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GLACIER BANCORP, INC. - Quarter Report: 2017 March (Form 10-Q)




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

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
 
¨ 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.    ý  Yes    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    ý  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
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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    ý  No
The number of shares of Registrant’s common stock outstanding on April 17, 2017 was 76,619,952. 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
Basel III – third installment of the Basel Accords
Board – Glacier Bancorp, Inc.’s Board of Directors
CCP – Core Consolidation Project
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
Dodd-Frank Act – Dodd-Frank Wall Street Reform and Consumer Protection Act
Fannie Mae – Federal National Mortgage Association
FASB – Financial Accounting Standards Board
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
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
TDR – troubled debt restructuring
TSB – Treasure State Bank
VIE – variable interest entity
 
 
 
 
 
 








GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Dollars in thousands, except per share data)
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Cash on hand and in banks
$
124,501

 
135,268

Federal funds sold
190

 

Interest bearing cash deposits
109,313

 
17,273

Cash and cash equivalents
234,004

 
152,541

Investment securities, available-for-sale
2,314,521

 
2,425,477

Investment securities, held-to-maturity
667,388

 
675,674

Total investment securities
2,981,909

 
3,101,151

Loans held for sale
25,649

 
72,927

Loans receivable
5,876,974

 
5,684,463

Allowance for loan and lease losses
(129,226
)
 
(129,572
)
Loans receivable, net
5,747,748

 
5,554,891

Premises and equipment, net
175,283

 
176,198

Other real estate owned
17,771

 
20,954

Accrued interest receivable
48,043

 
45,832

Deferred tax asset
64,575

 
67,121

Core deposit intangible, net
11,746

 
12,347

Goodwill
147,053

 
147,053

Non-marketable equity securities
23,944

 
25,550

Other assets
76,183

 
74,035

Total assets
$
9,553,908

 
9,450,600

Liabilities
 
 
 
Non-interest bearing deposits
$
2,049,476

 
2,041,852

Interest bearing deposits
5,430,681

 
5,330,427

Securities sold under agreements to repurchase
497,187

 
473,650

Federal Home Loan Bank advances
211,627

 
251,749

Other borrowed funds
8,894

 
4,440

Subordinated debentures
126,027

 
125,991

Accrued interest payable
3,467

 
3,584

Other liabilities
91,309

 
102,038

Total liabilities
8,418,668

 
8,333,731

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
766

 
765

Paid-in capital
749,381

 
749,107

Retained earnings - substantially restricted
389,505

 
374,379

Accumulated other comprehensive loss
(4,412
)
 
(7,382
)
Total stockholders’ equity
1,135,240

 
1,116,869

Total liabilities and stockholders’ equity
$
9,553,908

 
9,450,600

Number of common stock shares issued and outstanding
76,619,952

 
76,525,402


See accompanying notes to unaudited condensed consolidated financial statements.

4




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months ended
(Dollars in thousands, except per share data)
March 31,
2017
 
March 31,
2016
Interest Income
 
 
 
Investment securities
$
21,939

 
23,883

Residential real estate loans
7,918

 
8,285

Commercial loans
49,970

 
44,503

Consumer and other loans
7,801

 
7,710

Total interest income
87,628

 
84,381

Interest Expense
 
 
 
Deposits
4,440

 
4,795

Securities sold under agreements to repurchase
382

 
318

Federal Home Loan Bank advances
1,510

 
1,652

Other borrowed funds
15

 
18

Subordinated debentures
1,019

 
892

Total interest expense
7,366

 
7,675

Net Interest Income
80,262

 
76,706

Provision for loan losses
1,598

 
568

Net interest income after provision for loan losses
78,664

 
76,138

Non-Interest Income
 
 
 
Service charges and other fees
15,633

 
14,681

Miscellaneous loan fees and charges
980

 
1,021

Gain on sale of loans
6,358

 
5,992

(Loss) gain on sale of investments
(100
)
 
108

Other income
2,818

 
2,450

Total non-interest income
25,689

 
24,252

Non-Interest Expense
 
 
 
Compensation and employee benefits
39,246

 
36,941

Occupancy and equipment
6,646

 
6,676

Advertising and promotions
1,973

 
2,125

Data processing
3,124

 
3,373

Other real estate owned
273

 
390

Regulatory assessments and insurance
1,061

 
1,508

Core deposit intangibles amortization
601

 
797

Other expenses
10,420

 
10,546

Total non-interest expense
63,344

 
62,356

Income Before Income Taxes
41,009

 
38,034

Federal and state income tax expense
9,754

 
9,352

Net Income
$
31,255

 
28,682

Basic earnings per share
$
0.41

 
0.38

Diluted earnings per share
$
0.41

 
0.38

Dividends declared per share
$
0.21

 
0.20

Average outstanding shares - basic
76,572,116

 
76,126,251

Average outstanding shares - diluted
76,633,283

 
76,173,417



See accompanying notes to unaudited condensed consolidated financial statements.

5




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Net Income
$
31,255

 
28,682

Other Comprehensive Income, Net of Tax
 
 
 
Unrealized gains on available-for-sale securities
3,113

 
13,598

Reclassification adjustment for losses (gains) included in net income
139

 
(61
)
Net unrealized gains on available-for-sale securities
3,252

 
13,537

Tax effect
(1,260
)
 
(5,244
)
Net of tax amount
1,992

 
8,293

Unrealized gains (losses) on derivatives used for cash flow hedges
264

 
(9,928
)
Reclassification adjustment for losses included in net income
1,332

 
1,829

Net unrealized gains (losses) on derivatives used for cash flow hedges
1,596

 
(8,099
)
Tax effect
(618
)
 
3,138

Net of tax amount
978

 
(4,961
)
Total other comprehensive income, net of tax
2,970

 
3,332

Total Comprehensive Income
$
34,225

 
32,014






























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 March 31, 2017 and 2016
 
(Dollars in thousands, except per share data)
Common Stock
 
Paid-in Capital
 
Retained
Earnings
Substantially Restricted
 
Accumulated
Other Compre-
hensive Income (Loss)
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2015
76,086,288

 
$
761

 
736,368

 
337,532

 
1,989

 
1,076,650

Comprehensive income

 

 

 
28,682

 
3,332

 
32,014

Cash dividends declared ($0.20 per share)

 

 

 
(15,281
)
 

 
(15,281
)
Stock issuances under stock incentive plans
82,100

 
1

 
(1
)
 

 

 

Stock-based compensation and related taxes

 

 
297

 

 

 
297

Balance at March 31, 2016
76,168,388

 
$
762

 
736,664

 
350,933

 
5,321

 
1,093,680

Balance at December 31, 2016
76,525,402

 
$
765

 
749,107

 
374,379

 
(7,382
)
 
1,116,869

Comprehensive income

 

 

 
31,255

 
2,970

 
34,225

Cash dividends declared ($0.21 per share)

 

 

 
(16,129
)
 

 
(16,129
)
Stock issuances under stock incentive plans
94,550

 
1

 
(1
)
 

 

 

Stock-based compensation and related taxes

 

 
275

 

 

 
275

Balance at March 31, 2017
76,619,952

 
$
766

 
749,381

 
389,505

 
(4,412
)
 
1,135,240























See accompanying notes to unaudited condensed consolidated financial statements.

7




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Operating Activities
 
 
 
Net income
$
31,255

 
28,682

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,598

 
568

Net amortization of investment securities premiums and discounts
5,830

 
6,594

Net accretion of purchase accounting adjustments
(1,394
)
 
(1,774
)
Loans held for sale originated or acquired
(171,110
)
 
(179,471
)
Proceeds from sales of loans held for sale
231,318

 
202,605

Gain on sale of loans
(6,358
)
 
(5,992
)
Loss (gain) on sale of investments
100

 
(108
)
Bank-owned life insurance income, net
(315
)
 
(257
)
Stock-based compensation
1,722

 
828

Net tax benefits from stock-based compensation
(1,117
)
 
(253
)
Depreciation of premises and equipment
3,720

 
3,730

(Gain) loss on sale of other real estate owned and write-downs, net
(928
)
 
52

Amortization of core deposit intangibles
601

 
797

Amortization of investments in variable interest entities
730

 
255

Net increase in accrued interest receivable
(2,211
)
 
(2,839
)
Net decrease (increase) in other assets
1,093

 
(98
)
Net (decrease) increase in accrued interest payable
(117
)
 
91

Net (decrease) increase in other liabilities
(660
)
 
2,823

Net cash provided by operating activities
93,757

 
56,233

Investing Activities
 
 
 
Sales of available-for-sale securities

 
20,539

Maturities, prepayments and calls of available-for-sale securities
110,475

 
156,779

Purchases of available-for-sale securities
(1,701
)
 
(163,654
)
Maturities, prepayments and calls of held-to-maturity securities
7,790

 
11,155

Purchases of held-to-maturity securities

 
(1,223
)
Principal collected on loans
420,744

 
347,869

Loans originated or acquired
(620,407
)
 
(465,644
)
Net increase of premises and equipment and other real estate owned
(2,805
)
 
(2,726
)
Proceeds from sale of other real estate owned
4,156

 
4,457

Proceeds from sale of non-marketable equity securities
18,206

 
27,896

Purchases of non-marketable equity securities
(16,600
)
 
(24,599
)
Proceeds from bank-owned life insurance
437

 
294

Investments in variable interest entities
(3,865
)
 

Net cash used in investing activities
(83,570
)
 
(88,857
)




See accompanying notes to unaudited condensed consolidated financial statements.

8




GLACIER BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Financing Activities
 
 
 
Net increase in deposits
$
107,888

 
71,218

Net increase in securities sold under agreements to repurchase
23,537

 
22,546

Net decrease in short-term Federal Home Loan Bank advances
(40,000
)
 
(80,000
)
Repayments of long-term Federal Home Loan Bank advances
(114
)
 
(128
)
Net increase in other borrowed funds
4,454

 
31

Cash dividends paid
(23,042
)
 
(22,883
)
Tax withholding payments for stock-based compensation
(1,447
)
 
(552
)
Net cash provided by (used in) financing activities
71,276

 
(9,768
)
Net increase (decrease) in cash and cash equivalents
81,463

 
(42,392
)
Cash and cash equivalents at beginning of period
152,541

 
193,253

Cash and cash equivalents at end of period
$
234,004

 
150,861

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
7,483

 
7,584

Cash paid during the period for income taxes
70

 

Supplemental Disclosure of Non-Cash Investing Activities
 
 
 
Sale and refinancing of other real estate owned
$
345

 
474

Transfer of loans to other real estate owned
390

 
178

Dividends declared but not paid
16,224

 
15,281

























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, Wyoming, Colorado, Utah and Washington through its wholly-owned bank subsidiary, Glacier Bank (“Bank”). The Company offers a wide range of banking products and services, including transaction and savings deposits, real estate, commercial, agriculture and consumer loans and 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 March 31, 2017, the results of operations and comprehensive income for the three month periods ended March 31, 2017 and 2016, and changes in stockholders’ equity and cash flows for the three month periods ended March 31, 2017 and 2016. The condensed consolidated statement of financial condition of the Company as of December 31, 2016 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, 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results anticipated for the year ending December 31, 2017.

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 investment 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 thirteen bank divisions, a treasury division and an information technology division. The treasury division includes the Bank’s investment portfolio and wholesale borrowings and the information technology division includes the Bank’s internal data processing and information technology expenses. 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 (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 parent holding company also 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 non-marketable equity securities on the Company's statement of financial condition.

In August 2016, the Company completed its acquisition of Treasure State Bank (“TSB”), a community bank based in Missoula, Montana. The transaction was accounted for using the acquisition method, and its results of operations have been included in the Company’s consolidated financial statements as of the acquisition date.

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.

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.


12




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 years 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.

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.


13




The ALLL is increased by provisions for loan losses which are charged to expense. The portions of loan 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 real estate owned 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.

Reclassifications
Certain reclassifications have been made to the 2016 financial statements to conform to the 2017 presentation.

Impact of Recent Authoritative Accounting Guidance
The Accounting Standards Codification (“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 or newly issued but not yet effective accounting standards that could have a material effect on the Company’s financial position or results of operations.

In March 2017, FASB amended FASB ASC Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. The amendments in the Update 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 state and local governments category. The Company is currently evaluating the amount of the premium associated with debt securities that will be impacted by the amendments and whether it will early adopt. The accounting policies and procedures will be modified after the Company has fully evaluated the standard, although, significant changes are not expected.

In January 2017, FASB amended FASB ASC Topic 350, Simplifying the Test for Goodwill. The amendments in the Update 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 2016, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceed 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.


14




In June 2016, FASB amended FASB ASC Topic 326, Financial Instruments - Credit Losses. The amendments in this Update 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 investment securities. In addition, the current accounting policy and procedures for other-than-temporary impairment on available-for-sale investment securities will be replaced with an allowance approach. The Company is expecting to begin developing and implementing processes and procedures during the next two years to ensure it is fully compliant with the amendments at adoption date. For additional information on the allowance for loan losses, see Note 3.

In March 2016, FASB amended FASB ASC Topic 718, Compensation - Stock Compensation. The amendments in this Update address certain aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of awards on the statement of cash flows. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2016 and the Company adopted the amendments as of January 1, 2017. The amendments require entities to recognize all income tax effects related to share-based payment awards in the statement of operations when the awards vest or are settled. Previously, income tax benefits at the settlement of awards were reported as increases (or decreases) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits recognized in earnings during the awards’ vesting periods. Such amounts are to be classified as an operating activity in the statement of cash flows instead of the prior accounting treatment, which required it to be classified as both an operating and a financing activity. The Company has elected to apply this classification change on a retrospective basis. Also in connection with the adoption of the Update, the Company has elected to change its accounting policy to recognize forfeitures as they occur. The requirement to report income tax effects in earnings has been applied to the settlement of awards on a prospective basis and the impact of applying the guidance reduced reported income tax expense for the three month period ended March 31, 2017 by $537,000, or approximately $0.01 per diluted common share. The implementation of the remaining provisions of the Update did not have a significant impact on the Company’s consolidated financial statements.

In February 2016, FASB amended FASB ASC Topic 842, Leases. The amendments in this Update 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 several lease agreements for which the amendments will require the Company to recognize 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. As permitted by the amendments, the Company is anticipating electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The impact is not expected to have a material effect on the Company’s financial position or results of operations since the Company does not have a material amount of lease agreements. The Company is currently in the process of fully evaluating the amendments and will subsequently implement new processes which are not expected to significantly change since the Company already has processes for certain lease agreements that recognize the lease assets and lease liabilities. In addition, the Company will change its current accounting policies to comply with the amendments with such changes as mentioned above.


15




In January 2016, FASB amended FASB ASC Topic 825, Financial Instruments. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2017. Early adoption is only permitted under certain circumstances outlined in the amendments. A reporting entity should apply the amendments by means of a cumulative-effect adjustment to the Company’s statement of financial condition as of the beginning of the reporting year of adoption. The amendments will impact the Company in a few areas including requiring equity investments (with certain exclusions) to be measured at fair value with the changes recognized in net income, requirement to utilize an exit price when measuring the fair value of financial instruments, additional disclosures related to other comprehensive income, evaluation of a valuation allowance on a deferred tax asset related to available-for-sale investment securities in combination with the entity’s other deferred tax assets, and other disclosure changes. The Company is currently evaluating the impact of these amendments, but does not expect them to have a material material effect on the Company’s financial position or results of operations since it does not have a material amount of equity securities or a valuation allowance. However, the amendments will have an impact on certain items that are disclosed at fair value that are not currently utilizing the exit price notion when measuring fair value. As of March 31, 2017, the Company cannot quantify the change in the fair value of such disclosures since the Company is currently evaluating the full impact of the Update and is in the planning stages of developing appropriate procedures and processes to comply with the disclosure requirements of such amendments. The current accounting policies and procedures will be modified after the Company has fully evaluated the standard to comply with the accounting changes mentioned above.

In May 2014, FASB amended FASB ASC Topic 606, Revenue from Contracts with Customers. The amendments clarify the principals for recognizing revenue and develop a common revenue standard among industries. The new guidance establishes the following core principal: 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 are provided for a company or organization to follow to achieve such core principle. The new guidance also includes a cohesive set of disclosure requirements that will provide 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 entity should apply the amendments using one of two retrospective methods described in the amendment. Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606) delayed the effective date for public entities to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Several subsequent amendments have been issued that provide clarifying guidance and are effective with the adoption of the original Update. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is in its preliminary stages of evaluating the impact of these amendments, although it doesn’t expect the amendments to have a significant impact to the Company’s financial position or results of operation. The amendments could potentially impact the accounting procedures and processes over the recognition of certain revenue sources, including, but not limited to, non-interest income. The Company is expecting to begin developing processes and procedures during 2017 to ensure it is fully compliant with these amendments at the date of adoption.


