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 2019 Annual Report on Form 10-K, the following factors, among others, could cause actual results to differ materially from the anticipated results: •the risks associated with lending and potential adverse changes of the credit quality of loans in the Company's portfolio; •changes in trade, monetary and fiscal policies and laws, including interest rate policies of 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 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 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.
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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) 2020 2020 2020 2019 2020 2019
Operating results
Net income $ 77,757 63,444 43,339 51,610 184,540 153,134
Basic earnings per share $ 0.81 0.67 0.46 0.57 1.95 1.76
Diluted earnings per share $ 0.81 0.66 0.46 0.57 1.95 1.76
Dividends declared per share $ 0.30 0.29 0.29 0.29 0.88 0.82
Market value per share
Closing $ 32.05 35.29 34.01 40.46 32.05 40.46
High $ 38.13 46.54 46.10 42.61 46.54 45.47
Low $ 30.05 30.30 26.66 37.70 26.66 37.58
Selected ratios and other data
Number of common stock shares
outstanding 95,413,743 95,409,061 95,408,274 92,180,618 95,413,743 92,180,618
Average outstanding shares - basic 95,411,656 95,405,493 93,287,670 90,294,811 94,704,198 86,911,402
Average outstanding shares - diluted 95,442,576 95,430,403 93,359,792 90,449,195 94,747,894 87,082,178
Return on average assets (annualized) 1.80 % 1.57 % 1.25 % 1.55 % 1.56 % 1.63 %
Return on average equity (annualized) 13.73 % 11.68 % 8.52 % 10.92 % 11.40 % 12.17 %
Efficiency ratio 49.16 % 49.29 % 52.55 % 65.95 % 50.21 % 58.82 %
Dividend payout ratio 37.04 % 43.28 % 63.04 % 50.88 % 45.13 % 46.59 %
Loan to deposit ratio 82.29 % 86.45 % 88.10 % 88.71 % 82.29 % 88.71 %
Number of full time equivalent
employees 2,946 2,954 2,955 2,802 2,946 2,802
Number of locations 193 192 192 182 193 182
Number of ATMs 250 251 247 238 250 238
The Company reported net income of $77.8 million for the current quarter, an
increase of $26.2 million , or 51 percent, from the $51.6 million of net income
for the prior year third quarter. Diluted earnings per share for the current
quarter was $0.81 per share, an increase of 42 percent from the prior year third
quarter diluted earnings per share of $0.57 . Included in the current quarter was
$793 thousand of acquisition-related expenses.
Net income for the nine months ended September 30, 2020 was $185 million , an
increase of $31.4 million , or 21 percent, from the $153 million net income from
the first nine months of the prior year. Diluted earnings per share for the
first nine months of the current year was $1.95 per share, an increase of 11
percent, from the diluted earnings per share of $1.76 for the same period last
year.
The Company continues to navigate through the COVID-19 pandemic to ensure the
safety of its employees and customers along with monitoring credit quality and
protecting shareholder value. The Company's geographic footprint has experienced
varying levels of exposure and impact from COVID-19 and the Company's pandemic
team remains flexible in responding to the changing conditions in all the
markets that it serves.
In order to meet the needs of customers impacted by the pandemic, during the
second quarter of 2020 the Company modified 3,054 loans in the amount of $1.515
billion primarily with short-term payment deferrals under six months. The
majority of these modified loan deferral periods expired and the loans returned
to regular payment status with only $466 million loans, or 5 percent, remaining
deferred as of September 30, 2020 .
48
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In addition, the Company originated SBA Payroll Protection Program ("PPP") loans
for businesses in its communities. The Company originated 16,090 PPP loans in
the amount of $1.472 billion during the current year. During the current
quarter, these loans provided an additional $9.3 million of interest income
(including net deferred fees and costs) and $438 thousand of deferred
compensation costs for a total increase in income of $9.8 million ($7.3 million
net of tax).
Recent Acquisition
On February 29, 2020 , the Company completed the acquisition of State Bank Corp. ,
the parent company of State Bank of Arizona , a community bank based in Lake
Havasu City, Arizona (collectively, "SBAZ"). SBAZ provides banking services to
individuals and businesses in Arizona with ten banking offices located in
Bullhead City , Cottonwood , Kingman , Lake Havasu City , Phoenix , Prescott Valley
and Prescott . Upon closing of the transaction, SBAZ merged into the Company's
Foothills Bank division, which expanded the Company's footprint in Arizona to
cover all major markets in the state and be a leading community bank in Arizona .
During the current quarter, the Company also completed the system core
conversion for SBAZ. The business combinations were accounted for using the
acquisition method, with the results of operations included in the Company's
consolidated financial statements as of the acquisition dates. For additional
information relating to recent mergers and acquisitions, see Note 13 to the
Consolidated Financial Statements in "Part I. Item 1. Financial Statements."
The following table discloses the preliminary fair value estimates of selected classifications of assets and liabilities acquired:
State Bank Corp.
(Dollars in thousands) February 29, 2020
Total assets $ 745,420
Debt securities 142,174
Loans receivable 451,702
Non-interest bearing deposits 141,620
Interest bearing deposits 461,669
Borrowings 10,904
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Financial Condition AnalysisAssets
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) 2020 2020 2019 2019 2020 2019 2019
Cash and cash equivalents $ 769,879 547,610 330,961 406,384 222,269 438,918 363,495
Debt securities,
available-for-sale 4,125,548 3,533,950 2,575,252 2,459,036 591,598 1,550,296 1,666,512
Debt securities,
held-to-maturity 193,509 203,275 224,611 234,992 (9,766) (31,102) (41,483)
Total debt securities 4,319,057 3,737,225 2,799,863 2,694,028 581,832 1,519,194 1,625,029
Loans receivable
Residential real estate 862,614 903,198 926,388 936,877 (40,584) (63,774) (74,263)
Commercial real estate 6,201,817 6,047,692 5,579,307 5,548,174 154,125 622,510 653,643
Other commercial 3,593,322 3,547,249 2,094,254 2,145,257 46,073 1,499,068 1,448,065
Home equity 646,850 654,392 617,201 615,781 (7,542) 29,649 31,069
Other consumer 314,128 300,847 295,660 294,999 13,281 18,468 19,129
Loans receivable 11,618,731 11,453,378 9,512,810 9,541,088 165,353 2,105,921 2,077,643
Allowance for credit losses (164,552) (162,509) (124,490) (125,535) (2,043) (40,062) (39,017)
Loans receivable, net 11,454,179 11,290,869 9,388,320 9,415,553 163,310 2,065,859 2,038,626
Other assets 1,382,952 1,330,944 1,164,855 1,202,827 52,008 218,097 180,125
Total assets $ 17,926,067 16,906,648 13,683,999 13,718,792 1,019,419 4,242,068 4,207,275
Total debt securities of $4.319 billion at September 30, 2020 increased $582
million , or 16 percent, during the current quarter and increased $1.625 billion ,
or 60 percent, from the prior year third quarter. The Company continues to
purchase debt securities with the excess liquidity produced from the increase in
core deposits. Debt securities represented 24 percent of total assets at
September 30, 2020 compared to 20 percent at December 31, 2019 and 20 percent of
total assets at September 30, 2019 .
The loan portfolio of $11.619 billion increased $165 million , or 1 percent,
during the current quarter with the largest increase in commercial real estate
which increased $154 million , or 3 percent. Excluding the PPP loans and the SBAZ
acquisition, the loan portfolio increased $178 million , or 2 percent, since the
prior year third quarter with the largest increase in commercial real estate
loans which increased $318 million , or 6 percent.
