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Section 1: 10-Q (FORM 10-Q)

Document



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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________             
Commission file number 000-18911
____________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________
MONTANA
81-0519541
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
49 Commons Loop, Kalispell, Montana
59901
(Address of principal executive offices)
(Zip Code)
(406) 756-4200
Registrant’s telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report) 
____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒ Yes    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐  Yes    ☒  No
The number of shares of Registrant’s common stock outstanding on October 16, 2018 was 84,521,692. No preferred shares are issued or outstanding.





TABLE OF CONTENTS
 


 
Page
Part I. Financial Information
 
Item 1 – Financial Statements
 





ABBREVIATIONS/ACRONYMS

 

ALCO – Asset Liability Committee
ALLL or allowance – allowance for loan and lease losses
ASC – Accounting Standards CodificationTM
ATM – automated teller machine
Bank – Glacier Bank
CDE – Certified Development Entity
CDFI Fund – Community Development Financial Institutions Fund
CEO – Chief Executive Officer
CFO – Chief Financial Officer
Collegiate – Columbine Capital Corp. and its subsidiary, Collegiate Peaks Bank
Company – Glacier Bancorp, Inc.
DDA – demand deposit account
Dodd-Frank Act – Dodd-Frank Wall Street Reform and Consumer Protection Act
Fannie Mae – Federal National Mortgage Association
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FHLB – Federal Home Loan Bank
Final Rules – final rules implemented by the federal banking agencies that amended regulatory risk-based capital rules
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
FSB – Inter-Mountain Bancorp., Inc. and its subsidiary, First Security Bank
GAAP – accounting principles generally accepted in the United States of America
Ginnie Mae – Government National Mortgage Association
LIBOR – London Interbank Offered Rate
LIHTC – Low Income Housing Tax Credit
NMTC – New Markets Tax Credit
NOW – negotiable order of withdrawal
NRSRO – Nationally Recognized Statistical Rating Organizations
OCI – other comprehensive income
OREO – other real estate owned
Repurchase agreements – securities sold under agreements to repurchase
S&P – Standard and Poor’s
SEC – United States Securities and Exchange Commission
Tax Act – The Tax Cuts and Jobs Act
TBA – to-be-announced
TDR – troubled debt restructuring
VIE – variable interest entity
 
 








GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Dollars in thousands, except per share data)
September 30,
2018
 
December 31,
2017
Assets
 
 
 
Cash on hand and in banks
$
171,394

 
139,948

Interest bearing cash deposits
135,710

 
60,056

Cash and cash equivalents
307,104

 
200,004

Debt securities, available-for-sale
2,103,619

 
1,778,243

Debt securities, held-to-maturity
590,915

 
648,313

Total debt securities
2,694,534

 
2,426,556

Loans held for sale, at fair value
50,649

 
38,833

Loans receivable
8,123,245

 
6,577,824

Allowance for loan and lease losses
(132,535
)
 
(129,568
)
Loans receivable, net
7,990,710

 
6,448,256

Premises and equipment, net
239,006

 
177,348

Other real estate owned
12,399

 
14,269

Accrued interest receivable
62,248

 
44,462

Deferred tax asset
37,264

 
38,344

Core deposit intangible, net
50,973

 
14,184

Goodwill
289,535

 
177,811

Non-marketable equity securities
16,502

 
29,884

Bank-owned life insurance
81,850

 
59,351

Other assets
76,328

 
37,047

Total assets
$
11,909,102

 
9,706,349

Liabilities
 
 
 
Non-interest bearing deposits
$
3,103,112

 
2,311,902

Interest bearing deposits
6,498,070

 
5,267,845

Securities sold under agreements to repurchase
408,754

 
362,573

Federal Home Loan Bank advances
155,328

 
353,995

Other borrowed funds
9,944

 
8,224

Subordinated debentures
134,055

 
126,135

Accrued interest payable
4,065

 
3,450

Other liabilities
103,162

 
73,168

Total liabilities
10,416,490

 
8,507,292

Stockholders’ Equity
 
 
 
Preferred shares, $0.01 par value per share, 1,000,000 shares authorized, none issued or outstanding

 

Common stock, $0.01 par value per share, 117,187,500 shares authorized
845

 
780

Paid-in capital
1,050,463

 
797,997

Retained earnings - substantially restricted
471,021

 
402,259

Accumulated other comprehensive loss
(29,717
)
 
(1,979
)
Total stockholders’ equity
1,492,612

 
1,199,057

Total liabilities and stockholders’ equity
$
11,909,102

 
9,706,349

Number of common stock shares issued and outstanding
84,521,093

 
78,006,956



See accompanying notes to unaudited condensed consolidated financial statements.