16




Note 2. Investment Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s investment securities:
 
March 31, 2017
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
37,598

 
26

 
(208
)
 
37,416

U.S. government sponsored enterprises
19,551

 
31

 
(46
)
 
19,536

State and local governments
750,443

 
21,463

 
(9,739
)
 
762,167

Corporate bonds
443,012

 
1,274

 
(585
)
 
443,701

Residential mortgage-backed securities
954,072

 
2,959

 
(7,940
)
 
949,091

Commercial mortgage-backed securities
103,918

 
26

 
(1,334
)
 
102,610

Total available-for-sale
2,308,594

 
25,779

 
(19,852
)
 
2,314,521

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
667,388

 
21,125

 
(8,118
)
 
680,395

Total held-to-maturity
667,388

 
21,125

 
(8,118
)
 
680,395

Total investment securities
$
2,975,982

 
46,904

 
(27,970
)
 
2,994,916


 
December 31, 2016
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in thousands)
 
Gains
 
Losses
 
Available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
39,554

 
15

 
(162
)
 
39,407

U.S. government sponsored enterprises
19,557

 
55

 
(42
)
 
19,570

State and local governments
775,395

 
20,941

 
(9,963
)
 
786,373

Corporate bonds
471,569

 
1,175

 
(793
)
 
471,951

Residential mortgage-backed securities
1,014,518

 
2,744

 
(9,747
)
 
1,007,515

Commercial mortgage-backed securities
102,209

 
30

 
(1,578
)
 
100,661

Total available-for-sale
2,422,802

 
24,960

 
(22,285
)
 
2,425,477

Held-to-maturity
 
 
 
 
 
 
 
State and local governments
675,674

 
21,400

 
(7,985
)
 
689,089

Total held-to-maturity
675,674

 
21,400

 
(7,985
)
 
689,089

Total investment securities
$
3,098,476

 
46,360

 
(30,270
)
 
3,114,566



17




The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity securities by contractual maturity at March 31, 2017. Actual maturities may differ from expected or contractual maturities since issuers have the right to prepay obligations with or without prepayment penalties.

 
March 31, 2017
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due within one year
$
146,875

 
147,136

 

 

Due after one year through five years
393,309

 
394,219

 
593

 
605

Due after five years through ten years
204,217

 
207,961

 
57,405

 
58,611

Due after ten years
506,203

 
513,504

 
609,390

 
621,179

 
1,250,604

 
1,262,820

 
667,388

 
680,395

Mortgage-backed securities 1
1,057,990

 
1,051,701

 

 

Total
$
2,308,594

 
2,314,521

 
667,388

 
680,395

__________
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 investment securities and the associated gains and losses that have been included in earnings are listed below:
 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Available-for-sale
 
 
 
Proceeds from sales and calls of investment securities
$
8,491

 
58,623

Gross realized gains 1
10

 
800

Gross realized losses 1
(149
)
 
(739
)
Held-to-maturity
 
 
 
Proceeds from calls of investment securities
7,790

 
11,155

Gross realized gains 1
81

 
47

Gross realized losses 1
(42
)
 

__________
1 The gain or loss on the sale or call of each investment security is determined by the specific identification method.



18




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

 
March 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
$
4,527

 
(42
)
 
22,972

 
(166
)
 
27,499

 
(208
)
U.S. government sponsored enterprises
6,048

 
(46
)
 

 

 
6,048

 
(46
)
State and local governments
208,261

 
(4,716
)
 
78,082

 
(5,023
)
 
286,343

 
(9,739
)
Corporate bonds
142,028

 
(575
)
 
6,128

 
(10
)
 
148,156

 
(585
)
Residential mortgage-backed securities
636,458

 
(7,670
)
 
27,561

 
(270
)
 
664,019

 
(7,940
)
Commercial mortgage-backed securities
100,570

 
(1,334
)
 

 

 
100,570

 
(1,334
)
Total available-for-sale
$
1,097,892

 
(14,383
)
 
134,743

 
(5,469
)
 
1,232,635

 
(19,852
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
105,671

 
(1,644
)
 
85,782

 
(6,474
)
 
191,453

 
(8,118
)
Total held-to-maturity
$
105,671

 
(1,644
)
 
85,782

 
(6,474
)
 
191,453

 
(8,118
)
 
 
December 31, 2016
 
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
$
6,718

 
(24
)
 
26,239

 
(138
)
 
32,957

 
(162
)
U.S. government sponsored enterprises
6,049

 
(42
)
 

 

 
6,049

 
(42
)
State and local governments
222,700

 
(4,949
)
 
81,783

 
(5,014
)
 
304,483

 
(9,963
)
Corporate bonds
174,821

 
(774
)
 
6,141

 
(19
)
 
180,962

 
(793
)
Residential mortgage-backed securities
688,811

 
(9,079
)
 
29,957

 
(668
)
 
718,768

 
(9,747
)
Commercial mortgage-backed securities
89,298

 
(1,578
)
 

 

 
89,298

 
(1,578
)
Total available-for-sale
$
1,188,397

 
(16,446
)
 
144,120

 
(5,839
)
 
1,332,517

 
(22,285
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
117,912

 
(1,712
)
 
86,601

 
(6,273
)
 
204,513

 
(7,985
)
Total held-to-maturity
$
117,912

 
(1,712
)
 
86,601

 
(6,273
)
 
204,513

 
(7,985
)

Based on an analysis of its investment securities with unrealized losses as of March 31, 2017 and December 31, 2016, 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 investment securities is expected to recover as payments are received and the securities approach maturity. At March 31, 2017, management determined that it did not intend to sell investment securities with unrealized losses, and there was no expected requirement to sell any of its investment 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 Three Months ended
 
At or for the Year ended
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
Residential real estate loans
$
685,458

 
674,347

Commercial loans
 
 
 
Real estate
3,056,372

 
2,990,141

Other commercial
1,462,110

 
1,342,250

Total
4,518,482

 
4,332,391

Consumer and other loans
 
 
 
Home equity
433,554

 
434,774

Other consumer
239,480

 
242,951

Total
673,034

 
677,725

Loans receivable 1
5,876,974

 
5,684,463

Allowance for loan and lease losses
(129,226
)
 
(129,572
)
Loans receivable, net
$
5,747,748

 
5,554,891

Weighted-average interest rate on loans (tax-equivalent)
4.73
%
 
4.77
%
__________
1 
Includes net deferred fees, costs, premiums and discounts of $12,017,000 and $13,372,000 at March 31, 2017 and December 31, 2016, respectively.

The following tables summarize the activity in the ALLL by portfolio segment:
  
 
Three Months ended March 31, 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
1,598

 
(926
)
 
(370
)
 
1,621

 
129

 
1,144

Charge-offs
(4,229
)
 
(22
)
 
(888
)
 
(471
)
 
(96
)
 
(2,752
)
Recoveries
2,285

 
47

 
238

 
184

 
74

 
1,742

Balance at end of period
$
129,226

 
11,535

 
64,753

 
39,157

 
7,679

 
6,102

 
 
Three Months ended March 31, 2016
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Balance at beginning of period
$
129,697

 
14,427

 
67,877

 
32,525

 
8,998

 
5,870

Provision for loan losses
568

 
(1,149
)
 
(873
)
 
3,720

 
(793
)
 
(337
)
Charge-offs
(1,163
)
 
(100
)
 
(253
)
 
(324
)
 
(229
)
 
(257
)
Recoveries
969

 
18

 
295

 
133

 
173

 
350

Balance at end of period
$
130,071

 
13,196

 
67,046

 
36,054

 
8,149

 
5,626


20




The following tables disclose the balance in the ALLL and the recorded investment in loans by portfolio segment:

 
March 31, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
6,787

 
245

 
545

 
5,047

 
551

 
399

Collectively evaluated for impairment
122,439

 
11,290

 
64,208

 
34,110

 
7,128

 
5,703

Total allowance for loan and lease losses
$
129,226

 
11,535

 
64,753

 
39,157

 
7,679

 
6,102

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
135,086

 
13,048

 
85,452

 
27,050

 
6,449

 
3,087

Collectively evaluated for impairment
5,741,888

 
672,410

 
2,970,920

 
1,435,060

 
427,105

 
236,393

Total loans receivable
$
5,876,974

 
685,458

 
3,056,372

 
1,462,110

 
433,554

 
239,480

 
 
December 31, 2016
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Allowance for loan and lease losses
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
6,881

 
856

 
922

 
4,419

 
296

 
388

Collectively evaluated for impairment
122,691

 
11,580

 
64,851

 
33,404

 
7,276

 
5,580

Total allowance for loan and lease losses
$
129,572

 
12,436

 
65,773

 
37,823

 
7,572

 
5,968

Loans receivable
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
130,263

 
11,612

 
85,634

 
23,950

 
5,934

 
3,133

Collectively evaluated for impairment
5,554,200

 
662,735

 
2,904,507

 
1,318,300

 
428,840

 
239,818

Total loans receivable
$
5,684,463

 
674,347

 
2,990,141

 
1,342,250

 
434,774

 
242,951


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.


21




The following tables disclose information related to impaired loans by portfolio segment:

 
At or for the Three Months ended March 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
$
19,877

 
2,891

 
5,279

 
10,053

 
546

 
1,108

Unpaid principal balance
20,139

 
2,955

 
5,285

 
10,190

 
559

 
1,150

Specific valuation allowance
6,787

 
245

 
545

 
5,047

 
551

 
399

Average balance
21,003

 
2,825

 
7,204

 
9,434

 
440

 
1,100

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
115,209

 
10,157

 
80,173

 
16,997

 
5,903

 
1,979

Unpaid principal balance
138,436

 
11,224

 
98,480

 
19,350

 
7,323

 
2,059

Average balance
111,672

 
9,505

 
78,339

 
16,067

 
5,751

 
2,010

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
135,086

 
13,048

 
85,452

 
27,050

 
6,449

 
3,087

Unpaid principal balance
158,575

 
14,179

 
103,765

 
29,540

 
7,882

 
3,209

Specific valuation allowance
6,787

 
245

 
545

 
5,047

 
551

 
399

Average balance
132,675

 
12,330

 
85,543

 
25,501

 
6,191

 
3,110

 
 
At or for the Year ended December 31, 2016
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Loans with a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
22,128

 
2,759

 
9,129

 
8,814

 
334

 
1,092

Unpaid principal balance
22,374

 
2,825

 
9,130

 
8,929

 
345

 
1,145

Specific valuation allowance
6,881

 
856

 
922

 
4,419

 
296

 
388

Average balance
26,745

 
4,942

 
10,441

 
9,840

 
257

 
1,265

Loans without a specific valuation allowance
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
108,135

 
8,853

 
76,505

 
15,136

 
5,600

 
2,041

Unpaid principal balance
131,059

 
9,925

 
94,180

 
17,724

 
7,120

 
2,110

Average balance
108,827

 
12,858

 
72,323

 
15,537

 
6,004

 
2,105

Total
 
 
 
 
 
 
 
 
 
 
 
Recorded balance
$
130,263

 
11,612

 
85,634

 
23,950

 
5,934

 
3,133

Unpaid principal balance
153,433

 
12,750

 
103,310

 
26,653

 
7,465

 
3,255

Specific valuation allowance
6,881

 
856

 
922

 
4,419

 
296

 
388

Average balance
135,572

 
17,800

 
82,764

 
25,377

 
6,261

 
3,370


Interest income recognized on impaired loans for the three months ended March 31, 2017 and 2016 was not significant.


22




The following tables present an aging analysis of the recorded investment in loans by portfolio segment:
 
 
March 31, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
27,122

 
5,255

 
11,294

 
7,657

 
1,555

 
1,361

Accruing loans 60-89 days past due
12,038

 
431

 
8,100

 
2,259

 
641

 
607

Accruing loans 90 days or more past due
3,028

 

 
203

 
2,441

 
336

 
48

Non-accrual loans
50,674

 
5,949

 
30,277

 
8,301

 
5,619

 
528

Total past due and non-accrual loans
92,862

 
11,635

 
49,874

 
20,658

 
8,151

 
2,544

Current loans receivable
5,784,112

 
673,823

 
3,006,498

 
1,441,452

 
425,403

 
236,936

Total loans receivable
$
5,876,974

 
685,458

 
3,056,372

 
1,462,110

 
433,554

 
239,480

 
 
December 31, 2016
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
Accruing loans 30-59 days past due
$
20,599

 
6,338

 
5,079

 
5,388

 
2,439

 
1,355

Accruing loans 60-89 days past due
5,018

 
1,398

 
754

 
1,352

 
844

 
670

Accruing loans 90 days or more past due
1,099

 
266

 
145

 
283

 
191

 
214

Non-accrual loans
49,332

 
4,528

 
30,216

 
8,817

 
5,240

 
531

Total past due and non-accrual loans
76,048

 
12,530

 
36,194

 
15,840

 
8,714

 
2,770

Current loans receivable
5,608,415

 
661,817

 
2,953,947

 
1,326,410

 
426,060

 
240,181

Total loans receivable
$
5,684,463

 
674,347

 
2,990,141

 
1,342,250

 
434,774

 
242,951


The following tables present TDRs that occurred during the periods presented and the TDRs that occurred within the previous twelve months that subsequently defaulted during the periods presented:

 
Three Months ended March 31, 2017
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
TDRs that occurred during the period
 
 
 
 
 
 
 
 
 
 
 
Number of loans
10

 
2

 
2

 
4

 
1

 
1

Pre-modification recorded balance
$
9,555

 
280

 
582

 
8,530

 
153

 
10

Post-modification recorded balance
$
9,552

 
280

 
582

 
8,530

 
153

 
7

TDRs that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans
2

 

 

 
1

 

 
1

Recorded balance
$
25

 

 

 
18

 

 
7


23




 
Three Months ended March 31, 2016
(Dollars in thousands)
Total
 
Residential
Real Estate
 
Commercial
Real Estate
 
Other
Commercial
 
Home
Equity
 
Other
Consumer
TDRs that occurred during the period
 
 
 
 
 
 
 
 
 
 
 
Number of loans
3

 

 
1

 
1

 
1

 

Pre-modification recorded balance
$
8,959

 

 
56

 
8,755

 
148

 

Post-modification recorded balance
$
8,959

 

 
56

 
8,755

 
148

 

TDRs that subsequently defaulted
 
 
 
 
 
 
 
 
 
 
 
Number of loans

 

 

 

 

 

Recorded balance
$

 

 

 

 

 


The modifications for the TDRs that occurred during the three months ended March 31, 2017 and 2016 included one or a combination of the following: an extension of the maturity date, a reduction of the interest rate or a reduction in the principal amount.

In addition to the TDRs that occurred during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $514,000 and $210,000 for the three months ended March 31, 2017 and 2016, respectively, for which other real estate owned (“OREO”) was received in full or partial satisfaction of the loans. The majority of such TDRs were in commercial real estate and residential real estate for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017 and December 31, 2016, the Company had $2,532,000 and $1,770,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At March 31, 2017 and December 31, 2016, the Company had $2,354,000 and $2,699,000, respectively, of OREO secured by residential real estate properties.

Note 4. Goodwill

There were no changes in the carrying value of goodwill during the three months ended March 31, 2017 and 2016. The gross carrying value of goodwill and the accumulated impairment charge consists of the following:

(Dollars in thousands)
March 31,
2017
 
December 31,
2016
Gross carrying value
$
187,212

 
187,212

Accumulated impairment charge 1
(40,159
)
 
(40,159
)
Net carrying value
$
147,053

 
147,053

__________
1 A goodwill impairment charge was recognized in 2011 and was due to high levels of volatility and dislocation in bank stock prices nationwide.

The Company performed its annual goodwill impairment test during the third quarter of 2016 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. Changes in the economic environment, operations of the aggregated reporting units, or other factors could result in the decline in the fair value of the aggregated reporting units which could result in a goodwill impairment in the future.
 

24




Note 5. Variable Interest Entities

A VIE is a partnership, limited liability company, trust or other legal entity that meets one of the following criteria: 1) the entity’s equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; 2) the holders of the equity investment at risk, as a group, lack the characteristics of a controlling financial interest; and 3) the voting rights of some holders of the equity investment at risk are disproportionate to their obligation to absorb losses or receive returns, and substantially all of the activities are conducted on behalf of the holder of equity investment at risk with disproportionately few voting rights. A VIE must be consolidated by the Company if it is deemed to be the primary beneficiary, which is the party involved with the VIE that has both: 1) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance; and 2) the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company’s VIEs are regularly monitored to determine if any reconsideration events have occurred that could cause the primary beneficiary status to change. A previously unconsolidated VIE is consolidated when the Company becomes the primary beneficiary. A previously consolidated VIE is deconsolidated when the Company ceases to be the primary beneficiary or the entity is no longer a VIE.

