slowing of purchase and
refinance activity after the historically high levels in the prior year. Other
income of $8.7 million decreased $1.3 million from the prior year and was
primarily the result of a gain of $2.4 million on the sale of a former branch
building in the first quarter of 2020.
Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
Nine Months ended
Sep 30, Sep 30,
(Dollars in thousands) 2021 2020 $ Change % Change
Compensation and employee benefits $ 192,941 $ 182,507 $ 10,434 6 %
Occupancy and equipment 28,135 27,945 190 1 %
Advertising and promotions 8,513 7,404 1,109 15 %
Data processing 16,002 15,921 81 1 %
Other real estate owned 202 373 (171) (46) %
Regulatory assessments and insurance 5,592 3,622 1,970 54 %
Core deposit intangibles amortization 7,464 7,758 (294) (4) %
Other expenses 41,926 48,094 (6,168) (13) %
Total non-interest expense $ 300,775 $ 293,624 $ 7,151 2 %
Total non-interest expense of $301 million for the first nine months of 2021
increased $7.2 million , or 2 percent, over the prior year same period.
Compensation and employee benefits for the first nine months of 2021 increased
$10.4 million , or 6 percent, from last year due to the increased number of
employees from organic growth, increased performance-related compensation and
annual salary increases. Advertising and promotions for the first nine months of
2021 increased $1.1 million , or 15 percent, from the prior year. Regulatory
assessment and insurance for the first nine months of 2021 increased $2.0
million from the prior year same period 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 $41.9 million , decreased $6.2 million , or 13 percent, from the prior
year, primarily from a decrease in acquisition-related expenses.
Acquisition-related expenses were $1.7 million in the current year compared to
$7.3 million in the prior year.
Efficiency Ratio
The efficiency ratio was 48.94 percent for the first nine months of 2021
compared to 49.83 percent for the same period last year. Excluding the impact
from the PPP loans, the efficiency ratio was 53.34 in 2021 compared to 53.30 in
2020.
Provision for Credit Losses
The provision for credit loss benefit was $4.9 million for the first nine months
of 2021, including provision for credit loss benefit of $2.9 million on the loan
portfolio and credit loss benefit of $2.0 million on unfunded loan commitments.
The provision for credit loss benefit of $2.9 million on the loan portfolio in
the current year decreased $42.1 million over the provision for credit loss
expense of $39.2 million in the prior year which was primarily attributable to
changes in the economic forecast related to COVID-19. Net charge-offs during the
current year were $1.7 million compared to $2.9 million during the prior year.
57
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ADDITIONAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Investment Activity
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. During the first quarter of the current year, the Company transferred$404 million of available-for-sale securities with an unrealized net gain of$3.8 million into the held-to-maturity portfolio after determining it had the intent and ability to hold such securities until maturity. The Company transferred an additional$440 million of available-for-sale securities with an unrealized net gain of$40.6 million into held-to-maturity portfolio during the second quarter of the current year. Unrealized gains or losses, net of tax, on available-for-sale debt securities are reflected as an adjustment to other comprehensive income. The Company's debt securities are summarized below: September 30, 2021 December 31, 2020 September 30, 2020 (Dollars in thousands) Carrying Amount Percent Carrying Amount Percent Carrying Amount Percent
Available-for-sale
U.S. government and federal agency $ 31,373 1 % $ 38,588 1 % $ 40,140 1 %U.S. government sponsored enterprises 47,051 1 % 9,781 1 % 9,825 1 % State and local governments 508,691 6 % 1,416,683 26 % 1,275,376 29 % Corporate bonds 198,119 2 % 349,098 6 % 361,024 8 % Residential mortgage-backed securities 5,491,345 64 % 2,289,090 41 % 1,275,858 30 % Commercial mortgage-backed securities 1,114,001 13 % 1,234,574 22 % 1,163,325 26 % Total available-for-sale 7,390,580 87 % 5,337,814 97 % 4,125,548 95 %
Held-to-maturity
State and local governments 1,128,299 13 % 189,836 3 % 193,509 5 % Total held-to-maturity 1,128,299 13 % 189,836 3 % 193,509 5 % Total debt securities$ 8,518,879 100 %$ 5,527,650 100 %$ 4,319,057 100 % 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 lifeU.S. agency guaranteed residential and commercial mortgage pass-through securities and to a lesser extent, short, weighted-average lifeU.S. agency guaranteed residential collateralized mortgage obligations. Combined, the mortgage-backed securities provide the Company with ongoing liquidity as scheduled and pre-paid principal is received on the securities. State and local government securities carry different risks that are not as prevalent in other security types. The Company evaluates the investment grade quality of its securities in accordance with regulatory guidance. Investment grade securities are those where the issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely payment of principal and interest are expected. In assessing credit risk, the Company may use credit ratings from Nationally Recognized Statistical Rating Organizations ("NRSRO" entities such as S&P and Moody's) as support for the evaluation; however, they are not solely relied upon. There have been no significant differences in the Company's internal evaluation of the creditworthiness of any issuer when compared with the ratings assigned by the NRSROs. 58 -------------------------------------------------------------------------------- The following table stratifies the state and local government securities by the associated NRSRO ratings. The highest issued rating was used to categorize the securities in the table for those securities where the NRSRO ratings were not at the same level. September 30, 2021 December 31, 2020 Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value S&P: AAA / Moody's: Aaa$ 389,559 398,464 385,773 420,646 S&P: AA+, AA, AA- / Moody's: Aa1, Aa2, Aa3 1,122,979 1,156,558 1,015,634 1,080,972 S&P: A+, A, A- / Moody's: A1, A2, A3 87,099 92,155 101,494 109,504 S&P: BBB+, BBB, BBB- / Moody's: Baa1, Baa2, Baa3 92 95 3,217 3,230 Not rated by either entity 7,686 7,872 5,481 5,547 Below investment grade - - - - Total$ 1,607,415 1,655,144 1,511,599 1,619,899
State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following table stratifies the state and local government securities by the associated security type.
