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

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________             
Commission file number 000-18911
____________________________________________________________
GLACIER BANCORP INC
(Exact name of registrant as specified in its charter)
 ____________________________________________________________
Montana
81-0519541
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
49 Commons Loop
Kalispell,
Montana
59901
(Address of principal executive offices)
(Zip Code)
 
 
(406)
756-4200
(Registrant’s telephone number, including area code)
 ____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
GBCI
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes    No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No
The number of shares of Registrant’s common stock outstanding on July 17, 2019 was 86,637,394. 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
ASU – Accounting Standards Update
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
Company – Glacier Bancorp, Inc.
DDA – demand deposit account
Fannie Mae – Federal National Mortgage Association
FASB – Financial Accounting Standards Board
FDIC – Federal Deposit Insurance Corporation
FHLB – Federal Home Loan Bank
Final Rules – final rules implemented by the federal banking agencies that established a new comprehensive regulatory capital framework
FNB – FNB Bancorp and its subsidiary, The First National Bank of Layton
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
GAAP – accounting principles generally accepted in the United States of America
Ginnie Mae – Government National Mortgage Association
Heritage  Heritage Bancorp and its subsidiary, Heritage Bank of Nevada
Interest rate locks - residential real estate derivatives for commitments
LIBOR – London Interbank Offered Rate
LIHTC – Low Income Housing Tax Credit
NMTC – New Markets Tax Credit
NOW – negotiable order of withdrawal
NRSRO – Nationally Recognized Statistical Rating Organizations
OCI – other comprehensive income
OREO – other real estate owned
Repurchase agreements – securities sold under agreements to repurchase
ROU - right-of-use
S&P – Standard and Poor’s
SEC – United States Securities and Exchange Commission
TBA – to-be-announced
TDR – troubled debt restructuring
VIE – variable interest entity
 
 








GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Dollars in thousands, except per share data)
June 30,
2019
 
December 31,
2018
Assets
 
 
 
Cash on hand and in banks
$
181,526

 
161,782

Interest bearing cash deposits
49,683

 
42,008

Cash and cash equivalents
231,209

 
203,790

Debt securities, available-for-sale
2,470,634

 
2,571,663

Debt securities, held-to-maturity
252,097

 
297,915

Total debt securities
2,722,731

 
2,869,578

Loans held for sale, at fair value
54,711

 
33,156

Loans receivable
8,841,777

 
8,287,549

Allowance for loan and lease losses
(129,054
)
 
(131,239
)
Loans receivable, net
8,712,723

 
8,156,310

Premises and equipment, net
296,915

 
241,528

Other real estate owned
7,281

 
7,480

Accrued interest receivable
58,567

 
54,408

Deferred tax asset
3,371

 
23,564

Core deposit intangible, net
54,646

 
49,242

Goodwill
330,887

 
289,586

Non-marketable equity securities
23,031

 
27,871

Bank-owned life insurance
93,543

 
82,320

Other assets
86,746

 
76,651

Total assets
$
12,676,361

 
12,115,484

Liabilities
 
 
 
Non-interest bearing deposits
$
3,265,077

 
3,001,178

Interest bearing deposits
6,589,798

 
6,492,589

Securities sold under agreements to repurchase
494,651

 
396,151

Federal Home Loan Bank advances
319,996

 
440,175

Other borrowed funds
14,765

 
14,708

Subordinated debentures
139,912

 
134,051

Accrued interest payable
5,091

 
4,252

Other liabilities
159,695

 
116,526

Total liabilities
10,988,985

 
10,599,630

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
866

 
845

Paid-in capital
1,139,289

 
1,051,253

Retained earnings - substantially restricted
503,773

 
473,183

Accumulated other comprehensive income (loss)
43,448

 
(9,427
)
Total stockholders’ equity
1,687,376

 
1,515,854

Total liabilities and stockholders’ equity
$
12,676,361

 
12,115,484

Number of common stock shares issued and outstanding
86,637,394

 
84,521,692



See accompanying notes to unaudited condensed consolidated financial statements.