Consolidated Variable Interest Entities
The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax Credits (“NMTC”). The NMTC program provides federal tax incentives to investors to make investments in distressed communities and promotes economic improvements through the development of successful businesses in these communities. The NMTC is available to investors over a seven-year period and is subject to recapture if certain events occur during such period. The maximum exposure to loss in the CDEs is the amount of equity invested and credit extended by the Company. However, the Company has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. The Company has evaluated the variable interests held by the Company in each CDE (NMTC) investment and determined the Company does not individually meet the characteristics of a primary beneficiary; however, the related-party group does meet the criteria as a group and substantially all of the activities of the CDEs either involve or are conducted on behalf of the Company. As a result, the Company is the primary beneficiary of the CDEs and their assets, liabilities, and results of operations are included in the Company’s consolidated financial statements. The primary activities of the CDEs are recognized in commercial loans interest income and other borrowed funds interest expense on the Company’s statements of operations and the federal income tax credit allocations from the investments are recognized in the Company’s statements of operations as a component of income tax expense. Such related cash flows are recognized in loans originated, principal collected on loans and change in other borrowed funds.

The following table summarizes the carrying amounts of the consolidated VIEs’ assets and liabilities included in the Company’s statements of financial condition and are adjusted for intercompany eliminations. All assets presented can be used only to settle obligations of the consolidated VIEs and all liabilities presented consist of liabilities for which creditors and other beneficial interest holders therein have no recourse to the general credit of the Company.
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Loans receivable
$
43,143

 
36,950

Accrued interest receivable
125

 
120

Other assets
2,095

 
1,984

Total assets
$
45,363

 
39,054

Liabilities
 
 
 
Other borrowed funds
$
8,577

 
4,105

Accrued interest payable
6

 
2

Other liabilities
22

 
27

Total liabilities
$
8,605

 
4,134



25




Unconsolidated Variable Interest Entities
The Company has equity investments in Low-Income Housing Tax Credit (“LIHTC”) partnerships with carrying values of $8,616,000 and $7,282,000 as of March 31, 2017 and December 31, 2016, respectively. The LIHTCs are indirect federal subsidies to finance low-income housing and are used in connection with both newly constructed and renovated residential rental buildings. Once a project is placed in service, it is generally eligible for the tax credit for ten consecutive years. To continue generating the tax credit and to avoid tax credit recapture, a LIHTC building must satisfy specific low-income housing compliance rules for a full fifteen-year period. The maximum exposure to loss in the VIEs is the amount of equity invested and credit extended by the Company. However, the Company has credit protection in the form of indemnification agreements, guarantees, and collateral arrangements. The Company has evaluated the variable interests held by the Company in each LIHTC investment and determined that the Company does not have controlling financial interests in such investments, and is not the primary beneficiary. The Company reports the investments in the unconsolidated LIHTCs as other assets on the Company’s statements of financial condition. Total unfunded contingent commitments related to the Company’s LIHTC investments totaled $18,095,000 at March 31, 2017, and the Company expects to fulfill the majority of these commitments during 2017. There were no impairment losses on the Company’s LIHTC investments during the three months ended March 31, 2017.

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

 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Amortization expense
$
503

 
255

Tax credits and other tax benefits recognized
776

 
392


The Company also owns the following trust subsidiaries, each of which issued trust preferred securities as Tier 1 capital instruments: Glacier Capital Trust II, Glacier Capital Trust III, Glacier Capital Trust IV, Citizens (ID) Statutory Trust I, Bank of the San Juans Bancorporation Trust I, First Company Statutory Trust 2001, and First Company Statutory Trust 2003. The trust subsidiaries have no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the securities held by third parties. The trust subsidiaries are not included in the Company’s consolidated financial statements because the sole asset of each trust subsidiary is a receivable from the Company, even though the Company owns all of the voting equity shares of the trust subsidiaries, has fully guaranteed the obligations of the trust subsidiaries and may have the right to redeem the third party securities under certain circumstances. The Company reports the trust preferred securities issued to the trust subsidiaries as subordinated debentures on the Company’s statements of financial condition.


26




Note 6. Securities Sold Under Agreements to Repurchase

The Company’s securities sold under agreements to repurchase (“repurchase agreements”) totaled $497,187,000 and $473,650,000 at March 31, 2017 and December 31, 2016, respectively, and are secured by investment securities with carrying values of $478,899,000 and $472,239,000, respectively. Securities are pledged to customers at the time of the transaction in an amount at least equal to the outstanding balance and are held in custody accounts by third parties. The fair value of collateral is continually monitored and additional collateral is provided as deemed appropriate.

The following tables summarize the carrying value of the Company’s repurchase agreements by remaining contractual maturity and category of collateral:
 
March 31, 2017
 
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)
Overnight and Continuous
 
Up to 30 Days
 
Total
Residential mortgage-backed securities
$
484,126

 

 
484,126

Commercial mortgage-backed securities
13,061

 

 
13,061

Total
$
497,187

 

 
497,187


 
December 31, 2016
 
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)
Overnight and Continuous
 
Up to 30 Days
 
Total
Residential mortgage-backed securities
$
471,706

 
643

 
472,349

Commercial mortgage-backed securities
1,301

 

 
1,301

Total
$
473,007

 
643

 
473,650


Note 7. Derivatives and Hedging Activities

As of March 31, 2017, the Company’s interest rate swap derivative financial instruments were designated as cash flow hedges and are summarized as follows:
 
(Dollars in thousands)
Forecasted
Notional  Amount
 
Variable
Interest Rate 1
 
Fixed
Interest Rate 1
 
Payment Term
Interest rate swap
$
160,000

 
3 month LIBOR
 
3.378
%
 
Oct. 21, 2014 - Oct. 21, 2021
Interest rate swap
100,000

 
3 month LIBOR
 
2.498
%
 
Nov. 30, 2015 - Nov. 30, 2022
__________
1 The Company pays the fixed interest rate and the counterparty pays the Company the variable interest rate.

The hedging strategy converts the LIBOR-based variable interest rate on borrowings to a fixed interest rate, thereby protecting the Company from interest rate variability.


27




The interest rate swaps with the $160,000,000 and $100,000,000 notional amounts began their payment terms in October 2014 and November 2015, respectively. The Company designated wholesale deposits as the cash flow hedge and these deposits were determined to be fully effective during the current and prior year. As such, no amount of ineffectiveness has been included in the Company’s statements of operations for the three months ended March 31, 2017 and 2016. Therefore, the aggregate fair value of the interest rate swaps was recorded in other liabilities with changes recorded in other comprehensive income (“OCI”). The Company expects the hedges to remain highly effective during the remaining terms of the interest rate swaps. Interest expense recorded on the interest rate swaps totaled $1,976,000 and $1,998,000 for the three months ended March 31, 2017 and 2016, respectively, and is reported as a component of interest expense on deposits. Unless the interest rate swaps are terminated during the next year, the Company expects $5,183,000 of the unrealized loss reported in other comprehensive income at March 31, 2017 to be reclassified to interest expense during the next twelve months.

The following table presents the pre-tax gains or losses recorded in accumulated other comprehensive income and the Company’s statements of operations relating to the interest rate swap derivative financial instruments:

 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Interest rate swaps
 
 
 
Amount of gain (loss) recognized in OCI (effective portion)
$
264

 
(9,928
)
Amount of loss reclassified from OCI to interest expense
(1,332
)
 
(1,829
)
Amount of loss recognized in other non-interest expense (ineffective portion)

 


The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities. There were no interest rate swap derivative assets at the dates presented.

 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Liabilities Presented in the Statements of Financial Position
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statements of Financial Position
 
Net Amounts of Liabilities Presented in the Statements of Financial Position
Interest rate swaps
$
13,129

 

 
13,129

 
14,725

 

 
14,725


Pursuant to the interest rate swap agreements, the Company pledged collateral to the counterparty in the form of investment securities totaling $27,931,000 at March 31, 2017. There was $0 collateral pledged from the counterparty to the Company as of March 31, 2017. There is the possibility that the Company may need to pledge additional collateral in the future if there were declines in the fair value of the interest rate swap derivative financial instruments versus the collateral pledged.


28




Note 8. Other Expenses

Other expenses consists of the following:
 
Three Months ended
(Dollars in thousands)
March 31,
2017
 
March 31,
2016
Debit card expenses
$
1,718

 
1,849

Consulting and outside services
1,420

 
1,014

Telephone
977

 
960

Loan expenses
891

 
783

Employee expenses
789

 
579

Postage
725

 
880

Printing and supplies
640

 
943

Accounting and audit fees
512

 
391

VIE amortization and other expenses
464

 
639

Checking and operating expenses
365

 
694

Business development
340

 
342

Legal fees
340

 
237

ATM expenses
312

 
255

Other
927

 
980

Total other expenses
$
10,420

 
10,546


Note 9. Accumulated Other Comprehensive Income (Loss)

The following table illustrates the activity within accumulated other comprehensive income (loss) by component, net of tax:
 
(Dollars in thousands)
Gains on Available-For-Sale Securities
 
Losses on Derivatives Used for Cash Flow Hedges
 
Total
Balance at December 31, 2015
$
13,935

 
(11,946
)
 
1,989

Other comprehensive income (loss) before reclassifications
8,331

 
(6,082
)
 
2,249

Amounts reclassified from accumulated other comprehensive (loss) income
(38
)
 
1,121

 
1,083

Net current period other comprehensive income (loss)
8,293

 
(4,961
)
 
3,332

Balance at March 31, 2016
$
22,228

 
(16,907
)
 
5,321

Balance at December 31, 2016
$
1,639

 
(9,021
)
 
(7,382
)
Other comprehensive income before reclassifications
1,907

 
162

 
2,069

Amounts reclassified from accumulated other comprehensive income
85

 
816

 
901

Net current period other comprehensive income
1,992

 
978

 
2,970

Balance at March 31, 2017
$
3,631

 
(8,043
)
 
(4,412
)


29




Note 10. Earnings Per Share

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

Basic and diluted earnings per share has been computed based on the following:
 
Three Months ended
(Dollars in thousands, except per share data)
March 31,
2017
 
March 31,
2016
Net income available to common stockholders, basic and diluted
$
31,255

 
28,682

Average outstanding shares - basic
76,572,116

 
76,126,251

Add: dilutive restricted stock awards
61,167

 
47,166

Average outstanding shares - diluted
76,633,283

 
76,173,417

Basic earnings per share
$
0.41

 
0.38

Diluted earnings per share
$
0.41

 
0.38


There were 39,348 and 0 stock awards excluded from the diluted average outstanding share calculation for the three months ended March 31, 2017 and 2016, respectively. Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock award exceeds the market price of the Company’s stock.

Note 11. Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
 
Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Transfers in and out of Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs) and Level 3 (significant unobservable inputs) are recognized on the actual transfer date. There were no transfers between fair value hierarchy levels during the three month periods ended March 31, 2017 and 2016.

Recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2017.

Investment securities, available-for-sale: fair value for available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest rates, volatilities, market spreads, prepayments, defaults, recoveries, cumulative loss projections, and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. Where Level 1 or Level 2 inputs are not available, such securities are classified as Level 3 within the hierarchy.


30




Fair value determinations of available-for-sale securities are the responsibility of the Company’s corporate accounting and treasury departments. The Company obtains fair value estimates from independent third party vendors on a monthly basis. The vendors’ pricing system methodologies, procedures and system controls are reviewed to ensure they are appropriately designed and operating effectively. The Company reviews the vendors’ inputs for fair value estimates and the recommended assignments of levels within the fair value hierarchy. The review includes the extent to which markets for investment securities are determined to have limited or no activity, or are judged to be active markets. The Company reviews the extent to which observable and unobservable inputs are used as well as the appropriateness of the underlying assumptions about risk that a market participant would use in active markets, with adjustments for limited or inactive markets. In considering the inputs to the fair value estimates, the Company places less reliance on quotes that are judged to not reflect orderly transactions, or are non-binding indications. In assessing credit risk, the Company reviews payment performance, collateral adequacy, third party research and analyses, credit rating histories and issuers’ financial statements. For those markets determined to be inactive or limited, the valuation techniques used are models for which management has verified that discount rates are appropriately adjusted to reflect illiquidity and credit risk.

Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments are based upon the estimated amounts to settle the contracts considering current interest rates and are calculated using discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. The inputs used to determine fair value include the 3 month LIBOR forward curve to estimate variable rate cash inflows and the Fed Funds Effective Swap Rate to estimate the discount rate. The estimated variable rate cash inflows are compared to the fixed rate outflows and such difference is discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtains and compares the reasonableness of the pricing from an independent third party.

The following tables disclose the fair value measurement of assets and liabilities measured at fair value on a recurring basis:
  
 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value March 31, 2017
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investment securities, available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
37,416

 

 
37,416

 

U.S. government sponsored enterprises
19,536

 

 
19,536

 

State and local governments
762,167

 

 
762,167

 

Corporate bonds
443,701

 

 
443,701

 

Residential mortgage-backed securities
949,091

 

 
949,091

 

Commercial mortgage-backed securities
102,610

 

 
102,610

 

Total assets measured at fair value on a recurring basis
$
2,314,521

 

 
2,314,521

 

Interest rate swaps
$
13,129

 

 
13,129

 

Total liabilities measured at fair value on a recurring basis
$
13,129

 

 
13,129

 



31




 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value December 31, 2016
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investment securities, available-for-sale
 
 
 
 
 
 
 
U.S. government and federal agency
$
39,407

 

 
39,407

 

U.S. government sponsored enterprises
19,570

 

 
19,570

 

State and local governments
786,373

 

 
786,373

 

Corporate bonds
471,951

 

 
471,951

 

Residential mortgage-backed securities
1,007,515

 

 
1,007,515

 

Commercial mortgage-backed securities
100,661

 

 
100,661

 

Total assets measured at fair value on a recurring basis
$
2,425,477

 

 
2,425,477

 

Interest rate swaps
$
14,725

 

 
14,725

 

Total liabilities measured at fair value on a recurring basis
$
14,725

 

 
14,725

 


Non-recurring Measurements
The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a non-recurring basis, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2017.

Other real estate owned: OREO is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell. Estimated fair value of OREO is based on appraisals or evaluations (new or updated). OREO is classified within Level 3 of the fair value hierarchy.

Collateral-dependent impaired loans, net of ALLL: loans included in the Company’s loan portfolio for which it is probable that the Company will not collect all principal and interest due according to contractual terms are considered impaired. Estimated fair value of collateral-dependent impaired loans is based on the fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company’s credit departments review appraisals for OREO and collateral-dependent loans, giving consideration to the highest and best use of the collateral. The appraisal or evaluation (new or updated) is considered the starting point for determining fair value. The valuation techniques used in preparing appraisals or evaluations (new or updated) include the cost approach, income approach, sales comparison approach, or a combination of the preceding valuation techniques. The key inputs used to determine the fair value of the collateral-dependent loans and OREO include selling costs, discounted cash flow rate or capitalization rate, and adjustment to comparables. Valuations and significant inputs obtained by independent sources are reviewed by the Company for accuracy and reasonableness. The Company also considers other factors and events in the environment that may affect the fair value. The appraisals or evaluations (new or updated) are reviewed at least quarterly and more frequently based on current market conditions, including deterioration in a borrower’s financial condition and when property values may be subject to significant volatility. After review and acceptance of the collateral appraisal or evaluation (new or updated), adjustments to the impaired loan or OREO may occur. The Company generally obtains appraisals or evaluations (new or updated) annually.


32




The following tables disclose the fair value measurement of assets with a recorded change during the period resulting from re-measuring the assets at fair value on a non-recurring basis:

 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value March 31, 2017
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other real estate owned
$
147

 

 

 
147

Collateral-dependent impaired loans, net of ALLL
7,601

 

 

 
7,601

Total assets measured at fair value on a non-recurring basis
$
7,748

 

 

 
7,748


 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Fair Value December 31, 2016
 
Quoted Prices
in Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other real estate owned
$
7,839

 

 

 
7,839

Collateral-dependent impaired loans, net of ALLL
5,664

 

 

 
5,664

Total assets measured at fair value on a non-recurring basis
$
13,503

 

 

 
13,503


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

 
Fair Value March 31, 2017
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average) 1
Other real estate owned
$
147

 
Sales comparison approach
 
Selling costs
 
8.0% - 8.0% (8.0%)
Collateral-dependent impaired loans, net of ALLL
$
5

 
Cost approach
 
Selling costs
 
20.0% - 20.0% (20.0%)
 
2,994

 
Sales comparison approach
 
Selling costs
 
8.0% - 10.0% (9.7%)
 
4,602

 
Combined approach
 
Selling costs
 
10.0% - 10.0% (10.0%)
 
 
 
 
 
Adjustment to comparables
 
20.0% - 20.0% (20.0%)
 
$
7,601

 
 
 
 
 
 


33




 
Fair Value December 31, 2016
 
Quantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted-Average) 1
Other real estate owned
$
7,767

 
Sales comparison approach
 
Selling costs
 
6.0% - 10.0% (6.9%)
 
 
 
 
 
Adjustment to comparables
 
0.0% - 10.0% (0.1%)
 
72

 
Combined approach
 
Selling costs
 
10.0% - 10.0% (10.0%)
 
 
 
 
 
Adjustment to comparables
 
10.0% - 10.0% (10.0%)
 
$
7,839

 
 
 
 
 
 
Collateral-dependent impaired loans, net of ALLL
$
110

 
Cost approach
 
Selling costs
 
6.0% - 20.0% (6.6%)
 
1,982

 
Sales comparison approach
 
Selling costs
 
8.0% - 10.0% (9.6%)
 
3,572

 
Combined approach
 
Selling costs
 
10.0% - 10.0% (10.0%)
 
 
 
 
 
Adjustment to comparables
 
20.0% - 20.0% (20.0%)
 
$
5,664

 
 
 
 
 
 
__________
1 The range for selling costs and adjustments to comparables indicate reductions to the fair value.

Fair Value of Financial Instruments
The following is a description of the methods used to estimate the fair value of all other assets and liabilities recognized at amounts other than fair value.