50
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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) 2020 2020 2019 2019 2020 2019 2019 Deposits Non-interest bearing deposits$ 5,479,311 5,043,704 3,696,627 3,772,766 435,607 1,782,684 1,706,545 NOW and DDA accounts 3,300,152 3,113,863 2,645,404 2,592,483 186,289 654,748 707,669 Savings accounts 1,864,143 1,756,503 1,485,487 1,472,465 107,640 378,656 391,678 Money market deposit accounts 2,557,294 2,403,641 1,937,141 1,940,517 153,653 620,153 616,777 Certificate accounts 979,857 995,536 958,501 955,765 (15,679) 21,356 24,092 Core deposits, total 14,180,757 13,313,247 10,723,160 10,733,996 867,510 3,457,597 3,446,761 Wholesale deposits 119,131 68,285 53,297 134,629 50,846 65,834 (15,498) Deposits, total 14,299,888 13,381,532 10,776,457 10,868,625 918,356 3,523,431 3,431,263 Securities sold under agreements to repurchase 965,668 881,227 569,824 558,752 84,441 395,844 406,916Federal Home Loan Bank advances 7,318 37,963 38,611 8,707 (30,645) (31,293) (1,389) Other borrowed funds 32,967 32,546 28,820 14,808 421 4,147 18,159 Subordinated debentures 139,918 139,917 139,914 139,913 1 4 5 Deferred tax liability 17,227 25,213 - - (7,986) 17,227 17,227 Other liabilities 207,992 204,535 169,640 174,586 3,457 38,352 33,406 Total liabilities$ 15,670,978 14,702,933 11,723,266 11,765,391 968,045 3,947,712 3,905,587 Core deposits of$14.181 billion as ofSeptember 30, 2020 increased$868 million , or 7 percent, from the prior quarter. Excluding the SBAZ acquisition, core deposits increased$2.843 billion , or 26 percent, from the prior year third quarter, with non-interest bearing deposits increasing$1.565 billion , or 41 percent. The current year significant increase in deposits was attributable to a number of factors including the PPP loan proceeds deposited by customers, and the increase in customer savings rate. Non-interest bearing deposits were 39 percent of total core deposits atSeptember 30, 2020 compared to 35 percent of total core deposits atSeptember 30, 2019 .Federal Home Loan Bank ("FHLB") advances of$7.3 million atSeptember 30, 2020 decreased$31 million from the prior quarter and decreased$1.4 million from the prior year third quarter. The low level of FHLB advances was the result of the significant increase in core deposits which funded loans and debt security growth. FHLB advances will continue to fluctuate as necessary for balance sheet growth and to supplement liquidity needs of the Company. 51 -------------------------------------------------------------------------------- Stockholders' Equity The following table summarizes the stockholders' equity balances as of the dates indicated: $ Change from (Dollars in thousands, Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30, except per share data) 2020 2020 2019 2019 2020 2019 2019 Common equity$ 2,123,991 2,073,806 1,920,507 1,905,306 50,185 203,484 218,685 Accumulated other comprehensive income 131,098 129,909 40,226 48,095 1,189 90,872 83,003 Total stockholders' equity 2,255,089 2,203,715 1,960,733 1,953,401 51,374 294,356 301,688Goodwill and core deposit intangible, net (572,134) (574,088) (519,704) (522,274) 1,954 (52,430) (49,860) Tangible stockholders' equity$ 1,682,955 1,629,627 1,441,029 1,431,127 53,328 241,926 251,828 Stockholders' equity to total assets 12.58 % 13.03 % 14.33 % 14.24 % Tangible stockholders' equity to total tangible assets 9.70 % 9.98 % 10.95 % 10.84 % Book value per common share$ 23.63 23.10 21.25 21.19 0.53 2.38 2.44 Tangible book value per common share$ 17.64 17.08 15.61 15.53 0.56 2.03 2.11 Tangible stockholders' equity of$1.683 billion atSeptember 30, 2020 increased$53 million , or 3 percent, from the prior quarter and was primarily the result of earnings retention. Tangible stockholders' equity increased$252 million over the prior year third quarter, which was the result of$112 million of Company stock issued for the acquisitions of SBAZ and an increase in other comprehensive income and earnings retention. These increases more than offset the increase in goodwill and core deposit intangible associated with the acquisition. The current year decrease in both the stockholder's equity to total assets ratio and the tangible stockholders' equity to total tangible assets ratio was primarily the result of adding$1.448 billion of PPP loans. Tangible book value per common share of$17.64 at the current quarter end increased$0.56 per share from the prior quarter and increased$2.11 per share from a year ago. For additional information on the current expected credit loss ("CECL") accounting standard, see Note 1 to the Consolidated Financial Statements in "Part I. Item 1. Financial Statements." Cash Dividend OnSeptember 30, 2020 , the Company's Board of Directors declared a quarterly cash dividend of$0.30 per share. The dividend was payableOctober 22, 2020 to shareholders of record onOctober 13, 2020 . The dividend was the 142nd consecutive dividend. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations. S&P MidCap 400® Index During the second quarter of 2020, Standard and Poor's ["S&P"] Dow Jones Indices selected the Company to transition from the S&P SmallCap 600® to the S&P MidCap 400® effective prior to the opening trading onMonday, June 22, 2020 . The S&P MidCap 400® index consists of 400 companies that are chosen with regard to market capitalization, liquidity and industry representation. 52 -------------------------------------------------------------------------------- Operating Results for Three Months EndedSeptember 30, 2020 Compared to June 30, 2020, and March 31, 2020 Income Summary The following table summarizes income for the periods indicated: Three Months ended $ Change from Sep 30, Jun 30, Mar 31, Sep 30, Jun 30, Mar 31, Sep 30, (Dollars in thousands) 2020 2020 2020 2019 2020 2020 2019 Net interest income Interest income$ 157,487 155,404 142,865 142,395 2,083 14,622 15,092 Interest expense 6,084 7,185 8,496 10,947 (1,101) (2,412) (4,863) Total net interest income 151,403 148,219 134,369 131,448 3,184 17,034 19,955 Non-interest income Service charges and other fees 13,404 11,366 14,020 15,138 2,038 (616) (1,734) Miscellaneous loan fees and charges 2,084 1,682 1,285 1,775 402 799 309 Gain on sale of loans 35,516 25,858 11,862 10,369 9,658 23,654 25,147 Gain on sale of investments 24 128 863 13,811 (104) (839) (13,787) Other income 2,639 2,190 5,242 1,956 449 (2,603) 683 Total non-interest income 53,667 41,224 33,272 43,049 12,443 20,395 10,618 Total income$ 205,070 189,443 167,641 174,497 15,627 37,429 30,573 Net interest margin (tax-equivalent) 3.92 % 4.12 % 4.36 % 4.42 % Net Interest Income The current quarter net interest income of$151 million increased$3.2 million , or 2 percent, over the prior quarter and increased$20.0 million , or 15 percent, from the prior year third quarter. The current quarter interest income of$157 million increased$2.1 million , or 1 percent, compared to the prior quarter which was driven by an increase in income from commercial loans primarily from the PPP loans. The current quarter interest income increased$15.1 million , or 11 percent, over prior year third quarter and was due to an increase in income from commercial loans and an increase in income on debt securities. Included in interest income was interest from the PPP loans of$9.3 million in the current quarter and$7.3 million in the prior quarter. The current quarter interest expense of$6.1 million decreased$1.1 million , or 15 percent, over the prior quarter primarily as result of a decrease in deposit rates and borrowing interest rates. Current quarter interest expense decreased$4.9 million , or 44 percent, over prior year third quarter which was due to the decrease in higher cost borrowings and a decrease in deposit rates. During the current quarter, the total cost of funding (including non-interest bearing deposits) declined 5 basis points to 16 basis points compared to 21 basis points for the prior quarter primarily as a result of a decrease in rates on both deposits and borrowings. The total cost of funding decreased 23 basis points from the prior year third quarter and was attributable to a decrease in rates and a shift from higher cost borrowings to low cost deposits. The Company's net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the current quarter was 3.92 percent compared to 4.12 percent in the prior quarter. The core net interest margin, excluding 2 basis points of discount accretion, 1 basis point of non-accrual interest, and 13 basis points of interest income from the PPP loans, was 4.02 percent compared to 4.21 in the prior quarter and 4.35 percent in the prior year third quarter. The Company experienced a 19 basis points decrease in the core net interest margin during the current quarter from decreased yields on loans and debt securities which were partially offset by the decrease in the cost of funding. The core net interest margin decreased 33 basis points from the prior year third quarter primarily from a decrease in earning asset yields, primarily loan yields, that outpaced the decrease in the total cost of funding. 53 -------------------------------------------------------------------------------- Non-interest Income Non-interest income for the current quarter totaled$53.7 million which was an increase of$12.4 million , or 30 percent, over the prior quarter and an increase of$10.6 million , or 25 percent, over the same quarter last year. Service charges and other fees of$13.4 million for the current quarter increased$2.0 million , or 18 percent, from the prior quarter. Service charges and other fees decreased$1.7 million from the prior year third quarter due to the decreased overdraft activity. Gain on the sale of loans of$35.5 million for the current quarter increased$9.7 million , or 37 percent, compared to the prior quarter and increased$25.1 million , or 242 percent, from the prior year third quarter due to the significant increase in refinance activity driven by the decrease in interest rates. During the prior year third quarter, the Company terminated$260 million notional pay-fixed interest rate swaps and corresponding debt along with the sale of$308 million of available-for-sale debt securities. Sale of the investment securities resulted in a gain of$13.8 million in the prior year third quarter. Offsetting the gain was a$10 million loss recognized on the early termination of the interest swaps and a$3.5 million write-off of deferred prepayment penalties on FHLB borrowings. Non-interest Expense The following table summarizes non-interest expense for the periods indicated: Three Months ended $ Change from Sep 30, Jun 30, Mar 31, Sep 30, Jun 30, Mar 31, Sep 30, (Dollars in thousands) 2020 2020 2020 2019 2020 2020 2019 Compensation and employee benefits$ 64,866 57,981 59,660 62,509 6,885 5,206 2,357 Occupancy and equipment 9,369 9,357 9,219 8,731 12 150 638 Advertising and promotions 2,779 2,138 2,487 2,719 641 292 60 Data processing 5,597 5,042 5,282 4,466 555 315 1,131 Other real estate owned 186 75 112 166 111 74 20 Regulatory assessments and insurance 1,495 1,037 1,090 593 458 405 902 Loss on termination of hedging activities - - - 13,528 - - (13,528) Core deposit intangibles amortization 2,612 2,613 2,533 2,360 (1) 79 252 Other expenses 18,786 19,898 11,545 15,603 (1,112) 7,241 3,183 Total non-interest expense$ 105,690 98,141 91,928 110,675 7,549 13,762 (4,985) Total non-interest expense of$106 million for the current quarter increased$7.5 million , or 8 percent, over the prior quarter and decreased$5.0 million , or 5 percent, over the prior year third quarter. Compensation and employee benefits increased by$6.9 million , or 12 percent, from the prior quarter which was primarily driven by the decrease in deferring compensation on originating the PPP loans which was$438 thousand in the current quarter compared to$8.4 million in the prior quarter. Compensation and employee benefits increased$2.4 million , or 4 percent, from the prior year third quarter primarily due to an increased number of employees driven by acquisitions and organic growth which more than offset the decrease from the$5.4 million of stock compensation expense in the prior year third quarter related to theHeritage Bancorp acquisition. Occupancy and equipment expense increased$638 thousand , or 7 percent, over the prior year third quarter primarily as a result of increased costs from acquisitions. Data processing expense increased$555 thousand , or 11 percent, over the prior quarter and increased$1.1 million , or 25 percent over the prior year third quarter as a result of the increased cost from acquisitions along with increased investment in technology infrastructure. Regulatory assessment and insurance increased$458 thousand from the prior quarter primarily due to an accrual adjustment in the prior quarter for waiver of theState of Montana regulatory semi-annual assessment for the first half of 2020. Regulatory assessment and insurance increased$902 thousand from the prior year third quarter quarter primarily due to$1.3 million in Small Bank Assessment credits applied in the prior year third quarter. The prior year loss on termination of hedging activities included$3.5 million write-off of the remaining unamortized deferred prepayment penalties on FHLB debt and a$10 million loss on the termination of pay-fixed interest rate swaps with notional amount of$260 million in the prior year third quarter. Other expenses of$18.8 million , decreased$1.1 million , or 6 percent, from the prior quarter primarily due to a decrease in acquisition-related expenses. Other expenses increased$3.2 million , or 20 percent, over the prior year third quarter and was driven primarily from an increase in expense related to unfunded loan commitments. Current quarter other expenses included acquisition-related expenses of$793 thousand compared to$3.7 million in the prior quarter and$2.1 million in the prior year third quarter. Expense related to unfunded loan commitments was$2.3 million in the current quarter compared to$3.4 million 54 --------------------------------------------------------------------------------
in the prior quarter and no expense in the prior year third quarter. Also
included in the current quarter other expenses was
Efficiency Ratio
The efficiency ratio was 49.16 percent in the current quarter and 49.29 percent
in the prior quarter. Excluding the impact from the PPP loans, the efficiency
ratio would have been 51.67 percent in the current quarter, which was a 406
basis points decrease from the prior quarter efficiency ratio of 55.73 percent
and was primarily due to the increase in gain on sale of loans. The prior year
third quarter efficiency was 65.95 and excluding the impact from the termination
of the cash flow hedges and the accelerated stock compensation expense, the
efficiency ratio would have been 54.41 percent. Excluding these adjustments, the
current quarter efficiency ratio decreased 274 basis points from the prior year
third quarter efficiency ratio which was also driven by the increased gain on
sale of loans.
