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GLACIER BANCORP, INC. - Annual Report: 2019 (Form 10-K)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
________________________________________________________________________________________________________________________
FORM 10-K
________________________________________________________________________________________________________________________

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________             
Commission file number 000-18911
________________________________________________________________________________________________________________________
GLACIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________________________________________
Montana81-0519541
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
49 Commons LoopKalispell,Montana59901
(Address of principal executive offices)(Zip Code)
(406)756-4200
(Registrant’s telephone number, including area code)
________________________________________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par valueGBCINASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ☒  Yes    ☐  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes    ☒  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   ☒  Yes    ☐  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   ☐  Yes    ☒  No
The aggregate market value of the voting common equity held by non-affiliates at June 30, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), was $3,494,246,985 (based on the average bid and asked price as quoted on the NASDAQ Global Select Market as of the close of business on that date).
The number of shares of registrant’s common stock outstanding on February 11, 2020 was 92,308,549. No preferred shares are issued or outstanding.
Document Incorporated by Reference
Portions of the 2020 Annual Meeting Proxy Statement dated on or about March 16, 2020 are incorporated by reference into Parts I and III of this Form 10-K.


TABLE OF CONTENTS

 

  Page
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
SIGNATURES



ABBREVIATIONS/ACRONYMS

 

ACL – allowance for credit losses
GAAP – accounting principles generally accepted in the
ALCO – Asset Liability Committee
United States of America
ALLL or allowance – allowance for loan and lease losses
Ginnie Mae – Government National Mortgage Association
ARRC – Alternative Reference Rates Committee
GLBA – Gramm-Leach-Bliley Financial Services
ASC – Accounting Standards CodificationTM
Modernization Act of 1999
ASU – Accounting Standards Update
Heritage – Heritage Bancorp and its subsidiary, Heritage Bank of Nevada
ATM – automated teller machine
Interest rate locks – residential real estate derivatives for commitments
Bank – Glacier Bank
Interstate Act – Riegle-Neal Interstate Banking and Branching
Basel III – third installment of the Basel Accords
Efficiency Act of 1994
BHCA – Bank Holding Company Act of 1956, as amended
IRS – Internal Revenue Service
Board – Glacier Bancorp, Inc.’s Board of Directors
LIBOR – London Interbank Offered Rate
bp or bps – basis point(s)
LIHTC – Low-Income Housing Tax Credit
BSA – Bank Secrecy Act
MT Division of Banking – Montana Department of Administration’s
CDE – Certified Development Entity
Division of Banking and Financial Institutions
CDFI Fund – Community Development Financial Institutions Fund
NII – net interest income
CEO – Chief Executive Officer
NMTC – New Markets Tax Credits
CECL – current expected credit losses
NOW – negotiable order of withdrawal
CFO – Chief Financial Officer
NRSRO – Nationally Recognized Statistical Rating Organizations
CFPB – Consumer Financial Protection Bureau
OCI – other comprehensive income
Collegiate – Columbine Capital Corp. and its subsidiary,
OREO – other real estate owned
Collegiate Peaks Bank
Patriot Act – Uniting and Strengthening America by Providing Appropriate
Company – Glacier Bancorp, Inc.
Tools Required to Intercept and Obstruct Terrorism Act of 2001
COSO – Committee of Sponsoring Organizations of the
PCAOB – Public Company Accounting Oversight Board (United States)
Treadway Commission
Proxy Statement – the 2020 Annual Meeting Proxy Statement
CRA – Community Reinvestment Act of 1977
Repurchase agreements – securities sold under agreements
DDA – demand deposit account
to repurchase
DIF – federal Deposit Insurance Fund
ROU – right-of-use
Dodd-Frank Act – Dodd-Frank Wall Street Reform and
S&P – Standard and Poor’s
Consumer Protection Act of 2010
SBAZ – State Bank Corp. and its subsidiary, State Bank of Arizona
EGRRC Act – Economic Growth, Regulatory Relief, and Consumer
SEC – United States Securities and Exchange Commission
Protection Act
SERP – Supplemental Executive Retirement Plan
EVE – economic value of equity
SOFR – Secured Overnight Financing Rate
Fannie Mae – Federal National Mortgage Association
SOX Act – Sarbanes-Oxley Act of 2002
FASB – Financial Accounting Standards Board
Tax Act – The Tax Cuts and Jobs Act
FDIC – Federal Deposit Insurance Corporation
TBA – to-be-announced
FHLB – Federal Home Loan Bank
TDR – troubled debt restructuring
Final Rules – final rules implemented by the federal banking
VIE – variable interest entity
agencies that amended regulatory risk-based capital rules
FNB – FNB Bancorp and its subsidiary, The First National Bank
of Layton
FRB – Federal Reserve Bank
Freddie Mac – Federal Home Loan Mortgage Corporation
FSB – Inter-Mountain Bancorp., Inc., and its subsidiary,
First Security Bank



PART I
 
Item 1. Business

General
Glacier Bancorp, Inc., headquartered in Kalispell, Montana, is a Montana corporation incorporated in 2004 as a successor corporation to the Delaware corporation originally incorporated in 1990. The terms “Company,” "we," "us" and "our" mean Glacier Bancorp, Inc. and its subsidiaries, when appropriate. The Company is a publicly-traded company and its common stock trades on the NASDAQ Global Select Market under the symbol GBCI. We provide a full range of banking services to individuals and businesses from 181 locations in Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada through our wholly-owned bank subsidiary, Glacier Bank (“Bank”). We offer a wide range of banking products and services, including: 1) retail banking; 2) business banking; 3) real estate, commercial, agriculture and consumer loans; and 4) mortgage origination services. We serve individuals, small to medium-sized businesses, community organizations and public entities. For information regarding our lending, investment and funding activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company includes the parent holding company and the Bank. As of December 31, 2019, the Bank consists of sixteen bank divisions, a treasury division, an information technology division and a centralized mortgage division. The Bank divisions operate under separate names, management teams and advisory directors. and include the following:
•Glacier Bank (Kalispell, Montana) with operations in Montana;
•First Security Bank of Missoula (Missoula, Montana) with operations in Montana;
•Valley Bank of Helena (Helena, Montana) with operations in Montana;
•First Security Bank (Bozeman, Montana) with operations in Montana;
•Western Security Bank (Billings, Montana) with operations in Montana;
•First Bank of Montana (Lewistown, Montana) with operations in Montana;
•Mountain West Bank (Coeur d’Alene, Idaho) with operations in Idaho and Washington;
•Citizens Community Bank (Pocatello, Idaho) with operations in Idaho;
•First Bank (Powell, Wyoming) with operations in Wyoming;
•First State Bank (Wheatland, Wyoming) with operations in Wyoming;
•North Cascades Bank (Chelan, Washington) with operations in Washington;
•Bank of the San Juans (Durango, Colorado) with operations in Colorado;
•Collegiate Peaks Bank (Buena Vista, Colorado) with operations in Colorado;
•The Foothills Bank (Yuma, Arizona) with operations in Arizona;
•First Community Bank Utah (Layton, Utah) with operations in Utah; and
•Heritage Bank of Nevada (Reno, NV) with operations in Nevada.

The treasury division includes the Bank’s investment portfolio and wholesale borrowings, the information technology division includes the Bank’s internal data processing, and the centralized mortgage division includes mortgage loan servicing and secondary market sales. We consider the Bank to be our sole operating segment.

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

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

As of December 31, 2019, the Company and its subsidiaries were not engaged in any operations in foreign countries.

4

Recent and Pending Acquisitions
Our strategy is to profitably grow our business through internal growth and selective acquisitions. We continue to look for profitable expansion opportunities primarily in existing and new markets in the Rocky Mountain and Western states. We have completed the following acquisitions during the last five years:

(Dollars in thousands)DateTotal
Assets		Gross
Loans		Total
Deposits
Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank
of Nevada (collectively, "Heritage")		July 31, 2019$977,944  615,279  722,220  
FNB Bancorp and its wholly-owned subsidiary, The First National
Bank of Layton (collectively, "FNB")		April 30, 2019379,155  245,485  274,646  
Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary,
    First Security Bank (collectively, “FSB”)
February 28, 20181,109,684  627,767  877,586  
Columbine Capital Corp., and its wholly-owned subsidiary,
  Collegiate Peaks Bank (collectively, “Collegiate”)
January 31, 2018551,198  354,252  437,171  
TFB Bancorp, Inc. and its subsidiary, The Foothills Bank
April 30, 2017385,839  292,529  296,760  
Treasure State BankAugust 31, 201676,165  51,875  58,364  
Cañon Bank Corporation and its subsidiary, Cañon National BankOctober 31, 2015270,121  159,759  237,326  
Montana Community Banks, Inc. and its subsidiary,
  Community Bank
February 28, 2015175,774  84,689  146,820  

On September 30, 2019, we announced the signing of a definitive agreement to acquire State Bank Corp., the parent company of State Bank of Arizona, a community bank based in Lake Havasu City, Arizona (collectively, “SBAZ”). SBAZ provides banking services to individuals and businesses in Arizona with locations in Bullhead City, Cottonwood, Kingman, Lake Havasu City, Phoenix, Prescott Valley and Prescott. As of December 31, 2019, SBAZ had total assets of $678 million, gross loans of $439 million and total deposits of $587 million. The acquisition has received regulatory approvals, is subject to other customary conditions of closing and is expected to be completed in the first quarter of 2020. Upon closing of the transaction, SBAZ will merge into our Foothills Bank division and will expand our footprint in Arizona to cover all major markets in the state and be a leading community bank in Arizona.

See Note 22 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information regarding the 2019 and 2018 acquisitions.

Market Area and Competition
We have 181 locations, which consists of 164 branches and 17 loan or administration offices, in 66 counties within 8 states including Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada. The market area’s economic base primarily focuses on tourism, construction, mining, energy, manufacturing, agriculture, service industry, and health care. The tourism industry is highly influenced by national parks, ski resorts, significant lakes and rural scenic areas.

Commercial banking is a highly competitive business and operates in a rapidly changing environment. There are a large number of depository institutions including savings and loans, commercial banks, and credit unions in the markets in which we have locations. Competition is also increasing for deposit and lending services from internet-based competitors. Non-depository financial service institutions, primarily in the securities, insurance and retail industries, have also become competitors for retail savings, investment funds and lending activities. In addition to offering competitive interest rates, the principal methods used by the Bank to attract deposits include the offering of a variety of services including on-line banking, mobile banking and convenient office locations and business hours. The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturities, loan fees, and the quality of service.
5

The following table summarizes our number of locations, the number of counties we serve and the percentage of Federal Deposit Insurance Corporation (“FDIC”) insured deposits we have in those counties for each of the eight states we operate in. Percentages of deposits are based on the FDIC summary of deposits survey as of June 30, 2019.

Number of LocationsNumber of Counties ServedPercent of Deposits
Montana71  17  26.1 %
Idaho29  9  7.6 %
Utah10  5  0.1 %
Washington14  7  2.2 %
Wyoming17  8  23.8 %
Colorado25  12  1.5 %
Arizona8  5  1.3 %
Nevada7  3  5.8 %
181  66  

Employees
As of December 31, 2019, we employed 3,046 persons, 2,801 of whom were employed full time and none of whom were represented by a collective bargaining group. We provide our qualifying employees with a comprehensive benefit program, including health, dental and vision insurance, life and accident insurance, short- and long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan, stock-based compensation plan, deferred compensation plans, and a supplemental executive retirement plan. We consider our employee relations to be excellent. See Note 13 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for detailed information regarding employee benefit plans and eligibility requirements.

Board of Directors and Committees
The Company's Board of Directors (“Board”) has the ultimate authority and responsibility for overseeing risk management at the Company. Some aspects of risk oversight are fulfilled at the Board level, and the Board delegates other aspects of its risk oversight function to its committees. The Board has established, among others, an Audit Committee, a Compensation Committee, a Nominating/Corporate Governance Committee, a Compliance Committee, and a Risk Oversight Committee. Additional information regarding Board committees is set forth under the heading “Meetings and Committees of the Board of Directors - Committee Membership” in the Company’s 2020 Annual Meeting Proxy Statement (“Proxy Statement”) and is incorporated herein by reference.

Website Access
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.glacierbancorp.com) as soon as reasonably practicable after we have filed the material with, or furnished it to, the United States Securities and Exchange Commission (“SEC”). Copies can also be obtained by accessing the SEC’s website (www.sec.gov).

Supervision and Regulation
We are subject to extensive regulation under federal and state laws. This section provides a general overview of the federal and state regulatory framework applicable to us. In general, this regulatory framework is designed to protect depositors, the federal Deposit Insurance Fund (“DIF”), and the federal and state banking system as a whole, rather than specifically for the protection of shareholders. Note that this section is not intended to summarize all laws and regulations applicable to us. Descriptions of statutory or regulatory provisions do not purport to be complete and are qualified by reference to those provisions.

These statutes and regulations, as well as related policies, continue to be subject to change by Congress, state legislatures, and federal and state regulators. Changes in statutes, regulations, or regulatory policies applicable to us (including their interpretation or implementation) cannot be predicted and could have a material effect on our business and operations. Numerous changes to the statutes, regulations, and regulatory policies applicable to us have been made or proposed in recent years. Continued efforts to monitor and comply with new regulatory requirements add to the complexity and cost of our business and operations.

6

The Company is subject to regulation and supervision by the Federal Reserve and the Montana Department of Administration’s Division of Banking and Financial Institutions (“MT Division of Banking”) and regulation generally by the State of Montana. The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, which are both administered by the SEC. The Bank is subject to regulation and supervision by the FDIC, the MT Division of Banking, and, with respect to Bank branches outside of the State of Montana, the respective regulators in those states.

Federal and State Bank Holding Company Regulation
General. The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”), due to its ownership of and control over the Bank. As a bank holding company, the Company is subject to regulation, supervision, and examination by the Federal Reserve. Further, because the Bank is a “regional banking organization” under Montana law, the Company (as a bank holding company of the Bank) is also subject to regulation, supervision and examination by the MT Division of Banking. In general, the BHCA limits the business of a bank holding company to owning or controlling banks and engaging in, or retaining or acquiring shares in a company engaged in, other activities closely related to the business of banking. In addition, the Company must also file reports with and provide additional information to the Federal Reserve.

Holding Company Bank Ownership. The BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before: 1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5 percent of such shares; 2) acquiring all or substantially all of the assets of another bank or bank holding company; or 3) merging or consolidating with another bank holding company.

Holding Company Control of Non-banks. With some exceptions, the BHCA prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation, or order, have been identified as activities closely related to the business of banking or managing or controlling banks.

Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral for loans to any borrower. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) further extended the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and borrowing transactions as covered transactions under the regulations. It also 1) expands the scope of covered transactions required to be collateralized; 2) requires collateral to be maintained at all times for covered transactions required to be collateralized; and 3) places limits on acceptable collateral. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payments of dividends, interest, and operational expenses.

Tying Arrangements. We are also prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. For example, with certain exceptions, we may not condition an extension of credit to a customer on either 1) a requirement that the customer obtain additional services provided by us; or 2) an agreement by the customer to refrain from obtaining other services from a competitor.

Support of Bank Subsidiaries. Under Federal Reserve policy and the Dodd-Frank Act, the Company is required to act as a source of financial and managerial strength to the Bank. This means that the Company is required to commit, as necessary, capital and resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources or when it may not be in the Company's or its shareholders' best interests to do so. Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.

State Law Restrictions under Corporate Law. As a Montana corporation, the Company is subject to certain limitations and restrictions under applicable Montana corporate law. For example, Montana corporate law includes limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.


7

Federal and State Regulation of the Bank
General. Deposits in the Bank are insured by the FDIC. The Bank is subject to primary supervision, periodic examination, and regulation of the FDIC and the MT Division of Banking. These agencies have the authority to prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. The federal laws that apply to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of and collateral for loans. Federal laws also regulate community reinvestment and insider credit transactions and impose safety and soundness standards. In addition to federal law and the laws of the State of Montana, with respect to the Bank's branches in Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada, the Bank is also subject to the various laws and regulations governing its activities in those states.

Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationships and interactions with consumers, including laws and regulations that impose certain disclosure requirements and that govern the manner in which the Bank takes deposits, makes and collects loans, and provides other services. In recent years, examination and enforcement by federal and state banking agencies for non-compliance with consumer protection laws and regulations have increased and become more intense. Failure to comply with these laws and regulations may subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines, civil monetary penalties, criminal penalties, punitive damages, and the loss of certain contractual rights. The Bank has established a comprehensive compliance system to ensure consumer protection.

Community Reinvestment. The Community Reinvestment Act of 1977 (“CRA”) requires that, in connection with examinations of financial institutions within their jurisdictions, federal bank regulators evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch or facility. In some cases, a bank's failure to comply with the CRA, or CRA protests filed by interested parties during applicable comment periods, can result in the denial or delay of such transactions. The Bank received a “satisfactory” rating in its most recent CRA examination.

Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests. These extensions of credit 1) must be made on substantially the same terms (including interest rates and collateral) and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not related to the lending bank; and 2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders and generally prohibit loans to senior officers other than for certain specified purposes.

Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the bank's federal supervisory agency; 2) as discussed above, places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and 3) generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards. Certain non-capital safety and soundness standards are also imposed upon banks. These standards cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings, and stock valuation. In addition, each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information, and ensure the proper disposal of customer and consumer information. An institution that fails to meet these standards may be required to submit a compliance plan, or be subject to regulatory sanctions, including restrictions on growth. The Bank has established comprehensive policies and risk management procedures to ensure the safety and soundness of the Bank.


8

Interstate Banking and Branching
The Dodd-Frank Act eliminated interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), and removed many restrictions on de novo interstate branching by state and federally chartered banks.  Federal regulators have authority to approve applications by such banks to establish de novo branches in states other than the bank's home state if the host state's banks could establish a branch at the same location. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal bank regulations prohibit banks from using their interstate branches primarily for deposit production and federal bank regulatory agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.

Dividends
A principal source of the Company’s cash is from dividends received from the Bank, which are subject to regulation and limitation. As a general rule, regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice. For example, regulators have stated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice and that an institution should generally pay dividends only out of current operating earnings. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. In certain circumstances, Montana law also places limits or restrictions on a bank’s ability to declare and pay dividends.

Rules adopted in accordance with the third installment of the Basel Accords (“Basel III”) also impose limitations on the Bank's ability to pay dividends. In general, these rules limit the Bank's ability to pay dividends unless the Bank's common equity conservation buffer exceeds the minimum required capital ratio by at least 2.5 percent of risk-weighted assets.

The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding companies. In general, the policy statement expresses the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless the bank holding company’s earnings for the past year are sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. A bank holding company's ability to pay dividends may also be restricted if a subsidiary bank becomes under-capitalized. These various regulatory policies may affect our ability to pay dividends or otherwise engage in capital distributions.

The Dodd-Frank Act
General. The Dodd-Frank Act was signed into law in July 2010. The Dodd-Frank Act significantly changed the bank regulatory structure and is affecting the lending, deposit, investment, trading, and operating activities of banks and bank holding companies. Some of the provisions of the Dodd-Frank Act that may impact our business and operations are summarized below.

Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute” arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions. In August 2015, the SEC adopted a rule mandated by the Dodd-Frank Act that requires a public company to disclose the ratio of the compensation of its Chief Executive Officer (“CEO”) to the median compensation of its employees. This rule is intended to provide shareholders with information that they can use to evaluate a CEO’s compensation.

Prohibition Against Charter Conversions of Financial Institutions. The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless the depository institution seeks prior approval from its primary regulator and complies with specified procedures to ensure compliance with the enforcement action.

Repeal of Demand Deposit Interest Prohibition. The Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.


9

Consumer Financial Protection Bureau. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) and empowered it to exercise broad rulemaking, supervision, and enforcement authority for a wide range of consumer protection laws. Because our total consolidated assets exceed $10 billion, we are subject to the direct supervision of the CFPB. The CFPB has issued and continues to issue numerous regulations under which we will continue to incur additional expense in connection with our ongoing compliance obligations. Significant recent CFPB developments that may affect operations and compliance costs include:
•positions taken by the CFPB on fair lending, including applying the disparate impact theory which could make it more difficult for lenders to charge different rates or to apply different terms to loans to different customers;
•the CFPB's final rule amending Regulation C, which implements the Home Mortgage Disclosure Act, requiring most lenders to report expanded information in order for the CFPB to more effectively monitor fair lending concerns and other information shortcomings identified by the CFPB;
•positions taken by the CFPB regarding the Electronic Fund Transfer Act and Regulation E, which require companies to obtain consumer authorizations before automatically debiting a consumer’s account for pre-authorized electronic funds transfers; and
•focused efforts on enforcing certain compliance obligations the CFPB deems a priority, such as automobile loan servicing, debt collection, mortgage origination and servicing, remittances, and fair lending, among others.

Interchange Fees. Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic transactions are "reasonable and proportional" to the costs incurred by issuers for processing such transactions. Notably, the Federal Reserve's rules set a maximum permissible interchange fee, among other requirements. Because our total consolidated assets exceeded $10 billion during the first quarter of 2018, we became subject to the interchange fee cap beginning July 1, 2019 on a go-forward basis. The interchange fee cap is estimated to reduce our interchange fee income by an estimated $20 million (pre-tax) on an annual basis.

Stress Testing
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRC Act”) was signed into law, which is bipartisan legislation that rolled back certain provisions of the Dodd-Frank Act to provide regulatory relief to certain financial institutions. In relevant part, the EGRRC Act raised the applicability threshold for company-run stress testing required under the Dodd-Frank Act by exempting bank holding companies under $100 billion in total assets and raising the asset threshold for covered banks from $10 billion to $250 billion. In November of 2019, the FDIC adopted a final rule to implement these changes. As a result, we are not currently subject to the Dodd-Frank Act stress testing requirements.

Capital Adequacy
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal regulatory agencies, which involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory guidelines. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. The capital requirements are intended to ensure that institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments and are applied separately to the Company and the Bank.

Federal regulations require insured depository institutions and bank holding companies to meet several minimum capital standards, including: 1) a common equity Tier 1 capital to risk-based assets ratio of 4.5 percent; 2) a Tier 1 capital to risk-based assets ratio of 6 percent; 3) a total capital to risk-based assets ratio of 8 percent; and 4) a 4 percent Tier 1 capital to total assets leverage ratio. These minimum capital requirements became effective in January 2015 and were the result of final rules implementing certain regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act ("Final Rules").

The Final Rules also require a capital conservation buffer designed to absorb losses during periods of economic stress. Failure to comply with this buffer requirement may result in constraints on capital distributions (e.g., dividends, equity repurchases, and certain bonus compensation for executive officers). The Final Rules change the risk-weights of certain assets for purposes of the risk-based capital ratios and phase out certain instruments as qualifying capital. For additional information regarding trust preferred securities and their impact to regulatory capital, see Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”


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The Final Rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on an insured depository institution if its capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements to qualify as “well capitalized”: 1) a Tier 1 common equity capital ratio of at least 6.5 percent; 2) a Tier 1 capital ratio of at least 8 percent; 3) a total capital ratio of at least 10 percent; 4) a Tier 1 leverage ratio of at least 5 percent; and 5) not be subject to any order or written directive requiring a specific capital level. The FDIC’s rules (as amended by the Final Rules) contain other capital classification categories, such as “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” each of which are based on certain capital ratios. An institution may be downgraded to a category lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition, or if the institution receives an unsatisfactory examination rating.

The application of the Final Rules may result in lower returns on invested capital, require the raising of additional capital or require regulatory action if the Bank were unable to comply with such requirements. In addition, management may be required to modify its business strategy due to the changes to the asset risk-weights for risk-based capital calculations and the requirement to meet the capital conservation buffers. The imposition of liquidity requirements in connection with these rules could also cause the Bank to increase its holdings of liquid assets, change its business strategy, and make other changes to the terms of its funding.

Regulatory Oversight and Examination
Inspections. The Federal Reserve conducts periodic inspections of bank holding companies. In general, the objectives of the Federal Reserve's inspection program are to ascertain whether the financial strength of a bank holding company is maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank subsidiaries. The inspection type and frequency typically varies depending on asset size, complexity of the organization, and the bank holding company’s rating at its last inspection.

Examinations. Banks are subject to periodic examinations by their primary regulators. In assessing a bank's condition, bank examinations have evolved from reliance on transaction testing to a risk-focused approach. These examinations are extensive and cover the entire breadth of the operations of a bank. Generally, safety and soundness examinations occur on an 18-month cycle for banks under $3 billion in total assets that are well capitalized and without regulatory issues, and 12-months otherwise. Examinations alternate between the federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised institutions as frequently as deemed necessary based on the condition of the institution or as a result of certain triggering events. Because our total consolidated assets exceed $10 billion, we are also subject to the direct supervision of the CFPB.

Commercial Real Estate Ratios. The federal banking regulators recently issued guidance reminding financial institutions to reexamine the existing regulations regarding concentrations in commercial real estate lending. The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The banking regulators are directed to examine each bank’s exposure to commercial real estate loans that are dependent on cash flow from the real estate held as collateral and to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in evaluating capital adequacy and does not specifically limit a bank’s commercial real estate lending to a specified concentration level.

Corporate Governance and Accounting
The Sarbanes-Oxley Act of 2002 (“SOX Act”) addresses, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. In general, the SOX Act 1) requires chief executive officers and chief financial officers to certify to the compliance of periodic reports filed with the SEC; 2) imposes specific and enhanced corporate disclosure requirements; 3) accelerates the time frame for reporting insider transactions and periodic disclosures by public companies; 4) requires companies to adopt and disclose information about corporate governance practices, including whether or not they have adopted a code of ethics for senior financial officers and whether the audit committee includes at least one “audit committee financial expert” and 5) requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. As a publicly reporting company, the Company is subject to the requirements of the SOX Act and related rules and regulations issued by the SEC and NASDAQ.


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Anti-Money Laundering and Anti-Terrorism
The Bank Secrecy Act (“BSA”) requires all financial institutions to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA also sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that might signal criminal activity) and certain due diligence and "know your customer" documentation requirements.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”), intended to combat terrorism, was renewed with certain amendments in 2006. In relevant part, the Patriot Act 1) prohibits banks from providing correspondent accounts directly to foreign shell banks; 2) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; 3) requires financial institutions to establish an anti-money laundering compliance program; and 4) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. Regulators are directed to consider a bank holding company’s and a bank’s effectiveness in combating money laundering when reviewing and ruling on applications under the BHCA and the Bank Merger Act. We have established comprehensive compliance programs designed to comply with the requirements of the BSA and Patriot Act.

Financial Services Modernization
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) brought about significant changes to the laws affecting banks and bank holding companies. Generally, the GLBA 1) repeals historical restrictions on preventing banks from affiliating with securities firms; 2) provides a uniform framework for the activities of banks, savings institutions, and their holding companies; 3) broadens the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; 4) provides an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and 5) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. The Bank is subject to FDIC regulations implementing the privacy provisions of the GLBA. These regulations require a bank to disclose its privacy policy, including informing consumers of the bank's information sharing practices and their right to opt out of certain practices.

Deposit Insurance
FDIC Insured Deposits. The Bank's deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments by the FDIC, which are designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act redefined the assessment base used for calculating deposit insurance assessments by requiring the FDIC to determine assessments based on assets instead of deposits. Assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution. Under the FDIC’s assessment system for determining payments to the DIF, insured depository institutions with more than $10 billion in assets are assessed under a “scorecard” methodology that seeks to capture both the probability that such an institution will fail and the magnitude of the impact on the DIF if such a failure occurs. In addition, the Dodd-Frank Act 1) raised the minimum designated reserve ratio (the FDIC is required to set the reserve ratio each year) of the DIF from 1.15 percent to 1.35 percent; 2) required that the DIF reserve ratio meet 1.35 percent by 2020; and 3) eliminated the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for the increase from 1.15 percent to 1.35 percent by imposing a surcharge on those institutions. The surcharge continued through September of 2018 when the DIF reserve ratio reached 1.36 percent, which was ahead of the Dodd-Frank Act’s 2020 deadline to meet the 1.35 percent reserve ratio. As a result, certain institutions, such as the Bank, are entitled to receive credits for the portions of their assessments that contributed to growth in the reserve ratio between 1.15 percent and 1.35 percent. For instance, the Bank received a $2.5 million credit during 2019. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. The FDIC may also prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the DIF.

Safety and Soundness. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order, or any condition imposed by an agreement with the FDIC. Management is not aware of any existing circumstances that would result in termination of the Bank's deposit insurance.

Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased FDIC deposit insurance from $100,000 to $250,000 per depositor. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.


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Recent and Proposed Legislation
The economic and political environment of the past several years has led to a number of proposed legislative, governmental, and regulatory initiatives that may significantly impact the banking industry. Other regulatory initiatives by federal and state agencies may also significantly impact our business. We cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on our operations, competitive situation, financial conditions, or results of operations. While recent history has demonstrated that new legislation or changes to existing laws or regulations typically result in a greater compliance burden (and therefore increase the general costs of doing business), the current administration has expressed an attempt to reduce these regulatory burdens.

Effects of Federal Government Monetary Policy
The Company’s earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. Through its open market operations in U.S. government securities, control of the discount rate applicable to borrowings, establishment of reserve requirements against certain deposits, and control of the interest rate applicable to excess reserve balances and reverse repurchase agreements, the Federal Reserve influences the availability and cost of money and credit and, ultimately, a range of economic variables including employment, output, and the prices of goods and services. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

Heightened Requirements for Large Bank Holding Companies and Banks
As mentioned above, the Dodd-Frank Act imposed heightened requirements on large bank holding companies and banks, and the EGRRC Act has rolled back certain provisions of the Dodd-Frank Act. In particular, the EGRRC Act increased the asset threshold for certain rules that previously applied to bank holding companies and banks with at least $10 billion in total consolidated assets. As a result of the EGRRC Act and follow-up rules, we are not currently subject to several of those heightened requirements (e.g., stress testing and a dedicated risk committee), but we will remain subject to other requirements of the Dodd-Frank Act left unaffected by the EGRRC Act, such as the requirement that we be examined, primarily by the CFPB, for compliance with federal consumer protection laws. We have established a comprehensive compliance system to ensure compliance with these rules.


Item 1A. Risk Factors

The following is a discussion of what we believe are the most significant risks and uncertainties that may affect our business, financial condition and future results of operations. These risks are not the only ones that we face. Other risks and uncertainties not currently known to us or currently believed to be material may harm our future business, financial condition, results of operations and prospects.

Economic conditions in the market areas the Bank serves may adversely impact its earnings and could increase the credit risk associated with its loan portfolio and the value of its investment portfolio.
Substantially all of the Bank’s loans are to businesses and individuals in Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada, and a softening of the economies in these market areas could have a material adverse effect on its business, financial condition, results of operations and prospects. Any future deterioration in economic conditions in the markets the Bank serves could result in the following consequences, any of which could have an adverse impact, which could be material, on our business, financial condition, results of operations and prospects:
•loan delinquencies may increase;
•problem assets and foreclosures may increase;
•collateral for loans made may decline in value, in turn reducing customers’ borrowing power;
•certain securities within the investment portfolio could become other-than-temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity;
•low cost or non-interest bearing deposits may decrease; and
•demand for loan and other products and services may decrease.


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National and global economic and geopolitical conditions could adversely affect our future results of operations or market price of our stock.
Our business is impacted by factors such as economic, political and market conditions, broad trends in industry and finance, changes in government monetary and fiscal policies, inflation, and financial market volatility, all of which are beyond our control. National and global economies are constantly in flux, as evidenced by recent market volatility resulting from, among other things, global trade disputes and the associated imposition of tariffs in certain cases, the uncertain future relationship of the United Kingdom with the European Union (e.g., Brexit), and the ever-changing landscape of the energy and medical industries. Future economic conditions cannot be predicted, and any renewed deterioration in the economies of the nation as a whole or in our markets could have an adverse effect, which could be material, on its business, financial condition, results of operations and prospects, and could cause the market price of our stock to decline.