Cash and cash equivalents: fair value is estimated at book value.

Investment securities, held-to-maturity: fair value for held-to-maturity securities is estimated in the same manner as available-for-sale securities, which is described above.

Loans held for sale: fair value is estimated at book value.

Loans receivable, net of ALLL: fair value is estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities. The market rates used are based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions. Estimated fair value of impaired loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 and all other loans are classified as Level 2 within the valuation hierarchy.

Accrued interest receivable: fair value is estimated at book value.

Non-marketable equity securities: fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.

Deposits: fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The market rates used were obtained from an independent third party and reviewed by the Company. The rates were the average of current rates offered by the Company’s local competitors. The estimated fair value of demand, NOW, savings, and money market deposits is the book value since rates are regularly adjusted to market rates and transactions are executed at book value daily. Therefore, such deposits are classified in Level 1 of the valuation hierarchy. Certificate accounts and wholesale deposits are classified as Level 2 within the hierarchy.

Federal Home Loan Bank advances: fair value of non-callable Federal Home Loan Bank (“FHLB”) advances is estimated by discounting the future cash flows using rates of similar advances with similar maturities. Such rates were obtained from current rates offered by FHLB. The estimated fair value of callable FHLB advances was obtained from FHLB and the model was reviewed by the Company.


34




Securities sold under agreements to repurchase and other borrowed funds: fair value of term repurchase agreements and other term borrowings is estimated based on current repurchase rates and borrowing rates currently available to the Company for repurchases and borrowings with similar terms and maturities. The estimated fair value for overnight repurchase agreements and other borrowings is book value.

Subordinated debentures: fair value of the subordinated debt is estimated by discounting the estimated future cash flows using current estimated market rates. The market rates used were averages of currently traded trust preferred securities with similar characteristics to the Company’s issuances and obtained from an independent third party.

Accrued interest payable: fair value is estimated at book value.

Off-balance sheet financial instruments: commitments to extend credit and letters of credit represent the principal categories of off-balance sheet financial instruments. Rates for these commitments are set at time of loan closing, such that no adjustment is necessary to reflect these commitments at market value. The Company has an insignificant amount of off-balance sheet financial instruments.

The following tables present the carrying amounts, estimated fair values and the level within the fair value hierarchy of the Company’s financial instruments:
 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Carrying Amount March 31, 2017
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
234,004

 
234,004

 

 

Investment securities, available-for-sale
2,314,521

 

 
2,314,521

 

Investment securities, held-to-maturity
667,388

 

 
680,395

 

Loans held for sale
25,649

 
25,649

 

 

Loans receivable, net of ALLL
5,747,748

 

 
5,558,406

 
128,299

Accrued interest receivable
48,043

 
48,043

 

 

Non-marketable equity securities
23,944

 

 
23,944

 

Total financial assets
$
9,061,297

 
307,696

 
8,577,266

 
128,299

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
7,480,157

 
6,197,583

 
1,284,399

 

FHLB advances
211,627

 

 
217,435

 

Repurchase agreements and other borrowed funds
506,081

 

 
506,081

 

Subordinated debentures
126,027

 

 
89,136

 

Accrued interest payable
3,467

 
3,467

 

 

Interest rate swaps
13,129

 

 
13,129

 

Total financial liabilities
$
8,340,488

 
6,201,050

 
2,110,180

 



35




 
 
 
Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)
Carrying Amount December 31, 2016
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
152,541

 
152,541

 

 

Investment securities, available-for-sale
2,425,477

 

 
2,425,477

 

Investment securities, held-to-maturity
675,674

 

 
689,089

 

Loans held for sale
72,927

 
72,927

 

 

Loans receivable, net of ALLL
5,554,891

 

 
5,380,286

 
123,382

Accrued interest receivable
45,832

 
45,832

 

 

Non-marketable equity securities
25,550

 

 
25,550

 

Total financial assets
$
8,952,892

 
271,300

 
8,520,402

 
123,382

Financial liabilities
 
 
 
 
 
 
 
Deposits
$
7,372,279

 
6,090,879

 
1,283,532

 

FHLB advances
251,749

 

 
257,643

 

Repurchase agreements and other borrowed funds
478,090

 

 
478,090

 

Subordinated debentures
125,991

 

 
85,557

 

Accrued interest payable
3,584

 
3,584

 

 

Interest rate swaps
14,725

 

 
14,725

 

Total financial liabilities
$
8,246,418

 
6,094,463

 
2,119,547

 


Note 12. Subsequent Event

On April 30, 2017, the Company acquired 100 percent of the outstanding common stock of TFB Bancorp, Inc. and its wholly-owned subsidiary, The Foothills Bank, a community bank based in Yuma, Arizona (collectively, “Foothills”). Foothills provides banking services to individuals and businesses in Arizona, with banking offices located in Yuma, Prescott and Casa Grande, Arizona. The acquisition expands the Company’s market into the state of Arizona and further diversifies the Company’s loan, customer and deposit base. Foothills merged into Glacier Bank and will operate as a separate Bank division under its existing name and management team.

As of March 31, 2017, Foothills had total assets of $359,941,000, gross loans of $305,239,000 and total deposits of $292,320,000. The calculation of fair value of the consideration transferred, the total identifiable net assets acquired and resulting goodwill has not yet been determined.


36




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Glacier Bancorp, Inc.’s (“Company”) operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.”

FORWARD-LOOKING STATEMENTS

This Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. In addition to the factors set forth in the sections titled “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as applicable, in this report and the Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”), the following factors, among others, could cause actual results to differ materially from the anticipated results:
the risks associated with lending and potential adverse changes of the credit quality of loans in the Company’s portfolio;
changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System or the Federal Reserve Board, which could adversely affect the Company’s net interest income and profitability;
changes in the cost and scope of insurance from the FDIC and other third parties;
legislative or regulatory changes, including increased banking and consumer protection regulation that adversely affect the Company’s business;
ability to complete pending or prospective future acquisitions, limit certain sources of revenue, or increase cost of operations;
costs or difficulties related to the completion and integration of acquisitions;
the goodwill the Company has recorded in connection with acquisitions could become impaired, which may have an adverse impact on earnings and capital;
reduced demand for banking products and services;
the reputation of banks and the financial services industry could deteriorate, which could adversely affect the Company's ability to obtain (and maintain) customers;
competition among financial institutions in the Company's markets may increase significantly;
the risks presented by continued public stock market volatility, which could adversely affect the market price of the Company’s common stock and the ability to raise additional capital or grow the Company through acquisitions;
the projected business and profitability of an expansion or the opening of a new branch could be lower than expected;
consolidation in the financial services industry in the Company’s markets resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;
dependence on the Chief Executive Officer (“CEO”), the senior management team and the Presidents of Glacier Bank (“Bank”) divisions;
material failure, potential interruption or breach in security of the Company’s systems and technological changes which could expose us to new risks (e.g., cybersecurity), fraud or system failures;
natural disasters, including fires, floods, earthquakes, and other unexpected events;
the Company’s success in managing risks involved in the foregoing; and
the effects of any reputational damage to the Company resulting from any of the foregoing.

Please take into account that forward-looking statements speak only as of the date of this Form 10-Q. The Company does not undertake any obligation to publicly correct or update any forward-looking statement if it later becomes aware that actual results are likely to differ materially from those expressed in such forward-looking statement.


37




MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Highlights
 
At or for the Three Months ended
(Dollars in thousands, except per share and market data)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
Operating results
 
 
 
 
 
Net income
$
31,255

 
31,041

 
28,682

Basic earnings per share
$
0.41

 
0.41

 
0.38

Diluted earnings per share
$
0.41

 
0.41

 
0.38

Dividends declared per share 1
$
0.21

 
0.50

 
0.20

Market value per share
 
 
 
 
 
Closing
$
33.93

 
36.23

 
25.42

High
$
38.03

 
37.66

 
26.34

Low
$
32.47

 
27.50

 
22.19

Selected ratios and other data
 
 
 
 
 
Number of common stock shares outstanding
76,619,952

 
76,525,402

 
76,168,388

Average outstanding shares - basic
76,572,116

 
76,525,402

 
76,126,251

Average outstanding shares - diluted
76,633,283

 
76,615,272

 
76,173,417

Return on average assets (annualized)
1.35
%
 
1.33
%
 
1.28
%
Return on average equity (annualized)
11.19
%
 
10.82
%
 
10.53
%
Efficiency ratio
55.57
%
 
55.08
%
 
56.53
%
Dividend payout ratio 1
51.22
%
 
121.95
%
 
52.63
%
Loan to deposit ratio
78.91
%
 
78.10
%
 
74.65
%
Number of full time equivalent employees
2,224

 
2,222

 
2,184

Number of locations
142

 
142

 
144

Number of ATMs
161

 
166

 
167

__________
1 Includes a special dividend declared of $0.30 per share for the three months ended December 31, 2016.

The Company reported net income of $31.3 million for the current quarter, an increase of $2.6 million, or 9 percent, from the $28.7 million of net income for the prior year first quarter. Diluted earnings per share for the current quarter was $0.41 per share, an increase of $0.03, or 8 percent, from the prior year first quarter diluted earnings per share of $0.38.

Recent Acquisition
On April 30, 2017, the Company completed the acquisition of TFB Bancorp, Inc. and its wholly-owned subsidiary, The Foothills Bank (collectively, “Foothills”), which has community banking offices in Yuma, Prescott and Casa Grande, Arizona. The Foothills Bank merged into Glacier Bank and will operate as a separate Bank division under its existing name and management team. As of March 31, 2017, Foothills had total assets of $360 million, gross loans of $305 million and total deposits of $292 million. The calculation of fair value of the consideration transferred, the total identifiable net assets acquired and resulting goodwill has not yet been determined.


38




Financial Condition Analysis

Assets
The following table summarizes the Company’s assets as of the dates indicated: 
 
 
 
 
 
 
 
$ Change from
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Cash and cash equivalents
$
234,004

 
152,541

 
150,861

 
81,463

 
83,143

Investment securities, available-for-sale
2,314,521

 
2,425,477

 
2,604,625

 
(110,956
)
 
(290,104
)
Investment securities, held-to-maturity
667,388

 
675,674

 
691,663

 
(8,286
)
 
(24,275
)
Total investment securities
2,981,909

 
3,101,151

 
3,296,288

 
(119,242
)
 
(314,379
)
Loans receivable
 
 
 
 
 
 
 
 
 
Residential real estate
685,458

 
674,347

 
685,026

 
11,111

 
432

Commercial real estate
3,056,372

 
2,990,141

 
2,680,691

 
66,231

 
375,681

Other commercial
1,462,110

 
1,342,250

 
1,172,956

 
119,860

 
289,154

Home equity
433,554

 
434,774

 
423,895

 
(1,220
)
 
9,659

Other consumer
239,480

 
242,951

 
234,625

 
(3,471
)
 
4,855

Loans receivable
5,876,974

 
5,684,463

 
5,197,193

 
192,511

 
679,781

Allowance for loan and lease losses
(129,226
)
 
(129,572
)
 
(130,071
)
 
346

 
845

Loans receivable, net
5,747,748

 
5,554,891

 
5,067,122

 
192,857

 
680,626

Other assets
590,247

 
642,017

 
606,471

 
(51,770
)
 
(16,224
)
Total assets
$
9,553,908

 
9,450,600

 
9,120,742

 
103,308

 
433,166


Total investment securities of $2.982 billion at March 31, 2017 decreased $119 million, or 4 percent, during the current quarter and decreased $314 million, or 10 percent, from the prior year first quarter. The decrease in the investment portfolio resulted from the Company redeploying the investment securities portfolio cash flow into the Company’s higher yielding loan portfolio. Investment securities represented 31 percent of total assets at March 31, 2017 compared to 33 percent of total assets at December 31, 2016 and 36 percent of total assets at March 31, 2016.

The Company experienced another solid quarter for loan growth with an increase of $193 million, or 14 percent annualized, during the current quarter. The loan category with the largest increase was other commercial loans which increased $120 million, or 9 percent, and included an increase of $42 million from municipal loans. Excluding the acquisition of Treasure State Bank (“TSB”), the loan portfolio increased $628 million, or 12 percent, since March 31, 2016 with the primary increase coming from growth in commercial real estate and other commercial loans of $351 million and $281 million, respectively.


39




Liabilities
The following table summarizes the Company’s liabilities as of the dates indicated:
 
 
 
 
 
 
 
$ Change from
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Deposits
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
$
2,049,476

 
2,041,852

 
1,887,004

 
7,624

 
162,472

NOW and DDA accounts
1,596,353

 
1,588,550

 
1,448,454

 
7,803

 
147,899

Savings accounts
1,035,023

 
996,061

 
879,541

 
38,962

 
155,482

Money market deposit accounts
1,516,731

 
1,464,415

 
1,411,970

 
52,316

 
104,761

Certificate accounts
941,628

 
948,714

 
1,063,735

 
(7,086
)
 
(122,107
)
Core deposits, total
7,139,211

 
7,039,592

 
6,690,704

 
99,619

 
448,507

Wholesale deposits
340,946

 
332,687

 
325,490

 
8,259

 
15,456

Deposits, total
7,480,157

 
7,372,279

 
7,016,194

 
107,878

 
463,963

Securities sold under agreements to repurchase
497,187

 
473,650

 
445,960

 
23,537

 
51,227

Federal Home Loan Bank advances
211,627

 
251,749

 
313,969

 
(40,122
)
 
(102,342
)
Other borrowed funds
8,894

 
4,440

 
6,633

 
4,454

 
2,261

Subordinated debentures
126,027

 
125,991

 
125,884

 
36

 
143

Other liabilities
94,776

 
105,622

 
118,422

 
(10,846
)
 
(23,646
)
Total liabilities
$
8,418,668

 
8,333,731

 
8,027,062

 
84,937

 
391,606


The Company benefited from the current quarter growth in core deposits which increased $99.6 million, or 6 percent annualized, from the prior quarter. Excluding the TSB acquisition, core deposits increased $390 million, or 6 percent, from March 31, 2016. Non-interest bearing deposits of $2.049 billion at March 31, 2017 increased $7.6 million, or 37 basis points, from the prior quarter. Excluding the TSB acquisition, non-interest bearing deposits increased $149 million, or 8 percent, from March 31, 2016.

Securities sold under agreements to repurchase (“repurchase agreements”) of $497 million at March 31, 2017 increased $23.5 million, or 5 percent, from the prior quarter and increased $51.2 million, or 11 percent, from the prior year first quarter. Federal Home Loan Bank (“FHLB”) advances of $212 million at March 31, 2017 decreased $40.1 million, or 16 percent, from the prior quarter and decreased $102 million, or 33 percent, from the prior year first quarter due to the increase in deposits.

Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated: 
 
 
 
 
 
 
 
$ Change from
(Dollars in thousands, except per share data)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Common equity
$
1,139,652

 
1,124,251

 
1,088,359

 
15,401

 
51,293

Accumulated other comprehensive (loss) income
(4,412
)
 
(7,382
)
 
5,321

 
2,970

 
(9,733
)
Total stockholders’ equity
1,135,240

 
1,116,869

 
1,093,680

 
18,371

 
41,560

Goodwill and core deposit intangible, net
(158,799
)
 
(159,400
)
 
(154,396
)
 
601

 
(4,403
)
Tangible stockholders’ equity
$
976,441

 
957,469

 
939,284

 
18,972

 
37,157

Stockholders’ equity to total assets
11.88
%
 
11.82
%
 
11.99
%
 
 
 
 
Tangible stockholders’ equity to total tangible assets
10.39
%
 
10.31
%
 
10.48
%
 
 
 
 
Book value per common share
$
14.82

 
14.59

 
14.36

 
0.23

 
0.46

Tangible book value per common share
$
12.74

 
12.51

 
12.33

 
0.23

 
0.41



40




Tangible stockholders’ equity of $976 million at March 31, 2017 increased $19.0 million, or 2 percent, from the prior quarter primarily as a result of earnings retention and an increase in accumulated other comprehensive income. Tangible stockholders’ equity increased $37.2 million, or 4 percent, from a year ago, the result of earnings retention and $10.5 million of Company stock issued in connection with the TSB acquisition; such increases more than offset the increase in goodwill and other intangibles from the acquisition and the decrease in accumulated other comprehensive income. Tangible book value per common share at quarter end increased $0.23 per share from the prior quarter and increased $0.41 per share from a year ago.