4




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months ended
 
Nine Months ended
(Dollars in thousands, except per share data)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Interest Income
 
 
 
 
 
 
 
Investment securities
$
21,971

 
19,987

 
64,483

 
63,305

Residential real estate loans
10,356

 
8,326

 
29,290

 
24,594

Commercial loans
80,587

 
59,875

 
221,926

 
166,027

Consumer and other loans
9,991

 
8,276

 
27,987

 
24,198

Total interest income
122,905

 
96,464

 
343,686

 
278,124

Interest Expense
 
 
 
 
 
 
 
Deposits
4,837

 
4,564

 
13,370

 
13,505

Securities sold under agreements to repurchase
570

 
537

 
1,541

 
1,362

Federal Home Loan Bank advances
2,132

 
1,398

 
6,734

 
4,642

Other borrowed funds
63

 
21

 
105

 
55

Subordinated debentures
1,558

 
1,132

 
4,345

 
3,228

Total interest expense
9,160

 
7,652

 
26,095

 
22,792

Net Interest Income
113,745

 
88,812

 
317,591

 
255,332

Provision for loan losses
3,194

 
3,327

 
8,707

 
7,938

Net interest income after provision for loan losses
110,551

 
85,485

 
308,884

 
247,394

Non-Interest Income
 
 
 
 
 
 
 
Service charges and other fees
19,504

 
17,307

 
55,179

 
50,435

Miscellaneous loan fees and charges
1,807

 
1,211

 
5,527

 
3,283

Gain on sale of loans
7,256

 
9,141

 
21,495

 
23,031

(Loss) gain on sale of debt securities
(367
)
 
77

 
(756
)
 
(545
)
Other income
4,216

 
3,449

 
8,885

 
8,326

Total non-interest income
32,416

 
31,185

 
90,330

 
84,530

Non-Interest Expense
 
 
 
 
 
 
 
Compensation and employee benefits
49,927

 
41,297

 
144,671

 
120,041

Occupancy and equipment
7,914

 
6,500

 
22,850

 
19,706

Advertising and promotions
2,432

 
2,239

 
7,132

 
6,381

Data processing
3,752

 
3,647

 
11,960

 
10,180

Other real estate owned
2,674

 
817

 
2,957

 
1,532

Regulatory assessments and insurance
1,277

 
1,214

 
3,812

 
3,362

Core deposit intangibles amortization
1,735

 
640

 
4,539

 
1,880

Other expenses
13,118

 
12,198

 
40,330

 
34,123

Total non-interest expense
82,829

 
68,552

 
238,251

 
197,205

Income Before Income Taxes
60,138

 
48,118

 
160,963

 
134,719

Federal and state income tax expense
10,802

 
11,639

 
28,684

 
33,298

Net Income
$
49,336

 
36,479

 
132,279

 
101,421

Basic earnings per share
$
0.58

 
0.47

 
1.59

 
1.31

Diluted earnings per share
$
0.58

 
0.47

 
1.59

 
1.31

Dividends declared per share
$
0.26

 
0.51

 
0.75

 
0.93

Average outstanding shares - basic
84,518,407

 
78,004,450

 
83,294,111

 
77,379,514

Average outstanding shares - diluted
84,593,122

 
78,065,942

 
83,362,323

 
77,442,944


See accompanying notes to unaudited condensed consolidated financial statements.

5




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months ended
 
Nine Months ended
(Dollars in thousands)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Net Income
$
49,336

 
36,479

 
132,279

 
101,421

Other Comprehensive (Loss) Income, Net of Tax
 
 
 
 
 
 
 
Unrealized (losses) gains on available-for-sale debt securities
(14,190
)
 
(2,835
)
 
(46,597
)
 
17,172

Reclassification adjustment for (losses) gains included in net income
(151
)
 
(77
)
 
195

 
519

Net unrealized (losses) gains on available-for-sale debt securities
(14,341
)
 
(2,912
)
 
(46,402
)
 
17,691

Tax effect
3,634

 
1,129

 
11,759

 
(6,853
)
Net of tax amount
(10,707
)
 
(1,783
)
 
(34,643
)
 
10,838

Unrealized gains (losses) on derivatives used for cash flow hedges
1,234

 
45

 
7,302

 
(1,799
)
Reclassification adjustment for losses included in net income
469

 
1,182

 
1,946

 
3,776

Net unrealized gains on derivatives used for cash flow hedges
1,703

 
1,227

 
9,248

 
1,977

Tax effect
(431
)
 
(476
)
 
(2,343
)
 
(766
)
Net of tax amount
1,272

 
751

 
6,905

 
1,211

Total other comprehensive (loss) income, net of tax
(9,435
)
 
(1,032
)
 
(27,738
)
 
12,049

Total Comprehensive Income
$
39,901

 
35,447

 
104,541

 
113,470

























See accompanying notes to unaudited condensed consolidated financial statements.