We are subject to heightened regulatory requirements related to our having exceeded $10 billion in assets.
We exceeded total consolidated assets of $10 billion during the first quarter of 2018. The Dodd-Frank Act and its implementing regulations impose additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with specific sections of the Federal Reserve's prudential oversight requirements. The Durbin Amendment, which was passed as part of the Dodd-Frank Act, instructed the Federal Reserve to establish rules limiting the amount of interchange fees that can be charged to merchants for debit card processing.  The Federal Reserve's Final ules contained several key pieces, including in relevant part an interchange fee cap, certain fraud prevention adjustments, and, most notably, an exemption from the interchange fee cap for small issuers.  Issuers with less than $10 billion in total assets (as of the end of the previous calendar year) are exempt from the Federal Reserve's interchange fee cap.  As our total assets exceeded $10 billion, the interchange fee cap of the Durbin Amendment negatively affected the interchange income the Bank receives from electronic payment transactions. The interchange fee cap became effective to us commencing in July of 2019.

In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to compliance with various federal consumer financial protection laws and regulations. As a fairly new agency with evolving regulations and practices, it is uncertain as to how the CFPB's examinations and regulatory authority may impact our business.

A failure in or breach of the Bank’s operational or security systems, or those of the Bank’s third party service providers, including as a result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase costs and cause losses.
In the normal course of its business, the Bank collects, processes and retains sensitive and confidential customer information. Despite the security measures we have in place, our facilities may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, and other similar events.

Information security risks for financial institutions such as the Bank have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies, including mobile devises, to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber attacks or other security breaches involving the theft of sensitive and confidential information, hackers have engaged in attacks against financial institutions designed to disrupt key business services such as customer-facing web sites. We are not able to anticipate or implement effective preventative measures against all security breaches of these types. Although the Bank employs detection and response mechanisms designed to contain and mitigate security incidents, early detection may be thwarted by sophisticated attacks and malware designed to avoid detection, which continue to evolve.

Additionally, the Bank faces the risk of operational disruption, failure, termination or capacity constraints of any of the third parties that facilitate its business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, the Bank’s operational systems.

Any failures, interruptions or security breaches in the Bank’s information systems could damage its reputation, result in a loss of customer business, result in a violation of privacy or other laws, or expose us to civil litigation, regulatory fines or losses not covered by insurance.


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The allowance for loan and lease losses may not be adequate to cover actual loan losses, which could adversely affect earnings.
The Bank maintains an allowance for loan and lease losses (“ALLL” or “allowance”) in an amount that it believes is adequate to provide for losses in the loan portfolio. While the Bank strives to carefully manage and monitor credit quality and to identify loans that may become non-performing, at any time there are loans included in the portfolio that will result in losses, but that have not been identified as non-performing or potential problem loans. With respect to real estate loans and property taken in satisfaction of such loans (“other real estate owned” or “OREO”), the Bank can be required to recognize significant declines in the value of the underlying real estate collateral quite suddenly as values are updated through appraisals and evaluations (new or updated) performed in the normal course of monitoring the credit quality of the loans. There are many factors that can cause the value of real estate to decline, including declines in the general real estate market, changes in methodology applied by appraisers, and/or using a different appraiser than was used for the prior appraisal or evaluation. The Bank’s ability to recover on real estate loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining values, which increases the likelihood the Bank will suffer losses on defaulted loans beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the Bank’s provision for loan losses and ALLL. By closely monitoring credit quality, the Bank attempts to identify deteriorating loans before they become non-performing assets and adjust the ALLL accordingly. However, because future events are uncertain, and if difficult economic conditions occur, there may be loans that deteriorate to a non-performing status in an accelerated time frame. As a result, future additions to the ALLL may be necessary beyond the levels commensurate with any loan growth. Because the loan portfolio contains a number of loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing loans, requiring an increase to the ALLL. Additionally, future significant additions to the ALLL may be required based on changes in the mix of loans comprising the portfolio, changes in the financial condition of borrowers, which may result from changes in economic conditions, or changes in the assumptions used in determining the ALLL. Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the Bank’s loan portfolio and the adequacy of the ALLL. These regulatory authorities may require the Bank to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from the Bank’s judgments. Any increase in the ALLL could have an adverse effect, which could be material, on our financial condition and results of operations.

Additionally, the changes in accounting standards described below under “Changes in accounting standards could materially impact our financial statements” will change the current historical method of providing allowances for credit losses that are probable, and may require the Bank to increase the amount of the ALLL.

The Bank has a high concentration of loans secured by real estate, so any future deterioration in the real estate markets could require material increases in the ALLL and adversely affect our financial condition and results of operations.
The Bank has a high degree of concentration in loans secured by real estate. Any future deterioration in the real estate markets could adversely impact borrowers’ ability to repay loans secured by real estate and the value of real estate collateral, thereby increasing the credit risk associated with the loan portfolio. The Bank’s ability to recover on these loans by selling or disposing of the underlying real estate collateral would be adversely impacted by any decline in real estate values, which increases the likelihood that the Bank will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL. This, in turn, could require material increases in the ALLL which would adversely affect our financial condition and results of operations.

Non-performing assets could increase, which could adversely affect our results of operations and financial condition.
The Bank may experience increases in non-performing assets in the future. Non-performing assets (which include OREO) adversely affect our financial condition and results of operations in various ways. The Bank does not record interest income on non-accrual loans or OREO, thereby adversely affecting its earnings. When the Bank takes collateral in foreclosures and similar proceedings, it is required to mark the related asset to the then fair value of the collateral, less estimated cost to sell, which may result in a charge-off of the value of the asset and lead the Bank to increase the provision for loan losses. An increase in the level of non-performing assets also increases the Bank’s risk profile and may impact the capital levels its regulators believe are appropriate in light of such risks. Further decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond the Bank’s control, could adversely affect our business, results of operations and financial condition, perhaps materially. In addition to the carrying costs to maintain OREO, the resolution of non-performing assets increases the Bank’s loan administration costs generally, and requires significant commitments of time from management and our directors, which reduces the time they have to focus on profitably growing our business.


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The Bank’s loan portfolio mix increases the exposure to credit risks tied to deteriorating conditions.
The loan portfolio contains a high percentage of commercial, commercial real estate, real estate acquisition and development loans in relation to the total loans and total assets. These types of loans have historically been viewed as having more risk of default than residential real estate loans or certain other types of loans or investments. In fact, the FDIC has issued pronouncements alerting banks of its concern about banks with a heavy concentration of commercial real estate loans. These types of loans also typically are larger than residential real estate loans and other commercial loans. Because the Bank’s loan portfolio contains a significant number of commercial and commercial real estate loans with relatively large balances, the deterioration of one or more of these loans may cause a significant increase in non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in charge-offs, which could have a material adverse impact on our results of operations and financial condition.

Competition in the Bank’s market areas may limit future success.
Commercial banking is a highly competitive business and a consolidating industry. The Bank competes with other commercial banks, credit unions, finance, insurance and other non-depository companies operating in its market areas. The Bank is subject to substantial competition for loans and deposits from other financial institutions. Some of its competitors are not subject to the same degree of regulation and restriction as the Bank. Some of the Bank’s competitors have greater financial resources than the Bank. If the Bank is unable to effectively compete in its market areas, the Bank’s business, our results of operations and prospects could be adversely affected.

Fluctuating interest rates can adversely affect profitability.
The Bank’s profitability is dependent to a large extent upon net interest income, which is the difference (or “spread”) between the interest earned on loans, investment securities and other interest earning assets and interest paid on deposits, borrowings, and other interest bearing liabilities. Because of the differences in maturities and repricing characteristics of interest earning assets and interest bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest earning assets and interest paid on interest bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect the Bank’s interest rate spread, and, in turn, profitability. The Bank seeks to manage its interest rate risk within well established policies and guidelines. Generally, the Bank seeks an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, the Bank’s structures and practices to manage interest rate risk may not be effective in a highly volatile rate environment. Over the course of 2017 and 2018, the Federal Reserve increased the federal funds target range seven times, and in 2019 decreased the target range three times.

We may be impacted by the retirement of London Interbank Offered Rate (“LIBOR”) as a reference rate.
In July 2017, the United Kingdom Financial Conduct Authority announced that LIBOR may no longer be published after 2021. LIBOR is used extensively in the U.S and globally as a “benchmark” or “reference rate” for various commercial and financial contracts. In response, the Alternative Reference Rates Committee (“ARRC”), made up of financial and capital market institutions, was convened to address the replacement of LIBOR in the U.S. The ARRC identified a potential successor to LIBOR in the Secured Overnight Financing Rate (“SOFR”) and crafted a plan to facilitate the transition. However, there are significant conceptual and technical differences between LIBOR and SOFR. The Financial Stability Oversight Committee has stated that the end or waning use of LIBOR has the potential to significantly disrupt trading in many important types of financial contracts.

At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures or other securities or financial arrangements. The replacement of LIBOR with one or more alternative rates may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debentures and derivative financial instruments. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under contracts or financial instruments to which we are a party, we may incur significant expenses in effecting the transition.

We may not be able to continue to grow organically or through acquisitions.
Historically, we have expanded through a combination of organic growth and acquisitions. If market and regulatory conditions change, we may be unable to grow organically or successfully complete or integrate potential future acquisitions at the same pace. We have historically used our strong stock currency and capital resources to complete acquisitions. Downturns in the stock market and the trading price of our stock could have an impact on future acquisitions. Furthermore, there can be no assurance that we can successfully complete such transactions, since they are subject to regulatory review and approval.


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Growth through future acquisitions could, in some circumstances, adversely affect profitability or other performance measures.
During 2019 and in prior years, we have been active in acquisitions and may in the future engage in selected acquisitions of additional financial institutions. There are risks associated with any such acquisitions that could adversely affect profitability and other performance measures. These risks include, among other things, incorrectly assessing the asset quality of a financial institution being acquired, discovering compliance or regulatory issues after the acquisition, encountering greater than anticipated cost and use of management time associated with integrating acquired businesses into our operations, and being unable to profitably deploy funds acquired in an acquisition. We may not be able to continue to grow through acquisitions, and if we do, there is a risk of negative impacts of such acquisitions on our operating results and financial condition.

Acquisitions may also cause business disruptions that cause the Bank to lose customers or cause customers to remove their accounts from the Bank and move to competing financial institutions. Further, acquisitions may also disrupt the Bank's ongoing businesses or create inconsistencies in standards, controls, procedures, and policies that adversely affect relationships with employees, clients, customers, and depositors. The loss of key employees during acquisitions may also adversely affect our business.

We anticipate that we might issue capital stock in connection with future acquisitions. Acquisitions and related issuances of stock may have a dilutive effect on earnings per share, book value per share, or the percentage ownership of current shareholders. In acquisitions involving the use of cash as consideration, there will be an impact on our capital position.

Our business is heavily dependent on the services of members of the senior management team.
We believe our success to date has been substantially dependent on its executive management team. In addition, our unique model relies upon the Presidents of our separate Bank divisions, particularly in light of our decentralized management structure in which such Bank divisions have significant local decision-making authority. The unexpected loss of any of these persons could have an adverse effect on our business and future growth prospects.

Our future performance will depend on our ability to respond timely to technological change.
The financial services industry is experiencing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products or services, or be successful in marketing these products and services. Additionally, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause services interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. There can be no assurance that we will be able to successfully manage the risks associated with increased dependency on technology.

A decline in the fair value of the Bank’s investment portfolio could adversely affect earnings and capital.
The fair value of the Bank’s debt securities could decline as a result of factors including changes in market interest rates, tax reform, credit quality and credit ratings, lack of market liquidity and other economic conditions. A debt security is impaired if the fair value of the security is less than the carrying value. When a security is impaired, the Bank determines whether the impairment is temporary or other-than-temporary. If an impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the amortized cost only for the credit loss associated with the other-than-temporary loss with a corresponding charge to earnings for a like amount. Any such impairment charge would have an adverse effect, which could be material, on our results of operations and financial condition, including its capital.

While we believe that the terms of our debt securities have been kept relatively short, we are subject to elevated interest rate risk exposure if rates were to increase sharply. Further, debt securities present a different type of asset quality risk than the loan portfolio. At December 31, 2019, the investment portfolio consisted of 92 percent available-for-sale and 8 percent held-to-maturity designated debt securities. While we believe a relatively conservative management approach has been applied to the investment portfolio, there is always potential loss exposure under changing economic conditions.


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If goodwill recorded in connection with acquisitions becomes impaired, it could have an adverse impact on earnings and capital.
Accounting standards require us to account for acquisitions using the acquisition method of accounting. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of its net assets, the excess is carried on the acquirer’s balance sheet as goodwill. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), goodwill is not amortized but rather is evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Our goodwill was not considered impaired as of December 31, 2019 and 2018; however, there can be no assurance that future evaluations of goodwill will not result in findings of impairment and write-downs, which could be material. Since we have $456 million in goodwill, representing 23 percent of our stockholders' equity, impairment of goodwill could have a material adverse effect on our business, financial condition and results of operations. Furthermore, even though it is a non-cash item, significant impairment of goodwill could subject us to regulatory limitations, including the ability to pay dividends on our common stock.

There can be no assurance we will be able to continue paying dividends on our common stock at recent levels.
We may not be able to continue paying quarterly dividends commensurate with recent levels given that our ability to pay dividends on our common stock depends on a variety of factors. The payment of dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. This is heavily based on our earnings and capital levels which currently are strong. Current guidance from the Federal Reserve provides, among other things, that dividends per share should not exceed earnings per share measured over the previous four fiscal quarters. In certain circumstances, Montana law also places limits or restrictions on a bank’s ability to declare and pay dividends. As a result, our future dividends will generally depend on the level of earnings at the Bank.

We operate in a highly regulated environment and changes or increases in, or supervisory enforcement of, banking or other laws and regulations or governmental fiscal or monetary policies could adversely affect us.
We are subject to extensive regulation, supervision and examination by federal and state banking regulators. In addition, as a publicly-traded company, we are subject to regulation by the SEC. Any change in applicable regulations or federal, state or local legislation or in policies or interpretations or regulatory approaches to compliance and enforcement, income tax laws and accounting principles could have a substantial impact on us and our operations. Changes in laws and regulations may also increase expenses by imposing additional fees or taxes or restrictions on operations. Additional legislation and regulations that could significantly affect powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations. Failure to appropriately comply with any such laws, regulations or principles could result in sanctions by regulatory agencies or damage to our reputation, all of which could adversely affect our business, financial condition or results of operations.

Regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding companies in the performance of their supervisory and enforcement duties. Existing and proposed federal and state laws and regulations restrict, limit and govern all aspects of our activities and may affect our ability to expand our business over time, may result in an increase in our compliance costs, and may affect our ability to attract and retain qualified executive officers and employees. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations, including limiting the types of financial services and products we may offer or increasing the ability of non-banks to offer competing financial services and products. Additionally, our business is affected significantly by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve.

We cannot accurately predict the full effects of recent legislation or the various other governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets and on us. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.


18

Changes in accounting standards could materially impact our financial statements.
Periodically, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. The ASU introduces a new impairment model based on current expected credit losses (“CECL”) rather than incurred losses. The CECL model will apply to most financial assets measured at amortized cost, including loans receivable, loan commitments and held-to-maturity debt securities.

Under the CECL model, we will recognize an impairment allowance equal to our current estimate of expected credit losses for financial instruments as of the end of the reporting period. Measuring expected credit losses will likely be a significant challenge for all entities, including us. Additionally, to estimate expected credit losses, we have incurred one-time and recurring costs, some of which are related to system changes and data collection.

Further, the impairment allowance measured under a CECL model could differ materially from the impairment allowance measured under our incurred loss model. To initially apply the CECL amendments, for most debt instruments, we would record a cumulative-effect adjustment to its statement of financial condition as of the beginning of the first reporting period in which the guidance is effective (a modified retrospective approach). The amendments in ASU 2016-13 are effective for us as of January 1, 2020, and are required to be adopted through a modified retrospective approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the ASU is effective.

The impact of certain provisions of the CECL model regarding loan portfolios of acquired financial institutions could result in earnings volatility, as any adjustments to the ALLL with respect to certain acquired loans are required to be made immediately subsequent to the acquisition.

The FDIC has adopted a final rule to increase the federal Deposit Insurance Fund, including additional future premium increases and special assessments.
On March 15, 2016, the FDIC adopted a final rule to increase insurance premiums and has imposed special assessments to rebuild and maintain the DIF, and any additional future premium increases or special assessments could have a material adverse effect on our business, financial condition, and results of operations.

The Dodd-Frank Act broadened the base for FDIC insurance assessments. In addition, the Dodd-Frank Act established 1.35 percent as the minimum DIF reserve ratio. The FDIC has determined that the fund reserve ratio should be 2.0 percent (which is beyond what is required by law) and has adopted a plan under which it will meet the statutory minimum fund reserve ratio of 1.35 percent by the statutory deadline of September 30, 2020. The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for the increase from 1.15 percent to 1.35 percent. The increase is effective for banks in the first quarter following four consecutive quarters of total consolidated assets exceeding $10 billion. Since the Bank exceeded the $10 billion asset threshold in the first quarter of 2018, the increase in deposit insurance assessments to be paid by the Bank was effective in the first quarter of 2019. Additionally, under the FDIC’s assessment system for determining payments to the DIF, insured depository institutions with more than $10 billion in assets are assessed under a “scorecard” system.

Additional information regarding this matter is set forth under the section captioned “Deposit Insurance” within “Supervision and Regulation” in “Item 1. Business.”

We have various anti-takeover measures that could impede a takeover.
Our articles of incorporation include certain provisions that could make it more difficult to acquire us by means of a tender offer, a proxy contest, merger or otherwise. These provisions include a requirement that any “Business Combination” (as defined in the articles of incorporation) be approved by at least 80 percent of the voting power of the then outstanding shares, unless it is either approved by our Board or certain price and procedural requirements are satisfied. In addition, the authorization of preferred stock, which is intended primarily as a financing tool and not as a defensive measure against takeovers, may potentially be used by management to make more difficult uninvited attempts to acquire control of us. These provisions may have the effect of lengthening the time required to acquire control of us through a tender offer, proxy contest or otherwise, and may deter any potentially unfriendly offers or other efforts to obtain control of us. This could deprive our shareholders of opportunities to realize a premium for their common stock in the Company, even in circumstances where such action is favored by a majority of our shareholders.


19

Our business is subject to the risks of earthquakes, floods, fires, and other natural catastrophes.
With Bank branches located in Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada, our business could be affected by a major natural catastrophe, such as a fire, flood, earthquake, or other natural disaster. The occurrence of any of these natural disasters may result in a prolonged interruption of our business, which could have a material adverse effect on our financial condition and operations.


Item 1B. Unresolved Staff Comments

None
 

Item 2. Properties

The following schedule provides information on the Company’s 181 properties as of December 31, 2019:
 
(Dollars in thousands)Properties
Leased		Properties
Owned		Net Book
Value
Montana7  64  $130,751  
Idaho7  22  36,092  
Utah1  9  12,409  
Washington3  11  6,065  
Wyoming2  15  17,625  
Colorado3  22  34,161  
Arizona6  2  4,708  
Nevada1  6  11,801  
Total30  151  $253,612  

We believe that all of our facilities are well maintained, generally adequate and suitable for the current operations of our business, as well as fully utilized. In the normal course of business, new locations and facility upgrades occur as needed.

For additional information regarding the Company’s premises and equipment and lease obligations, see Note 4 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”


Item 3. Legal Proceedings

The Company is involved in various claims, legal actions and complaints which arise in the ordinary course of business. In our 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 our financial condition or results of operations.


Item 4. Mine Safety Disclosures

Not Applicable


20

PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

The Company’s stock trades on the NASDAQ Global Select Market under the symbol: GBCI. As of December 31, 2019, there were approximately 1,533 shareholders of record for the Company’s common stock. The market range of high and low sales prices for the Company’s common stock for the periods indicated are shown below:
 
 20192018
HighLowHighLow
First quarter$45.47  37.58  41.24  36.72  
Second quarter43.44  38.65  41.47  35.77  
Third quarter42.61  37.70  46.28  38.37  
Fourth quarter46.51  38.99  47.67  36.84  

The following table summarizes the Company’s dividends declared during the periods indicated:

Years ended
December 31,
2019		December 31,
2018
First quarter$0.26  0.23  
Second quarter0.27  0.26  
Third quarter0.29  0.26  
Fourth quarter0.29  0.26  
Special0.20  0.30  
Total$1.31  1.31  

Future cash dividends will depend on a variety of factors, including net income, capital, asset quality, general economic conditions and regulatory considerations. Information regarding the regulation considerations is set forth under the heading “Supervision and Regulation” in “Item 1. Business.”

Issuer Stock Purchases
The Company made no stock repurchases during 2019.

21

Stock Performance Graph
The following graph compares the yearly cumulative total return of the Company’s common stock over a five-year measurement period with the yearly cumulative total return on the stocks included in 1) the Russell 2000 Index; and 2) the KBW NASDAQ Regional Banking Index (“KBW Regional Banking Index”). Total return includes appreciation in market value of the stock as well as the actual cash and stock dividends paid to shareholders. The graph assumes that the value of the each investment was $100 on December 31, 2014 and that all dividends were reinvested.

gbci-20191231_g1.jpg


Period Ending
12/31/1412/31/1512/31/1612/31/1712/31/1812/31/19
Glacier Bancorp, Inc.100.00  99.34  141.34  159.97  164.89  198.02  
Russell 2000 Index100.00  95.59  115.95  132.94  118.30  148.49  
KBW Regional Banking Index100.00  105.91  147.24  149.82  123.60  153.03  

22

Item 6. Selected Financial Data

Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this Annual Report on Form 10-K contains certain non-GAAP financial measures. The Company believes that providing these non-GAAP financial measures provides investors with information useful in understanding and comparing the Company’s financial performance, performance trends, and financial position. While the Company uses these non-GAAP measures in its analysis of the Company’s performance, this information should not be considered an alternative to measurements required by GAAP. The following table provides a reconciliation of certain GAAP financial measures to non-GAAP financial measures.

 Year ended December 31, 2017
(Dollars in thousands, except per share data)GAAPTax Act AdjustmentNon-GAAP
Federal and state income tax expense$64,625  (19,699) 44,926  
Net income$116,377  19,699  136,076  
Basic earnings per share$1.50  0.25  1.75  
Diluted earnings per share$1.50  0.25  1.75  
Return on average assets1.20 %0.21 %1.41 %
Return on average equity9.80 %1.66 %11.46 %
Dividend payout ratio76.00 %(10.86 %)65.14 %
Effective income tax rate35.70 %(10.88 %)24.82 %

The reconciling item between the GAAP and non-GAAP financial measures was due to the one-time net tax expense of $19.7 million during the year ended December 31, 2017. The one-time net tax expense was driven by The Tax Cuts and Jobs Act (“Tax Act”) and the change in the federal marginal corporate income tax rate from 35 percent to 21 percent for 2018 and future years, which resulted in the revaluation of its deferred tax assets and deferred tax liabilities (“net deferred tax asset”). The Company believes the financial results are more comparable excluding the impact of the revaluation of the net deferred tax asset.

Basic earnings per share is calculated by dividing net income by average outstanding shares and diluted earnings per share is calculated by dividing net income by diluted average outstanding shares. The one-time net tax expense of $19.7 million was included in determining income for both the GAAP basic earnings per share and the GAAP diluted earnings per share. Conversely, the one-time net tax expense of $19.7 million was excluded in determining income for both the non-GAAP basic earnings per share and the non-GAAP diluted earnings per share. Average outstanding shares of 77,537,664 was used in the GAAP and non-GAAP basic earnings per share for the year ended December 31, 2017. Diluted average outstanding shares of 77,607,605 was used in the GAAP and non-GAAP diluted earnings per share for the year ended December 31, 2017.

The return on average assets ratio is calculated by dividing net income by average assets and the return on average equity ratio is calculated by dividing net income by average equity. The one-time net tax expense of $19.7 million was included in determining income for both the GAAP return on average assets and the GAAP return on average equity. Conversely, the one-time net tax expense of $19.7 million was excluded in determining income for both the non-GAAP return on average assets and the non-GAAP return on average equity. Average assets of $9.678 billion was used in the GAAP and non-GAAP return on average assets ratios for the year ended December 31, 2017. Average equity of $1.188 billion was used in the GAAP and non-GAAP return on average equity ratios for the year ended December 31, 2017.

The dividend payout ratio is calculated by dividing dividends declared per share by basic earnings per share. The non-GAAP dividend payout ratio uses the non-GAAP basic earnings per share for calculating the ratio.

The effective income tax rate is calculated by dividing federal and state income tax expense by income before income taxes. The non-GAAP effective income tax rate uses the non-GAAP federal and state income tax expense of $44.9 million for calculating the rate.

23

Selected Financial Data
The following financial data of the Company is derived from the Company’s historical audited financial statements and related notes. The information set forth below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” contained elsewhere in this Annual Report on Form 10-K.

 December 31,Compounded Annual
Growth Rate
(Dollars in thousands, except per share data)201920182017201620151-Year5-Year
Selected Statements of Financial Condition Information
Total assets$13,683,999  $12,115,484  $9,706,349  $9,450,600  $9,089,232  12.9 %  8.5 %  
Debt securities2,799,863  2,869,578  2,426,556  3,101,151  3,312,832  (2.4)%(3.3)%
Loans receivable, net9,388,320  8,156,310  6,448,256  5,554,891  4,948,984  15.1 %  13.7 %  
Allowance for loan and lease losses(124,490) (131,239) (129,568) (129,572) (129,697) (5.1)%(0.8)%
Goodwill and intangibles519,704  338,828  191,995  159,400  155,193  53.4 %  27.3 %  
Deposits10,776,457  9,493,767  7,579,747  7,372,279  6,945,008  13.5 %  9.2 %  
Federal Home Loan Bank advances38,611  440,175  353,995  251,749  394,131  (91.2)%(37.2)%
Securities sold under agreements to repurchase and other borrowed funds
598,644  410,859  370,797  478,090  430,016  45.7 %  6.8 %  
Stockholders’ equity1,960,733  1,515,854  1,199,057  1,116,869  1,076,650  29.3 %  12.7 %  
Equity per share21.25  17.93  15.37  14.59  14.15  18.5 %  8.5 %  
Equity as a percentage of total assets14.3 %12.5 %12.4 %11.8 %11.9 %14.5 %  3.9 %  

 Years ended December 31,Compounded Annual
Growth Rate
(Dollars in thousands, except per share data)201920182017201620151-Year5-Year
Summary Statements of Operations
Interest income$546,177  $468,996  $375,022  $344,153  $319,681  16.5 %  11.3 %  
Interest expense42,773  35,531  29,864  29,631  29,275  20.4 %  7.9 %  
Net interest income503,404  433,465  345,158  314,522  290,406  16.1 %  11.6 %  
Provision for loan losses57  9,953  10,824  2,333  2,284  (99.4)%(52.2)%
Non-interest income130,774  118,824  112,239  107,318  98,761  10.1 %  5.8 %  
Non-interest expense374,927  320,127  265,571  258,714  236,757  17.1 %  9.6 %  
Income before income taxes259,194  222,209  181,002  160,793  150,126  16.6 %  11.5 %  
Federal and state income tax expense 1
48,650  40,331  44,926  39,662  33,999  20.6 %  7.4 %  
Net income 1
$210,544  $181,878  $136,076  $121,131  $116,127  15.8 %  12.6 %  
Basic earnings per share 1
$2.39  $2.18  $1.75  $1.59  $1.54  9.6 %  9.2 %  
Diluted earnings per share 1
$2.38  $2.17  $1.75  $1.59  $1.54  9.7 %  9.1 %  
Dividends declared per share$1.31  $1.31  $1.14  $1.10  $1.05  — %4.5 %  

24

 At or for the Years ended December 31,
(Dollars in thousands)20192018201720162015
Selected Ratios and Other Data
Return on average assets 1
1.64 %1.59 %1.41 %1.32 %1.36 %
Return on average equity 1
12.01 %12.56 %11.46 %10.79 %10.84 %
Dividend payout ratio 1
54.81 %60.09 %65.14 %69.18 %68.18 %
Average equity to average asset ratio13.69 %12.67 %12.27 %12.27 %12.52 %
Total capital (to risk-weighted assets)
14.95 %14.70 %15.64 %16.38 %17.17 %
Tier 1 capital (to risk-weighted assets)
13.76 %13.37 %14.39 %15.12 %15.91 %
Common Equity Tier 1 (to risk-weighted assets)
12.58 %12.10 %12.81 %13.42 %14.06 %
Tier 1 capital (to average assets)
11.65 %11.35 %11.90 %11.90 %12.01 %
Net interest margin on average earning assets (tax-equivalent)
4.39 %4.21 %4.12 %4.02 %4.00 %
Efficiency ratio 2
57.78 %54.73 %53.94 %55.88 %55.40 %
Allowance for loan and lease losses as a percent of loans
1.31 %1.58 %1.97 %2.28 %2.55 %
Allowance for loan and lease losses as a percent of nonperforming loans
385 %266 %255 %257 %244 %
Non-performing assets as a percentage of subsidiary assets
0.27 %0.47 %0.68 %0.76 %0.88 %
Non-performing assets$37,437  56,750  65,179  71,385  80,079  
Loans originated and acquired$4,607,536  4,301,678  3,629,493  3,474,000  3,000,830  
Number of full time equivalent employees
2,826  2,623  2,278  2,222  2,149  
Number of locations181  167  145  142  144  
______________________________
1 Excludes a one-time revaluation of the deferred tax assets and deferred tax liabilities as a result of the Tax Act for the year ended December 31, 2017. For additional information on the revaluation, see the “Non-GAAP Financial Measures” section.
2 Non-interest expense before OREO expenses, core deposit intangibles amortization, goodwill impairment charges, and non-recurring expense items as a percentage of tax-equivalent net interest income and non-interest income, excluding gains or losses on sale of investments, OREO income, and non-recurring income items.




25

Item 7. 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 Company’s 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 “Item 8. Financial Statements and Supplementary Data.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 the Company’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 the negative version of those words or other comparable words or phrases of a future or forward-looking nature. 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. The following factors, among others, could cause actual results to differ materially from the anticipated results (express or implied) or other expectations in the forward-looking statements, including those set forth in this Annual Report on Form 10-K, or the documents incorporated by reference:
•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, both generally and as a result of the Company exceeding $10 billion in total consolidated assets;
•ability to complete pending or prospective future acquisitions;
•costs or difficulties related to the completion and integration of acquisitions;
•the goodwill the Company has recorded in connection with acquisitions could become impaired, which may have an adverse impact on earnings and capital;
•reduced demand for banking products and services;
•the reputation of banks and the financial services industry could deteriorate, which could adversely affect the Company's ability to obtain and maintain customers;
•competition among financial institutions in the Company's markets may increase significantly;
•the risks presented by continued public stock market volatility, which could adversely affect the market price of the Company’s common stock and the ability to raise additional capital or grow the Company through acquisitions;
•the projected business and profitability of an expansion or the opening of a new branch could be lower than expected;
•consolidation in the financial services industry in the Company’s markets resulting in the creation of larger financial institutions who may have greater resources could change the competitive landscape;
•dependence on the CEO, the senior management team and the Presidents of Glacier 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.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in “Item 1A. Risk Factors.” Please take into account that forward-looking statements speak only as of the date of this Annual Report on Form 10-K (or documents incorporated by reference, if applicable). Given the described uncertainties and risks, the Company cannot guarantee its future performance or results of operations and you should not place undue reliance on these forward-looking statements. The Company does not undertake any obligation to publicly correct, revise, 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, except as required under federal securities laws.