Cash Dividend
On March 29, 2017, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share, an increase of $0.01 per share, or 5 percent. The dividend was payable April 20, 2017 to shareholders of record April 11, 2017. Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations.

Operating Results for Three Months Ended March 31, 2017 
Compared to December 31, 2016 and March 31, 2016

Income Summary
The following table summarizes revenue for the periods indicated: 

 
Three Months ended
 
$ Change from
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Net interest income
 
 
 
 
 
 
 
 
 
Interest income
$
87,628

 
87,759

 
84,381

 
(131
)
 
3,247

Interest expense
7,366

 
7,214

 
7,675

 
152

 
(309
)
Total net interest income
80,262

 
80,545

 
76,706

 
(283
)
 
3,556

Non-interest income
 
 
 
 
 
 
 
 
 
Service charges and other fees
15,633

 
15,645

 
14,681

 
(12
)
 
952

Miscellaneous loan fees and charges
980

 
1,234

 
1,021

 
(254
)
 
(41
)
Gain on sale of loans
6,358

 
9,765

 
5,992

 
(3,407
)
 
366

(Loss) gain on sale of investments
(100
)
 
(757
)
 
108

 
657

 
(208
)
Other income
2,818

 
2,127

 
2,450

 
691

 
368

Total non-interest income
25,689

 
28,014

 
24,252

 
(2,325
)
 
1,437

 
$
105,951

 
108,559

 
100,958

 
(2,608
)
 
4,993

Net interest margin (tax-equivalent)
4.03
%
 
4.02
%
 
4.01
%
 
 
 
 

Net Interest Income
In the current quarter, interest income of $87.6 million decreased $131 thousand, or 15 basis points, from the prior quarter which was primarily attributable to two less days during the current quarter. Current quarter interest income increased $3.2 million, or 4 percent, over the prior year first quarter. Current quarter interest income on commercial loans increased $5.5 million, or 12 percent, from the prior year first quarter which more than offset the $1.9 million decrease in investment interest income.

The current quarter interest expense of $7.4 million increased $152 thousand, or 2 percent, from the prior quarter and decreased $309 thousand, or 4 percent, from the prior year first quarter. The total cost of funding (including non-interest bearing deposits) for the current quarter was 37 basis points compared to 36 basis points for the prior quarter and 39 basis points for the prior year first quarter.


41




The Company’s net interest margin as a percentage of earning assets, on a tax-equivalent basis, for the current quarter was 4.03 percent compared to 4.02 percent in the prior quarter which was attributable to an increase in the earning asset yields from the continuing shift of lower yielding investments to higher yielding loans. The current quarter net interest margin increased 2 basis points over the prior year first quarter net interest margin of 4.01 percent, due to a 2 basis points decrease in cost of funds and the remix of earning assets to higher yielding loans.

Non-interest Income
Non-interest income for the current quarter totaled $25.7 million, a decrease of $2.3 million, or 8 percent, from the prior quarter and an increase of $1.4 million, or 6 percent, over the same quarter last year. Service fee income of $15.6 million, increased by $952 thousand, or 6 percent, from the prior year first quarter as a result of the increased number of accounts. Gain on sale of loans for the current quarter decreased $3.4 million, or 35 percent, from the prior quarter and was driven by the seasonal activity. Gain on sale of loans for the current quarter increased $366 thousand, or 6 percent, from the prior year first quarter. Other income of $2.8 million, increased $691 thousand, or 32 percent, over the prior quarter and increased $368 thousand, or 15 percent, over the prior year first quarter principally due to the current quarter gain on sale of other real estate owned (“OREO”). Other income included a gain of $967 thousand from the sale of OREO and operating revenue of $15 thousand from OREO, a combined total of $982 thousand for the current quarter compared to $481 thousand for the prior quarter and $214 thousand for the prior year first quarter.

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
 
 
Three Months ended
 
$ Change from
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Compensation and employee benefits
$
39,246

 
38,826

 
36,941

 
420

 
2,305

Occupancy and equipment
6,646

 
6,692

 
6,676

 
(46
)
 
(30
)
Advertising and promotions
1,973

 
2,125

 
2,125

 
(152
)
 
(152
)
Data processing
3,124

 
3,409

 
3,373

 
(285
)
 
(249
)
Other real estate owned
273

 
2,076

 
390

 
(1,803
)
 
(117
)
Regulatory assessments and insurance
1,061

 
1,048

 
1,508

 
13

 
(447
)
Core deposit intangibles amortization
601

 
608

 
797

 
(7
)
 
(196
)
Other expenses
10,420

 
11,933

 
10,546

 
(1,513
)
 
(126
)
Total non-interest expense
$
63,344

 
66,717

 
62,356

 
(3,373
)
 
988


The Company consolidated its Bank divisions’ individual core database systems into a single core database and re-issued debit cards with chip technology during 2016 (the Core Consolidation Project or “CCP”). Expenses related to the CCP were $741 thousand in the fourth quarter of 2016 and $834 thousand during the first quarter of 2016. Excluding CCP expenses, non-interest expense for the current quarter decreased $2.6 million, or 4 percent, over the prior quarter and increased $1.8 million, or 4 percent, over the prior year first quarter.

Compensation and employee benefits for the current quarter increased by $2.3 million, or 6 percent, from the prior year first quarter due to salary increases, vesting of restricted stock awards and the increased number of employees, including increases from the TSB acquisition. The current quarter OREO expense of $273 thousand included $234 thousand of operating expense, $21 thousand of fair value write-downs, and $18 thousand of loss from the sales of OREO. The current quarter other expenses decreased $1.5 million over the prior quarter primarily from decreases related to CCP, acquisition related expenses, and expenses connected with equity investments in New Markets Tax Credit (“NMTC”) projects. Current quarter other expenses decreased $126 thousand, or 1 percent, from the prior year first quarter which was driven by decreased costs from CCP.


42




Efficiency Ratio
The current quarter efficiency ratio was 55.57 percent, a 49 basis points increase from the prior quarter efficiency ratio of 55.08 percent. Although there was a reduction in expenses, the decrease in gain on sale of loans during the current quarter drove the increase in the efficiency ratio from the prior quarter. The current quarter efficiency ratio decreased 96 basis points from the prior year first quarter ratio of 56.53 percent resulting from the increase in income on commercial loans, which was greater than the increase in non-interest expense.

Provision for Loan Losses 
The following table summarizes the provision for loan losses, net charge-offs and select ratios relating to the provision for loan losses for the previous eight quarters:
(Dollars in thousands)
Provision
for Loan
Losses
 
Net
Charge-Offs (Recoveries)
 
Allowance for Loan and Lease Losses
as a Percent
of Loans
 
Accruing
Loans 30-89
Days Past Due
as a Percent of
Loans
 
Non-Performing
Assets to
Total Sub-sidiary Assets
First quarter 2017
$
1,598

 
$
1,944

 
2.20
%
 
0.67
%
 
0.75
%
Fourth quarter 2016
1,139

 
4,101

 
2.28
%
 
0.45
%
 
0.76
%
Third quarter 2016
626

 
478

 
2.37
%
 
0.49
%
 
0.84
%
Second quarter 2016

 
(2,315
)
 
2.46
%
 
0.44
%
 
0.82
%
First quarter 2016
568

 
194

 
2.50
%
 
0.46
%
 
0.88
%
Fourth quarter 2015
411

 
1,482

 
2.55
%
 
0.38
%
 
0.88
%
Third quarter 2015
826

 
577

 
2.68
%
 
0.37
%
 
0.97
%
Second quarter 2015
282

 
(381
)
 
2.71
%
 
0.59
%
 
0.98
%

Net charge-offs for the current quarter were $1.9 million compared to $4.1 million for the prior quarter and $194 thousand from the same quarter last year. The quarterly net charge-offs continue to experience a fair amount of volatility on a quarterly basis. There was $1.6 million of current quarter provision for loan losses, compared to $1.1 million in the prior quarter and $568 thousand in the prior year first quarter. Loan portfolio growth, composition, average loan size, credit quality considerations, and other environmental factors will continue to determine the level of the loan loss provision.

The determination of the allowance for loan and lease losses (“ALLL” or “allowance”) and the related provision for loan losses is a critical accounting estimate that involves management’s judgments about current environmental factors which affect loan losses, such factors including economic conditions, changes in collateral values, net charge-offs, and other factors discussed below in “Additional Management’s Discussion and Analysis.”


43




ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Activity
Investment securities classified as available-for-sale are carried at estimated fair value and investment securities classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale securities are reflected as an adjustment to other comprehensive income. The Company’s investment securities are summarized below:

 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
(Dollars in thousands)
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
 
Carrying Amount
 
Percent
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
37,416

 
1
%
 
$
39,407

 
1
%
 
$
45,687

 
1
%
U.S. government sponsored enterprises
19,536

 
1
%
 
19,570

 
1
%
 
68,773

 
2
%
State and local governments
762,167

 
26
%
 
786,373

 
25
%
 
901,133

 
27
%
Corporate bonds
443,701

 
15
%
 
471,951

 
15
%
 
442,875

 
14
%
Residential mortgage-backed securities
949,091

 
32
%
 
1,007,515

 
33
%
 
1,131,641

 
35
%
Commercial mortgage-backed securities
102,610

 
3
%
 
100,661

 
3
%
 
14,516

 
%
Total available-for-sale
2,314,521

 
78
%
 
2,425,477

 
78
%
 
2,604,625

 
79
%
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
State and local governments
667,388

 
22
%
 
675,674

 
22
%
 
691,663

 
21
%
Total held-to-maturity
667,388

 
22
%
 
675,674

 
22
%
 
691,663

 
21
%
Total investment securities
$
2,981,909

 
100
%
 
$
3,101,151

 
100
%
 
$
3,296,288

 
100
%

The Company’s investment portfolio is primarily comprised of state and local government securities and mortgage-backed securities. State and local government securities are largely exempt from federal income tax and the Company’s maximum federal statutory rate of 35 percent is used in calculating the tax-equivalent yields on the tax-exempt securities. Mortgage-backed securities are primarily short, weighted-average life U.S. agency guaranteed residential mortgage pass-through securities.  To a lesser extent, mortgage-backed securities also consist of short, weighted-average life U.S. agency guaranteed residential collateralized mortgage obligations and U.S. agency guaranteed commercial mortgage-backed securities. Combined, the mortgage-backed securities provide the Company with ongoing liquidity as scheduled and pre-paid principal is received on the securities.

State and local government securities carry different risks that are not as prevalent in other security types. The Company evaluates the investment grade quality of its securities in accordance with regulatory guidance. Investment grade securities are those where the issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely payment of principal and interest are expected. In assessing credit risk, the Company may use credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSRO” entities such as Standard and Poor’s [“S&P”] and Moody’s) as support for the evaluation; however, they are not solely relied upon. There have been no significant differences in the Company’s internal evaluation of the creditworthiness of any issuer when compared with the ratings assigned by the NRSROs.

44




The following table stratifies the state and local government securities by the associated NRSRO ratings. The highest issued rating was used to categorize the securities in the table for those securities where the NRSRO ratings were not at the same level.

 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
S&P: AAA / Moody’s: Aaa
$
344,903

 
345,267

 
345,527

 
346,301

S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
873,023

 
889,476

 
879,271

 
894,652

S&P: A+, A, A- / Moody’s: A1, A2, A3
182,733

 
189,884

 
209,217

 
216,589

S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa3
2,270

 
2,348

 
2,270

 
2,352

Not rated by either entity
14,052

 
14,715

 
13,934

 
14,694

Below investment grade
850

 
872

 
850

 
874

Total
$
1,417,831

 
1,442,562

 
1,451,069

 
1,475,462


State and local government securities largely consist of both taxable and tax-exempt general obligation and revenue bonds. The following table stratifies the state and local government securities by the associated security type.

 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
General obligation - unlimited
$
790,524

 
804,975

 
805,779

 
819,990

General obligation - limited
215,617

 
222,978

 
221,099

 
228,218

Revenue
377,401

 
379,332

 
389,506

 
391,615

Certificate of participation
23,214

 
24,276

 
23,590

 
24,603

Other
11,075

 
11,001

 
11,095

 
11,036

Total
$
1,417,831

 
1,442,562

 
1,451,069

 
1,475,462


The following table outlines the five states in which the Company owns the highest concentrations of state and local government securities.

 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Washington
$
192,540

 
197,404

 
188,778

 
193,035

Texas
191,383

 
194,157

 
193,652

 
196,641

Michigan
173,214

 
177,815

 
173,400

 
177,305

Montana
93,602

 
96,946

 
94,168

 
97,259

California
92,994

 
93,793

 
93,441

 
94,275

All other states
674,098

 
682,447

 
707,630

 
716,947

Total
$
1,417,831

 
1,442,562

 
1,451,069

 
1,475,462



45




The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity investment securities by contractual maturity at March 31, 2017. Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted-average yields on tax-exempt investment securities exclude the federal income tax benefit.

 
One Year or Less
 
After One through Five Years
 
After Five through Ten Years
 
After Ten Years
 
Mortgage-Backed Securities
 
Total
(Dollars in thousands)
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$

 
%
 
$
1,848

 
1.53
%
 
$
14,057

 
1.52
%
 
$
21,511

 
1.48
%
 
$

 
%
 
$
37,416

 
1.49
%
U.S. government sponsored enterprises
407

 
2.24
%
 
19,129

 
1.96
%
 

 
%
 

 
%
 

 
%
 
19,536

 
1.97
%
State and local governments
23,010

 
1.95
%
 
53,260

 
2.16
%
 
193,904

 
3.43
%
 
491,993

 
4.23
%
 

 
%
 
762,167

 
3.78
%
Corporate bonds
123,719

 
1.94
%
 
319,982

 
2.10
%
 

 
%
 

 
%
 

 
%
 
443,701

 
2.06
%
Residential mortgage-backed securities

 
%
 

 
%
 

 
%
 

 
%
 
949,091

 
2.00
%
 
949,091

 
2.00
%
Commercial mortgage-backed securities

 
%
 

 
%
 

 
%
 

 
%
 
102,610

 
2.03
%
 
102,610

 
2.03
%
Total available- for-sale
147,136

 
1.94
%
 
394,219

 
2.10
%
 
207,961

 
3.30
%
 
513,504

 
4.11
%
 
1,051,701

 
2.01
%
 
2,314,521

 
2.59
%
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and local governments

 
%
 
593

 
1.84
%
 
57,405

 
2.97
%
 
609,390

 
4.08
%
 

 
%
 
667,388

 
3.98
%
Total held-to-maturity

 
%
 
593

 
1.84
%
 
57,405

 
2.97
%
 
609,390

 
4.08
%
 

 
%
 
667,388

 
3.98
%
Total investment securities
$
147,136

 
1.94
%
 
$
394,812

 
2.10
%
 
$
265,366

 
3.23
%
 
$
1,122,894

 
4.09
%
 
$
1,051,701

 
2.01
%
 
$
2,981,909

 
2.90
%

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

Other-Than-Temporary Impairment on Securities Analysis
Non-marketable equity securities. Non-marketable equity securities largely consist of capital stock issued by the FHLB of Des Moines and are evaluated for impairment whenever events or circumstances suggest the carrying value may not be recoverable. Based on the Company’s evaluation of its investments in non-marketable equity securities as of March 31, 2017, the Company determined that none of such securities had other-than-temporary impairment.

Debt securities. In evaluating debt securities for other-than-temporary impairment losses, management assesses whether the Company intends to sell the security or if it is more-likely-than-not that the Company will be required to sell the debt security. In so doing, management considers contractual constraints, liquidity, capital, asset/liability management and securities portfolio objectives. For debt securities with limited or inactive markets, the impact of macroeconomic conditions in the U.S. upon fair value estimates includes higher risk-adjusted discount rates and changes in credit ratings provided by NRSRO. In November 2016, S&P reaffirmed its AA+ rating of U.S. government long-term debt, and the outlook remains stable. In November 2016, Moody's reaffirmed its Aaa rating of U.S. government long-term debt and the outlook remains stable. In April 2016, Fitch reaffirmed its AAA rating of U.S. government long-term debt and the outlook remains stable. S&P, Moody's and Fitch have similar credit ratings and outlooks with respect to certain long-term debt instruments issued by Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and other U.S. government agencies linked to the long-term U.S. debt.


46




The following table separates investments with an unrealized loss position at March 31, 2017 into two categories: investments purchased prior to 2017 and those purchased during 2017. Of those investments purchased prior to 2017, the fair market value and unrealized gain or loss at December 31, 2016 is also presented.