September 30, 2021 December 31, 2020
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
General obligation - unlimited $ 604,104 636,992 625,660 672,610
General obligation - limited 110,796 115,556 121,886 129,250
Revenue 876,246 885,218 745,908 798,188
Certificate of participation 12,515 13,501 14,098 15,636
Other 3,754 3,877 4,047 4,215
Total $ 1,607,415 1,655,144 1,511,599 1,619,899
The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.
September 30, 2021 December 31, 2020
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
New York $ 252,005 254,874 235,036 254,976
Texas 138,057 141,867 143,421 154,511
Michigan 133,529 138,607 139,836 148,544
California 151,512 161,174 148,564 166,311
Washington 111,987 116,269 99,699 106,012
All other states 820,325 842,353 745,043 789,545
Total $ 1,607,415 1,655,144 1,511,599 1,619,899
59-------------------------------------------------------------------------------- The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity debt securities by contractual maturity atSeptember 30, 2021 . 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 YearsMortgage-Backed Securities 1 Total (Dollars in thousands) Amount Yield Amount Yield Amount Yield
Amount Yield Amount Yield
Amount Yield
Available-for-sale
U.S. government and federal
agency $ - - % $ 1,719 1.57 % $ 10,544 1.46 % $
19,110 1.43 % $ - - %$ 31,373 1.45 %U.S. government sponsored enterprises 1,507 0.96 % 265 0.93 % 45,279 1.08 % - - % - - % 47,051 1.08 % State and local governments 5,983 2.10 % 61,729 2.61 % 199,196 3.63 %
241,783 3.20 % - - % 508,691 3.28 %
Corporate bonds 61,387 3.28 % 131,623 3.25 % 4,066 4.00 % 1,043 0.46 % - - % 198,119 3.26 %
Residential mortgage-backed
securities - - % - - % - - % - - % 5,491,345 0.97 % 5,491,345 0.97 %
Commercial mortgage-backed
securities - - % - - % - - % - - % 1,114,001 2.33 % 1,114,001 2.33 %
Total available-for-sale 68,877 3.13 % 195,336 3.03 % 259,085 3.08 % 261,936 3.05 % 6,605,346 1.19 % 7,390,580 1.38 %
Held-to-maturity
State and local governments 1,529 2.29 % 27,382 2.46 % 89,010 2.64 % 1,010,378 2.78 % - - % 1,128,299 2.76 % Total held-to-maturity 1,529 2.29 % 27,382 2.46 % 89,010 2.64 % 1,010,378 2.78 % - - % 1,128,299 2.76 %
Total debt
securities$ 70,406 3.11 %$ 222,718 2.96 %$ 348,095 2.96 %$ 1,272,314 2.84 %$ 6,605,346 1.19 %$ 8,518,879 1.56 %
______________________________
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 ofSeptember 30, 2021 , 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 atSeptember 30, 2021 .
For additional information on debt securities, see Note 2 to the Consolidated Financial Statements in "Part I. Item 1. Financial Statements."
60
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Equity securities
Non-marketable equity securities primarily consist of capital stock issued by
the FHLB of Des Moines and are carried at cost less impairment. The Company also
has an insignificant amount of marketable equity securities that are included in
other assets on the Company's statements of financial condition.
Non-marketable equity securities and marketable equity securities without
readily determinable fair values are evaluated for impairment whenever events or
circumstances suggest the carrying value may not be recoverable. Based on the
Company's evaluation of its investments in non-marketable equity securities and
marketable equity securities without readily determinable fair values as of
September 30, 2021 , the Company determined that none of such securities were
impaired.
Lending Activity
The Company focuses its lending activities primarily on the following types of
loans: 1) first-mortgage, conventional loans secured by residential properties,
particularly single-family; 2) commercial lending, including agriculture and
public entities; and 3) installment lending for consumer purposes (e.g., home
equity, automobile, etc.). Supplemental information regarding the Company's loan
portfolio and credit quality based on regulatory classification is provided in
the section captioned "Loans by Regulatory Classification" included in "Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations." The regulatory classification of loans is based primarily on the
type of collateral for the loans. Loan information included in "Part I. Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" is based on the Company's loan segments, which are based on the
purpose of the loan, unless otherwise noted as a regulatory classification. The
following table summarizes the Company's loan portfolio as of the dates
indicated:
September 30, 2021 December 31, 2020 September 30, 2020
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Residential real estate $ 781,538 7 % $ 802,508 7 % $ 862,614 8 %
Commercial real estate 6,912,569 62 % 6,315,895 58 % 6,201,817 54 %
Other commercial 2,598,616 23 % 3,054,817 28 % 3,593,322 31 %
Home equity 660,920 6 % 636,405 6 % 646,850 6 %
Other consumer 340,248 3 % 313,071 3 % 314,128 3 %
Loans receivable 11,293,891 101 % 11,122,696 102 % 11,618,731 102 %
Allowance for credit losses (153,609) (1) % (158,243) (2) % (164,552) (2) %
Loans receivable, net $ 11,140,282 100 % $ 10,964,453 100 % $ 11,454,179 100 %
61
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Non-performing Assets
The following table summarizes information regarding non-performing assets at
the dates indicated:
At or for the Nine At or for the Six At or for the Year At or for the Nine
Months ended Months ended ended Months ended
September 30, June 30, December 31, September 30,
(Dollars in thousands) 2021 2021 2020 2020
Other real estate owned and foreclosed
assets $ 106 771 1,744 5,361
Accruing loans 90 days or more past due
Residential real estate 52 338 934 217
Commercial real estate 2,785 2,349 231 1,426
Other commercial 2,083 1,234 293 1,102
Home equity 98 155 135 80
Other consumer 154 144 132 127
Total 5,172 4,220 1,725 2,952
Non-accrual loans