6




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Months ended September 30, 2018 and 2017
 
(Dollars in thousands, except per share data)
Common Stock
 
Paid-in Capital
 
Retained
Earnings
Substantially Restricted
 
Accumulated
Other Compre-
hensive (Loss) Income
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2016
76,525,402

 
$
765

 
749,107

 
374,379

 
(7,382
)
 
1,116,869

Net income

 

 

 
101,421

 

 
101,421

Other comprehensive income

 

 

 

 
12,049

 
12,049

Cash dividends declared ($0.93 per share)

 

 

 
(72,427
)
 

 
(72,427
)
Stock issued in connection with acquisitions
1,381,661

 
14

 
46,659

 

 

 
46,673

Stock issuances under stock incentive plans
99,893

 
1

 
(1
)
 

 

 

Stock-based compensation and related taxes

 

 
1,616

 

 

 
1,616

Balance at September 30, 2017
78,006,956

 
$
780

 
797,381

 
403,373

 
4,667

 
1,206,201

Balance at December 31, 2017
78,006,956

 
$
780

 
797,997

 
402,259

 
(1,979
)
 
1,199,057

Net income

 

 

 
132,279

 

 
132,279

Other comprehensive loss

 

 

 

 
(27,738
)
 
(27,738
)
Cash dividends declared ($0.75 per share)

 

 

 
(63,517
)
 

 
(63,517
)
Stock issued in connection with acquisitions
6,432,868

 
64

 
250,743

 

 

 
250,807

Stock issuances under stock incentive plans
81,269

 
1

 
(1
)
 

 

 

Stock-based compensation and related taxes

 

 
1,724

 

 

 
1,724

Balance at September 30, 2018
84,521,093

 
$
845

 
1,050,463

 
471,021

 
(29,717
)
 
1,492,612

















See accompanying notes to unaudited condensed consolidated financial statements.

7




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months ended
(Dollars in thousands)
September 30,
2018
 
September 30,
2017
Operating Activities
 
 
 
Net income
$
132,279

 
101,421

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
8,707

 
7,938

Net amortization of debt securities
10,088

 
16,265

Net accretion of purchase accounting adjustments
(2,962
)
 
(4,534
)
Amortization of debt modification costs
1,237

 

Origination of loans held for sale
(647,932
)
 
(672,055
)
Proceeds from loans held for sale
669,344

 
730,082

Gain on sale of loans
(21,495
)
 
(23,031
)
Loss on sale of debt securities
756

 
545

Bank-owned life insurance income, net
(1,782
)
 
(1,032
)
Stock-based compensation, net of tax benefits
2,523

 
1,449

Depreciation of premises and equipment
11,543

 
10,989

Loss (gain) on sale and write-downs of other real estate owned, net
2,347

 
(1,808
)
Amortization of core deposit intangibles
4,539

 
1,880

Amortization of investments in variable interest entities
5,070

 
3,581

Net increase in accrued interest receivable
(10,581
)
 
(3,564
)
Net (increase) decrease in other assets
(6,820
)
 
6,147

Net increase (decrease) in accrued interest payable
170

 
(431
)
Net increase in other liabilities
10,481

 
4,609

Net cash provided by operating activities
167,512

 
178,451

Investing Activities
 
 
 
Sales of available-for-sale debt securities
224,612

 
247,748

Maturities, prepayments and calls of available-for-sale debt securities
259,102

 
347,450

Purchases of available-for-sale debt securities
(550,096
)
 
(28,301
)
Maturities, prepayments and calls of held-to-maturity debt securities
55,202

 
18,910

Principal collected on loans
1,908,670

 
1,472,757

Loan originations
(2,500,098
)
 
(2,022,508
)
Net additions to premises and equipment
(13,984
)
 
(7,682
)
Proceeds from sale of other real estate owned
3,370

 
11,812

Proceeds from redemption of non-marketable equity securities
73,199

 
47,805

Purchases of non-marketable equity securities
(62,585
)
 
(42,598
)
Proceeds from bank-owned life insurance
1,331

 
437

Investments in variable interest entities
(30,685
)
 
(16,541
)
Net cash received from (paid in) acquisitions
101,268

 
(4,091
)
Net cash (used in) provided by investing activities
(530,694
)
 
25,198





See accompanying notes to unaudited condensed consolidated financial statements.