 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Fair Value
 
Unrealized
Loss
 
Unrealized
Loss as a
Percent of
Fair Value
 
Fair Value
 
Unrealized
Loss
 
Unrealized
Loss as a
Percent of
Fair Value
Temporarily impaired securities purchased prior to 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
27,499

 
$
(208
)
 
(1
)%
 
$
28,663

 
$
(156
)
 
(1
)%
U.S. government sponsored enterprises
6,048

 
(46
)
 
(1
)%
 
6,048

 
(42
)
 
(1
)%
State and local governments
476,272

 
(17,787
)
 
(4
)%
 
477,528

 
(17,395
)
 
(4
)%
Corporate bonds
147,157

 
(583
)
 
 %
 
147,656

 
(709
)
 
 %
Residential mortgage-backed securities
656,619

 
(7,886
)
 
(1
)%
 
691,907

 
(9,559
)
 
(1
)%
Commercial mortgage-backed securities
97,562

 
(1,331
)
 
(1
)%
 
98,743

 
(1,578
)
 
(2
)%
Total
$
1,411,157

 
$
(27,841
)
 
(2
)%
 
$
1,450,545

 
$
(29,439
)
 
(2
)%
Temporarily impaired securities purchased during 2017
 
 
 
 
 
 
 
 
 
 
 
State and local governments
$
1,524

 
$
(70
)
 
(5
)%
 
 
 
 
 
 
Corporate bonds
999

 
(2
)
 
 %
 
 
 
 
 
 
Residential mortgage-backed securities
7,400

 
(54
)
 
(1
)%
 
 
 
 
 
 
Commercial mortgage-backed securities
3,008

 
(3
)
 
 %
 
 
 
 
 
 
Total
$
12,931

 
$
(129
)
 
(1
)%
 
 
 
 
 
 
Temporarily impaired securities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
27,499

 
$
(208
)
 
(1
)%
 
 
 
 
 
 
U.S. government sponsored enterprises
6,048

 
(46
)
 
(1
)%
 
 
 
 
 
 
State and local governments
477,796

 
(17,857
)
 
(4
)%
 
 
 
 
 
 
Corporate bonds
148,156

 
(585
)
 
 %
 
 
 
 
 
 
Residential mortgage-backed securities
664,019

 
(7,940
)
 
(1
)%
 
 
 
 
 
 
Commercial mortgage-backed securities
100,570

 
(1,334
)
 
(1
)%
 
 
 
 
 
 
Total
$
1,424,088

 
$
(27,970
)
 
(2
)%
 
 
 
 
 
 

With respect to severity, the following table provides the number of debt securities and amount of unrealized loss in the various ranges of unrealized loss as a percent of book value at March 31, 2017:
(Dollars in thousands)
Number of
Debt
Securities
 
Unrealized
Loss
5.1% to 10.0%
88

 
$
(11,303
)
0.1% to 5.0%
631

 
(16,667
)
Total
719

 
$
(27,970
)


47




With respect to the duration of the impaired debt securities, the Company identified 153 securities which have been continuously impaired for the twelve months ending March 31, 2017. The valuation history of such securities in the prior year(s) was also reviewed to determine the number of months in the prior year(s) in which the identified securities were in an unrealized loss position.

The following table provides details of the 153 debt securities which have been continuously impaired for the twelve months ended March 31, 2017, including the most notable loss for any one bond in each category.

(Dollars in thousands)
Number of
Debt
Securities
 
Unrealized
Loss for
12 Months
Or More
 
Most
Notable
Loss
U.S. government and federal agency
19

 
$
(166
)
 
$
(36
)
State and local governments
108

 
(11,497
)
 
(1,289
)
Corporate bonds
3

 
(10
)
 
(6
)
Residential mortgage-backed securities
23

 
(270
)
 
(107
)
Total
153

 
$
(11,943
)
 
 

Based on the Company's analysis of its impaired debt securities as of March 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. A substantial portion of the debt securities with unrealized losses at March 31, 2017 were issued by Fannie Mae, Freddie Mac, Government National Mortgage Association (“Ginnie Mae”) and other agencies of the U.S. government or have credit ratings issued by one or more of the NRSRO entities in the four highest credit rating categories. All of the Company's impaired debt securities at March 31, 2017 have been determined by the Company to be investment grade.

Lending Activity
The Company focuses its lending activities primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family; 2) commercial lending, including agriculture, that concentrates on targeted businesses; and 3) installment lending for consumer purposes (e.g., home equity, automobile, etc.). Supplemental information regarding the Company’s loan portfolio and credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification” included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The regulatory classification of loans is based primarily on the type of collateral for the loans. Loan information included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the Company’s loan segments and classes, which are based on the purpose of the loan, unless otherwise noted as a regulatory classification. The following table summarizes the Company’s loan portfolio as of the dates indicated:

 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Residential real estate loans
$
685,458

 
12
 %
 
$
674,347

 
12
 %
 
$
685,026

 
14
 %
Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Real estate
3,056,372

 
53
 %
 
2,990,141

 
54
 %
 
2,680,691

 
53
 %
Other commercial
1,462,110

 
25
 %
 
1,342,250

 
24
 %
 
1,172,956

 
23
 %
Total
4,518,482

 
78
 %
 
4,332,391

 
78
 %
 
3,853,647

 
76
 %
Consumer and other loans
 
 
 
 
 
 
 
 
 
 
 
Home equity
433,554

 
8
 %
 
434,774

 
8
 %
 
423,895

 
8
 %
Other consumer
239,480

 
4
 %
 
242,951

 
4
 %
 
234,625

 
5
 %
Total
673,034

 
12
 %
 
677,725

 
12
 %
 
658,520

 
13
 %
Loans receivable
5,876,974

 
102
 %
 
5,684,463

 
102
 %
 
5,197,193

 
103
 %
Allowance for loan and lease losses
(129,226
)
 
(2
)%
 
(129,572
)
 
(2
)%
 
(130,071
)
 
(3
)%
Loans receivable, net
$
5,747,748

 
100
 %
 
$
5,554,891

 
100
 %
 
$
5,067,122

 
100
 %


48




Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
 
 
At or for the Three Months ended
 
At or for the Year ended
 
At or for the Three Months ended
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
 
March 31,
2016
Other real estate owned
$
17,771

 
20,954

 
22,085

Accruing loans 90 days or more past due
 
 
 
 
 
Residential real estate

 
266

 
833

Commercial
2,644

 
428

 
3,637

Consumer and other
384

 
405

 
145

Total
3,028

 
1,099

 
4,615

Non-accrual loans
 
 
 
 
 
Residential real estate
5,949

 
4,528

 
7,319

Commercial
38,578

 
39,033

 
39,546

Consumer and other
6,147

 
5,771

 
6,658

Total
50,674

 
49,332

 
53,523

Total non-performing assets
$
71,473

 
71,385

 
80,223

Non-performing assets as a percentage of subsidiary assets
0.75
%
 
0.76
%
 
0.88
%
ALLL as a percentage of non-performing loans
241
%
 
257
%
 
224
%
Accruing loans 30-89 days past due
$
39,160

 
25,617

 
23,996

Accruing troubled debt restructurings
$
38,955

 
52,077

 
53,311

Non-accrual troubled debt restructurings
$
19,479

 
21,693

 
23,879

U.S. government guarantees included in non-performing assets
$
1,690

 
1,746

 
2,247

Interest income 1
$
589

 
2,364

 
639

__________
1 
Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

Non-performing assets at March 31, 2017 were $71.5 million, with a slight increase from the prior quarter and a decrease of $8.8 million, or 11 percent, from a year ago. Non-performing assets as a percentage of subsidiary assets at March 31, 2017 was 0.75 percent which was a decrease of 13 basis points from the prior year first quarter of 0.88 percent. Early stage delinquencies (accruing loans 30-89 days past due) of $39.2 million at March 31, 2017 increased $13.5 million from the prior quarter and increased $15.2 million from the prior year first quarter with half of the increase from one loan that the Company is currently in the process of evaluating.

Most of the Company’s non-performing assets are secured by real estate, and based on the most current information available to management, including updated appraisals or evaluations (new or updated), the Company believes the value of the underlying real estate collateral is adequate to minimize significant charge-offs or losses to the Company. The Company evaluates the level of its non-performing loans, the values of the underlying real estate and other collateral, and related trends in internal and external environmental factors and net charge-offs in determining the adequacy of the ALLL. Through pro-active credit administration, the Company works closely with its borrowers to seek favorable resolution to the extent possible, thereby attempting to minimize net charge-offs or losses to the Company.


49




In prior years, construction loans, a regulatory classification, accounted for a significant portion of the Company’s non-accrual loans. As a result of the gradual economic recovery and the Company’s diligent focus on this category of non-performing loans, construction loans only accounted for 21 percent of the Company’s non-accrual loans as of March 31, 2017. With very limited exceptions, the Company does not disburse additional funds on non-performing loans. Instead, the Company has proceeded to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.

For additional information on accounting policies relating to non-performing assets and impaired loans, see Note 1 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

Impaired Loans
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).

Impaired loans were $135 million and $130 million as of March 31, 2017 and December 31, 2016, respectively. The ALLL includes specific valuation allowances of $6.8 million and $6.9 million of impaired loans as of March 31, 2017 and December 31, 2016, respectively. Of the total impaired loans at March 31, 2017, there were 15 significant commercial real estate and other commercial loans that accounted for $57.5 million, or 43 percent, of the impaired loans. The 15 loans were collateralized by 145 percent of the loan value, the majority of which had appraisals or evaluations (new or updated) during the last year, such appraisals reviewed at least quarterly taking into account current market conditions. Of the total impaired loans at March 31, 2017, there were 116 loans aggregating $72.3 million, or 53 percent, whereby the borrowers had more than one impaired loan.

Restructured Loans
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company had TDR loans of $58.4 million and $77.2 million as of March 31, 2017 and December 31, 2016, respectively. The Company’s TDR loans are considered impaired loans of which $19.5 million and $23.9 million as of March 31, 2017 and December 31, 2016, respectively, are designated as non-accrual.

Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service the debt as modified. The Company discourages the use of the multiple loan strategy when restructuring loans regardless of whether or not the loans are designated as TDRs.

Other Real Estate Owned
The book value of loans prior to the acquisition of collateral and transfer of the loans into OREO during 2017 was $514 thousand. The fair value of the loan collateral acquired in foreclosure during 2017 was $390 thousand. The following table sets forth the changes in OREO for the periods indicated:
 
At or for the Three Months ended
 
At or for the Year ended
 
At or for the Three Months ended
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
 
March 31,
2016
Balance at beginning of period
$
20,954

 
26,815

 
26,815

Acquisitions

 
882

 

Additions
390

 
5,198

 
178

Capital improvements

 
149

 
75

Write-downs
(21
)
 
(1,821
)
 
(55
)
Sales
(3,552
)
 
(10,269
)
 
(4,928
)
Balance at end of period
$
17,771

 
20,954

 
22,085



50




Allowance for Loan and Lease 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 ALLL methodology is designed to reasonably estimate the probable loan and lease losses within the Company’s loan portfolio. Accordingly, the ALLL is maintained within a range of estimated losses. The determination of the ALLL, including the provision for loan losses and net charge-offs, is a critical accounting estimate that involves management’s judgments about all known relevant internal and external environmental factors that affect loan losses, including the credit risk inherent in the loan portfolio, economic conditions nationally and in the local markets in which the Company operates, trends and changes in collateral values, delinquencies, non-performing assets, net charge-offs and credit-related policies and personnel. Although the Company continues to actively monitor economic trends, soft economic conditions combined with potential declines in the values of real estate that collateralize most of the Company’s loan portfolio may adversely affect the credit risk and potential for loss to the Company.

The ALLL evaluation is well documented and approved by the Company’s Board. In addition, the policy and procedures for determining the balance of the ALLL are reviewed annually by the Company’s Board, the internal audit department, independent credit reviewers and state and federal bank regulatory agencies.

At the end of each quarter, the Company analyzes its loan portfolio and maintains an ALLL at a level that is appropriate and determined in accordance with GAAP. The allowance consists of a specific valuation allowance component and a general valuation allowance component. The specific valuation allowance component relates to loans that are determined to be impaired. A specific valuation allowance is established when the fair value of a collateral-dependent loan or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate) is lower than the carrying value of the impaired loan. 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 Bank divisions’ credit administration reviews their respective loan portfolios to determine which loans are impaired and estimates the specific valuation allowance. The impaired loans and related specific valuation allowance are then provided to the Company’s credit administration for further review and approval. The Company’s credit administration also determines the estimated general valuation allowance and reviews and approves the overall ALLL. The credit administration of the Company exercises significant judgment when evaluating the effect of applicable qualitative or environmental factors on the Company’s historical loss experience for loans not identified as impaired. Quantification of the impact upon the Company’s ALLL is inherently subjective as data for any factor may not be directly applicable, consistently relevant, or reasonably available for management to determine the precise impact of a factor on the collectability of the Company’s loans collectively evaluated for impairment as of each evaluation date. The Company’s credit administration documents its conclusions and rationale for changes that occur in each applicable factor’s weight (i.e., measurement) and ensures that such changes are directionally consistent based on the underlying current trends and conditions for the factor. To have directional consistency, the provision for loan losses and credit quality should generally move in the same direction.

The Company’s model includes thirteen Bank divisions with separate management teams providing substantial local oversight to the lending and credit management function. The Company’s business model affords multiple reviews of larger loans before credit is extended, a significant benefit in mitigating and managing the Company’s credit risk. The geographic dispersion of the market areas in which the Company operates further mitigates the risk of credit loss. While this process is intended to limit credit exposure, there can be no assurance that further problem credits will not arise and additional loan losses incurred, particularly in this slowly improving, but fragile economic recovery and in periods of rapid economic downturns.

The primary responsibility for credit risk assessment and identification of problem loans rests with the loan officer of the account. This continuous process of identifying impaired loans is necessary to support management’s evaluation of the ALLL adequacy. An independent loan review function verifying credit risk ratings evaluates the loan officer and management’s evaluation of the loan portfolio credit quality.

No assurance can be given that the Company will not, in any particular period, sustain losses that are significant relative to the ALLL amount, or that subsequent evaluations of the loan portfolio applying management’s judgment about then current factors, including economic and regulatory developments, will not require significant changes in the ALLL. Under such circumstances, this could result in enhanced provisions for loan losses.


51




The following table summarizes the allocation of the ALLL as of the dates indicated:

 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
(Dollars in thousands)
ALLL
 
Percent of ALLL in
Category
 
Percent of
Loans in
Category
 
ALLL
 
Percent
of  ALLL in
Category
 
Percent
of Loans in
Category
 
ALLL
 
Percent
of  ALLL in
Category
 
Percent
of Loans in
Category
Residential real estate
$
11,535

 
9
%
 
12
%
 
$
12,436

 
9
%
 
12
%
 
$
13,196

 
10
%
 
13
%
Commercial real estate
64,753

 
50
%
 
52
%
 
65,773

 
51
%
 
52
%
 
67,046

 
52
%
 
52
%
Other commercial
39,157

 
30
%
 
25
%
 
37,823

 
29
%
 
24
%
 
36,054

 
28
%
 
22
%
Home equity
7,679

 
6
%
 
7
%
 
7,572

 
6
%
 
8
%
 
8,149

 
6
%
 
8
%
Other consumer
6,102

 
5
%
 
4
%
 
5,968

 
5
%
 
4
%
 
5,626

 
4
%
 
5
%
Total
$
129,226

 
100
%
 
100
%
 
$
129,572

 
100
%
 
100
%
 
$
130,071

 
100
%
 
100
%

The following table summarizes the ALLL experience for the periods indicated:
 
At or for the Three Months ended
 
At or for the Year ended
 
At or for the Three Months ended
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
 
March 31,
2016
Balance at beginning of period
$
129,572

 
129,697

 
129,697

Provision for loan losses
1,598

 
2,333

 
568

Charge-offs
 
 
 
 
 
Residential real estate
(22
)
 
(464
)
 
(100
)
Commercial loans
(1,359
)
 
(4,226
)
 
(577
)
Consumer and other loans
(2,848
)
 
(6,806
)
 
(486
)
Total charge-offs
(4,229
)
 
(11,496
)
 
(1,163
)
Recoveries
 
 
 
 
 
Residential real estate
47

 
207

 
18

Commercial loans
422

 
5,271

 
428

Consumer and other loans
1,816

 
3,560

 
523

Total recoveries
2,285

 
9,038

 
969

Charge-offs, net of recoveries
(1,944
)
 
(2,458
)
 
(194
)
Balance at end of period
$
129,226

 
129,572

 
130,071

ALLL as a percentage of total loans
2.20
%
 
2.28
%
 
2.50
%
Net charge-offs as a percentage of total loans
0.03
%
 
0.04
%
 
%

The allowance as a percent of total loans outstanding at March 31, 2017 was 2.20 percent, a decrease of 8 basis points from 2.28 percent at December 31, 2016.

The Company’s ALLL of $129 million is considered adequate to absorb losses from any class of its loan portfolio. For the periods ended March 31, 2017 and 2016, the Company believes the ALLL is commensurate with the risk in the Company’s loan portfolio and is directionally consistent with the change in the quality of the Company’s loan portfolio.

When applied to the Company’s historical loss experience, the qualitative or environmental factors result in the provision for loan losses being recorded in the period in which the loss has probably occurred. When the loss is confirmed at a later date, a charge-off is recorded. During 2017, loan charge-offs, net of recoveries, exceeded the provision for loan losses by $346 thousand. During the same period in 2016, the provision for loan losses exceeded loan charge-offs, net of recoveries, by $374 thousand.