26

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2019 COMPARED TO DECEMBER 31, 2018

Highlights and Overview
During 2019, the Company completed two bank acquisitions which increased the asset size of the Company by $1.357 billion, or 11 percent. During the second quarter of 2019, the Company completed the acquisition of FNB, a community bank based in Layton, Utah which provides banking services to individuals and business throughout Utah with six locations in Layton, Bountiful, Clearfield and Draper. Upon closing this transaction, FNB became First Community Bank Utah, the Company's first division in Utah and the fifteenth Bank division. During the fourth quarter of 2019, the Company combined its four existing Utah-based branches into FNB enhancing the Company's growth prospects in one of the fastest growing markets in the United States. During the third quarter of 2019, the Company completed the acquisition of Heritage, a community bank based in Reno, Nevada which provides banking services to individuals and businesses throughout Northern Nevada with seven locations in Carson City, Garnerville, Reno and Sparks. Upon closing, Heritage became the Company's sixteenth Bank division and was the Company's first entrance into the state of Nevada. In September of 2019, the Company announced the signing of a definitive agreement to acquire SBAZ, a community bank based in Lake Havasu City, Arizona. SBAZ provides banking services to individuals and business in Arizona with ten locations in Bullhead City, Cottonwood, Kingman, Lake Havasu City, Phoenix, Prescott Valley and Prescott. As of December 31, 2019, SBAZ had total assets of $678 million, gross loans of $439 million and total deposits of $587 million. Upon closing of this transaction, which is expected to occur in the first quarter of 2020, SBAZ will merge into the Company's Foothills Bank division and will expand the Company's footprint in Arizona to cover all major markets in the state and be a leading community bank in Arizona. See Notes 22 in the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for additional information regarding these acquisitions.

The Company ended the year at $13.684 billion in assets, which was a 13 percent increase over the prior year and was driven primarily from current year acquisitions along with an increase of 2 percent in organic growth. Organic loan growth and core deposit growth for the year were both stable at 4 percent. The Company experienced another great year in non-interest bearing deposits which organically grew 10 percent for the current year and 9 percent in the prior year. Debt securities decreased 2 percent compared to the prior year and will continue to fluctuate to supplement liquidity needs. During the third quarter of 2019, the Company implemented a balance sheet strategy to increase its net interest income and net interest margin. The strategy included early termination of the Company's $260 million notional pay-fixed interest rate swaps and corresponding debt along with the sale of $308 million of debt securities. Tangible stockholders’ equity increased $264 million, or $1.68 per share, as a result of earnings retention, an increase in other comprehensive income (“OCI”) and Company stock issued in connection with the current year acquisitions, all of which offset the increases in goodwill and intangibles from the acquisitions. The Company increased its total regular quarterly dividends declared from $1.01 per share during 2018 to $1.11 per share in 2019.

The Company experienced another successful year in reducing its non-performing assets and ended the year at $37.4 million, or 0.27 percent of assets, which was a decrease of $19.3 million or, 34 percent, from the prior year end. In addition, early stage delinquencies (accruing 30-89 days past due) as a percentage of loans at December 31, 2019 was 0.24 percent compared to 0.41 percent at the prior year end. The allowance as a percentage of total loans as of December 31, 2019 was 1.31 percent, a decrease of 27 basis points (“bps”) from 1.58 percent at December 31, 2018.

The Company had record net income for the year of $211 million, which was an increase of $28.7 million, or 16 percent, over the prior year net income of $182 million. Diluted earnings per share for the year was $2.38, an increase of $0.21 per share, or 10 percent, from the 2018 diluted earnings per share of $2.17. The improvement in net income for 2019 was due to the acquisitions, organic growth, the significant increase in commercial interest income, and controlled operating expenses. The Company's net interest margin for 2019 was 4.39 percent, an 18 basis points increase from the net interest margin of 4.21 percent from 2018. During the year the Company also benefited from a $2.5 million reduction in regulatory assessment as a result of Small Bank Assessment credits applied by the FDIC. On the other hand, as of July 1, 2019, the Company became subject to the Durbin Amendment to the Dodd-Frank Act, which established limits on the amount of interchange fees that can be charged to merchants for debit card processing and reduced the Company's service charge fees approximately $10 million in the second half of the current year. During 2020, the Company will be impacted by the Durbin Amendment for the entire year.

Looking forward, the Company’s future performance will depend on many factors including economic conditions in the markets the Company serves, interest rate changes, increasing competition for deposits and loans, loan quality and growth, the impact and successful integration of acquisitions, and managing regulatory burden.

27

Financial Highlights
 At or for the Years ended
(Dollars in thousands, except per share and market data)December 31,
2019		December 31,
2018
Operating results
Net income
$210,544  181,878  
Basic earnings per share
$2.39  2.18  
Diluted earnings per share
$2.38  2.17  
Dividends declared per share$1.31  1.31  
Market value per share
Closing$45.99  39.62  
High$46.51  47.67  
Low$37.58  35.77  
Selected ratios and other data
Number of common stock shares outstanding92,289,750  84,521,692  
Average outstanding shares - basic88,255,290  83,603,515  
Average outstanding shares - diluted88,385,775  83,677,185  
Return on average assets (annualized)
1.64 %1.59 %
Return on average equity (annualized)
12.01 %12.56 %
Efficiency ratio57.78 %54.73 %
Dividend payout ratio
54.81 %60.09 %
Loan to deposit ratio88.92 %87.64 %
Number of full time equivalent employees2,826  2,623  
Number of locations181  167  
Number of ATMs248  216  

Recent Acquisitions
The Company completed the following acquisitions during the last two years:
•Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank of Nevada
•FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton
•Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank
•Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank

The business combinations were accounted for using the acquisition method with the results of operations included in the Company’s consolidated financial statements as of the acquisition dates. For additional information regarding acquisitions, see Note 22 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” The following table discloses the fair value of selected classifications of assets and liabilities acquired:

(Dollars in thousands)Heritage
July 31,
2019		FNB
April 30,
2019		FSB
February 28, 2018		Collegiate
January 31,
2018
Total assets$977,944  $379,155  1,109,684  551,198  
Debt securities103,231  47,247  271,865  42,177  
Loans receivable615,279  245,485  627,767  354,252  
Non-interest bearing deposits296,393  93,647  301,468  170,022  
Interest bearing deposits425,827  180,999  576,118  267,149  
Borrowings
—  7,273  36,880  12,509  

28

Financial Condition Analysis

Assets
The following table summarizes the Company’s assets as of the dates indicated: 

(Dollars in thousands)December 31, 2019December 31, 2018$ Change% Change
Cash and cash equivalents$330,961  $203,790  $127,171  62 %
Debt securities, available-for-sale2,575,252  2,571,663  3,589  — %
Debt securities, held-to-maturity224,611  297,915  (73,304) (25 %)
Total debt securities2,799,863  2,869,578  (69,715) (2 %)
Loans receivable
Residential real estate926,388  887,742  38,646  4 %
Commercial real estate5,579,307  4,657,561  921,746  20 %
Other commercial2,094,254  1,911,171  183,083  10 %
Home equity617,201  544,688  72,513  13 %
Other consumer295,660  286,387  9,273  3 %
Loans receivable9,512,810  8,287,549  1,225,261  15 %
Allowance for loan and lease losses(124,490) (131,239) 6,749  (5 %)
Loans receivable, net9,388,320  8,156,310  1,232,010  15 %
Other assets1,164,855  885,806  279,049  32 %
Total assets$13,683,999  $12,115,484  $1,568,515  13 %

Total debt securities of $2.800 billion at December 31, 2019 decreased $69.7 million, or 2 percent, from the prior year. Debt securities represented 20 percent of total assets at December 31, 2019 compared to 24 percent of total assets at December 31, 2018. The level of debt securities will continue to fluctuate as necessary to supplement liquidity needs of the Company.

Excluding the FNB and Heritage acquisitions, the loan portfolio increased $364 million, or 4 percent, since December 31, 2018, with the largest increase in commercial real estate loans, which increased $195 million, or 4 percent.

29

Liabilities
The following table summarizes the Company’s liabilities as of the dates indicated:

(Dollars in thousands)December 31, 2019December 31, 2018$ Change% Change
Deposits
Non-interest bearing deposits$3,696,627  $3,001,178  $695,449  23 %
NOW and DDA accounts2,645,404  2,391,307  254,097  11 %
Savings accounts1,485,487  1,346,790  138,697  10 %
Money market deposit accounts1,937,141  1,684,284  252,857  15 %
Certificate accounts958,501  901,484  57,017  6 %
Core deposits, total10,723,160  9,325,043  1,398,117  15 %
Wholesale deposits53,297  168,724  (115,427) (68 %)
Deposits, total10,776,457  9,493,767  1,282,690  14 %
Securities sold under agreements to repurchase569,824  396,151  173,673  44 %
Federal Home Loan Bank advances38,611  440,175  (401,564) (91 %)
Other borrowed funds28,820  14,708  14,112  96 %
Subordinated debentures139,914  134,051  5,863  4 %
Other liabilities169,640  120,778  48,862  40 %
Total liabilities$11,723,266  $10,599,630  $1,123,636  11 %

Excluding acquisitions, core deposits increased $401 million, or 4 percent, from prior year end with non-interest bearing deposits increasing $305 million, or 10 percent. Non-interest bearing deposits were 34 percent of total core deposits at current year end, an increase of 2 percent from 32 percent of total core deposits at the prior year end.

Wholesale deposits of $53.3 million at December 31, 2019 decreased $115 million from the prior year end. Federal Home Loan Bank (“FHLB”) advances of $38.6 million at December 31, 2019 decreased $402 million from the prior year end. In September 2019, the Company implemented a balance sheet strategy to increase its net interest income and net interest margin. The balance sheet strategy included early termination of the Company's $260 million notional pay-fixed interest rate swaps and reduction of corresponding wholesale deposits and FHLB advances. Wholesale deposits and FHLB advances will continue to fluctuate as necessary for balance sheet growth and to supplement liquidity needs of the Company.

Stockholders’ Equity
The following table summarizes the stockholders’ equity balances as of the dates indicated: 

(Dollars in thousands, except per share data)December 31, 2019December 31, 2018$ Change% Change
Common equity$1,920,507  $1,525,281  $395,226  26 %
Accumulated other comprehensive income (loss)
40,226  (9,427) 49,653  (527 %)
Total stockholders’ equity1,960,733  1,515,854  444,879  29 %
Goodwill and core deposit intangible, net
(519,704) (338,828) (180,876) 53 %
Tangible stockholders’ equity$1,441,029  $1,177,026  $264,003  22 %
Stockholders’ equity to total assets14.33 %12.51 %15 %
Tangible stockholders’ equity to total tangible assets
10.95 %9.99 %10 %
Book value per common share$21.25  $17.93  $3.32  19 %
Tangible book value per common share$15.61  $13.93  $1.68  12 %

Tangible stockholders’ equity increased $264 million, or 22 percent, over the prior year end which was primarily the result of earnings retention, an increase in OCI, and the result of $317 million of Company stock issued for current year acquisitions. Tangible book value per common share of $15.61 at December 31, 2019 increased $1.68 per share from the prior year end.

30

Results of Operations
In this section, the Company’s results of operations are discussed for the year ended December 31, 2019 compared to the year ended December 31, 2018. For a discussion of the year ended December 31, 2018 compared to the year ended December 31, 2017, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K for the year ended December 31, 2018.

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

 Years ended$ Change% Change
(Dollars in thousands)December 31,
2019		December 31,
2018
Net interest income
Interest income$546,177  $468,996  $77,181  16 %
Interest expense42,773  35,531  7,242  20 %
Total net interest income503,404  433,465  69,939  16 %
Non-interest income
Service charges and other fees
67,934  74,887  (6,953) (9 %)
Miscellaneous loan fees and charges5,313  6,805  (1,492) (22 %)
Gain on sale of loans34,064  27,134  6,930  26 %
Gain (loss) on sale of investments14,415  (1,113) 15,528  (1,395 %)
Other income9,048  11,111  (2,063) (19 %)
Total non-interest income130,774  118,824  11,950  10 %
Total income$634,178  $552,289  $81,889  15 %
Net interest margin (tax-equivalent)4.39 %4.21 %

Net Interest Income
Net interest income of $503 million for 2019 increased $69.9 million, or 16 percent, from prior year and was primarily attributable to a $64.9 million increase in interest income from commercial loans. Interest expense of $42.8 million for 2019 increased $7.2 million, or 20 percent over the prior year as a result of an increase in the amount of deposits and interest rate increases on deposits. The total funding cost (including non-interest bearing deposits) for 2019 was 39 basis points compared to 36 basis points for 2018.

The net interest margin as a percentage of earning assets, on a tax-equivalent basis, for 2019 was 4.39 percent, an 18 basis points increase from the net interest margin of 4.21 percent for 2018. The increase in the margin was principally due to a shift in earning assets to higher yielding loans along with an increase in yields on the loan portfolio and an increase in non-accrual interest recoveries combined with relatively stable cost of funds and an increase low cost deposits. The current year included $4.4 million in non-accrual interest recoveries compared to $187 thousand in the prior year.

Non-interest Income
Non-interest income of $131 million for 2019 increased $12.0 million, or 10 percent, over the last year which was driven by the sale of debt securities from the balance sheet strategy implemented during the current year. Service charges and other fees of $67.9 million for 2019 decreased $7.0 million, or 9 percent, from the prior year. Excluding the impact from the Durbin Amendment, there was an increase in fees during the current year from the increased number of deposit accounts from organic growth and acquisitions. Gain on the sale of loans of $34.1 million for 2019, increased $6.9 million, or 26 percent, compared to the prior year as a result of increased purchase and refinance activity. Other income decreased $2.1 million from the prior year and was the result of a gain of $2.3 million on the sale of a former branch building in the prior year third quarter.

31

Non-interest Expense
The following table summarizes non-interest expense for the periods indicated:
 
 Years ended$ Change% Change
(Dollars in thousands)December 31,
2019		December 31,
2018
Compensation and employee benefits$222,753  $195,056  $27,697  14 %
Occupancy and equipment34,497  30,734  3,763  12 %
Advertising and promotions10,621  9,566  1,055  11 %
Data processing17,392  15,911  1,481  9 %
Other real estate owned1,105  3,221  (2,116) (66 %)
Regulatory assessments and insurance
3,771  5,075  (1,304) (26 %)
Loss on termination of hedging activities13,528  —  13,528  n/m   
Core deposit intangible amortization8,485  6,270  2,215  35 %
Other expenses62,775  54,294  8,481  16 %
Total non-interest expense$374,927  $320,127  $54,800  17 %
______________________________
n/m - not measurable

Total non-interest expense of $375 million for 2019 increased $54.8 million, or 17 percent, over the prior year. Compensation and employee benefits for 2019 increased $27.7 million, or 14 percent, from the prior year due to the increased number of employees from acquisitions and organic growth, a $5.4 million of stock compensation expense related to the Heritage acquisition and annual salary increases. Occupancy and equipment expense for 2019 increased $3.8 million, or 12 percent from the prior year as a result of increased cost from acquisitions and general cost increases. Data processing expense increased $1.5 million or 9 percent, over the prior year primarily as a result of increased costs from acquisitions. Regulatory assessment and insurance decreased $1.3 million, or 26 percent, from the prior year and included $2.5 million of Small Bank Assessment credits applied by the FDIC during the current year. Other expenses of $62.8 million in the current year, increased $8.5 million, or 16 percent, from the prior year and was primarily driven an increase in acquisition-related expenses, increased costs from acquisitions and general cost increases. Other expenses included acquisition-related expenses of $8.5 million in 2019 compared to $6.6 million in the prior year.

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		ALLL
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
Fourth quarter 2019$—  $1,045  1.31 %0.24 %0.27 %
Third quarter 2019—  3,519  1.32 %0.31 %0.40 %
Second quarter 2019—  732  1.46 %0.43 %0.41 %
First quarter 201957  1,510  1.56 %0.44 %0.42 %
Fourth quarter 20181,246  2,542  1.58 %0.41 %0.47 %
Third quarter 20183,194  2,223  1.63 %0.31 %0.61 %
Second quarter 20184,718  762  1.66 %0.50 %0.71 %
First quarter 2018795  2,755  1.66 %0.59 %0.64 %

The provision for loan losses was $57 thousand for 2019, a decrease of $9.9 million from prior year. Net charge-offs during the 2019 were $6.8 million compared to $8.3 million during 2018.


32

Efficiency Ratio
The efficiency ratio for the year ended December 31, 2019 was 57.78 percent. Excluding the $10.0 million loss recognized on the termination of the interest rate swaps, the $3.5 million write-off of the remaining unamortized deferred prepayment penalties on FHLB advances, and the $5.4 million of accelerated stock compensation expense related to the Heritage acquisition, the efficiency ratio would have been 54.79 percent, which was an increase of 6 basis points from the efficiency ratio of 54.73 percent for 2018. The increase in the efficiency ratio was driven by the decrease in interchange fees from the Durbin Amendment that outpaced the increase in net interest income.

ADDITIONAL MANAGEMENT’S DISCUSSION AND ANALYSIS

Investment Activity
The Company’s investment securities primarily consist of debt securities classified as available-for-sale or held-to-maturity. Non-marketable equity securities consist of capital stock issued by the FHLB of Des Moines and are carried at cost less impairment.

Debt Securities
In November 2018, the Company adopted FASB ASU 2017-12, Derivatives and Hedging, and in doing so redesignated state and local government securities with a carrying value of $270,331,000, from held-to-maturity classification to available-for-sale classification. The Company considers the available-for-sale classification of these debt securities to be appropriate since it no longer had the intent to hold them to maturity. Debt securities classified as available-for-sale are carried at estimated fair value and debt securities classified as held-to-maturity are carried at amortized cost. Unrealized gains or losses, net of tax, on available-for-sale debt securities are reflected as an adjustment to OCI. The Company’s debt securities are summarized below:

December 31, 2019December 31, 2018December 31, 2017December 31, 2016December 31, 2015
(Dollars in thousands)Carrying AmountPercentCarrying AmountPercentCarrying AmountPercentCarrying AmountPercentCarrying AmountPercent
Available-for-sale
U.S. government and federal agency
$20,044  1 %$23,649  1 %$31,127  1 %$39,407  1 %$47,451  1 %
U.S. government sponsored enterprises
43,677  1 %120,208  4 %19,091  1 %19,570  1 %93,167  3 %
State and local governments
702,398  25 %852,250  30 %629,501  26 %786,373  25 %885,019  27 %
Corporate bonds157,602  6 %290,817  10 %216,762  9 %471,951  15 %384,163  12 %
Residential mortgage-backed securities
738,724  26 %792,915  28 %779,283  32 %1,007,515  33 %1,198,549  36 %
Commercial mortgage-backed securities
912,807  33 %491,824  17 %102,479  4 %100,661  3 %2,411  — %
Total available-for-sale
2,575,252  92 %2,571,663  90 %1,778,243  73 %2,425,477  78 %2,610,760  79 %
Held-to-maturity
State and local governments
224,611  8 %297,915  10 %648,313  27 %675,674  22 %702,072  21 %
Total held-to-maturity224,611  8 %297,915  10 %648,313  27 %675,674  22 %702,072  21 %
Total debt securities
$2,799,863  100 %$2,869,578  100 %$2,426,556  100 %$3,101,151  100 %$3,312,832  100 %

The Company’s debt securities are primarily comprised of state and local government securities and mortgage-backed securities. State and local government securities are largely exempt from federal income tax and the Company’s federal statutory income tax rate of 21 percent is used in calculating the tax-equivalent yields on the tax-exempt securities. As a result of the Tax Act, the federal statutory income tax rate decreased from 35 percent in 2017 to 21 percent beginning in 2018. Mortgage-backed securities largely consists of short, weighted-average life U.S. agency guaranteed residential and commercial mortgage pass-through securities and to a lesser extent, short, weighted-average life U.S. agency guaranteed residential collateralized mortgage obligations. Combined, the mortgage-backed securities provide the Company with ongoing liquidity as scheduled and pre-paid principal is received on the securities.


33

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.

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.

December 31, 2019December 31, 2018
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
S&P: AAA / Moody’s: Aaa
$251,101  259,690  299,275  296,027  
S&P: AA+, AA, AA- / Moody’s: Aa1, Aa2, Aa3
523,150  539,758  643,023  640,736  
S&P: A+, A, A- / Moody’s: A1, A2, A3
113,275  120,048  163,041  167,779  
S&P: BBB+, BBB, BBB- / Moody’s: Baa1, Baa2, Baa33,217  3,302  4,208  4,382  
Not rated by either entity
13,451  13,795  31,954  30,532  
Below investment grade
201  201  1,050  1,050  
Total
$904,395  936,794  1,142,551  1,140,506  

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.

December 31, 2019December 31, 2018
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
General obligation - unlimited
$445,584  465,066  657,051  658,062  
General obligation - limited
119,884  124,939  173,973  177,275  
Revenue325,331  332,354  290,106  283,939  
Certificate of participation
8,003  8,815  14,174  14,463  
Other
5,593  5,620  7,247  6,767  
Total
$904,395  936,794  1,142,551  1,140,506  

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

December 31, 2019December 31, 2018
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Washington$116,458  146,538  179,691  179,808  
Texas112,397  121,641  157,978  157,706  
Michigan141,131  116,581  144,378  147,386  
Montana72,061  76,549  109,106  111,492  
Ohio29,000  30,592  53,698  53,615  
All other states
433,348  444,893  497,700  490,499  
Total
$904,395  936,794  1,142,551  1,140,506  

34

The following table presents the carrying amount and weighted-average yield of available-for-sale and held-to-maturity debt securities by contractual maturity at December 31, 2019. Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration premium amortization, discount accretion and mortgage-backed securities’ prepayment provisions. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.

One Year
or Less		After One through Five YearsAfter Five through Ten YearsAfter
Ten Years
Mortgage-Backed Securities 1
Total
(Dollars in thousands)AmountYieldAmountYieldAmountYieldAmountYieldAmountYieldAmountYield
Available-for-sale
U.S. government and federal agency
$504  2.03 %$2,338  2.28 %$7,602  1.34 %$9,600  1.85 %$—  — %$20,044  1.71 %
U.S. government sponsored enterprises
998  — %42,679  2.71 %—  — %—  — %—  — %43,677  2.65 %
State and local governments
3,404  3.20 %29,225  2.82 %206,915  3.68 %462,854  3.62 %—  — %702,398  3.60 %
Corporate bonds
57,649  2.78 %99,953  3.28 %—  — %—  — %—  — %157,602  3.09 %
Residential mortgage-backed securities
—  — %—  — %—  — %—  — %738,724  2.44 %738,724  2.44 %
Commercial mortgage-backed securities
—  — %—  — %—  — %—  — %912,807  2.86 %912,807  2.86 %
Total available-for-sale
62,555  2.75 %174,195  3.05 %214,517  3.60 %472,454  3.58 %1,651,531  2.67 %2,575,252  2.94 %
Held-to-maturity
State and local governments
—  — %12,841  2.36 %71,708  2.70 %140,062  3.26 %—  — %224,611  3.03 %
Total held-to-maturity
—  — %12,841  2.36 %71,708  2.70 %140,062  3.26 %—  — %224,611  3.03 %
Total debt securities
$62,555  2.75 %$187,036  3.00 %$286,225  3.37 %$612,516  3.51 %$1,651,531  2.67 %$2,799,863  2.95 %
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

Interest income from debt securities consisted of the following:
 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Taxable interest$55,120  46,554  38,433  
Tax-exempt interest30,384  39,945  43,535  
Total interest income$85,504  86,499  81,968  

For additional information on debt securities, see Notes 1 and 2 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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Other-Than-Temporary Impairment on Securities Analysis
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. S&P, Moody's and Fitch have all issued stable outlooks of U.S. government long-term debt and 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.

The following table separates debt securities with an unrealized loss position at December 31, 2019 into two categories: securities purchased prior to 2019 and those purchased during 2019. Of those securities purchased prior to 2019, the fair market value and unrealized gain or loss at December 31, 2018 is also presented.

 December 31, 2019December 31, 2018
(Dollars in thousands)Fair ValueUnrealized
Loss		Unrealized
Loss as a
Percent of
Fair Value		Fair ValueUnrealized
Loss		Unrealized
Loss as a
Percent of
Fair Value
Temporarily impaired securities purchased prior to 2019
U.S. government and federal agency$10,366  $(65) (1 %)$14,505  $(81) (1 %)
State and local governments750  (1) — %775  (32) (4 %)
Corporate bonds7,378  (1) — %7,547  (39) (1 %)
Residential mortgage-backed securities52,425  (374) (1 %)68,817  (2,272) (3 %)
Commercial mortgage-backed securities20,152  (173) (1 %)23,142  (839) (4 %)
Total$91,071  $(614) (1 %)$114,786  $(3,263) (3 %)
Temporarily impaired securities purchased during 2019
State and local governments$18,294  (79) — %
Residential mortgage-backed securities62,175  (175) — %
Commercial mortgage-backed securities164,596  (1,219) (1 %)
Total$245,065  $(1,473) (1 %)
Temporarily impaired securities
U.S. government and federal agency$10,366  $(65) (1 %)
State and local governments19,044  (80) — %
Corporate bonds7,378  (1) — %
Residential mortgage-backed securities114,600  (549) — %
Commercial mortgage-backed securities184,748  (1,392) (1 %)
Total$336,136  $(2,087) (1 %)

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With respect to severity, the following table provides the number of debt securities and amount of unrealized loss in the identified ranges of unrealized loss as a percent of book value at December 31, 2019:
(Dollars in thousands)Number of
Debt
Securities		Unrealized
Loss
0.1% to 5.0%88  $(2,087) 

With respect to the valuation history of the impaired debt securities, the Company identified 39 securities which have been continuously impaired for the twelve months ending December 31, 2019. 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 39 debt securities which have been continuously impaired for the twelve months ended December 31, 2019, 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 agency18  $(65) $(15) 
Residential mortgage-backed securities18  (315) (69) 
Commercial mortgage-backed securities3  (99) (50) 
Total39  $(479) 

Based on the Company's analysis of its impaired debt securities as of December 31, 2019, 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 December 31, 2019 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 December 31, 2019 have been determined by the Company to be investment grade.

Equity securities. Non-marketable equity securities and marketable equity securities without readily determinable fair values are evaluated for impairment whenever events or circumstances suggest the carrying value may not be recoverable. Based on the Company’s evaluation of its investments in non-marketable equity securities and marketable equity securities without readily determinable fair values as of December 31, 2019, the Company determined that none of such securities were impaired.

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Lending Activity
The Company focuses its lending activities primarily on the following types of loans: 1) first-mortgage, conventional loans secured by residential properties, particularly single-family; 2) commercial lending, including agriculture and public entities; and 3) installment lending for consumer purposes (e.g., home equity, automobile, etc.). Supplemental information regarding the Company’s loan portfolio and credit quality based on regulatory classification is provided in the section captioned “Loans by Regulatory Classification” included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The regulatory classification of loans is based primarily on the type of collateral for the loans. Loan information included in “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the Company’s loan segments 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:
 
 December 31, 2019December 31, 2018December 31, 2017December 31, 2016December 31, 2015
(Dollars in thousands)AmountPercentAmountPercentAmountPercentAmountPercentAmountPercent
Residential real estate loans
$926,388  10 %$887,742  11 %$720,728  11 %$674,347  12 %$688,912  14 %
Commercial loans
Real estate5,579,307  59 %4,657,561  57 %3,577,139  55 %2,990,141  54 %2,633,953  53 %
Other commercial2,094,254  22 %1,911,171  23 %1,579,353  25 %1,342,250  24 %1,099,564  22 %
Total7,673,561  81 %6,568,732  80 %5,156,492  80 %4,332,391  78 %3,733,517  75 %
Consumer and other loans
Home equity617,201  7 %544,688  7 %457,918  7 %434,774  8 %420,901  9 %
Other consumer295,660  3 %286,387  4 %242,686  4 %242,951  4 %235,351  5 %
Total912,861  10 %831,075  11 %700,604  11 %677,725  12 %656,252  14 %
Loans receivable9,512,810  101 %8,287,549  102 %6,577,824  102 %5,684,463  102 %5,078,681  103 %
ALLL
(124,490) (1 %)(131,239) (2 %)(129,568) (2 %)(129,572) (2 %)(129,697) (3 %)
Loans receivable, net
$9,388,320  100 %$8,156,310  100 %$6,448,256  100 %$5,554,891  100 %$4,948,984  100 %

The stated maturities or first repricing term (if applicable) for the loan portfolio at December 31, 2019 was as follows:
 
(Dollars in thousands)Residential
Real Estate		CommercialConsumer
and Other		Total
Variable rate maturing or repricing
In one year or less$189,615  2,040,327  300,540  2,530,482  
After one year through five years349,618  2,686,529  285,612  3,321,759  
Thereafter88,382  284,156  7,721  380,259  
Fixed rate maturing
In one year or less98,706  1,007,329  107,965  1,214,000  
After one year through five years137,156  1,240,900  179,850  1,557,906  
Thereafter62,911  414,320  31,173  508,404  
Total$926,388  7,673,561  912,861  9,512,810  

Residential Real Estate Lending
The Company’s lending activities consist of the origination of both construction and permanent loans on residential real estate. The Company actively solicits residential real estate loan applications from real estate brokers, contractors, existing customers, customer referrals, and on-line applications. The Company’s lending policies generally limit the maximum loan-to-value ratio on residential mortgage loans to 80 percent of the lesser of the appraised value or purchase price. Policies allow for higher loan-to-values with appropriate risk mitigation such as documented compensating factors, credit enhancement, etc. For loans held for sale, the Company complies with the investor’s loan-to-value guidelines. The Company also provides interim construction financing for single-family dwellings. These loans are supported by a term take-out commitment.

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Consumer Land or Lot Loans
The Company originates land and lot acquisition loans to borrowers who intend to construct their primary residence on the respective land or lot. These loans are generally for a term of three to five years and are secured by the developed land or lot with the loan-to-value limited to the lesser of 75 percent of the appraised value or 75 percent of the cost.

Unimproved Land and Land Development Loans
Although the Company has originated very few unimproved land and land development loans since the economic downturn in 2008, the Company may originate such loans on properties intended for residential and commercial use where improved real estate market conditions have occurred. These loans are typically made for a term of 18 months to two years and are secured by the developed property with a loan-to-value not to exceed the lesser of 75 percent of cost or 65 percent of the appraised discounted bulk sale value upon completion of the improvements. The projects under development are inspected on a regular basis and advances are made on a percentage-of-completion basis. The loans are made to borrowers with real estate development experience and appropriate financial strength. Generally, the Company requires that a certain percentage of the development be pre-sold or that construction and term take-out commitments are in place prior to funding the loan. Loans made on unimproved land are generally made for a term of five to ten years with a loan-to-value not to exceed the lesser of 50 percent of appraised value or 50 percent of cost.

Residential Builder Guidance Lines
The Company provides Builder Guidance Lines that are comprised of pre-sold and spec-home construction and lot acquisition loans. The spec-home construction and lot acquisition loans are limited to a specific number and maximum amount. Generally, the individual loans will not exceed a one year maturity. The homes under construction are inspected on a regular basis and advances made on a percentage-of-completion basis.