8




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
Nine Months ended
(Dollars in thousands)
September 30,
2018
 
September 30,
2017
Financing Activities
 
 
 
Net increase in deposits
$
706,469

 
98,013

Net increase (decrease) in securities sold under agreements to repurchase
17,001

 
(20,054
)
Net decrease in short-term Federal Home Loan Bank advances
(200,000
)
 
(62,800
)
Proceeds from long-term Federal Home Loan Bank advances

 
150,000

Repayments of long-term Federal Home Loan Bank advances
(641
)
 
(208,097
)
Net (decrease) increase in other borrowed funds
(9,823
)
 
3,803

Cash dividends paid
(41,542
)
 
(95,332
)
Tax withholding payments for stock-based compensation
(1,182
)
 
(1,513
)
Net cash provided by (used in) financing activities
470,282

 
(135,980
)
Net increase in cash, cash equivalents and restricted cash
107,100

 
67,669

Cash, cash equivalents and restricted cash at beginning of period
200,004

 
152,541

Cash, cash equivalents and restricted cash at end of period
$
307,104

 
220,210

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
25,925

 
23,223

Cash paid during the period for income taxes
18,440

 
29,315

Supplemental Disclosure of Non-Cash Investing Activities
 
 
 
Sale and refinancing of other real estate owned
$
406

 
531

Transfer of loans to other real estate owned
4,066

 
3,844

Dividends declared but not paid
22,240

 
232

Acquisitions
 
 
 
Fair value of common stock shares issued
250,807

 
46,673

Cash consideration for outstanding shares
16,265

 
17,342

Effective settlement of a pre-existing relationship
10,054

 

Fair value of assets acquired
1,549,158

 
355,230

Liabilities assumed
1,383,756

 
321,824

















See accompanying notes to unaudited condensed consolidated financial statements.

9




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

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company’s financial condition as of September 30, 2018, the results of operations and comprehensive income for the three and nine month periods ended September 30, 2018 and 2017, and changes in stockholders’ equity and cash flows for the nine month periods ended September 30, 2018 and 2017. The condensed consolidated statement of financial condition of the Company as of December 31, 2017 has been derived from the audited consolidated statements of the Company as of that date.

The accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results anticipated for the year ending December 31, 2018.

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

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

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


10




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

The parent holding company owns non-bank subsidiaries that have issued trust preferred securities as Tier 1 capital instruments. The trust subsidiaries are not included in the Company’s consolidated financial statements. The Company's investments in the trust subsidiaries are included in other assets on the Company's statements of financial condition.

In February 2018, the Company completed its acquisition of Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank, a community bank based in Bozeman, Montana (collectively, “FSB”). In January 2018, the Company completed its acquisition of Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado (collectively, “Collegiate”). The transactions were accounted for using the acquisition method, and their results of operations have been included in the Company’s consolidated financial statements as of the acquisition dates. For additional information relating to recent mergers and acquisitions, see Note 12.

Loans Receivable
Loans that are intended to be held-to-maturity are reported at the unpaid principal balance less net charge-offs and adjusted for deferred fees and costs on originated loans and unamortized premiums or discounts on acquired loans. Fees and costs on originated loans and premiums or discounts on acquired loans are deferred and subsequently amortized or accreted as a yield adjustment over the expected life of the loan utilizing the interest method. The objective of the interest method is to calculate periodic interest income at a constant effective yield. When a loan is paid off prior to maturity, the remaining fees and costs on originated loans and premiums or discounts on acquired loans are immediately recognized into interest income.

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

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

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


11




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

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

For additional information relating to loans, see Note 3.

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


12




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

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

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

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

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

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

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

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


13




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

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

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

Revenue Recognition
The Company recognizes revenue when services or products are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled. The Company’s principal source of revenue is interest income from debt securities and loans. Revenue from contracts with customers within the scope of Accounting Standards Codification (“ASC”) Topic 606 was $56,519,000 and $52,058,000 for the nine months ended September 30, 2018 and 2017, respectively, and largely consisted of revenue from service charges and other fees from deposits (e.g., overdraft fees, ATM fees, debit card fees). Due to the short-term nature of the Company’s contracts with customers, an insignificant amount of receivables related to such revenue was recorded at September 30, 2018 and December 31, 2017 and there were no impairment losses recognized. Policies specific to revenue from contracts with customers include the following:

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

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

Accounting Guidance Adopted in 2018
The ASC is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative. The following paragraphs provide descriptions of recently adopted accounting standards that may have had a material effect on the Company’s financial position or results of operations.