4




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months ended
 
Six Months ended
(Dollars in thousands, except per share data)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Interest Income
 
 
 
 
 
 
 
Investment securities
$
21,892

 
22,370

 
43,243

 
42,512

Residential real estate loans
11,410

 
10,149

 
22,189

 
18,934

Commercial loans
88,043

 
75,824

 
171,582

 
141,339

Consumer and other loans
11,040

 
9,372

 
21,487

 
17,996

Total interest income
132,385

 
117,715

 
258,501

 
220,781

Interest Expense
 
 
 
 
 
 
 
Deposits
5,624

 
4,617

 
10,965

 
8,533

Securities sold under agreements to repurchase
886

 
486

 
1,688

 
971

Federal Home Loan Bank advances
3,847

 
2,513

 
6,902

 
4,602

Other borrowed funds
38

 
26

 
76

 
42

Subordinated debentures
1,694

 
1,519

 
3,362

 
2,787

Total interest expense
12,089

 
9,161

 
22,993

 
16,935

Net Interest Income
120,296

 
108,554

 
235,508

 
203,846

Provision for loan losses

 
4,718

 
57

 
5,513

Net interest income after provision for loan losses
120,296

 
103,836

 
235,451

 
198,333

Non-Interest Income
 
 
 
 
 
 
 
Service charges and other fees
20,025

 
18,804

 
38,040

 
35,675

Miscellaneous loan fees and charges
1,192

 
2,243

 
2,159

 
3,720

Gain on sale of loans
7,762

 
8,142

 
13,560

 
14,239

Gain (loss) on sale of debt securities
134

 
(56
)
 
347

 
(389
)
Other income
1,721

 
2,695

 
5,202

 
4,669

Total non-interest income
30,834

 
31,828

 
59,308

 
57,914

Non-Interest Expense
 
 
 
 
 
 
 
Compensation and employee benefits
51,973

 
49,023

 
104,701

 
94,744

Occupancy and equipment
8,180

 
7,662

 
16,617

 
14,936

Advertising and promotions
2,767

 
2,530

 
5,155

 
4,700

Data processing
4,062

 
4,241

 
7,954

 
8,208

Other real estate owned
191

 
211

 
330

 
283

Regulatory assessments and insurance
1,848

 
1,329

 
3,133

 
2,535

Core deposit intangibles amortization
1,865

 
1,748

 
3,559

 
2,804

Other expenses
15,284

 
15,051

 
27,551

 
27,212

Total non-interest expense
86,170

 
81,795

 
169,000

 
155,422

Income Before Income Taxes
64,960

 
53,869

 
125,759

 
100,825

Federal and state income tax expense
12,568

 
9,485

 
24,235

 
17,882

Net Income
$
52,392

 
44,384

 
101,524

 
82,943

Basic earnings per share
$
0.61

 
0.53

 
1.19

 
1.00

Diluted earnings per share
$
0.61

 
0.52

 
1.19

 
1.00

Dividends declared per share
$
0.27

 
0.26

 
0.53

 
0.49

Average outstanding shares - basic
85,826,290

 
84,514,257

 
85,191,658

 
82,671,816

Average outstanding shares - diluted
85,858,286

 
84,559,268

 
85,241,238

 
82,734,407


See accompanying notes to unaudited condensed consolidated financial statements.

5




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months ended
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
 
June 30,
2019
 
June 30,
2018
Net Income
$
52,392

 
44,384

 
101,524

 
82,943

Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities
29,877

 
(6,696
)
 
76,329

 
(32,407
)
Reclassification adjustment for (gains) losses included in net income
(134
)
 
64

 
(355
)
 
346

Net unrealized gains (losses) on available-for-sale securities
29,743

 
(6,632
)
 
75,974

 
(32,061
)
Tax effect
(7,537
)
 
1,681

 
(19,252
)
 
8,125

Net of tax amount
22,206

 
(4,951
)
 
56,722

 
(23,936
)
Unrealized (losses) gains on derivatives used for cash flow hedges
(3,820
)
 
1,689

 
(5,654
)
 
6,068

Reclassification adjustment for losses included in net income
278

 
577

 
501

 
1,477

Net unrealized (losses) gains on derivatives used for cash flow hedges
(3,542
)
 
2,266

 
(5,153
)
 
7,545

Tax effect
897

 
(574
)
 
1,306

 
(1,912
)
Net of tax amount
(2,645
)
 
1,692

 
(3,847
)
 
5,633

Total other comprehensive income (loss), net of tax
19,561

 
(3,259
)
 
52,875

 
(18,303
)
Total Comprehensive Income
$
71,953

 
41,125

 
154,399

 
64,640

























See accompanying notes to unaudited condensed consolidated financial statements.