Credit Loss Expense
The following table summarizes credit loss expense, net charge-offs and select
ratios relating to credit loss expense for the previous eight quarters:
Accruing
Allowance for Loans 30-89
Credit Credit Losses Days Past Due Non-Performing
Loss Net as a Percent as a Percent of Assets to
(Dollars in thousands) Expense Charge-Offs of Loans Loans Total Sub-sidiary Assets
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 %
Third quarter 2019 - 3,519 1.32 % 0.31 % 0.40 %
Second quarter 2019 - 732 1.46 % 0.43 % 0.41 %
First quarter 2019 57 1,510 1.56 % 0.44 % 0.42 %
Fourth quarter 2018 1,246 2,542 1.58 % 0.41 % 0.47 %
Net charge-offs for the current quarter were $826 thousand compared to $1.2
million for the prior quarter and $3.5 million from the same quarter last year.
Loan portfolio growth, composition, average loan size, credit quality
considerations, economic forecasts and other environmental factors will continue
to determine the level of the credit loss expense.
The determination of the allowance for credit losses ("ACL" or "allowance") on
loans and the related credit loss expense is a critical accounting estimate that
involves management's judgments about the loan portfolio that impact credit
losses. For additional information on the allowance, see the Allowance For
Credit Losses section under "Additional Management's Discussion and Analysis."
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Operating Results for Nine Months Ended September 30, 2020
Compared to September 30, 2019
Income Summary
Nine Months ended
Sep 30, Sep 30,
(Dollars in thousands) 2020 2019 $ Change % Change
Net interest income
Interest income $ 455,756 $ 400,896 $ 54,860 14 %
Interest expense 21,765 33,940 (12,175) (36) %
Total net interest income 433,991 366,956 67,035 18 %
Non-interest income
Service charges and other fees 38,790 53,178 (14,388) (27) %
Miscellaneous loan fees and charges 5,051 3,934 1,117 28 %
Gain on sale of loans 73,236 23,929 49,307 206 %
Gain on sale of investments 1,015 14,158
(13,143) (93) %
Other income 10,071 7,158 2,913 41 %
Total non-interest income 128,163 102,357 25,806 25 %
Total income $ 562,154 $ 469,313 $ 92,841 20 %Net interest margin (tax-equivalent) 4.12 % 4.36 %
Net Interest Income Net-interest income of$434 million for the first nine months of 2020 increased$67.0 million , or 18 percent, over the first nine months of 2019. Interest income of$456 million for the first nine months of 2020 increased$54.9 million , or 14 percent, from the first nine months of 2019 and was primarily attributable to a$45.7 million increase in income from commercial loans, including$16.6 million from the PPP loans. Interest expense of$21.8 million for the first nine months of 2020 decreased$12.2 million , or 36 percent over the prior year same period primarily as a result of decreased higher cost FHLB advances and the decrease in the cost of deposits and borrowings. The total funding cost (including non-interest bearing deposits) for the first nine months of 2020 was 22 basis points, which decreased 20 basis points, or 48 percent, compared to 42 basis points for the first nine months of 2019. The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the first nine months of 2020 was 4.12 percent, a 24 basis points decrease from the net interest margin of 4.36 percent for the first nine months of 2019. The core net interest margin, excluding 3 basis points of discount accretion, 1 basis point of non-accrual interest, and 9 basis points of interest income from the PPP loans was 4.17 compared to a core margin of 4.29 percent in the prior year first nine months. Although the Company was successful in reducing the cost of funding, it was not enough to outpace the decrease in yields on loans and debt securities driven by the current interest rate environment. Non-interest Income Non-interest income of$128 million for the first nine months of 2020 increased$25.8 million , or 25 percent, over the same period last year. Service charges and other fees of$38.8 million for 2020 year-to-date decreased$14.4 million , or 27 percent, from the same period prior year as a result of a decrease in overdraft activity and the impact of the Durbin Amendment. As ofJuly 1, 2019 , the Company became subject to the Durbin Amendment which established limits on the amount of interchange fees that can be charged to merchants for debit card processing. Gain on the sale of loans of$73.2 million for the first nine months of 2020, increased$49.3 million , or 206 percent, compared to the prior year as a result significant increase in refinance activity driven by the decrease in interest rates. Other income increased$2.9 million from the prior year and was primarily the result of a gain of$2.4 million on the sale of a former branch building in the first quarter of 2020. 56 -------------------------------------------------------------------------------- Non-interest Expense The following table summarizes non-interest expense for the periods indicated: Nine Months ended Sep 30, Sep 30, (Dollars in thousands) 2020 2019 $ Change % Change Compensation and employee benefits$ 182,507 $ 167,210 $ 15,297 9 % Occupancy and equipment 27,945 25,348 2,597 10 % Advertising and promotions 7,404 7,874 (470) (6) % Data processing 15,921 12,420 3,501 28 % Other real estate owned 373 496 (123) (25) % Regulatory assessments and insurance 3,622 3,726
(104) (3) %
Loss on termination of hedging activities - 13,528
(13,528) (100) %
Core deposit intangibles amortization 7,758 5,919 1,839 31 % Other expenses 50,229 43,154 7,075 16 % Total non-interest expense$ 295,759 $ 279,675 $ 16,084 6 % Total non-interest expense of$296 million for the first nine months of 2020 increased$16.1 million , or 6 percent, over the prior year same period. Compensation and employee benefits for the first nine months of 2020 increased$15.3 million , or 9 percent, from the same period last year due to the increased number of employees from acquisitions and organic growth and annual salary increases which more than offset the$8.9 million deferral of compensation cost from the PPP loans in the current year and the$5.4 million of stock compensation expense in the prior year from theHeritage Bancorp acquisition. Occupancy and equipment expense for the first nine months of 2020 increased$2.6 million , or 10 percent from the prior year primarily from increased cost from acquisitions. Data processing expense for the first nine months of 2020 increased$3.5 million , or 28 percent, from the prior year as a result of the increased costs from acquisitions along with increased investment in technology infrastructure. Other expenses of$50.2 million , increased$7.1 million , or 16 percent, from the prior year and was primarily driven by an increase in expense related to unfunded loan commitments and an increase in acquisition-related expenses. Acquisition-related expenses were$7.3 million in the current year first nine months compared to$4.1 million in the prior year first nine months. In the current year-to-date period, there was$2.1 million of expense related to unfunded loan commitments which was primarily attributable to the economic forecast related to COVID-19. Efficiency Ratio The efficiency ratio was 50.21 percent for the first nine months of 2020. Excluding the impact from the PPP loans, the efficiency ratio would have been 53.30 percent. The prior year first nine months efficiency ratio was 58.82 and excluding the impact from the termination of the cash flow hedges and the accelerated stock compensation expense, the efficiency ratio would have been 54.74 percent. Excluding these adjustments, the current year efficiency ratio decreased 144 basis points from the prior year efficiency ratio which was driven by the increased gain on sale of loans and increase in net interest income that more than offset the decrease in service fee income from the Durbin Amendment and increases in compensation expense. Credit Loss Expense The credit loss expense was$39.2 million for the first nine months of 2020, an increase of$39.1 million from the same period in the prior year, this increase was primarily attributable to changes in the economic forecast related to COVID-19. Net charge-offs during the first nine months of 2020 were$2.9 million compared to$5.8 million during the same period in 2019. 57 -------------------------------------------------------------------------------- ADDITIONAL MANAGEMENT'S DISCUSSION AND ANALYSIS
Investment Activity
Debt Securities Debt securities classified as available-for-sale are carried at estimated fair value and debt securities classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale debt securities are reflected as an adjustment to other comprehensive income. The Company's debt securities are summarized below: September 30, 2020 December 31, 2019 September 30, 2019 (Dollars in thousands) Carrying Amount Percent Carrying Amount Percent Carrying Amount Percent
Available-for-sale
U.S. government and federal agency $ 40,140 1 % $ 20,044 1 % $ 147,434 5 %U.S. government sponsored enterprises 9,825 1 % 43,677 1 % 67,189 3 % State and local governments 1,275,376 29 % 702,398 25 % 613,865 23 % Corporate bonds 361,024 8 % 157,602 6 % 147,383 5 % Residential mortgage-backed securities 1,275,858 30 % 738,724 26 % 767,253 28 % Commercial mortgage-backed securities 1,163,325 26 % 912,807 33 % 715,912 27 % Total available-for-sale 4,125,548 95 % 2,575,252 92 % 2,459,036 91 %
Held-to-maturity
State and local governments 193,509 5 % 224,611 8 % 234,992 9 % Total held-to-maturity 193,509 5 % 224,611 8 % 234,992 9 % Total debt securities$ 4,319,057 100 %$ 2,799,863 100 %$ 2,694,028 100 % The Company's debt securities are primarily comprised of state and local government securities and mortgage-backed securities. State and local government securities are largely exempt from federal income tax and the Company's federal statutory income tax rate of 21 percent is used in calculating the tax-equivalent yields on the tax-exempt securities. Mortgage-backed securities largely consists of short, weighted-average 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, 2020 December 31, 2019 Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value S&P: AAA / Moody's: Aaa$ 355,351 386,927 251,101 259,690 S&P: AA+, AA, AA- / Moody's: Aa1, Aa2, Aa3 910,314 966,159 523,150 539,758 S&P: A+, A, A- / Moody's: A1, A2, A3 107,568 115,407 113,275 120,048 S&P: BBB+, BBB, BBB- / Moody's: Baa1, Baa2, Baa3 3,217 3,245 3,217 3,302 Not rated by either entity 9,964 10,215 13,451 13,795 Below investment grade - - 201 201 Total$ 1,386,414 1,481,953 904,395 936,794
State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following table stratifies the state and local government securities by the associated security type.