Residential real estate 2,465 3,183 3,403 3,488
Commercial real estate 10,618 11,110 15,817 18,298
Other commercial 29,794 30,507 9,509 11,371
Home equity 2,457 2,667 2,713 2,891
Other consumer 567 583 522 302
Total 45,901 48,050 31,964 36,350
Total non-performing assets $ 51,179 53,041 35,433 44,663
Non-performing assets as a percentage of
subsidiary assets 0.24 % 0.26 % 0.19 % 0.25 %
ACL as a percentage of non-performing loans 301 % 290 % 470 % 419 %
Accruing loans 30-89 days past due $ 26,002 12,076 22,721 17,631
Accruing troubled debt restructurings $ 36,666 37,667 42,003 39,999
Non-accrual troubled debt restructurings $ 2,820 3,179 3,507 7,579
U.S. government guarantees included in
non-performing assets $ 4,116 4,186 3,011 4,411
Interest income 1 $ 1,657 1,144 1,545 1,296
______________________________
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$51.2 million atSeptember 30, 2021 decreased$1.9 million , or 4 percent, over the prior quarter. Non-performing assets increased$6.5 million , or 15 percent, over the prior year third quarter. Non-performing assets as a percentage of subsidiary assets atSeptember 30, 2021 was 0.24 percent compared to 0.26 percent in the prior quarter and 0.25 percent in the prior year third quarter. Early stage delinquencies (accruing loans 30-89 days past due) of$26.0 million atSeptember 30, 2021 increased$13.9 million from the prior quarter with a large portion of the increase primarily isolated to one credit relationship. Early stage delinquencies increased$8.4 million from the prior year third quarter. Early stage delinquencies as a percentage of loans atSeptember 30, 2021 was 0.23 percent, which was an increase of 12 basis points from prior quarter and an 8 basis points increase from prior year third quarter. 62 -------------------------------------------------------------------------------- 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$39.5 million and$45.5 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. OnMarch 27, 2020 , the CARES Act was signed into law which includes many provisions that impact the Company and its customers. The banking regulatory agencies have encouraged banks to work with borrowers who have been impacted by the COVID-19 pandemic, and the CARES Act, along with related regulatory guidance, allows the Bank to not designate certain modifications as TDRs that otherwise may have been classified as TDRs. For additional information on modifications related to the COVID-19 pandemic, see the PPP section under "Additional Management's Discussion and Analysis." Other Real Estate Owned and Foreclosed Assets The book value of loans prior to the acquisition of collateral and transfer of the loans into other real estate owned ("OREO") during 2021 was$1.6 million . The fair value of the loan collateral acquired in foreclosure during 2021 was$1.5 million . The following table sets forth the changes in OREO for the periods indicated: At or for the Nine Months At or for the Six At or for the Year At or for the Nine ended Months ended ended Months ended September 30, June 30, December 31, September 30, (Dollars in thousands) 2021 2021 2020 2020 Balance at beginning of period$ 1,744 1,744 5,142 5,142 Acquisitions - - 307 307 Additions 1,481 1,459 2,076 2,062 Capital improvements - - 145 141 Write-downs (120) - (451) (189) Sales (2,999) (2,432) (5,475) (2,102) Balance at end of period $ 106 771 1,744 5,361 63
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PPP Loans
Three Months ended Nine Months ended
September 30,
(Dollars in thousands) 2021 June 30, 2021 March 31, 2021 September 30, 2021 September 30, 2020
PPP interest income $ 12,894 10,328 13,523 36,745 16,646
Deferred compensation on originating
PPP loans - 1,522 5,213 6,735 8,850
Total PPP income impact $ 12,894 11,850 18,736 43,480 25,496
September 30,
(Dollars in thousands) 2021 June 30, 2021 December 31, 2020 September 30, 2020
PPP Round 1 loans $ 56,048 176,498 909,173 1,448,417
PPP Round 2 loans 312,865 518,107 - -
Total PPP loans $ 368,913 694,605 909,173 1,448,417
Net remaining fees - Round 1 $ 485 1,313 17,605 36,099
Net remaining fees - Round 2 12,501 22,694 - -
Total net remaining fees $ 12,986 24,007 17,605 36,099
The United States Small Business Administration ("SBA") Round 2 PPP program
ended in early May after the available funds were fully drawn upon. During the
first half of 2021, the Company originated $555 million of Round 2 PPP loans
which generated $33.2 million of SBA deferred processing fees and $6.7 million
of deferred compensation costs for total net deferred fees of $26.5 million .
During the current year, the SBA processing fees received on Round 2 averaged
5.99 percent which compared to the average of 3.75 percent received on Round 1
in the prior year. The increase in the fee percentage received on Round 2 was
the result of an increase in the number of smaller loans which receive a higher
percentage fee.
The Company received $327 million in PPP loan forgiveness during the current
quarter and received $1.103 billion in the first nine months of 2021. As of
September 30, 2021 , the Company had $56 million , or 4 percent of the $1.472
billion of Round 1 PPP loans originated in the prior year and had $313 million ,
or 56 percent of the $555 million of Round 2 PPP loans originated in the current
year.
The Company recognized $12.9 million of interest income (including deferred fees
and costs) from the Round 1 and Round 2 PPP loans in the current quarter. The
income recognized in the current quarter included $10.5 million acceleration of
net deferred fees in interest income resulting from the SBA forgiveness of
loans. Net deferred fees remaining on the balance of the PPP loans at September
30, 2021 were $13.0 million , which will be recognized into interest income over
the remaining life of the loans or when the loans are forgiven in whole or in
part by the SBA.