6




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months ended June 30, 2019 and 2018
 
(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 April 1, 2018
84,511,472

 
$
845

 
1,048,860

 
421,342

 
(17,023
)
 
1,454,024

Net income

 

 

 
44,384

 

 
44,384

Other comprehensive loss

 

 

 

 
(3,259
)
 
(3,259
)
Cash dividends declared ($0.26 per share)

 

 

 
(22,021
)
 

 
(22,021
)
Stock issuances under stock incentive plans
5,178

 

 

 

 

 

Stock-based compensation and related taxes

 

 
864

 

 

 
864

Balance at June 30, 2018
84,516,650

 
$
845

 
1,049,724

 
443,705

 
(20,282
)
 
1,473,992

Balance at April 1, 2019
84,588,199

 
$
846

 
1,051,299

 
474,818

 
23,887

 
1,550,850

Net income

 

 

 
52,392

 

 
52,392

Other comprehensive income

 

 

 

 
19,561

 
19,561

Cash dividends declared ($0.27 per share)

 

 

 
(23,437
)
 

 
(23,437
)
Stock issued in connection with acquisitions
2,046,341

 
20

 
87,133

 

 

 
87,153

Stock issuances under stock incentive plans
2,854

 

 

 

 

 

Stock-based compensation and related taxes

 

 
857

 

 

 
857

Balance at June 30, 2019
86,637,394

 
$
866

 
1,139,289

 
503,773

 
43,448

 
1,687,376













See accompanying notes to unaudited condensed consolidated financial statements.

7




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
Six Months Months ended June 30, 2019 and 2018
 
(Dollars in thousands, except per share data)
Common Stock
 
Paid-in Capital
 
Retained
Earnings
Substantially Restricted
 
Accumulated
Other Compre-
hensive (Loss) Income
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at January 1, 2018
78,006,956

 
$
780

 
797,997

 
402,259

 
(1,979
)
 
1,199,057

Net income

 

 

 
82,943

 

 
82,943

Other comprehensive loss

 

 

 

 
(18,303
)
 
(18,303
)
Cash dividends declared ($0.49 per share)

 

 

 
(41,497
)
 

 
(41,497
)
Stock issued in connection with acquisitions
6,432,868

 
64

 
250,743

 

 

 
250,807

Stock issuances under stock incentive plans
76,826

 
1

 
(1
)
 

 

 

Stock-based compensation and related taxes

 

 
985

 

 

 
985

Balance at June 30, 2018
84,516,650

 
$
845

 
1,049,724

 
443,705

 
(20,282
)
 
1,473,992

Balance at January 1, 2019
84,521,692

 
$
845

 
1,051,253

 
473,183

 
(9,427
)
 
1,515,854

Net income

 

 

 
101,524

 

 
101,524

Other comprehensive income

 

 

 

 
52,875

 
52,875

Cash dividends declared ($0.53 per share)

 

 

 
(45,476
)
 

 
(45,476
)
Stock issued in connection with acquisitions
2,046,341

 
20

 
87,133

 

 

 
87,153

Stock issuances under stock incentive plans
69,361

 
1

 
(1
)
 

 

 

Stock-based compensation and related taxes

 

 
904

 

 

 
904

Cumulative-effect of accounting changes

 

 

 
(25,458
)
 

 
(25,458
)
Balance at June 30, 2019
86,637,394

 
$
866

 
1,139,289

 
503,773

 
43,448

 
1,687,376















See accompanying notes to unaudited condensed consolidated financial statements.