September 30, 2020 December 31, 2019
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
General obligation - unlimited $ 598,871 642,518 445,584 465,066
General obligation - limited 137,821 144,919 119,884 124,939
Revenue 630,456 673,690 325,331 332,354
Certificate of participation 15,199 16,599 8,003 8,815
Other 4,067 4,227 5,593 5,620
Total $ 1,386,414 1,481,953 904,395 936,794
The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.
September 30, 2020 December 31, 2019
Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
New York $ 187,681 204,225 14,701 14,870
Texas 143,709 154,138 112,397 121,641
Michigan 140,018 148,274 141,131 116,581
California 128,744 144,328 23,482 24,406
Washington 108,527 114,678 116,458 146,538
All other states 677,735 716,310 496,226 512,758
Total $ 1,386,414 1,481,953 904,395 936,794
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, 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 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 $ 73 0.49 %$ 2,641 1.47 %$ 13,089 1.63 %$ 24,337 1.63 % $ - - %$ 40,140 1.59 %U.S. government sponsored enterprises 8,022 1.07 % 1,803 0.95 % - - % - - % - - % 9,825 1.08 % State and local governments 6,248 2.15 % 34,628 2.60 % 248,555 3.59 % 985,945 3.36 % - - % 1,275,376 3.45 % Corporate bonds 106,960 3.29 % 238,686 3.32 % 15,378 3.76 % - - % - - % 361,024 3.51 % Residential mortgage-backed securities - - % - - % - - % - - % 1,275,858 1.48 % 1,275,858 1.90 % Commercial mortgage-backed securities - - % - - % - - % - - % 1,163,325 2.57 % 1,163,325 2.82 % Total available-for-sale 121,303 3.09 % 277,758 3.20 % 277,022 3.50 % 1,010,282 3.32 % 2,439,183 1.99 % 4,125,548 2.87 %
Held-to-maturity
State and local governments - - % 19,543 2.63 % 69,924 2.78 % 104,042 3.10 % - - % 193,509 2.88 % Total held-to-maturity - - % 19,543 2.63 % 69,924 2.78 % 104,042 3.10 % - - % 193,509 2.88 %
Total debt
securities$ 121,303 3.09 %$ 297,301 3.16 %$ 346,946 3.35 %$ 1,114,324 3.30 %$ 2,439,183 1.99 %$ 4,319,057 2.87 %
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.
Based on an analysis of its available-for-sale debt securities with unrealized losses as ofSeptember 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 atSeptember 30, 2020 .
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, 2020 , the Company determined that none of such securities were
impaired.
Lending Activity
The Company focuses its lending activities primarily on the following types of
loans: 1) first-mortgage, conventional loans secured by residential properties,
particularly single-family; 2) commercial lending, including agriculture and
public entities; and 3) installment lending for consumer purposes (e.g., home
equity, automobile, etc.). Supplemental information regarding the Company's loan
portfolio and credit quality based on regulatory classification is provided in
the section captioned "Loans by Regulatory Classification" included in "Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations." The regulatory classification of loans is based primarily on the
type of collateral for the loans. Loan information included in "Part I. Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" is based on the Company's loan segments, which are based on the
purpose of the loan, unless otherwise noted as a regulatory classification. The
following table summarizes the Company's loan portfolio as of the dates
indicated:
September 30, 2020 December 31, 2019 September 30, 2019
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Residential real estate $ 862,614 8 % $ 926,388 10 % $ 936,877 10 %
Commercial real estate 6,201,817 54 % 5,579,307 59 % 5,548,174 59 %
Other commercial 3,593,322 31 % 2,094,254 22 % 2,145,257 23 %
Home equity 646,850 6 % 617,201 7 % 615,781 6 %
Other consumer 314,128 3 % 295,660 3 % 294,999 3 %
Loans receivable 11,618,731 102 % 9,512,810 101 % 9,541,088 101 %
Allowance for credit losses (164,552) (2) % (124,490) (1) % (125,535) (1) %
Loans receivable, net $ 11,454,179 100 % $ 9,388,320 100 % $ 9,415,553 100 %
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) 2020 2020 2019 2019
Other real estate owned $ 5,361 4,743 5,142 7,148
Accruing loans 90 days or more past due
Residential real estate 217 206 753 1,212
Commercial real estate 1,426 3,110 64 4,350
Other commercial 1,102 2,519 143 1,045
Home equity 80 98 - 681
Other consumer 127 138 452 624
Total 2,952 6,071 1,412 7,912
Non-accrual loans
Residential real estate 3,488 4,243 4,715 5,295
Commercial real estate 18,298 19,682 15,650 23,781
Other commercial 11,371 7,713 6,592 2,876
Home equity 2,891 3,086 3,266 766
Other consumer 302 433 660 7,299
Total 36,350 35,157 30,883 40,017
Total non-performing assets $ 44,663 45,971 37,437 55,077
Non-performing assets as a percentage of
subsidiary assets 0.25 % 0.27 % 0.27 % 0.40 %
Allowance for credit losses as a percentage
of non-performing loans 419 % 394 % 385 % 262 %
Accruing loans 30-89 days past due $ 17,631 25,225 23,192 29,954
Accruing troubled debt restructurings $ 39,999 41,759 34,055 32,949
Non-accrual troubled debt restructurings $ 7,579 8,204 3,346 6,723
U.S. government guarantees included in
non-performing assets $ 4,411 3,305 1,786 3,000
Interest income 1 $ 1,296 851 1,603 1,544
______________________________
1Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms. Non-performing assets of$44.7 million atSeptember 30, 2020 decreased$1.3 million , or 3 percent, over the prior quarter and decreased$10.4 million , or 19 percent, over the prior year third quarter. Non-performing assets as a percentage of subsidiary assets atSeptember 30, 2020 was 0.25 percent. Excluding the government guaranteed PPP loans, the non-performing assets as a percentage of subsidiary assets atSeptember 30, 2020 was 0.27 percent, a decrease of 3 basis points from the prior quarter, and a decrease of 13 basis points from the prior year third quarter. Early stage delinquencies (accruing loans 30-89 days past due) of$17.6 million atSeptember 30, 2020 decreased$7.6 million from the prior quarter and decreased$12.3 million from the prior year third quarter. Early stage delinquencies as a percentage of loans atSeptember 30, 2020 was 0.15 percent, which was a decrease of 7 basis points from prior quarter and a 16 basis points decrease from prior year third quarter. Excluding PPP loans, early stage delinquencies as a percentage of loans atSeptember 30, 2020 was 0.17 percent, which was a decrease of 8 basis points from prior quarter and a 14 basis points decrease from prior year third quarter. 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$47.6 million and$37.4 million atSeptember 30, 2020 andDecember 31, 2019 , 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 thePPP and COVID-19 Bank Loan Modifications sections under "Additional Management's Discussion and Analysis." Other Real Estate Owned The book value of loans prior to the acquisition of collateral and transfer of the loans into other real estate owned ("OREO") during 2020 was$2,265 thousand . The fair value of the loan collateral acquired in foreclosure during 2020 was$2,062 thousand . The following table sets forth the changes in OREO for the periods indicated: At or for the Nine Months At or for the Six At or for the Year At or for the Nine ended Months ended ended Months ended September 30, June 30, December 31, September 30, (Dollars in thousands) 2020 2020 2019 2019 Balance at beginning of period$ 5,142 5,142 7,480 7,480 Acquisitions 307 307 - - Additions 2,062 791 2,349 2,347 Capital improvements 141 72 63 - Write-downs (189) (60) (766) (271) Sales (2,102) (1,509) (3,984) (2,408) Balance at end of period$ 5,361 4,743 5,142 7,148 63
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PPP and COVID-19 Bank Loan Modifications
The following table summarizes information regarding PPP loans:
September 30, 2020
PPP Loans (Amount)
as a Percent of
Total Loans Total Loans
Number of Amount of Receivable, Net of PPP Receivable, Net of
(Dollars in thousands) PPP Loans PPP Loans Loans PPP Loans
Residential real estate - $ - 862,614 - %
Commercial real estate and other commercial
Real estate rental and leasing 1,221 64,647 3,361,074 1.92 %
Accommodation and food services 1,502 160,295 644,627 24.87 %
Healthcare 1,928 288,612 826,809 34.91 %
Manufacturing 830 80,483 193,216 41.65 %
Retail and wholesale trade 1,672 168,837 471,115 35.84 %
Construction 2,297 214,652 774,069 27.73 %
Other 6,640 470,891 2,075,812 22.68 %
Home equity and other consumer - - 960,978 - %
Total 16,090 $ 1,448,417 10,170,314 14.24 %
The PPP loan originations generated $55.2 million of SBA processing fees, or an
average of 3.75 percent, and $8.9 million of deferred compensation costs for
total net deferred fees of $46.3 million . Net deferred fees remaining on the PPP
loans at September 30, 2020 were $36.1 million , which will be recognized into
interest income over the life of the loans, generally two years, or when the
loans are forgiven in whole or part by the SBA. The Company has actively been
working with its customers to submit applications to the SBA for forgiveness of
the loans and the Company started receiving forgiveness payments in the fourth
quarter of 2020.