Supplemental information regarding credit quality and identification of the
Company's loan portfolio based on regulatory classification is provided in the
exhibits at the end of this press release. The regulatory classification of
loans is based primarily on collateral type while the Company's loan segments
presented herein are based on the purpose of the loan.
64
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Allowance for Credit Losses - Loans Receivable
On January 1, 2020 , the Company adopted Financial Accounting Standards Board
("FASB") Accounting Standards Updates ("ASU") 2016-13, Financial Instruments -
Credit Losses, which significantly changed the allowance for credit loss
accounting policies. The following allowance for credit loss discussion was
presented under Accounting Standards Codification™ ("ASC") Topic 326.
The following table summarizes the allocation of the ACL as of the dates
indicated:
September 30, 2021 December 31, 2020 September 30, 2020
Percent of Percent of Percent of Percent Percent of Percent
ACL in Loans in ACL in of Loans in ACL in of Loans in
(Dollars in thousands) ACL Category Category ACL Category Category ACL Category Category
Residential real estate $ 11,859 8 % 7 % $ 9,604 6 % 7 % $ 9,805 6 % 7 %
Commercial real estate 100,038 65 % 62 % 86,999 55 % 57 % 94,397 57 % 53 %
Other commercial 28,845 19 % 23 % 49,133 31 % 27 % 48,753 30 % 31 %
Home equity 7,865 5 % 5 % 8,182 5 % 6 % 7,430 5 % 6 %
Other consumer 5,002 3 % 3 % 4,325 3 % 3 % 4,167 2 % 3 %
Total $ 153,609 100 % 100 % $ 158,243 100 % 100 % $ 164,552 100 % 100 %
65
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The following table summarizes the ACL experience for the periods indicated:
At or for the Nine At or for the Six At or for the Year At or for the Nine
Months ended Months ended ended Months ended
September 30, June 30, December 31, September 30,
(Dollars in thousands) 2021 2021 2020 2020
Balance at beginning of period $ 158,243 158,243 124,490 124,490
Impact of adopting CECL - - 3,720 3,720
Acquisitions - - 49 49
Provision for credit losses (2,921) (5,234) 37,637 39,165
Charge-offs
Residential real estate (38) (38) (21) (21)
Commercial real estate (203) (41) (3,497) (625)
Other commercial (3,790) (3,113) (4,860) (3,471)
Home equity (45) (45) (384) (293)
Other consumer (4,490) (2,709) (5,046) (3,455)
Total charge-offs (8,566) (5,946) (13,808) (7,865)
Recoveries
Residential real estate 288 275 61 54
Commercial real estate 1,579 907 1,094 860
Other commercial 2,407 1,547 1,811 1,496
Home equity 219 67 256 246
Other consumer 2,360 1,589 2,933 2,337
Total recoveries 6,853 4,385 6,155 4,993
Net charge-offs (1,713) (1,561) (7,653) (2,872)
Balance at end of period $ 153,609 151,448 158,243 164,552
ACL as a percentage of total loans 1.36 % 1.35 % 1.42 % 1.42 %
Net charge-offs as a percentage of total
loans 0.02 % 0.01 % 0.07 % 0.03 %
The current quarter provision for credit loss expense for loans was $2.3 million
which was an increase of $8.0 million from the prior quarter provision for
credit loss benefit of $5.7 million and a $556 thousand decrease from the prior
year third quarter provision for credit loss expense of $2.9 million . The
increase in provision for credit losses for loans in the current quarter
compared to the prior quarter was primarily driven by organic loan growth in the
current quarter.
The allowance for credit losses on loans ("ACL") as a percentage of total loans
outstanding at September 30, 2021 was 1.36 percent which was a 1 basis point
increase compared to the prior quarter and a 6 basis point decrease from the
prior year third quarter. Excluding the PPP loans, the ACL as percentage of
loans was 1.40 percent compared to 1.43 percent in the prior quarter and 1.62
percent in the prior year third quarter. The Company's ACL of $154 million is
considered adequate to absorb the estimated credit losses from any segment of
its loan portfolio. For the periods ended September 30, 2021 and 2020, 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.
66
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At the end of each quarter, the Company analyzes its loan portfolio and
maintains an ACL at a level that is appropriate and determined in accordance
with accounting principles generally accepted in the United States of America
("GAAP"). Determining the adequacy of the ACL involves a high degree of judgment
and is inevitably imprecise as the risk of loss is difficult to quantify. The
ACL methodology is designed to reasonably estimate the probable credit losses
within the Company's loan portfolio. Accordingly, the ACL is maintained within a
range of estimated losses. The determination of the ACL on loans, including
credit loss expense and net charge-offs, is a critical accounting estimate that
involves management's judgments about the loan portfolio that impact credit
losses, including the credit risk inherent in the loan portfolio, economic
forecasts nationally and in the local markets in which the Company operates,
trends and changes in collateral values, delinquencies, non-performing assets,
net charge-offs, credit-related policies and personnel, and other environmental
factors.
In determining the allowance, the loan portfolio is separated into pools of
loans that share similar risk characteristics which are the Company's loan
segments. The Company then derives estimated loss assumptions from its model by
loan segment which is further segregated by the credit quality indicators. The
loss assumptions are then applied to each segment of loan to estimate the ACL on
the pooled loans. For any loans that do not share similar risk characteristics,
the estimated credit losses are determined on an individual loan basis and such
loans primarily consist of non-accrual loans. An estimated credit loss is
recorded on individually reviewed loans when the fair value of a
collateral-dependent loan or the present value of the loan's expected future
cash flows (discounted at the loans original effective interest rate) is less
than the amortized cost of the loan.
The Company provides commercial banking services to individuals, small to
medium-sized businesses, community organizations and public entities from 194
locations, including 173 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."