8




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
Operating Activities
 
 
 
Net income
$
101,524

 
82,943

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
57

 
5,513

Net amortization of debt securities
8,707

 
6,835

Net accretion of purchase accounting adjustments
(2,187
)
 
(1,425
)
Amortization of debt modification costs
825

 
825

Origination of loans held for sale
(353,921
)
 
(415,553
)
Proceeds from loans held for sale
346,144

 
425,484

Gain on sale of loans
(13,560
)
 
(14,239
)
(Gain) loss on sale of debt securities
(347
)
 
389

Bank-owned life insurance income, net
(1,021
)
 
(1,310
)
Stock-based compensation, net of tax benefits
1,850

 
1,868

Depreciation and amortization of premises and equipment
9,011

 
7,544

Gain on sale and write-downs of other real estate owned, net
(334
)
 
(81
)
Amortization of core deposit intangibles
3,559

 
2,804

Amortization of investments in variable interest entities
3,885

 
2,911

Net increase in accrued interest receivable
(3,213
)
 
(4,306
)
Net (increase) decrease in other assets
(6,520
)
 
1,048

Net increase in accrued interest payable
749

 
57

Net decrease in other liabilities
(9,518
)
 
(2,070
)
Net cash provided by operating activities
85,690

 
99,237

Investing Activities
 
 
 
Sales of available-for-sale debt securities
415,093

 
219,855

Maturities, prepayments and calls of available-for-sale debt securities
247,854

 
156,482

Purchases of available-for-sale debt securities
(457,915
)
 
(499,552
)
Maturities, prepayments and calls of held-to-maturity debt securities
32,575

 
26,767

Principal collected on loans
1,364,270

 
1,269,145

Loan originations
(1,675,181
)
 
(1,681,348
)
Net additions to premises and equipment
(11,882
)
 
(11,297
)
Proceeds from sale of other real estate owned
2,440

 
1,693

Proceeds from redemption of non-marketable equity securities
76,948

 
41,393

Purchases of non-marketable equity securities
(71,198
)
 
(40,385
)
Proceeds from bank-owned life insurance

 
299

Investments in variable interest entities
(6,451
)
 
(23,072
)
Net cash received from acquisitions
11,307

 
101,268

Net cash used in investing activities
(72,140
)
 
(438,752
)




See accompanying notes to unaudited condensed consolidated financial statements.

9




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
Six Months ended
(Dollars in thousands)
June 30,
2019
 
June 30,
2018
Financing Activities
 
 
 
Net increase in deposits
$
86,429

 
528,881

Net increase (decrease) in securities sold under agreements to repurchase
97,091

 
(30,238
)
Net (decrease) increase in short-term Federal Home Loan Bank advances
(120,000
)
 
40,000

Repayments of long-term Federal Home Loan Bank advances
(987
)
 
(528
)
Net increase (decrease) in other borrowed funds
54

 
(9,850
)
Cash dividends paid
(47,560
)
 
(19,551
)
Tax withholding payments for stock-based compensation
(1,158
)
 
(1,071
)
Net cash provided by financing activities
13,869

 
507,643

Net increase in cash, cash equivalents and restricted cash
27,419

 
168,128

Cash, cash equivalents and restricted cash at beginning of period
203,790

 
200,004

Cash, cash equivalents and restricted cash at end of period
$
231,209

 
368,132

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
22,244

 
16,878

Cash paid during the period for income taxes
21,680

 
12,403

Supplemental Disclosure of Non-Cash Investing and Financing Activities
 
 
 
Sale and refinancing of other real estate owned
$
7

 
372

Transfer of loans to other real estate owned
1,914

 
1,144

Right-of-use assets obtained in exchange for operating lease liabilities
3,862

 

Dividends declared but not paid
23,482

 
22,211

Acquisitions
 
 
 
Fair value of common stock shares issued
87,153

 
250,807

Cash consideration
4

 
16,265

Effective settlement of a pre-existing receivable

 
10,054

Fair value of assets acquired
379,155

 
1,549,158

Liabilities assumed
291,998

 
1,383,756

















See accompanying notes to unaudited condensed consolidated financial statements.