14




Financial Instruments. In January 2016, FASB amended ASC Topic 825 to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2017. Amendments were to be applied by means of a cumulative-effect adjustment to the Company’s statements of financial condition as of the beginning of the reporting year of adoption. The amendments impacted the Company as follows: 1) equity investments (with certain exclusions) are to be measured at fair value with the changes recognized in net income; 2) an exit price must be utilized when measuring the fair value of financial instruments; and 3) additional disclosures are required relating to other comprehensive income (“OCI”), the evaluation of a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the entity’s other deferred tax assets, and other disclosures. The Company adopted the amendments effective January 1, 2018 and determined that the impact of these amendments did not have a significant impact on the Company’s equity securities, fair value disclosures, financial position or results of operations. The amendments changed the method utilized to disclose the fair value of the loan portfolio to an exit price notion when measuring fair value. The Company developed processes to comply with the disclosure requirements of such amendments and accounting policies and procedures were updated accordingly. For additional information on fair value of assets and liabilities, see Note 11.

Revenue Recognition. In May 2014, FASB amended ASC Topic 606 to clarify the principles for recognizing revenue and develop a common revenue standard among industries. The new guidance established the following core principle: recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods or services. Five steps were provided for a company or organization to follow to achieve such core principle. The new guidance also included a cohesive set of disclosure requirements that provided users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new revenue recognition guidance effective January 1, 2018 and determined the majority of the Company’s revenue sources, such as interest income from debt securities and loans, fee income from loans and gain on sale of loans, were not within the scope of Topic 606. The Company evaluated the revenue sources determined to be in scope of Topic 606, including service charges and fee income on deposits and gain or loss on sale of OREO and determined the adoption of the guidance did not have a significant impact to the Company’s financial position or results of operations; however, OREO policies and procedures were updated and implemented and new disclosures about the Company’s revenue have been incorporated into the notes to the financial statements.

Accounting Guidance Pending Adoption at September 30, 2018
The following paragraphs provide descriptions of newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

Derivatives and Hedging. In August 2017, FASB amended ASC Topic 815 to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments made targeted improvements to simplify the application of the hedge accounting guidance. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the full impact of the amendments on its existing interest rate swaps and whether it will early adopt. The Company does not expect there to be an impact to the Company’s financial position and results of operations, although, there may be additional financial statement disclosures. The accounting policies and procedures will be modified after the Company has fully evaluated the standard, although significant changes are not expected. For additional information on derivatives, see Note 7.

Receivables - Nonrefundable Fees and Other Costs. In March 2017, FASB amended ASC Subtopic 310-20 to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date instead of the maturity date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted and if adopted in an interim period, any adjustments should be reflected as of the beginning of the year that includes the interim period. The entity should apply the amendments on a modified retrospective basis through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has premiums on debt securities that are currently being amortized to the maturity date, primarily in the state and local governments category. If the Company were to adopt these amendments as of October 1, 2018, the Company estimates that $22,612,000 of the premium associated with debt securities would be adjusted to retained earnings. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date, including accounting policies and procedures, and doesn’t expect to early adopt.


15




Goodwill and Other Intangibles. In January 2017, FASB amended ASC Topic 350 to simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During the third quarter of 2018, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis. For additional information regarding goodwill impairment testing, see Note 4.

Financial Instruments. In June 2016, FASB amended ASC Topic 326 to replace the incurred loss model with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. The ALLL is a material estimate of the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALLL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALLL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The Company will also develop new procedures for determining an allowance for credit losses relating to held-to-maturity debt securities. In addition, the current accounting policy and procedures for other-than-temporary impairment on available-for-sale debt securities will be replaced with an allowance approach. The Company formed a project team and is actively reviewing the standard for developing and implementing processes and procedures to ensure it is fully compliant with the amendments at adoption date. For additional information on the ALLL, see Note 3.

Leases. In February 2016, FASB amended ASC Topic 842 to address several aspects of lease accounting with the significant change being the recognition of lease assets and lease liabilities for leases previously classified as operating leases. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company has lease agreements for which the amendments will require the recognition of a lease liability to make lease payments and a right-of-use asset which will represent its right to use the underlying asset for the lease term. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date and doesn’t expect to early adopt. The Company does not expect the amendments to have a material effect on the Company’s financial position or results of operations since the Company does not have a significant amount of lease agreements. New processes and accounting policies will be implemented to comply with the amendments.