67
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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
Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30,
(Dollars in thousands) 2021 2021 2020 2020 2021 2020 2020
Custom and owner occupied
construction $ 170,489 $ 158,405 $ 157,529 $ 166,195 8 % 8 % 3 %
Pre-sold and spec construction 188,668 163,740 148,845 157,242 15 % 27 % 20 %
Total residential construction 359,157 322,145 306,374 323,437 11 % 17 % 11 %
Land development 151,640 111,736 102,930 96,814 36 % 47 % 57 %
Consumer land or lots 143,977 138,292 123,747 122,019 4 % 16 % 18 %
Unimproved land 68,805 63,469 59,500 64,770 8 % 16 % 6 %
Developed lots for operative
builders 33,487 27,143 30,449 30,871 23 % 10 % 8 %
Commercial lots 76,382 64,664 60,499 62,445 18 % 26 % 22 %
Other construction 562,223 554,548 555,375 537,105 1 % 1 % 5 %
Total land, lot, and other
construction 1,036,514 959,852 932,500 914,024 8 % 11 % 13 %
Owner occupied 2,069,551 2,019,860 1,945,686 1,889,512 2 % 6 % 10 %
Non-owner occupied 2,561,777 2,436,672 2,290,512 2,259,062 5 % 12 % 13 %
Total commercial real estate 4,631,328 4,456,532 4,236,198 4,148,574 4 % 9 % 12 %
Commercial and industrial 1,407,353 1,654,237 1,850,197 2,308,710 (15) % (24) % (39) %
Agriculture 748,548 746,678 721,490 747,145 - % 4 % - %
1st lien 1,159,265 1,105,579 1,228,867 1,256,111 5 % (6) % (8) %
Junior lien 36,942 38,029 41,641 43,355 (3) % (11) % (15) %
Total 1-4 family 1,196,207 1,143,608 1,270,508 1,299,466 5 % (6) % (8) %
Multifamily residential 373,022 398,499 391,895 359,030 (6) % (5) % 4 %
Home equity lines of credit 709,828 693,135 657,626 651,546 2 % 8 % 9 %
Other consumer 198,763 201,336 190,186 191,761 (1) % 5 % 4 %
Total consumer 908,591 894,471 847,812 843,307 2 % 7 % 8 %
States and political
subdivisions 612,882 631,199 575,647 617,624 (3) % 6 % (1) %
Other 114,427 129,237 156,647 205,351 (11) % (27) % (44) %
Total loans receivable,
including loans held for sale 11,388,029 11,336,458 11,289,268 11,766,668 - % 1 % (3) %
Less loans held for sale 1 (94,138) (98,410) (166,572) (147,937) (4) % (43) % (36) %
Total loans receivable $ 11,293,891 $ 11,238,048 $ 11,122,696 $ 11,618,731 - % 2 % (3) %
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
68
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The following table summarizes the Company's non-performing assets by regulatory
classification:
Non- Accruing
Non-performing Assets, Accrual Loans 90 Days or
by Loan Type Loans More Past Due OREO
Sep 30, Jun 30, Dec 31, Sep 30, Sep 30, Sep 30, Sep 30,
(Dollars in thousands) 2021 2021 2020 2020 2021 2021 2021
Custom and owner occupied
construction $ 240 243 247 249 240 - -
Pre-sold and spec
construction - - - - - - -
Total residential
construction 240 243 247 249 240 - -
Land development 31 279 342 450 31 - -
Consumer land or lots 186 190 201 223 186 - -
Unimproved land 166 178 294 417 166 - -
Developed lots for operative
builders - - - - - - -
Commercial lots - 368 368 682 - - -
Other construction 276 - - - 276 - -
Total land, lot and other
construction 659 1,015 1,205 1,772 659 - -
Owner occupied 3,323 3,747 6,725 9,077 3,323 - -
Non-owner occupied 2,089 1,892 4,796 4,879 1,716 373 -
Total commercial real estate 5,412 5,639 11,521 13,956 5,039 373 -
Commercial and industrial 5,621 6,046 6,689 8,571 5,444 177 -
Agriculture 32,712 31,742 6,313 8,972 28,412 4,300 -
1st lien 3,178 4,186 5,353 6,559 3,091 87 -
Junior lien 166 272 301 986 166 - -
Total 1-4 family 3,344 4,458 5,654 7,545 3,257 87 -
Multifamily residential - - - - - - -
Home equity lines of credit 2,393 2,653 2,939 2,903 2,224 81 88
Other consumer 539 542 572 407 392 129 18
Total consumer 2,932 3,195 3,511 3,310 2,616 210 106
States and political
subdivisions - - - - - - -
Other 259 703 293 288 234 25 -
Total $ 51,179 53,041 35,433 44,663 45,901 5,172 106
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The following table summarizes the Company's accruing loans 30-89 days past due by regulatory classification:
Accruing 30-89 Days Delinquent
Loans, by Loan Type % Change from
Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30,
(Dollars in thousands) 2021 2021 2020 2020 2021 2020 2020
Custom and owner occupied
construction $ 892 $ - $ 788 $ 448 n/m 13 % 99 %
Pre-sold and spec construction 325 70 - - 364 % n/m n/m
Total residential construction 1,217 70 788 448 1,639 % 54 % 172 %
Land development 276 - 202 - n/m 37 % n/m
Consumer land or lots 325 - 71 220 n/m 358 % 48 %
Unimproved land 181 307 357 381 (41) % (49) % (52) %
Developed lots for operative
builders 59 - 306 - n/m (81) % n/m
Other construction 12,884 - - - n/m n/m n/m
Total land, lot and other
construction 13,725 307 936 601 4,371 % 1,366 % 2,184 %
Owner occupied 1,933 2,243 3,432 3,163 (14) % (44) % (39) %
Non-owner occupied 443 574 149 1,157 (23) % 197 % (62) %
Total commercial real estate 2,376 2,817 3,581 4,320 (16) % (34) % (45) %
Commercial and industrial 1,581 2,947 1,814 2,354 (46) % (13) % (33) %
Agriculture 1,032 837 1,553 2,795 23 % (34) % (63) %
1st lien 350 736 6,677 2,589 (52) % (95) % (86) %
Junior lien 167 106 55 738 58 % 204 % (77) %
Total 1-4 family 517 842 6,732 3,327 (39) % (92) % (84) %
Home equity lines of credit 3,023 1,942 2,840 2,200 56 % 6 % 37 %