Construction Loans
During the construction loan term, all construction loan collateral properties are inspected at least monthly, or more frequently as needed, until completion. Draws on construction loans are predicated upon the results of the inspection and advanced based upon a percentage-of-completion basis versus original budget percentages. When construction loans become non-performing and the associated project is not complete, the Company on a case-by-case basis makes the decision to advance additional funds or to initiate collection/foreclosure proceedings. Such decision includes obtaining “as-is” and “at completion” appraisals for consideration of potential increases or decreases in the collateral’s value. The Company also considers the increased costs of monitoring progress to completion, and the related collection/holding period costs should collateral ownership be transferred to the Company.

Commercial Real Estate Loans
Loans are made to purchase, construct and finance commercial real estate properties. These loans are generally made to borrowers who will own and occupy the property, but may include loans to finance investment or income properties. Commercial real estate loans generally have a loan-to-value up to the lesser of 75 percent of the appraised value or 75 percent of the cost and require a minimum 1.2 times debt service coverage margin.

Agricultural Lending
Agricultural lending is conducted on a conservative basis and consists of operating credits, term real estate loans for the acquisition or refinance of agricultural real estate or equipment, and term livestock loans for the acquisition or refinance of livestock. Loan-to-value on equipment, livestock and agricultural real estate is generally limited to 75 percent.

Home Equity Loans
The Company’s home equity loans of $617 million and $545 million as of December 31, 2019 and 2018, respectively, consist of 1-4 family junior lien mortgages and first and junior lien lines of credit secured by residential real estate. At December 31, 2019, the home equity loan portfolio consisted of 92 percent variable interest rate and 8 percent fixed interest rate loans. Approximately 56 percent of the home equity loans were in a first lien status with the remaining 44 percent in junior lien status. Approximately 5 percent of the home equity loans were closed-end amortizing loans and 95 percent were open-end, revolving home equity lines of credit. At December 31, 2018, the home equity loan portfolio consisted of 92 percent variable interest rate and 8 percent fixed interest rate loans. Approximately 56 percent of the home equity loans were in a first lien status with the remaining 44 percent in junior lien status. Approximately 6 percent of the home equity loans were closed-end amortizing loans and 94 percent were open-end, revolving home equity lines of credit.

Home equity lines of credit are generally originated with maturity terms of 15 years. At origination, borrowers can choose a variable interest rate that changes quarterly, or after the first 3, 5 or 10 years from the origination date. The draw period for home equity lines of credit usually exists from origination to maturity. During the draw period, the Company has home equity lines of credit where the borrowers pay interest only and home equity lines of credit where borrowers pay principal and interest.

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Consumer Lending
The majority of consumer loans are secured by real estate, automobiles, or other assets. The Company intends to continue making such loans because of their short-term nature, generally between three months and five years. Moreover, interest rates on consumer loans are generally higher than on residential mortgage loans. The Company also originates second mortgage and home equity loans, especially to existing customers in instances where the first and second mortgage loans are less than 80 percent of the current appraised value of the property.

States and Political Subdivisions Lending
The Company lends directly to state and local political subdivisions. The loans are typically secured by the full faith and credit of the municipality or a specific revenue stream such as water or sewer fees.  In general, state and local political subdivision loans carry a low risk of default and offer other complimentary business opportunities such as deposits and cash management. The loans are generally long-term in nature and interest on many of these loans is tax-exempt for federal income tax purposes.

Credit Risk Management
The Company is committed to a conservative management of the credit risk within the loan portfolio, including the early recognition of problem loans. The Company’s credit risk management includes stringent credit policies, individual loan approval limits, limits on concentrations of credit, and committee approval of larger loan requests. Management practices also include regular internal and external credit examinations, identification and review of individual loans and leases experiencing deterioration of credit quality, procedures for the collection of non-performing assets, quarterly monitoring of the loan portfolio, semi-annual review of loans by industry, and periodic stress testing of the loans secured by real estate. Federal and state regulatory safety and soundness examinations are conducted annually.

The Company’s loan policy and credit administration practices establish standards and limits for all extensions of credit that are secured by interests in or liens on real estate, or made for the purpose of financing the construction of real property or other improvements. Ongoing monitoring and review of the loan portfolio is based on current information, including: the borrowers’ and guarantors’ creditworthiness, value of the real estate and other collateral, the project’s performance against projections, and monthly inspections by Company employees or external parties until the real estate project is complete.

Monitoring of the junior lien and home equity lines of credit portfolios includes evaluating payment delinquency, collateral values, bankruptcy notices and foreclosure filings. Additionally, the Company places junior lien mortgages and junior lien home equity lines of credit on non-accrual status when there is evidence that the associated senior lien is 90 days past due or is in the process of foreclosure, regardless of the junior lien delinquency status.

Loan Approval Limits
Individual loan approval limits have been established for each lender based on the loan types and experience of the individual. There are four additional loan approval levels: 1) the Bank divisions’ Officer Loan Committees, consisting of senior lenders and members of senior management; 2) the Bank divisions’ advisory boards; 3) the Bank’s Executive Loan Committee, consisting of the Bank divisions’ senior loan officers and the Company’s Chief Credit Administrator; and 4) Bank’s Board of Directors. Under banking laws, loans to one borrower and related entities are limited to a prescribed percentage of the unimpaired capital and surplus of the Bank.

Interest Reserves
Interest reserves are used to periodically advance loan funds to pay interest charges on the outstanding balance of the related loan. As with any extension of credit, the decision to establish a loan-funded interest reserve upon origination of construction loans, including residential construction and land, lot and other construction loans, is based on prudent underwriting, including the feasibility of the project, expected cash flow, creditworthiness of the borrower and guarantors, and the protection provided by the real estate and other underlying collateral. Interest reserves provide an effective means for addressing the cash flow characteristics of construction loans. In response to the downturn in the housing market and potential impact upon construction lending, the Company discourages the creation or continued use of interest reserves.

Interest reserves are advanced provided the related construction loan is performing as expected. Loans with interest reserves may be extended, renewed or restructured only when the related loan continues to perform as expected and meets the prudent underwriting standards identified above. Such renewals, extension or restructuring are not permitted in order to keep the related loan current.

In monitoring the performance and credit quality of a construction loan, the Company assesses the adequacy of any remaining interest reserve, and whether the use of an interest reserve remains appropriate in the presence of emerging weakness and associated risks in the construction loan.


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The ongoing accrual and recognition of uncollected interest as income continues only when facts and circumstances continue to reasonably support the contractual payment of principal or interest. Loans are typically designated as non-accrual when the collection of the contractual principal or interest is unlikely and has remained unpaid for ninety days or more. For such loans, the accrual of interest and its capitalization into the loan balance will be discontinued.

The Company had $240 million and $179 million of loans with remaining interest reserves of $8.6 million and $7.1 million as of December 31, 2019 and 2018, respectively. During 2019 and 2018, the Company extended, renewed or restructured 42 loans and 9 loans, respectively, with interest reserves. Such loans had an aggregate outstanding principal balance of $30.4 million and $11.6 million as of December 31, 2019 and 2018, respectively. As of December 31, 2019, the Company had no construction loans with interest reserves that are currently non-performing or which are potential problem loans.

Loan Purchases and Sales
Fixed rate, long-term mortgage loans are generally sold in the secondary market. The Company is active in the secondary market, primarily through the origination of conventional, Rural Development, Federal Housing Administration and Department of Veterans Affairs residential mortgages. The sale of loans in the secondary mortgage market reduces the Company’s risk of holding long-term, fixed rate loans during periods of rising interest rates. In connection with conventional loan sales, the Company typically sells the majority of mortgage loans originated with servicing released; however, the Company strategically retains servicing in certain circumstances. The Company has also been very active in generating commercial Small Business Administration loans, and other commercial loans, with a portion of those loans sold to investors. The Company has not originated any type of subprime mortgages, either for the loan portfolio or for sale to investors. In addition, the Company has not purchased debt securities collateralized with subprime mortgages. The Company does not actively purchase loans from other financial institutions, and substantially all of the Company’s loans receivable are with customers in the Company’s geographic market areas.

Loan Origination and Other Fees
In addition to interest earned on loans, the Company receives fees for originating loans. Loan fees generally are a percentage of the principal amount of the loan and are charged to the borrower, and are normally deducted from the proceeds of the loan. Loan origination fees are generally 1.0 to 1.5 percent on residential mortgages and 0.5 to 1.5 percent on commercial loans. Consumer loans generally require a fixed fee amount. The Company also receives other fees and charges relating to existing loans, which include charges and fees collected in connection with loan modifications.

Appraisal and Evaluation Process
The Company’s loan policy and credit administration practices have adopted and implemented the applicable legal and regulatory requirements, which establishes criteria for obtaining appraisals or evaluations (new or updated), including transactions that are otherwise exempt from the appraisal requirements.

Each of the Bank divisions monitor conditions, including supply and demand factors, in the real estate markets served so they can react quickly to changing market conditions to mitigate potential losses from specific credit exposures within the loan portfolio. Evidence of the following real estate market conditions and trends is obtained from lending personnel and third party sources:
•demographic indicators, including employment and population trends;
•foreclosures, vacancy, construction and absorption rates;
•property sales prices, rental rates, and lease terms;
•current tax assessments;
•economic indicators, including trends within the lending areas; and
•valuation trends, including discount and capitalization rates.

Third party information sources include federal, state, and local governments and agencies thereof, private sector economic data vendors, real estate brokers, licensed agents, sales, rental and foreclosure data tracking services.

The time between ordering an appraisal or evaluation and receipt from third party vendors is typically two to six weeks for residential property depending on geographic market and four to six weeks for non-residential property. For real estate properties that are of highly specialized or limited use, significantly complex or large, additional time beyond the typical times may be required for new appraisals or evaluations (new or updated).

41

As part of the Company’s credit administration and portfolio monitoring practices, the Company’s regular internal and external credit examinations review a significant number of individual loan files. Appraisals and evaluations (new or updated) are reviewed to determine whether the timeliness, methods, assumptions, and findings are reasonable and in compliance with the Company’s loan policy and credit administration practices. Such reviews include the adequacy of the steps taken by the Company to ensure that the individuals who perform appraisals and evaluations (new or updated) are appropriately qualified and are not subject to conflicts of interest. If there are any deficiencies noted in the reviews, they are reported to Bank management and prompt corrective action is taken.

Non-performing Assets
The following table summarizes information regarding non-performing assets at the dates indicated:
 
At or for the Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017		December 31,
2016		December 31,
2015
Other real estate owned$5,142  7,480  14,269  20,954  26,815  
Accruing loans 90 days or more past due
Residential real estate753  788  2,366  266  —  
Commercial207  492  3,582  428  2,051  
Consumer and other452  738  129  405  80  
Total1,412  2,018  6,077  1,099  2,131  
Non-accrual loans
Residential real estate4,715  8,021  4,924  4,528  8,073  
Commercial22,242  35,883  35,629  39,033  36,510  
Consumer and other3,926  3,348  4,280  5,771  6,550  
Total30,883  47,252  44,833  49,332  51,133  
Total non-performing assets
$37,437  56,750  65,179  71,385  80,079  
Non-performing assets as a percentage of subsidiary assets
0.27 %0.47 %0.68 %0.76 %0.88 %
ALLL as a percentage of non-performing loans
385 %266 %255 %257 %244 %
Accruing loans 30-89 days past due$23,192  33,567  37,687  25,617  19,413  
Accruing troubled debt restructurings
$34,055  25,833  38,491  52,077  63,590  
Non-accrual troubled debt restructurings$3,346  10,660  23,709  21,693  27,057  
U.S. government guarantees included in
  non-performing assets
$1,786  4,811  2,513  1,746  2,312  
Interest income 1
$1,603  2,340  2,162  2,364  2,471  
______________________________
1Amounts represent estimated interest income that would have been recognized on loans accounted for on a non-accrual basis as of the end of each period had such loans performed pursuant to contractual terms.

The Company experienced another successful year in reducing non-performing assets as the Bank divisions continued to focus on resolving outstanding credit issues. Non-performing assets of $37.4 million at December 31, 2019 decreased $19.3 million, or 34 percent, over the prior year end. Non-performing assets as a percentage of subsidiary assets at December 31, 2019 was 0.27 percent, a decrease of 20 basis points from the prior year fourth quarter. Early stage delinquencies (accruing loans 30-89 days past due) of $23.2 million at December 31, 2019 decreased $10.4 million from the prior year end. Early stage delinquencies as a percentage of loans at December 31, 2019 was 0.24 percent, which was a decrease of 17 basis points from the prior year end.

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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. With very limited exceptions, the Company does not disburse additional funds on non-performing loans. Instead, the Company proceeds to collection and foreclosure actions in order to reduce the Company’s exposure to loss on such loans.

For additional information on accounting policies relating to non-performing assets and impaired loans, see Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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 $95 million and $109 million as of December 31, 2019 and December 31, 2018, respectively. The ALLL includes specific valuation allowances of $0.1 million and $3.2 million of impaired loans as of December 31, 2019 and December 31, 2018, respectively.

Restructured Loans
A restructured loan is considered a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Each restructured debt is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service 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. The Company’s TDR loans of $37.4 million and $36.5 million as of December 31, 2019 and December 31, 2018, respectively, are considered impaired loans.

Other Real Estate Owned
The book value of loans prior to the acquisition of collateral and transfer of the loans into OREO during 2019 was $3.0 million. The fair value of the loan collateral acquired in foreclosure during 2019 was $2.3 million. The following table sets forth the changes in OREO for the periods indicated:
 
Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017		December 31, 2016December 31, 2015
Balance at beginning of period$7,480  14,269  20,954  26,815  27,804  
Acquisitions—  187  96  882  974  
Additions2,349  4,924  4,466  5,198  7,989  
Capital improvements63  21  —  149  1,710  
Write-downs(766) (2,727) (604) (1,821) (1,575) 
Sales(3,984) (9,194) (10,643) (10,269) (10,087) 
Balance at end of period$5,142  7,480  14,269  20,954  26,815  

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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 sixteen 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.

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. See additional risk factors in “Item 1A. Risk Factors.”

44

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

 December 31, 2019December 31, 2018December 31, 2017December 31, 2016December 31, 2015
(Dollars in thousands)ALLLPercent of Loans  in
Category		ALLLPercent
of Loans in
Category		ALLLPercent
of Loans in
Category		ALLLPercent
of Loans in
Category		ALLLPercent
of Loans in
Category
Residential real estate
$10,111  10 %$10,631  11 %$10,798  11 %$12,436  12 %$14,427  13 %
Commercial real estate
69,496  59 %72,448  56 %68,515  54 %65,773  52 %67,877  52 %
Other commercial
36,129  22 %38,160  23 %39,303  24 %37,823  24 %32,525  22 %
Home equity4,937  6 %5,811  7 %6,204  7 %7,572  8 %8,998  8 %
Other consumer
3,817  3 %4,189  3 %4,748  4 %5,968  4 %5,870  5 %
Total$124,490  100 %$131,239  100 %$129,568  100 %$129,572  100 %$129,697  100 %

The following table summarizes the ALLL experience for the periods indicated:
 
At or for the Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017		December 31, 2016December 31, 2015
Balance at beginning of period$131,239  129,568  129,572  129,697  129,753  
Provision for loan losses57  9,953  10,824  2,333  2,284  
Charge-offs
Residential real estate(608) (728) (199) (464) (985) 
Commercial loans(6,649) (8,514) (9,044) (4,860) (4,242) 
Consumer and other loans(7,921) (8,565) (10,088) (6,172) (1,775) 
Total charge-offs(15,178) (17,807) (19,331) (11,496) (7,002) 
Recoveries
Residential real estate251  87  82  207  92  
Commercial loans4,393  5,045  3,569  5,576  3,620  
Consumer and other loans3,728  4,393  4,852  3,255  950  
Total recoveries8,372  9,525  8,503  9,038  4,662  
Charge-offs, net of recoveries(6,806) (8,282) (10,828) (2,458) (2,340) 
Balance at end of period$124,490  131,239  129,568  129,572  129,697  
ALLL as a percentage of total loans
1.31 %1.58 %1.97 %2.28 %2.55 %
Net charge-offs as a percentage of average loans
0.08 %0.11 %0.17 %0.05 %0.05 %

The ALLL as a percent of total loans outstanding at December 31, 2019 was 1.31 percent, which was a decrease of 27 basis points from a year ago. The decrease from prior year end was attributable to stabilizing credit quality. The Company’s ALLL of $124 million is considered adequate to absorb losses from any class of its loan portfolio. For the periods ended December 31, 2019 and 2018, 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. During 2019, charge-offs, net of recoveries, exceeded the provision for loan losses by $6.7 million. During the same period in 2018, the provision for loan losses exceeded charge-offs, net of recoveries, by $1.7 million.

45

The Company provides commercial services to individuals, small to medium-sized businesses, community organizations and public entities from 181 locations, including 164 branches, across Montana, Idaho, Utah, Washington, Wyoming, Colorado, Arizona and Nevada. The states in which the Company operates have diverse economies and markets that are tied to commodities (crops, livestock, minerals, oil and natural gas), tourism, real estate and land development and an assortment of industries, both manufacturing and service-related. Thus, the changes in the global, national, and local economies are not uniform across the Company’s geographic locations.

Overall, the economic environment and housing markets throughout the Company’s footprint continue to show positive signs of improvement. Home prices continue to increase in all of the states within the Company’s footprint and all of the eight states continue to remain above the United States average. Three of the top ten states for house price appreciation belong to states in the Company’s footprint. Home ownership in the United States is at 64.8 percent, which is still approximately 4 percent less than the peak before the most recent financial crisis. The Federal Reserve Bank of Philadelphia’s composite state coincident indices projects positive growth in all states in the Company’s footprint, except Wyoming. The third quarter of 2019 was the tenth consecutive quarter the United States economy grew at or above 2.0 percent. All states in the Company’s footprint have unemployment rates below 5 percent, which reflects the Federal Reserve’s definition of full employment. Crude oil prices remain volatile, base metal prices began a downward trend in 2018 but remained stable through the later part of 2019, and natural gas prices, outside of winter spikes, experienced a decline in 2019. Most agriculture commodities within the Company’s footprint remain relatively stable. 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. In general, the Company sees positive signs in the various economic indices; however, given the significant recession experienced during the late 2000s and the current lack of housing supply within the Company’s footprint, the Company is cautiously optimistic about the housing market. 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 and 14 percent of the Company’s total loan portfolio and accounted for 6 percent and 21 percent of the Company’s non-accrual loans at December 31, 2019 and December 31, 2018, 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)December 31,
2019		December 31,
2018
Specific valuation allowance$95  3,223  
General valuation allowance124,395  128,016  
Total ALLL$124,490  131,239  

During 2019, the ALLL decreased by $6.7 million, the net result of a $3.1 million decrease in the specific valuation allowance and a $3.6 million decrease in the general valuation allowance. The specific valuation allowance decreased as the result of a $13.8 million decrease in loans individually evaluated for impairment with a specific impairment. The decrease in the general valuation allowance since the prior year end was a result of changes in qualitative or environmental factors and stabilizing 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 “Item 8. Financial Statements and Supplementary Data.”

46

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:
 
(Dollars in thousands)December 31,
2019		December 31,
2018		$ Change% Change
Custom and owner occupied construction
$143,479  $126,595  $16,884  13 %
Pre-sold and spec construction180,539  121,938  58,601  48 %
Total residential construction324,018  248,533  75,485  30 %
Land development101,592  137,814  (36,222) (26 %)
Consumer land or lots125,759  127,775  (2,016) (2 %)
Unimproved land62,563  83,579  (21,016) (25 %)
Developed lots for operative builders17,390  17,061  329  2 %
Commercial lots46,408  34,096  12,312  36 %
Other construction478,368  520,005  (41,637) (8 %)
Total land, lot, and other construction
832,080  920,330  (88,250) (10 %)
Owner occupied1,667,526  1,343,563  323,963  24 %
Non-owner occupied2,017,375  1,605,960  411,415  26 %
Total commercial real estate3,684,901  2,949,523  735,378  25 %
Commercial and industrial991,580  907,340  84,240  9 %
Agriculture701,363  646,822  54,541  8 %
1st lien1,186,889  1,108,227  78,662  7 %
Junior lien53,571  56,689  (3,118) (6 %)
Total 1-4 family1,240,460  1,164,916  75,544  6 %
Multifamily residential342,498  247,457  95,041  38 %
Home equity lines of credit617,900  539,938  77,962  14 %
Other consumer174,643  165,865  8,778  5 %
Total consumer792,543  705,803  86,740  12 %
States and political subdivisions533,023  404,671  128,352  32 %
Other139,538  125,310  14,228  11 %
Total loans receivable, including loans held for sale9,582,004  8,320,705  1,261,299  15 %
Less loans held for sale 1
(69,194) (33,156) (36,038) 109 %
Total loans receivable$9,512,810  $8,287,549  $1,225,261  15 %
______________________________
1 Loans held for sale are primarily 1st lien 1-4 family loans.

47

The following table summarizes the Company’s non-performing assets by regulatory classification:
 
Non-performing Assets,
by Loan Type		Non-
Accruing
Loans		Accruing
Loans 90
Days or 
More Past 
Due		OREO
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2019		December 31,
2019		December 31,
2019
Custom and owner occupied construction
$185  —  185  —  —  
Pre-sold and spec construction
743  463  743  —  —  
Total residential construction
928  463  928  —  —  
Land development852  2,166  474  —  378  
Consumer land or lots330  1,428  330  —  —  
Unimproved land1,181  9,338  105  —  1,076  
Developed lots for operative builders
—  68  —  —  —  
Commercial lots529  1,046  —  —  529  
Other construction—  120  —  —  —  
Total land, lot and other construction
2,892  14,166  909  —  1,983  
Owner occupied4,608  5,940  3,320  41  1,247  
Non-owner occupied8,229  10,567  8,229  —  —  
Total commercial real estate
12,837  16,507  11,549  41  1,247  
Commercial and industrial
5,297  3,914  4,945  142  210  
Agriculture2,288  7,040  2,137  1  150  
1st lien8,671  10,290  6,414  753  1,504  
Junior lien569  565  546  23  —  
Total 1-4 family9,240  10,855  6,960  776  1,504  
Multifamily residential
201  —  201  —  —  
Home equity lines of credit
2,618  2,770  2,618  —  —  
Other consumer837  456  344  445  48  
Total consumer3,455  3,226  2,962  445  48  
Other299  579  292  7  —  
Total$37,437  56,750  30,883  1,412  5,142  

48

The following table summarizes the Company’s accruing loans 30-89 days past due by regulatory classification:

 Accruing 30-89 Days Delinquent Loans, by Loan Type
(Dollars in thousands)December 31,
2019		December 31,
2018		$ Change% Change
Custom and owner occupied construction$637  $1,661  $(1,024) (62 %)
Pre-sold and spec construction148  887  (739) (83 %)
Total residential construction785  2,548  (1,763) (69 %)
Land development—  228  (228) (100 %)
Consumer land or lots672  200  472  236 %
Unimproved land558  579  (21) (4 %)
Developed lots for operative builders2  122  (120) (98 %)
Commercial lots—  203  (203) (100 %)
Other construction—  4,170  (4,170) (100 %)
Total land, lot and other construction1,232  5,502  (4,270) (78 %)
Owner occupied3,052  2,981  71  2 %
Non-owner occupied1,834  1,245  589  47 %
Total commercial real estate4,886  4,226  660  16 %
Commercial and industrial2,036  3,374  (1,338) (40 %)
Agriculture4,298  6,455  (2,157) (33 %)
1st lien4,711  5,384  (673) (13 %)
Junior lien624  118  506  429 %
Total 1-4 family5,335  5,502  (167) (3 %)
Home equity lines of credit2,352  3,562  (1,210) (34 %)
Other consumer1,187  1,650  (463) (28 %)
Total consumer3,539  5,212  (1,673) (32 %)
States and political subdivisions—  229  (229) (100 %)
Other1,081  519  562  108 %
Total$23,192  $33,567  $(10,375) (31 %)

49

The following table summarizes the Company’s charge-offs and recoveries by regulatory classification:
 
 Net Charge-Offs (Recoveries), Years ended, By Loan TypeCharge-OffsRecoveries
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2019		December 31,
2019
Custom and owner occupied construction$98  —  98  —  
Pre-sold and spec construction(18) (352) —  18  
Total residential construction80  (352) 98  18  
Land development(30) (116) 42  72  
Consumer land or lots(138) (146) 64  202  
Unimproved land(311) (445) —  311  
Developed lots for operative builders(18) 33  —  18  
Commercial lots(6) 1  —  6  
Other construction(142) (19) 9  151  
Total land, lot and other construction(645) (692) 115  760  
Owner occupied(479) 1,320  362  841  
Non-owner occupied2,015  853  2,156  141  
Total commercial real estate1,536  2,173  2,518  982  
Commercial and industrial1,472  2,449  2,385  913  
Agriculture21  16  119  98  
1st lien(12) 577  477  489  
Junior lien(303) (371) 61  364  
Total 1-4 family(315) 206  538  853  
Multifamily residential—  (649) —  —  
Home equity lines of credit19  (97) 73  54  
Other consumer603  261  895  292  
Total consumer622  164  968  346  
Other4,035  4,967  8,437  4,402  
Total$6,806  8,282  15,178  8,372  

50

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

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

December 31, 2019December 31, 2018December 31, 2017December 31, 2016December 31, 2015
(Dollars in thousands)AmountPercentAmountPercentAmountPercentAmountPercentAmountPercent
Non-interest bearing deposits
$3,696,627  34 %$3,001,178  32 %$2,311,902  31 %$2,041,852  28 %$1,918,310  28 %
NOW and DDA
accounts		2,645,404  25 %2,391,307  25 %1,695,246  22 %1,588,550  22 %1,516,026  22 %
Savings accounts1,485,487  14 %1,346,790  14 %1,082,604  14 %996,061  13 %838,274  12 %
Money market deposit accounts
1,937,141  18 %1,684,284  18 %1,512,693  20 %1,464,415  20 %1,382,028  20 %
Certificate accounts958,501  9 %901,484  9 %817,259  11 %948,714  13 %1,060,650  15 %
Wholesale deposits53,297  — %168,724  2 %160,043  2 %332,687  4 %229,720  3 %
Total interest bearing deposits
7,079,830  66 %6,492,589  68 %5,267,845  69 %5,330,427  72 %5,026,698  72 %
Total deposits$10,776,457  100 %$9,493,767  100 %$7,579,747  100 %$7,372,279  100 %$6,945,008  100 %

The following table summarizes the amounts outstanding at December 31, 2019 for deposits of $100,000 and greater, according to the time remaining to maturity. Included in demand deposits are brokered deposits of $53 million.
 
(Dollars in thousands)Certificates
of Deposit		Demand
Deposits		Total
Within three months$118,008  6,074,403  6,192,411  
Three months to six months172,603  —  172,603  
Seven months to twelve months152,917  —  152,917  
Over twelve months131,569  —  131,569  
Total$575,097  6,074,403  6,649,500  

For additional information on deposits, see Note 7 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

51

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

The Bank is a member of the FHLB 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 debt 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.

For additional information concerning the Company’s borrowings, see Note 8 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Repurchase agreements
Amount outstanding at end of period$569,824  396,151  362,573  
Weighted interest rate on outstanding amount0.74 %0.87 %0.53 %
Maximum outstanding at any month end$569,824  408,754  497,187  
Average balance$470,351  383,791  413,873  
Weighted-average interest rate0.79 %0.59 %0.45 %

52

Subordinated Debentures
In addition to funds obtained in the ordinary course of business, the Company formed or acquired financing subsidiaries for the purpose of issuing trust preferred securities that entitle the investor to receive cumulative cash distributions thereon. Subordinated debentures were issued in conjunction with the trust preferred securities and the terms of the subordinated debentures and trust preferred securities are the same. For regulatory capital purposes, the trust preferred securities are included in Tier 1 capital up to a certain limit. The Company also has subordinated debt that qualifies as Tier 2 capital. The subordinated debentures outstanding as of December 31, 2019 were $140 million, including fair value adjustments from acquisitions. For additional information regarding the subordinated debentures, see Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

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 VIEs, see Note 6 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

The following table represents the Company’s contractual obligations as of December 31, 2019:
 
Payments Due by Period
(Dollars in thousands)Total
Indeter-minate
Maturity 1
20202021202220232024Thereafter
Deposits$10,776,457  9,817,956  706,520  150,925  55,809  23,584  21,513  150  
Repurchase agreements569,824  —  569,824  —  —  —  —  —  
FHLB advances38,611  —  31,492  5,000  889  165  780  285  
Other borrowed funds23,149  —  —  —  373  1,082  6,959  14,735  
Subordinated debentures139,914  —  —  —  —  —  —  139,914  
Finance lease liabilities8,173  —  335  257  255  261  268  6,797  
Operating lease liabilities
62,788  —  3,965  3,761  3,473  3,123  3,130  45,336  
Total$11,618,916  9,817,956  1,312,136  159,943  60,799  28,215  32,650  207,217  
______________________________
1 Represents non-interest bearing deposits and NOW, DDA, savings, and money market accounts.

53

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

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

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

(Dollars in thousands)December 31,
2019		December 31,
2018
FHLB advances
Borrowing capacity$2,360,599  2,103,860  
Amount utilized(38,589) (444,749) 
Amount available$2,322,010  1,659,111  
FRB discount window
Borrowing capacity$1,061,872  875,936  
Amount utilized—  —  
Amount available$1,061,872  875,936  
Unsecured lines of credit available$230,000  230,000  
Unencumbered debt securities
U.S. government and federal agency$19,540  23,649  
U.S. government sponsored enterprises7,416  108,952  
State and local governments527,348  618,613  
Corporate bonds157,602  290,817  
Residential mortgage-backed securities210,356  220,653  
Commercial mortgage-backed securities401,849  273,439  
Total unencumbered debt securities$1,324,111  1,536,123  

54

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 92,289,750 have been issued as of December 31, 2019. The Company also has the capacity to issue 1,000,000 shares of preferred stock of which none have been issued as of December 31, 2019. 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 the 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 certain regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act and substantially amended the regulatory risk-based capital rules applicable to the Company. The Final Rules require the Company to hold a 2.5 percent capital conservation buffer designed to absorb losses during periods of economic stress. As of December 31, 2019, management believes the Company and Bank meet all capital adequacy requirements to which they are subject and there are no conditions or events subsequent to this date that management believes have changed the Company’s or Bank’s risk-based capital category.

The following table illustrates the Bank’s regulatory capital ratios and the Federal Reserve’s capital adequacy guidelines as of December 31, 2019:
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 actual regulatory ratios
14.64 %13.52 %13.52 %11.50 %
Minimum capital requirements
8.00 %6.00 %4.50 %4.00 %
Minimum capital requirements plus capital
  conservation buffer
10.50 %8.50 %7.00 %N/A  
Well capitalized requirements
10.00 %8.00 %6.50 %5.00 %

For additional information regarding regulatory capital, see Note 11 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

55

Federal and State Income Taxes
The Company files a consolidated federal income tax return using the accrual method of accounting. All required tax returns have been timely filed. Financial institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended, in the same general manner as other corporations. The federal statutory corporate income tax rate is 21 percent.

Under Montana, Idaho, Utah, Colorado and Arizona law, financial institutions are subject to a corporation income tax, which incorporates or is substantially similar to applicable provisions of the Internal Revenue Code. The corporation income tax is imposed on federal taxable income, subject to certain adjustments. State taxes are incurred at the rate of 6.75 percent in Montana, 6.925 percent in Idaho, 4.95 percent in Utah, 4.5 percent in Colorado and 4.9 percent in Arizona. Washington, Wyoming and Nevada do not impose a corporate income tax.