64
--------------------------------------------------------------------------------COVID-19 Bank Loan Modifications
September 30, 2020 June 30, 2020 Loan Modifications Loan Modifications
(Amount) as a Percent of (Amount) as
a Percent of
Total Loans Amount of Unexpired Amount of Total Loans Amount of Total Loans
Receivable, Net of Original Loan Amount of Remaining Loan Receivable, Net of PPP Remaining Loan Receivable, Net of PPP
(Dollars in thousands) PPP Loans Modifications Re-deferral Loan Modifications Modifications Loans Modifications Loans
Residential real estate $ 862,614 28,571 - 28,571 3.31 % $ 66,395 7.35 %
Commercial real estate
and other commercial
Real estate rental
and leasing 3,361,074 163,103 43,735 206,838 6.15 % 587,609 18.11 %
Accommodation and
food services 644,627 69,328 12,854 82,182 12.75 % 395,882 61.41 %
Healthcare 826,809 29,136 14,117 43,253 5.23 % 126,808 16.01 %
Manufacturing 193,216 15,263 3,296 18,559 9.61 % 49,338 24.41 %
Retail and wholesale
trade 471,115 13,299 2,554 15,853 3.36 % 46,623 9.78 %
Construction 774,069 13,337 1,188 14,525 1.88 % 38,751 5.06 %
Other 2,075,812 23,146 27,442 50,588 2.44 % 192,060 9.40 %
Home equity and other
consumer 960,978 5,767 - 5,767 0.60 % 11,326 1.19 %
Total $ 10,170,314 360,950 105,186 466,136 4.58 % $ 1,514,792 15.11 %
In response to COVID-19, the Company modified 3,054 loans in the amount of
$1.515 billion during the second quarter of 2020. These modifications were
primarily short-term payment deferrals under six months. During the third
quarter of 2020, the majority of the modified loan deferral periods expired, and
the loans returned to regular payment status. During the current quarter, the
re-deferral rate was 9.12 percent for modified loans whose original deferral
period had expired, with no industry category exceeding 20 percent. As of
September 30, 2020 , $466 million of the modifications, or 4.58 percent of the
$10.170 billion of loans, net of the PPP loans, remain in the deferral period, a
reduction of $1.049 billion from the $1.515 billion of loan modifications at the
end of the prior quarter.
In addition to the Bank loan modifications presented above, the state of Montana
created the Montana Loan Deferment Program for only Montana -based businesses and
was implemented only in the third quarter. Cares Act Funds were used to provide
interest payments upfront and directly to lenders on behalf of participating
borrowers to convert existing commercial loans to interest only status,
resulting in the deferral of principal and interest for a period of six to
twelve months. None of the interest payments are required to be repaid by the
borrowers, thus providing a grant to the borrowers. This program was unique to
Montana , had minimal qualification requirements, and required that participating
lenders modify eligible loans to conform to the program in order for borrowers
to qualify for the grant. As of September 30, 2020 , the Company had $237 million
in eligible loans benefiting from this grant program, which was 2.33 percent of
total loans receivable, net of PPP loans. Given the unique nature of the Montana
only grant program, the $237 million was not included in the Bank loan
modifications presented above.
65
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COVID-19 Higher Risk Industries - Enhanced Monitoring
The Company has certain industries for which it has identified as higher risk.
The following table summarizes information regarding these higher risk loans:
September 30, 2020
Loan Modifications
(Amount) as a Percent
Percent of of Enhanced Monitoring
Enhanced Monitoring Total Loans Amount of Loans
Loans Receivable, Receivable, Net of Amount of Unexpired Original Amount of Remaining Loan Receivable, Net of PPP
(Dollars in thousands) Net of PPP Loans PPP Loans Loan Modifications Re-deferral Loan Modifications Modifications Loans
Hotel and motel $ 422,500 4.15 % 44,091 6,679 50,770 12.02 %
Restaurant 138,944 1.37 % 12,977 6,175 19,152 13.78 %
Travel and tourism 19,726 0.19 % 4,605 397 5,002 25.36 %
Gaming 14,500 0.14 % 1,101 - 1,101 7.59 %
Oil and gas 22,178 0.22 % 1,474 - 1,474 6.65 %
Total $ 617,848 6.08 % 64,248 13,251 77,499 12.54 %
June 30, 2020
Loan Modifications
(Amount) as a Percent
of Enhanced
Amount of Percent of Loans Monitoring Loans
Remaining Loan Receivable, Net of Receivable, Net of
(Dollars in thousands) Modifications PPP Loans PPP Loans
Hotel and motel $ 300,747 4.20 % 71.34 %
Restaurant 76,632 1.50 % 50.91 %
Travel and tourism 7,845 0.21 % 37.79 %
Gaming 9,214 0.15 % 60.95 %
Oil and gas 6,013 0.23 % 26.43 %
Total $ 400,451 6.29 % 63.49 %
Excluding the PPP loans, the Company has $618 million , or 6 percent, of its
total loan portfolio with direct exposure to industries for which it has
identified as higher risk, requiring enhanced monitoring. As of
September 30, 2020 , $77.5 million have modifications, which was a reduction of
$323 million , or 81 percent, from the $400 million of modifications at the end
of the prior quarter. During the current quarter the re-deferral rate was 3.94
percent for modified loans whose original deferral period had expired, with no
industry category exceeding 15 percent. The Company continues to conduct
enhanced portfolio reviews and monitoring for potential credit deterioration.
66-------------------------------------------------------------------------------- Allowance for Credit Losses - Loans Receivable OnJanuary 1, 2020 , the Company adoptedFinancial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASU") 2016-13, Financial Instruments - Credit Losses, which significantly changed the allowance for credit loss accounting policies. The following allowance for credit loss discussion was presented under Accounting Standards Codification™ ("ASC") Topic 326, whereas prior periods are presented in accordance with the incurred loss model as disclosed in the Company's 2019 Annual Report on Form 10-K. The following table summarizes the allocation of the ACL as of the dates indicated:September 30, 2020 December 31, 2019 September 30, 2019 Percent of Percent of Percent of Percent Percent of Percent ACL in Loans in ACL in of Loans in ACL in of Loans in (Dollars in thousands) ACL Category Category ACL Category Category ACL Category Category Residential real estate$ 9,805 6 % 7 %$ 10,111 8 % 10 %$ 10,237 8 % 10 % Commercial real estate 94,397 57 % 53 % 69,496 56 % 59 % 69,658 56 % 58 % Other commercial 48,753 30 % 31 % 36,129 29 % 22 % 36,858 29 % 22 % Home equity 7,430 5 % 6 % 4,937 4 % 6 % 5,041 4 % 7 % Other consumer 4,167 2 % 3 % 3,817 3 % 3 % 3,741 3 % 3 % Total$ 164,552 100 % 100 %$ 124,490 100 % 100 %$ 125,535 100 % 100 % 67
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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) 2020 2020 2019 2019
Balance at beginning of period $ 124,490 124,490 131,239 131,239
Impact of adopting CECL 3,720 3,720 - -
Acquisitions 49 49 - -
Credit loss expense 39,165 36,296 57 57
Charge-offs
Residential real estate (21) (21) (608) (482)
Commercial real estate (625) (180) (2,460) (2,266)
Other commercial (3,471) (1,873) (4,189) (2,598)
Home equity (293) (194) (90) (28)
Other consumer (3,455) (2,967) (7,831) (6,716)
Total charge-offs (7,865) (5,235) (15,178) (12,090)
Recoveries
Residential real estate 54 19 251 240
Commercial real estate 860 330 2,212 1,301
Other commercial 1,496 1,182 2,181 1,819
Home equity 246 153 79 44
Other consumer 2,337 1,505 3,649 2,925
Total recoveries 4,993 3,189 8,372 6,329
Net charge-offs (2,872) (2,046) (6,806) (5,761)
Balance at end of period $ 164,552 162,509 124,490 125,535
ACL as a percentage of total loans 1.42 % 1.42 % 1.31 % 1.32 %
Net charge-offs as a percentage of total
loans 0.03 % 0.02 % 0.07 % 0.06 %
The current quarter credit loss expense was $2.9 million , a decrease of $10.7
million from the prior quarter credit loss expense of $13.6 million . The current
year-to-date credit loss expense was $39.2 million and primarily attributable to
credit loss expense related to COVID-19 and an additional $4.8 million of credit
loss expense related to the SBAZ acquisition. The allowance for credit losses
("ACL") as a percentage of total loans outstanding at September 30, 2020 was
1.42 percent which remained unchanged compared to the prior quarter. Excluding
the PPP loans, the ACL as percentage of loans was 1.62 percent which also
remained unchanged compared to the prior quarter. The Company's ACL of $165
million is considered adequate to absorb the estimated credit losses from any
segment of its loan portfolio. For the periods ended September 30, 2020 and
2019, the Company believes the ACL is commensurate with the risk in the
Company's loan portfolio and is directionally consistent with the change in the
quality of the Company's loan portfolio.