Other consumer 1,361 919 1,054 789 48 % 29 % 72 %
Total consumer 4,384 2,861 3,894 2,989 53 % 13 % 47 %
States and political subdivisions - - 2,358 - n/m (100) % n/m
Other 1,170 1,395 1,065 797 (16) % 10 % 47 %
Total $ 26,002 $ 12,076 $ 22,721 $ 17,631 115 % 14 % 47 %
______________________________
n/m - not measurable
70
--------------------------------------------------------------------------------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
Sep 30, Jun 30, Dec 31, Sep 30, Sep 30, Sep 30,
(Dollars in thousands) 2021 2021 2020 2020 2021 2021
Custom and owner occupied
construction $ - - (9) (9) - -
Pre-sold and spec construction (12) (8) (24) (19) - 12
Total residential construction (12) (8) (33) (28) - 12
Land development (163) (77) (106) (63) - 163
Consumer land or lots (164) (164) (221) (217) 3 167
Unimproved land (241) (21) (489) (489) - 241
Commercial lots - - (55) (5) - -
Total land, lot and other
construction (568) (262) (871) (774) 3 571
Owner occupied (410) (70) (168) (82) 41 451
Non-owner occupied (356) (503) 3,030 246 148 504
Total commercial real estate (766) (573) 2,862 164 189 955
Commercial and industrial (87) (218) 1,533 740 481 568
Agriculture - (6) 337 309 12 12
1st lien (250) (237) 69 (27) 42 292
Junior lien (511) (475) (211) (169) - 511
Total 1-4 family (761) (712) (142) (196) 42 803
Multifamily residential (40) (40) (244) (244) - 40
Home equity lines of credit (601) (23) 101 79 41 642
Other consumer 145 74 307 233 369 224
Total consumer (456) 51 408 312 410 866
Other 4,403 3,329 3,803 2,589 7,429 3,026
Total $ 1,713 1,561 7,653 2,872 8,566 6,853
71
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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 deposits and certificate accounts. The Company's deposits
are summarized below:
September 30, 2021 December 31, 2020 September 30, 2020
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Non-interest bearing deposits$ 6,632,402 38 %$ 5,454,539 37 %$ 5,479,311 38 % NOW and DDA accounts 4,299,244 25 % 3,698,559 25 % 3,300,152 23 % Savings accounts 2,502,268 14 % 2,000,174 13 % 1,864,143 13 % Money market deposit accounts 3,123,425 18 % 2,627,336 18 % 2,557,294 18 % Certificate accounts 919,852 5 % 978,779 7 % 979,857 7 % Wholesale deposits 26,123 - % 38,142 - % 119,131 1 % Total interest bearing deposits 10,870,912 62 % 9,342,990 63 % 8,820,577 62 % Total deposits$ 17,503,314 100 %$ 14,797,529 100 %$ 14,299,888 100 % 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 ofDes 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 ofDes 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, theU.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.
72
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Short-term borrowings
A critical component of the Company's liquidity and capital resources is access
to short-term borrowings to fund its operations. Short-term borrowings are
accompanied by increased risks managed by the Bank's Asset Liability Committee
("ALCO") such as rate increases or unfavorable change in terms which would make
it more costly to obtain future short-term borrowings. The Company's short-term
borrowing sources include FHLB advances, federal funds purchased and retail and
wholesale repurchase agreements. The Company also has access to the short-term
discount window borrowing programs (i.e., primary credit) of the Federal Reserve
Bank ("FRB"). FHLB advances and certain other short-term borrowings may be
renewed as long-term borrowings to decrease certain risks such as liquidity or
interest rate risk; however, the reduction in risks are weighed against the
increased cost of funds and other risks.
The following table provides information relating to significant short-term
borrowings, which consists of borrowings that mature within one year of period
end:
At or for the Nine At or for the Year
Months ended ended
September 30, December 31,
(Dollars in thousands) 2021 2020
Repurchase agreements
Amount outstanding at end of period $ 1,040,939 1,004,583
Weighted interest rate on outstanding amount 0.19 % 0.33 %
Maximum outstanding at any month-end $ 1,040,939 1,004,583
Average balance $ 988,092 783,100
Weighted-average interest rate 0.25 % 0.46 %
Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company
formed or acquired financing subsidiaries for the purpose of issuing trust
preferred securities that entitle the investor to receive cumulative cash
distributions thereon. Subordinated debentures were issued in conjunction with
the trust preferred securities and the terms of the subordinated debentures and
trust preferred securities are the same. For regulatory capital purposes, the
trust preferred securities are included in Tier 2 capital at September 30, 2021 .
The subordinated debentures outstanding as of September 30, 2021 were $133
million , including fair value adjustments from acquisitions.
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments
to obtain funding and to extend credit, such as letters of credit and unfunded
loan commitments, which are not reflected in the accompanying condensed
consolidated financial statements. The Company assessed the off-balance sheet
credit exposures as of September 30, 2021 and determined its ACL of $14.1
million was adequate to absorb the estimated credit losses.