Income tax expense for the years ended December 31, 2019 and 2018 was $48.7 million and $40.3 million, respectively. The Company’s effective income tax rate for the years ended December 31, 2019 and 2018 was 18.8 percent and 18.2 percent, respectively. The current and prior year’s low effective income tax rates are due to income from tax-exempt debt securities, municipal loans and leases and benefits from federal income tax credits. Income from tax-exempt debt securities, loans and leases was $49.2 million and $56.1 million for the years ended December 31, 2019 and 2018, respectively. Benefits from federal income tax credits were $11.4 million and $9.2 million for the years ended December 31, 2019 and 2018, respectively.

The Company has equity investments in Certified Development Entities (“CDE”) which have received allocations of New Markets Tax Credits (“NMTC”). Administered by the Community Development Financial Institutions Fund (“CDFI Fund”) of the U.S. Department of the Treasury, the NMTC program is aimed at stimulating economic and community development and job creation in low-income communities. The federal income tax credits received are claimed over a seven-year credit allowance period. The Company also has equity investments in Low-Income Housing Tax Credits (“LIHTC”) which are indirect federal subsidies used to finance the development of affordable rental housing for low-income households. The federal income tax credits are claimed over a ten-year credit allowance period. The Company has investments of $18.6 million in Qualified School Construction bonds whereby the Company receives quarterly federal income tax credits in lieu of taxable interest income. The federal income tax credits on these debt securities are subject to federal and state income tax.

Following is a list of expected federal income tax credits to be received in the years indicated.
 
(Dollars in thousands)New
Markets
Tax Credits		Low-Income
Housing
Tax Credits		Debt
Securities
Tax Credits		Total
2020$5,076  8,048  794  13,918  
20215,312  8,841  736  14,889  
20224,663  8,837  673  14,173  
20234,068  8,726  640  13,434  
20242,136  8,576  604  11,316  
Thereafter720  32,133  905  33,758  
$21,975  75,161  4,352  101,488  

For additional information on income taxes, see Note 15 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data”.

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).
 
56

Years ended
 December 31, 2019December 31, 2018December 31, 2017
(Dollars in thousands)Average
Balance		Interest
and
Dividends		Average
Yield/
Rate		Average
Balance		Interest
and
Dividends		Average
Yield/
Rate		Average
Balance		Interest
and
Dividends		Average
Yield/
Rate
Assets
Residential real estate loans$965,553  $46,899  4.86 %$868,467  $40,041  4.61 %$744,523  $33,114  4.45 %
Commercial loans 1
7,084,753  373,888  5.28 %6,134,018  308,263  5.03 %4,792,720  233,744  4.88 %
Consumer and other loans881,726  44,667  5.07 %774,813  38,292  4.94 %684,129  32,584  4.76 %
Total loans 2
8,932,032  465,454  5.21 %7,777,298  386,596  4.97 %6,221,372  299,442  4.81 %
Tax-exempt investment securities 3
917,454  38,195  4.16 %1,083,999  50,239  4.63 %1,160,182  66,077  5.70 %
Taxable investment securities 4
1,935,215  56,258  2.91 %1,802,704  47,771  2.65 %1,722,264  39,727  2.31 %
Total earning assets11,784,701  559,907  4.75 %10,664,001  484,606  4.54 %9,103,818  405,246  4.45 %
Goodwill and intangibles410,561  311,321  180,014  
Non-earning assets611,788  453,394  394,363  
Total assets$12,807,050  $11,428,716  $9,678,195  
Liabilities
Non-interest bearing deposits$3,323,641  $—  — %$2,829,916  $—  — %$2,175,750  $—  — %
NOW and DDA accounts2,447,037  4,196  0.17 %2,242,935  3,862  0.17 %1,656,865  1,402  0.08 %
Savings accounts1,420,682  1,022  0.07 %1,298,985  862  0.07 %1,055,688  624  0.06 %
Money market deposit accounts
1,787,149  5,385  0.30 %1,704,269  3,377  0.20 %1,547,659  2,407  0.16 %
Certificate accounts923,840  9,257  1.00 %919,356  6,497  0.71 %888,887  5,114  0.58 %
Wholesale deposits 5
137,442  3,420  2.49 %156,022  3,761  2.41 %275,804  7,246  2.63 %
FHLB advances265,712  9,023  3.35 %231,158  8,880  3.79 %258,528  6,748  2.57 %
Repurchase agreements and other borrowed funds
625,242  10,470  1.67 %526,623  8,292  1.57 %547,307  6,323  1.16 %
Total interest bearing liabilities
10,930,745  42,773  0.39 %9,909,264  35,531  0.36 %8,406,488  29,864  0.36 %
Other liabilities123,002  71,901  83,991  
Total liabilities11,053,747  9,981,165  8,490,479  
Stockholders’ Equity
Common stock883  836  775  
Paid-in capital1,208,772  1,014,559  781,267  
Retained earnings510,601  452,996  406,200  
Accumulated other comprehensive income (loss)
33,047  (20,840) (526) 
Total stockholders’ equity1,753,303  1,447,551  1,187,716  
Total liabilities and stockholders’ equity
$12,807,050  $11,428,716  $9,678,195  
Net interest income (tax-equivalent)
$517,134  $449,075  $375,382  
Net interest spread (tax-equivalent)
4.36 %4.18 %4.09 %
Net interest margin (tax-equivalent)
4.39 %4.21 %4.12 %
______________________________
1Includes tax effect of $4.8 million, $4.1 million and $6.4 million on tax-exempt municipal loan and lease income for the years ended December 31, 2019, 2018 and 2017, respectively.
2Total 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.
3Includes tax effect of $7.8 million, $10.3 million and $22.5 million on tax-exempt debt securities income for the years ended December 31, 2019, 2018 and 2017, respectively.
4Includes tax effect of $1.1 million, $1.2 million and $1.3 million on federal income tax credits for the years ended December 31, 2019, 2018 and 2017, respectively.
5Wholesale deposits include brokered deposits classified as NOW, DDA, money market deposit and certificate accounts.
57

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.

Year ended December 31,Year ended December 31,
2019 vs. 20182018 vs. 2017
 Increase (Decrease) Due to:Increase (Decrease) Due to:
(Dollars in thousands)VolumeRateNetVolumeRateNet
Interest income
Residential real estate loans$4,476  2,382  6,858  5,513  1,414  6,927  
Commercial loans (tax-equivalent)47,779  17,846  65,625  65,416  9,103  74,519  
Consumer and other loans5,284  1,091  6,375  4,319  1,389  5,708  
Investment securities (tax-equivalent)(1,156) (2,401) (3,557) 157  (7,951) (7,794) 
Total interest income56,383  18,918  75,301  75,405  3,955  79,360  
Interest expense
NOW and DDA accounts351  (17) 334  496  1,964  2,460  
Savings accounts81  79  160  144  94  238  
Money market deposit accounts164  1,844  2,008  244  726  970  
Certificate accounts32  2,728  2,760  175  1,208  1,383  
Wholesale deposits(448) 107  (341) (3,147) (338) (3,485) 
FHLB advances1,327  (1,184) 143  (714) 2,846  2,132  
Repurchase agreements and other borrowed funds
1,553  625  2,178  (239) 2,208  1,969  
Total interest expense3,060  4,182  7,242  (3,041) 8,708  5,667  
Net interest income (tax-equivalent)
$53,323  14,736  68,059  78,446  (4,753) 73,693  

Net interest income (tax-equivalent) increased $68.1 million for the year ended December 31, 2019 compared to the same period in 2018. The interest income for 2019 increased over the same period last year primarily from increased loan growth in all categories, with the largest increase in the Company’s commercial loan portfolio. Consistent with the prior year, increases in interest rates on existing variable rate loans and new loans also increased the loan interest income. Total interest expense increased from the prior year primarily from the increase in money market deposit accounts, certificate accounts and repurchase agreements driven by both rate and volume increases.

Net interest income (tax-equivalent) increased $73.7 million during 2018 compared to 2017. The interest income for 2018 increased over the prior year primarily from increased loan growth in all categories, with the largest increase in the Company’s commercial loan portfolio. Furthermore, increases in interest rates on existing variable rate loans and new loans also increased the loan interest income. The decrease in interest income on the debt securities portfolio was primarily the result of a decrease in the tax benefit related to the tax-exempt debt securities. Total interest expense increased from the prior year primarily from an increase in deposit and FHLB interest rates, which was partially offset by the decrease in wholesale deposits.

58

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

Cyber Risk
A failure in or breach of the Company’s operational or security systems, or those of the Company’s third party service providers, including as a result of cyber attacks, could disrupt business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase costs and cause losses. The Company employs detection and response mechanisms designed to contain and mitigate these risks. The Company maintains a robust information security program that is regularly reviewed, tested, and updated. This includes vulnerability and patch management programs, incident response planning, security monitoring, employee training, and security awareness testing. The Board's Risk Oversight Committee is responsible for monitoring the Company’s cyber risk management profile and related programs. The Board is responsible for approval of related policies.

Critical Accounting Policies
The preparation of consolidated financial statements in conformity with GAAP often requires management to use significant judgments as well as subjective and/or complex measurements in making estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. The Company considers its accounting policies for the ALLL, goodwill and fair value measurements to be critical accounting policies. The application of these policies has a significant impact on the Company’s consolidated financial statements and financial results could differ significantly if different judgments or estimates were to be applied.

Allowance for Loan and Lease Losses
For information regarding the ALLL, its relation to the provision for loan losses and risk related to asset quality, see the section captioned “Allowance for Loan and Lease Losses” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 1 and 3 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

Goodwill
For information on goodwill, see Notes 1 and 5 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

Fair Value Measurements
For information on fair value measurements, see Note 20 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

Impact of Recently Issued Accounting Standards
Authoritative accounting guidance that may have had a material impact on the Company that became effective during 2019 or 2018 includes amendments to:
•FASB Accounting Standards CodificationTM (“ASC”) Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs;
•FASB ASC Topic 842, Leases;
•FASB ASC Topic 815, Derivatives and Hedging;
•FASB ASC Topic 825, Financial Instruments; and
•FASB ASC Topic 606, Revenue from Contracts with Customers

Authoritative accounting guidance that may possibly have a material impact on the Company that is pending adoption at December 31, 2019 includes amendments to:
•FASB ASC Topic 350, Simplifying the Test for Goodwill; and
•FASB ASC Topic 326, Financial Instruments - Credit Losses

For additional information on the topics and the impact on the Company see Note 1 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”


59

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company’s primary market risk exposure is interest rate risk.

Interest Rate Risk
Interest rate risk is the potential for loss of future earnings resulting from adverse changes in the level of interest rates. Interest rate risk results from many factors and could have a significant impact on the Company’s net interest income, which is the Company’s primary source of net income. Net interest income is affected by changes in interest rates, the relationship between rates on interest bearing assets and liabilities, the impact of the interest fluctuations on asset prepayments and the mix of interest bearing assets and liabilities.
Although interest rate risk is inherent in the banking industry, banks are expected to have sound risk management practices in place to measure, monitor and control interest rate exposures. The objective of interest rate risk management is to contain the risks associated with interest rate fluctuations. The process involves identification and management of the sensitivity of net interest income to changing interest rates.
The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process which is governed by policies established by the Company’s Board that are reviewed and approved annually. The Board delegates responsibility for carrying out the asset/liability management policies to the Bank’s ALCO. In this capacity, the ALCO develops guidelines and strategies impacting the Company’s asset/liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. The Company’s goal of its asset and liability management practices is to maintain or increase the level of net interest income within an acceptable level of interest rate risk.
Net interest income simulation
The Company uses a detailed and dynamic simulation model to quantify the estimated exposure of net interest income (“NII”) to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over rolling two-year and five-year horizons, it also utilizes additional tools to monitor potential longer-term interest rate risk (e.g., economic value of equity). The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company’s statements of financial condition. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year and two year horizon, assuming no balance sheet growth. The ALCO policy rate scenarios include upward and downward shifts in interest rates for 100 bps, 200 bps, 300 bps, and 400 bps scenarios with instantaneous and parallel changes in current market yield curves. The ALCO policy also includes 200 bps and 400 bps rate scenarios with gradual parallel shifts in interest rates over 12-month and 24-month periods, respectively. Given the historically low rate environment, the Company only models and reports for a downward shift in interest rates of 100 bps. Other non-parallel rate movement scenarios are also modeled to determine the potential impact on net interest income. The additional scenarios are adjusted as the economic environment changes and provide ALCO additional interest rate risk monitoring tools to evaluate current market conditions.

60

The following is indicative of the Company’s overall NII sensitivity analysis as of December 31, 2019 as compared to the ALCO policy limits approved by the Company’s Board. The Company’s interest sensitivity remained within policy limits at December 31, 2019. 

 One YearTwo Years
Rate ScenariosPolicy
Limits		Estimated
Sensitivity		Policy
Limits		Estimated
Sensitivity
-100 bps Rate shock(10 %)(2.55 %)(15 %)(4.55 %)
+100 bps Rate shock(10 %)(0.20 %)(15 %)1.88 %
+200 bps Rate shock(10 %)(0.86 %)(15 %)2.95 %
+200 bps Rate ramp(10 %)(1.13 %)(15 %)1.02 %
+300 bps Rate shock(20 %)(1.35 %)(20 %)4.13 %
+400 bps Rate shock(20 %)(2.18 %)(20 %)4.92 %
+400 bps Rate ramp(10 %)(0.41 %)(20 %)0.95 %

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including, but not limited to, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.

Economic value of equity
In addition to the NII analyses, the Company calculates the economic value of equity (“EVE”) which focuses on longer term interest rate risk. The EVE process models the cash flow of financial instruments to maturity and then discounts those cashflows based on prevailing interest rates in order to develop a baseline EVE. The interest rates used in the model are then shocked for an immediate increase and decrease in interest rates. The results for the shocked model are compared to the baseline results to determine the percentage change in EVE under the various scenarios. The resulting percentage change in the EVE is an indication of the longer term re-pricing risk and option risks embedded in the balance sheet. The measure is not designed to estimate the Company’s capital levels, such as tangible, regulatory, or market capitalization.

The following reflects the Company’s EVE maximum sensitivity policy limits and EVE analysis as of December 31, 2019:
 
Rate ScenariosPolicy
Limits		Post
Shock Ratio
-100 bps Rate shock(10 %)(8.03 %)
+100 bps Rate shock(10 %)1.87 %
+200 bps Rate shock(20 %)0.14 %
+300 bps Rate shock(30 %)(2.01 %)
+400 bps Rate shock(40 %)(5.13 %)
 

Item 8. Financial Statements and Supplementary Data


61





Report of Independent Registered Public Accounting Firm



To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Kalispell, Montana


Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Glacier Bancorp, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



62

To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Page 2


Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan and Lease Losses

As described in Note 3 to the consolidated financial statements, the Company’s consolidated allowance for loan and lease losses (ALLL) was approximately $124 million at December 31, 2019. The ALLL is an estimate of probable credit losses related to specifically identified loans and for losses inherent in the portfolio that have been incurred as of the balance sheet date. The determination of the ALLL requires management to exercise significant judgment and consider numerous subjective factors, including determining qualitative factors utilized to adjust historical loss rates, risk grading loans and identifying loan impairments, among others. As disclosed by management, different assumptions and conditions could result in a materially different amount for the ALLL.

We identified the valuation of the ALLL as a critical audit matter. Auditing the allowance for loan and lease losses involved a high degree of subjectivity in evaluating management's estimates, such as evaluating management's identification of credit quality indicators, assessment of economic conditions and other environmental factors, evaluating the adequacy of specific allowances associated with impaired loans and assessing the appropriateness of loan grades and the “impaired loan” designation.

The primary procedures we performed to address this critical audit matter included:

•Testing the effectiveness of controls, including those related to technology, over the ALLL including data completeness and accuracy, classifications of loans by loan segment, historical loss data, the calculation of a historical loss rate, the establishment of qualitative adjustments to the historical loss rate, identification of impaired loans and risk classification of individual loans and/or loan relationships and establishment of specific reserves on impaired loans including purchased loans that have experienced further credit deterioration and management’s review controls over the ALLL balance as a whole;
•Testing of completeness and accuracy of the information utilized in the ALLL through testing of year-end loan balances, impaired loan designations, gross charge-offs and recoveries and past due amounts;
•Review of the Company’s ALLL Narrative supporting the overall ALLL process is place and adjusted loss factors applied to various loan segments;
•Testing the Company’s ALLL model for computational accuracy;
•Evaluating the qualitative adjustments to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions;
•Testing the internal and outsourced loan review functions and evaluating the accuracy of loan grades and impaired loan identification;
63

To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Page 3


•Utilizing internal subject matter experts in the area of loan review to assist us in evaluating the appropriateness of loan grades, impaired loan identification and to assess the reasonableness of specific impairments allocated to impaired loans;
•Evaluating the overall reasonableness of assumptions used by considering the past performance of the Company and evaluating to trends identified within the banking industry, including, but not limited to the following:
◦Various banking industry analytic comparisons through the historical look-back period and through the most recent economic downturn
◦Timing and frequency of improvements noted in key lending ratios that are indicative of potential credit risk in the overall loan portfolio and banking industry
◦Observation of trends in the Company’s overall environmental factors to ensure directional consistency, the overall economic climate and risk trends identified in the loan portfolio
Merger and Acquisition

As described in Note 22 to the consolidated financial statements, the Company consummated the acquisitions of two single bank holding companies during the year ended December 31, 2019, resulting in the expansion of the Company’s operating foot print and additional goodwill of approximately $167 million being recognized on the Company’s consolidated statement of financial condition. As part of the acquisitions consummated during the year, management determined that the acquisitions qualified as a business and accordingly all identifiable assets and liabilities acquired were valuated at fair value as part of the purchase price allocation as of acquisition date. The identification and valuation of such acquired assets and assumed liabilities requires management to exercise significant judgment and consider the use of outside vendors to estimate the fair value allocations.

We identified the consummated acquisitions and the valuation of acquired assets and assumed liabilities as a critical audit matter. Auditing the acquired balance sheets and acquisition related considerations involved a high degree of subjectivity in evaluating management's operational assumptions of the newly acquired divisions, fair value estimates, purchase price allocations and assessing the appropriateness of outside vendor valuation models.

The primary procedures we performed to address this critical audit matter included:

•Obtaining and reviewing executed Plan and Agreement of Merger documents to gain an understanding of the underlying terms of the consummated acquisition;
•Obtaining and reviewing management’s Purchase Accounting Checklist to gain an understanding of cut-off procedures performed and asset/liability identification considerations made;
•Testing management’s Purchase Accounting Spreadsheet focusing on the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to identified assets acquired and liabilities assumed;
•Obtaining all significant outside vendor valuation estimates and challenging management’s analysis of the appropriateness of the valuations allocated to assets acquired and liabilities assumed; including but not limited to, testing all critical inputs, assumptions applied, and valuation models utilized by the outside vendors;
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To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Page 4


•Utilization of BKD Forensics & Valuation Services group to assist with testing the related fair value purchase price allocations made to identified assets acquired and liabilities assumed;
•Testing the goodwill calculation resulting from the acquisition consummated, being the difference between the total net consideration paid and the fair value of the net assets acquired;
•Reviewing and evaluating the adequacy of the disclosures made in the footnotes of the Company’s SEC filings.

Emphasis of a Matter
As discussed in Note 1 to the financial statements, on January 1, 2019, the Company adopted new accounting guidance for accounting for leases and premium amortization on purchased callable debt securities. Our opinion is not modified with respect to this matter.

/s/ BKD, LLP

We have served as the Company’s auditor since 2005.
Denver, Colorado
February 21, 2020

65





Report of Independent Registered Public Accounting Firm



To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Kalispell, Montana


Opinion on Internal Control Over Financial Reporting
We have audited Glacier Bancorp, Inc.’s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company and our report dated February 21, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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To the Stockholders, Board of Directors and Audit Committee
Glacier Bancorp, Inc.
Page 2


Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BKD, LLP

Denver, Colorado
February 21, 2020




67

GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 
(Dollars in thousands, except per share data)December 31,
2019		December 31,
2018
Assets
Cash on hand and in banks$198,639  161,782  
Interest bearing cash deposits132,322  42,008  
Cash and cash equivalents330,961  203,790  
Debt securities, available-for-sale2,575,252  2,571,663  
Debt securities, held-to-maturity224,611  297,915  
Total debt securities2,799,863  2,869,578  
Loans held for sale, at fair value69,194  33,156  
Loans receivable9,512,810  8,287,549  
Allowance for loan and lease losses(124,490) (131,239) 
Loans receivable, net9,388,320  8,156,310  
Premises and equipment, net310,309  241,528  
Other real estate owned5,142  7,480  
Accrued interest receivable56,047  54,408  
Deferred tax asset2,037  23,564  
Core deposit intangible, net63,286  49,242  
Goodwill456,418  289,586  
Non-marketable equity securities11,623  27,871  
Bank-owned life insurance109,428  82,320  
Other assets81,371  76,651  
Total assets$13,683,999  12,115,484  
Liabilities
Non-interest bearing deposits$3,696,627  3,001,178  
Interest bearing deposits7,079,830  6,492,589  
Securities sold under agreements to repurchase569,824  396,151  
Federal Home Loan Bank advances38,611  440,175  
Other borrowed funds28,820  14,708  
Subordinated debentures139,914  134,051  
Accrued interest payable4,686  4,252  
Other liabilities164,954  116,526  
Total liabilities11,723,266  10,599,630  
Commitments and Contingent Liabilities
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 authorized923  845  
Paid-in capital1,378,534  1,051,253  
Retained earnings - substantially restricted541,050  473,183  
Accumulated other comprehensive income (loss)40,226  (9,427) 
Total stockholders’ equity1,960,733  1,515,854  
Total liabilities and stockholders’ equity$13,683,999  12,115,484  
Number of common stock shares issued and outstanding92,289,750  84,521,692  


See accompanying notes to consolidated financial statements.
68

GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 Years ended
(Dollars in thousands, except per share data)December 31,
2019		December 31,
2018		December 31,
2017
Interest Income
Investment securities$85,504  86,499  81,968  
Residential real estate loans46,899  40,041  33,114  
Commercial loans369,107  304,164  227,356  
Consumer and other loans44,667  38,292  32,584  
Total interest income546,177  468,996  375,022  
Interest Expense
Deposits23,280  18,359  16,793  
Securities sold under agreements to repurchase3,694  2,248  1,858  
Federal Home Loan Bank advances9,023  8,880  6,748  
Other borrowed funds
215  95  79  
Subordinated debentures6,561  5,949  4,386  
Total interest expense42,773  35,531  29,864  
Net Interest Income503,404  433,465  345,158  
Provision for loan losses57  9,953  10,824  
Net interest income after provision for loan losses
503,347  423,512  334,334  
Non-Interest Income
Service charges and other fees67,934  74,887  67,717  
Miscellaneous loan fees and charges5,313  6,805  4,360  
Gain on sale of loans34,064  27,134  30,439  
Gain (loss) on sale of debt securities14,415  (1,113) (660) 
Other income9,048  11,111  10,383  
Total non-interest income130,774  118,824  112,239  
Non-Interest Expense
Compensation and employee benefits222,753  195,056  160,506  
Occupancy and equipment34,497  30,734  26,631  
Advertising and promotions10,621  9,566  8,405  
Data processing17,392  15,911  14,150  
Other real estate owned1,105  3,221  1,909  
Regulatory assessments and insurance3,771  5,075  4,431  
Loss on termination of hedging activities13,528  —  —  
Core deposit intangible amortization8,485  6,270  2,494  
Other expenses62,775  54,294  47,045  
Total non-interest expense374,927  320,127  265,571  
Income Before Income Taxes259,194  222,209  181,002  
Federal and state income tax expense48,650  40,331  64,625  
Net Income$210,544  181,878  116,377  
Basic earnings per share$2.39  2.18  1.50  
Diluted earnings per share$2.38  2.17  1.50  
Dividends declared per share$1.31  1.31  1.14  
Average outstanding shares - basic88,255,290  83,603,515  77,537,664  
Average outstanding shares - diluted88,385,775  83,677,185  77,607,605  
See accompanying notes to consolidated financial statements.
69

GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Net Income$210,544  181,878  116,377  
Other Comprehensive Income (Loss), Net of Tax
Unrealized gains (losses) on available-for-sale securities77,158  (15,608) 3,428  
Reclassification adjustment for (gains) losses included in net income(14,423) 12  636  
Net unrealized gains (losses) on available-for-sale securities62,735  (15,596) 4,064  
Tax effect(15,896) 3,952  (1,563) 
Net of tax amount46,839  (11,644) 2,501  
Unrealized (losses) gains on derivatives used for cash flow hedges(7,047) 3,286  444  
Reclassification adjustment for losses included in net income10,816  2,334  4,892  
Net unrealized gains on derivatives used for cash flow hedges
3,769  5,620  5,336  
Tax effect(955) (1,424) (2,083) 
Net of tax amount2,814  4,196  3,253  
Total other comprehensive income (loss), net of tax49,653  (7,448) 5,754  
Total Comprehensive Income$260,197  174,430  122,131  






























See accompanying notes to consolidated financial statements.
70

GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 31, 2019, 2018 and 2017
 
(Dollars in thousands, except per share data)Common StockPaid-in CapitalRetained
Earnings
Substantially Restricted		Accumulated
Other Comp-rehensive (Loss) Income		 
SharesAmountTotal
Balance at January 1, 2017  76,525,402  $765  749,107  374,379  (7,382) 1,116,869  
Net income—  —  —  116,377  —  116,377  
Other comprehensive income—  —  —  351  5,403  5,754  
Cash dividends declared ($1.14 per share)—  —  —  (88,848) —  (88,848) 
Stock issued in connection with acquisitions1,381,661  14  46,659  —  —  46,673  
Stock issuances under stock incentive plans
99,893  1  (1) —  —  —  
Stock-based compensation and related taxes
—  —  2,232  —  —  2,232  
Balance at December 31, 201778,006,956  $780  797,997  402,259  (1,979) 1,199,057  
Net income—  —  —  181,878  —  181,878  
Other comprehensive loss—  —  —  —  (7,448) (7,448) 
Cash dividends declared ($1.31 per share)
—  —  —  (110,954) —  (110,954) 
Stock issued in connection with acquisitions
6,432,868  64  250,743  —  —  250,807  
Stock issuances under stock incentive plans
81,868  1  (1) —  —  —  
Stock-based compensation and related taxes
—  —  2,514  —  —  2,514  
Balance at December 31, 201884,521,692  $845  1,051,253  473,183  (9,427) 1,515,854  
Net income—  —  —  210,544  —  210,544  
Other comprehensive income—  —  —  —  49,653  49,653  
Cash dividends declared ($1.31 per share)
—  —  —  (117,563) —  (117,563) 
Stock issued in connection with acquisitions
7,519,617  75  316,463  —  —  316,538  
Stock issuances under stock incentive plans
248,441  3  (3) —  —  —  
Stock-based compensation and related taxes
—  —  10,821  —  —  10,821  
Cumulative-effect of accounting changes—  —  —  (25,114) —  (25,114) 
Balance at December 31, 201992,289,750  $923  1,378,534  541,050  40,226  1,960,733  

















See accompanying notes to consolidated financial statements.
71

GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Operating Activities
Net income$210,544  181,878  116,377  
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses57  9,953  10,824  
Net amortization of debt securities12,985  13,095  20,026  
Net accretion of purchase accounting adjustments(3,712) (3,963) (5,131) 
Amortization of debt modification costs4,630  1,649  471  
Origination of loans held for sale(983,988) (841,451) (889,212) 
Proceeds from loans held for sale985,345  896,145  984,506  
Gain on sale of loans(34,064) (27,134) (30,439) 
(Gain) loss on sale of debt securities(14,415) 1,113  660  
Bank-owned life insurance income, net(2,245) (2,234) (1,395) 
Stock-based compensation, net of tax benefits7,475  3,122  2,952  
Depreciation and amortization of premises and equipment18,592  16,019  14,758  
Loss (gain) on sale and write-downs of other real estate owned, net73  2,130  (1,641) 
Deferred tax (benefit) expense(356) 6,861  25,887  
Amortization of core deposit intangibles8,485  6,270  2,494  
Amortization of investments in variable interest entities9,700  7,639  4,692  
Net decrease (increase) in accrued interest receivable1,899  (2,741) 2,466  
Net decrease in other assets5,078  348  1,139  
Net increase (decrease) in accrued interest payable312  357  (135) 
Net increase (decrease) in other liabilities254  11,655  (4,558) 
Net cash provided by operating activities226,649  280,711  254,741  
Investing Activities
Sales of available-for-sale debt securities712,113  226,842  247,748  
Maturities, prepayments and calls of available-for-sale debt securities711,838  357,876  446,695  
Purchases of available-for-sale debt securities(1,224,231) (820,333) (36,239) 
Maturities, prepayments and calls of held-to-maturity debt securities58,750  76,832  25,187  
Principal collected on loans3,250,220  2,691,953  2,099,292  
Loan originations(3,623,548) (3,460,227) (2,740,281) 
Net additions to premises and equipment(16,398) (18,637) (10,128) 
Proceeds from sale of other real estate owned4,670  9,385  12,335  
Proceeds from redemption of non-marketable equity securities118,516  87,221  68,610  
Purchases of non-marketable equity securities(97,597) (87,975) (71,396) 
Proceeds from bank-owned life insurance—  1,331  437  
Investments in variable interest entities(16,348) (37,956) (14,514) 
Net cash received from (paid in) acquisitions79,333  101,268  (4,091) 
Net cash (used in) provided by investing activities(42,682) (872,420) 23,655  





See accompanying notes to consolidated financial statements.
72

GLACIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 Years ended
(Dollars in thousands)December 31, 2019December 31, 2018December 31, 2017
Financing Activities
Net increase in deposits$285,856  599,037  (89,397) 
Net increase in securities sold under agreements to repurchase172,264  4,398  (111,077) 
Net (decrease) increase in short-term Federal Home Loan Bank advances(255,000) 85,000  137,200  
Proceeds from long-term Federal Home Loan Bank advances—  —  150,000  
Repayments of long-term Federal Home Loan Bank advances(151,160) (1,198) (208,192) 
Net increase (decrease) in other borrowed funds14,109  (5,059) 3,784  
Cash dividends paid(124,468) (85,493) (111,720) 
Tax withholding payments for stock-based compensation(1,293) (1,214) (1,531) 
Proceeds from stock option exercises2,896  24  —  
Net cash (used in) provided by financing activities(56,796) 595,495  (230,933) 
Net increase in cash, cash equivalents and restricted cash127,171  3,786  47,463  
Cash, cash equivalents and restricted cash at beginning of period203,790  200,004  152,541  
Cash, cash equivalents and restricted cash at end of period$330,961  203,790  200,004  
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest$42,461  35,174  30,000  
Cash paid during the period for income taxes36,817  26,489  40,219  
Supplemental Disclosure of Non-Cash Investing Activities
Transfer of debt securities from held-to-maturity to available-for-sale
$—  270,331  —  
Sale and refinancing of other real estate owned7  406  553  
Transfer of loans to other real estate owned2,349  4,924  4,466  
Right-of-use assets obtained in exchange for operating lease liabilities9,948  —  —  
Dividends declared during the period but not paid18,686  25,726  265  
Acquisitions
Fair value of common stock shares issued316,538  250,807  46,673  
Cash consideration16,424  16,265  17,342  
Effective settlement of pre-existing receivable—  10,054  —  
Fair value of assets acquired1,190,267  1,660,882  355,230  
Liabilities assumed1,024,137  1,383,756  321,824  















See accompanying notes to consolidated financial statements.
73

GLACIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations and Summary of Significant Accounting Policies

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

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

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

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

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

In July 2019, the Company completed the acquisition of Heritage Bancorp, the bank holding company for Heritage Bank of Nevada, a community bank based in Reno, Nevada (collectively, “Heritage”). In April 2019, the Company completed the acquisition of FNB Bancorp, the holding company for The First National Bank of Layton, a community bank based in Layton, Utah (collectively, “FNB”). In February 2018, the Company completed its acquisition of Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank, a community bank based in Bozeman, Montana (collectively, “FSB”). In January 2018, the Company completed its acquisition of Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado (collectively, “Collegiate”). In April 2017, the Company completed its acquisition of TFB Bancorp, Inc. and its wholly-owned subsidiary, The Foothills Bank, a community bank based in Yuma, Arizona. The business combinations were accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition dates. For additional information relating to recent mergers and acquisitions, see Note 22.