10




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

General
Glacier Bancorp, Inc. (“Company”) is a Montana corporation headquartered in Kalispell, Montana. The Company provides a full range of banking services to individuals and businesses in Montana, Idaho, Utah, Washington, Wyoming, Colorado 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 reflect all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. These interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and they should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Operating results for the six months ended June 30, 2019 are not necessarily indicative of the results anticipated for the year ending December 31, 2019. The condensed consolidated statement of financial condition of the Company as of December 31, 2018 has been derived from the audited consolidated statements of the Company as of that date.

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

Material estimates that are particularly susceptible to significant change include: 1) the determination of the allowance for 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 fifteen 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.

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.


11




On April 30, 2019, the Company completed its acquisition of FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). The business combination was accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date. For additional information relating to recent mergers and acquisitions, see Note 13.

On July 31, 2019, the Company completed its acquisition of Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank of Nevada, a community bank based in Reno, Nevada (collectively, “Heritage”). For additional information relating to this subsequent event, see Note 14.

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.


12




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.

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.


13




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.


14




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.

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

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

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


15




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 $38,943,000 and $36,553,000 for the six months ended June 30, 2019 and 2018, 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 June 30, 2019 and December 31, 2018 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 2019
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 Updates (“ASU”) that may have had a material effect on the Company’s financial position or results of operations.

ASU 2017-08 - 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 required the premium to be amortized to the earliest call date instead of the maturity date. The amendments did not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018 and any adjustments were to be reflected as of the beginning of the year that includes the interim period. Entities were to apply the amendments on a modified retrospective basis; therefore, a cumulative-effect reduction to retained earnings of $24,102,000 was recognized as of the January 1, 2019 effective date. The Company’s debt securities that were effected by the amendments were primarily in the state and local governments category. The Company’s accounting policies and procedures were updated to reflect the amendments.

ASU 2016-02 - 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 were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018. The Company has lease agreements for which the amendments required the recognition of a lease liability to make lease payments and an ROU asset which represents its right to use the underlying asset for the lease term. An entity is permitted to elect not to restate its comparative periods in the period of adoption when transitioning to ASC Topic 842 and the Company made this election. In addition, the Company made the following elections related to implementation: 1) to not use hindsight in determining lease terms and in assessing impairment of ROU assets; and 2) to use the practical expedient package, which required no reassessment of whether existing contracts are or contain leases as well as no reassessment of lease classification for existing leases. At the date of adoption, the Company recognized an ROU asset and related lease liability on the Company’s statement of financial condition of $36,178,000 and $38,220,000, respectively. The Company developed new processes to comply with the accounting and disclosure requirements of such amendments and policies and procedures were updated accordingly.


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Accounting Guidance Pending Adoption at June 30, 2019
The following paragraphs provide descriptions of newly issued but not yet effective ASUs that could have a material effect on the Company’s financial position or results of operations.

ASU 2017-04 - Intangibles - Goodwill and Other. In January 2017, FASB amended ASC Topic 350 to simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments 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 5.

ASU 2016-13 - Financial Instruments - Credit Losses. In June 2016, FASB amended ASC Topic 326 to replace the incurred loss model with a methodology that reflects 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 proposed amendments are effective for public business entities, excluding smaller reporting companies, 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 has engaged a third-party vendor solution and is currently in the implementation phase and evaluating the appropriate models, loan pools and assumptions to be utilized. The project team is running parallel models to refine its processes and procedures. For additional information on the ALLL, see Note 3.


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Note 2. Debt Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s debt securities:
 
June 30, 2019
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
19,603

 
25

 
(141
)
 
19,487

U.S. government sponsored enterprises
117,911

 
2,039

 

 
119,950

State and local governments
671,714

 
28,506

 
(27
)
 
700,193

Corporate bonds
177,812

 
1,895

 
(23
)
 
179,684

Residential mortgage-backed securities
697,041

 
5,432

 
(1,684
)
 
700,789

Commercial mortgage-backed securities
719,436

 
31,294

 
(199
)
 
750,531

Total available-for-sale
2,403,517

 
69,191

 
(2,074
)
 
2,470,634

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
252,097

 
8,597

 

 
260,694

Total held-to-maturity
252,097

 
8,597

 

 
260,694

Total debt securities
$
2,655,614

 
77,788

 
(2,074
)
 
2,731,328


 
December 31, 2018