Off-balance sheet arrangements also include any obligation related to a variable
interest held in an unconsolidated entity. The Company does not anticipate any
material losses as a result of these transactions. For additional information
regarding the Company's interests in unconsolidated variable interest entities
("VIE"), see Note 7 to the Unaudited Consolidated Financial Statements in "Part
I. Item 1. Financial Statements."
73
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Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations as they come due because of an inability to
liquidate assets or obtain adequate funding at a reasonable cost. The objective
of liquidity management is to maintain cash flows adequate to meet current and
future needs for credit demand, deposit withdrawals, maturing liabilities and
corporate operating expenses. Effective liquidity management entails three
elements:
1.assessing on an ongoing basis, the current and expected future needs for
funds, and ensuring that sufficient funds or access to funds exist to meet those
needs at the appropriate time;
2.providing for an adequate cushion of liquidity to meet unanticipated cash flow
needs that may arise from potential adverse circumstances ranging from high
probability/low severity events to low probability/high severity; and
3.balancing the benefits between providing for adequate liquidity to mitigate
potential adverse events and the cost of that liquidity.
The Company has a wide range of versatility in managing the liquidity and
asset/liability mix. The Bank's ALCO meets regularly to assess liquidity risk,
among other matters. The Company monitors liquidity and contingency funding
alternatives through management reports of liquid assets (e.g., debt
securities), both unencumbered and pledged, as well as borrowing capacity, both
secured and unsecured, including off-balance sheet funding sources. The Company
evaluates its potential funding needs across alternative scenarios and maintains
contingency funding plans consistent with the Company's access to diversified
sources of contingent funding.
The following table identifies certain liquidity sources and capacity available to the Company as of the dates indicated:
September 30 ,
(Dollars in thousands) 2021
2020
FHLB advances
Borrowing capacity $ 2,822,024 2,446,759
Amount utilized - -
Letters of credit (1,631) (1,498)
Amount available $ 2,820,393 2,445,261
FRB discount window
Borrowing capacity $ 1,422,290 1,269,778
Amount utilized - -
Amount available $ 1,422,290 1,269,778
Unsecured lines of credit available
Unencumbered debt securities
U.S. government sponsored enterprises 47,051
9,781
State and local governments 656,611 185,680
Corporate bonds 39,986 99,764
Residential mortgage-backed securities 4,261,048 1,994,927
Commercial mortgage-backed securities 922,366 1,028,944
Total unencumbered debt securities
74
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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 95,512,659 have
been issued as of September 30, 2021 . The Company also has the capacity to issue
1,000,000 shares of preferred stock of which none have been issued as of
September 30, 2021 . Conversely, the Company may decide to utilize a portion of
its strong capital position, as it has done in the past, to repurchase shares of
its outstanding common stock, depending on market price and other relevant
considerations.
The Federal Reserve has adopted capital adequacy guidelines that are used to
assess the adequacy of capital in supervising a bank holding company. The
federal banking agencies issued final rules ("Final Rules") that established a
comprehensive regulatory capital framework based on the recommendation of the
Basel Committee on Banking Supervision and certain requirements of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rules
require the Company to hold a 2.5 percent capital conservation buffer designed
to absorb losses during periods of economic stress. As of September 30, 2021 ,
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
Leverage Ratio/
Total Capital (To Tier 1 Capital (To Common Equity Tier 1 (To Tier 1 Capital (To
Risk-Weighted Assets) Risk-Weighted Assets) Risk-Weighted Assets) Average Assets)
Glacier Bank 13.32 % 12.32 % 12.32 % 8.75 %
Minimum capital requirements 8.00 % 6.00 % 4.50 % 4.00 %
Minimum capital requirements plus
capital conservation buffer 10.50 % 8.50 % 7.00 % N/A
Well capitalized requirements 10.00 % 8.00 % 6.50 % 5.00 %
On January 1, 2020 , the Company adopted the current expected credit losses
("CECL") accounting standard that requires management's estimate of credit
losses over the expected contractual lives of the Company's relevant financial
assets. On March 27, 2020 , in response to the COVID-19 pandemic, federal banking
regulators issued an interim final rule to delay for two years the initial
adoption impact of CECL on regulatory capital, followed by a three-year
transition period to phase out the aggregate amount of the capital benefit
provided during 2020 and 2021 (i.e., a five-year transition period). The Company
has elected to utilize the five-year transition period. During the two-year
delay, the Company will add back to Common Tier 1 capital 100 percent of the
initial adoption impact of CECL plus 25 percent of the cumulative quarterly
changes in ACL (i.e., quarterly transitional amounts). Starting on January 1,
2022 , the quarterly transitional amounts along with the initial adoption impact
of CECL will be phased out of Common Tier 1 capital evenly over the three-year
period.
Federal and State Income Taxes
The Company files a consolidated federal income tax return using the accrual
method of accounting. All required tax returns have been timely filed. Financial
institutions are subject to the provisions of the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations. The federal
statutory corporate income tax rate is 21 percent.
Within the Company's geographic footprint, 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 , 4.6
percent in Colorado and 4.9 percent in Arizona . Washington , Wyoming and Nevada
do not impose a corporate income tax. The Company is also required to file in
the states other than the eight states in which it has properties.
75
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The following table summarizes information relevant to the Company's federal and
state income taxes:
Nine Months ended
September 30, September 30,
(Dollars in thousands) 2021 2020
Income Before Income Taxes $ 289,457 227,230
Federal and state income tax expense 55,409 42,690
Net Income $ 234,048 184,540
Effective tax rate 1 19.1 % 18.8 %
Income from tax-exempt debt securities, municipal loans and leases
45,378
Benefits from federal income tax credits $ 9,260 9,626
______________________________
1The current and prior year's low effective income tax rates are due to income
from tax-exempt debt securities, municipal loans and leases and benefits from
federal income tax credits.
The Company has equity investments in Certified Development Entities ("CDE")
which have received allocations of New Markets Tax Credits ("NMTC").