74

Pending Acquisition
On September 30, 2019, the Company announced the signing of a definitive agreement to acquire State Bank Corp., the parent company of State Bank of Arizona, a community bank based in Lake Havasu City, Arizona (collectively, “SBAZ”). SBAZ provides banking services to individuals and businesses in Arizona with locations in Bullhead City, Cottonwood, Kingman, Lake Havasu City, Phoenix, Prescott Valley and Prescott. As of December 31, 2019, SBAZ had total assets of $677,654,000, gross loans of $439,237,000 and total deposits of $586,688,000. The acquisition has received regulatory approvals, is subject to other customary conditions of closing and is expected to be completed in the first quarter of 2020. Upon closing of the transaction, SBAZ will merge into the Company's Foothills Bank division and will expand the Company's footprint in Arizona to cover all major markets in the state and be a leading community bank in Arizona.

Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held as demand deposits at various banks and the Federal Reserve Bank (“FRB”), interest bearing deposits, federal funds sold, and liquid investments with original maturities of three months or less. The Bank is required to maintain an average reserve balance with either the FRB or in the form of cash on hand. The required reserve balance at December 31, 2019 was $50,055,000.

Debt Securities
Debt securities for which the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. Debt securities held primarily for the purpose of selling in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses included in income. Debt securities not classified as held-to-maturity or trading are classified as available-for-sale and are reported at fair value with unrealized gains and losses, net of income taxes, as a separate component of other comprehensive income (“OCI”). Premiums and discounts on debt securities are amortized or accreted into income using a method that approximates the interest method. The objective of the interest method is to calculate periodic interest income at a constant effective yield. The Company does not have any debt securities classified as trading securities.

The Company reviews and analyzes the various risks that may be present within the investment portfolio on an ongoing basis, including market risk and credit risk. Market risk is the risk to an entity’s financial condition resulting from adverse changes in the value of its holdings arising from movements in interest rates, foreign exchange rates, equity prices or commodity prices. The Company assesses the market risk of individual debt securities as well as the investment portfolio as a whole. Credit risk, broadly defined, is the risk that an issuer or counterparty will fail to perform on an obligation. A debt security is investment grade if the issuer has an adequate capacity to meet its commitment over the expected life of the investment, i.e., the risk of default is low and full and timely repayment of interest and principal is expected. To determine investment grade status for debt securities, the Company conducts due diligence of the creditworthiness of the issuer or counterparty prior to acquisition and ongoing thereafter consistent with the risk characteristics of the security and the overall risk of the investment portfolio. Credit quality due diligence takes into account the extent to which a security is guaranteed by the U.S. government and other agencies of the U.S. government. The depth of the due diligence is based on the complexity of the structure, the size of the security, and takes into account material positions and specific groups of securities or stratifications for analysis and review of similar risk positions. The due diligence includes consideration of payment performance, collateral adequacy, internal analyses, third party research and analytics, external credit ratings and default statistics.

For additional information relating to debt securities, see Note 2.

Temporary versus Other-Than-Temporary Impairment
The Company assesses individual debt securities in its investment portfolio for impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant. A debt security is impaired if the fair value of the security is less than its carrying value at the financial statement date. If impairment is determined to be other-than-temporary, an impairment loss is recognized by reducing the amortized cost for the credit loss portion of the impairment with a corresponding charge to earnings for a like amount.

In evaluating impaired debt securities for other-than-temporary impairment losses, management considers 1) the severity and duration of the impairment; 2) the credit ratings of the security; and 3) the overall deal structure, including the Company’s position within the structure, the overall and near term financial performance of the issuer and underlying collateral, delinquencies, defaults, loss severities, recoveries, prepayments, cumulative loss projections, discounted cash flows and fair value estimates.

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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. If impairment is determined to be other-than-temporary and the Company does not intend to sell a debt security, and it is more-likely-than-not the Company will not be required to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion (noncredit portion) in OCI, net of tax. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in OCI for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively, as an increase to the carrying amount of the security, over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

If impairment is determined to be other-than-temporary and the Company intends to sell a debt security or it is more-likely-than-not the Company will be required to sell the security before recovery of its cost basis, it recognizes the entire amount of the other-than-temporary impairment in earnings.

For debt securities with other-than-temporary impairment, the previous amortized cost basis less the other-than-temporary impairment recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the debt security.

Loans Held for Sale
Loans held for sale generally consist of long-term, fixed rate, conforming, single-family residential real estate loans intended to be sold on the secondary market. Loans held for sale are recorded at fair value as of each balance sheet date. The fair value includes the servicing value of the loans and any change in fair value is recognized in non-interest income. Fair value elections are made at the time of origination or purchase based on the Company’s fair value election policy.

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 non-accrual, 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.
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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.

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.

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

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

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

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

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

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

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

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

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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 non-accrual loans;
•changes in the quality of the Company’s loan review system;
•changes in the value of underlying collateral for collateral-dependent loans;
•the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
•the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s existing portfolio.

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

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

Premises and Equipment
Premises and equipment are accounted for at cost less depreciation. Depreciation is computed on a straight-line method over the estimated useful lives or the term of the related lease. The estimated useful life for office buildings is 15 to 40 years and the estimated useful life for furniture, fixtures, and equipment is 3 to 10 years. Interest is capitalized for any significant building projects. For additional information relating to premises and equipment, see Note 4.

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

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

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


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Other Real Estate Owned
Property acquired by foreclosure or deed-in-lieu of foreclosure is initially recorded at fair value, less estimated selling cost, at acquisition date (i.e., cost of the property). The Company is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon the occurrence of either the Company obtaining legal title to the property or the borrower conveying all interest in the property through a deed-in-lieu or similar agreement. Fair value is determined as the amount that could be reasonably expected in a current sale between a willing buyer and a willing seller in an orderly transaction between market participants at the measurement date. Subsequent to the initial acquisition, if the fair value of the asset, less estimated selling cost, is less than the cost of the property, a loss is recognized in other expense and the asset carrying value is reduced. Gain or loss on disposition of OREO is recorded in non-interest income or non-interest expense, respectively. In determining the fair value of the properties on the date of transfer and any subsequent estimated losses of net realizable value, the fair value of other real estate acquired by foreclosure or deed-in-lieu of foreclosure is determined primarily based upon appraisal or evaluation of the underlying property value.

Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is deemed impaired if the sum of the expected future cash flows is less than the carrying amount of the asset. If impaired, an impairment loss is recognized in other expense to reduce the carrying value of the asset to fair value. At December 31, 2019 and 2018, no long-lived assets were considered materially impaired.

Business Combinations and Intangible Assets
Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets. Goodwill is recorded if the purchase price exceeds the net fair value of assets acquired and a bargain purchase gain is recorded in other income if the net fair value of assets acquired exceeds the purchase price.

Adjustment of the allocated purchase price may be related to fair value estimates for which all information has not been obtained of the acquired entity known or discovered during the allocation period, the period of time required to identify and measure the fair values of the assets and liabilities acquired in the business combination. The allocation period is generally limited to one year following consummation of a business combination.

Core deposit intangible represents the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions and is amortized using an accelerated method based on an estimated runoff of the related deposits. The core deposit intangible is evaluated for impairment and recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable, with any changes in estimated useful life accounted for prospectively over the revised remaining life. For additional information relating to core deposit intangibles, see Note 5.

The Company tests goodwill for impairment at the reporting unit level annually during the third quarter. The Company has identified that each of the Bank divisions are reporting units (i.e., components of the Glacier Bank operating segment) given that each division has a separate management team that regularly reviews its respective division financial information; however, the reporting units are aggregated into a single reporting unit due to the reporting units having similar economic characteristics.

The goodwill of a reporting unit is tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Examples of events and circumstances that could trigger the need for interim impairment testing include:
•a significant change in legal factors or in the business climate;
•an adverse action or assessment by a regulator;
•unanticipated competition;
•a loss of key personnel;
•a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of; and
•the testing for recoverability of a significant asset group within a reporting unit.


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For the goodwill impairment assessment, the Company has the option, prior to the two-step process, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. The Company opted to bypass the qualitative assessment for its 2019 and 2018 annual goodwill impairment testing and proceed directly to the two-step goodwill impairment test. The goodwill impairment two-step process requires the Company to make assumptions and judgments regarding fair value. In the first step, the Company calculates an implied fair value based on a control premium analysis. If the implied fair value is less than the carrying value, the second step is completed to compute the impairment amount, if any, by determining the “implied fair value” of goodwill. This determination requires the allocation of the estimated fair value of the reporting units to the assets and liabilities of the reporting units. Any remaining unallocated fair value represents the “implied fair value” of goodwill, which is compared to the corresponding carrying value of goodwill to compute impairment, if any.

For additional information relating to goodwill, see Note 5.

Equity Securities
Non-marketable equity securities primarily consist of Federal Home Loan Bank (“FHLB”) stock. FHLB stock is restricted because such stock may only be sold to FHLB at its par value. Due to restrictive terms, and the lack of a readily determinable fair value, FHLB stock is carried at cost and evaluated for impairment. The investments in FHLB stock are required investments related to the Company’s borrowings from FHLB. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs is jointly and severally liable for repayment of each other’s debt.

The Company also has an insignificant amount of marketable equity securities that are included in other assets on the Company’s statements of financial condition. Marketable equity securities with readily determinable fair values are measured at fair value and changes in fair value are recognized in other income. Marketable equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.

Bank-Owned Life Insurance
The Company maintains bank-owned life insurance policies on certain current and former employees and directors, which are recorded at their cash surrender values as determined by the insurance carriers. The appreciation in the cash surrender value of the policies is recognized as a component of other non-interest income in the Company’s statements of operations.

Derivatives and Hedging Activities
For asset and liability management purposes, the Company previously entered into interest rate swap agreements to hedge against changes in forecasted cash flows due to interest rate exposures. In September 2019, the Company implemented a balance sheet strategy to increase its net interest income and net interest margin and early terminated its’ pay-fixed interest rate swaps. Prior to termination, the interest rate swaps were recognized as assets or liabilities on the Company’s statements of financial condition and were measured at fair value. Fair value estimates were obtained from third parties and were based on pricing models. The Company did not enter into interest rate swap agreements for trading or speculative purposes.

The Company included the impact of bilateral collateral and master netting agreements that allowed the Company to settle all interest rate swap agreements held with a single counterparty on a net basis, and to offset the net interest rate swap derivative position with the related collateral when recognizing interest rate swap derivative assets and liabilities.

The Company's interest rate swaps were contracts in which a series of interest payments were exchanged over a prescribed period. The notional amount upon which the interest payments were based was not exchanged. The swap agreements were derivative instruments and converted a portion of the Company’s forecasted variable rate debt to a fixed rate (i.e., cash flow hedge) over the payment term of the interest rate swap. The effective portion of the gain or loss on the cash flow hedging instruments was initially reported as a component of OCI and subsequently reclassified into earnings in the same period during which the transaction affects earnings. For highly effective hedges, the ineffective portion of the gain or loss on derivative instruments, if any, would be amortized over the remaining life the hedging instrument using a systematic and rational method. During the years ended December 31, 2019, 2018, and 2017, the Company’s cash flow hedges were determined to be fully effective.


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Interest rate derivative financial instruments received hedge accounting treatment only if they were designated as a hedge and were expected to be, and were, highly effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Derivative financial instruments that did not meet specified hedging criteria were recorded at fair value with changes in fair value recorded in income. The Company’s interest rate swaps were considered highly effective and met the hedge accounting criteria.

Cash flows resulting from the interest rate derivative financial instruments that were accounted for as hedges of assets and liabilities were classified in the Company’s cash flow statement in the same category as the cash flows of the items being hedged. For additional information relating to interest rate swap agreements, see Note 10.

Revenue Recognition
The Company recognizes revenue when services or products are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled. The Company’s principal source of revenue is interest income from debt securities and loans. Revenue from contracts with customers within the scope of Accounting Standards Codification™ (“ASC”) Topic 606 was $69,877,000, $76,664,000, and $69,808,000 for the years ended December 31, 2019, 2018, and 2017, respectively, and largely consisted of revenue from service charges and other fees from deposits (e.g., overdraft fees, ATM fees, debit card fees). Due to the short-term nature of the Company’s contracts with customers, an insignificant amount of receivables related to such revenue was recorded at December 31, 2019 and 2018 and there were no impairment losses recognized. Policies specific to revenue from contracts with customers include the following:

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

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

Stock-based Compensation
Stock-based compensation awards granted, comprised of restricted stock units and stock options, are valued at fair value and compensation cost is recognized on a straight-line basis over the requisite service period of each award. The impact of forfeitures of stock-based compensation awards on compensation expense is recognized as forfeitures occur. For additional information relating to stock-based compensation, see Note 12.

Advertising and Promotion
Advertising and promotion costs are recognized in the period incurred.

Income Taxes
The Company’s income tax expense consists of current and deferred income tax expense. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of enacted tax law to earnings or losses. Deferred income tax expense results from changes in deferred assets and liabilities between periods. The Company recognizes interest and penalties related to income tax matters in income tax expense.

Deferred tax assets and liabilities are recognized for estimated future income tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date.


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Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The term more-likely-than-not means a likelihood of more than 50 percent. The recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to the Company’s judgment. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence. For additional information relating to income taxes, see Note 15.

Comprehensive Income
Comprehensive income consists of net income and OCI. OCI includes unrealized gains and losses, net of tax effect, on available-for-sale securities and derivatives used for cash flow hedges. For additional information relating to OCI, see Note 16.

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 stock options were exercised and restricted stock units were vested, using the treasury stock method. For additional information relating to earnings per share, see Note 17.

Reclassifications
Certain reclassifications have been made to the 2018 and 2017 financial statements to conform to the 2019 presentation.

Accounting Guidance Adopted in 2019
The ASC is the Financial Accounting Standards Board’s (“FASB”) officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of the federal securities laws are also sources of authoritative GAAP for the Company as an SEC registrant. All other accounting literature is non-authoritative. The following paragraphs provide descriptions of recently adopted Accounting Standards Updates (“ASU”) that may have had a material effect on the Company’s financial position or results of operations.

ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs. In March 2017, FASB amended ASC Subtopic 310-20 to shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments required the premium to be amortized to the earliest call date instead of the maturity date. The amendments did not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2018 and any adjustments were to be reflected as of the beginning of the year that includes the interim period. Entities were to apply the amendments on a modified retrospective basis; therefore, a cumulative-effect reduction to retained earnings of $24,102,000 was recognized as of the January 1, 2019 effective date. The Company’s debt securities that were effected by the amendments were primarily in the state and local governments category. The Company’s accounting policies and procedures were updated to reflect the amendments.

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


83

Accounting Guidance Pending Adoption at December 31, 2019
The following paragraphs provide descriptions of newly issued but not yet effective ASUs that could have a material effect on the Company’s financial position or results of operations.

ASU 2017-04 - Intangibles - Goodwill and Other. In January 2017, FASB amended ASC Topic 350 to simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under these amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has goodwill from prior business combinations and performs an annual impairment test or more frequently if changes or circumstances occur that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. During the third quarter of 2019, the Company performed its impairment assessment and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment, it is unlikely that an impairment amount would need to be calculated and, therefore, the Company does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis. For additional information regarding goodwill impairment testing, see Note 5.

ASU 2016-13 - Financial Instruments - Credit Losses. In June 2016, FASB amended ASC Topic 326 to replace the incurred loss model with a methodology that reflects expected credit losses over the life of the loan and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. As a result of the adoption of the amendments, the ALLL will be referred to as the allowance for credit losses (“ACL”). The Company has evaluated the impact of these amendments to the Company’s financial position and results of operations and has determined the estimated range of the ACL will be between $125,600,000 and $131,300,000 and the estimated allowance for unfunded commitments will be between $12,800,000 and $13,600,000 upon adoption of the amendments. An adjustment to retained earnings, net of tax, will be required for the difference between such estimated amounts and the balances at December 31, 2019. The estimated impact to retained earnings on the date of adoption is approximately $9,955,000 to $14,808,000. The Company had developed internal implementation controls over the development of the ACL model and resulting financial statement disclosures. As part of the implementation of the amendments, the Company has adjusted its processes and procedures to calculate the ACL, 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 has also developed new procedures for determining an allowance for credit losses relating to held-to-maturity debt securities. In addition, the current accounting policy and procedures for other-than-temporary impairment on available-for-sale debt securities were replaced with an allowance approach. The Company engaged a third-party vendor solution and is currently in the final phases of evaluating the solution including model validation, adjusting assumptions utilized, and reviewing the accuracy of the financial statement disclosures. The project team is refining its processes and procedures which will continue during the first quarter of 2020. For additional information on the ALLL, see Note 3.


84

Note 2. Debt Securities

The following tables present the amortized cost, the gross unrealized gains and losses and the fair value of the Company’s debt securities:

 December 31, 2019
 Amortized
Cost		Gross UnrealizedFair
Value
(Dollars in thousands)GainsLosses
Available-for-sale
U.S. government and federal agency$20,061  48  (65) 20,044  
U.S. government sponsored enterprises42,724  953  —  43,677  
State and local governments679,784  22,694  (80) 702,398  
Corporate bonds155,665  1,938  (1) 157,602  
Residential mortgage-backed securities731,766  7,507  (549) 738,724  
Commercial mortgage-backed securities891,374  22,825  (1,392) 912,807  
Total available-for-sale2,521,374  55,965  (2,087) 2,575,252  
Held-to-maturity
State and local governments224,611  9,785  —  234,396  
Total held-to-maturity224,611  9,785  —  234,396  
Total debt securities$2,745,985  65,750  (2,087) 2,809,648  

 December 31, 2018
 Amortized
Cost		Gross UnrealizedFair
Value
(Dollars in thousands)GainsLosses
Available-for-sale
U.S. government and federal agency$23,757  54  (162) 23,649  
U.S. government sponsored enterprises120,670  52  (514) 120,208  
State and local governments844,636  18,936  (11,322) 852,250  
Corporate bonds292,052  378  (1,613) 290,817  
Residential mortgage-backed securities808,537  628  (16,250) 792,915  
Commercial mortgage-backed securities490,868  3,312  (2,356) 491,824  
Total available-for-sale2,580,520  23,360  (32,217) 2,571,663  
Held-to-maturity
State and local governments297,915  1,380  (11,039) 288,256  
Total held-to-maturity297,915  1,380  (11,039) 288,256  
Total debt securities$2,878,435  24,740  (43,256) 2,859,919  

In November 2018, the Company adopted FASB ASU 2017-12, Derivatives and Hedging, and in doing so redesignated state and local government securities with a carrying value of $270,331,000, from held-to-maturity classification to available-for-sale classification. The Company considers the available-for-sale classification of these debt securities to be appropriate since it no longer had the intent to hold them to maturity. No gain or loss was recorded at the time of transfer.


85

The following table presents the amortized cost and fair value of available-for-sale and held-to-maturity debt securities by contractual maturity at December 31, 2019. Actual maturities may differ from expected or contractual maturities since issuers have the right to prepay obligations with or without prepayment penalties.

 December 31, 2019
 Available-for-SaleHeld-to-Maturity
(Dollars in thousands)Amortized CostFair ValueAmortized CostFair Value
Due within one year$62,317  62,555  —  —  
Due after one year through five years170,631  174,195  12,841  13,383  
Due after five years through ten years206,056  214,517  71,708  75,771  
Due after ten years459,230  472,454  140,062  145,242  
898,234  923,721  224,611  234,396  
Mortgage-backed securities 1
1,623,140  1,651,531  —  —  
Total$2,521,374  2,575,252  224,611  234,396  
______________________________
1 Mortgage-backed securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

Proceeds from sales and calls of debt securities and the associated gains and losses that have been included in earnings are listed below:

 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Available-for-sale
Proceeds from sales and calls of debt securities$928,710  265,587  280,783  
Gross realized gains 1
18,936  443  3,369  
Gross realized losses 1
(4,513) (455) (4,005) 
Held-to-maturity
Proceeds from calls of debt securities58,750  79,000  23,020  
Gross realized gains 1
2  101  204  
Gross realized losses 1
(10) (1,202) (228) 
______________________________
1 The gain or loss on the sale or call of each debt security is determined by the specific identification method.

At December 31, 2019 and 2018, the Company had debt securities with carrying values of $1,475,752,000 and $1,333,455,000, respectively, pledged as collateral for FHLB advances, FRB discount window borrowings, securities sold under agreements to repurchase (“repurchase agreements”), interest rate swap agreements and deposits of several local government units.


86

Debt securities with an unrealized loss position are summarized as follows:
 
 December 31, 2019
 Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale
U.S. government and federal agency
$464  —  9,902  (65) 10,366  (65) 
State and local governments19,044  (80) —  —  19,044  (80) 
Corporate bonds7,378  (1) —  —  7,378  (1) 
Residential mortgage-backed securities85,562  (234) 29,038  (315) 114,600  (549) 
Commercial mortgage-backed securities177,051  (1,293) 7,697  (99) 184,748  (1,392) 
Total available-for-sale
$289,499  (1,608) 46,637  (479) 336,136  (2,087) 

 December 31, 2018
 Less than 12 Months12 Months or MoreTotal
(Dollars in thousands)Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
Available-for-sale
U.S. government and federal agency
$4,287  (27) 10,519  (135) 14,806  (162) 
U.S. government sponsored enterprises
43,400  (103) 35,544  (411) 78,944  (514) 
State and local governments72,080  (922) 232,244  (10,400) 304,324  (11,322) 
Corporate bonds119,111  (937) 114,800  (676) 233,911  (1,613) 
Residential mortgage-backed securities132,405  (833) 537,202  (15,417) 669,607  (16,250) 
Commercial mortgage-backed securities73,118  (402) 86,504  (1,954) 159,622  (2,356) 
Total available-for-sale
$444,401  (3,224) 1,016,813  (28,993) 1,461,214  (32,217) 
Held-to-maturity
State and local governments$87,392  (2,778) 126,226  (8,261) 213,618  (11,039) 
Total held-to-maturity$87,392  (2,778) 126,226  (8,261) 213,618  (11,039) 

Based on an analysis of its debt securities with unrealized losses as of December 31, 2019 and 2018, the Company determined that none of such securities had other-than-temporary impairment and the unrealized losses were primarily the result of interest rate changes and market spreads subsequent to acquisition. The fair value of the debt securities is expected to recover as payments are received and the securities approach maturity. At December 31, 2019, management determined that it did not intend to sell debt securities with unrealized losses, and there was no expected requirement to sell any of its debt securities with unrealized losses before recovery of their amortized cost.


87

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:

(Dollars in thousands)December 31,
2019		December 31,
2018
Residential real estate loans$926,388  887,742  
Commercial loans
Real estate5,579,307  4,657,561  
Other commercial2,094,254  1,911,171  
Total7,673,561  6,568,732  
Consumer and other loans
Home equity617,201  544,688  
Other consumer295,660  286,387  
Total912,861  831,075  
Loans receivable9,512,810  8,287,549  
Allowance for loan and lease losses(124,490) (131,239) 
Loans receivable, net$9,388,320  8,156,310  
Net deferred origination (fees) costs included in loans receivable$(6,964) (5,685) 
Net purchase accounting (discounts) premiums included in loans receivable$(21,574) (25,172) 

At December 31, 2019, the Company had loans of $5,228,136,000 pledged as collateral for FHLB advances and FRB discount window. The Company is subject to regulatory limits for the amount of loans to any individual borrower and the Company is in compliance with this regulation as of December 31, 2019 and 2018. No borrower had outstanding loans or commitments exceeding 10 percent of the Company’s consolidated stockholders’ equity as of December 31, 2019.

Loans that are serviced for others are not reported as assets. The principal balances of these loans were $185,897,000 and $181,281,000 at December 31, 2019 and 2018, respectively. The fair value of servicing rights was insignificant at December 31, 2019 and 2018. There were no significant purchases or sales of portfolio loans during 2019, 2018 and 2017.

The Company has entered into transactions with its executive officers and directors and their affiliates. The aggregate amount of loans outstanding to such related parties at December 31, 2019 and 2018 was $57,825,000 and $59,528,000, respectively. During 2019, new loans to such related parties were $17,504,000 and repayments were $19,207,000. In management’s opinion, such loans were made in the ordinary course of business and were made on substantially the same terms as those prevailing at the time for comparable transaction with other persons.


88

Allowance for Loan and Lease Losses
The ALLL is a valuation allowance for probable incurred credit losses. The following tables summarize the activity in the ALLL by loan class:

 Year ended December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Balance at beginning of period$131,239  10,631  72,448  38,160  5,811  4,189  
Provision for loan losses57  (163) (2,704) (23) (863) 3,810  
Charge-offs(15,178) (608) (2,460) (4,189) (90) (7,831) 
Recoveries8,372  251  2,212  2,181  79  3,649  
Balance at end of period$124,490  10,111  69,496  36,129  4,937  3,817  
 
 Year ended December 31, 2018
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Balance at beginning of period$129,568  10,798  68,515  39,303  6,204  4,748  
Provision for loan losses9,953  474  4,343  1,916  (471) 3,691  
Charge-offs(17,807) (728) (3,469) (5,045) (210) (8,355) 
Recoveries9,525  87  3,059  1,986  288  4,105  
Balance at end of period$131,239  10,631  72,448  38,160  5,811  4,189  

 Year ended December 31, 2017
(Dollars in thousands)TotalResidential
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 losses10,824  (1,521) 7,152  2,545  (1,103) 3,751  
Charge-offs(19,331) (199) (6,188) (2,856) (489) (9,599) 
Recoveries8,503  82  1,778  1,791  224  4,628  
Balance at end of period$129,568  10,798  68,515  39,303  6,204  4,748  

The following tables disclose the recorded investment in loans and the balance in the ALLL by loan class:
 
 December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Loans receivable
Individually evaluated for impairment
$94,504  7,804  58,609  21,475  3,745  2,871  
Collectively evaluated for impairment
9,418,306  918,584  5,520,698  2,072,779  613,456  292,789  
Total loans receivable$9,512,810  926,388  5,579,307  2,094,254  617,201  295,660  
ALLL
Individually evaluated for impairment
$95  —  73  10  —  12  
Collectively evaluated for impairment
124,395  10,111  69,423  36,119  4,937  3,805  
Total ALLL
$124,490  10,111  69,496  36,129  4,937  3,817  
 
89

 December 31, 2018
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Loans receivable
Individually evaluated for impairment
$108,788  12,685  68,837  20,975  3,497  2,794  
Collectively evaluated for impairment
8,178,761  875,057  4,588,724  1,890,196  541,191  283,593  
Total loans receivable$8,287,549  887,742  4,657,561  1,911,171  544,688  286,387  
ALLL
Individually evaluated for impairment
$3,223  83  568  2,313  39  220  
Collectively evaluated for impairment
128,016  10,548  71,880  35,847  5,772  3,969  
Total ALLL
$131,239  10,631  72,448  38,160  5,811  4,189  

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.

Aging Analysis
The following tables present an aging analysis of the recorded investment in loans by loan class:
 
 December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Accruing loans 30-59 days past due$15,944  3,403  4,946  4,685  1,040  1,870  
Accruing loans 60-89 days past due7,248  749  2,317  1,190  1,902  1,090  
Accruing loans 90 days or more past due
1,412  753  64  143  —  452  
Non-accrual loans30,883  4,715  15,650  6,592  3,266  660  
Total past due and non-accrual loans
55,487  9,620  22,977  12,610  6,208  4,072  
Current loans receivable9,457,323  916,768  5,556,330  2,081,644  610,993  291,588  
Total loans receivable$9,512,810  926,388  5,579,307  2,094,254  617,201  295,660  
 
 December 31, 2018
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Accruing loans 30-59 days past due$24,312  5,251  9,477  4,282  3,213  2,089  
Accruing loans 60-89 days past due9,255  860  3,231  3,838  735  591  
Accruing loans 90 days or more past due
2,018  788  —  492  428  310  
Non-accrual loans47,252  8,021  27,264  8,619  2,575  773  
Total past due and non-accrual loans
82,837  14,920  39,972  17,231  6,951  3,763  
Current loans receivable8,204,712  872,822  4,617,589  1,893,940  537,737  282,624  
Total loans receivable$8,287,549  887,742  4,657,561  1,911,171  544,688  286,387  

90

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. The following tables disclose information related to impaired loans by loan class:
 
 At or for the Year ended December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Loans with a specific valuation allowance
Recorded balance$5,388  —  5,343  10  —  35  
Unpaid principal balance5,388  —  5,343  10  —  35  
Specific valuation allowance95  —  73  10  —  12  
Average balance10,378  409  6,341  3,490  24  114  
Loans without a specific valuation allowance
Recorded balance89,116  7,804  53,266  21,465  3,745  2,836  
Unpaid principal balance99,355  9,220  57,735  24,758  4,494  3,148  
Average balance93,338  9,879  59,107  18,079  3,486  2,787  
Total
Recorded balance94,504  7,804  58,609  21,475  3,745  2,871  
Unpaid principal balance104,743  9,220  63,078  24,768  4,494  3,183  
Specific valuation allowance95  —  73  10  —  12  
Average balance103,716  10,288  65,448  21,569  3,510  2,901  

 At or for the Year ended December 31, 2018
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
Loans with a specific valuation allowance
Recorded balance$19,197  1,957  9,345  7,268  120  507  
Unpaid principal balance19,491  2,220  9,345  7,268  120  538  
Specific valuation allowance3,223  83  568  2,313  39  220  
Average balance19,519  2,686  8,498  7,081  82  1,172  
Loans without a specific valuation allowance
Recorded balance89,591  10,728  59,492  13,707  3,377  2,287  
Unpaid principal balance107,486  11,989  71,300  17,689  3,986  2,522  
Average balance106,747  10,269  73,889  17,376  3,465  1,748  
Total
Recorded balance108,788  12,685  68,837  20,975  3,497  2,794  
Unpaid principal balance126,977  14,209  80,645  24,957  4,106  3,060  
Specific valuation allowance3,223  83  568  2,313  39  220  
Average balance126,266  12,955  82,387  24,457  3,547  2,920  

Interest income recognized on impaired loans for the years ended December 31, 2019, 2018, and 2017 was not significant.


91

Restructured Loans
A restructured loan is considered a troubled debt restructuring 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 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:
 
 Year ended December 31, 2019
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans18  1  6  6  2  3  
Pre-modification recorded balance
$18,508  117  8,524  9,382  214  271  
Post-modification recorded balance
$18,476  123  8,524  9,364  214  251  
TDRs that subsequently defaulted
Number of loans1  —  1  —  —  —  
Recorded balance$106  —  106  —  —  —  

 Year ended December 31, 2018
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans25  4  8  10  2  1  
Pre-modification recorded balance
$21,995  724  12,901  7,813  252  305  
Post-modification recorded balance
$21,881  724  12,787  7,813  252  305  
TDRs that subsequently defaulted
Number of loans1  1  —  —  —  —  
Recorded balance$47  47  —  —  —  —  

 Year ended December 31, 2017
(Dollars in thousands)TotalResidential
Real Estate		Commercial
Real Estate		Other
Commercial		Home
Equity		Other
Consumer
TDRs that occurred during the period
Number of loans32  5  13  11  2  1  
Pre-modification recorded balance
$41,521  841  31,109  9,403  158  10  
Post-modification recorded balance
$38,838  841  28,426  9,403  158  10  
TDRs that subsequently defaulted
Number of loans1  —  —  1  —  —  
Recorded balance$18  —  —  18  —  —  

The modifications for the loans designated as TDRs during the years ended December 31, 2019, 2018 and 2017 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.