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While the Company has incorporated its estimate of the impact of the COVID-19
pandemic into its calculation of the allowance based on assumptions and
forecasts that existed as of the reporting period end, the uncertainty of the
current economic environment remains volatile and the Company cannot predict
whether additional credit losses will be sustained as a result of the COVID-19
pandemic if assumptions and forecasts change in the future.
At the end of each quarter, the Company analyzes its loan portfolio and
maintains an ACL at a level that is appropriate and determined in accordance
with accounting principles generally accepted in the United States of America
("GAAP"). Determining the adequacy of the ACL involves a high degree of judgment
and is inevitably imprecise as the risk of loss is difficult to quantify. The
ACL methodology is designed to reasonably estimate the probable credit losses
within the Company's loan portfolio. Accordingly, the ACL is maintained within a
range of estimated losses. The determination of the ACL on loans, including
credit loss expense and net charge-offs, is a critical accounting estimate that
involves management's judgments about the loan portfolio that impact credit
losses, including the credit risk inherent in the loan portfolio, economic
forecasts nationally and in the local markets in which the Company operates,
trends and changes in collateral values, delinquencies, non-performing assets,
net charge-offs, credit-related policies and personnel, and other environmental
factors.
In determining the allowance, the loan portfolio is separated into pools of
loans that share similar risk characteristics which are the Company's loan
segments. The Company then derives estimated loss assumptions from its model by
loan segment which is further segregated by the credit quality indicators. The
loss assumptions are then applied to each segment of loan to estimate the ACL on
the pooled loans. For any loans that do not share similar risk characteristics,
the estimated credit losses are determined on an individual loan basis and such
loans primarily consist of non-accrual loans. An estimated credit loss is
recorded on individually reviewed loans when the fair value of a
collateral-dependent loan or the present value of the loan's expected future
cash flows (discounted at the loans original effective interest rate) is less
than the amortized cost of the loan.
The Company provides commercial banking services to individuals, small to
medium-sized businesses, community organizations and public entities from 193
locations, including 175 branches, across Montana , Idaho , Utah , Washington ,
Wyoming , Colorado , Arizona and Nevada . The states in which the Company operates
have diverse economies and markets that are tied to commodities (crops,
livestock, minerals, oil and natural gas), tourism, real estate and land
development and an assortment of industries, both manufacturing and
service-related. Thus, the changes in the global, national, and local economies
are not uniform across the Company's geographic locations. The geographic
dispersion of these market areas helps to mitigate the risk of credit loss. The
Company's model of sixteen bank divisions with separate management teams is also
a significant benefit in mitigating and managing the Company's credit risk. This
model provides substantial local oversight to the lending and credit management
function and requires multiple reviews of larger loans before credit is
extended.
The primary responsibility for credit risk assessment and identification of
problem loans rests with the loan officer of the account. This continuous
process of identifying non-performing loans is necessary to support management's
evaluation of the ACL adequacy. An independent loan review function verifying
credit risk ratings evaluates the loan officer and management's evaluation of
the loan portfolio credit quality. The ACL evaluation is well documented and
approved by the Company's Board. In addition, the policy and procedures for
determining the balance of the ACL are reviewed annually by the Company's Board,
the internal audit department, independent credit reviewers and state and
federal bank regulatory agencies.
Although the Company continues to actively monitor economic trends and
regulatory developments, no assurance can be given that the Company will not, in
any particular period, sustain losses that are significant relative to the ACL
amount, or that subsequent evaluations of the loan portfolio applying
management's judgment about then current factors will not require significant
changes in the ACL. Under such circumstances, additional credit loss expense
could result.
For additional information regarding the ACL, its relation to credit loss expense and risk related to asset quality, see Note 3 to the Consolidated Financial Statements in "Part I. Item 1. Financial Statements."
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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) 2020 2020 2019 2019 2020 2019 2019
Custom and owner occupied
construction $ 166,195 $ 177,172 $ 143,479 $ 147,626 (6) % 16 % 13 %
Pre-sold and spec construction 157,242 161,964 180,539 207,596 (3) % (13) % (24) %
Total residential construction 323,437 339,136 324,018 355,222 (5) % - % (9) %
Land development 96,814 94,667 101,592 103,090 2 % (5) % (6) %
Consumer land or lots 122,019 120,015 125,759 128,668 2 % (3) % (5) %
Unimproved land 64,770 63,459 62,563 71,467 2 % 4 % (9) %
Developed lots for operative
builders 30,871 26,647 17,390 13,782 16 % 78 % 124 %
Commercial lots 62,445 60,563 46,408 64,904 3 % 35 % (4) %
Other construction 537,105 477,922 478,368 443,947 12 % 12 % 21 %
Total land, lot, and other
construction 914,024 843,273 832,080 825,858 8 % 10 % 11 %
Owner occupied 1,889,512 1,855,994 1,667,526 1,666,211 2 % 13 % 13 %
Non-owner occupied 2,259,062 2,238,586 2,017,375 2,023,262 1 % 12 % 12 %
Total commercial real estate 4,148,574 4,094,580 3,684,901 3,689,473 1 % 13 % 12 %
Commercial and industrial 2,308,710 2,342,081 991,580 1,009,310 (1) % 133 % 129 %
Agriculture 747,145 714,227 701,363 718,255 5 % 7 % 4 %
1st lien 1,256,111 1,227,514 1,186,889 1,208,096 2 % 6 % 4 %
Junior lien 43,355 47,121 53,571 53,931 (8) % (19) % (20) %
Total 1-4 family 1,299,466 1,274,635 1,240,460 1,262,027 2 % 5 % 3 %
Multifamily residential 359,030 343,870 342,498 350,622 4 % 5 % 2 %
Home equity lines of credit 651,546 655,492 617,900 612,775 (1) % 5 % 6 %
Other consumer 191,761 181,402 174,643 171,633 6 % 10 % 12 %
Total consumer 843,307 836,894 792,543 784,408 1 % 6 % 8 %
States and political
subdivisions 617,624 581,673 533,023 471,599 6 % 16 % 31 %
Other 205,351 198,354 139,538 174,755 4 % 47 % 18 %
Total loans receivable,
including loans held for sale 11,766,668 11,568,723 9,582,004 9,641,529 2 % 23 % 22 %
Less loans held for sale 1 (147,937) (115,345) (69,194) (100,441) 28 % 114 % 47 %
Total loans receivable $ 11,618,731 $ 11,453,378 $ 9,512,810 $ 9,541,088 1 % 22 % 22 %
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.