Administered by the Community Development Financial Institutions Fund ("CDFI
Fund ") of the U.S. Department of the Treasury , the NMTC program is aimed at
stimulating economic and community development and job creation in low-income
communities. The federal income tax credits received are claimed over a
seven-year credit allowance period. The Company also has equity investments in
Low-Income Housing Tax Credits ("LIHTC") which are indirect federal subsidies
used to finance the development of affordable rental housing for low-income
households. The federal income tax credits are claimed over a ten-year credit
allowance period. The Company has investments of $16.2 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.
New Low-Income Debt
Markets Housing Securities
(Dollars in thousands) Tax Credits Tax Credits Tax Credits Total
2021 $ 6,617 10,049 727 17,393
2022 5,969 12,926 664 19,559
2023 5,373 15,652 631 21,656
2024 3,636 15,878 594 20,108
2025 1,890 15,760 451 18,101
Thereafter 2,340 69,545 452 72,337
$ 25,825 139,810 3,519 169,154
76
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Average Balance Sheet
The following schedule provides 1) the total dollar amount of interest and
dividend income of the Company for earning assets and the average yields; 2) the
total dollar amount of interest expense on interest bearing liabilities and the
average rates; 3) net interest and dividend income and interest rate spread; and
4) net interest margin (tax-equivalent).
Three Months ended Nine Months ended
September 30, 2021 September 30, 2021
Average Average
Average Interest and Yield/ Average Interest and Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate
Assets
Residential real estate loans $ 817,150 $ 9,885 4.84 % $ 844,945 $ 29,572 4.67 %
Commercial loans 1 9,468,440 116,963 4.90 % 9,467,329 344,117 4.86 %
Consumer and other loans 974,582 10,971 4.47 % 963,002 32,386 4.50 %
Total loans 2 11,260,172 137,819 4.86 % 11,275,276 406,075 4.82 %
Tax-exempt investment securities 3 1,548,447 14,711 3.80 % 1,547,429 44,162 3.81 %
Taxable investment securities 4 6,767,418 18,896 1.12 % 5,771,573 51,998 1.20 %
Total earning assets 19,576,037 171,426 3.47 % 18,594,278 502,235 3.61 %
Goodwill and intangibles 563,257 565,724
Non-earning assets 803,226 816,982
Total assets $ 20,942,520 $ 19,976,984
Liabilities
Non-interest bearing deposits $ 6,505,530 $ - - % $ 6,069,326 $ - - %
NOW and DDA accounts 4,261,648 597 0.06 % 4,057,019 1,768 0.06 %
Savings accounts 2,440,332 146 0.02 % 2,277,335 425 0.02 %
Money market deposit accounts 3,041,634 814 0.11 % 2,895,362 2,540 0.12 %
Certificate accounts 928,165 1,036 0.44 % 951,655 3,640 0.51 %
Total core deposits 17,177,309 2,593 0.06 % 16,250,697 8,373 0.07 %
Wholesale deposits 5 26,117 16 0.24 % 32,787 55 0.22 %
Repurchase agreements 988,283 495 0.20 % 988,092 1,835 0.25 %
Subordinated debentures and other
borrowed funds 166,151 1,024 2.44 % 165,996 3,092 2.49 %
Total interest bearing liabilities 18,357,860 4,128 0.09 % 17,437,572 13,355 0.10 %
Other liabilities 182,573 181,640
Total liabilities 18,540,433 17,619,212
Stockholders' Equity
Common stock 955 955
Paid-in capital 1,497,107 1,496,051
Retained earnings 805,253 757,666
Accumulated other comprehensive income 98,772 103,100
Total stockholders' equity 2,402,087 2,357,772
Total liabilities and stockholders'
equity $ 20,942,520 $ 19,976,984
Net interest income (tax-equivalent) $ 167,298 $ 488,880
Net interest spread (tax-equivalent) 3.38 % 3.51 %
Net interest margin (tax-equivalent) 3.39 % 3.52 %
______________________________
1Includes tax effect of$1.4 million and$4.2 million on tax-exempt municipal loan and lease income for the three and nine months endedSeptember 30, 2021 , 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$3.0 million and$9.0 million on tax-exempt debt securities income for the three and nine months endedSeptember 30, 2021 , respectively. 4Includes tax effect of$255 thousand and$766 thousand on federal income tax credits for the three and nine months endedSeptember 30, 2021 , respectively. 5Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts with contractual maturities. 77 -------------------------------------------------------------------------------- Rate/Volume Analysis Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company's interest earning assets and interest bearing liabilities ("volume") and the yields earned and paid on such assets and liabilities ("rate"). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate. Nine Months ended 2021 vs. 2020 Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Interest income Residential real estate loans$ (5,844) 200 (5,644) Commercial loans (tax-equivalent) 19,187 6,495 25,682 Consumer and other loans 431 (1,816) (1,385) Investment securities (tax-equivalent) 82,463 (66,915) 15,548 Total interest income 96,237 (62,036) 34,201 Interest expense NOW and DDA accounts 808 (1,284) (476) Savings accounts 208 (362) (154) Money market deposit accounts 1,106 (2,591) (1,485) Certificate accounts (272) (3,029) (3,301) Wholesale deposits (179) (98) (277) Repurchase agreements 1,019 (1,966) (947) FHLB advances (684) - (684) Subordinated debentures and other borrowed funds (157) (929) (1,086) Total interest expense 1,849 (10,259) (8,410) Net interest income (tax-equivalent)$ 94,388 (51,777) 42,611 Net interest income (tax-equivalent) increased$42.6 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The interest income for the first nine months of 2021 increased over the same period last year primarily from income associated with the PPP loans and increased volume of debt securities. Total interest expense decreased from the prior year primarily from a decrease in rates on 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. 78
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