16




Note 2. Debt Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s debt securities:
 
September 30, 2018
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
25,363

 
64

 
(160
)
 
25,267

U.S. government sponsored enterprises
120,498

 

 
(1,948
)
 
118,550

State and local governments
647,908

 
10,040

 
(13,934
)
 
644,014

Corporate bonds
306,057

 
696

 
(1,528
)
 
305,225

Residential mortgage-backed securities
855,183

 
183

 
(29,202
)
 
826,164

Commercial mortgage-backed securities
188,273

 

 
(3,874
)
 
184,399

Total available-for-sale
2,143,282

 
10,983

 
(50,646
)
 
2,103,619

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
590,915

 
7,482

 
(14,840
)
 
583,557

Total held-to-maturity
590,915

 
7,482

 
(14,840
)
 
583,557

Total debt securities
$
2,734,197

 
18,465

 
(65,486
)
 
2,687,176


 
December 31, 2017
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
31,216

 
54

 
(143
)
 
31,127

U.S. government sponsored enterprises
19,195

 

 
(104
)
 
19,091

State and local governments
614,366

 
20,299

 
(5,164
)
 
629,501

Corporate bonds
216,443

 
802

 
(483
)
 
216,762

Residential mortgage-backed securities
785,960

 
1,253

 
(7,930
)
 
779,283

Commercial mortgage-backed securities
104,324

 
25

 
(1,870
)
 
102,479

Total available-for-sale
1,771,504

 
22,433

 
(15,694
)
 
1,778,243

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
648,313

 
20,346

 
(8,573
)
 
660,086

Total held-to-maturity
648,313

 
20,346

 
(8,573
)
 
660,086

Total debt securities
$
2,419,817

 
42,779

 
(24,267
)
 
2,438,329



17




The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by contractual maturity at September 30, 2018. Actual maturities may differ from expected or contractual maturities since issuers have the right to prepay obligations with or without prepayment penalties.

 
September 30, 2018
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due within one year
$
151,030

 
150,658

 

 

Due after one year through five years
322,470

 
319,836

 
4,551

 
4,555

Due after five years through ten years
284,496

 
285,279

 
108,553

 
106,980

Due after ten years
341,830

 
337,283

 
477,811

 
472,022

 
1,099,826

 
1,093,056

 
590,915

 
583,557

Mortgage-backed securities 1
1,043,456

 
1,010,563

 

 

Total
$
2,143,282

 
2,103,619

 
590,915

 
583,557

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

Proceeds from sales and calls of debt securities and the associated gains and losses that have been included in earnings are listed below:
 
Three Months ended
 
Nine Months ended
(Dollars in thousands)
September 30,
2018
 
September 30,
2017
 
September 30,
2018
 
September 30,
2017
Available-for-sale
 
 
 
 
 
 
 
Proceeds from sales and calls of debt securities
$
12,135

 
155,894

 
245,581

 
268,557

Gross realized gains 1
188

 
278

 
203

 
3,345

Gross realized losses 1
(37
)
 
(201
)
 
(398
)
 
(3,864
)
Held-to-maturity
 
 
 
 
 
 
 
Proceeds from calls of debt securities
28,435

 
3,675

 
57,370

 
18,910

Gross realized gains 1
12

 

 
76

 
153

Gross realized losses 1
(530
)
 

 
(637
)
 
(179
)
______________________________
1 The gain or loss on the sale or call of each debt security is determined by the specific identification method.


18




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

 
September 30, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
6,553

 
(28
)
 
8,887

 
(132
)
 
15,440

 
(160
)
U.S. government sponsored enterprises
112,590

 
(1,791
)
 
5,960

 
(157
)
 
118,550

 
(1,948
)
State and local governments
215,703

 
(4,959
)
 
145,908

 
(8,975
)
 
361,611

 
(13,934
)
Corporate bonds
173,308

 
(820
)
 
60,862

 
(708
)
 
234,170

 
(1,528
)
Residential mortgage-backed securities
328,829

 
(6,397
)
 
471,471

 
(22,805
)
 
800,300

 
(29,202
)
Commercial mortgage-backed securities
104,099

 
(1,240
)
 
74,278

 
(2,634
)
 
178,377

 
(3,874
)
Total available-for-sale
$
941,082

 
(15,235
)
 
767,366

 
(35,411
)
 
1,708,448

 
(50,646
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
201,181

 
(6,234
)
 
90,502

 
(8,606
)
 
291,683

 
(14,840
)
Total held-to-maturity
$
201,181

 
(6,234
)
 