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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) 2020 2020 2019 2019 2020 2020 2020
Custom and owner occupied
construction $ 249 440 185 283 249 - -
Pre-sold and spec construction - - 743 1,219 - - -
Total residential construction 249 440 928 1,502 249 - -
Land development 450 659 852 1,006 202 - 248
Consumer land or lots 223 427 330 828 61 - 162
Unimproved land 417 663 1,181 8,781 270 - 147
Commercial lots 682 529 529 575 153 - 529
Total land, lot and other
construction 1,772 2,278 2,892 11,190 686 - 1,086
Owner occupied 9,077 9,424 4,608 8,251 7,338 - 1,739
Non-owner occupied 4,879 5,482 8,229 9,271 4,879 - -
Total commercial real estate 13,956 14,906 12,837 17,522 12,217 - 1,739
Commercial and industrial 8,571 5,039 5,297 6,135 7,614 396 561
Agriculture 8,972 11,087 2,288 3,469 7,011 1,961 -
1st lien 6,559 7,634 8,671 9,420 4,698 217 1,644
Junior lien 986 746 569 669 815 171 -
Total 1-4 family 7,545 8,380 9,240 10,089 5,513 388 1,644
Multifamily residential - 92 201 206 - - -
Home equity lines of credit 2,903 3,048 2,618 3,553 2,550 80 273
Other consumer 407 412 837 1,098 241 108 58
Total consumer 3,310 3,460 3,455 4,651 2,791 188 331
Other 288 289 299 313 269 19 -
Total $ 44,663 45,971 37,437 55,077 36,350 2,952 5,361
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The following table summarizes the Company's accruing loans 30-89 days past due by regulatory classification:
Accruing 30-89 Days Delinquent
Loans, by Loan Type % Change from
Sep 30, Jun 30, Dec 31, Sep 30, Jun 30, Dec 31, Sep 30,
(Dollars in thousands) 2020 2020 2019 2019 2020 2019 2019
Custom and owner occupied
construction $ 448 $ - $ 637 $ 49 n/m (30) % 814 %
Pre-sold and spec construction - - 148 8 n/m (100) % (100) %
Total residential construction 448 - 785 57 n/m (43) % 686 %
Land development - - - 1,282 n/m n/m (100) %
Consumer land or lots 220 248 672 836 (11) % (67) % (74) %
Unimproved land 381 411 558 8 (7) % (32) % 4,663 %
Developed lots for operative
builders - - 2 - n/m (100) % n/m
Commercial lots - 153 - - (100) % n/m n/m
Total land, lot and other
construction 601 812 1,232 2,268 (26) % (51) % (74) %
Owner occupied 3,163 1,512 3,052 2,949 109 % 4 % 7 %
Non-owner occupied 1,157 966 1,834 1,286 20 % (37) % (10) %
Total commercial real estate 4,320 2,478 4,886 4,235 74 % (12) % 2 %
Commercial and industrial 2,354 4,127 2,036 12,780 (43) % 16 % (82) %
Agriculture 2,795 12,084 4,298 1,290 (77) % (35) % 117 %
1st lien 2,589 656 4,711 2,521 295 % (45) % 3 %
Junior lien 738 160 624 715 361 % 18 % 3 %
Total 1-4 family 3,327 816 5,335 3,236 308 % (38) % 3 %
Multifamily residential - - - 149 n/m n/m (100)
Home equity lines of credit 2,200 3,330 2,352 4,162 (34) % (6) % (47) %
Other consumer 789 739 1,187 1,388 7 % (34) % (43) %
Total consumer 2,989 4,069 3,539 5,550 (27) % (16) % (46) %
States and political subdivisions - 124 - - (100) n/m n/m
Other 797 715 1,081 389 11 % (26) % 105 %
Total $ 17,631 $ 25,225 $ 23,192 $ 29,954 (30) % (24) % (41) %
______________________________
n/m - not measurable
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--------------------------------------------------------------------------------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) 2020 2020 2019 2019 2020 2020
Custom and owner occupied
construction $ (9) - 98 - - 9
Pre-sold and spec construction (19) (12) (18) (12) - 19
Total residential construction (28) (12) 80 (12) - 28
Land development (63) (50) (30) (25) - 63
Consumer land or lots (217) (17) (138) (160) 7 224
Unimproved land (489) (287) (311) (271) - 489
Developed lots for operative
builders - - (18) (18) - -
Commercial lots (5) (3) (6) (4) - 5
Other construction - - (142) (142) - -
Total land, lot and other
construction (774) (357) (645) (620) 7 781
Owner occupied (82) (49) (479) (35) 52 134
Non-owner occupied 246 115 2,015 1,861 295 49
Total commercial real estate 164 66 1,536 1,826 347 183
Commercial and industrial 740 576 1,472 1,066 1,317 577
Agriculture 309 33 21 (32) 315 6
1st lien (27) - (12) 189 21 48
Junior lien (169) (129) (303) (254) 28 197
Total 1-4 family (196) (129) (315) (65) 49 245
Multifamily residential (244) (43) - - - 244
Home equity lines of credit 79 24 19 (25) 310 231
Other consumer 233 161 603 380 445 212
Total consumer 312 185 622 355 755 443
Other 2,589 1,727 4,035 3,243 5,075 2,486
Total $ 2,872 2,046 6,806 5,761 7,865 4,993
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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 deposit and certificate accounts. The Company's deposits
are summarized below:
September 30, 2020 December 31, 2019 September 30, 2019
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
Non-interest bearing deposits$ 5,479,311 38 %$ 3,696,627 34 %$ 3,772,766 35 % NOW and DDA accounts 3,300,152 23 % 2,645,404 25 % 2,592,483 24 % Savings accounts 1,864,143 13 % 1,485,487 14 % 1,472,465 13 % Money market deposit accounts 2,557,294 18 % 1,937,141 18 % 1,940,517 18 % Certificate accounts 979,857 7 % 958,501 9 % 955,765 9 % Wholesale deposits 119,131 1 % 53,297 - % 134,629 1 % Total interest bearing deposits 8,820,577 62 % 7,079,830 66 % 7,095,859 65 % Total deposits$ 14,299,888 100 %$ 10,776,457 100 %$ 10,868,625 100 % Securities Sold Under Agreements to Repurchase, Federal Home Loan Bank Advances and Other Borrowings The Company borrows money through repurchase agreements. This process involves the selling of one or more of the securities in the Company's investment portfolio and simultaneously entering into an agreement to repurchase the same securities at an agreed upon later date, typically overnight. A rate of interest is paid for the agreed period of time. The Bank enters into repurchase agreements with local municipalities, and certain customers, and has adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities. In addition to retail repurchase agreements, the Company periodically enters into wholesale repurchase agreements as additional funding sources. The Company has not entered into reverse repurchase agreements. The Bank is a member of the FHLB 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.
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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) 2020 2019
Repurchase agreements
Amount outstanding at end of period $ 965,668 569,824
Weighted interest rate on outstanding amount 0.40 % 0.74 %
Maximum outstanding at any month-end $ 965,668 569,824
Average balance $ 720,593 470,351
Weighted-average interest rate 0.51 % 0.79 %
Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company
formed or acquired financing subsidiaries for the purpose of issuing trust
preferred securities that entitle the investor to receive cumulative cash
distributions thereon. Subordinated debentures were issued in conjunction with
the trust preferred securities and the terms of the subordinated debentures and
trust preferred securities are the same. For regulatory capital purposes, the
trust preferred securities are included in Tier 2 capital at September 30, 2020 .
Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 require that if a depository institution holding company exceeds $15
billion due to an acquisition, then trust preferred securities are to be
excluded from Tier 1 capital beginning in the period in which the transaction
occurred. During the current year, the Company's acquisition of SBAZ resulted in
total consolidated assets exceeding $15 billion ; accordingly, trust preferred
securities are now included in Tier 2 capital. The Company also has subordinated
debt that qualifies as Tier 2 capital. The subordinated debentures outstanding
as of September 30, 2020 were $140 million , including fair value adjustments
from acquisitions.
Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments
to obtain funding and to extend credit, such as letters of credit and unfunded
loan commitments, which are not reflected in the accompanying condensed
consolidated financial statements. The Company assessed the off-balance sheet
credit exposures as of September 30, 2020 and determined its ACL of $16.1
million was adequate to absorb the estimated credit losses.
Off-balance sheet arrangements also include any obligation related to a variable
interest held in an unconsolidated entity. The Company does not anticipate any
material losses as a result of these transactions. For additional information
regarding the Company's interests in unconsolidated variable interest entities
("VIE"), see Note 6 to the Consolidated Financial Statements in "Part I. Item 1.
Financial Statements."
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Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund
present and future obligations as they come due because of an inability to
liquidate assets or obtain adequate funding at a reasonable cost. The objective
of liquidity management is to maintain cash flows adequate to meet current and
future needs for credit demand, deposit withdrawals, maturing liabilities and
corporate operating expenses. Effective liquidity management entails three
elements:
1.assessing on an ongoing basis, the current and expected future needs for
funds, and ensuring that sufficient funds or access to funds exist to meet those
needs at the appropriate time;
2.providing for an adequate cushion of liquidity to meet unanticipated cash flow
needs that may arise from potential adverse circumstances ranging from high
probability/low severity events to low probability/high severity; and
3.balancing the benefits between providing for adequate liquidity to mitigate
potential adverse events and the cost of that liquidity.
The Company has a wide range of versatility in managing the liquidity and
asset/liability mix. The Bank's ALCO meets regularly to assess liquidity risk,
among other matters. The Company monitors liquidity and contingency funding
alternatives through management reports of liquid assets (e.g., debt
securities), both unencumbered and pledged, as well as borrowing capacity, both
secured and unsecured, including off-balance sheet funding sources. The Company
evaluates its potential funding needs across alternative scenarios and maintains
contingency funding plans consistent with the Company's access to diversified
sources of contingent funding.
The following table identifies certain liquidity sources and capacity available to the Company as of the dates indicated:
September 30 ,
(Dollars in thousands) 2020
2019
FHLB advances
Borrowing capacity $ 2,606,534 2,360,599
Amount utilized (7,318) (38,589)
Amount available $ 2,599,216 2,322,010
FRB discount window
Borrowing capacity $ 1,300,146 1,061,872
Amount utilized - -
Amount available $ 1,300,146 1,061,872
Unsecured lines of credit available
Unencumbered debt securities
U.S. government sponsored enterprises 9,825
7,416
State and local governments 137,222 527,348
Corporate bonds 107,843 157,602
Residential mortgage-backed securities 1,062,492 210,356
Commercial mortgage-backed securities 956,345 401,849
Total unencumbered debt securities
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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 95,413,743 have
been issued as of September 30, 2020 . The Company also has the capacity to issue
1,000,000 shares of preferred stock of which none have been issued as of
September 30, 2020 . Conversely, the Company may decide to utilize a portion of
its strong capital position, as it has done in the past, to repurchase shares of
its outstanding common stock, depending on market price and other relevant
considerations.