92

In addition to the loans designated as TDRs during the period provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $2,992,000, $6,793,000 and $5,987,000 for the years ended December 31, 2019, 2018 and 2017, respectively, for which OREO was received in full or partial satisfaction of the loans. The majority of such TDRs were in residential real estate for the year ended December 31, 2019 and in commercial real estate for the years ended December 31, 2018 and 2017. At December 31, 2019 and 2018, the Company had $1,744,000 and $350,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At December 31, 2019 and 2018, the Company had $1,504,000 and $698,000, respectively, of OREO secured by residential real estate properties.

There were $3,933,000 and $5,335,000 of additional unfunded commitments on TDRs outstanding at December 31, 2019 and 2018, respectively. The amount of charge-offs on TDRs during 2019, 2018 and 2017 was $709,000, $1,685,000 and $2,984,000, respectively.

Note 4. Premises and Equipment

Premises and equipment, net of accumulated depreciation, consist of the following:
(Dollars in thousands)December 31, 2019December 31, 2018
Land$52,738  47,511  
Buildings and construction in progress251,151  231,854  
Furniture, fixtures and equipment96,576  90,030  
Leasehold improvements11,144  9,370  
Accumulated depreciation(148,373) (137,237) 
Net premises and equipment, excluding ROU assets263,236  241,528  
ROU assets47,073  —  
Net premises and equipment$310,309  241,528  

Leases
The Company leases certain land, premises and equipment from third parties. Effective January 1, 2019, ROU assets for operating and finance leases are included in net premises and equipment and lease liabilities are included in other liabilities and other borrowed funds, respectively, on the Company’s statements of financial condition. The following table summarizes the Company’s leases:

December 31, 2019
(Dollars in thousands)Finance
Leases		Operating
Leases
ROU assets$6,537  
Accumulated depreciation(917) 
Net ROU assets$5,620  41,453  
Lease liabilities$5,671  43,904  
Weighted-average remaining lease term24 years19 years
Weighted-average discount rate3.0 %3.7 %


93

Maturities of lease liabilities consist of the following:
December 31, 2019
(Dollars in thousands)Finance
Leases		Operating
Leases
Maturing within one year$335  3,965  
Maturing one year through two years257  3,761  
Maturing two years through three years255  3,473  
Maturing three years through four years261  3,123  
Maturing four years through five years268  3,130  
Thereafter6,797  45,336  
Total lease payments8,173  62,788  
Present value of lease payments
Short-term170  2,421  
Long-term5,501  41,483  
Total present value of lease payments5,671  43,904  
Difference between lease payments and present value of lease payments$2,502  18,884  

The components of lease expense consist of the following:
Year ended
(Dollars in thousands)December 31,
2019
Finance lease cost
Amortization of ROU assets$101  
Interest on lease liabilities34  
Operating lease cost4,063  
Short-term lease cost431  
Variable lease cost896  
Sublease income(6) 
Total lease expense$5,519  

Supplemental cash flow information related to leases is as follows:
Year ended
December 31, 2019
(Dollars in thousands)Finance
Leases		Operating
Leases
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows$34  2,136  
Financing cash flows98  N/A   
______________________________
N/A - Not applicable

The Company also leases office space to third parties through operating leases. Rent income from these leases for the year ended December 31, 2019 was not significant.

94

Note 5. Other Intangible Assets and Goodwill

The following table sets forth information regarding the Company’s core deposit intangibles:

 At or for the Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Gross carrying value$85,506  62,977  21,649  
Accumulated amortization(22,220) (13,735) (7,465) 
Net carrying value$63,286  49,242  14,184  
Aggregate amortization expense$8,485  6,270  2,494  
Estimated amortization expense for the years ending December 31,
2020$9,978  
20219,519  
20229,029  
20238,276  
20247,535  

Core deposit intangibles increased $22,529,000, $41,328,000 and $4,331,000 during 2019, 2018 and 2017, respectively, due to acquisitions. For additional information relating to acquisitions, see Note 22.

The following schedule discloses the changes in the carrying value of goodwill:

 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Net carrying value at beginning of period$289,586  177,811  147,053  
Acquisitions and adjustments166,832  111,775  30,758  
Net carrying value at end of period$456,418  289,586  177,811  
 
The Company’s first step in evaluating goodwill for possible impairment is a control premium analysis. The analysis first calculates the market capitalization and then adjusts such value for a control premium range which results in an implied fair value. The control premium range is determined based on historical control premiums for acquisitions that are comparable to the Company and is obtained from an independent third party. The calculated implied fair value is then compared to the book value to determine whether the Company needs to proceed to step two of the goodwill impairment assessment. The Company performed its annual goodwill impairment test during the third quarter of 2019 and determined the fair value of the aggregated reporting units exceeded the carrying value, such that the Company’s goodwill was not considered impaired. In recognition there were no events or circumstances that occurred during the fourth quarter of 2019 that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value, the Company did not perform interim testing at December 31, 2019. 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. Accumulated impairment charges were $40,159,000 as of December 31, 2019 and 2018.

95

Note 6. 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 seven years 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 Bank is also the sole member of certain tax credit funds that make direct investments in qualified affordable housing projects (e.g., Low-Income Housing Tax Credit [“LIHTC”] partnerships). As such, the Company is the primary beneficiary of these tax credit funds and their assets, liabilities, and results of operations are included in the Company’s consolidated financial statements.

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)December 31,
2019		December 31,
2018
Assets
Loans receivable$84,390  80,123  
Accrued interest receivable63  96  
Other assets54,692  45,779  
Total assets$139,145  125,998  
Liabilities
Other borrowed funds$23,149  14,527  
Accrued interest payable36  1  
Other liabilities123  125  
Total liabilities$23,308  14,653  

96

Unconsolidated Variable Interest Entities
The Company has equity investments in LIHTC partnerships, both directly and through tax credit funds, with carrying values of $41,521,000 and $35,112,000 as of December 31, 2019 and 2018, 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 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 years. 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. There were no impairment losses on the Company’s LIHTC investments during the years ended December 31, 2019, 2018 and 2017. Future unfunded contingent commitments related to the Company’s LIHTC investments at December 31, 2019 are as follows:

(Dollars in thousands)Amount
Years ending December 31,
2020$11,916  
20217,692  
20227,471  
2023130  
2024309  
Thereafter419  
Total$27,937  

The Company has elected to use the proportional amortization method, and more specifically, the practical expedient 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.

Years ended
(Dollars in thousands)December 31, 2019December 31, 2018December 31,
2017
Amortization expense
$6,289  4,926  2,507  
Tax credits and other tax benefits recognized
8,547  6,550  3,827  

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, First Company Statutory Trust 2003, FNB (UT) Statutory Trust I and FNB (UT) Statutory Trust II. 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. For additional information on the Company’s investments in trust subsidiaries, see Note 9.
97

Note 7. Deposits

Time deposits that meet or exceed the Federal Deposit Insurance Corporation Insurance (“FDIC”) limit of $250,000 at December 31, 2019 and 2018 were $281,054,000 and $244,999,000, respectively.

The scheduled maturities of time deposits are as follows:
 
(Dollars in thousands)Amount
Years ending December 31,
2020$706,520  
2021150,925  
202255,809  
202323,584  
202421,513  
Thereafter150  
$958,501  

The Company reclassified $5,514,000 and $5,992,000 of overdraft demand deposits to loans as of December 31, 2019 and 2018, respectively. The Company has entered into deposit transactions with its executive officers, directors and their affiliates. The aggregate amount of deposits with such related parties at December 31, 2019 and 2018 was $21,723,000 and $26,260,000, respectively.

Note 8. Borrowings

The Company’s repurchase agreements totaled $569,824,000 and $396,151,000 at December 31, 2019 and 2018, respectively, and are secured by debt securities with carrying values of $711,210,000 and $511,294,000, 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:

December 31, 2019
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)Overnight and ContinuousUp to 30 DaysTotal
Residential mortgage-backed securities$312,015  —  312,015  
Commercial mortgage-backed securities257,809  —  257,809  
Total$569,824  —  569,824  

December 31, 2018
Remaining Contractual Maturity of the Agreements
(Dollars in thousands)Overnight and ContinuousUp to 30 DaysTotal
Residential mortgage-backed securities$328,174  —  328,174  
Commercial mortgage-backed securities66,339  1,638  67,977  
Total$394,513  1,638  396,151  


98

The Company’s FHLB advances bear a fixed rate of interest and are subject to restrictions or penalties in the event of prepayment. The advances are collateralized by specifically pledged loans and debt securities, FHLB stock owned by the Company, and a blanket assignment of the unpledged qualifying loans and investments. In September 2019, the Company implemented a balance sheet strategy to increase its net interest income and net interest margin. The strategy included early termination of the Company's pay-fixed interest rate swaps and corresponding debt, including FHLB advances. A $3,531,000 loss was recognized on the early payment of the FHLB advances and was reported in loss on termination of hedging activities on the Company’s statements of operations. The scheduled maturities of FHLB advances consist of the following:

 December 31, 2019December 31, 2018
(Dollars in thousands)AmountWeighted
Rate		AmountWeighted
Rate
Maturing within one year$31,492  1.81 %$285,847  2.63 %
Maturing one year through two years5,000  2.95 %1,572  3.50 %
Maturing two years through three years889  5.25 %150,370  3.77 %
Maturing three years through four years165  5.45 %918  5.25 %
Maturing four years through five years780  4.31 %204  5.45 %
Thereafter285  6.31 %1,264  4.82 %
Total$38,611  2.14 %$440,175  3.03 %

The Company’s other borrowings consisted of finance lease liabilities and other debt obligations through consolidation of certain VIEs. At December 31, 2019, the Company had $230,000,000 in unsecured lines of credit which are typically renewed on an annual basis with various correspondent entities.

Note 9. Subordinated Debentures

The Company’s subordinated debentures are reflected in the table below. The amounts include fair value adjustments from acquisitions.
December 31, 2019Rate StructureMaturity
Date
(Dollars in thousands)BalanceRate
Subordinated debentures owed to trust subsidiaries
First Company Statutory Trust 2001$3,395  5.227 %3 month LIBOR plus 3.30%07/31/2031
First Company Statutory Trust 20032,497  5.197 %3 month LIBOR plus 3.25%03/26/2033
Glacier Capital Trust II46,393  4.736 %3 month LIBOR plus 2.75%04/07/2034
Citizens (ID) Statutory Trust I5,155  4.550 %3 month LIBOR plus 2.65%06/17/2034
Glacier Capital Trust III36,083  3.276 %3 month LIBOR plus 1.29%04/07/2036
Glacier Capital Trust IV30,928  3.464 %3 month LIBOR plus 1.57%09/15/2036
Bank of the San Juans Bancorporation Trust I1,970  3.734 %3 month LIBOR plus 1.82%03/01/2037
FNB (UT) Statutory Trust I4,124  5.061 %3 month LIBOR plus 3.10%06/26/2033
FNB (UT) Statutory Trust II1,752  3.614 %3 month LIBOR plus 1.72%12/15/2036
Total subordinated debentures owed to trust subsidiaries
132,297  
Tier 2 subordinated debentures7,617  6.625 %Fixed10/01/2025
Total subordinated debentures$139,914  


99

Subordinated Debentures Owed to Trust Subsidiaries
Trust preferred securities were issued by the Company’s trust subsidiaries, the common stock of which is wholly-owned by the Company, in conjunction with the Company issuing subordinated debentures to the trust subsidiaries. The terms of the subordinated debentures are the same as the terms of the trust preferred securities. The Company guaranteed the payment of distributions and payments for redemption or liquidation of the trust preferred securities to the extent of funds held by the trust subsidiaries. The obligations of the Company under the subordinated debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by the Company of the obligations of all trusts under the trust preferred securities.

The trust preferred securities are subject to mandatory redemption upon repayment of the subordinated debentures at their stated maturity date or the earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. Interest distributions are payable quarterly. The Company may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that the deferral period does not extend past the stated maturity. During any such deferral period, distributions on the trust preferred securities will also be deferred and the Company’s ability to pay dividends on its common shares will be restricted.

Subject to prior approval by the FRB, the trust preferred securities may be redeemed at par prior to maturity at the Company’s option on or after the redemption date. All of the Company’s trust preferred securities have reached the redemption date and could be redeemed at the Company’s option. The trust preferred securities may also be redeemed at any time in whole (but not in part) for the Trusts in the event of unfavorable changes in laws or regulations that result in 1) subsidiary trusts becoming subject to federal income tax on income received on the subordinated debentures; 2) interest payable by the Company on the subordinated debentures becoming non-deductible for federal tax purposes; 3) the requirement for the trusts to register under the Investment Company Act of 1940, as amended; or 4) loss of the ability to treat the trust preferred securities as Tier 1 capital under the FRB capital adequacy guidelines.

For regulatory capital purposes, the FRB has allowed bank holding companies to continue to include trust preferred securities in Tier 1 capital up to a certain limit. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) require the FRB to exclude trust preferred securities from Tier 1 capital, but a permanent grandfather provision applicable to the Company permits bank holding companies with consolidated assets of less than $15 billion to continue counting existing trust preferred securities as Tier 1 capital until they mature, even after the Company’s total assets exceed the $15 billion threshold as a result of organic growth.  Once the Company has crossed the $15 billion threshold, any subsequent merger or acquisition would result in disqualification of the Company’s combined trust preferred securities as Tier 1 capital; however, the trust preferred securities would be included in Tier 2 capital. If the Company crosses the $15 billion threshold as a direct result of an acquisition, neither the Company’s nor the acquired institution’s trust preferred securities would continue to qualify as Tier 1 capital, but instead would be included in Tier 2 capital. All of the Company’s trust preferred securities qualified as Tier 1 capital instruments at December 31, 2019.

Tier 2 Subordinated Debentures
The Company acquired subordinated debentures with the FSB acquisition that qualify as Tier 2 capital under the applicable capital adequacy rules and regulations promulgated by the FRB. The Tier 2 subordinated debentures are not deposits and are not insured by the FDIC or any other government agency. Such obligations are subordinated to the claims of general creditors, are unsecured and are ineligible as collateral. The principal amount is due at maturity and interest distributions are payable quarterly. The Tier 2 subordinated debentures shall not be prepaid prior to the fifth anniversary of the closing date, which is September 30, 2020, except in the event the obligation no longer qualifies as Tier 2 capital (“Tier 2 capital event”) or the interest payable is no longer deductible (“tax event”). Any prepayment made in connection with a Tier 2 capital event or a tax event will be subject to obtaining the prior approval of the FRB. The Company has the ability to prepay these obligations on or after the fifth anniversary of the closing date at any time with notice.

For additional information on regulatory capital, see Note 11.


100

Note 10. Derivatives and Hedging Activities

Interest Rate Swap Derivatives
The Company is exposed to certain risk relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with forecasted variable rate borrowings. In September 2019, the Company implemented a balance sheet strategy to increase its net interest income and net interest margin. The strategy included early termination of the Company’s pay-fixed interest rate swaps with notional amounts totaling $260,000,000. A $9,997,000 loss was recognized on the early termination of the pay-fixed interest rate swaps and was reported in loss on termination of hedging activities on the Company’s statements of operations. The Company recognized interest rate swaps as either assets or liabilities at fair value in the statements of financial condition, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allowed the Company to settle all interest rate swap agreements held with a single counterparty on a net basis, and to offset net interest rate swap derivative positions with related collateral, where applicable.

The interest rate swaps on variable rate borrowings were designated as cash flow hedges and were over-the-counter contracts. The contracts were entered into by the Company with a single counterparty, and the specific terms and conditions were negotiated, including forecasted notional amounts, interest rates and maturity dates. The Company was exposed to credit-related losses in the event of nonperformance by the counterparty to the agreements. The Company controlled the counterparty credit risk by maintaining bilateral collateral agreements and through monitoring policy and procedures. The Company only conducted business with primary dealers and believed that the credit risk inherent in these contracts was not significant.

The interest rate swaps that were terminated had $160,000,000 and $100,000,000 of notional amounts and began their payment terms in October 2014 and November 2015, respectively. The Company designated wholesale deposits and FHLB advances for the cash flow hedge and these hedged items were determined to be fully effective during current and prior periods. The aggregate fair value of the interest rate swaps was recorded in other liabilities with changes recorded in OCI. Interest expense recorded on the interest rate swaps totaled $5,532,000, $8,013,000 and $8,013,000 during 2019, 2018 and 2017, respectively, and was reported as a component of interest expense on deposits and FHLB advances.

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

Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Interest rate swaps
Amount of (loss) gain recognized in OCI$(7,047) 3,286  444  
Amount of loss reclassified from OCI to interest expense(10,816) (2,334) (4,892) 

The following table discloses the offsetting of financial assets and interest rate swap derivative assets.

December 31, 2019December 31, 2018
(Dollars in thousands)Gross Amount of Recognized AssetsGross Amount Offset in the Statements of Financial PositionNet Amounts of Assets Presented in the Statements of Financial PositionGross Amount of Recognized AssetsGross Amount Offset in the Statements of Financial PositionNet Amounts of Assets Presented in the Statements of Financial Position
Interest rate swaps$—  —  —  139  (139) —  

101

The following table discloses the offsetting of financial liabilities and interest rate swap derivative liabilities.

December 31, 2019December 31, 2018
(Dollars in thousands)Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Statements of Financial PositionNet Amounts of Liabilities Presented in the Statements of Financial PositionGross Amounts of Recognized LiabilitiesGross Amounts Offset in the Statements of Financial PositionNet Amounts of Liabilities Presented in the Statements of Financial Position
Interest rate swaps$—  —  —  3,908  (139) 3,769  

Residential Real Estate Derivatives
At December 31, 2019, the Company had residential real estate derivatives for commitments (“interest rate locks”) to fund certain residential real estate loans to be sold into the secondary market. At December 31, 2019 and 2018, loan commitments with interest rate lock commitments totaled $84,803,000 and $59,974,000, respectively, and the fair value of the related derivatives was included in other assets with corresponding changes recorded in gain on sale of loans. The Company enters into free-standing derivatives to mitigate interest rate risk for most residential real estate loans to be sold. These derivatives include forward commitments to sell to-be-announced (“TBA”) securities which are used to economically hedge the interest rate risk associated with such loans and unfunded commitments. At December 31, 2019 and 2018, TBA commitments were $82,000,000 and $40,750,000, respectively, and the fair value of the related derivatives was included in other liabilities with corresponding changes recorded in gain on sale of loans. The Company doesn’t enter into a commitment to sell these loans to an investor until the loan is funded and is ready to be delivered to the investor. Due to the forward sales commitments being short-term in nature, the corresponding derivatives are not significant. For all other residential real estate loans to be sold, the Company enters into “best efforts” forward sales commitments for the future delivery of loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. Forward sales commitments on a “best efforts” basis are not designated in hedge relationships until the loan is funded.

Note 11. Regulatory Capital

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 certain regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act and substantially amended the regulatory risk-based capital rules applicable to the Company. The Final Rules require the Company to hold a 2.5 percent capital conservation buffer designed to absorb losses during periods of economic stress. The Company has elected to opt-out of the requirement to include most components of accumulated other comprehensive income. As of December 31, 2019, management believes the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide the following classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. If undercapitalized, capital distributions (including payment of a dividend) are generally restricted, as is paying management fees to its bank holding company. Failure to meet minimum capital requirements set forth in the table below can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial condition. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

At December 31, 2019 and 2018, the most recent regulatory notifications categorized the Company and Bank as well capitalized under the regulatory framework for prompt corrective action. To be well capitalized, the Bank must maintain minimum total capital, Tier 1 capital, Common Tier 1 capital and Tier 1 Leverage ratios as set forth in the table below. There are no conditions or events since December 31, 2019 that management believes have changed the Company’s or Bank’s risk-based capital category.

Current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company’s common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters. In certain circumstances, Montana law also places limits or restrictions on a bank’s ability to declare and pay dividends.


102

The following tables illustrate the FRB’s adequacy guidelines and the Company’s and the Bank’s compliance with those guidelines:

December 31, 2019
ActualRequired for Capital Adequacy PurposesTo Be Well Capitalized
Under Prompt Corrective Action Regulations
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
Total capital (to risk-weighted assets)
Consolidated$1,661,249  14.95 %$888,986  8.00 %N/A   N/A   
Glacier Bank1,625,527  14.64 %888,110  8.00 %$1,110,137  10.00 %
Tier 1 capital (to risk-weighted assets)
Consolidated1,528,683  13.76 %666,740  6.00 %N/A   N/A   
Glacier Bank1,500,461  13.52 %666,082  6.00 %888,110  8.00 %
Common Equity Tier 1 (to risk-weighted assets)
Consolidated1,398,183  12.58 %500,055  4.50 %N/A   N/A   
Glacier Bank1,500,461  13.52 %499,562  4.50 %721,589  6.50 %
Tier 1 capital (to average assets)
Consolidated1,528,683  11.65 %524,987  4.00 %N/AN/A
Glacier Bank1,500,461  11.50 %522,040  4.00 %652,550  5.00 %

December 31, 2018
ActualRequired for Capital Adequacy PurposesTo Be Well Capitalized
Under Prompt Corrective Action Regulations
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
Total capital (to risk-weighted assets)
Consolidated$1,437,889  14.70 %$782,453  8.00 %N/A   N/A   
Glacier Bank1,401,991  14.35 %781,430  8.00 %$976,787  10.00 %
Tier 1 capital (to risk-weighted assets)
Consolidated1,308,017  13.37 %586,840  6.00 %N/A   N/A   
Glacier Bank1,279,778  13.10 %586,072  6.00 %781,430  8.00 %
Common Equity Tier 1 (to risk-weighted assets)
Consolidated1,183,517  12.10 %440,130  4.50 %N/A   N/A   
Glacier Bank1,279,778  13.10 %439,554  4.50 %634,911  6.50 %
Tier 1 capital (to average assets)
Consolidated1,308,017  11.35 %461,130  4.00 %N/AN/A
Glacier Bank1,279,778  11.08 %462,072  4.00 %577,590  5.00 %
______________________________
N/A - Not applicable


103

Note 12. Stock-based Compensation Plan

The Company’s stock-based compensation plan, The 2015 Stock Incentive Plan, provides incentives and awards to select employees and directors of the Company and permits the granting of stock options, share appreciation rights, restricted shares, restricted share units, unrestricted shares and performance awards. At December 31, 2019, the number of shares available to award to employees and directors under the 2015 Stock Incentive Plan was 2,041,367.

During 2019 and 2018, the Company also assumed stock-based compensation plans through the Heritage and Collegiate acquisitions, respectively. No additional shares may be awarded from these plans.

Restricted Stock Units
The Company has awarded restricted stock units to select employees and directors under the 2015 Stock Incentive Plan. Common stock is issued as vesting restrictions lapse, which may be immediately or according to the terms of a vesting schedule. Restricted stock units may not be sold, pledged or otherwise transferred until restrictions have lapsed. The recipient does not have the right to vote or to receive dividends until the restricted stock unit has vested. The fair value of the restricted stock unit is the closing price of the Company’s common stock on the award date.

Compensation expense related to restricted stock units for the years ended December 31, 2019, 2018 and 2017 was $3,803,000, $3,684,000 and $3,764,000, respectively, and the recognized income tax benefit related to this expense was $964,000, $934,000 and $1,452,000. As of December 31, 2019, total unrecognized compensation expense of $4,434,000 related to restricted stock units is expected to be recognized over a weighted-average period of 2.0 years.

The fair value of restricted stock units that vested during the years ended December 31, 2019, 2018 and 2017 was $3,536,000, $3,319,000 and $3,746,000, respectively, and the income tax benefit related to these awards was $1,124,000, $1,126,000 and $1,998,000, respectively. Upon vesting of restricted stock units, the shares are issued from the Company’s authorized stock balance.

The following table summarizes the restricted stock unit activity for the year ended December 31, 2019:
Restricted
Stock
Units		Weighted-
Average
Grant Date
Fair Value
Non-vested at December 31, 2018181,983  $36.03  
Granted101,978  42.96  
Vested(103,473) 34.17  
Forfeited(3,827) 40.80  
Non-vested at December 31, 2019176,661  41.01  

The average remaining contractual term on non-vested restricted stock units at December 31, 2019 is 0.9 years. The aggregate intrinsic value of the non-vested restricted stock units at December 31, 2019 was $8,125,000.

Stock Options
During 2019 and 2018, the Company assumed stock options through the Heritage and Collegiate acquisitions, respectively. All stock option shares and per share market values were adjusted at acquisition dates. The option price at which the Company's common stock may be purchased upon exercise of stock options granted under the plans must be at least equal to the per share market value of such stock at the date the option was granted. Upon exercise of the stock options, the shares are obtained from the Company's authorized and unissued stock. Prior to the Heritage and Collegiate stock options being assumed, there were no outstanding stock options and there were no stock options granted during 2019, 2018 or 2017.

Compensation expense related to stock options for the years ended December 31, 2019 and 2018 was $5,415,000 and $19,000, respectively, and the recognized income tax benefit related to this expense was $1,372,000 and $5,000. As of December 31, 2019, total unrecognized compensation expense of $23,000 related to stock options is expected to be recognized over a weighted-average period of 1.4 years.


104

The total intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $4,491,000 and $13,000, respectively, and the income tax benefit related to these exercises was $934,000 and $0. Total cash received from options exercised during the years ended December 31, 2019 and 2018 was $2,896,000 and $24,000, respectively.

Changes in shares granted for stock options for the year ended December 31, 2019 are summarized as follows:
Stock
Options		Weighted-
Average
Exercise
Price
Outstanding at December 31, 201826,167  $25.84  
Acquisitions235,246  16.70  
Exercised(175,161) 16.53  
Forfeited(2,787) 25.84  
Outstanding at December 31, 201983,465  19.61  
Exercisable at December 31, 201972,315  18.65  

The average remaining contractual term on outstanding stock options at December 31, 2019 is 5.7 years. The aggregate intrinsic value of the outstanding stock options at December 31, 2019 was $2,202,000.

Note 13. Employee Benefit Plans

The Company provides its qualified employees with a comprehensive benefit program, including health, dental and vision insurance, life and accident insurance, short- and long-term disability coverage, vacation and sick leave, 401(k) plan, profit sharing plan, stock-based compensation plan, deferred compensation plans, and supplemental executive retirement plan. The Company has elected to self-insure certain costs related to employee health, dental and vision benefit programs. Costs resulting from non-insured losses are expensed as incurred. The Company has purchased insurance that limits its exposure on an individual claim basis for the employee health benefit programs.

401(k) Plan and Profit Sharing Plan
The Company’s 401(k) plan and profit sharing plan have safe harbor and employer discretionary components. To be considered eligible for the 401(k) and safe harbor components of the profit sharing plan, an employee must be 21 years of age and employed for three full months. Employees are eligible to participate in the 401(k) plan the first day of the month once they have met the eligibility requirements. To be considered eligible for the employer discretionary contribution of the profit sharing plan, an employee must be 21 years of age, worked one full calendar quarter, worked 501 hours in the plan year and be employed as of the last day of the plan year. Participants are at all times fully vested in all contributions.

The profit sharing plan contributions consists of a 3 percent non-elective safe harbor contribution fully funded by the Company and an employer discretionary contribution. The employer discretionary contribution depends on the Company’s profitability. The total profit sharing plan expense for the years ended December 31, 2019, 2018, and 2017 was $17,227,000, $15,406,000 and $10,100,000 respectively.
 
The 401(k) plan allows eligible employees under the age of 50 to contribute up to 60 percent, and those 50 and older to contribute up to 100 percent of their eligible annual compensation up to the limit set annually by the Internal Revenue Service (“IRS”). The Company matches an amount equal to 50 percent of the first 6 percent of an employee’s contribution. The Company’s contribution to the 401(k) for the years ended December 31, 2019, 2018 and 2017 was $4,236,000, $4,037,000, and $3,224,000, respectively.


105

Deferred Compensation Plans
The Company has non-funded deferred compensation plans for directors, senior officers and certain nonemployee service providers. The plans provide for participants’ elective deferral of cash payments of up to 50 percent of a participants’ salary and 100 percent of bonuses and directors fees. As of December 31, 2019 and 2018, the liability related to the plans was $8,660,000 and $8,371,000, respectively, and was included in other liabilities. The total amount deferred for the plans was $766,000, $803,000, and $739,000, for the years ending December 31, 2019, 2018, and 2017, respectively. The participant receives an earnings credit at a rate equal to 50 percent of the Company’s return on average equity. Total expense incurred for the years ended December 31, 2019, 2018, and 2017 for the plans was $480,000, $502,000 and $481,000, respectively.

In connection with several acquisitions, the Company assumed the obligations of deferred compensation plans for certain key employees. As of December 31, 2019 and 2018, the liability related to the acquired plans was $17,661,000 and $13,651,000, respectively, and was included in other liabilities. Total expense incurred for the years ended December 31, 2019, 2018, and 2017 for the acquired plans was $992,000, $801,000 and $588,000, respectively.

Supplemental Executive Retirement Plan
The Company has a Supplemental Executive Retirement Plan (“SERP”) which is intended to supplement payments due to participants upon retirement under the Company’s other qualified plans. The Company credits the participant’s account on an annual basis for an amount equal to employer contributions that would have otherwise been allocated to the participant’s account under the tax-qualified plans were it not for limitations imposed by the IRS or the participation in the non-funded deferred compensation plan. Eligible employees include participants of the non-funded deferred compensation plan and employees whose benefits were limited as a result of IRS regulations. As of December 31, 2019 and 2018, the liability related to the SERP was $2,713,000 and $2,287,000, respectively, and was included in other liabilities. The Company’s required contribution to the SERP for the years ended December 31, 2019, 2018 and 2017 was $662,000, $423,000, and $287,000, respectively. The participant receives an earnings credit at a rate equal to 50 percent of the Company’s return on average equity. Total expense incurred for the years ended December 31, 2019, 2018, and 2017 for the SERP was $120,000, $122,000, and $105,000, respectively.

Note 14. Other Expenses

Other expenses consists of the following:
 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Mergers and acquisition expenses$8,503  6,618  2,130  
Consulting and outside services8,276  7,219  5,331  
Debit card expenses5,968  5,104  7,189  
Employee expenses5,138  4,412  4,160  
Telephone4,827  4,487  3,891  
Business development4,446  4,172  3,333  
VIE amortization and other expenses4,341  3,618  3,109  
Loan expenses4,140  3,462  3,080  
Postage3,437  3,104  2,684  
Printing and supplies3,256  3,264  2,661  
Checking and operating expenses1,757  1,234  1,760  
Accounting and audit fees1,712  1,456  1,848  
ATM expenses1,700  1,217  1,720  
Legal fees1,245  1,763  1,106  
Other4,029  3,164  3,043  
Total other expenses$62,775  54,294  47,045  

106

Note 15. Federal and State Income Taxes

The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 and resulted in a decrease in the federal marginal corporate income tax rate from 35 percent to 21 percent beginning in 2018. As a result of the Tax Act, the Company incurred a one-time tax expense adjustment of $19,699,000 during 2017 due to the Company’s revaluation of the deferred tax assets and deferred tax liabilities (“net deferred tax asset”). This adjustment is reflected in the following tables.