90,502

 
(8,606
)
 
291,683

 
(14,840
)
 
 
December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
1,208

 
(5
)
 
13,179

 
(138
)
 
14,387

 
(143
)
U.S. government sponsored enterprises
14,926

 
(56
)
 
3,425

 
(48
)
 
18,351

 
(104
)
State and local governments
61,126

 
(689
)
 
121,181

 
(4,475
)
 
182,307

 
(5,164
)
Corporate bonds
99,636

 
(264
)
 
29,034

 
(219
)
 
128,670

 
(483
)
Residential mortgage-backed securities
372,175

 
(3,050
)
 
254,721

 
(4,880
)
 
626,896

 
(7,930
)
Commercial mortgage-backed securities
37,650

 
(469
)
 
62,968

 
(1,401
)
 
100,618

 
(1,870
)
Total available-for-sale
$
586,721

 
(4,533
)
 
484,508

 
(11,161
)
 
1,071,229

 
(15,694
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
21,207

 
(186
)
 
105,486

 
(8,387
)
 
126,693

 
(8,573
)
Total held-to-maturity
$
21,207

 
(186
)
 
105,486

 
(8,387
)
 
126,693

 
(8,573
)

Based on an analysis of its debt securities with unrealized losses as of September 30, 2018 and December 31, 2017, the Company determined that none of such securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate changes and market spreads subsequent to acquisition. The fair value of the debt securities is expected to recover as payments are received and the securities approach maturity. At September 30, 2018, management determined that it did not intend to sell debt securities with unrealized losses, and there was no expected requirement to sell any of its debt securities with unrealized losses before recovery of their amortized cost.


19




Note 3. Loans Receivable, Net

The Company’s loan portfolio is comprised of three segments: residential real estate, commercial, and consumer and other loans. The loan segments are further disaggregated into the following classes: residential real estate, commercial real estate, other commercial, home equity and other consumer loans. The following table presents loans receivable for each portfolio class of loans:
 
At or for the Nine Months ended
 
At or for the Year ended
(Dollars in thousands)
September 30,
2018
 
December 31,
2017
Residential real estate loans
$
862,830

 
720,728

Commercial loans
 
 
 
Real estate
4,527,577

 
3,577,139

Other commercial
1,921,955

 
1,579,353

Total
6,449,532

 
5,156,492

Consumer and other loans
 
 
 
Home equity
528,404

 
457,918

Other consumer
282,479

 
242,686

Total
810,883

 
700,604

Loans receivable
8,123,245

 
6,577,824

Allowance for loan and lease losses
(132,535
)
 
(129,568
)
Loans receivable, net
$
7,990,710

 
6,448,256

Net deferred origination (fees) costs included in loans receivable
$
(4,876
)
 
(2,643
)
Net purchase accounting (discounts) premiums included in loans receivable
$
(26,601
)
 
(16,325
)
Weighted-average interest rate on loans (tax-equivalent)
4.94
%
 
4.81
%


20




The following tables summarize the activity in the ALLL by loan class:

 
Three Months ended September 30, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
131,564

 
10,903

 
71,245

 
38,664

 
6,092

 
4,660

Provision for loan losses
3,194

 
54

 
2,922

 
(257
)
 
(165
)
 
640

Charge-offs
(4,294
)
 
(210
)
 
(909
)
 
(897
)
 
(82
)
 
(2,196
)
Recoveries
2,071

 
7

 
308

 
447

 
83

 
1,226

Balance at end of period
$
132,535

 
10,754

 
73,566

 
37,957

 
5,928

 
4,330

 
 
Three Months ended September 30, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
129,877

 
11,522

 
68,503

 
36,984

 
7,662

 
5,206

Provision for loan losses
3,327

 
(10
)
 
2,214

 
696

 
(682
)
 
1,109

Charge-offs
(5,983
)
 
(44
)
 
(3,227
)
 
(374
)
 
(15
)
 
(2,323
)
Recoveries
2,355

 
12

 
735

 
514

 
16

 
1,078

Balance at end of period
$
129,576

 
11,480

 
68,225

 
37,820

 
6,981

 
5,070


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

 
10,798

 
68,515

 
39,303

 
6,204

 
4,748

Provision for loan losses
8,707

 
135

 
5,941

 
415

 
(359
)
 
2,575

Charge-offs
(11,905
)
 
(257
)
 
(2,132
)
 
(3,325
)
 
(101
)
 
(6,090
)
Recoveries
6,165

 
78

 
1,242

 
1,564

 
184

 
3,097

Balance at end of period
$
132,535

 
10,754

 
73,566

 
37,957

 
5,928

 
4,330

 
 