52




The Company provides commercial services to individuals, small to medium-sized businesses, community organizations and public entities from 142 locations, including 133 branches, across Montana, Idaho, Wyoming, Colorado, Utah, and Washington. The Rocky Mountain states in which the Company operates have diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the changes in the global, national, and local economies are not uniform across the Company’s geographic locations.

Overall, there continues to be slow improvements in the economic environment compared to the past several years and the housing market is slowly recovering. Home prices continue to increase in all of the states within the Company’s footprint, except Wyoming. Colorado and Washington are experiencing the strongest pricing pressures, while Wyoming continues to lag behind the national trend. Four of the Company’s states are ranked in the top 10 nationally for house price appreciation. Home ownership in the United States has continually declined since 2008; however, there have been recent periods of increased home ownership during the second half of 2015 and the second half of 2016. The long-term average for the United States homeownership rate is at 65 percent. Annual personal income growth remains in positive territory for each of the Company’s states, while Washington, Colorado and Utah exceed the national average. The Federal Reserve Bank of Philadelphia’s composite state coincident indices projects steady growth during the first half of 2017 throughout the Company’s footprint. The increase in Gross Domestic Product during the prior quarter reflected positive contributions from personal consumption expenditures, private inventory investment and residential/nonresidential fixed investment and was partly offset by negative contributions from federal government spending and exports. Colorado, Utah, Idaho, Montana and Wyoming all have unemployment rates below 5 percent, which reflects the Federal Reserve’s definition of full employment. Crude oil, natural gas and base metal prices have all increased throughout 2016 and certain agriculture commodities within the Company’s footprint remain volatile. The tourism industry and related lodging activity continues to be a source of strength for locations where the Company’s markets include national parks and similar recreational areas. However, Canadian tourism in Washington, Idaho and Montana has been negatively impacted by the weak Canadian dollar. Overall, the Company sees positive signs in the various economic indices; however, given the significant recession experienced during 2008 and 2009, the Company is cautiously optimistic about the subsequent recovery of the housing industry. The Company will continue to actively monitor the economy’s impact on its lending portfolio.

In evaluating the need for a specific or general valuation allowance for impaired and unimpaired loans, respectively, within the Company’s construction loan portfolio (i.e., regulatory classification), including residential construction and land, lot and other construction loans, the credit risk related to such loans was considered in the ongoing monitoring of such loans, including assessments based on current information, including appraisals or evaluations (new or updated) of the underlying collateral, expected cash flows and the timing thereof, as well as the estimated cost to sell when such costs are expected to reduce the cash flows available to repay or otherwise satisfy the construction loan. Construction loans were 12 percent of the Company’s total loan portfolio and accounted for 21 percent and 20 percent of the Company’s non-accrual loans at March 31, 2017 and December 31, 2016, respectively. Collateral securing construction loans includes residential buildings (e.g., single/multi-family and condominiums), commercial buildings, and associated land (e.g., multi-acre parcels and individual lots, with and without shorelines).

The Company’s ALLL consisted of the following components as of the dates indicated:
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
 
March 31,
2016
Specific valuation allowance
$
6,787

 
6,881

 
8,440

General valuation allowance
122,439

 
122,691

 
121,631

Total ALLL
$
129,226

 
129,572

 
130,071


During 2017, the ALLL decreased by $346 thousand, the net result of a $94 thousand decrease in the specific valuation allowance and a $252 thousand decrease in the general valuation allowance. The specific valuation allowance decreased as the result of a $2.3 million decrease in loans individually reviewed for impairment with a specific impairment. The minimal decrease in the general valuation allowance since the prior year end was a result of the continued improvement in credit quality.

For additional information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see Note 3 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”

53




Loans by Regulatory Classification
Supplemental information regarding identification of the Company’s loan portfolio and credit quality based on regulatory classification is provided in the following tables. The regulatory classification of loans is based primarily on the type of collateral for the loans. There may be differences when compared to loan tables and loan amounts appearing elsewhere which reflect the Company’s internal loan segments and classes which are based on the purpose of the loan.

The following table summarizes the Company’s loan portfolio by regulatory classification:
 
Loans Receivable, by Loan Type
 
% Change from
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Custom and owner occupied construction
$
92,835

 
$
86,233

 
$
68,893

 
8
 %
 
35
 %
Pre-sold and spec construction
68,736

 
66,184

 
59,220

 
4
 %
 
16
 %
Total residential construction
161,571

 
152,417

 
128,113

 
6
 %
 
26
 %
Land development
78,042

 
75,078

 
59,539

 
4
 %
 
31
 %
Consumer land or lots
94,840

 
97,449

 
93,922

 
(3
)%
 
1
 %
Unimproved land
66,857

 
69,157

 
73,791

 
(3
)%
 
(9
)%
Developed lots for operative builders
13,046

 
13,254

 
12,973

 
(2
)%
 
1
 %
Commercial lots
26,639

 
30,523

 
23,558

 
(13
)%
 
13
 %
Other construction
272,184

 
257,769

 
166,378

 
6
 %
 
64
 %
Total land, lot, and other construction
551,608

 
543,230

 
430,161

 
2
 %
 
28
 %
Owner occupied
988,544

 
977,932

 
944,411

 
1
 %
 
5
 %
Non-owner occupied
964,913

 
929,729

 
806,856

 
4
 %
 
20
 %
Total commercial real estate
1,953,457

 
1,907,661

 
1,751,267

 
2
 %
 
12
 %
Commercial and industrial
739,475

 
686,870

 
664,855

 
8
 %
 
11
 %
Agriculture
411,094

 
407,208

 
372,616

 
1
 %
 
10
 %
1st lien
839,387

 
877,893

 
841,848

 
(4
)%
 
 %
Junior lien
54,801

 
58,564

 
63,162

 
(6
)%
 
(13
)%
Total 1-4 family
894,188

 
936,457

 
905,010

 
(5
)%
 
(1
)%
Multifamily residential
162,636

 
184,068

 
197,267

 
(12
)%
 
(18
)%
Home equity lines of credit
405,309

 
402,614

 
379,866

 
1
 %
 
7
 %
Other consumer
153,159

 
155,193

 
150,047

 
(1
)%
 
2
 %
Total consumer
558,468

 
557,807

 
529,913

 
 %
 
5
 %
Other
470,126

 
381,672

 
258,475

 
23
 %
 
82
 %
Total loans receivable, including loans held for sale
5,902,623

 
5,757,390

 
5,237,677

 
3
 %
 
13
 %
Less loans held for sale 1
(25,649
)
 
(72,927
)
 
(40,484
)
 
(65
)%
 
(37
)%
Total loans receivable
$
5,876,974

 
$
5,684,463

 
$
5,197,193

 
3
 %
 
13
 %
__________
1  Loans held for sale are primarily 1st lien 1-4 family loans.

54




The following tables summarize selected information identified by regulatory classification of the Company’s non-performing assets.
 
 
Non-performing Assets,  by Loan Type
 
Non-
Accrual
Loans
 
Accruing
Loans 90  Days or  More Past Due
 
Other
Real  Estate
Owned
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Mar 31,
2017
Mar 31,
2017
Mar 31,
2017
Custom and owner occupied construction
$

 

 
995

 

 

 

Pre-sold and spec construction
227

 
226

 

 
227

 

 

Total residential construction
227

 
226

 
995

 
227

 

 

Land development
8,856

 
9,864

 
18,190

 
1,482

 

 
7,374

Consumer land or lots
1,728

 
2,137

 
1,751

 
754

 

 
974

Unimproved land
12,017

 
11,905

 
11,651

 
8,137

 

 
3,880

Developed lots for operative builders
116

 
175

 
457

 

 

 
116

Commercial lots
1,255

 
1,466

 
1,333

 

 

 
1,255

Total land, lot and other construction
23,972

 
25,547

 
33,382

 
10,373

 

 
13,599

Owner occupied
17,956

 
18,749

 
12,130

 
16,109

 
148

 
1,699

Non-owner occupied
3,194

 
3,426

 
4,354

 
3,194

 

 

Total commercial real estate
21,150

 
22,175

 
16,484

 
19,303

 
148

 
1,699

Commercial and industrial
4,466

 
5,184

 
6,046

 
4,298

 
65

 
103

Agriculture
1,878

 
1,615

 
3,220

 
1,488

 
390

 

1st lien
10,047

 
9,186

 
11,041

 
8,037

 
296

 
1,714

Junior lien
1,335

 
1,167

 
1,111

 
1,286

 
49

 

Total 1-4 family
11,382

 
10,353

 
12,152

 
9,323

 
345

 
1,714

Multifamily residential
388

 
400

 
432

 
388

 

 

Home equity lines of credit
6,008

 
5,494

 
5,432

 
5,136

 
232

 
640

Other consumer
202

 
391

 
280

 
138

 
48

 
16

Total consumer
6,210

 
5,885

 
5,712

 
5,274

 
280

 
656

Other
1,800

 

 
1,800

 

 
1,800

 

Total
$
71,473

 
71,385

 
80,223

 
50,674

 
3,028

 
17,771




55




 
Accruing 30-89 Days Delinquent Loans,  by Loan Type
 
% Change from
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Dec 31,
2016
 
Mar 31,
2016
Custom and owner occupied construction
$
380

 
$
1,836

 
$

 
(79
)%
 
n/m

Pre-sold and spec construction
488

 

 
304

 
n/m

 
61
 %
Total residential construction
868

 
1,836

 
304

 
(53
)%
 
186
 %
Land development

 
154

 
198

 
(100
)%
 
(100
)%
Consumer land or lots
432

 
638

 
796

 
(32
)%
 
(46
)%
Unimproved land
938

 
1,442

 
1,284

 
(35
)%
 
(27
)%
Commercial lots
258

 

 

 
n/m

 
n/m

Other construction
7,125

 

 

 
n/m

 
n/m

Total land, lot and other construction
8,753

 
2,234

 
2,278

 
292
 %
 
284
 %
Owner occupied
6,686

 
2,307

 
4,552

 
190
 %
 
47
 %
Non-owner occupied
405

 
1,689

 
1,466

 
(76
)%
 
(72
)%
Total commercial real estate
7,091

 
3,996

 
6,018

 
77
 %
 
18
 %
Commercial and industrial
6,796

 
3,032

 
4,907

 
124
 %
 
38
 %
Agriculture
3,567

 
1,133

 
659

 
215
 %
 
441
 %
1st lien
7,132

 
7,777

 
5,896

 
(8
)%
 
21
 %
Junior lien
848

 
1,016

 
759

 
(17
)%
 
12
 %
Total 1-4 family
7,980

 
8,793

 
6,655

 
(9
)%
 
20
 %
Multifamily residential
2,028

 
10

 

 
20,180
 %
 
n/m

Home equity lines of credit
703

 
1,537

 
2,528

 
(54
)%
 
(72
)%
Other consumer
1,317

 
1,180

 
607

 
12
 %
 
117
 %
Total consumer
2,020

 
2,717

 
3,135

 
(26
)%
 
(36
)%
Other
57

 
1,866

 
40

 
(97
)%
 
43
 %
Total
$
39,160

 
$
25,617

 
$
23,996

 
53
 %
 
63
 %
__________
n/m - not measurable


56




The following table summarizes net charge-offs at the dates indicated, including identification by regulatory classification:

 
Net Charge-Offs (Recoveries), Year-to-Date
Period Ending, By Loan Type
 
Charge-Offs
 
Recoveries
(Dollars in thousands)
Mar 31,
2017
 
Dec 31,
2016
 
Mar 31,
2016
 
Mar 31,
2017
 
Mar 31,
2017
Custom and owner occupied construction
$

 
(1
)
 

 

 

Pre-sold and spec construction
(11
)
 
786

 
(28
)
 

 
11

Total residential construction
(11
)
 
785

 
(28
)
 

 
11

Land development
(33
)
 
(2,661
)
 
(100
)
 

 
33

Consumer land or lots
(57
)
 
(688
)
 
(240
)
 

 
57

Unimproved land
(96
)
 
(184
)
 
(34
)
 

 
96

Developed lots for operative builders
(5
)
 
(27
)
 
(12
)
 

 
5

Commercial lots
(2
)
 
27

 
23

 

 
2

Total land, lot and other construction
(193
)
 
(3,533
)
 
(363
)
 

 
193

Owner occupied
795

 
1,196

 
(27
)
 
888

 
93

Non-owner occupied
(1
)
 
44

 
(1
)
 

 
1

Total commercial real estate
794

 
1,240

 
(28
)
 
888

 
94

Commercial and industrial
344

 
(370
)
 
69

 
470

 
126

Agriculture
(3
)
 
50

 
(1
)
 

 
3

1st lien
(15
)
 
487

 
47

 
44

 
59

Junior lien
(16
)
 
60

 
(15
)
 

 
16

Total 1-4 family
(31
)
 
547

 
32

 
44

 
75

Multifamily residential

 
229

 
229

 

 

Home equity lines of credit
12

 
611

 
179

 
75

 
63

Other consumer
(11
)
 
257

 
95

 
73

 
84

Total consumer
1

 
868

 
274

 
148

 
147

Other
1,043

 
2,642

 
10

 
2,679

 
1,636

Total
$
1,944

 
2,458

 
194

 
4,229

 
2,285





57




Sources of Funds
The Company’s deposits have traditionally been the principal source of funds for use in lending and other business purposes. The Company also obtains funds from repayment of loans and investment securities, repurchase agreements, wholesale deposits, advances from FHLB and other borrowings. Loan repayments are a relatively stable source of funds, while interest bearing deposit inflows and outflows are significantly influenced by general interest rate levels and market conditions. Borrowings and advances may be used on a short-term basis to compensate for reductions in normal sources of funds such as deposit inflows at less than projected levels. Borrowings also may be used on a long-term basis to support expanded activities, match maturities of longer-term assets or manage interest rate risk.

Deposits
The Company has several deposit programs designed to attract both short-term and long-term deposits from the general public by providing a wide selection of accounts and rates. These programs include non-interest bearing demand accounts, interest bearing NOW and demand accounts, savings, money market deposit accounts, fixed rate certificates of deposit with maturities ranging from three months to five years, negotiated-rate jumbo certificates, and individual retirement accounts. These deposits are obtained primarily from individual and business residents in the Bank’s geographic market areas. In addition, wholesale deposits are obtained through various programs and include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts. The Company’s deposits are summarized below:

 
March 31, 2017
 
December 31, 2016
 
March 31, 2016
(Dollars in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Non-interest bearing deposits
$
2,049,476

 
27
%
 
$
2,041,852

 
28
%
 
$
1,887,004

 
27
%
NOW and DDA accounts
1,596,353

 
21
%
 
1,588,550

 
22
%
 
1,448,454

 
21
%
Savings accounts
1,035,023

 
14
%
 
996,061

 
13
%
 
879,541

 
12
%
Money market deposit accounts
1,516,731

 
20
%
 
1,464,415

 
20
%
 
1,411,970

 
20
%
Certificate accounts
941,628

 
13
%
 
948,714

 
13
%
 
1,063,735

 
15
%
Wholesale deposits
340,946

 
5
%
 
332,687

 
4
%
 
325,490

 
5
%
Total interest bearing deposits
5,430,681

 
73
%
 
5,330,427

 
72
%
 
5,129,190

 
73
%
Total deposits
$
7,480,157

 
100
%
 
$
7,372,279

 
100
%
 
$
7,016,194

 
100
%

Securities Sold Under Agreements to Repurchase, Federal Home Loan Bank Advances and Other Borrowings
The Company borrows money through repurchase agreements. This process involves the selling of one or more of the securities in the Company’s investment portfolio and simultaneously entering into an agreement to repurchase that same securities at an agreed upon later date, typically overnight. A rate of interest is paid for the agreed period of time. Through a policy adopted by the Bank’s Board of Directors, the Bank enters into repurchase agreements with local municipalities, and certain customers, and has adopted procedures designed to ensure proper transfer of title and safekeeping of the underlying securities. In addition to retail repurchase agreements, the Company enters into wholesale repurchase agreements as additional funding sources. The Company has not entered into reverse repurchase agreements.

The Bank is a member of the FHLB of Des Moines, which is one of eleven banks that comprise the FHLB system.  The Bank is required to maintain a certain level of activity-based stock in order to borrow or to engage in other transactions with the FHLB of Des Moines. Additionally, the Bank is subject to a membership capital stock requirement that is based upon an annual calibration tied to the total assets of the Bank. The borrowings are collateralized by eligible categories of loans and investment securities (principally, securities which are obligations of, or guaranteed by, the U.S. government and its agencies), provided certain standards related to credit-worthiness have been met. Advances are made pursuant to several different credit programs, each of which has its own interest rates and range of maturities. The Bank’s maximum amount of FHLB advances is limited to the lesser of a fixed percentage of the Bank’s total assets or the discounted value of eligible collateral. FHLB advances fluctuate to meet seasonal and other withdrawals of deposits and to expand lending or investment opportunities of the Company.