The following table is a summary of consolidated income tax expense:
 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Current
Federal$34,461  21,510  29,555  
State14,545  11,960  9,183  
Total current income tax expense49,006  33,470  38,738  
Deferred 1
Federal(279) 5,372  22,246  
State(77) 1,489  3,641  
Total deferred income tax (benefit) expense(356) 6,861  25,887  
Total income tax expense$48,650  40,331  64,625  
______________________________
1 Includes tax benefit of operating loss carryforwards of $317,000, $443,000 and $644,000 for the years ended December 31, 2019, 2018, and 2017, respectively.

Combined federal and state income tax expense differs from that computed at the federal statutory corporate income tax rate as follows:

 Years ended
 December 31,
2019		December 31,
2018		December 31,
2017
Federal statutory rate21.0 %21.0 %35.0 %
State taxes, net of federal income tax benefit4.4 %4.8 %4.6 %
Tax rate change— %— %10.9 %
Tax-exempt interest income(3.7 %)(5.0 %)(10.5 %)
Tax credits(4.5 %)(4.2 %)(3.2 %)
Other, net1.6 %1.6 %(1.1 %)
Effective income tax rate18.8 %18.2 %35.7 %
107

The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and deferred tax liabilities are as follows:
(Dollars in thousands)December 31,
2019		December 31,
2018
Deferred tax assets
Allowance for loan and lease losses$31,698  33,313  
Operating lease liabilities11,127  —  
Deferred compensation7,447  6,251  
Employee benefits6,646  5,652  
Acquisition fair market value adjustments5,480  6,380  
Net operating loss carryforwards2,209  2,525  
Available-for-sale debt securities—  2,244  
Other3,891  3,841  
Total gross deferred tax assets68,498  60,206  
Deferred tax liabilities
Intangibles(16,469) (12,667) 
Depreciation of premises and equipment(13,987) (10,776) 
Available-for-sale debt securities(13,652) —  
Operating lease ROU assets(10,506) —  
Deferred loan costs(7,311) (6,436) 
FHLB stock dividends(1,486) (2,722) 
Other(3,050) (4,041) 
Total gross deferred tax liabilities(66,461) (36,642) 
Net deferred tax asset$2,037  23,564  

The Company has federal net operating loss carryforwards of $8,038,000 expiring between 2030 and 2035. The Company has Colorado net operating loss carryforwards of $11,989,000 expiring between 2031 and 2032. The net operating loss carryforwards originated from acquisitions.

The Company and the Bank file consolidated income tax returns in the following jurisdictions: federal, Montana, Idaho, Utah, Colorado and Arizona. Wyoming, Washington and Nevada do not impose a corporate income tax. All required income tax returns have been timely filed. The following schedule summarizes the years that remain subject to examination as of December 31, 2019:

 Years ended December 31,
Federal2005, 2008, 2010, 2011, 2012, 2013, 2016, 2017 and 2018
Montana2016, 2017 and 2018
Idaho2016, 2017 and 2018
Utah2016, 2017 and 2018
Colorado2010, 2011, 2012, 2015, 2016, 2017 and 2018
Arizona2015, 2016, 2017 and 2018


108

The Company had no unrecognized income tax benefits as of December 31, 2019 and 2018. The Company recognizes interest related to unrecognized income tax benefits in interest expense and penalties are recognized in other expense. Interest expense and penalties recognized with respect to income tax liabilities for the years ended December 31, 2019, 2018, and 2017 was not significant. The Company had no accrued liabilities for the payment of interest or penalties at December 31, 2019 and 2018.

The Company has assessed the need for a valuation allowance and determined that a valuation allowance was not necessary at December 31, 2019 and 2018. The Company believes that it is more-likely-than-not that the Company’s deferred tax assets will be realizable by offsetting future taxable income from reversing taxable temporary differences and anticipated future taxable income (exclusive of reversing temporary differences). In its assessment, the Company considered its strong earnings history, no history of income tax credit carryforwards expiring unused, and no expected future net operating losses (for tax purposes).

Note 16. 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 (Losses) on Available-For-Sale Debt SecuritiesLosses on Derivatives Used for Cash Flow HedgesTotal
Balance at January 1, 2017$1,639  (9,021) (7,382) 
Other comprehensive income before reclassifications2,110  248  2,358  
Reclassification adjustments for losses included in net income391  3,005  3,396  
Reclassifications to retained earnings 1
891  (1,242) (351) 
Net current period other comprehensive income3,392  2,011  5,403  
Balance at December 31, 2017$5,031  (7,010) (1,979) 
Other comprehensive (loss) income before reclassifications(11,653) 2,453  (9,200) 
Reclassification adjustments for losses included in net income9  1,743  1,752  
Net current period other comprehensive (loss) income(11,644) 4,196  (7,448) 
Balance at December 31, 2018$(6,613) (2,814) (9,427) 
Other comprehensive income (loss) before reclassifications57,607  (5,261) 52,346  
Reclassification adjustments for (gains) losses included in net income(10,768) 8,075  (2,693) 
Net current period other comprehensive income46,839  2,814  49,653  
Balance at December 31, 2019$40,226  —  40,226  
______________________________
1 Reclassifications were due to the one-time revaluation of the net deferred tax asset as a result of the Tax Act. For additional information on the Tax Act, see Note 15.
109

Note 17. 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 units were vested and stock options were exercised, using the treasury stock method.

Basic and diluted earnings per share has been computed based on the following:
 Years ended
(Dollars in thousands, except per share data)December 31,
2019		December 31,
2018		December 31,
2017
Net income available to common stockholders, basic and diluted$210,544  181,878  116,377  
Average outstanding shares - basic88,255,290  83,603,515  77,537,664  
Add: dilutive restricted stock units and stock options130,485  73,670  69,941  
Average outstanding shares - diluted88,385,775  83,677,185  77,607,605  
Basic earnings per share$2.39  2.18  1.50  
Diluted earnings per share$2.38  2.17  1.50  
Restricted stock units and stock options excluded from the
  diluted average outstanding share calculation 1
—  1,357  —  
______________________________
1 Anti-dilution occurs when the unrecognized compensation cost per share of a restricted stock units or the exercise price of a stock option exceeds the market price of the Company’s stock.

Note 18. Parent Holding Company Information (Condensed)

The following condensed financial information was the unconsolidated information for the parent holding company:

Condensed Statements of Financial Condition
(Dollars in thousands)December 31,
2019		December 31,
2018
Assets
Cash on hand and in banks$23,491  22,000  
Interest bearing cash deposits34,345  42,299  
Cash and cash equivalents57,836  64,299  
Other assets12,966  12,639  
Investment in subsidiaries2,063,011  1,612,115  
Total assets$2,133,813  1,689,053  
Liabilities and Stockholders’ Equity
Dividends payable$18,821  25,726  
Subordinated debentures139,914  134,051  
Other liabilities14,345  13,422  
Total liabilities173,080  173,199  
Common stock923  845  
Paid-in capital1,378,534  1,051,253  
Retained earnings541,050  473,183  
Accumulated other comprehensive income (loss)40,226  (9,427) 
Total stockholders’ equity1,960,733  1,515,854  
Total liabilities and stockholders’ equity$2,133,813  1,689,053  
110

Condensed Statements of Operations and Comprehensive Income
 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Income
Dividends from subsidiaries$142,000  153,574  119,000  
Intercompany charges for services20,661  16,523  14,299  
Other income513  1,284  228  
Total income163,174  171,381  133,527  
Expenses
Compensation and employee benefits25,806  20,873  17,864  
Other operating expenses15,118  12,201  10,425  
Total expenses40,924  33,074  28,289  
Income before income tax benefit and equity in undistributed net income of subsidiaries
122,250  138,307  105,238  
Income tax benefit4,488  3,773  2,983  
Income before equity in undistributed net income of subsidiaries
126,738  142,080  108,221  
Equity in undistributed net income of subsidiaries83,806  39,798  8,156  
Net Income$210,544  181,878  116,377  
Comprehensive Income$260,197  174,430  122,131  

Condensed Statements of Cash Flows
 Years ended
(Dollars in thousands)December 31,
2019		December 31,
2018		December 31,
2017
Operating Activities
Net income$210,544  181,878  116,377  
Adjustments to reconcile net income to net cash provided by operating activities:
Subsidiary income in excess of dividends distributed(83,806) (39,798) (8,156) 
Stock-based compensation, net of tax benefits1,320  1,219  1,460  
Net change in other assets and other liabilities1,854  (3,209) 5,191  
Net cash provided by operating activities129,912  140,090  114,872  
Investing Activities
Sales of available-for-sale debt securities—  —  27  
Net additions of premises and equipment(114) (300) (79) 
Proceeds from sale of marketable equity securities89  —  114  
Equity contributions to subsidiaries(13,485) (24,989) (17,565) 
Net cash used in investing activities(13,510) (25,289) (17,503) 
Financing Activities
Net decrease in other borrowed funds—  (11,543) —  
Cash dividends paid(124,468) (85,493) (111,720) 
Tax withholding payments for stock-based compensation(1,293) (1,214) (1,531) 
Proceeds from stock option exercises2,896  24  —  
Net cash used in financing activities(122,865) (98,226) (113,251) 
Net (decrease) increase in cash, cash equivalents and restricted cash(6,463) 16,575  (15,882) 
Cash, cash equivalents and restricted cash at beginning of period64,299  47,724  63,606  
Cash, cash equivalents and restricted cash at end of period$57,836  64,299  47,724  

111

Note 19. Unaudited Quarterly Financial Data (Condensed)

Summarized unaudited quarterly financial data is as follows:
 Quarters ended 2019
(Dollars in thousands, except per share data)March 31June 30September 30December 31
Interest income$126,116  132,385  142,395  145,281  
Interest expense10,904  12,089  10,947  8,833  
Net interest income115,212  120,296  131,448  136,448  
Provision for loan losses57  —  —  —  
Net interest income after provision for loan losses115,155  120,296  131,448  136,448  
Non-interest income28,474  30,834  43,049  28,417  
Non-interest expense82,830  86,170  110,675  95,252  
Income before income taxes60,799  64,960  63,822  69,613  
Federal and state income tax expense11,667  12,568  12,212  12,203  
Net income$49,132  52,392  51,610  57,410  
Basic earnings per share$0.58  0.61  0.57  0.62  
Diluted earnings per share$0.58  0.61  0.57  0.62  

 Quarters ended 2018
(Dollars in thousands, except per share data)March 31June 30September 30December 31
Interest income$103,066  117,715  122,905  125,310  
Interest expense7,774  9,161  9,160  9,436  
Net interest income95,292  108,554  113,745  115,874  
Provision for loan losses795  4,718  3,194  1,246  
Net interest income after provision for loan losses94,497  103,836  110,551  114,628  
Non-interest income26,086  31,828  32,416  28,494  
Non-interest expense73,627  81,795  82,829  81,876  
Income before income taxes46,956  53,869  60,138  61,246  
Federal and state income tax expense8,397  9,485  10,802  11,647  
Net income$38,559  44,384  49,336  49,599  
Basic earnings per share$0.48  0.53  0.58  0.59  
Diluted earnings per share$0.48  0.52  0.58  0.59  

112

Note 20. 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 years ended December 31, 2019, 2018, and 2017.

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 December 31, 2019.

Debt securities, available-for-sale: fair value for available-for-sale debt 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.

Fair value determinations of available-for-sale debt 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 debt 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.

Loans held for sale, at fair value: loans held for sale measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors. Loans held for sale measured at fair value are classified within Level 2. Included in gain on sale of loans were net gains of $661,000, net losses of $155,000 and net gains of $994,000 for the years ended December 31, 2019, 2018 and 2017, respectively, from the changes in fair value of loans held for sale measured at fair value. Electing to measure loans held for sale at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

113

Interest rate swap derivative financial instruments: fair values for interest rate swap derivative financial instruments were based upon the estimated amounts to settle the contracts considering current interest rates and were calculated using discounted cash flows that were observable or that could be corroborated by observable market data and, therefore, were classified within Level 2 of the valuation hierarchy. The inputs used to determine fair value included 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 were compared to the fixed rate outflows and such difference was discounted to a present value to estimate the fair value of the interest rate swaps. The Company also obtained and compared 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 December 31, 2019Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Debt securities, available-for-sale
U.S. government and federal agency$20,044  —  20,044  —  
U.S. government sponsored enterprises43,677  —  43,677  —  
State and local governments702,398  —  702,398  —  
Corporate bonds157,602  —  157,602  —  
Residential mortgage-backed securities738,724  —  738,724  —  
Commercial mortgage-backed securities912,807  —  912,807  —  
Loans held for sale, at fair value
69,194  —  69,194  —  
Total assets measured at fair value on a recurring basis
$2,644,446  —  2,644,446  —  

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Fair Value December 31, 2018Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Debt securities, available-for-sale
U.S. government and federal agency$23,649  —  23,649  —  
U.S. government sponsored enterprises120,208  —  120,208  —  
State and local governments852,250  —  852,250  —  
Corporate bonds290,817  —  290,817  —  
Residential mortgage-backed securities792,915  —  792,915  —  
Commercial mortgage-backed securities491,824  —  491,824  —  
Loans held for sale, at fair value33,156  —  33,156  —  
Total assets measured at fair value on a recurring basis
$2,604,819  —  2,604,819  —  
Interest rate swaps$3,769  —  3,769  —  
Total liabilities measured at fair value on a recurring basis
$3,769  —  3,769  —  


114

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 December 31, 2019.

Other real estate owned: OREO is initially recorded at fair value less estimated cost to sell, establishing a new cost basis. OREO is subsequently accounted for at lower of cost or 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 department reviews 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.

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 December 31, 2019Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Other real estate owned$1,983  —  —  1,983  
Collateral-dependent impaired loans, net of ALLL23  —  —  23  
Total assets measured at fair value on a non-recurring basis
$2,006  —  —  2,006  

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Fair Value December 31, 2018Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Unobservable
Inputs
(Level 3)
Other real estate owned$1,011  —  —  1,011  
Collateral-dependent impaired loans, net of ALLL6,985  —  —  6,985  
Total assets measured at fair value on a non-recurring basis
$7,996  —  —  7,996  


115

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 ValueQuantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)December 31,
2019		Valuation TechniqueUnobservable Input
Range (Weighted- Average) 1
Other real estate owned$1,983  Sales comparison approachSelling costs6.0% - 10.0% (7.3%)
Adjustment to comparables0.0% - 11.1% (4.5%)
Collateral-dependent
impaired loans, net of ALLL		$9  Cost approachSelling costs10.0% - 10.0% (10.0%)
14  Sales comparison approachAdjustment to comparables0.0% - 0.0% (0.0%)
$23  

 Fair ValueQuantitative Information about Level 3 Fair Value Measurements
(Dollars in thousands)December 31,
2018		Valuation TechniqueUnobservable Input
Range (Weighted- Average) 1
Other real estate owned$1,011  Sales comparison approachSelling costs8.0% - 15.0% (9.2%)
Collateral-dependent impaired loans, net of ALLL$2,384  Sales comparison approachSelling costs8.0% - 20.0% (9.9%)
4,601  Combined approachSelling costs10.0% - 10.0% (10.0%)
$6,985  
______________________________
1 The range for selling cost inputs represents reductions to the fair value of the assets.

Fair Value of 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 not carried at fair value. Receivables and payables due in one year or less, equity securities without readily determinable fair values and deposits with no defined or contractual maturities are excluded.

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Carrying Amount December 31, 2019Quoted 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$330,961  330,961  —  —  
Debt securities, held-to-maturity224,611  —  234,396  —  
Loans receivable, net of ALLL9,388,320  —  —  9,438,121  
Total financial assets$9,943,892  330,961  234,396  9,438,121  
Financial liabilities
Term deposits$1,011,798  —  1,017,505  —  
FHLB advances38,611  —  38,787  —  
Repurchase agreements and other borrowed funds
598,644  —  598,644  —  
Subordinated debentures139,914  —  124,094  —  
Total financial liabilities$1,788,967  —  1,779,030  —  

116

  Fair Value Measurements
At the End of the Reporting Period Using
(Dollars in thousands)Carrying Amount December 31, 2018Quoted 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$203,790  203,790  —  —  
Debt securities, held-to-maturity297,915  —  288,256  —  
Loans receivable, net of ALLL8,156,310  —  —  8,079,112  
Total financial assets$8,658,015  203,790  288,256  8,079,112  
Financial liabilities
Term deposits$1,070,208  —  1,069,777  —  
FHLB advances440,175  —  439,615  —  
Repurchase agreements and other borrowed funds
410,859  —  410,859  —  
Subordinated debentures134,051  —  120,302  —  
Total financial liabilities$2,055,293  —  2,040,553  —  

Note 21. Commitments and Contingent Liabilities

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit, and involve, to varying degrees, elements of credit risk. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The Company had the following outstanding commitments:
(Dollars in thousands)December 31,
2019		December 31,
2018
Unused lines of credit$2,422,828  1,948,516  
Letters of credit59,845  45,263  
Total outstanding commitments$2,482,673  1,993,779  

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.

117

Note 22. Mergers and Acquisitions

The Company has completed the following acquisitions during the last two years:
•Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank of Nevada
•FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton
•Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank
•Columbine Capital Corp., and its wholly-owned subsidiary, Collegiate Peaks Bank

The assets and liabilities of Heritage, FNB, FSB and Collegiate were recorded on the Company’s consolidated statements of financial condition at their estimated fair values as of their acquisition dates and their results of operations have been included in the Company’s consolidated statements of operations since those dates. The following table discloses the fair value estimates of the consideration transferred, the total identifiable net assets acquired and the resulting goodwill arising from the acquisitions:

(Dollars in thousands)Heritage
July 31,
2019		FNB
April 30,
2019		FSB February 28, 2018Collegiate January 31, 2018
Fair value of consideration transferred
Fair value of Company shares issued$229,385  87,153  181,043  69,764  
Cash consideration16,420  4  —  16,265  
Effective settlement of a pre-existing relationship—  —  —  10,054  
Total fair value of consideration transferred245,805  87,157  181,043  96,083  
Recognized amounts of identifiable assets acquired and liabilities assumed
Identifiable assets acquired
Cash and cash equivalents84,446  11,311  24,397  93,136  
Debt securities103,231  47,247  271,865  42,177  
Loans receivable615,279  245,485  627,767  354,252  
Core deposit intangible 1
13,566  8,963  31,053  10,275  
Accrued income and other assets35,891  24,848  78,274  15,911  
Total identifiable assets acquired852,413  337,854  1,033,356  515,751  
Liabilities assumed
Deposits722,220  274,646  877,586  437,171  
Borrowings 2
—  7,273  36,880  12,509  
Accrued expenses and other liabilities9,919  10,079  14,175  5,435  
Total liabilities assumed732,139  291,998  928,641  455,115  
Total identifiable net assets120,274  45,856  104,715  60,636  
Goodwill recognized$125,531  41,301  76,328  35,447  
______________________________
1 The core deposit intangible for each acquisition was determined to have an estimated life of 10 years.
2 Borrowings assumed with the FSB acquisition included Tier 2 subordinated debentures of $5,864,000.


118

2019 Acquisitions
On July 31, 2019, the Company acquired 100 percent of the outstanding common stock of Heritage Bancorp and its wholly-owned subsidiary, Heritage Bank of Nevada, a community bank based in Reno, Nevada. Heritage provides banking services to individuals and businesses throughout northern Nevada with locations in Carson City, Gardnerville, Reno and Sparks. The acquisition expands the Company’s franchise footprint into Northern Nevada. Heritage operates as a new division of the Bank under its existing name and management team. The Heritage acquisition was valued at $245,805,000 and resulted in the Company issuing 5,473,276 shares of its common stock and paying $16,420,000 in cash in exchange for all of Heritage’s outstanding common stock shares. The fair value of the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the July 31, 2019 acquisition date. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Heritage. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange.

On April 30, 2019, the Company acquired 100 percent of the outstanding common stock of FNB Bancorp and its wholly-owned subsidiary, The First National Bank of Layton, a community bank based in Layton, Utah. FNB provides banking services to individuals and businesses throughout Utah with locations in Layton, Bountiful, Clearfield and Draper. The acquisition expands the Company’s presence in Utah and sets the stage for future growth. The branches of FNB, along with the Bank’s branches operating in Utah, operate as a new division of the Bank under the name “First Community Bank Utah, division of Glacier Bank.” The FNB acquisition was valued at $87,157,000 and resulted in the Company issuing 2,046,341 shares of its common stock. The fair value of the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the April 30, 2019 acquisition date. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and FNB. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange.

The fair values of the Heritage and FNB assets acquired include loans with fair values of $615,279,000 and $245,485,000, respectively. The gross principal and contractual interest due under the Heritage and FNB contracts was $617,214,000 and $248,226,000, respectively. The Company evaluated the principal and contractual interest due at each of the acquisition dates and determined that insignificant amounts were not expected to be collectible.

The Company incurred $3,032,000 and $4,979,000 of expenses in connection with the Heritage and FNB acquisitions, respectively, during the year ended December 31, 2019. Mergers and acquisition expenses are included in other expense in the Company's consolidated statements of operations and consist of third-party costs, conversion costs and employee retention and severance expenses.

Total income consisting of net interest income and non-interest income of the acquired operations of Heritage was approximately $15,506,000 and net income was approximately $2,286,000 from July 31, 2019 to December 31, 2019. Total income consisting of net interest income and non-interest income of the acquired operations of FNB was approximately $12,607,000 and net income was approximately $249,000 from April 30, 2019 to December 31, 2019. The following unaudited pro forma summary presents consolidated information of the Company as if the Heritage and FNB acquisitions had occurred on January 1, 2018:
Year ended
(Dollars in thousands)December 31,
2019		December 31,
2018
Net interest income and non-interest income662,937  608,787  
Net income216,045  209,004  


119

2018 Acquisitions
On February 28, 2018, the Company acquired 100 percent of the outstanding common stock of Inter-Mountain Bancorp., Inc. and its wholly-owned subsidiary, First Security Bank, a community bank based in Bozeman, Montana. FSB provides banking services to individuals and businesses throughout Montana with locations in Bozeman, Belgrade, Big Sky, Choteau, Fairfield, Fort Benton, Three Forks, Vaughn and West Yellowstone. The acquisition expands the Company’s presence in the Bozeman and Golden Triangle markets in Montana and further diversifies the Company’s loan, customer and deposit base. FSB merged into the Bank and became a new bank division headquartered in Bozeman and the Bank’s existing Bozeman-based division, Big Sky Western Bank, combined with the new FSB division. The agriculture-focused northern branches of FSB combined with the Bank’s First Bank of Montana division. The FSB acquisition was valued at $181,043,000 and resulted in the Company issuing 4,654,091 shares of its common stock. The fair value of the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the February 28, 2018 acquisition date. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and FSB. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange.

On January 31, 2018, the Company acquired 100 percent of the outstanding common stock of Columbine Capital Corp. and its wholly-owned subsidiary, Collegiate Peaks Bank, a community bank based in Buena Vista, Colorado. Collegiate provides banking services to businesses and individuals in the Mountain and Front Range communities of Colorado, with locations in Aurora, Buena Vista, Denver and Salida. The acquisition expands the Company’s presence in Colorado to the mountains and along the Front Range and further diversifies the Company’s loan, customer and deposit base. Collegiate merged into the Bank and operates as a separate Bank division under its existing name and management team. The Collegiate acquisition was valued at $96,083,000 and resulted in the Company issuing 1,778,777 shares of its common stock and paying $16,265,000 in cash in exchange for all of Collegiate’s outstanding common stock shares and $10,054,000 due to an effective settlement of pre-existing receivable from Columbine Capital Corp. The fair value of the Company shares issued was determined on the basis of the closing market price of the Company’s common stock on the January 31, 2018 acquisition date. The excess of the fair value of consideration transferred over total identifiable net assets was recorded as goodwill. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Collegiate. None of the goodwill is deductible for income tax purposes as the acquisition was accounted for as a tax-free exchange.

The fair values of the FSB and Collegiate assets acquired include loans with fair values of $627,767,000 and $354,252,000, respectively. The gross principal and contractual interest due under the FSB and Collegiate contracts was $632,370,000 and $355,364,000, respectively. The Company evaluated the principal and contractual interest due at each of the acquisition dates and determined that insignificant amounts were not expected to be collectible.

The Company incurred $4,714,000 and $1,683,000 of expenses in connection with the FSB and Collegiate acquisitions, respectively, during the year ended December 31, 2018. Mergers and acquisition expenses are included in other expense in the Company's consolidated statements of operations and consist of third-party costs, conversion costs and employee retention and severance expenses.

Total income consisting of net interest income and non-interest income of the acquired operations of FSB was approximately $42,796,000 and net income was approximately $11,303,000 from February 28, 2018 to December 31, 2018. Total income consisting of net interest income and non-interest income of the acquired operations of Collegiate was approximately $23,921,000 and net income was approximately $4,962,000 from January 31, 2018 to December 31, 2018. The following unaudited pro forma summary presents consolidated information of the Company as if the FSB and Collegiate acquisitions had occurred on January 1, 2017:
Years ended
(Dollars in thousands)December 31,
2018		December 31,
2017
Net interest income and non-interest income$560,979  520,634  
Net income177,267  138,042  








120

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no changes or disagreements with accountants on accounting and financial disclosure.
 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and Chief Financial Officer (“CFO”), of the effectiveness of the disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that as of the end of the period covered by this report, the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that are filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized and timely reported as provided in the SEC’s rules and forms. As a result of this evaluation, there were no significant changes in the internal control over financial reporting during the year ended December 31, 2019 that have materially affected, or are reasonable likely to materially affect, the internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting as it relates to its financial statements presented in conformity with GAAP. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with GAAP. Internal control over financial reporting includes self monitoring mechanisms and actions are taken to correct deficiencies as they are identified.

There are inherent limitations in any internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.

Management assessed its internal control structure over financial reporting as of December 31, 2019. This assessment was based on criteria for effective internal control over financial reporting described in the “2013 Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management asserts that the Company maintained effective internal control over financial reporting as it relates to its financial statements presented in conformity with GAAP.

BKD, LLP, the independent registered public accounting firm that audited the financial statements for the year ended December 31, 2019, has issued an attestation report on the Company’s internal control over financial reporting. Such attestation report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 and is included in “Item 8. Financial Statements and Supplementary Data.”
 

Item 9B. Other Information

At the recommendation of its Compensation Committee, the Board of Directors of the Company recently approved amendments to its Employment Agreements with Randall M. Chesler, President and Chief Executive Officer, Ron J. Copher, Executive Vice President and Chief Financial Officer, and Don J. Chery, Executive Vice President and Chief Administrative Officer (the “Executives”). Under each Executive’s Amendment to Employment Agreement (each, an “Amendment”), the term of the Executive’s Employment Agreement is amended to continue for a period of two (2) years (the “Term”) and, subject to prior termination in accordance with the Employment Agreement, automatically extend for an additional one–year term from the anniversary of the Amended Commencement Date, as defined in the Amendment (the “Renewal Date”), under the same terms and conditions unless either the Company and the Bank or the Executive give(s) written notice of non–renewal to the other party(ies) at least one hundred twenty (120) days prior to a Renewal Date. In the event of such a notice of non–renewal, the Term and Employment Agreement will terminate at the end of the then–current two–year Term.

121

PART III
 
Item 10. Directors, Executive Officers and Corporate Governance

Information regarding “Directors and Executive Officers” is set forth under the headings “Election of Directors” and “Management – Named Executive Officers Who Are Not Directors” of the Company’s 2020 Annual Meeting Proxy Statement (“Proxy Statement”) and is incorporated herein by reference.

Information regarding “Compliance with Section 16(a) of the Exchange Act” is set forth under the section “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement and is incorporated herein by reference.

Information regarding the Company’s Corporate Governance, including the Audit Committee, is set forth under the headings of “Corporate Governance” and “Report of Audit Committee” in the Company’s Proxy Statement and is incorporated herein by reference.

The Company has adopted a Code of Ethics for Senior Financial Officers, a Director Code of Ethics and a Code of Ethics and Conduct applicable to all employees. Each of the codes is available electronically by visiting the Company’s website at www.glacierbancorp.com and clicking on “Governance Documents”  or by writing to:  Glacier Bancorp, Inc., Corporate Secretary, 49 Commons Loop, Kalispell, Montana 59901.  Waivers of the applicable code for directors or executive officers are required to be approved by the Company’s Board of Directors.  Information regarding any such waivers will be disclosed on a current report on Form 8-K within four business days after the waiver is approved.
 

Item 11. Executive Compensation

Information regarding “Executive Compensation” is set forth under the headings “Compensation of Directors,” “Executive Compensation,” “Compensation Discussion and Analysis” and “Compensation Tables” of the Company’s Proxy Statement and is incorporated herein by reference.

Information regarding the “Compensation Committee Report” is set forth under the heading “Report of Compensation Committee” of the Company’s Proxy Statement and is incorporated herein by reference.
 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information regarding “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” is set forth under the headings “Voting Securities and Principal Holders Thereof,” “Compensation Discussion and Analysis,” “Compensation of Directors” and “Equity Compensation Plan Information” of the Company’s Proxy Statement and is incorporated herein by reference.
 

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information regarding “Certain Relationships and Related Transactions, and Director Independence” is set forth under the headings “Transactions with Management” and “Corporate Governance – Director Independence” of the Company’s Proxy Statement and is incorporated herein by reference.
 

Item 14. Principal Accounting Fees and Services

Information regarding “Principal Accounting Fees and Services” is set forth under the heading “Auditors – Fees Paid to Independent Registered Public Accounting Firm” of the Company’s Proxy Statement and is incorporated herein by reference.

122

PART IV
 
Item 15. Exhibits, Financial Statement Schedules

List of Financial Statements and Financial Statement Schedules
(a) The following documents are filed as a part of this report:
(1) Financial Statements and
(2) Financial Statement schedules required to be filed by Item 8 of this report.
(3) The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K:
Exhibit No. Description
3(i) 1
 
3(ii) 1
 
4(a)
10(a) 1,2
 
10(b) 1,2
 
10(c) 1,2
10(d) 1,2
10(e) 1,2
10(f) 1,2
10(g) 1,2
10(h) 1,2
10(i) 1,2
10(j) 1,2
 
10(k) 1,2
10(l) 1,2
 
10(m) 2
21   Subsidiaries of the Company (See Item 1. Business, “General”)
23   
31.1   
31.2   
32   


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Exhibit No. Description
101.INS  XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH  XBRL Taxonomy Extension Schema Document
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  XBRL Taxonomy Extension Labels Linkbase Document
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document
104  Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
______________________________
1 Exhibit has been previously filed with the United States Securities and Exchange Commission and is incorporated herein as an exhibit by reference to the prior filing.
2 Compensatory Plan or Arrangement

All other financial statement schedules required by Regulation S-X are omitted because they are not applicable, not material or because the information is included in the consolidated financial statements or related notes.


Item 16. Form 10-K Summary

None
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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on February 21, 2020.
 
GLACIER BANCORP, INC.
By: /s/ Randall M. Chesler
Randall M. Chesler
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 21, 2020, by the following persons on behalf of the registrant and in the capacities indicated.
 
/s/ Randall M. Chesler  President, CEO, and Director
Randall M. Chesler  (Principal Executive Officer)
/s/ Ron J. Copher  Executive Vice President and CFO
Ron J. Copher  (Principal Financial Accounting Officer)
Board of Directors  
/s/ Dallas I. Herron  Chairman
Dallas I. Herron  
/s/ David C. Boyles  Director
David C. Boyles  
/s/ Sherry L. Cladouhos  Director
Sherry L. Cladouhos  
/s/ James M. English  Director
James M. English  
/s/ Annie M. Goodwin  Director
Annie M. Goodwin  
/s/ Craig A. Langel  Director
Craig A. Langel  
/s/ Douglas J. McBride  Director
Douglas J. McBride  
/s/ John W. Murdoch  Director
John W. Murdoch  
/s/ George R. Sutton  Director
George R. Sutton  


125