Nine Months ended September 30, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
129,572

 
12,436

 
65,773

 
37,823

 
7,572

 
5,968

Provision for loan losses
7,938

 
(946
)
 
6,403

 
551

 
(324
)
 
2,254

Charge-offs
(14,801
)
 
(87
)
 
(5,261
)
 
(1,855
)
 
(458
)
 
(7,140
)
Recoveries
6,867

 
77

 
1,310

 
1,301

 
191

 
3,988

Balance at end of period
$
129,576

 
11,480

 
68,225

 
37,820

 
6,981

 
5,070


21




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

 
September 30, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
123,576

 
14,007

 
81,170

 
21,973

 
3,569

 
2,857

Collectively evaluated for impairment
7,999,669

 
848,823

 
4,446,407

 
1,899,982

 
524,835

 
279,622

Total loans receivable
$
8,123,245

 
862,830

 
4,527,577

 
1,921,955

 
528,404

 
282,479

ALLL

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,690

 
83

 
650

 
687

 
5

 
265

Collectively evaluated for impairment
130,845

 
10,671

 
72,916

 
37,270

 
5,923

 
4,065

Total ALLL
$
132,535

 
10,754

 
73,566

 
37,957

 
5,928

 
4,330

 
 
December 31, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
119,994

 
12,399

 
77,536

 
23,032

 
3,755

 
3,272

Collectively evaluated for impairment
6,457,830

 
708,329

 
3,499,603

 
1,556,321

 
454,163

 
239,414

Total loans receivable
$
6,577,824

 
720,728

 
3,577,139

 
1,579,353

 
457,918

 
242,686

ALLL
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,223

 
246

 
500

 
3,851

 
56

 
570

Collectively evaluated for impairment
124,345

 
10,552

 
68,015

 
35,452

 
6,148

 
4,178

Total ALLL
$
129,568

 
10,798

 
68,515

 
39,303

 
6,204

 
4,748


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


22




The following tables disclose information related to impaired loans by loan class:
 
 
At or for the Three or Nine Months ended September 30, 2018
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
20,021

 
2,367

 
9,843

 
6,878

 
38

 
895

Unpaid principal balance
20,327

 
2,442

 
10,043

 
6,878

 
38

 
926

Specific valuation allowance
1,690

 
83

 
650

 
687

 
5

 
265

Average balance - three months
18,267

 
2,434

 
10,005

 
4,775

 
19

 
1,034

Average balance - nine months
19,599

 
2,868

 
8,286

 
7,034

 
72

 
1,339

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
103,555

 
11,640

 
71,327

 
15,095

 
3,531

 
1,962

Unpaid principal balance
125,552

 
12,845

 
88,290

 
18,245

 
4,110

 
2,062

Average balance - three months
113,734

 
10,783

 
76,027

 
21,604

 
3,560

 
1,760

Average balance - nine months
111,037

 
10,154

 
77,489

 
18,293

 
3,488

 
1,613

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
123,576

 
14,007

 
81,170

 
21,973

 
3,569

 
2,857

Unpaid principal balance
145,879

 
15,287

 
98,333

 
25,123

 
4,148

 
2,988

Specific valuation allowance
1,690

 
83

 
650

 
687

 
5

 
265

Average balance - three months
132,001

 
13,217

 
86,032

 
26,379

 
3,579

 
2,794

Average balance - nine months
130,636

 
13,022

 
85,775

 
25,327

 
3,560

 
2,952

 
 
At or for the Year ended December 31, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
17,689

 
2,978

 
4,545

 
8,183

 
186

 
1,797

Unpaid principal balance
18,400

 
3,046

 
4,573

 
8,378

 
199

 
2,204

Specific valuation allowance
5,223

 
246

 
500

 
3,851

 
56

 
570

Average balance
18,986

 
2,928

 
5,851

 
8,477

 
359

 
1,371

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
102,305

 
9,421

 
72,991

 
14,849

 
3,569

 
1,475

Unpaid principal balance
122,833

 
10,380

 
89,839

 
16,931

 
4,098

 
1,585

Average balance
107,945

 
9,834

 
76,427

 
15,129

 
4,734

 
1,821

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
119,994

 
12,399

 
77,536

 
23,032

 
3,755

 
3,272

Unpaid principal balance
141,233

 
13,426

 
94,412

 
25,309

 
4,297

 
3,789

Specific valuation allowance
5,223

 
246

 
500

 
3,851

 
56

 
570

Average balance
126,931