The Federal Reserve has adopted capital adequacy guidelines that are used to
assess the adequacy of capital in supervising a bank holding company. The
federal banking agencies issued final rules ("Final Rules") that established a
comprehensive regulatory capital framework based on the recommendation of the
Basel Committee on Banking Supervision and certain requirements of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Final Rules
require the Company to hold a 2.5 percent capital conservation buffer designed
to absorb losses during periods of economic stress. As of September 30, 2020 ,
management believes the Company and Bank meet all capital adequacy requirements
to which they are subject and there are no conditions or events subsequent to
this date that management believes have changed the Company's or Bank's
risk-based capital category.
The following table illustrates the Bank's regulatory capital ratios and the
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 14.35 % 13.12 % 13.12 % 10.08 %
Minimum capital requirements 8.00 % 6.00 % 4.50 % 4.00 %
Minimum capital requirements plus
capital conservation buffer 10.50 % 8.50 % 7.00 % N/A
Well capitalized requirements 10.00 % 8.00 % 6.50 % 5.00 %
On January 1, 2020 , the Company adopted the CECL accounting standard that
requires management's estimate of credit losses over the expected contractual
lives of the Company's relevant financial assets. On March 27, 2020 , in response
to the COVID-19 pandemic, federal banking regulators issued an interim final
rule to delay for two years the initial adoption impact of CECL on regulatory
capital, followed by a three-year transition period to phase out the aggregate
amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year
transition period). The Company has elected to utilize the five-year transition
period. During the two-year delay, the Company will add back to Common Tier 1
capital 100 percent of the initial adoption impact of CECL plus 25 percent of
the cumulative quarterly changes in ACL (i.e., quarterly transitional amounts).
Starting on January 1, 2022 , the quarterly transitional amounts along with the
initial adoption impact of CECL will be phased out of Common Tier 1 capital
evenly over the three-year period.
Federal and State Income Taxes
The Company files a consolidated federal income tax return using the accrual
method of accounting. All required tax returns have been timely filed. Financial
institutions are subject to the provisions of the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations. The federal
statutory corporate income tax rate is 21 percent.
Under Montana , Idaho , Utah , Colorado and Arizona law, financial institutions are
subject to a corporation income tax, which incorporates or is substantially
similar to applicable provisions of the Internal Revenue Code. The corporation
income tax is imposed on federal taxable income, subject to certain adjustments.
State taxes are incurred at the rate of 6.75 percent in Montana , 6.925 percent
in Idaho , 4.95 percent in Utah , 4.5 percent in Colorado and 4.9 percent in
Arizona . Washington , Wyoming and Nevada do not impose a corporate income tax.
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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) 2020 2019
Income Before Income Taxes $ 227,230 189,581
Federal and state income tax expense 42,690 36,447
Net Income $ 184,540 153,134
Effective tax rate 1 18.8 % 19.2 %
Income from tax-exempt debt securities, municipal loans and leases
36,879
Benefits from federal income tax credits $ 9,626 7,947
______________________________
1The current and prior year's low effective income tax rates are due to income
from tax-exempt debt securities, municipal loans and leases and benefits from
federal income tax credits.
The Company has equity investments in Certified Development Entities ("CDE")
which have received allocations of New Markets Tax Credits ("NMTC").
Administered by the Community Development Financial Institutions Fund ("CDFI
Fund ") of the U.S. Department of the Treasury , the NMTC program is aimed at
stimulating economic and community development and job creation in low-income
communities. The federal income tax credits received are claimed over a
seven-year credit allowance period. The Company also has equity investments in
Low-Income Housing Tax Credits ("LIHTC") which are indirect federal subsidies
used to finance the development of affordable rental housing for low-income
households. The federal income tax credits are claimed over a ten-year credit
allowance period. The Company has investments of $25.9 million in Qualified
School Construction bonds whereby the Company receives quarterly federal income
tax credits in lieu of taxable interest income. The federal income tax credits
on these debt securities are subject to federal and state income tax.
Following is a list of expected federal income tax credits to be received in the
years indicated.
New Low-Income Debt
Markets Housing Securities
(Dollars in thousands) Tax Credits Tax Credits Tax Credits Total
2020 $ 5,351 8,435 794 14,580
2021 5,642 10,031 736 16,409
2022 4,993 11,146 673 16,812
2023 4,398 11,167 640 16,205
2024 2,466 11,032 604 14,102
Thereafter 720 47,686 905 49,311
$ 23,570 99,497 4,352 127,419
78
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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, 2020 September 30, 2020
Average Average
Average Interest and Yield/ Average Interest and Yield/
(Dollars in thousands) Balance Dividends Rate Balance Dividends Rate
Assets
Residential real estate loans $ 1,010,503 $ 11,592 4.59 % $ 1,013,072 $ 35,216 4.63 %
Commercial loans 1 9,636,631 110,847 4.58 % 8,896,708 318,435 4.78 %
Consumer and other loans 957,284 11,000 4.57 % 947,372 33,771 4.76 %
Total loans 2 11,604,418 133,439 4.57 % 10,857,152 387,422 4.77 %
Tax-exempt investment securities 3 1,379,577 13,885 4.03 % 1,237,779 37,542 4.04 %
Taxable investment securities 4 2,809,545 14,568 2.07 % 2,380,184 43,070 2.41 %
Total earning assets 15,793,540 161,892 4.08 % 14,475,115 468,034 4.32 %
Goodwill and intangibles 572,759 562,533
Non-earning assets 794,165 760,758
Total assets $ 17,160,464 $ 15,798,406
Liabilities
Non-interest bearing deposits $ 5,171,984 $ - - % $ 4,528,500 $ - - %
NOW and DDA accounts 3,218,536 642 0.08 % 2,971,702 2,244 0.10 %
Savings accounts 1,804,438 166 0.04 % 1,670,722 580 0.05 %
Money market deposit accounts 2,453,659 1,161 0.19 % 2,262,781 4,025 0.24 %
Certificate accounts 981,385 1,936 0.78 % 986,807 6,940 0.94 %
Total core deposits 13,630,002 3,905 0.11 % 12,420,512 13,789 0.15 %
Wholesale deposits 5 86,852 47 0.22 % 70,880 332 0.63 %
FHLB advances 21,273 70 1.30 % 103,700 684 0.87 %
Repurchase agreements and other
borrowed funds 1,049,002 2,062 0.78 % 892,418 6,960 1.04 %
Total interest bearing liabilities 14,787,129 6,084 0.16 % 13,487,510 21,765 0.22 %
Other liabilities 120,294 149,423
Total liabilities 14,907,423 13,636,933
Stockholders' Equity
Common stock 954 947
Paid-in capital 1,493,353 1,467,623
Retained earnings 622,099 586,963
Accumulated other comprehensive income 136,635 105,940
Total stockholders' equity 2,253,041 2,161,473
Total liabilities and stockholders'
equity $ 17,160,464 $ 15,798,406
Net interest income (tax-equivalent) $ 155,808 $ 446,269
Net interest spread (tax-equivalent) 3.92 % 4.10 %
Net interest margin (tax-equivalent) 3.92 % 4.12 %
______________________________
1Includes tax effect of$1.3 million and$3.9 million on tax-exempt municipal loan and lease income for the three and nine months endedSeptember 30, 2020 , respectively. 2Total loans are gross of the allowance for credit losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period. 3Includes tax effect of$2.8 million and$7.6 million on tax-exempt debt securities income for the three and nine months endedSeptember 30, 2020 , respectively. 4Includes tax effect of$266 thousand and$798 thousand on federal income tax credits for the three and nine months endedSeptember 30, 2020 , respectively. 5Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts. 79 -------------------------------------------------------------------------------- Rate/Volume Analysis Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company's interest earning assets and interest bearing liabilities ("volume") and the yields earned and paid on such assets and liabilities ("rate"). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate. Nine Months ended 2020 vs. 2019 Increase (Decrease) Due to: (Dollars in thousands) Volume Rate Net Interest income Residential real estate loans$ 2,260 (1,389) 871 Commercial loans (tax-equivalent) 79,812 (33,646) 46,166 Consumer and other loans 3,016 (2,390) 626 Investment securities (tax-equivalent) 19,872 (10,698) 9,174 Total interest income 104,960 (48,123) 56,837 Interest expense NOW and DDA accounts 742 (1,536) (794) Savings accounts 151 (328) (177) Money market deposit accounts 1,140 (790) 350 Certificate accounts 569 (278) 291 Wholesale deposits (1,694) (1,035) (2,729) FHLB advances (6,280) (1,973) (8,253) Repurchase agreements and other borrowed funds 3,877 (4,740) (863) Total interest expense (1,495) (10,680) (12,175) Net interest income (tax-equivalent)$ 106,455 (37,443) 69,012 Net interest income (tax-equivalent) increased$69.0 million for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The interest income for the first nine months of 2020 increased over the same period last year primarily from increased loan growth in all categories, with the largest increase in the Company's commercial loan portfolio which included increases from the PPP loans. Total interest expense decreased from the prior year primarily from decreased balances of FHLB advances and a decrease in rates on both borrowings and deposits. Effect of inflation and changing prices GAAP often requires the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of the Company are monetary in nature; therefore, interest rates generally have a more significant impact on a company's performance than does the effect of inflation. 80
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