Additionally, the Company has other sources of secured and unsecured borrowing lines from various sources that may be used from time to time.


58




Short-term borrowings
A critical component of the Company’s liquidity and capital resources is access to short-term borrowings to fund its operations. Short-term borrowings are accompanied by increased risks managed by the Bank’s Asset Liability Committee (“ALCO”) such as rate increases or unfavorable change in terms which would make it more costly to obtain future short-term borrowings. The Company’s short-term borrowing sources include FHLB advances, federal funds purchased and retail and wholesale repurchase agreements. The Company also has access to the short-term discount window borrowing programs (i.e., primary credit) of the Federal Reserve Bank (“FRB”). FHLB advances and certain other short-term borrowings may be renewed as long-term borrowings to decrease certain risks such as liquidity or interest rate risk; however, the reduction in risks are weighed against the increased cost of funds and other risks.

The following table provides information relating to significant short-term borrowings, which consists of borrowings that mature within one year of period end:
 
At or for the Three Months ended
 
At or for the Year ended
(Dollars in thousands)
March 31,
2017
 
December 31,
2016
Repurchase agreements
 
 
 
Amount outstanding at end of period
$
497,187

 
473,650

Weighted interest rate on outstanding amount
0.38
%
 
0.34
%
Maximum outstanding at any month-end
$
497,187

 
473,650

Average balance
$
430,552

 
384,066

Weighted-average interest rate
0.36
%
 
0.31
%

Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed or acquired financing subsidiaries for the purpose of issuing trust preferred securities that entitle the investor to receive cumulative cash distributions thereon. The subordinated debentures outstanding as of March 31, 2017 were $126 million, including fair value adjustments from prior acquisitions.

Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, there may be various outstanding commitments to obtain funding and to extend credit, such as letters of credit and un-advanced loan commitments, which are not reflected in the accompanying condensed consolidated financial statements. The Company does not anticipate any material losses as a result of these transactions.

Off-balance sheet arrangements also include any obligation related to a variable interest held in an unconsolidated entity. The Company does not anticipate any material losses as a result of these transactions. For additional information regarding the Company’s interests in unconsolidated variable interest entities (“VIE”), see Note 5 to the Consolidated Financial Statements in “Part I. Item 1. Financial Statements.”


59




Liquidity Risk
Liquidity risk is the possibility that the Company will not be able to fund present and future obligations as they come due because of an inability to liquidate assets or obtain adequate funding at a reasonable cost. The objective of liquidity management is to maintain cash flows adequate to meet current and future needs for credit demand, deposit withdrawals, maturing liabilities and corporate operating expenses. Effective liquidity management entails three elements:
1.
Assessing on an ongoing basis, the current and expected future needs for funds, and ensuring that sufficient funds or access to funds exist to meet those needs at the appropriate time;
2.
Providing for an adequate cushion of liquidity to meet unanticipated cash flow needs that may arise from potential adverse circumstances ranging from high probability/low severity events to low probability/high severity; and
3.
Balancing the benefits between providing for adequate liquidity to mitigate potential adverse events and the cost of that liquidity.

The Company has a wide range of versatility in managing the liquidity and asset/liability mix. The Bank’s ALCO meets regularly to assess liquidity risk, among other matters. The Company monitors liquidity and contingency funding alternatives through management reports of liquid assets (e.g., investment securities), both unencumbered and pledged, as well as borrowing capacity, both secured and unsecured, including off-balance sheet funding sources. The Company evaluates its potential funding needs across alternative scenarios and maintains contingency funding plans consistent with the Company’s access to diversified sources of contingent funding.

The following table identifies certain liquidity sources and capacity available to the Company as of the dates indicated:

(Dollars in thousands)
March 31,
2017
 
December 31,
2016
FHLB advances
 
 
 
Borrowing capacity
$
1,694,600

 
1,558,527

Amount utilized
(211,627
)
 
(251,749
)
Amount available
$
1,482,973

 
1,306,778

FRB discount window
 
 
 
Borrowing capacity
$
1,259,540

 
1,226,683

Amount utilized

 

Amount available
$
1,259,540

 
1,226,683

Unsecured lines of credit available
$
255,000

 
255,000

Unencumbered investment securities
 
 
 
U.S. government and federal agency
$
35,071

 
39,407

U.S. government sponsored enterprises
8,651

 
12,086

State and local governments
741,147

 
814,942

Corporate bonds
25,539

 
19,573

Residential mortgage-backed securities
203,423

 
258,260

Commercial mortgage-backed securities
57,315

 
78,144

Total unencumbered securities
$
1,071,146

 
1,222,412



60




Capital Resources
Maintaining capital strength continues to be a long-term objective of the Company. Abundant capital is necessary to sustain growth, provide protection against unanticipated declines in asset values, and to safeguard the funds of depositors. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. The Company has the capacity to issue 117,187,500 shares of common stock of which 76,619,952 have been issued as of March 31, 2017. The Company also has the capacity to issue 1,000,000 shares of preferred stock of which none have been issued as of March 31, 2017. Conversely, the Company may decide to utilize a portion of its strong capital position, as it has done in the past, to repurchase shares of its outstanding common stock, depending on market price and other relevant considerations.

The Federal Reserve has adopted capital adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding company. The federal banking agencies implemented final rules (“Final Rules”) to establish a new comprehensive regulatory capital framework with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rules implemented the third installment of the Basel Accords (“Basel III”) regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and substantially amended the regulatory risk-based capital rules applicable to the Company. Under Basel III, the Company must hold a conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2017 is 1.25%. As of March 31, 2017, management believes the Company and Bank meet all capital adequacy requirements to which they are subject.

The following table illustrates the Bank’s regulatory ratios and the Federal Reserve’s current capital adequacy guidelines as of March 31, 2017. The Federal Reserve’s fully phased-in guidelines applicable in 2019 are also summarized.

 
Total Capital (To Risk-Weighted Assets)
 
Tier 1 Capital (To Risk-Weighted Assets)
 
Common Equity Tier 1 (To Risk-Weighted Assets)
 
Leverage Ratio/ Tier 1 Capital (To Average Assets)
Glacier Bank’s actual regulatory ratios
15.63
%
 
14.37
%
 
14.37
%
 
11.41
%
Minimum capital requirements
8.00
%
 
6.00
%
 
4.50
%
 
4.00
%
Well capitalized requirements
10.00
%
 
8.00
%
 
6.50
%
 
5.00
%
Minimum capital requirements, including fully-phased in capital conservation buffer (2019)
10.50
%
 
8.50
%
 
7.00
%
 
N/A


There are no conditions or events since March 31, 2017 that management believes have changed the Company’s or Bank’s risk-based capital category.


61




Federal and State Income Taxes
The Company files a consolidated federal income tax return using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations.

Under Montana, Idaho, Colorado and Utah law, financial institutions are subject to a corporation income tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 7.4 percent in Idaho, 5 percent in Utah and 4.63 percent in Colorado. Wyoming and Washington do not impose a corporate income tax.

Income tax expense for the three months ended March 31, 2017 and 2016 was $9.8 million and $9.4 million, respectively. The Company’s effective tax rate for the three months ended March 31, 2017 and 2016 was 23.8 percent and 24.6 percent, respectively. The current and prior year’s low effective tax rates are due to income from tax-exempt investment securities, municipal loans and leases and benefits from federal income tax credits. The income from tax-exempt investment securities, loans and leases was $14.4 million for the three months ended March 31, 2017 and 2016. The benefits from federal income tax credits were $987 thousand and $509 thousand for the three months ended March 31, 2017 and 2016, respectively.

The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of NMTCs. Administered by the Community Development Financial Institutions Fund (“CDFI Fund”) of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has equity investments in Low-Income Housing Tax Credits (“LIHTC”) which are indirect federal subsidies used to finance the development of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance period. The Company has investments of $22.1 million in Qualified Zone Academy and Qualified School Construction bonds whereby the Company receives quarterly federal income tax credits in lieu of taxable interest income. The federal income tax credits on these investment securities are subject to federal and state income tax.

Following is a list of expected federal income tax credits to be received in the years indicated.
 
(Dollars in thousands)
New
Markets
Tax Credits
 
Low-Income
Housing
Tax Credits
 
Investment
Securities
Tax Credits
 
Total
2017
$
1,911

 
2,860

 
783

 
5,554

2018
1,589

 
3,647

 
710

 
5,946

2019
1,689

 
3,647

 
661

 
5,997

2020
1,754

 
3,432

 
611

 
5,797

2021
1,754

 
2,615

 
566

 
4,935

Thereafter
1,375

 
13,838

 
1,929

 
17,142

 
$
10,072

 
30,039

 
5,260

 
45,371



62




Average Balance Sheet
The following schedule provides 1) the total dollar amount of interest and dividend income of the Company for earning assets and the average yields; 2) the total dollar amount of interest expense on interest bearing liabilities and the average rates; 3) net interest and dividend income and interest rate spread; and 4) net interest margin (tax-equivalent).
 
Three Months ended
 
Three Months ended
 
March 31, 2017
 
March 31, 2016
(Dollars in thousands)
Average
Balance
 
Interest and
Dividends
 
Average
Yield/
Rate
 
Average
Balance
 
Interest and
Dividends
 
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Residential real estate loans
$
709,432

 
$
7,918

 
4.46
%
 
$
726,270

 
$
8,285

 
4.56
%
Commercial loans 1
4,372,299

 
51,335

 
4.76
%
 
3,749,929

 
45,335

 
4.86
%
Consumer and other loans
672,480

 
7,801

 
4.70
%
 
653,839

 
7,710

 
4.74
%
Total loans 2
5,754,211

 
67,054

 
4.73
%
 
5,130,038

 
61,330

 
4.81
%
Tax-exempt investment securities 3
1,245,358

 
17,761

 
5.70
%
 
1,352,683

 
19,383

 
5.73
%
Taxable investment securities 4
1,857,335

 
10,575

 
2.28
%
 
1,999,000

 
11,461

 
2.29
%
Total earning assets
8,856,904

 
95,390

 
4.37
%
 
8,481,721

 
92,174

 
4.37
%
Goodwill and intangibles
159,089

 
 
 
 
 
154,790

 
 
 
 
Non-earning assets
369,274

 
 
 
 
 
390,891

 
 
 
 
Total assets
$
9,385,267

 
 
 
 
 
$
9,027,402

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing deposits
$
1,970,654

 
$

 
%
 
$
1,863,389

 
$

 
%
NOW and DDA accounts
1,575,928

 
247

 
0.06
%
 
1,465,181

 
293

 
0.08
%
Savings accounts
1,015,108

 
146

 
0.06
%
 
863,764

 
104

 
0.05
%
Money market deposit accounts
1,490,198

 
565

 
0.15
%
 
1,406,718

 
553

 
0.16
%
Certificate accounts
953,527

 
1,333

 
0.57
%
 
1,071,055

 
1,564

 
0.59
%
Wholesale deposits 5
332,255

 
2,149

 
2.62
%
 
335,126

 
2,281

 
2.74
%
FHLB advances
271,225

 
1,510

 
2.23
%
 
308,040

 
1,652

 
2.12
%
Repurchase agreements and other borrowed funds
562,628

 
1,416

 
1.02
%
 
521,565

 
1,228

 
0.95
%
Total interest bearing liabilities
8,171,523

 
7,366

 
0.37
%
 
7,834,838

 
7,675

 
0.39
%
Other liabilities
81,419

 
 
 
 
 
96,701

 
 
 
 
Total liabilities
8,252,942

 
 
 
 
 
7,931,539

 
 
 
 
Stockholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
766

 
 
 
 
 
761

 
 
 
 
Paid-in capital
748,851

 
 
 
 
 
736,398

 
 
 
 
Retained earnings
389,798

 
 
 
 
 
351,536

 
 
 
 
Accumulated other comprehensive (loss) income
(7,090
)
 
 
 
 
 
7,168

 
 
 
 
Total stockholders’ equity
1,132,325

 
 
 
 
 
1,095,863

 
 
 
 
Total liabilities and stockholders’ equity
$
9,385,267

 
 
 
 
 
$
9,027,402

 
 
 
 
Net interest income (tax-equivalent)
 
 
$
88,024

 
 
 
 
 
$
84,499

 
 
Net interest spread (tax-equivalent)
 
 
 
 
4.00
%
 
 
 
 
 
3.98
%
Net interest margin (tax-equivalent)
 
 
 
 
4.03
%
 
 
 
 
 
4.01
%
 
__________
1 
Includes tax effect of $1.4 million and $832 thousand on tax-exempt municipal loan and lease income for the three months ended March 31, 2017 and 2016, respectively.
2 
Total loans are gross of the allowance for loan and lease losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period.
3 
Includes tax effect of $6.1 million and $6.6 million on tax-exempt investment securities income for the three months ended March 31, 2017 and 2016, respectively.
4 
Includes tax effect of $338 thousand and $352 thousand on federal income tax credits for the three months ended March 31, 2017 and 2016, respectively.
5 
Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.

63




Rate/Volume Analysis
Net interest income can be evaluated from the perspective of relative dollars of change in each period. Interest income and interest expense, which are the components of net interest income, are shown in the following table on the basis of the amount of any increases (or decreases) attributable to changes in the dollar levels of the Company’s interest earning assets and interest bearing liabilities (“volume”) and the yields earned and paid on such assets and liabilities (“rate”). The change in interest income and interest expense attributable to changes in both volume and rates has been allocated proportionately to the change due to volume and the change due to rate.
 
Three Months ended March 31,
 
2017 vs. 2016
 
Increase (Decrease) Due to:
(Dollars in thousands)
Volume
 
Rate
 
Net
Interest income
 
 
 
 
 
Residential real estate loans
$
(192
)
 
(175
)
 
(367
)
Commercial loans (tax-equivalent)
6,943

 
(943
)
 
6,000

Consumer and other loans
133

 
(42
)
 
91

Investment securities (tax-equivalent)
(2,292
)
 
(216
)
 
(2,508
)
Total interest income
4,592

 
(1,376
)
 
3,216

Interest expense
 
 
 
 
 
NOW and DDA accounts
18

 
(64
)
 
(46
)
Savings accounts
17

 
25

 
42

Money market deposit accounts
26

 
(14
)
 
12

Certificate accounts
(187
)
 
(44
)
 
(231
)
Wholesale deposits
(44
)
 
(88
)
 
(132
)
FHLB advances
(213
)
 
71

 
(142
)
Repurchase agreements and other borrowed funds
82

 
106

 
188

Total interest expense
(301
)
 
(8
)
 
(309
)
Net interest income (tax-equivalent)
$
4,893

 
(1,368
)
 
3,525


Net interest income (tax-equivalent) increased $3.5 million for the three months ended March 31, 2017 compared to the same period in 2016. The interest income for the current quarter increased over the prior year first quarter primarily from increased growth of the Company’s commercial loan portfolio. Total interest expense remained relatively flat compared to the prior year with the majority of the change due to a decrease in FHLB borrowings and certificate accounts.

Effect of inflation and changing prices
Accounting principles generally accepted in the United States of America (“GAAP”) often requires the measurement of financial position and operating results in terms of historical dollars, without consideration for change in relative purchasing power over time due to inflation. Virtually all assets of the Company are monetary in nature; therefore, interest rates generally have a more significant impact on a company’s performance than does the effect of inflation.



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Item 3.
Quantitative and Qualitative Disclosure about Market Risk

The Company’s assessment of market risk as of March 31, 2017 indicates there are no material changes in the quantitative and qualitative disclosures from those in the 2016 Annual Report.


Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(c)) as of March 31, 2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.

Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2017, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.


PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In the Company’s opinion, all such matters are adequately covered by insurance, are without merit or are of such kind, or involve such amounts, that unfavorable disposition would not have a material adverse effect on the financial condition or results of operations of the Company.


Item 1A. Risk Factors

The Company believes there have been no material changes from risk factors previously disclosed in the 2016 Annual Report. The risks and uncertainties described in the 2016 Annual Report should be carefully reviewed. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that the Company does not currently know about or that the Company currently believes are immaterial, or that the Company has not predicted, may also harm its business operations or adversely affect the Company. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition, operating results or liquidity could be adversely affected.


Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

(a)
Not Applicable

(b)
Not Applicable

(c)
Not Applicable



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Item 3.
Defaults upon Senior Securities

(a)
Not Applicable

(b)
Not Applicable


Item 4.
Mine Safety Disclosures

Not Applicable


Item 5.
Other Information

(a)
Not Applicable

(b)
Not Applicable


Item 6. Exhibits
 
Exhibit 31.1 -
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

Exhibit 31.2 -
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002

Exhibit 32 -
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002

Exhibit 101 -
The following financial information from Glacier Bancorp, Inc's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 is formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
GLACIER BANCORP, INC.
 
 
 
 
May 2, 2017
/s/ Randall M. Chesler
 
 
Randall M. Chesler
 
 
President and CEO
 
 
 
 
May 2, 2017
/s/ Ron J. Copher
 
 
Ron J. Copher
 
 
Executive Vice President and CFO
 



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